Gas will account for 24% of global power generation by 2040; Mozambique’s projects need to proceed quickly to take advantage of the next market upturn
ABOUT 30 minutes down a pot-holed road from Vilanculos, where dhows ferry tourists to luxury resorts on Bazaruto island, Sasol Ltd. is ramping up output of a fuel that 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 pipeline to South Africa’s power-hungry 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 is tempered by 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 liquefied natural gas (LNG) production boost the size of the economy ninefold by 2035, according to Standard Bank Group Ltd., the continent’s biggest lender.
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 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.
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% a year from 2021 to 2025, estimates from the International Monetary Fund show.
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.”
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.
While South Africa’s SacOil Holding Ltd. is planning a 2,600-kilometer (1,616-mile) pipeline with about $6 billion of Chinese funding to tap offshore gas from the Rovuma basin, 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.”
While gas will account for 24% of global power generation by 2040, up from 21% 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 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.”
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