1. Current situation

Mozambique's potential as a new supplier in the global gas market has attracted significant levels of interest. With the end of a civil war and unrest, the country offers a more stable political environment with a government that is supportive of foreign investment in the country's petroleum sector.

Current players in the country, most notably Eni S.p.A (Eni) and Anadarko Petroleum Corporation (Anadarko), have made rapid progress in Mozambique. Anadarko has announced that it has 10-30tcf of gas with an upside of up to 100tcf in Area 1, Rovuma basin; Eni has announced estimates of 70tcf of gas in Area 4, Rovuma basin. In total, twelve gas discoveries have been reported within a 50km radius area in the Rovuma Basin. There are plans to develop a large scale LNG export project and Mozambique's petroleum exploration company, Empresa Nacional de Hidrocarbonetos (ENH), has stated that the country's offshore field may hold up to 250 tcf of gas.

Many companies such as Statoil, Total, Mitsui, PTTEP, Korea National Oil Corporation, ONGV Videsh Limited and Oil India's have already actively sought participation in existing Mozambique blocks and earlier this year, we advised China National Petroleum Corporation (CNPC) on its acquisition of an interest in Area 4 licence block in Mozambique from Eni.

Investors are given the exclusive right to conduct petroleum operations under an Exploration and Production Concession Contract (EPC). The Government of Mozambique holds petroleum interests under each EPC through ENH.

  1. Fifth licensing round

It has been reported that the 5th licensing round will include areas to the south of Rovuma, Mozambique basins and the Ultra Deep Marine Waters.

So far, ENH's interests in the existing blocks range from 10 – 30%. Though most of the gas from Mozambique will be exported, some of the gas is likely to be required to be used domestically to develop Mozambique's economy and enhance social development. The World Bank and the Government of Norway have assisted the Mozambican Government in determining how some of the gas may be used within Mozambique for the benefit of the country.

A multi-client tender was issued in preparation of the 5th licensing round in respect of Areas A, B and C and contracts have been awarded to WesternGeco, BGP GeoEast and ArkEx to conduct various 2D, gravity and magnetic surveys. A map of these areas has been provided by Mozambique's National Petroleum Institute, a governmental body (INP) (click here).

  1. Petroleum law

The bill revising the current Petroleum Law (Law No 3/2001) was approved by the Government in April 2013 and has been submitted to the Mozambique Parliament. It is expected that the Parliament will give its approval by the end of 2013. The president of Mozambique will then promulgate the legislation and the revised Petroleum Law will come into effect thirty days after publication on Boletim da República (the Government gazette).

We understand that the version of the bill that was approved by the Government is a variation on the version that was submitted in 2012 and no official copy has been published.

The Petroleum Law is supplemented by additional legislation which impacts on a concession including legislation on income tax, capital gains tax and VAT, the Mega Projects Law and the Public Companies Law.

  1. Key issues for new entrants
  • We anticipate that the new Petroleum Law will clarify that all direct and indirect transfers in concessions will require Government approval.

  • It is likely that the new Petroleum Law will adopt a separate regime for infrastructure development and access.

  • The new Petroleum Law will bring in tighter local content requirements and environmental controls.

  • The fiscal regime is contained in the Petroleum Law, legislation on income tax, capital gains tax and VAT as well as the EPC. Although there is stabilisation in the model EPC the provisions fall short of a binding commitment and are likely to be further diluted by the new Law.

  • As is the case in other African jurisdictions, changes to the capital gains tax regime have been introduced such that share sales where the underlying asset is in Mozambique will be subject to tax in Mozambique irrespective of the location of the company in which the shares have been sold.

  • VAT exemptions on various good and services will expire in 2015.

  • The Public Companies Law passed last year provides that Mozambique public (i.e. state-owned) companies may not agree to international arbitration. Disputes with Mozambique public companies must be resolved before the Mozambique courts.

  • The Mega Projects Law requires a level of State participation and it is assumed that this is treated as discharged by the participation of ENH but this is not clear cut.

  1. Potential issues

As with any investment, entry into Mozambique is not without its own challenges. We have provided some of the issues which companies may wish to consider.

  • Infrastructure and resources

The country lacks infrastructure but as in the past, there is a realistic chance that the country may receive support from ex-Portuguese colonies such as Angola for the development of infrastructure. Further, the Norwegian government is to provide a training programme for Mozambicans with the aim of creating a skilled workforce to support the gas developments in the Rovuma Basin. That said, the capital commitments are huge.

There may be a limited supply of suitable workers in Mozambique, however, the current local content requirements allow for such gap to be filled by workers from outside the country. As discussed above, local content will be tightened and there are initiatives aimed at creating a more apt and skilled local workforce.

  • Lack of skilled workers

  • Government capabilities

Companies are eager to participate in existing gas discoveries and other commercialisation projects in Mozambique but the surge in interest may surpass the capacity of the local Government to deal with the demand. Moreover, there are concerns over whether the Government will have sufficient funds to fund its interest in LNG projects, which cost billions of US dollars.

Piracy hangs as a threat to safe transportation of any LNG produced in Mozambique, and is a serious issue that has affected various oil and gas producing countries in Africa. Fortunately, due to international navel efforts in frustrating the efforts of Somali pirates, there has been a decline in piracy attacks.

Gas projects from Mozambique face competition from US shale gas and LNG projects in the Middle East and Australia. However, gas from Mozambique holds several advantages, including its geographical proximity to Asian buyers compared with the US (China, Japan, Korea and India being important buyers of gas) and its potential lower gas processing, liquefaction and production costs compared with both the US and Australia.

  • Transport of Gas

  • Competing resources

  1. Conclusion

Demand for gas is continually rising and there appears to be an increased appetite for gas produced in Mozambique. Despite some of the issues and challenges which companies may face in the country, the gas that has been discovered to date already surpasses the domestic requirements and accordingly, potential for export appears vast. It is clear that the current international players in Mozambique remain positive about the gas potential in the country.

The Government has been encouraging foreign participation in its petroleum market and international oil companies should eagerly await the announcement of the onshore and offshore oil and gas licensing rounds in Mozambique.