Following Anadarko Corp‘s (NYSE:APC) announcement about selling 10% of its stake in the Mozambican Rovuma basin gas assets, global oil and gas majors have started evincing their interest in the same. Anadarko is selling its stake together with Videocon’s 10% stake in order to make the deal attractive for a prospective investor.
According to reports, Royal Dutch Shell (RDS.A) and Exxon Mobil (XOM) have already held early-stage talks with Anadarko. Also, it is being reported that a joint bid has already been placed by Indian companies Oil and Natural Gas Corporation (ONGC) and Oil India Limited (OIL).
The stake sale is likely to be a huge positive for the development of gas resources in the region. It is expected to bring in a major industry player with expertise, funds, and a track record in carrying out development of liquefied natural gas reserves. Anadarko lacks sufficient expertise and financial resources to execute the project on its own.
In order to understand the eagerness of global energy majors in Mozambican gas and the reason why a portion of it is up for grabs, we give an in-depth primer on Mozambique’s gas assets, the current ownership pattern and why we think Anadarko is selling a partial stake. Then we talk about customers for this gas and a deduction of the likely price Anadarko can extract from eventual buyers.
How Important Are Mozambique’s Gas Reserves?
Many large natural gas discoveries have been made since late 2011 off the coasts of Mozambique, Tanzania, and most recently Kenya. So far, some 150 trillion cubic feet of gas has been discovered in the waters of Mozambique, which might supply a country like Japan for 35 years. These discoveries have transformed East Africa into one of the world’s most promising energy provinces, so much so that the region may emerge as a strong competitor to Qatar and Australia in the battle to capture key export markets in Asia. However, before that can happen, a huge challenge is to build facilities on land to turn the reserves into liquefied natural gas, which can then be shipped to the markets. That is where a new player with deep pockets can make all the difference.
The Current Ownership Pattern Of Rovuma Basin Gas Assets
Anadarko is the operator of Offshore Area 1 where these reserves are located and holds a 36.5% share of the fields. Its current partners are Mitsui of Japan with a 20% stake, Bharat Petroleum Corporation Limited and Videocon (both of India, with 10% stake each) and PTT of Thailand (8.5%). The Mozambican government is represented by its national oil company, Empresa Nacional de Hidrocarbonetos, which holds a 15% stake in the fields. If the sale goes through, Videocon would have exited the project completely while Anadarko’s stake will come down to 26.5%.
Why Anadarko Might Be Selling Its Stake
While the project is certainly attractive, it comes with a huge price tag. For the development and construction of a new offshore two-train liquefied natural gas terminal alone, Anadarko has estimated the total cost at $15 billion. The company will be constructing the LNG terminal jointly with EnI of Italy which also has huge gas reserves in the region. This will reduce its cost burden to some extent. However, there would certainly be additional costs involved in the development of reserves. Given that Anadarko is a high-debt company keen to reduce its debt obligations, it makes sense for the company to monetize the potential of its reserves. The money raised could be used for twin purposes of financing further project development and paying off debt. The company had a long-term debt of approximately $13 billion on its balance sheet on December 31, 2012.
According to Anadarko, the target is to begin construction of LNG plants in 2013 with the goal to bring the resources to market in 2018. Hence, for the next five years, Anadarko will have to keep putting up significant money without generating returns. This will certainly increase the debt burden unless financed using stake sales. Internal accruals are by far insufficient to meet project costs.
Also, considering the scale of resources and lack of experience and skill within the Mozambican government in this area, the times ahead are sure to be challenging. A number of legal, bureaucratic and financial hurdles will have to be overcome in close coordination with the government. This raises the risk profile of the project and financing from external sources will therefore be expensive unless Anadarko and EnI can bring in players like Shell, BP (BP), Total (TOT), ExxonMobil or Chevron (CVX) who have considerable experience and expertise in this area. A higher number and quality of project partners will ease the capital burden of individual players, reduce project risk and thus improve chances of cheaper financing.
Who Will Buy The Gas?
The demand for gas in Asia is expected to accelerate going forward, especially in India and China. The Mozambique gas should thus find ready buyers. Natural gas prices in Asia also tend to be higher than in the U.S. due to greater demand. While a supply glut in the U.S. is causing natural gas to be sold below $4 per million British thermal units (mBTU), the price in Asia could be as high as $20 per mBTU. Mozambique also has a competitive advantage over America and European countries in supplying LNG to Asian markets due to geographical proximity. These factors alone should make any potential investor salivate in anticipation.
Anadarko has already initiated talks with potential customers for the gas that is expected to start flowing in 2018. It is currently in talks with 20 companies across 10 countries. It specifically mentioned Japan, which is moving away from nuclear power as one of the countries where companies have shown interest in purchasing Mozambican gas. With the ongoing policy uncertainty in the U.S. over allowing LNG exports, Anadarko may stand to gain by sealing deals quickly.
What Price Can Anadarko Extract For Its Stake?
Until last year, Cove Energy held an 8.5% stake in the Rovuma Offshore Area 1 field. PTT Exploration and Production of Thailand eventually won the bidding war and snapped up Cove for $1.9 billion. This transaction will most likely serve as a benchmark for the upcoming sale. Therefore, even if no premium is paid, Anadarko can expect $2.2-2.3 billion for its 10% stake. Considering that Shell and Exxon are now in play, the chances of premium pricing have increased.
While ONGC and OIL have submitted a joint bid, the details are not known at this point. We think that Anadarko is more likely to go with a player who has proven expertise in building and operating LNG plants. Exxon and Shell fit the bill perfectly, being two of the world’s leading LNG investors and shippers.
We recently revised our price estimate for Anadarko to $80 after Q4 earnings results.