Mozambique: HCB changes organic structure in response to new energy sector situation
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Take your world class offshore exploration team to search in an exotic far away country; discover unimaginably large reserves of natural gas under the ocean; negotiate with the national government and financing partners on terms of investment, production and profit; take gas out of the ocean and sell it; distribute gains fairly and evenly among stakeholders – happy ending for all – right?
Well, it doesn’t always work out that way and certainly not in the case of Anadarko and Mozambique, for both of whom the story of the past decade in their respective joint offshore gas experience has certainly been far from ‘’add water, makes its own sauce’’.
However, past frustrations and errors of judgement, omission and commission aside and with partner/rival ENI signed off and entering the production side of offshore gas in the country at long last it should surely, only be a matter of time for Anadarko to get its onshore facilities up and running and in position to produce sometime in in the early-mid 2020’s?
As a first mover into Mozambique, Anadarko was once tipped to become the first gas producer too. However things have changed both inside the country and in the world gas market to a great extent, and suddenly the relatively untried and barely tested FLNG facility that ENI chose to promote and develop is looking like the better option: faster to market, more flexible, more secure… even if absolute production capacity cannot approach that of multiple onshore transformation chains.
Back in the heady days of 2010 when Anadarko first struck gas off Cabo Delgado and hearts began to beat a little faster in somnolent Maputo ministries, there was everything to hope for and an exciting outlook ahead – in the (then) not too distant future. Since those days, oil prices have risen close to $120/barrel and fallen down again below $30/bbl, giving anyone trying to plan an energy investment a roller-coaster of a moving target to contend with. Despite relatively stable global growth since the end of the Global Financial Crisis few observers expected such volatility in energy market conditions.
Domestically, also nobody predicted national bankruptcy, default and disgrace in world development circles, enormously hampering efforts in every industry and erasing so many years of goodwill; and most recently, who could have predicted the ugly spectre of terrorism on the doorstep of Mozambique’s most important future gas development site? These were just some of the previous unknowns which tragically are now all too well known by those with a stake in Mozambique’s energy economy.
Tortoise and the Hare stumbling towards the finish line
Worrying as they are, recent security developments in Mozambique’s north are not seen as a serious threat to gas industry investment, a point put to me in conversation last month in Johannesburg at the offices of Control Risks, the global consultancy firm. Seamus Duggan, their Mozambique analyst downplayed the impact of the recent Cabo Delgado attacks and suggested that it was unlikely that the gas companies themselves would become the main target of any future insurgencies.
For Anadarko, the true name of the game today is sourcing the finance to develop the first two of its Afungi Peninsula natural gas – LNG transformation trains, which in turn means securing the necessary buyer agreements. –These are the so-called Sale and Purchase Agreements or SPAs – from future buyers that will facilitate an approach to international capital markets for the tens of billions of dollars that will be required to build out its offshore Area 1 and supporting Palma, Cabo Delgado operations.
As of last month, for the 8m tons of annual LNG capacity that the company anticipates producing, deals for only 2.6m had been signed, according to Bloomberg News (January 9th), but with negotiations being strenuously pursued with Chinese and other potential Asian buyers to boost that level. At present, after a lull of several years, China is back in the world LNG market with a vengeance, registering a 50% increase in imports in the first 10 months of 2017 alone.
Since Anadarko’s internal financial position is not a given, every twist and turn on the world’s financial markets affects its ability to extend risk to its shareholders in an unpredictable country like Mozambique. By no means a giant in global energy terms, when stacked up on world share markets against e.g. Exxon with a market capitalisation of $370 bn or even ENI with its nearly $70bn, Anadarko’s relatively paltry $32 bn market cap. at recent prices makes it far from a heavy hitter on Wall Street.
Every little helps however, and as a company primarily involved in offshore exploration, recent, albeit highly unpopular, legislative proposals from the Trump Administration towards liberalizing offshore drilling on America’s two coasts (as well as similar measures already taken by Brazil in respect of its coastal drilling regulations) have helped boost Anadarko’s stock. The company’s shares have risen some 30% in value to around $62/share since mid-December last year, while remaining just under half the price they reached in August 2014. Any borrowing that the company needs to undertake in connection with new LNG operations or indeed any new share financing that is required, will be facilitated, and probably be cheaper to undertake, against the backdrop of the higher capital market valuation.
Regional LNG Price Convergence Reshaping an Industry
Taking a step backwards from Mozambique’s shores however another looming development is the near-revolution that is underway in the global LNG market itself, particularly in Asia, where old structural norms of crude-oil linked contracts and fixed, long-term offtake agreements are being blown away in a wave of disruption, pricing flexibility and emerging independent trading activity, the subject of a research paper for the J. P. Morgan Center for Commodities (GCARD) by this author.
Global and regional gas arbitrage has been driving Asian gas prices down and new players operating on much shorter contractual horizons, together with the upsurge of hedging activity on Asia’s new LNG futures markets have all combined to reduce the previously substantial Asian LNG price premium. The phenomenon may have further to run, however according to recent research from Citi Global Commodities. In a January 2018 report titled ‘’Global Gas, a New Era in Trading’’ analysts point to the continued unabated surge in shale gas production, US and Australian local market-global arbitrage and the so-called ‘’US-Europe LNG Bridge’’ as major factors that will continue to radically reshape the future world gas market into which all global players – from Moscow to Manitoba, and from Mobile to Maputo – will be compelled to operate.
By Colin Waugh
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