Speeding up of LNG Projects vital to ensuring debt sustainability and substantial revenue generation from a closing window of opportunities
Oil prices witnessed a sharp decline between June 2014 and January 2015, with spot prices plummeting from $105.79/barrel to $47.22/barrel. The decline also brought an end to a four-year period of relative price stability where crude oil prices remained fairly stable around $105/barrel. Following the decline, prices have failed to recover, with spot prices falling as low as $30.32/barrel in February 2016. On the back of the crude oil price slump, natural gas prices also fell steeply during the same period. This is largely due to the fact that there currently is no globally integrated market for natural gas and its prices are indexed to crude oil prices to a large extent.
Figure 1: Oil and Natural Gas Prices, Global, 2012 to 2016
Demand and supply conditions determine the long run trend in oil prices. Pricing trends and developments witnessed during the later half of 2014 and beyond were a culmination of several factors including:
- A greater than anticipated supply coinciding with a less than anticipated demand
- Shift in OPEC’s objectives from targeting a stable price band to sustaining its market share
- Reduced concerns around supply disruptions due to geopolitical situation in Middle East
- Increased shale oil production and supply in the United States
- Appreciation of the U.S. Dollar
Figure 2: Crude Oil Demand and Supply, Global, 2013 – 2016
Unlike some of the diversified global economies, fall in oil and natural gas prices is proving to be a disaster for most producing and exporting countries such as Angola, Nigeria, and more recently Mozambique, as these countries are heavily dependent on oil and gas as a contributor to their gross domestic product (GDP). The situation is even a greater cause of concern for East African nations such as Mozambique which have been banking upon their natural gas reserves to spur economic and social development. Since 2010, there have been significant gas discoveries in Mozambique’s offshore Rovuma basin. As per the Oil & Gas Journal, Mozambique’s proven natural gas reserves stand at 100 trillion cubic feet (tcf) making it the third largest African country after Nigeria and Algeria, in terms of proven natural gas reserves. Recoverable natural gas reserves for Mozambique have been estimated at over 180 tcf. These reserves have the potential of transforming one of the world’s poorest economies into a substantial supplier of liquefied natural gas (LNG), globally. The geographic location of Mozambique and its natural gas reserves provide LNG developers the opportunity to pursue various global markets, the growing Asian markets in particular. LNG export is the primary means of getting the country’s vast natural gas reserves into the global market.
Currently, the only natural gas production in Mozambique is occurring at the onshore Pande-Temane field operated by Sasol. Of the 198 billion cubic feet (bcf) natural gas produced by Mozambique in 2014, 134 bcf was exported to South Africa through the Sasol pipeline, while the remainder was used for domestic consumption.
Mozambique’s ambition of emerging amongst one of the largest global exporters of LNG rests heavily on investment decisions by Anadarko Petroleum Corp. (operator of Area 1) and Italian Eni SpA (operator of Area 4). In a study conducted by Standard Bank in 2014, which analysed the macroeconomic impact of LNG export from gas produced (45 tcf) from Area 1 alone, development of a facility with six LNG trains and domestic gas sales (DGS) by 2035 would result in an additional GDP of $39 billion being added over the $54 billion if no LNG facility is developed by 2035. In addition, assuming that facilities at Area 4 are developed and operational by 2035, Mozambique’s economy could increase by 8.5 times the 2014 base case. The stakes are high for Mozambique, as estimates project that foreign investments in the country’s gas sector could reach $35 billion in the five years between 2017 and 2022. Mozambique’s revenue earnings based on extraction of natural gas from Anadarko’s Area 1 alone could reach an estimated $212 billion over the entire life of the LNG project with the economy growing at 24% annually between 2021 and 2025. Considering the development of six LNG trains by 2035, Area 1 alone could create significant employment opportunities totalling over 700,000 direct and indirect jobs with a potential increase in GDP per capita from $650 in 2013 to approximately $4,500 by 2035. Development of natural gas projects in Mozambique has been taking longer than expected with Eni and Anadarko missing their original production deadline of 2018. LNG export from Mozambique is now anticipated no sooner than 2021. The sharp dip in international commodity prices has had a significant impact, with natural gas exploration and development activities falling sharply.
Plunging gas prices have clouded investment decisions and project developers delaying their final investment decisions (FID) due to the downturn. Buyers are now wary in striking long term supply deals due to pricing uncertainties with many preferring shorter, flexible contracts, and a committed investment from gas field developers prior to entering into a binding agreement. Some of the buyers have publicly expressed their intention of procuring more supplies in the spot market. The current situation has snowballed into a major economic catastrophe for Mozambique’s economy with the government taking on more debt assuming an easy repayment, once revenue from the proposed LNG projects started flowing in 2018. The government’s announcement of an outstanding hidden debt of $1.35 billion that it could fail to repay resulted in a suspension of funding, downgrade of its sovereign rating, and the risk of default becoming a realistic possibility. As of June 2016, the IMF has indicated that the country’s debt stock stood at 86% of its GDP, signalling a high risk of distress. IMF projects economic growth to slow to 4.5 per cent in 2016 after expanding 6.6 per cent in 2015. Mozambique’s weaker credit rating could witness a situation where investors demand more favourable terms on domestic gas obligations and pricing as well as larger tax breaks with the government eager to get projects operational and address their debt repayment concerns.
Figure 3: Public Debt as a per cent of GDP, Mozambique, 2011 – 2016
Mozambique needs to speed up the development of its natural gas reserves not only to cash in on a window of opportunity that is fast closing with the supply glut and falling global commodity prices which are showing signs of recovery over the past few months, but also to wade off competition from neighbouring Tanzania which is trying to monetise its 55 tcf of estimated reserves and emerge as a key participant in the global LNG market. One of the key considerations for natural gas development in the region is the possibility of exploiting the available reserves for boosting power generation. Future gas power plants in Mozambique and Tanzania could act as anchor customers for domestic gas sales and possible power trade between countries through the proposed interconnection between the Southern and Eastern African Power Pools would prove a revenue source for the government and investors alike.
The LNG market will remain depressed over the next few years; however, Mozambique will need to tap into lucrative opportunities available with South Africa as it plans to diversify its energy mix away from coal, over the long term. Essentially, the South African market is a good off taker given the legacy role with Sasol and the drive for LNG or cleaner fuel uptake. The sluggish South African economy is a restraint, but that does not necessarily imply that existing industrial and commercial companies cannot reduce their cost by taking up the cleaner fuel as part of their energy mix. The cleaner and potentially cheaper fuel will lower input cost helping competitiveness on the global market. The South African LNG uptake in volumes will be minimal compared to the global potential, but it is worthwhile to develop the market in conjunction with Sasol’s needs. Sasol seems rather bullish with its approach on Mozambique, and appear to be following a modular methodology where once infrastructure is in place, momentum will be gained. Long term supply agreements with India and Japan would be critical, so it will be exploring possible customers in emerging LNG markets of Indonesia, Thailand, Malaysia, Singapore, Pakistan, Jordan and so on. Mozambique has to ensure all its proposed LNG projects are materialised sooner rather than later, in order to ensure debt sustainability and cash in on the possibility of a supply-demand equilibrium being achieved in future. Delays in gas production and export, combined with possible drop in revenue due to uncertain global prices will further deteriorate the country’s debt ratio over the medium and long term.