Mozambique Gas Supplier To The World?
MozambiqueGas Supplier to the World?Paul Eardley-Taylor, Standard Bank9 May 2019
Table ofcontents1Energy & LNG Outlook2Mozambique – Underlying Documentation3Mozambique – LNG Projects & Implications4Regional Implications5Conclusion2
Section 1Energy & LNG Outlook3
GLOBAL ENERGY OUTLOOKS (1/2)In 2019, BP (to 2040) published itsGlobal Energy Outlook, whichsupplements ExxonMobil’s and theIEA’s 2018 annual global EnergyOutlooksGlobal population by 2040estimated around 9.2 billion. This isanchored by growth in the emergingmarkets with 2.5 bn people liftedout of poverty and a globalmiddle class of 5 billion.Global energy demand projectedto increase (1.3% p.a.) moreslowly than before due toincreases in energy efficiency.India will become the largest growthmarket for global energy. Globalautomobile liquids demandessentially flat, due to increasedefficiency and EV.
GLOBAL ENERGY OUTLOOKS (2/2)Per BP and Shell (2019) Gas isgenerally expected to increase indemand around 2% p.a. with LNGexpected to increase by around 4%p.a., with LNG representing 80% ofthe demand increase in longdistancegas trade.Consequently, the IEA expects gasto overtake coal by 2030 tobecome the world’s secondleading fuel.In passing, Africa’s demand forenergy is expected to increase ataround 4% p.a. hence the growth inAfrica’s own energy requirements isalso exciting.Feel free to chat to StandardBank about this
LNG DEMAND COMPARISONEleven independent LNGdemand forecasts outlinedfrom 2020-2040:1)2016&2017: Actual InternationalGas Union – 2018 Edition2)2018A: Shell LNG Outlook 2019P (Feb’19)BAML: P (July’17) Bank ofAmerica Merrill Lynch FLNGOverview*3)4)5)6)7)8)9)Bloomberg New Energy Finance(BNEF): P (Mar’18) Global LNGOutlook 1H2018BP: P (Feb’19) Energy Outlook2019Cheniere: P (Dec’18) CorporatePresentationEnergy Insights: P (Sept’18)Analysis, Energy Insights GasIntelligence ModelExxonMobil: P (Feb’18) EnergyOutlook 2040HSBC Global Research: P(Mar’18) Global LNG: Theglutabates, the crunch awaitsForecast LNG Demand 72001000201610) Next Decade: P (Oct’18)Corporate Presentation11) Shell: P (Feb’19) LNG Outlook2019 (319 MTPA)12) Wood Mackenzie: P LNG Tool2018CAGR3.8%800Actual2017Cheniere2018AEnergy InsightsNext Decade2020HSBC2025ShellBNEF2030Wood Mackenzie2035BAML2040BPExxonMobilP PublishedSummarised by Standard BankDemand is expected to increase from 319 MTPA to 632 MTPA (average)from 2018-2040 using leading industry players forecasts6
GLOBAL LNG PRICESLNG spreads (green) appearing range boundIncreasing spot liquidity (blue bar) and decreasing pricesLeft hand chart shows ‘’LNG Market Tightness’’. As US LNG can be moved globally, green shows Argus Gulf Coast LNG FOBminus Henry Hub (relative to global gas prices). Low spreads show global pricing convergence. Higher spreads indicate a need forglobal Final Investment Decisions (‘’FIDs’’)Right hand chart shows increasing LNG spot volumes. Blue bars are spot volumes in MTPA, red line is % market share and whiteline USD MBTU. Major increases in spot liquidity as new plants completed promotes lower spot prices and increased demandSource: Argus Media, OIES, Reuters (2019)
CHINESE LNG DEMANDChineseGovernmentpoliciestargetAs policy, China is switching from coal to gas (“Make Our SkiesBlue Again”) with all sectors showing increased demand.In 2018, LNG imports grew 41% year on year (IGU 2019 WorldLNG Report), following a 47% increase in 2017.Example of President Xi commitment to air S5b0006b2a3103f6866ee96c9.htmlChina gasdemandgrowth bysectorIn June 2018, the "Blue Sky Defence Action Plan” strengthenedwith the addition of 28 cities to various air pollution controls.The IEA sees China as “The Emerging Giant” of gas demand.Source: Shell (2019)
CHINESE LNG DEMANDChineseGovernmentpoliciestargetNote a doubling of 2018 Chinese LNG demand:55 MPTA110 MPTAChina gasdemandgrowth bysectorOnly represents a 1.3% delta of China’s 2018 coal consumption cap. Notethis plausible due to storage under construction and planned (Shell 2019).Source: Shell (2019)
Section 2Mozambique – Underlying Documentation10
UNDERLYING DOCUMENTATIONThe Government of Mozambique (‘’GOM’’) launched the 2nd Licensing Round on 15th July2005 and applications were submitted on 31st January 2006The core document is the Exploration and Production Concession Contract (‘’EPCC’’). Key provisions:30year5 yearExplorationPeriod (extendable)and (up to) 5 yearAppraisal Period (fornon-associated gas)Development &Production Concessiongranted toConcessionaire (fromPlan Of Development(‘’POD’’) approval).The EPCC was supplemented by the ‘’Decree Law’’ in 2014which in essence allows a ‘’world-scale LNG project financing’’along typical LNG industry norms to fit within Mozambican law.Petroleum Production2% PPT/RoyaltyTax (PPT/Royalty).Note there is no other EPCC Domgas, Domestic Market Obligationor Regional Obligation.Cost GasConcessionaire entitled to recover Cost Gas ofup to [65%/70]% Disposable Petroleum(net of PPT) (depending on Area)ProfitPetroleumSliding scale allocation depending oncumulative returns and can be taken in cashor kind by GOM.In addition, various other Agreements are required. For example,Profit Petroleum cannot be taken in kind by GOM if it would impedeLNG Sale & Purchase Agreements (‘’SPAs’’)11
Section 3Mozambique – LNG Projects & Implications12
MOZAMBIQUE SNAPSHOTFound 150-200 Tcf since 2010 offshorenorthern Cabo Delgado, equivalent of26-36 bn bbl.Geography2,800km longAfungi site isFifth licensing round now signedand sixth licensing round reported tobe launched next year.Young country.Independence 25 June 1975.Civil war 30 May 1977 - 4 October1992, with Cabo Delgado hit hard.Producing onshore gas since 2004,through Sasol.2,750kmfrom capital city (Maputo).Same distance as .New YorktoHoustonLondontoCasablancaParistoMoscowOne of world’s poorer countries.Debt to GDP around 100%. In sovereign default since 2016,official debt recently rescheduled with unofficial debt still in default.
FLNG Coral FLNG (3.4 MTPA) FID June 2017, First Gas June 2022Onshore Mozambique LNG (12.9 MTPA)OURCOUNTRY LNGHYPOTHESIS FID targeted 18 June 2019,Fully Commissioned 2024 Rovuma LNG (15.2 MTPA) FID 3Q 2019,Fully Commissioned 2025 Unitised Trains (15.2 MTPA) FID 2024,Fully Commissioned 2029 Prosperidade LNG (12.9 or 15.2 MTPA) FID 2024,Fully Commissioned 2029Domgas Projects Expected - Gas to Liquids (‘’GTL’’), Fertiliser, Independent Power Projects (‘’IPPs’’),Small-Scale LNG (‘’SSLNG’’), LNG Bunkering, Methanol to Olefins (‘’MTO’’)The 30 year EPCC term is limited and includes, through the Decree Law, a tight interim deadline (all PODs must besubmitted by December 2023, 10th anniversary of EPCC Commercial Assessment Period). This means Sponsorsmust use it or lose it. Can the country’s execution capacity match this market obligation?
AREA 1 - MOZAMBIQUE LNGOur current understanding of Mozambique LNG is as follows:On 8 May 2019, Anadarkopublicly committed to anFID of the 12.88 MTPAproject on 18 June 2019.Since 2017, significantprogress has been made: “Marine Concessions” agreed,finalising the marine facilities. The site resettlement processkicked off in November 2017and joined by Area 4. In February 2018, the Councilof Ministers (“COM”) agreedArea 1’s POD In November 2018,Technip/VanOord wereselected as offshore EPCIcontractorAnadarko publicly stated inJune 2018 that they havesufficient customers todeclare FID subject tofirming up SPAs forsuch customers.Subsequently, signedSPAs have beenannounced with Bharat,CNOOC, EDF, Pertamina,Shell, Tokyo Gas/Centricaand TohukuThe first two trains willalso provide 100 MSCFDof Domgas which willcontribute towards thesupply for the three InitialDomgas projects selectedby the GOM (GL Energy IPP; Yara – fertilizer andShell – GTL). We envisagedeveloping Domgasprojects at Afungi willlikely require bespokeport and accessarrangements.A Debt Wire story of 28th March reported that major progress has been made with raising USD 12.5 – 13bn debtfinancing, specifically the receipt of credit-approved offers from banks
AREA 1 – ANADARKO OFFERSOccidental (OXY),24APROffer 76 per share50% cash; 50% stockBerkshire HathawayChevron (CVX),30APRBM conditionallycommits to 10bninvestment in OXYTotalOffer now 78% cash;22% stock. Totalconditionally commitsto buy APC AfricanAssets for 8.8bn (incArea 1). 23% of 6MAYAPC market cap12APR Offer 65 per share25% cash; 75% stock9MAY Confirmed will notIncrease Offer5MAYAnadarko Petroleum Corporation (APC)11APR 46.80 per share16
AREA 4 - ROVUMA LNGCoral FLNG achieved FID in June 2017 and is under construction.Our current understanding of Rovuma LNG is as follows:Initial technical work assumed RovumaLNG was 10-12 MTPA. Area 4 nowplans to develop Rovuma LNG through“Mega-Trains” (first outside Qatar),with a target plant capacity of 15.2MTPA and Standard Bank assumedcost of around USD [30] bn. The PODwas submitted in July 2018.An increased capacity meanssignificant onshore and offshoretechnical work is needed. Weexpect finalized EPC bids in 2Q 2019.Noting this, we would expect FID in3Q 2019.In December 2018, Area 4 confirmed ithas secured commitments (TBAMTPA) to sell output to affiliates,subject to documentation and approvalby the GOM. This is likely to increasethe speed of executing RLNG’stargeted project financing.Separately, a key issue to negotiate with the GOM will be the volumes (and price) of Domgas RLNG will voluntarilyprovide to supply new Domgas-fed industrial projects.
STANDARD BANK ECONOMIC rd Bank has prepared anindependent Macroeconomic Studyupon Rovuma LNG. We havepreviously analysed MozambiqueLNG (2014) and Afungi GTL & Power(2018)We envisage Rovuma LNG will takea FID in mid-2019 and reachFinancial Close in 2019.Rovuma LNG will be thelargest Project in Africa’s historyThe Project will be a 15.2 MTPA,USD 27bn (Low Capex) - 32bn (HighCapex) Project which will monetize2.6 Bcf/d of Mozambique’soffshore resources.18
ROVUMA LNG – HIGH CAPEX & REINVESTMENT SCENARIOKey Project benefits include:USD 4bnGNP increase of257,586USD10bn p.a.Nationalemploymentopportunities* (average real)fiscal contributionto GOM p.a.* (average real)Capital formationUSD 35bnGDP increase ofUSD15bn p.a.* (average real)* (average real)USD 8bnBalance of Paymentscontribution p.a.*(average real)Major increase inMozambique’s longterm real growth rate4% to 4.8%19
ROVUMA LNG – LOW CAPEX & REINVESTMENT SCENARIOKey Project benefits include:USD 5bnGNP increase of323,050USD14bn p.a.Nationalemploymentopportunities* (average real)fiscal contributionto GOM p.a.* (average real)Capital formationUSD 33bnGDP increase ofUSD18bn p.a.* (average real)* (average real)USD 10bnBalance of Paymentscontribution p.a.*(average real)Major increase inMozambique’s longterm real growth rate4% to 5.4%20
ROVUMA LNG - KEY OPPORTUNITIES AND CHALLENGESIn 2017, China changed its energy policy to promotecoal to gas switching. Standard Bank considersMozambique can become to China for LNG, as Australia isfor minerals and New Zealand food.Multiple mega-trains promptlydeveloped allows the maximumamount of LNG sold to increasenational prosperity, develop localcontent (USD 3bn commitment) andfacilitate Domgas.We are aware of Domgas’ importance. Rovuma LNG has offered 75 mscfd per train Committed Domgas Volumes forPhase 1 and 350 mscfd long-term Domgas to the Aggregator, to help kick-off Mozambique’s Domgas projects. As wellas Domgas projects already tendered, we believe Mozambique can develop new industries such as MTO, SSLNG, LNGBunkering and indigenous LPG. This will help GOM achieve a ‘’Domgas Vision’’, where Domgas promptly follows LNG.21
AFUNGI & RAS LAFFAN (QATAR) PARALLELSQatar entered into production 77 MTPA ofonshore LNG between 1997 – 2010.Public domain, Mozambique will enter intoproduction 28.1 MTPA between 2023 - 2025(at the same site, per Curtis Island(Australia) and Ras Laffan). Mozambiquewill be building onshore LNG moreintensively than Qatar and we expect it tocontinue given the limited 30 year EPCCtermStandard Bank envisages the Afungi site will ultimately be able to host (with Mega-Trains), over 90 MTPAof LNG production plus a Domgas Industrial Park (most likely to the North West of the LNG trains).
‘’AS IT STANDS’’ PROJECT TIMETABLEKeyBuild PeriodOperating PeriodName/Key SponsorIndustrySovereign CreditImplicationsCoral South FLNG (Area 4)LNGUSD inflows (moderate)10Mozambique LNG (Area 1)LNGUSD inflows (major)25Rovuma LNG (Area 4)LNGUSD inflows (major)30Pande, Temane, Inhassoro (Sasol)Gas/LPGUSD inflows (moderate)1SSLNG & Power (Various)LNG/PowerGas to Liquids (Afungi) (Shell)LiquidsUSD inflows (major)5.5Fertiliser (Afungi) (Yara)FertiliserUSD inflows (moderate)2Next Two Rovuma LNG Mega-Trains (Area 4)LNGUSD inflows (major)21'Prosperidade'' LNG (Area 1)LNGUSD inflows (major)20Additional Golfinho Train (Area 1)LNGUSD inflows (major)7Methanol to Olefins (Afungi) (TBA)Petrochemicals USD inflows (najor)5CCGT IPP (Afungi) (TBA)Power0.5Total CapexSource: Standard BankAll-InUSDbn 252026202720282029203020312032By 2024,Mozambiqueshould haveoperational 4onshore LNGtrains and 1 FLNGship. We expect 4additional onshoreLNG trains couldbe operational by2029/2030, partlydriven by theunderlyingEPCC/Decree Lawrequirements. Thiswill trigger asecond wave ofDomgas projects.
‘’AS IT STANDS’’ PROJECT TIMETABLEKeyBuild PeriodOperating PeriodName/Key SponsorIndustrySovereign CreditImplicationsCoral South FLNG (Area 4)LNGUSD inflows (moderate)10Mozambique LNG (Area 1)LNGUSD inflows (major)25Rovuma LNG (Area 4)LNGUSD inflows (major)30Pande, Temane, Inhassoro (Sasol)Gas/LPGUSD inflows (moderate)1SSLNG & Power (Various)LNG/PowerGas to Liquids (Afungi) (Shell)LiquidsUSD inflows (major)5.5Fertiliser (Afungi) (Yara)FertiliserUSD inflows (moderate)2Next Two Rovuma LNG Mega-Trains (Area 4)LNGUSD inflows (major)21'Prosperidade'' LNG (Area 1)LNGUSD inflows (major)20Additional Golfinho Train (Area 1)LNGUSD inflows (major)7Methanol to Olefins (Afungi) (TBA)Petrochemicals USD inflows (najor)5CCGT IPP (Afungi) (TBA)Power0.5Total CapexSource: Standard BankAll-InUSDbn 252026202720282029203020312032 128128billionUSDbillionFIDFIDbyby20252025By 2024,Mozambiqueshould haveoperational 4onshore LNGtrains and 1 FLNGship. We expect 4additional onshoreLNG trains couldbe operational by2029/2030, partlydriven by theunderlyingEPCC/Decree Lawrequirements. Thiswill trigger asecond wave ofDomgas projects.
Section 4Regional Implications25
COMMERCIAL OBSERVATIONS 1/2The Decree Law does not discussregional (non-Mozambican) natural gasexport projects. Clause 9.4 favoursindustrial projects in Mozambique(national benefication), with Fertiliser,GTL, IPPs, MTO etc expected to receiveDomgas.South Africa (‘’SA’’) has purchased natural gas(through Sasol) from Mozambique since 2004.Note a piped gas deal for what would otherwisebe ‘’stranded gas’’ is significantly different from aLNG project (for which there is a USDdenominated, largely oil-linked, increasinglyliquid, global market).GOM does not own the gas. It is owned bythe Concession for the EPCC term. GOMentitlement is: PPT; negotiated Domgas; andin the future (e.g. after 7 years or so), ProfitPetroleum. The latter can be taken in kindper the EPCC but will be limited by projectSPA commitments under long-term SPAs.26
COMMERCIAL OBSERVATIONS 2/2There are no limitations onSAbuyingLNGoncommercial terms at anytime. SA’s limited shippingdistances from Mozambique(or Angola/Nigeria) will helpsecure a good DES price.More importantly, SA’s highdemand period (Winter) isthe opposite season to theNorthernHemisphere’swinter peak.This implies SA can makecompetitive LNG purchasesand take risks on spotpricing (noting increasingliquidity in LNG markets).No clarity yet on who the supplyingDomgas entity would be. Mozambiquehas defined ENH (the National OilCompany) as the Aggregator ofDomgas, but there are likely to benumerous structural and bankabilitychallenges surrounding this choice.27
DISCUSSION SA DELIVERED EX SHIP (‘’DES’’) LNG PRICINGAudience – multiply oil USD bbl * 17.4%for gas equivalent, or multiply USDMBTU by 5.75 for bbl price.US LNG can be delivered to SA at USD 37BOE. Assuming Crude Oil (Brent) is USD 70bbl, Importing Diesel to SA costs USD 77-80 bblUS LNG (USD MBTU)Upstream2.75 (2.50 Henry Hub (‘’HH’’) * 115%). HH 2.53 and falling as Permian increasingly pipe connectedLiquifaction2.50Shipping1.25Total6.50 (add 0.60 Regas so total 7.10 for gas to power (‘’GTP’’))Mozambique (USD MBTU)LNG FOB6.82 (10.5% Brent at USD 65 bbl, centred upon Asian destinations)Shipping0.25Total7.07 (0.60 Regas so total 7.67 total for GTPOne uncertainty is the 5.2 MTPA Angola LNG’s commercial position assuming long-term adequate feedstock, with aSA shipping distance little more than Mozambique. The 22 MTPA Nigeria LNG also has a shorter shipping distancethan USA. Given Atlantic Basin competition, SA is not likely to be the first market of choice for Mozambique’s LNG
PIPELINE DISCUSSIONDistance between Rovuma Basinand SA (Gauteng/Richards Bay)is c 3000 kms.Initial combined PPT andDomgas (c 350 MSCFD) likelyto be consumed by Domgasprojects located inMozambique. Next LNG trainsunlikely to be online until 2029 orso, with associated higherDomgas that could supply SA.Piped gas is higher credit riskthan LNG (tramline nature) andneeds to be competitive for Sellerand Buyer with the alternative ofimporting LNG (recall, SA is anexport destination fromMozambican perspective whocould be sold LNG)Pipeline (USD MBTU)Upstream4.42Pipeline2.68 (20% premium to LNG Canada pipeline)Shipping/Regas 0.00Total7.10As example, a crucial question is whetherthe Concessionaires would sell deepoffshore natural gas targeted for SA atUSD 4.42 when they can sell the samequantities as LNG for 6.82 (in thisexample). 1 Bcf/d 1000 MW CCGT 1LNG train.Who is funding an USD 6-8bn pipeline?Further, Mozambique will drill explorationwells in the Angoche and Zambesibasins c 2020, both of which aresignificantly nearer to SA and the existingROMPCO pipeline. What happens ifthey find gas?
POTENTIAL DEVELOPMENTS FUELLED BY LNG & DOMGASGTL potential to supplyproducts across the regionSignificant power potentialacross the countryMWArea 4MWArea 1PalmaPembaFLNGFertiliser, MTO and widerPetrochemicals value chainNacalaKey centresStorageLNGPotential FSRUGas-to-Liquids5th LicencingRound (Angoche)PetroChemical PlantPlanned Power Station–Potential pipeline to Maputofeeding power plants, industryand householdsBeira5th LicencingRound (Zambesi)Pande/TemaneSSLNG exports along theEast and Southern AfricancoastlinesRessanoGarciaPotential to export gas/powerto South AfricaMatolaMWGas PipelinePotential Gas PipelineRefined Product PipelinePotential New TransmissionProducing gas fieldsMaputoOffshore 5th Licencing Round Industrial hub based around Matola, FSRU/FSU/FRU potential ahead of pipeline completion LNG bunkeringOffshore Discoveries
Section 5Conclusions31
KEY NUMBERS (1/2)World’s most expensiveobject: Gorgon LNGWorld’s most expensiveobject ever: InternationalSpace StationUSD 65bnof FIDs by 3Q 2019 in aUSD 14bn GDP(with 100% external debtto GDP)USD 100bn but it is in the skyUSD 54bnThe only Cabo Delgadoparallel we can think of isGuangdong Province,China (USDbn) (13% p.a.)From 2019,the Afungi site, withUSD 55bn FIDswill be the world’s mostexpensive real estate sincetime began, and will be abuilding site for the nextdecade.The overallUSD 128bninvestment is scheduled totake place in a provincialGDP of USD 550m.1978 GDP – 112017 GDP – 1,332
KEY NUMBERS (2/2)Assuming both onshore LNG
GLOBAL ENERGY OUTLOOKS (1/2) In 2019, BP (to 2040) published its Global Energy Outlook, which supplements ExxonMobil’s and the IEA’s 2018 annual global Energy Outlooks Global population by 2040 estimated around 9.2 billion. This is anchored by growth in the emerging markets with 2.5 bn people lifted out of poverty and a global
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