Business Maverick

Deadly Triple Threat Douses Mozambique’s $60 Billion LNG Hopes

Residential and commercial buildings stand on the city skyline beside a waterway and the Maputo-Catembe suspension bridge development in Maputo, Mozambique, on Thursday, March 23, 2017.

By Bloomberg
04. May. 2020 0

At a restaurant overlooking the bay of Maputo in December, Pedro Couto, one of Mozambique’s top energy lawyers, was having a drink with a friend when he made the prediction: Finally, his country was going to realize its ambition to become a $60 billion force in the natural-gas market.

“We were all excited about 2020,” Pedro Couto, 48, said in an interview last week. “Everything did look like it was going to be a great year.”

Construction was beginning in earnest after mammoth discoveries off the northern coast a decade ago. A new airport and roads had started to frame projects that would transform one of the world’s poorest countries. Production wells were on the brink of being drilled along with early development of onshore facilities to super-cool gas into liquid for export.

But the rigs have been sent away and the sites are quiet, and it’s not just because of the coronavirus pandemic. Plans by companies including Total SA and Exxon Mobil Corp. are threatened on three fronts — each devastating in their own right.

Oil’s plunge has cut industry spending worldwide, the virus has spread through Total’s construction camp and attacks by an Islamic State-linked insurgency have surged.

Violence Spreads

The south-east African nation has been banking on the biggest investment projects on the continent to generate nearly $100 billion in state revenue over 25 years, more than seven times its gross domestic product.

Part of that money is meant to help service a Eurobond the government restructured last year. The coupon on the $900 million debt will nearly double to 9% in 2024, when gas production was scheduled to ramp up significantly.

Exxon, which has the biggest project costing as much as $30 billion, has indefinitely delayed a final investment decision. Rome-based Eni SpA says it’s pushing ahead with its smaller floating LNG project scheduled to start in 2022. Total hasn’t changed its target to start exporting in four years.

Output at Exxon’s project may be delayed by a year to 2026, according to an International Monetary Fund report on April 30. Total might also face a year’s delay, according to Andy Flower, a U.K.-based independent LNG consultant.

Insurgent Attacks

Even when the pandemic passes and prices recover, Mozambique’s government will need to quell violence that’s killed hundreds of people in Cabo Delgado province. Nowhere else globally saw as big an increase in Islamist-militant attacks last year and they increased in 2020, with a 300% jump in the first four months, according to Madison, Wisconsin-based Armed Conflict Location & Event Data Project.

While the developers will ultimately emerge from the downturn, “we’re tending to overlook that the insurgency has been the Sword of Damocles over the projects,” said Florival Mucave, president of the Mozambican oil and gas chamber.

The insurgency has been escalating in recent weeks, according to Darias Jonker, a London-based director at Eurasia Group Ltd. “Government seems to be losing the fight.”

Casualties were heavy in April, with the government claiming some success. On April 7, militants killed 52 civilians in a town called Xitaxi after they refused to join the group. The massacre was in response to defense-forces successes in killing dozens of insurgents, the government said last week.

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The coronavirus has taken its toll on the Total site. It accounts for nearly all of the confirmed infections in the country, a tragic twist for a project that was supposed to transform the nation’s fortune. The company says it’s restricted activity to essential services.

“In agreement with Mozambican health authorities, we are significantly reducing the number of people at site to allow for a thorough program of disinfection,” a spokeswoman for the project said. “This is the best way to rid the site of the virus and ensure we are well-placed to return to work when the effects of the global pandemic begin to ease.”

Great Potential

Anadarko Petroleum Corp. made the most significant East African gas discoveries in Mozambique’s relatively unexplored waters just over 10 years ago. Cove Energy Ltd. was a minority partner that raised money for a stake in the project.

“They understood very well the potential,” Michael Blaha, Cove’s then chairman, said of the government. “LNG was the only option.”

LNG Driven

Anadarko’s Mozambique LNG project would eventually be taken over by Occidental Petroleum Corp. and later sold to Total. As the project’s ownership changed, so did expectations and timelines.

“There was too much expectation in the sense that things will start moving straight away,” Couto, the Maputo-based lawyer, recalled after the discovery. “People looked at Qatar and said we’re going to be there in five years.”

Qatar was the world’s biggest exporter of the fuel in 2018, according to BP Plc.

The prospect of unprecedented and relatively quick revenue for Mozambique would lay the ground for a secret debt and corruption scandal that led to the country seeking to restructure about $2 billion of loans in 2016. Between commodity cycles, cyclones that battered the coast last year and Covid-19, the path to gas exports has been a long and rocky one.

Back at Couto’s after-work drinks, the setting sun reflected over the capital city’s port. His friend reminded him that they’d been anticipating Mozambique’s milestone year for each of the last four.

“I don’t doubt that it’s going to happen, eventually it’s going to start working,” Couto said. “The question is ‘can we survive everything’.”