Mozambique’s new President, Filipe Nyusi, named Pedro Couto Minister for Energy and Mineral Resources in his new cabinet on 17 January 2015. For supporters of Mozambique’s first liquefied natural gas (LNG) project, the appointment of Cuoto, a former energy minister, was a welcome development.

The financing of the $20-25 billion project has become more difficult because of the recent collapse in oil and gas prices, and Cuoto’s skills will be needed. The project’s long-term gas sales contracts have yet to be finalised, and the sponsors’ balance sheets will strain in this new price environment to provide the equity that the project requires.

But the project nevertheless appears to be gaining momentum. A Decree Law that passed in December 2014 gives its main sponsors, Anadarko and Eni, greater clarity about how to structure a deal, and sources close to the project say that a final investment decision (FID) could be agreed by year-end, with first gas scheduled for 2019.

The project also benefits from at least tacit political support. Nyusi is a native of Cabo Delgado province, where the onshore elements of LNG operation would be located, and is aware of the project’s economic benefits.

Considerable capex

The LNG project entails developing Block 1 (which includes the Prosperidade and Golfinho fields) and Block 4 of the Rovuma basin, and delivering gas to an onshore liquefaction plant on Mozambique’s Afungi peninsula. Different sponsor groups are developing the two blocks:

Block 1 – Anadarko (26.5% and operator), Mitsui E&P (20%), Empresa Nacional de Hidrocarbonetos (ENH, 15%), ONGC (10%), BPRL Ventures Mozambique (10%), Videocon (10%) and PTT (8.5%).

Block 4 – Eni (50% and operator), CNPC (20%), ENH (10%), Galp Energia (10%) and Kogas (10%).

In an effort to lower costs by sharing them, Anadarko and Eni would jointly build onshore liquefaction facilities, although Eni also plans to build an additional floating offshore unit at a later stage. The onshore plant would feature four trains, with Anadarko and Eni building two each. Each train is expected to produce five million tonnes of LNG per year.

Much of the project’s high costs are a result of the significant expense involved in building associated onshore infrastructure in the remote Afungi region. A prolonged lull in oil and gas prices could hit the balance sheets of the sponsors, which focus primarily on upstream development, and make these high capital costs harder to swallow.

The two operators may decide to bring in more investors. “You might find a number of entities involved in blocks 1 & 4 looking to sell down their interest this year,” said Julian Nichol, a partner at Bracewell & Giuliani in London. “These sponsors may not have even considered this a year ago, but will be forced to reassess, due to the outlook for oil prices.”

Rumours have circulated that the Anadarko consortium is considering bringing in an LNG specialist, but no buyer has yet emerged, possibly because the operators have asked for high prices for equity stakes. For example, CNPC paid $4.2 billion in 2013 for a 20% stake in Block 2. The subdued price of oil and gas, however, may lower the price for new entrants.

Legal clarity

The new Decree Law “allows Anadarko and ENI to make the projects bankable, as the foreign exchange rules are quite flexible, and they will be able to repay lenders directly from LNG sales,” said Ana Becker-Weinberg, a senior associate at Bracewell & Guiliani in London.

Under the new law, 25% of production must be sold domestically. The sponsors are understood to have agreed memoranda of understanding (MOUs) with potential buyers covering about 80% of expected production. This high proportion of pre-sales will be necessary to make the development bankable.

Sources close to the financing negotiations expect debt to meet about 70% of total costs, with 75-80% of the debt covered by, or coming from, export credit agencies (ECAs). This ECA debt would be a mixture of financing tied to construction contracts and subcontracts and equipment supplies, and untied loans based on the nationality of the ultimate buyers of the gas. The sponsors are hoping to sign on the debt in 2016, although some observers view that date as ambitious, given the project’s immediate challenges.

Looming deadlines

The MOUs now need to be converted into binding sale and purchase agreements, and potential buyers will probably want to revise the prices laid out in the provisional agreements. A dramatic drop in expected revenues could drag on financing discussions, and would thwart the government’s target of first gas by 2019. The sponsors will need to make significant progress this year to meet that target.

Sources familiar with the process say that an award for the main engineering, procurement and construction (EPC) contract may take place within two months, but the developers have yet to release a shortlist of prequalified bidders. One observer doubts that any LNG projects outside the US will make FID decisions in 2015, given the drop in oil prices.

But Nichol notes that political impetus behind the Mozambican project remains robust. “The fall in oil price has forced sponsors of all big LNG projects like this to reappraising their economics,” he said. “But this is a leviathan of a deal and will not be stopped.”