Introduction

The first discoveries of natural gas in the Rovuma Basin, off the northern coast of Mozambique, were made in 2011. After significant exploration activities during the past four years, the official estimate of the total volume of the two areas is now close to 200 trillon cubic feet (tcf) of natural gas, placing Mozambique firmly on the map as a future major natural gas producer. Due to the lack of local infrastructure and sufficient market, the discoveries will be developed and produced as a liquefied natural gas (LNG) development. The scale of the discoveries implies full onshore and offshore development, with investments estimated at $50 billion to $80 billion – making it Africa's largest industrial project ever.

In August 2014 Parliament passed the amended Petroleum Law, to be followed by the revised Petroleum Operations Regulations, which are expected to be passed by the Council of Ministers in 2015. At the same time, Parliament passed an enabling law, giving the Council of Ministers the authority to negotiate and pass a decree-law which establishes a legal basis for a special legal regime for the development of the LNG project. This decree-law was passed in December 2014. The discussions on the final regulatory and contractual regime applicable for the development of natural gas from these concession areas are still ongoing.

Exploration of oil and natural gas

Mozambique has a long history of oil and natural gas exploration. Although the first exploration was made as early as in 1904, no substantial petroleum production has resulted thus far. The only production at present is from the relatively small (2.6 tcf) onshore natural gas fields of Pande and Temane in the southern part of the country. The natural gas from these fields is mostly exported by pipeline to South Africa.

Over the last 20 years Mozambique has demonstrated consistent growth, becoming one of the fastest-growing economies in Africa, largely due to political and economic reforms and foreign investment. This growth is expected to continue in the years to come, especially when the development of the country's substantial natural resources commences. The natural gas discoveries made in the north are world class and will place Mozambique firmly on the map as one of the largest natural gas exporters in the world. If properly regulated and managed, the revenue from LNG and gas sales as well as the industrial development related to these discoveries will have the potential to substantially improve the country's economic future.

Rovuma Basin discoveries

Following the revision of the Petroleum Law in 2001, numerous concession contracts for petroleum activities have been awarded, predominantly in the waters off the coast of northern Mozambique. Anadarko and Eni are the operators in Rovuma Basin Areas 1 and 4, respectively. According to official sources, the dis­cov­er­ies made in offshore Areas 1 and 4 are esti­mated to hold up to 200 tcf (5,663 billion cubic metres) of natural gas. For comparison, the Shtokman field on the Russian continental shelf in the Barents Sea holds approximately 130 tcf of dry gas and the Norwegian Troll field holds approximately 50 tcf.

As there is currently no transportation infrastructure in place, nor any relevant domestic or regional African market that might justify a pipeline, the natural gas volumes must predominantly be landed onshore and shipped to market as LNG. Mozambique is positioned close to several strong Asian markets, and demand and price are forecast to be strongest in Asia over the short and intermediate term. The planned LNG facility is estimated to include up to 10 LNG production units ('LNG trains'), each with a capacity of producing 5 million tons of LNG annually. It has been estimated that the discoveries made in the two concession contract areas may justify the development of as many as 17 LNG trains long term, with a total annual production capacity of 85 million tons.

The initial stage of development will require tens of billions of dollars of investment in the LNG plant and associated onshore infrastructure (eg, storage facilities, pipelines and supplementary infrastructure). Also, new harbours, airports and roads must be developed, in addition to the infrastructure and housing necessary for the large workforce required to develop and operate the facilities and the related support and supply operations. Further, the onshore LNG development will spur demand for LNG tonnage and subsequent development and expansion of import terminal capacity in receiving countries.

Indications that other concession areas in the same geological basin may contain comparable prospects has led to heightened expectations, dramatically increasing activity in the transaction market and spurring considerable interest in the East Africa region within the major international upstream companies. The development of the discoveries in Areas 1 and 4, and the associated LNG plant, has also created a surge in the supply market and related activities in the country. Developing the offshore sub-sea installations and the landing pipelines required to bring the natural gas to the onshore LNG plant will be a major project requiring a host of marine and construction services. However, Mozambique has a lack of skilled personnel and companies in the petroleum industry, which presents major challenges for investors and the government, but offers great possibilities for foreign suppliers.

Legal framework

Compared to most African countries, Mozambique has a relatively modern petroleum legal framework, originally based on a law from 2001, petroleum regulations from 2004 and concession contract model documents established and evolved since 2004.

Exclusive rights to explore and produce petroleum within a certain geographical area are awarded through an exploration and production concession contract (EPCC). The EPCC constitutes a combination of elements from the traditional production sharing agreement and from the production licence system used in Northwest Europe (eg, in the United Kingdom and Norway). Legally, the EPCC is a hybrid, based on administrative law, but also including production sharing elements based on contractual terms that lock in the state's profit share by means of contract rather than by law. These concession contracts are largely standardised through the use of a model contract which basically applies for all awards in each licensing round. Some key issues are individually negotiated, such as the exploration work commitment, bonuses, R-factor and profit split. Standardisation enhances transparency and predictability, and reduces the administrative costs, transaction costs and risk.

Mozambique has established a practice of awarding the concession contract to groups of competent oil companies with a designated operator and establishing a high qualification threshold in transactions. In addition to the EPCC document, a number of standardised model documents, which also regulate the rights and obligations relating to concessionaires, are made available by the government.

In recent years there has been an ongoing process to revise the Mozambican petroleum legal framework. The first step was the Petroleum Law (August 18 2014). The amendments introduced by this law were relatively minor and to a large extent in keeping with the Mozambican legal tradition of passing legislation that largely delegates authority to the Council of Ministers to pass supplementary and more detailed secondary legislation in the form of regulations. The amendments rectified some regulatory inconsistencies, clarified rights and obligations and assisted in streamlining procedures. They also established a legal basis for the publication of awarded concession contracts, increasing transparency and accountability. This is a unique feature not seen in many petroleum-producing countries, where host government production sharing agreements are kept under lock and key as private confidential contracts. Other key changes were the establishment of the legal basis to award a separate concession contract for the processing and conversion of petroleum not already included in the scope of an existing EPCC. Concession contracts may then be awarded for such projects as a multi-user land-based LNG facility where the LNG plant will produce LNG from gas from more than one EPCC area. In addition, local content requirements were clarified and some environmental protection requirements were included. The regulation of contributions to local communities and potentially affected stakeholders, tightening of local content requirements, local presence and stock exchange registration for the players and inclusion of local industry in the petroleum activities were also among the debated changes.

As a consequence of the amendments to the Petroleum Law, the Petroleum Operations Regulations 2004 are in the process of being updated. A preliminary draft of the amended regulations has been developed, but the government has not yet presented a final draft. The amendments to the regulations are necessary to implement the amended Petroleum Law and to ensure consistent regulatory control over the central part of the upstream petroleum industry. Amendments are also required to implement, update and clarify the regulations, in response to the demands of industry. Several proposed amendments to the regulations could be implemented without any amendments to the Petroleum Law. However, it would arguably be beneficial to both industry and the government that these amendments be made in the wider context, taking into account the regulatory needs relating to the development of large natural gas discoveries. In this context, both the existing framework for upstream petroleum activities and the model EPCC are expected to be updated.

The fifth licensing round was announced in October 2014. Because applicants need to evaluate the final regulations and model concession contract documents on which their bids are to be based, the bidding deadline has been postponed to July 30 2015 to facilitate the final preparation of the new Petroleum Operations Regulations and the new model EPCC.

For further information on this topic please contact Preben Willoch or Frode Vareberg at Advokatfirmaet Simonsen Vogt Wiig's Oslo office by telephone (+47 21 95 55 00), fax (+47 21 95 55 01) or email (pwi@svw.no or fva@svw.no). The Advokatfirmaet Simonsen Vogt Wiig website can be accessed at www.svw.no.

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