Costs of Mozambique LNG project mustn’t rise, TotalEnergies warns

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Costs of Mozambique LNG project mustn’t rise, TotalEnergies warns

5:04 CAT | 13 Feb 2023

File photo: Reuters

Patrick Pouyanne, chairman and chief executive officer of French oil major TotalEnergies, says that the resumption of work in Cabo Delgado, northern Mozambique, cannot be rushed and will partially depend on costs.

“I’m not in a hurry to restart (…). If I see the costs going up and up, we’ll wait,” Pouyanne warned during a telephone conversation with investors reported by financial information agency Bloomberg [see transcript below].

The head of the French oil major leading the more-than US$20 billion project in northern Mozambique made it clear that the costs of the project, currently suspended due to the security situation, will be important in the decision to return to Mozambique.

In addition to the project costs, namely the renegotiation of contracts with local suppliers and subcontractors, Patrick Pouyanne further stressed that the issue of human rights will also be a fundamental part of the decision.

“I want a clear view on these human rights issues, which is a salient issue for me,” Pouyanné said in conversation with analysts and investors, referring to the report commissioned on the human rights situation in northern Mozambique.

Pouyanne’s statements came about a week after his visit to the north of the country in the company of President of the Republic, Filipe Nyusi.

Based on his recent visit, Pouyanne said that things are back to normal from a security point of view, and stressed that the decision [to return to work or suspend investment] is a decision of “all partners in the project”.

Pouyanne rejected the idea that there will have to be a choice between returning to Mozambique or investing in a US LNG project, saying: ” We are ready to finance both. We have the capacity to finance both within our $16 billion, $18 billion.”.

At the beginning of this month, TotalEnergies commissioned Jean-Christophe Rufin to assess the situation in Cabo Delgado and producing a report by the end of February, which will inform assessments of whether there are conditions to resume construction of the plant to liquefy natural gas extracted from the Rovuma basin 40 kilometres from the coast.

Mozambique has three natural gas development projects focussed on reserves in the Rovuma basin off the coast of Cabo Delgado, ranked among the largest in the world.

The two largest projects foresee piping the gas from the seabed to land before cooling it and exporting it by sea in a liquid state.

One is led by TotalEnergies (Area 1 consortium), and work advanced until it was suspended indefinitely following an armed attack on Palma in March, 2021, the French energy company declaring that it would only resume work when the area was safe.

Cabo Delgado province has been facing an armed insurgency for five years with some attacks claimed by the extremist group Islamic State.

The insurgency has led to a military response since July 2021 with support from Rwanda and the Southern African Development Community (SADC), liberating districts next to gas projects, but new waves of attacks have emerged in the south of the region and in the neighboring province of Nampula.

The conflict has already displaced one million people, according to the United Nations High Commissioner for Refugees (UNHCR), and around 4,000 deaths, according to the ACLED conflict registration project.

See below the transcript of the question with Pouyanné’s reply and subsequent statements on the Mozambique LNG project at TotalEnergies Q4 2022 Earnings Call , held on February 8, 2023 [highlights are ours].

Jason Gabelman

This is Jason Gabelman from Cowen. I have a couple of questions. The first is you press released last week that you had farmed down a position in the renewal power asset at a high multiple, but it was a low overall cash contribution, one that I wouldn’t have guessed [indiscernible] the materiality of press release.

It was a few hundred million dollars. And I’m wondering why you decided the press release was given. The thought was you have been farming down these assets all along. And if that potentially indicates that given the market environment, you’re possibly accelerating the farm downs of the developed renewable power business over the next year and what type of cash flow contribution that could bring.

My second question is on the LNG portfolio. You’re obviously undergoing the review in Mozambique, but there’s also been some reporting that you could take a large stake, either offtake or equity in a U.S. LNG project. And I’m wondering, if your case of growth in the U.S. LNG market is at all dependent on what happens in Mozambique and if you’ll still continue to view the U.S. LNG market as one in which you want to grow in.

Patrick Pouyanne

Jason, you have a complex question, but easy to answer. First, no, there is no acceleration at all. We have always been very clear. But to reach the double-digit profitability we want to have in renewables, we’ll have to integrate farm downs. It’s part of the business model. This is why we have some growth capacity objectives that is 35 gigawatt growth.

But at the end, we’ll keep more or less half of it. This is very clear. We stated that 3 or 5 years ago when we began the strategy, and we implement it. So there is no acceleration. It came on our desk. There was some assets in France, which were part of [indiscernible] to being farmed down. It has been done in a very good way.

And thanks to this farm down, we have on these assets more than a double-digit return, much better. We don’t give all the details because there are also a counterpart, but that’s clear. So it’s — to be clear, and we have embedded in the strategies a fact that maybe we developed a 100% project. But when we farm down.

And by the way, I always explain to you several times, it’s not only a matter for me of profitability. It’s a matter of managing the risk. I prefer to have 2x 50% of 2 projects, and 1x 100%. It’s just a matter of things could happen.

So that’s — yes, I can tell you, by the way, it was 16x EBITDA, if somebody gives me an indication, 16x EBITDA. So I think 16x EBITDA, I can tell you, no problem. I can’t continue to develop my renewable business with this type of returns of 50% of my portfolio. And this gives the cash also to recirculate the cash and risk this project. So I think it’s a smart way, and we’ll stick on this strategy.

No, there is no link between Mozambique and the U.S. We like both. We like LNG, okay? We want to continue to grow in a growing business, which is LNG. LNG is good. LNG is international gas. LNG is a way to decarbonize the coal-fired power plants in Asia and elsewhere. So there is no fear about it.

Maybe, there may be some cycles. Today, it’s at the top. It could go down because we are not able in the industry, of course, to plan all the plans very smartly. We invest, but — so we are — we think that the U.S. on the long term is competitive because you have the U.S. gas price is about the lowest in the world, so $3 to $5. Even at $5 per million BTU, it will be very, very profitable. So that’s the reason why.

So yes, we have Cameron LNG. Yes, we have ECA in Baja, California, Phase I, which is being built, and Phase II may be in the near future. We are looking over opportunities in the U.S., and it’s independently of Mozambique.

Mozambique, just to make — to answer your question, I spent a day last week, Friday, a day in Cabo Delgado because my — that — my company, I said there is no way for me to envisage any restart of Mozambique as not as you don’t allow me to visit Cabo Delgado. And I can travel around with a car, not an army, but alone. So we are only 3 of us, 2 cars.

I want to go there. I want to check. I want, in fact, to go to see what if life is back to normal. I can tell you what I’ve seen from a security point of view is good. Even life is back to normal. Villages, people are back.

But it’s one step. There is more steps to be done. The 2 next steps, it varies and I — because there have been some, I would say, controversies about human rights, about the — around the project, not because of us. We inherited that from Anadarko acquisition.

So I want a clear view on these human rights issues, which is a salient issue for me. It’s important. I have given a mission to — especially to human rights, a very well-known doctor in France, was accepted. He’s making his job, so I’m waiting to see his report to understand exactly what is, I would say, these — what are these issues.

If there are things to be done, we’ll execute the recommendation. We’ll be transparent on it. We will share obviously with our partners because it’s a Mozambique LNG decision to restart. It’s not a TotalEnergies decision. It’s — all the partners should be on board.

And there is a third step, which I can use this question to deliver is that, of course, we have to reengage with the contractors. And one key condition to restart will be to maintain the costs that we had. If I see the costs going up and up, we’ll wait. We have waited. We can continue to wait. And the contractors will wait as well.

So I’m not in a hurry in this condition to restart. Don’t — so there are conditions, I think, are okay. Human rights, I need the report. Costs, we will need another report from my teams. We will — probably, I will ask them to reengage, but smoothly. No hurry.

Again, I can wait on Mozambique LNG. If costs increase, we will wait, and we’ll take the time. So that’s where we are on these projects.

So my message is positive, but it will take time.

And it’s not in competition with the U.S. We are ready to finance both. We have the capacity to finance both within our $16 billion, $18 billion. These are 2 good projects. It did all that — by the way, on the U.S. projects, we could say the same.

What I see when we discuss with some project developers is that costs are increasing also. So it’s good to rush for volumes. But if you destroy the value because costs are too high, we know what is the impact at the end, and we experience it. So that’s the same for me, debate. It’s more a question today on — we are very convinced by the U.S. and by the LNG market, but we need to have cost efficiency in the project.

READ: TotalEnergies SE (TTE) Q4 2022 Earnings Call Transcript

Source: Lusa / Seeking Alpha