Energetic Upward Revisions

Following discoveries of over 100 trillion cubic feet (tcf) of natural gas in the offshore Rovuma Basin in 2012, operators continued to revise their estimates upward in 2013, putting Mozambique in line to be the third largest LNG exporter in the world. Meanwhile, plans are afoot to build four LNG units with a total capacity of 20 million metric tons a year by 2018, which would be the largest LNG export site after Ras Laffan in Qatar.

According to the Empresa Nacional de Hidrocarbonetos (ENH), the national oil company, Mozambique’s offshore fields may hold enough gas to meet total global demand for more than two decades. The country, which is poised to launch its fifth oil and gas bidding round in 2014, expects to begin exporting LNG to the global market in the next five to 10 years.

US-based Anadarko and Italy-based Eni have led exploration activities in the Rovuma Basin. Eni, which operates Area 4, has recently made a high-impact discovery at the Agulha exploration prospect that Forbes ranked as the largest oil and gas discovery of 2013. The Agulha well, located in the southern part of Area 4, approximately 80 kilometers off the Cabo Delgado coast, is the 10th well drilled in Area 4 and has to date achieved a 100% success rate. Eni now estimates that Area 4 contains 93 tcf of gascompared to previous estimates of 75 tcf. Eni’s stake in the block dropped from 70% to 50% with the sale of 20% to the China National Petroleum Corporation (CNCP). GalpEnergia of Portugal holds a 30% stake, while the remaining 20% is held by ENH.

Anadarko, operator of the Area 1 block, estimates recoverable gas reserves for that area of approximately 65 tcf, making it also among the largest natural gas discoveries in the world over the past decade. According to John Peffer, Country Manager for Anadarko Mozambique, the initial project is for 20 million tons of LNG, in conjunction with Eni’s Area 4. “That already ranks Mozambique as the third-largest LNG exporter in the world, although there is potential to do significantly more than that,” Peffer told TBY. “Area 1 alone is looking to export 50 million tons, which represents 20% of current global demand.”

Anadarko now owns 26.5% of the block that it operates, following the sale of a 10% stake to Indian state group ONGC Videsh for $2.64 billion. The remaining partners are Japan’s Mitsui & Co with 20%, OilIndia Ltd with 10%, Indian company Bharat Petroleum with 10%, Thai state group PTT with 8.5%, and ENH with 15%.

REGULATORY ENVIRONMENT

Three state bodies oversee upstream activities in Mozambique: the Ministry of Mineral Resources, the Instituto Nacional de Petróleo (INP), and ENH. Previously part of the National Directorate of Coal and Hydrocarbons, INP was created to focus solely on hydrocarbons and is responsible for upstream regulatory issues. ENH holds a share in each of Mozambique’s 11 exploration and production concession contracts (EPCC). According to ENH Chairman and CEO Nelson Ocuane, the goal of ENH is to become an operator in Mozambique’s oil and gas business within 20 to 40 years. “Over the course of that period, Mozambique will gain the technology and human resources necessary to take over field operations,” he told TBY.

A new law passed in 2013 levied a tax rate of 32% on the sales of local assets. According to the Mozambique Tax Authority, the state garnered $227 million in capital gains following the sale of Videocon Industries’ 10% stake in Area 1 of the Rovuma Basin. This raised the total received from taxes on the sale of stakes in the Rovuma Basin to $802 million across five transactions.

Following a regulation passed in July 2012, new EPCCs must also be consistent with the country’s nascent PPP law. This regulation requires 5% to 20% of shares to be listed on the local stock market, calls for the provision of benefits, mandates a signature bonus of between 0.5% and 5% of the value of the assets, and sets concession fixed fees between 2% and 5% of fair asset value.

MEGAPROJECT

Armed with massive gas reserves and a highly strategic location, Area 1 and Area 4 partners, led by Eni and Anadarko, will jointly develop a massive LNG project. With the capacity to produce 20 million tons of LNG annually, it would be the world’s largest LNG export site after ExxonMobil’s Ras Laffan facility in Qatar, which currently produces around 47 million tons. Deliveries are expected to commence by 2018.

“This is a megaproject on a global scale,” says Peffer. “It’s on par with any of the larger investments that have been developed on the continent in terms of scale, and is a harbinger of broader national growth.” Arsenio Mabote, Chairman of the National Petroleum Institute (INP), sees the LNG facility as an anchor project that will have a major knock on effect, particularly in terms of local capacity building. International interest in the project, he told TBY, will play a crucial role in “generating employment, improving infrastructure, and developing local capacity and content.” Anadarko, for one, is partnering with the government with an emphasis on all three of these areas. According to Peffer, Anadarko is helping to build a new airport in Palma, where the LNG facility is being developed, as well as upgrading the Port of Pemba in concert with the government and the project’s other stakeholders.

WELL POSITIONED

“It is about the same distance from here to Japan as it is from here to Europe or the US. It has a unique location and is one of the few countries that can handle cargo both ways without a cost impact in terms of transportation,” said Peffer. Although the current project is focused on Asian markets, Peffer notes, “We have the scope to consider markets worldwide.”

Mozambique is also keeping its neighbors in mind. “If you build east-west infrastructure, it is easy to connect to the markets of the interior, such as Malawi, Zambia, and South Africa,” ENH’s Nelson Ocuane told TBY.

Naturally, Asia’s energy hungry markets are taking note. In addition to Chinese, Thai, Indian, and Japanese companies recently purchasing stakes in existing concessions, high-level state visits have also focused on Mozambique as a source of energy security. In early 2014, for example, Japan’s Prime Minister Shinzo Abe sought to secure natural gas supplies from Mozambique during the first visit to the continent by a Japanese leader in almost eight years. The world’s number one importer of liquid natural gas, Japan is actively seeking alternative energy sources after the temporary suspension of all nuclear energy expansion in the wake of the Fukushima disaster.

OIL

Mozambique is also poised to become an oil-producing country. South African petrochemicals company Sasol has reported a small oil discovery near the Temane gas field in Inhambane, in the southern part of the country. The project will produce a marginal 2,000 barrels of oil per day. However, Sasol’s Managing Director Ebbie Haan told Reuters that it is “a small development, but it is a sign perhaps there is more.” Sasol, the world’s top gas-to-liquid fuel provider, sees the potential for additional gas monetization options beyond LNG and hopes to use Mozambique’s gas reserves for power, fertilizer, and methanol. Plans are currently underway to expand an existing Mozambique gas-processing plant as well as a pipeline to South Africa.

DOWNSTREAM

As Mozambique’s economy grows, so too does demand for oil and gas products at the consumer level. According to Petrogal Moçambique, the retail petrol and retail natural gas segments grew by more than 10% in 2012. In response, Petrogal grew its business in Mozambique by 12%. As the country’s underdeveloped road infrastructure improves and natural gas production comes online, Abilio Madalena, Petrogal’s Director General, told TBY that he sees this growth trajectory becoming even steeper. “In the future, Mozambique will become one of our most significant ventures,” said Madalena.

ELECTRICITY

On the power side of Mozambique’s energy spectrum, electricity supply is becoming increasingly critical due to rapid development. The country currently has an installed capacity of around 12,500 MW, nearly all of it supplied by the Cahora Bassa Dam on the Zambeze River. In 2013, the dam produced 16,000 GWh of power, of which 10,000 GWh was sold to South Africa’s Eskom. Electricity accounts for 7% of Mozambique’s exports and yielded $233 million in 2012. Now, plans are afoot to build a second hydropower plant on the Zambeze River. The proposed Mphanda Nkuwa Hydroelectric (HMNK) would add a further 1,500 MW of installed capacity. Of this, 20% would go to Mozambique’s Electricidade de Moçambique (EDM), with the remaining 80% purchased by South Africa’s Eskom. Despite robust generation capacity, nearly 76% of Mozambique lacks access to electricity, mostly due to the infrastructure challenges related to providing broad electricity coverage in rural areas. In this context, renewable energy is becoming an increasingly viable option. Companies like Self Energy Mozambique are using solar energy to electrify distant rural zones as well as reinforce the grid. The company plans to commence this work in 2014.