Mozambique: The next Liquefied Natural Gas player

Markets have become unpredictable, oil prices have dropped and Wood Mackenzie has predicted that up to $210 billion of planned oil and gas investments are now at risk, with at least half likely to be deferred. For Africa, the most resource rich continent in the world, this could prove particularly challenging. With annual budgets based on the premise of higher oil prices, many African governments have had to cut expenditure or source additional finance to adjust falls in revenue.

For Nigeria, where oil accounts for 57 percent of government revenues and 10 percent of the country’s GDP, the impact has been particularly painful. The latest data by Capital Economics has projected that Nigeria will suffer its worst economic hit for thirty-five years by the end of 2020 and in Angola, Africa’s second largest economy, the situation is not much better. The pandemic has managed to halt drilling across the entire country, something that even a twenty-seven-year civil war failed to do.

New licensing for fossil fuel exploration is also diminishing, and projects are being delayed or cancelled in countries from Mozambique to Guinea Bissau as companies continue to analyse costs and project viability. For example, Exxon Mobil has postponed the final investment decision on its Liquefied Natural Gas (LNG) project in Rovuma, Mozambique due to the market uncertainty triggered by the global crisis.

While this period of unprecedented upheaval will have far-reaching consequences across global energy markets, for some African countries the tide is beginning to turn as major opportunities present themselves.

In July, Mozambique’s first ever onshore LNG project led by operator Total secured $20 billion financing. The project is expected to reach financial completion by the third quarter of 2020 with co-investors including Mozambique, Japan, Thailand and India. This Final Investment Decision is the largest ever in sub-Saharan Africa oil and gas and will be transformational for Mozambique.

This is just one of several projects being developed in the country’s northernmost province of Cabo Delgado following one of the biggest natural gas finds in a decade off its coast.

Today, key energy players are increasingly looking to natural gas as a transition fuel in the shift to a lower carbon energy supply. The International Energy Agency (IEA) World Energy Outlook report (2019)  projected that demand for natural gas will overtake coal in the global energy mix by 2030 and that by 2040 natural gas consumption will rise to account for a quarter of global energy demand.

If managed correctly, Mozambique is in a unique position to become a leading supplier of LNG to some of the world’s largest economies, and this recent colossal investment by international and domestic partners shows that there is real  confidence in the long-term potential of LNG in Mozambique.

Led by Total, this recent project to extract, liquefy and export gas raises the hope of propelling Mozambique, one of the poorest countries in the world, to middle income status by the mid-2030s by generating in excess of $40 billion in revenue for the Government over its lifespan. This inflow of foreign investment will enable Mozambique’s Government to pursue its own development agenda and boost economic growth by stimulating local enterprises, creating employment opportunities and bringing meaningful social and economic benefits.

However, whilst Mozambique is positioning itself as the world’s next energy frontier, there is still doubt about whether the country’s natural gas resources can live up to expectations and whether these LNG projects will cover their outlays.

The coronavirus pandemic has hit demand for natural gas across the globe. Mozambique’s abundant reserves have been pegged as a crucial resource for the country to capitalise on, however the projections for the potential revenue these stores could generate were based on energy market prices that we may not see again.

Localised issues have also caused challenges. For example, Total has been forced to limit progress on construction after its site became the focal point of one of the country’s first coronavirus outbreaks. Security will also prove to be a big test as Total and the Government of Mozambique recently signed a security pact to support the development of the $20bn Mozambique liquefied natural gas (LNG) project as Mozambican security forces have been battling militias suspected of links to Islamic State according to Reuters.

Although COVID-19 will continue to test the resolve of the oil industry, economies and governments, the situation is not permanent. With an estimated 150 trillion cubic feet of LNG reserves, equivalent to 24 billion barrels of oil, Mozambique has the potential to become one of the world’s largest LNG producers. Now only time will tell how it plays out.