Mozambique-Tanzania gas development race enters a crucial lap
Huge Rovuma Basin reserves have convinced IOCs that both Mozambique and Tanzania can emerge as LNG exporters in the next decade, but discussion at the Africa Investment Exchange: Gas meeting on 27 to 28 May 2015 suggested that critical questions of local implementation capacity and policy choices could yet hold up these major developments.
No one doubts that gas fields in the Rovuma Basin offshore Mozambique and Tanzania hold huge reserves of gas. A 27 April-8 May International Monetary Fund (IMF) staff mission to Maputo concluded:“Mozambique’s plans to develop its oil and gas sector in the Rovuma Basin will represent one of the largest investments ever seen in Africa (up to $100bn) and could transform the country into the third largest liquefied natural gas (LNG) exporter in the world.”The critical question is how quickly that gas can be brought to market, and in what direction it goes.
Given that international oil companies (IOCs) and their cash- strapped government partners will need to structure huge project financing facilities, the logical first step of any project will be to secure revenue-generating long-term export markets, as Anadarko Petroleum Corporation and Eni have signalled in Mozambique. But even more than the timing of LNG schemes, the most delicate equation for planners is how to factor domestic market obligations into the mix, to fulfil ambitions to use gas for transformational economic development.
In both countries, but especially Tanzania – where the use of gas to boost industrialisation ambitions has been a regular feature of debate – sometimes discordant policy options, political imperatives and lack of local capacity are delaying key decisions.
Domestic gas use is rising up the Mozambican agenda as well, with a decree ordering that 25% of gas from Areas 1 and 4 should go to domestic consumers, including combined-cycle gas turbine power plants. Mozambique has around 120tcf of reserves, already putting it into the world’s top ten; but reserves engineers are quietly talking about a potential 200-250tcf of dry gas. It is expected that an LNG development would be timed to put gas onto the market from 2022 to 2023, when most analysts believe the current global oversupply will have passed.
Development of Tanzania’s reserves – widely put at 30-32tcf, although one operator put them at 40tcf – is expected to lead to a final investment decision in 2016. IOCs operating in Tanzania have made little secret of their determination to focus on LNG. One AIX participant suggested domestic projects could be supplied from inshore fields, leaving the big offshore fields for export. Away from their deep-water finds in the Mafia Basin (blocks 1, 3 and 4), Ophir in H2 2014 drilled a dry hole (Tende-1) in the East Pande Block; the seismic is sufficiently promising for another well to be considered on the shallow water block, from which any gas might go into the domestic market.
Questions of capacity are coming into view.“Tanzania has never had to deal with $20bn [capital spending] capex before,” an AIX delegate said; this will involve $15bn-20bn in project financing. With IOCs discussing a three- or four-train LNG development, the Tanzanian government “will be hit with a wall of gas” that it must deal with according to its own domestic market provisions, another participant said.
There is consensus that national oil company Tanzania Petroleum Development Corporation (TPDC) needs considerable strengthening to be a strong partner in developments. TPDC is getting ever more important jobs, notably as the single designated offtaker for gas.
Other parastatals with a big role include Tanzania Electric Supply Company, which has significant problems of payments risk, as well as governance. Details of payments have still to be negotiated in Tanzania by IOCs, which have agreements in principle in place.
Concerned foreign governments are lining up more support to strengthen Tanzanian governance. The US’ Millennium Challenge Corporation (MCC) is preparing a second Tanzanian ‘compact’ with a strong focus on improving governance. The first $700m compact, which expired in 2013, included major projects like the mainland-Zanzibar transmission link.
Huge new pipeline and other infrastructure developments will be required, and AiX delegates agreed that the Chinese-built pipeline would come into its own, providing 784mcf/d of capacity. TPDC’s project, financed by Beijing, showed that the ‘build and people will come’ scenario could work, a development finance professional said. A regional gas industry specialist said the pipeline now looked like being “a gutsy deal”.
An issue in Tanzania has been the allocation of land to build onshore facilities. At question is whether the land allocation should be a limited area on which IOCs can build their LNG trains, or whether it should include the much larger industrial parks the government wants the IOCs to finance to drive domestic development. The nature and timing of these concessions is a thorny issue in the run-up toTanzania’s general election, expected in October. Outgoing President Jakaya Kikwete, who is ineligible to stand for a third term, and his political allies seem unsure whether to leave the decision to his successor. “This is leading to more slippage, meaning Tanzania is falling behind in the queue for gas [once the 2022-23 supply window opens],” said another AIX participant.
“It being election year doesn’t help in this race with Mozambique,” an adviser said. President Filipe Nyusi and his government are accelerating the pace of work following the ruling Frente de Libertação de Moçambique (Frelimo) party’s 15 October 2014 victory at the polls – in stark contrast to pre-election delays in its northern neighbour.
Development financiers have told African Energy they are also very concerned about Mozambique’s rising debt and deteriorating credit profile. The IMF staff mission reported that “Mozambique’s economic performance remains robust and stronger than most other sub-Saharan African countries”, with growth expected to reach 7% in 2015, “though there are downside risks to this outlook due to declining commodity prices and the need for fiscal consolidation”. In classic IMF- speak, the mission communiqué said: “Prudent borrowing for projects that bring value for money is essential, as fiscal space for new debt is increasingly limited… The mission expressed concerns about the decline in international reserves, with a large shortfall vis-à-vis programme targets, but noted that exchange rate pressures seem to be abating.”
The Mozambique government is acutely aware that it has capacity constraints.A strong partnership with theWorld Bank Group is providing advisers to support negotiations and planning.“This is very necessary – the experience of Pande and Temane [the existing fields operated by Sasol, whose gas is sold very cheaply] wasn’t great,” an adviser said.
Southern African supply equation
Critical questions for Maputo include how to deal with big neighbour South Africa, which says it would like to get its hands on Rovuma Basin gas, and what domestic projects the government should focus on from a list of 25 to 30 big-ticket schemes now circulating. A current debate in Maputo is over whether ‘domestic’ (as in market obligations) means solely within Mozambique or in the wider Southern African Development Community. A wider commitment might include South Africa as a gas offtaker, but any deal that involves a subsidised price would be strongly resisted by Maputo.
Mozambique does not want a repeat of the low price paid for gas from Pande and Temane. AiX participants suggested that if PetroSA or another South African offtaker wanted the gas, it would probably have to buy in LNG shipments at international rates.
It was also observed that South Africa would be confronted with other big issues if it wished to import gas at international rates, not least currency risk for the government (South African thermal independent power projects as currently envisaged are essentially tolling agreements). While this risk could diminish as the rand was increasingly dollarised (a trend financial experts expected to continue), several participants argued that South Africa was not price-competitive to the US or Asia in global markets. Pending the creation of genuine regional markets and commercial cross-border trade, East African gas exporters might be better served selling elsewhere.
Anadarko sales, finance take shape
With a final investment decision (FID) set for early 2016, Anadarko has signed heads of agreement for the sale of 80% of gas volumes from its LNG scheme, as well as letters of intent with several banks for financing. The JV is in the process of transforming the headline gas purchase agreements into firm sales and purchase agreements (SPAs).
Letters of intent have been signed for more than $13bn in financing, Anadarko vice-president for LNG marketing and shipping Steve Hoyle told the World Gas Conference in Paris on 5 June.
Anadarko’s scheme, which will have two 6m t/yr trains to process gas from the Golfinho-Atum complex on Offshore Area 1, is being developed separately from Eni’s two-train development at Afungi for gas from the Mamba fields in Area 4. Eni is also planning a floating LNG scheme for its Coral South field.
“Heads of agreement have been signed for 80% of our volumes,” a source close to the Anadarko project told African Energy in Paris.“We are working on transforming the heads of agreement into SPAs. They are all in progress. Letters of intent have been signed with various banks.The appetite for financing is very strong.” One of the companies with whom offtake talks are under way is Thailand’s PTTEP, one of the shareholders in the upstream JV.
“We’ll probably reach FID late this year or early next,” said the source.“That’s the trigger [for construction]. Once we cross the FID, it will take four to four-and-a-half years to build the trains.”
Anadarko has lined up a JV of Chiyoda Corporation, CB&I and Saipem to carry out engineering, procurement and construction (EPC) work on the onshore LNG park (AE 301/13). Bids for the subsea engineering, procurement, construction and installation and equipment contracts are under evaluation, and selections will be made by the end of June, said Hoyle.
The initial phase of the project requires investment of $20bn, with a target range for the debt portion of $12bn-14bn, according to Hoyle.This will comprise $4bn-6bn in tied export credit agency (ECA) debt, $5bn-8bn in untied ECAs, $2bn-4bn from Chinese commercial banks and $1.5bn-3bn from regional and other international banks. Lead arrangers for ECA financing include Export Credit Insurance Corporation of South Africa, Italy’s Sace and the Export-Import Bank of the United States for the tied element, and Export-Import Bank of China, Japan Bank for International Co-operation and Nippon Export and Investment Insurance for the untied element.
The two ventures will not co-operate on the construction phase of the project, despite their proximity and potential economies of scale, the project source said. “We are developing our own project based on the Golfinho Block. Eni are developing their own project based on the Mamba Block,” he said. “Then there is Prosperidade, which straddles the two, which will be unitised.”
Eni has not secured long-term gas sales agreements – although it says talks with Asian buyers are at an advanced stage – and is not expected to progress to the selection of an EPC contractor for at least another six months. But any delay in Anadarko reaching FID could still allow room for a parallel development.
While Eni’s two-train onshore development is less advanced than Anadarko’s, the company is moving ahead with plans for two 2.5m t/yr floating LNG vessels to develop the Coral South field. A consortium of KBR and Daewoo Shipbuilding and Marine Engineering Company was awarded a front-end engineering and design contract on the development in late 2014, and Eni is studying technical and commercial bids for the construction phase.
“Obviously we have to take into account the situation of Eni globally, and there may be some delay, but we are committed to going forward with the project,” a source close to the Eni project told African Energy in Paris. “It’s important for Mozambique, too, that the project goes forward. They have a lot of gas but, if it’s not developed, they will not see any revenues from it.”
Source: African Energy