The Coming LNG Export Boom In Mozambique

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Includes: E, PTR, XOM
by: Callum Turcan

Summary

Mozambique is about to become the next big LNG exporter by the mid-2020s.

Looking at the massive gas fields located in Area 4.

LNG export developments are being spearheaded by Eni, Exxon Mobil, PetroChina, and others.

Get ready to welcome the next juggernaut on the global liquefied natural gas stage, Mozambique. Located in East Africa with a population of around 29 million, the nation houses an enormous amount of offshore natural gas resources. Italian energy major Eni (E) entered the nation back in 2006 with an eye on Mozambique’s Rovuma Basin in what is known as Area 4, a large offshore exploration block. As things stand today, Eni and its partners have located an estimated 85 trillion cubic feet of natural gas resources in the area. Let’s dig in.

Ownership overview

At the end of last year, Exxon Mobil Corporation (XOM) closed its $2.8 billion purchase of a portion of Eni’s stake in Mozambique Rovuma Venture (formerly Eni East Africa). Now Exxon and Eni each own a 35.7% stake in the Rovuma Venture, with China National Petroleum Corporation owning the remaining 28.6% interest via PetroChina Company Limited (PTR).

Mozambique Rovuma Venture owns 70% of the Area 4 concession, with Galp Energia (Portuguese energy firm), Korea Gas Corporation (known as KOGAS), and Empresa Nacional de Hidrocarbonetos (Mozambique’s state-run energy company) each owning 10% of the offshore concession.

As the operator of the Area 4 block, Mozambique Rovuma Venture is leading the charge towards Mozambique’s bright future as a major LNG exporter. Exxon Mobil will develop and operate the onshore liquefaction side of things while Eni will develop and operate the upstream side of things, as well as the Coral FLNG venture.

Coral FLNG

The Coral floating liquefied natural gas project envisions using an FLNG vessel with the capacity to export 3.4 million metric tons of LNG per year, and the project has already received a positive final investment decision. Floating LNG vessels are capable of handling gas production, processing, liquefaction, and loading activities all on one vessel, instead of having to first route offshore gas production onshore before beginning this process.

While FLNG vessels generally aren’t more economical than onshore LNG developments, they are required to commercialize smaller gas fields (generally speaking, it takes at least 7 Tcf-10 Tcf of recoverable reserves to make onshore LNG export projects viable). All of the Coral FLNG's LNG production capacity has been purchased by BP plc (BP) for a 20-year period, and by 2022, the project is expected to be up and running.

Resource estimates vary, largely due to differences between gas-in-place, technically recoverable resources, and what is economically possible to extract at reasonable price estimates. It appears the Coral Field has about 16 trillion cubic feet of natural gas in place, with 5 Tcf-10 Tcf of that expected to be recovered. The Coral Field is located in 1,500 meters to 2,300 meters of water 50 kilometers away from the coast of Mozambique, which investors should note is considered deepwater territory. This is the consortium’s first of many export endeavors, but most likely all future projects will be onshore.

Mamba development

With Exxon Mobil now as a partner, the consortium has the financial firepower and engineering prowess to kick it up a notch. The next development phase envisions developing the Mamba gas fields, which includes the Mamba South (15 Tcf), Mamba North (15 Tcf), and Mamba North East (10 Tcf) gas fields. Those fields are also located about 1,500 meters to 2,300 meters below the surface and are roughly 60 kilometers away from the coast, which is where Exxon’s expertise will really come in handy. As you can see, those three gas fields house 40 trillion cubic feet of natural gas resources (how much will be recovered is a different story).

Investors and readers should note that upstream and midstream development costs for deepwater projects are quite material. Beyond the need to lease drillships capable of handling depths of that magnitude, specialized subsea production & gathering infrastructure is required after those wells are drilled, and subsea long-haul pipelines are needed to route that production onshore (assuming the FLNG vessel strategy isn’t being pursued). This is why LNG exporters are always trying to pursue expansions of existing facilities, because the economics of brownfield LNG projects are very strong as development costs are far lower on a per unit basis than greenfield projects.

Exxon Mobil, Eni, and the rest of the consortium envision building two onshore liquefaction facilities to commercialize the large Mamba gas fields via exports. Each LNG train will have 7.6 million metric tons of LNG production capacity per year, with exports expected to start up by 2024 at the earliest. A final investment decision is expected next year, which will depend largely on the consortium’s ability to find long-term buyers for that output.

Investors should note there should be a fair amount of domestic gas sales as well, with regional sales also offering a nice amount of upside. That would require domestic and regional infrastructure to be built out, including gas-fired combined-cycle power plants, transmission lines, and onshore pipelines, which the consortium is more than capable of doing.

Demand growth key

From 2000 to 2017, the global LNG market has grown from 100 million metric tons to 293 million metric tons, according to Royal Dutch Shell's (RDS.A) (RDS.B) Global LNG Outlook. That demand growth is expected to continue roaring along as Shell sees global LNG demand hitting ~340 million metric tons by 2020.

Sure, obviously, Shell has a vested interest in making the trajectory of LNG demand look as strong as possible. However, the International Energy Agency backs up these bullish forecasts. From 2016 to 2022, the IEA expects global gas demand to grow from 3,630 billion cubic meters to 4,000 billion cubic meters, good for 1.6% annual demand growth. Note that this is more than just a fuel for electricity story, industrial demand growth is another big part of this picture (where natural gas is used as a feedstock for other products).

Final thoughts

Eni, Exxon Mobil, PetroChina, Mozambique, KOGAS, and Galp are all betting big on the LNG growth story. These LNG export terminals, along with the necessary upstream and midstream investments, cost tens of billions of US dollars to bring online. One has to be very confident that these developments can be completed on-time and on-budget, and that those additional volumes will be able to reach an end buyer (which is where the marketing teams come in, and another reason why Exxon Mobil is a good addition to this team due to its extensive knowledge on the subject). What is known is that Mozambique is loaded with natural gas and that the future of global gas demand growth looks very bright. Let's see how this story pans out over the coming years. Thanks for reading.

Author's note: Some of the companies mentioned above don't trade on a major U.S. stock exchange, which come with their own sets of risks and rewards. Always do your own due diligence before investing.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.