Oil & Gas Africa: Mozambique Eyes Bigger Slice Of Gas Windfall

Oil & Gas Africa: Mozambique Eyes Bigger Slice Of Gas Windfall

As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.

Luckily, the ups and downs of the African oil and gas trade aren’t one of them if you know where to look. To help with that, AFK Insider has compiled all the news you need to know now in order to slim down your risk in the weeks ahead. Let’s see what’s happening out there.

Mozambique announces a licensing round

One of the hottest plays in Africa looks set to heat up again.  The word out of Maputo is that Mozambique will be soliciting bids until mid-January for 15 blocks as part of the country’s fifth oil and gas lease licensing round.

The offerings include both on and offshore areas around the country, but the areas that will be of most interest to investors and international oil explorers is the acreage on offer in the offshore Rovuma Basin: a stretch of ocean that abuts the country’s maritime border with Tanzania where a vast amount of natural gas has been discovered by the Italian firm Eni and American independent Anadarko Petroleum.

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The licensing round comes after the government changed the rules governing Mozambique’s nascent oil and gas industry.

While much of the legislation is anodyne and regularly encountered in other countries where oil and gas explorers operate, the new laws do require company’s seeking to explore and develop hydrocarbons in Mozambique to register on the Maputo stock exchange and to devote 25 percent of any eventual oil or gas production to the domestic market.

While this may serve as a deterrent to some companies, most analysts believe that the requirements won’t pose too great an obstacle to developing the country’s nearly 100 trillion cubic feet of proven gas reserves.

The first and most obvious reason is that such a huge amount of gas and the prospect for finding even more in a world where large and lucrative finds are getting ever harder to find is simply too good an opportunity to pass up.  Indeed, interest in the region is such that in 2012 one of the minor partners in the block currently being explored by Anadarko was the subject of a heated, $1.9 billion bidding war between Royal Dutch Shell and Thai player PTTEP that Shell ultimately lost.

Also important is the fact that the current program of exploration and eventual development being carried out by Eni and Anadarko will not be much impacted by these new requirements.

The rules as written effectively grandfather-in the two firms’ projects and will not require very much in the way of large additional commitments from their projects to either the Mozambican government or the country’s larger development goals.

Given that Anadarko has already spent about $1.0 billion to bring the country’s offshore gas discoveries into production, this is probably a good thing given the need by all parties to get the gas to flow as quickly as possible.

As currently envisioned, Anadarko will build a huge LNG export operation in the country that will include the construction of gas treatment and processing plants, huge chilling facilities that will turn the gas into a liquid capable of being pumped through pipes and transported on ships, as well as miles of pipelines and a full panoply of offshore wells, platforms, and service vessels.

The total cost is pegged at around $16 billion, or about $1.0 billion more than Mozambique’s entire GDP in 2013.  As should be clear, the effort to bring all this gas, valuable though it may be, into production is huge—and could be more than Anadarko is capable of pulling off by itself. Indeed, the company has already begun selling off stakes in its Mozambican finds in the hopes of raising the capital it needs for the massive project.

Given that Eni, too, is trying to bring its equally huge finds into production as quickly as possible then the possibility of Mozambique seeing at least $30 billion in investment into just the gas fields in the offshore Rovuma Basin is a very likely prospect.

The onshore portion of both projects will likely focus on the northern ports of Pemba and Palma, where giant logistics bases and LNG plants will be built.

While these are still early days yet and Mozambican politics—an election is scheduled for October 15th—or global economic conditions could still yet derail plans in the short run, by 2018 the country could be exporting as much as 20 million tonnes of LNG a year.  At current prices that works out to around $10.8 billion annually.

Wages of global LNG

The most important bit of that last sentence is the phrase “current prices,” because it explains most of the great haste Anadarko and Eni are exhibiting as they both rush to get gas production up and running in Mozambique.

That’s due to the fact that prices for natural gas and LNG in particular have been falling due to huge amounts of gas coming onstream elsewhere in the world.  The South Pacific region in particular and the South China Sea have become a huge new source of exportable natural gas while Russia is also increasingly turning its export eye on Asia.

Then there is the United States, where the shale revolution has grown gas supplies so much that the country is buildings several new LNG export terminals to rid itself of some of its booming supplies.  Indeed, shale could be a real deal LNG killer as US EIA expects the technology to boost supplies globally by some 40 percent.

So, on the supply end the logic of commodity markets is such that premiums being paid for large quantities of natural gas and LNG will be coming down rapidly as more and more of this gas comes to market.

This is in turn could reduce that $10.8 billion number for Mozambican exports a great deal and force a reassessment of the project’s viability.

Indeed, earlier this year Shell noted that the dynamics of the LNG trade were such that many of these large, global projects now being touted by the energy industry will never be completed because prices are falling and, as importantly, development costs are rising.  Some will manage to wriggle through the closing window that is current opportunity in the LNG market, but others will not.  Will Mozambique be one of them?

That remains to be seen.


Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider and Mint Press News.