LNG latest setback for Mozambique

London — The decision this week by US major ExxonMobil to delay the final investment decision on the Rovuma LNG project in Mozambique is a new setback for the southeast African country's fledgling LNG industry.Mozambique is set to become one of the world's biggest LNG exporters with over 30 million mt/year of production capacity in development, but the industry is under threat from an increasing Islamist insurgency, very low LNG prices and swingeing cuts in company spending.ExxonMobil had already pushed back FID on the 15.2 million mt/year Rovuma LNG project into 2020, having been expected to sanction the project by end-2019.

Now, as part of a 30% reduction in spending this year, the US major said it would delay FID on Rovuma LNG while it worked with its partners to bring down costs.

"A final investment decision for the Rovuma LNG project in Mozambique, expected later this year, has been delayed," it said.

"ExxonMobil continues to actively work with its partners and the government to optimize development plans by improving synergies and exploring opportunities related to the current lower-cost environment," it said.Spot LNG prices have plunged since the start of the year, with the benchmark JKM spot price hitting an all-time low of just $2.26/MMBtu at the start of April.

Unfavorable economics

Analysts said the economics of Rovuma LNG look increasingly challenging."The first sign of trouble was the missed 2019 FID timeline that was an indication that there were potential issues remaining which the partners had yet to fully address," Joseph Gatdula from Fitch Solutions said Thursday."The glut of LNG supply and a recent sharp fall in oil prices, often used to set LNG prices, has only raised the risks for the challenging project economics. The timing -- while not a complete surprise -- will certainly be viewed as a setback for Mozambique," Gatdula said.

Luke Cottell, analyst at S&P Global Platts Analytics, said Thursday the estimated $27-30 billion price tag for the development was "clearly unappetizing" in a market environment where most energy companies are looking to dial back on capex commitments.

"The risk around investing in the project is exaggerated by the fact there are no known capacity offtakers, with export capacity instead contracted to equity holders in line with their ownership stake," Cottell said.

"Platts Analytics believes ExxonMobil will shelve this project until economics are more favorable, with first production from the project not forecast until 2030."Rovuma LNG is the biggest of three LNG projects under development in Mozambique and had been expected to begin operations in 2025, though that start date is now almost certain to be pushed back.The two others are the Total-operated, 12.9 million mt/year capacity Mozambique LNG project -- expected to start up in 2024 -- and the Eni-operated, 3.4 million mt/year capacity floating Coral LNG project.ExxonMobil -- a partner at Coral -- said that project development continued "as planned." First LNG is expected in 2022.

Increased insurgency

The developments of Mozambique LNG and Rovuma LNG have also been threatened by an increasing Islamist insurgency in the country. Militants in late March attacked the town of Mocimboa da Praia -- just 60 km (37 miles) from the site of the two high-profile LNG developments at Afungi.The attack was reported to be part of the Ansar al-Sunna Islamist insurgency in the southeast African country that began in October 2017.

Alexandre Raymakers, senior Africa analyst at global risk consultancy Verisk Maplecroft, said the attacks being so close to the LNG sites posed a significant problem for the local authorities.

"The events will raise questions regarding the ability of Mozambican security forces to protect strategic LNG facilities further north of Mocimba da Praia," Raymakers said.

 Ftich's Gatdula added that the investor outlook for the country has faced a rough year with Typhoon Idai decimating large swathes of the country against the backdrop of corruption scandals and a rising number of militant attacks in northern reaches of the country."Weak governance and the rising risk of increased military action to quell attacks only leads to a darkened outlook for Mozambique investors," Gatdula said.Before the late-March attacks, the closest the militants got to the LNG sites -- which Raymakers said would likely be considered "aspirational" targets -- was in February last year.Workers for the then-operator of Mozambique LNG –- US-based Anadarko Petroleum -- were attacked in two related incidents, the first to directly impact the country's LNG sector.Anadarko later sold the asset to Total.

Government pressure

Mozambique's state-owned ENH holds small stakes in all three projects and has come under some political pressure to keep to the development schedules.In February, Prime Minister Carlos Agostinho do Rosario appointed a new chairman to the company, Estevao Tomas Rafael Pale, tasking him to guarantee that the timetables were adhered to.Pale replaced Omar Mitha, who was head of ENH since August 2015 and had warned of potential delays to the projects coming online.Total took over as operator of Mozambique LNG in September 2019 after it closed its $3.9 billion deal to take the stake in the project held by Anadarko.Total CEO Patrick Pouyanne, speaking in February after the company's Q4 results, said he had wanted to close the deal quickly as the project had already reached FID and it was important to keep up the momentum.

"It was in our interest because it is an ongoing project. Embarking and being on-board was a priority," Pouyanne said.He added that dealing with the country's government had been "smooth" with no complications or disputes in matters such as taxation.The setbacks to Mozambique's LNG industry come at a critical time for the country, which is striving to improve living standards through economic development.In February, the International Monetary Fund urged the Mozambique government to continue with prudent economic policies and reforms. "The LNG sector under development in northern Mozambique has sizable potential and, given the appropriate policies and safeguards, could lift millions of people out of poverty," IMF deputy managing director Tao Zhang said."The IMF stands ready to further strengthen its collaboration with the Mozambican authorities and help advance their reform agenda," Zhang said.