Total’s investment is enormous and has the potential to double the size of the Mozambican economy. Isaac Matshego, Nedbank
Of the three projects, two are big onshore ones: one led by Total, the French oil and gas major, and known as the Mozambique LNG project, and another led by US-based ExxonMobil, and known as the Rovuma LNG project. Both projects have multiple partners and some companies are participating in more than one of them; the total number of foreign companies involved adds up to about 20. Both developments involve drilling the gas offshore and then piping it onshore where it is liquified. In June 2019, Total signed a final investment decision (FID) with the Mozambican government to develop its project, located in the Golfinho and Atum natural gas fields within the area one block of the Rovuma basin. It will involve a whopping total post-FID of $20bn.
In September of the same year, Total acquired Anadarko’s 26.5% stake in the fields for $3.9bn (Anadarko had agreed to be taken over by Occidental Petroleum, the US oil and gas company, but was replaced by Total in the Mozambican project after it agreed to buy Anadarko’s African assets as part of Occidental’s acquisition of Anadarko). It includes the construction of a two-train liquefaction plant with a total capacity of 13.1 million metric tonnes (t) per annum.
In July 2020, Total said it had secured $14.9bn in senior debt financing for the project, the biggest ever project financing transaction in Africa, including direct and covered loans from eight export credit agencies (ECAs), 19 commercial banks and from the African Development Bank. The ECAs taking part include the Export Import Bank of the United States (EXIM), Japan Bank for International Corporation, Japan's Nippon Export and Investment Insurance (NEXI), UK Export Finance, Servizi Assicurativi del Commercio Estero of Italy, the Export Credit Insurance Corporation of South Africa, Atradius Dutch State Business, and the Export-Import Bank of Thailand. EXIM was the largest lender in the group, providing a $4.7bn loan. In July 2020, NEXI said it would also provide $2bn in loan insurance. The project is expected to come into production by 2024.
ExxonMobil's Rovuma LNG project located in the area four block will involve a total investment of $30bn, but the FID has still not been signed. Its natural gas reserves add up to 2.4tcm and it will produce 15.2 million metric tonnes a year.
The third, smaller project – known as Coral South and also located within the area four block – is led by Eni, the Italian oil and gas major, which plans to invest a total of $7bn. It differs from the other two bigger projects, as it involves constructing a floating liquefaction unit connected to six subsea wells. The project's FID was made in June 2017 and it is now the most advanced LNG project in the whole of Africa, as well as the first deepwater floating LNG project in the world. It is expected to enter production in 2022. It will have a liquefaction capacity of 3.4 million metric tonnes per year. Samsung Heavy Industries shipyard in South Korea is constructing the floating liquefaction unit.
Will Islamic insurgent attacks jeopardise gas riches?
However, dramatic events in 2021 have thrown the two bigger investments into doubt. At the end of April, Total was driven to declare 'force majeure' on its project and to suspend all its contractors after Islamic insurgents attacked Palma – a port town in Mozambique's northern Cabo Delgado region located close to the liquefaction plant under construction – in March. At least seven people, including one South African, were killed during the onslaught and the French company had to quickly evacuate hundreds of staff from hotels in Palma.
Since the Islamist insurgency began in 2017, the fighting has left more than 2,500 people dead and 700,000 people displaced. There are plans for thousands of foreign troops to be deployed in Mozambique over coming months from at least seven different countries, including Rwanda, South Africa, the US and Portugal.
How to ensure that the projects benefit the local communities will be the challenge, but I think the government and the gas companies are alive to it. Stuart Culverhouse, Tellimer Research
Mozambique already produces natural gas, but the amounts are tiny compared with what would be possible under the new projects. It produced six billion cubic metres (bcm) and exported 4.19bcm in 2018; South Africa received 81% of its natural gas exports via the 860km Sasol Petroleum International gas pipeline.
The Mozambican government was expected to earn $100bn over 25 years from the LNG projects, while further trains could earn the country even more money. Western countries are moving towards renewable forms of energy as their main power source. However, natural gas is expected to play an important role during the transition period – in particular in Japan and South Korea – as it is cleaner than diesel or coal. The developing world is expected to become a major consumer of natural gas during the next 20 years, as it too shifts towards less carbon-intensive energy sources.
"As far as we know, the Total project has now been suspended until the end of this year, maybe the start of next," says Isaac Matshego, an economist at Nedbank, the South African banking group.
"It is possible that it could begin earlier depending on the security situation. Taken on its own, Total's investment is enormous and has the potential to double the size of the Mozambican economy. The Total and ExxonMobil projects are of absolute importance to the economy. They would also entail the construction of new road infrastructure between the north of the country and Maputo, the capital. South African retail groups are considering entering Mozambique as well, as they believe the spending power of many Mozambicans is about to shoot up, so a lot hinges on these projects going ahead."
It is understood that ExxonMobil's FID was delayed in 2020 by the Covid-19 pandemic and the subsequent global slump in oil prices. It has now been delayed again by the poor security situation. The only project that seems undisrupted by the militant insurgency is the offshore ENI operation.
Stuart Culverhouse, head of sovereign and fixed-income research at Tellimer Research, a London-based research house, says: "The Mozambican government probably needs to ensure the security of Cabo Delgado, where the onshore LNG projects are located, although this is a difficult task and has required international help. The projects are four times Mozambique’s GDP. They should boost growth, fiscal revenue and improve the external balance, but that will take time. How to ensure that the projects benefit the local communities will be the challenge, but I think the government and the gas companies are alive to it."
Tanzania's impressive gas reserves
Tanzania – Mozambique's northern neighbour – also has important natural gas reserves, estimated by the country's government at 1.6tcm. It has three fields: Songo Songo, located around Songo Songo island, about 15km from the Tanzanian mainland and 200km south of the commercial capital, Dar es Salaam; Mnazi Bay, covering an area of 756km2 and located in the Mtwara region of southern Tanzania, roughly 410km south of Dar es Salaam; and Kiliwani North, which is located close to the Songo Songo field.
Mnazi Bay field already produces some 1.8–2.1 million cubic metres of gas per day and provides about 70% of the country's gas supply. Tanzania reached a peak in natural gas production at 1.8bcm in 2019, up from 1.67bcm in 2018.
Tanzania's investment case has been muddied in recent years by ex-President Magufuli’s turn towards authoritarianism and nationalism. Patrick Curran, Tellimer Research
In March 2021, Samia Suluhu Hassan, the former vice-president of Tanzania under President John Magufuli, assumed the presidency following the latter's sudden death in the same month. In April, she indicated that she would like to revive the long-stalled $30bn LNG development in Lindi, a coastal town located 450km south of Dar es Salaam, where energy majors Shell and Equinor are leading two separate projects.
“We have been singing the LNG song for a very long time," Hassan said in April. "I remember when I was sworn in as the vice-president [in 2015], I tried to work on it but discovered it was beyond me and stopped.”
Magufuli's administration had been characterised by 'resource nationalism' and sidelined the projects. Instead, his government prioritised the East Africa Crude Oil Pipeline to take oil from Uganda to the Tanzanian port of Tanga. Total will construct it and invest a total of $3.5bn; its investment partner on the Ugandan side is the China National Offshore Oil Corporation.
In April, Hassan directed Tanzania's Ministry of Energy to accelerate talks with Shell and Equinor, according to the Citizen, a local newspaper. Tanzania LNG would involve gas from Shell-operated blocks one and four and Equinor’s block two being piped from deepwater subsea wells to two or three liquefaction trains at Lindi. These blocks house about 1tcm of recoverable gas, split almost evenly between the two operators’ assets.
To show how serious the new president is about the matter, an array of regulations have already been reviewed, including the removal of a tax on grants and loans. Tanzanian watchers say that her move to appoint Philip Mpango as the new vice-president shows that she wants to shift the country towards a more welcoming, investor-friendly stance. However, the LNG projects were languishing at the early engineering stage for years and, even if fiscal and legislative issues are resolved this year, they would be unlikely to come on stream before 2028.
"Tanzania has been one of the fast-growing economies in the world in recent years, with annual growth averaging nearly 7% in the five years before the pandemic, underpinned by high levels of investment, which neared 40% of GDP in 2019," says Patrick Curran, senior economist at Tellimer Research.
"This has given Tanzania the space to implement growth-friendly budgets, with a focus on key projects such as railways, roads, electricity and, eventually, gas-related infrastructure. However, the investment case has been muddied in recent years by former President Magufuli’s turn towards authoritarianism and nationalism, which has served as a major deterrent to private investment in the country."
A more business-friendly Tanzania?
Curran adds that there is hope that President Hassan will shift Tanzania in a more democratic and business-friendly direction and notes that she has already scored some early wins, including breathing new life into the massive LNG project, resuming talks on the Tanzania-Kenya gas pipeline, lifting some restrictions on the media and beginning to combat Covid in the country after a year of denialism under Magufuli.
Tanzania is a tough place to do business even by large African country standards and the presence of foreign investors is noticeably smaller in Tanzania than in the rest of east Africa. Paul Domjan, Tellimer Research
However, the arrest of a key opposition figure, Freeman Mbowe, in July has called into question her willingness or ability to shun the authoritarian tendencies that characterised Magufuli’s presidency and a lot still needs to be done to improve the business environment in Tanzania.
"The sheer size of the LNG project in Tanzania – estimated at $30bn, or nearly 50% of the country's GDP – could be transformational for the economy but the government must be careful not to over-extend itself amid regional competition from Mozambique – which is further along in the process and has a first-mover advantage – and a longer-term shift away from fossil fuels," adds Curran.
"The government must put in place a conducive regulatory framework and prove to investors that resource nationalism is a thing of the past to get the project off the ground and, if and when it comes to fruition, it must be careful to avoid the 'resource curse' by managing the windfalls in a way that limits corruption and rent-seeking, fosters the development of Tanzania’s non-resource sectors and doesn’t undermine the competitiveness of its nascent manufacturing sector. If it manages to successfully navigate these challenges then development of the LNG industry could be a major boon to its economy, but otherwise it could undermine Tanzania’s positive growth story and economic stability."
Curran's colleague, Paul Domjan, a senior contributing analyst at Tellimer, adds: "Despite growth-friendly macroeconomic policies, Tanzania is a tough place to do business even by large African country standards and the presence of foreign investors is noticeably smaller in Tanzania than in the rest of east Africa. LNG will bring money to the state but, unlike simpler onshore projects, the scope for linkage is limited."
Will the 'resource curse' strike Mozambique?
Analysts are also concerned that Mozambique could squander the financial windfall expected from its LNG projects. A lack of transparency could lead to corruption around the financial proceeds from the projects. In Transparency International's Corruption Perceptions Index 2020, the country was ranked in 149th spot among 190 nations worldwide (down six places since 2012). Tanzania was ranked in 94th place.
A key consideration is what the the Mozambican government does with the expected windfall: will it be prudent and invest it for the country's long-term future or not? Isaac Matshego
"A key consideration is what the the Mozambican government does with the expected windfall: will it be prudent and invest it for the country's long-term future or not?" asks Nedbank's Matshego.
He highlights the misappropriation of $2bn-worth of funds that occurred in the country during the so-called 'tuna bond' scandal in 2016. Manuel Chang – Mozambique’s finance minister between 2005 and 2015 under former president Armando Guebuza – was arrested in Johannesburg in transit to Dubai in December 2018 and faces charges of conspiracy to commit money laundering as well as wire and securities fraud. The US Justice Department indicted Chang and the indictment claims that he and his alleged co-conspirators arranged for more than $2bn in fraudulent loans from international investment banks for 'front' projects, including the development of a tuna fishing boat fleet. About $500m remains unaccounted for and the indictment alleges that $200m was spent on bribes and kickbacks.
In 2019, Andrew Pearse, the London-based former head of global financing at Credit Suisse, as well as former Credit Suisse bankers Detelina Subeva and Surjan Singh, pleaded guilty to charges brought in the US over receiving bribes in connection with the bonds. Credit Suisse has always said the three hid their dealings from the bank’s management.
What is the future of LNG?
The market outlook for LNG is uncertain. The Western world's embrace of the 'green revolution' and the shift away from coal and oil has the potential to make LNG an increasingly important energy source in the short to medium term. Natural gas has a high calorific value (the amount of energy produced by a unit mass of the fuel on its combustion) and does not produce ash on burning. It is regarded by many experts as the ‘cleanest’ fossil fuel, as it emits the lowest levels of carbon dioxide into the air when combusted.
Japan is one developed country that has become highly dependent on LNG over the past 50 years (in particular, as it has moved away from nuclear energy following the accident at the Fukushima I nuclear power plant in March 2011). The country’s desire for long-term LNG deals has helped to build and sustain the industry since the 1960s. Deals that last more than 20 years are pillars for new LNG export projects and without them it is challenging for developers to get backing from banks and investors for new terminals or expansions.
LNG provides about 56% of Japan's energy today. However, natural gas – once widely seen as the bridge to a 'green future' – has been falling out of favour with some governments, including in Japan, as they increase efforts to slow climate change at a time when the cost of renewables is dropping. Japan would like to cut its use of LNG to 41% of its overall energy matrix by the year 2030.
"LNG will probably continue to play an important role in Japan, but the government there is pushing the idea of carbon capture, utilisation and storage," says one industry insider. "It is an important emissions reduction technology that can be applied across the energy system, including in LNG. The likely future big markets for LNG will be in developing countries, such as India and China, which also have lower carbon emission targets. LNG can play an important role in the energy transition for these countries well into the 2030s."
One of the biggest issues facing Mozambique and Tanzania as they ramp up their LNG production is growing competition from other natural gas-producing countries around the world. Thanks to its soaring shale output, the US has been the world's largest natural gas producer since 2009 and became a net exporter of natural gas in 2017. The country's total reserves amount to 12.9tcm. However, the two African countries face even bigger competitors: Russia has 38tcm in reserves, Iran has 32tcm and Qatar 24.7tcm. Qatar, in particular, is developing an important LNG production capability.
"The outlook for LNG is not so exciting, at least in the long term," says Matshego. "It depends on how quickly the Western world transitions from hydrocarbons to renewables energy; it could take a couple of decades. There may well be demand for LNG in the developing world but the problem is that distributors in those countries could have an issue raising capital from Western banks as they gradually try to avoid carbon-intensive industries."
LNG has the potential to transform Mozambique if the government can get on top of the dire security situation in the Cabo Delgado region and fend off widespread corruption throughout the country. It could also be of huge economic benefit to Tanzania. However, the window of opportunity is limited to the next decade or so, as the long-term market for LNG is highly uncertain.
Jason Mitchell is a senior editor at Investment Monitor, with a specialisation in emerging markets.