Investment | Gas May Transform Mozambique Even as Debt Darkens Confidence

MAPUTO, Mozambique, Capital Markets in Africa: About 30 minutes down a pot-holed road from Vilanculos, where dhows ferry tourists to luxury resorts on Bazaruto island, Sasol Limited is ramping up output of a fuel that could transform the world’s 13th poorest nation.

Vast gas discoveries hold the potential to boost Mozambique’s economy, more than three decades after the apartheid regime of neighboring South Africa backed rebels in a civil war that laid waste to the former Portuguese colony.

“We’re going to incrementally increase capacity until we’ve reached the limit,”John Sichinga, senior vice president of Sasol’s exploration and production unit, said at the processing facility for the Temane and Pande gas fields.

While Sasol plans to spend $1.4 billion to produce more gas to send through a 865-kilometer (538-mile) pipeline to South Africa’s power-starved commercial hub, Mozambique’s ambition to become the world’s third-largest exporter of liquefied natural gas rests on investment decisions by Eni SpA and Anadarko Petroleum Corp. The still-positive sentiments emanating from the explorers can’t lift the gloom over ballooning state debt and depressed fuel prices.

“The uncertainty in country does create a challenge on the way forward,” said Chris Bredenhann, a partner at PricewaterhouseCoopers in Cape Town. “The project is pivotal for the development and growth of Mozambique.”

For Mozambique the stakes are high as Anadarko and Eni mull whether to proceed with projects expected to draw investment totaling $100 billion. Project approval could see LNG production boost the size of the economy ninefold by 2035, according to Standard Bank Group Ltd., the continent’s biggest lender.

Economic Dividend 
That potential from the 2010 discovery of one of the world’s biggest gas fields off Mozambique’s northern coast is at risk after the government in April disclosed $1.4 billion of previously hidden debt. That prompted the World Bank and other donors to suspend aid and Fitch Ratings last month downgraded Mozambique’s credit. The country missed an interest payment on a government-guaranteed loan and is in talks with the lender. On Wednesday, state-owned Airports of Mozambique announced plans to restructure $500 million in loans after a weakening currency impaired its ability to repay them.

Mozambique’s growing debt burden, compounded by a bond to fund a tuna-fishing fleet, won’t deter Anadarko from reaching a final investment decision to build an LNG plant, according to John Christiansen, head of corporate communications for The Woodlands, Texas-based explorer.

“We are aware of Mozambique’s debt issues and as the government works to address those, we are working hard to put in place a set of agreements with the government that will provide the foundation for definitive sales agreements with LNG customers,” Christiansen said. “Once those agreements and the financing arrangements are in place, we expect to be in a position to take FID.”

Missing Deadlines 
Filippo Cotalini, a spokesman for Eni, didn’t return an e-mail seeking comment. The Italian company’s Chief Executive Officer Claudio Descalzi said talks to sell a stake in the Mozambique project were moving forward, Il Sole 24 Ore reported on Wednesday.

Both Eni and Anadarko will miss their original 2018 deadline to start shipping LNG, after delays in taking the investment decision.

Omar Mitha, head of Mozambique’s state oil company, didn’t immediately respond to e-mails seeking comment.

Revenue for Mozambique could reach up to $212 billion over the life of the LNG project, based on the extraction of 45 trillion cubic feet from Anadarko’s Area 1 alone, according to a 2014 study by Standard Bank. LNG production could spur growth in the Mozambican economy to 24 percent a year from 2021 to 2025, estimates from the International Monetary Fund show.

LNG Prices 
Over the next few years the LNG market will remain depressed. LNG spot prices will fall to $3 per million British thermal units by mid-2017 or 2018 as new projects worsen a global glut, energy consultant FGE said earlier this week. LNGon the spot market near Singapore has fallen 68 percent since October 2014 to $4.43 per million Btu, according to Singapore Exchange Ltd.

Not far from the palm-fringed beaches of Vilanculos, Sasol hasn’t lost its appetite for Mozambique, which remains the focus of its investment drive.

“If you look at our demand, we need a lot more exploration prospects,” said Sichinga, adding that Sasol is looking to extend its existing commercial agreement in the country past 2029. “This is our heartland.”

Sasol doesn’t expect Mozambique’s debt issues to dampen investor interest and the company will consider offerings in the nation’s sixth licensing round, expected next year, according to Sichinga. In the fifth round, Sasol took a stake in an offshore block that will be operated by Eni, while Exxon Mobil Corp. was awarded another in a partnership with Rosneft OAO.

Licensing Round 
Neighboring South Africa is keen to source gas for power plants and stimulate industrial demand after electricity shortages hobbled growth in the continent’s second-biggest economy.

“The South African market is lucrative, given the current plans to diversify the energy mix away from coal up until 2030 and beyond,” said Nadine Steyn, a research analyst for consultant Frost & Sullivan.

Mozambique will need to reach Asian markets to realize its full potential, according to Christopher Haines, head of Oil & Gas at BMI Research.

“South Africa could eventually be an off-taker of Mozambique LNG, and it would certainly benefit from short shipping distances, but volumes would likely be pretty small,” said Haines. “Mozambique will need to lock in those big long-term contracts with India and Japan, and probably a higher oil price so Anadarko can borrow sufficient money without paying astronomical interest rates.”

Asian Contracts 
While gas will account for 24 percent of global power generation by 2040, up from 21 percent in 2013, as the share of dirtier coal declines, Mozambique’s LNG projects need to proceed quickly to take advantage of the next market upturn, according to Chris Holmes, managing director for global gas and LNG at IHS.

“If either of the projects can take FID and be ready to produce in the very early 2020s, then it will be coming into the market just as supply and demand are coming into balance,” he said. “If it misses that window then it will be one of many trying to exploit the next window of opportunity.”

Source: Bloomberg Business News