Energising Mozambique: upstream, midstream and downstream opportunities
A year ago Mozambique was floundering. April 2016 brought the bombshell revelation that state-owned companies had racked up close to USD 1.5bn in illegally-obtained debt. Never mind that public debt soared as a result to more than 100% of GDP, Mozambique’s development partners then suspended all their direct budgetary assistance. In the background, the opposition Mozambican National Resistance (RENAMO) insurgency continued its corrosive burn. In the foreground, President Filipe Nyusi appeared unable to take control of government policy. Investors lost faith. Foreign direct investment fell for a third consecutive year, contributing to the country’s slowest economic growth since 2000.
That was then. Mozambique still has huge challenges to overcome, but among the international investors flocking to the capital Maputo there is a palpable sense of optimism. Many of Control Risks’ clients view Mozambique as southern Africa’s most exciting investment destination, for a number of reasons. A ceasefire with RENAMO has held since the end of 2016. President Filipe Nyusi grows increasingly assertive and has assumed a pro-business posture. Early indicators in 2017 show improving economic growth and more prudent fiscal policy.
Each of these on its own is an important indicator. But one thing lies at the core of both Mozambique’s ills and its potential triumphs: natural gas.
Natural gas was even meant to head off the debt scandal. That mountain of hidden debt was accumulated on the assumption that vast increases in revenue from liquefied natural gas (LNG) projects would cover them before they attracted scrutiny. Final investment decisions on the two major LNG projects being developed by Italian international oil company (IOC) Eni and US IOC Anadarko, in fact, were expected to be made in 2013. Then came delays. As expectations were consistently pushed back, debts came due for repayment and investor confidence tanked. Even senior government officials privately voiced concerns that these decisions would be delayed until LNG prices improved, or that global oversupply could see companies prioritise Tanzanian hydrocarbon prospects while neglecting Mozambique.
Upstream potential
This is now: developments in 2017 have renewed confidence that natural gas will fuel rapid growth for Mozambique. ExxonMobil’s purchase of a 25% stake in Eni’s offshore interests and planned LNG developments in March was a much-needed display of confidence in the industry. Eni’s formal decision to move ahead with this project on 1 June has sparked a flurry of activity; contracts worth hundreds of millions of US dollars have already been signed for a range of services and equipment supply. Subcontractors are being chosen. Production is expected to start in 2022-2023.
Eni’s Coral South Floating LNG (FLNG) project may be the most advanced, but it is far from the only upstream opportunity in Mozambique. Andarko is expected to make its final investment decision in the first half of 2018, having announced on 31 July that it was waiting until “sales purchase agreements and financing are in place”. Sasol – for a long time the only natural gas producer in Mozambique – announced in February that it had discovered oil and gas in its offshore Blocks 16 and 19, on which it plans to start production within three years.
Alongside the estimated 100 trillion cubic feet (Tcf) of natural gas already discovered, Mozambique still has substantial exploration potential; some studies estimate that less than half of the country’s total hydrocarbon resources have been discovered. French IOC Total has started to move forward with exploration after it replaced Malaysia’s Petronas as the operator of Areas 3 and 6 in June last year. Contracts for the blocks awarded in the fifth licencing round held in 2015 are still being negotiated – sources say that a number of issues remain disputed, including the proportion of revenue companies must hold in Mozambican meticais (MZN) – but are likely to be finalised soon. Russian state-owned oil and gas company Rosneft, which holds minority shares in two concessions, is said to be planning to open an office shortly. Meanwhile, a sixth licencing round is optimistically planned for later this year, but will more likely take place in 2018.