Financing LNG in Mozambique

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In celebration of our recipient of AOP’s ‘Person of the Year Award’, H.E. President Felipe Nyusi, we are running content from the Africa Energy Series Report 2020: Mozambique, which highlights Mozambique’s gas revolution. H.E. Nyusi will receive the prestigious award at the Mozambique Gas & Power 2021 Conference & Exhibition.

With eight planned liquefied natural gas (LNG) projects containing a total liquefaction capacity of 44 million tons, sub-Saharan Africa is set to become a regional leader in LNG production and export, accounting for 8% of potential global capacity by the mid-2020s. Mozambique has emerged as an LNG hotspot on the continent and is anticipated to become one of the top ten LNG producers globally in the next five years, anchored by two large-scale developments in Area 1 and Area 4.

In November, the African Development Bank (AfDB) approved a $400 million loan to support the construction of an integrated LNG plant, including the development of offshore gas fields in Area 1 and a two-unit liquefaction plant with capacity of 12.9 million tons per year. Spearheaded by a Total-led consortium of energy developers and operators, the Mozambique LNG Area 1 project represents the single largest foreign direct investment on the continent to date.

The AfDB serves as one of several institutions, ranging from commercial banks to development financial institutions to export credit agencies, which are providing senior debt financing to the project. With a final investment decision (FID) made in June 2019, production is expected by 2024.

LNG production and export from Area 1 will be complemented by ExxonMobil’s neighboring Rovuma LNG project located in Area 4. The development aims to extract natural gas from a deep-water block that contains more than 85 trillion cubic feet of gas and would produce an estimated 15.2 million tons per year. While ExxonMobil was prepared to take an FID on the project in 2020, the decision has been indefinitely postponed due to the COVID-19 pandemic.

LNG Projects on the Continent

Between 2020 and 2035, requisite financing for the development of the African gas industry is estimated at approximately $721 billion. Over the next decade, LNG projects alone will demand a minimum of $80 billion in investment, while pipeline infrastructure will require $20 billion and gas-to-power projects will necessitate $8 billion. Because most Sub-Saharan countries lack sufficient pipelines and infrastructure to supply and distribute natural gas, most developments in the region are greenfield projects with heavy capital requirements.

While the continent’s vast LNG reserves have stimulated strong interest from developers, the securement of financing remains a primary constraint for development, and several project delays have occurred as a result. In Equatorial Guinea, the ultra-deepwater Fortuna FLNG was put on hold at the end of 2018, as operator Ophir Energy was unable to secure financing before the expiration of its Block R license. In Tanzania, the construction of an onshore LNG project in Lindi, set to monetize the country’s 57tcf of natural gas, has been delayed for years due to deferred approvals of a new commercial, legal and regulatory framework.

Another factor in the financial viability of LNG projects is the cost of transporting natural gas, which is higher than oil and coal due to a lower fuel density and energy content per volume unit. As a result, the break-even price for pipeline and LNG transportation is around 3,000 km, which impedes the development of small-scale LNG projects for local markets. In addition, prices tend to differ dramatically between sub-regions due to the lack of a single, large and integrated market, which increases risk for major FIDs on LNG developments. As developers seek to unlock the gas potential of the continent, the extent of return on investment for LNG projects remains at the forefront of FIDs, particularly in comparison to other LNG-producing regions around the world. Ultimately, the flow of funding will depend on field development costs, fiscal terms and the political and security climate, which both public and private sectors continue to attempt to ameliorate.