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With the second-largest gas resources in Africa, Mozambique made international headlines for its record-breaking offshore gas discoveries starting in 2010. Two LNG projects are in the pipeline, a rapidly improving regulatory framework is in place, and the government is aggressively pursuing international investors: Mozambique could quickly become one of Africa's top gas producers.
Law No. 21/2014 (Petroleum Law); Decree No. 2/2014 (Decree Law for Offshore Areas 1 and 4); Law No. 27/2014 (Taxation and Tax Benefits of Petroleum Operations)
Ministry of Energy and Mineral Resources Letcia Deusina da Silva Klemens, Minister of Energy and Mineral Resources
NATIONAL OIL COMPANY
Empresa Nacional de Hidrocarbonetos (ENH) Omar Mith, CEO and Chairman of ENH
R E G U L AT O R
Instituto Nacional de Petrleo (INP) Carlos Zacarias, Chairman of INP
Major gas discoveries in the past decade, with new LNG projects about to be built. Oil recently discovered and soon to be commercialized.
AFRICA ENERGY FRONTIERS
OVERVIEW AND BACKGROUND
Exploration activities started over a century ago in Mozambique, dating back to 1904, but had little early success because of a lack of funds and poor technology. International oil companies began exploring the area in 1948, leading to Gulf Oil discovering the Pande gas field in 1961 and the Temane field in 1967. Exploration halted in the 1970s because of civil war and dangerous conditions.
With the creation of the national oil company ENH in 1981, exploration activities kicked off. The company conducted extensive seismic studies on the onshore Pande and Temane fields. A first licensing round was held in 1984 and six wells were drilled in 1989 by ENH and the Tyumengeologia Association of Russia, with all wells yielding commercial gas deposits, though a massive blowout again delayed development.
The licenses for Pande and Temane were acquired by South African Sasol and the company began an extensive drilling campaign in 2013, discovering a new gas field, Inhassoro.
In total, 202 wells have been drilled in Mozambique, including 108 exploration wells and 23 production wells. Production began on the Temane field in 2004 and the Pande field in 2009, with Sasol building an 865-kilometer pipeline from Mozambique to South Africa to transport the gas to its industrial customers, with five off-take points in Mozambique for domestic use as well. Following the development of Pande and Temane, Mozambique's real exploration success took off, however, when Eni and Anadarko's exploration activities started offshore. Anadarko, the operator of Area 1, made the first discovery in the deep water Rovuma Basin in 2010. In total, the company has found 75 tcf of gas in Area 1, one of the largest natural gas discoveries in decades. Eni, operator of Area 4 also in the offshore Rovuma Basin, made its first discovery discovery in 2012. In total, Eni's area is estimated to hold 85 tcf of gas.
Since then, the two companies have agreed to develop the gas fields in a "separate but coordinated way" and both companies are planning multi-billion dollar LNG projects that could transform the economic landscape.
While up until this year all discoveries had been gas finds, Sasol announced in February 2017 the first oil discovery. Sasol said it hopes to be producing oil from the discovery off the southern coast of Mozambique in the next two to three years.
Mozambique already leading the way in East Africa for development of gas resources, with the final investment decision for the Coral South floating LNG project signed off by ENI on June 1, 2017. The partners for Anadarko-operated Block 1 expect to reach FID for their LNG project in 2018. Mozambique is racing against global competitors to get its LNG production off the ground and secure customers before other gas exporters and potential rivals such as Tanzania, Iran, Algeria and Angola can catch up.
AFRICA ENERGY FRONTIERS
RECENTLY UPDATED TO ACCOUNT FOR GAS DISCOVERIES, MOZAMBICAN REGULATIONS PROVIDE A MODERN FRAMEWORK FOR COMPANIES TO DO BUSINESS. ALTHOUGH THE GOVERNMENT'S INTENTION FOR THE 2014 PETROLEUM LAW WAS TO INCREASE THE SHARE OF BENEFITS TO THE STATE, THE LAW IS LARGELY CONSIDERED TO BE FAIR FOR INVESTORS.
Mozambique's legal framework for petroleum operations uses two key pieces of legislation: Law No. 21/2014 (Petroleum Law); and Decree No. 2/2014 (Decree Law for Offshore Areas 1 and 4).
Mozambique's legal framework is unique in that the 2014 Petroleum Law does not regulate Areas 1 and 4 in the Rovuma Basin. Instead, these projects are governed by Decree No. 2/2014 - the Decree Law for Offshore Areas 1 and 4. The law provides a comprehensive legal framework for the development of LNG projects from these concessions and solves many regulatory issues for the development of the projects. It stipulates that LNG sales will operate on a joint dedicated basis and that the government will approve the terms of gas sales and the financing structure of the projects.
The licensing structure set up under the Petroleum Law is very specific, and it lays the groundwork for several types of concession contracts, including: reconnaissance, exploration and production, construction and operation of oil and/or gas pipelines and construction and operation of infrastructure.
The reconnaissance structure grants non-exclusive rights to carry out preliminary exploration work of a concession area. These contracts are on a non-exclusive basis and are for a nonrenewable two-year term.
Under the exploration and production contract, companies are granted exclusive rights to explore for petroleum and granted exclusive production rights. Under this contract, they are also given non-exclusive rights to build pipelines and other infrastructure needed in order to enter production. Companies under this contract explore at their own risk and cost, unless and
until the project enters commercial production. At this point, using a predetermined sharing formula, royalties, taxes, costs and profits are determined. Becoming increasingly popular on the African continent, the concession contracts use the R-Factor to determine production sharing. The R-Factor is the ratio of revenue earned from oil divided by the costs of bringing the oil to the market in order to determine profit.
Exploratory terms cannot extend beyond eight years, even if an extension is necessary, and there is no specific provision for an extension of a concession for the purpose of production.
The law also allows for joint venture agreements between ENH and another oil and gas company, with the companies jointly owning and operating the concessions. Government approval is required for such agreements. The law provides a clear path for the government to acquire concessions in the event of a breach of contract. The state reserves the right to participate in any petroleum operations. Licensing is done via public tender.
The Petroleum Law also sets out clear local content requirements, including requiring oil and gas companies to register on the Mozambican Stock Exchange. Additionally, preference is to be given to local companies so long as the local companies' costs of goods or services do not exceed 10 percent of the cost of importing the goods or services from another country. Local content is also regulated under Decree No. 2/2014.
AFRICA ENERGY FRONTIERS
ENERGY SECTOR ORGANIZATION
State regulation and actors
The industry is regulated by the Petroleum Law passed in 2014, which regulates all of the activity in the oil and gas sector, including exploration and production activities and infrastructure development associated with such activity. All oil and gas activity is overseen by the Ministry of Energy and Mineral Resources, which oversees the National Institute of Petroleum (INP).
The INP is responsible for negotiating oil and gas concessions on behalf of the government. The national oil company ENH plays an important rolel, participating in oil and gas concessions on behalf of the state.
Mozambique' upstream activity is nearly entirely gas-focused. In initial exploration activity, oil was searched for almost exclusively but none was found. Tullow Oil searched for oil again in 2013, drilling a well past potential gas deposits to look for deeper deposits of crude oil, but no oil was discovered and Tullow and its partners exited the position when their license expired in 2014. However, Sasol announced in 2017 the country's first oil find, and after further work is done, the company hopes to begin production within the next three years.
Despite the lack of oil, Mozambique contains some of the largest natural gas reserves in the world and has the potential to be the world's third largest LNG exporter. If developed, the IMF predicts that gas revenues could boost Mozambique's growth rate by 2 percent annually.
Currently, the only gas in production in Mozambique orig-
inates from the onshore Temane and Pande fields operated by Sasol. These fields in the Inhambane province hold reserves of 2.6 trillion cubic feet. Gas is sent to South Africa via a 865-km pipeline. The pipeline also has offtake points for domestic use.
The projects drawing the most excitement are the offshore blocks operated by Eni and Anadarko, which represent combined natural gas reserves of an estimated 160 tcf. In Area 1 Anadarko's finds are sufficient to support two initial LNG trains with an capacity of 6 million tonnes per annum, each. The reserves could accommodate expansions of additional trains producing 50 MTPA each.
Midstream and Downstream
Mozambique's midstream is largely undeveloped, though there is some pipeline and storage infrastructure. There is no refining capability. Petromoc, founded in 1999, is the largest distributor of petroleum products. The company owns and operates storage facilities, pipelines and bunkers in Mozambique's ports, and has a total of 19 storage tanks with a combined capacity of 500,000 cubic meters. Puma Energy owns three terminals with a capacity of 276,700 cubic meters and has 22 retail sites. Engen launched a new 24,000 square meter fuel supply terminal in Beira in 2015.
Eni's Coral floating LNG project reached FID in June 2017, with the plan of development for Area 4 approved in February 2016. The prospects for development continue to improve, with ExxonMobil announcing in March plans to acquire a 25 percent indirect interest in Area 4 from Eni for $2.8 billion. Production could start by 2020 on the FLNG facility with a capacity of 2.4 MTPA.
Petronas holds the licenses for Areas 3 and 6, also in the Rovuma Basin. In the Mozambique Basin, Sasol also holds Blocks 16 and 19 and Area A. Buzi Hydrocarbons holds the license for the Buzi Area.
The INP launched its fifth licensing round in 2014, putting up 15 offshore and onshore areas for tender. In 2015, ExxonMobil, Sasol, Eni and Delonex Energy were awarded concessions for exploration, with ExxonMobil winning three bids, for Area 5-B, Area 5-C and Area 5-D. However, none of these companies have started exploration activities and the agreements with the government have not been finalized.
Sasol's gas export pipeline was constructed in 2003 and became operational in 2004. It is also responsible for supplying gas to domestic power stations in Mozambique. Sasol later expanded the pipeline by installing an additional 128-kilometer section, named Loop 1, to transport gas to Ressano Garcia in Mozambique
The downstream industry is largely dependent on imports, though the sector will expand rapidly as the Rovuma Basin is developed. Eni and Anakdarko have agreed to make a portion of the gas available for domestic development. In fact, the Ministry of Energy and Mineral Resources has already awarded contracts for domestic gas development, announcing in February 2017 that three out 14 companies who bid to utilize Rovuma Basin gas domestically were awarded contracts. The projects are: an allocation of 80-90 mcf/d of gas to produce 1.3 million tonnes/year of fertilizers and 30MW-50MW of power by Yara International; a 310330 mcf/d allocation to produce 38 million barrels per day of liquid fuels and 50 MW-80MW of power by Shell and a 41.8 mcf/d allocation to produce 250 MW of power by GL Africa Energy. Sasol has also expressed interest in building a gas-to-liquids plant.
AFRICA ENERGY FRONTIERS
ENERGY SECTOR ORGANIZATION
Mozambique's political structure is a unitary republic based on Portuguese-Roman law and the 1990 constitution, which was updated in 2004. A 250-member parliament is elected through direct suffrage every five years, and the president is also elected through direct suffrage. The president appoints the prime minister and ministers.
Leadership and vision
Filipe Jacinto Nyusi, a former defense minister, won the presidency in October 2014 and was inaugurated in January 2015. Nyusi, pledging to turn the country's newfound gas resources into economic growth and jobs, has taken an active role in the development of the Mozambican gas sector, personally courting investors, development banks and key oil and gas executives.
In September 2016 Nyusi made a working trip to the United States, where he met with top managers of the International Monetary Fund and the World Bank in order to normalize relationships with the IMF. Nyusi is seeking to mend relationships after the former administration kept undisclosed government guaranteed loans from the IMF, leading the fund to suspend its program with Mozambique in April 2016.
On the same trip Nyusi, leading a business delegation of 65 Mozambican businesspeople, particularly from the oil and gas sector, travelled to Houston, Texas. There he met with industry leaders to attract investment to the large gas fields discovered in the Rovuma Basin. He was also involved in a deal between CNPC and ENH on oil and gas cooperation; personally welcomed the former CEO of ExxonMobil, Rex Tillerson, to Mozambique for talks on
oil and gas; and met with the CEOs of Eni and Anadarko to formalize investment decisions on LNG projects.
In a move meant to create an enabling environment for LNG development, the Central Committee of the ruling party, the Front for the Liberation of Mozambique, has consolidated the power of the president, according to a report from Eurasia Group, in an effort to speed up land acquisition for projects.
After reports that the former Minister of Energy Pedro Conceio Couto was delaying the Mozambican gas projects by resisting the demands of oil and gas officials, Nyusi sacked him in September 2016 and appointed Leticia da Silva Klemens, who had no government experience but is expected to push gas projects through with rigor.
There is little doubt as to why Nyusi is taking such an active interest in the industry: LNG projects are expected to add $39 billion to Mozambique's economy over 20 years and boost GDP per capita from about $650 in 2013 to $4,500 by 2035.
AFRICA ENERGY FRONTIERS
TAX AND FISCAL REGIME
The applicable legislation for taxes in the oil and gas sector is Law No. 27/2014 (Taxation and Tax Benefits of Petroleum Operations). A Petroleum Production Tax is applied to all hydrocarbons produced, with rates set at 10 percent for crude oil and 6 percent for natural gas. The value is determined based on production levels and the weighted average of the prices by which the products were sold. However, if a project is specifically intended for the development of local industry, these tax rates are reduced by 50 percent.
Oil and gas companies are offered incentives, including exemption from customs and excise duties on imports of equipment, and on goods/ equipment used for exploration purposes (assuming the goods to be imported are not already made in Mozambique).
The production sharing in concession contracts is based on the R-Factor. The law stipulates a signature bonus and annual concession fee between 2 percent and 5 percent of the fair value of assets made available by the government. Cost recovery for oil and gas operations is set at a maximum of 60 percent per year of the disposable oil, excluding interest and other financial costs.
Oil and gas companies are held to the same corporate taxation rules as other companies, which include social security payments, value-added tax, and capital gains tax. The corporate income tax rate is set at 32 percent.
In 2011, in an effort to increase transparency, the government of Mozambique made public disclosure of contracts mandatory, though the first contracts were not published until 2013, including the contract for Sasol's Pande Temane gas project. No new contracts or model contracts have been released since the new Petroleum Law was passed in 2014.
Mozambique's power sector, similar to many of its East African neighbors, is underdeveloped. Facilities are unable to meet demand and the national electrification rate is estimated at 39 percent (66 percent for urban areas and 26 percent in rural areas).
The Ministry of Energy and Mineral Resources is responsible for making policy and overall supervision of the sector, though Mozambique is noted by the World Bank for not having an approved electrification plan. Conselho Nacional de Electricidade (CNELEC) is the national regulatory and advisory board for the electricity sector, while Electricidade de Moambique (EDM) is the 100-percent stateowned electricity company. EDM is wholly responsible for generation, transporting, distribution and commercializing electricity. It currently offers subsidized tariffs for low income residential customers, though this strategy is largely considered unsustainable by outside analysts.
The sector is dominated by hydropower, though gas-to-power projects are quickly gaining momentum. Mozambique has the continent's second largest dam, Cahora Bassa, which has a capacity of 2,075 MW. Hidroelectrica de Cahora Bassa, which owns the dam, sells 65 percent of the generated power to South Africa and then uses South African transmission lines to re-import the power to southern Mozambique. The other 35 percent of the dam's capacity goes to northern Mozambique and to Zimbabwe.
In gas-to-power, Mozambique has commissioned several new plants, with the most recent being a 175 MW gas-to-power plant at Ressano Garcia, inaugurated on June 30, 2017. The facility is fed by the Loop 1 pipeline extension from Sasol's gas export pipeline.
The government, while certainly keen to develop gas-fired plants, is also pushing for more renewable options, and the 40 MW Mocuba Solar project was approved in 2016.
AFRICA ENERGY FRONTIERS
Mozambique LNG will monetize the gas from offshore Area 1, which is estimated to hold 75 trillion cubic feet of gas. The onshore LNG park on the Afungi peninsula will be the first LNG facility of this magnitude in East Africa, with two initial trains of 6 MTPA planned. Additional trains are expected to raise capacity to 50 MMTPA. The Area 1 partners are seeking to finalize sales and purchase agreements and secure project financing. The project has yet to reach FID.
Mozambique LNG is operated by the following partners: ENH (15 percent); Anadarko (26.5 percent, operator), Mitsui (20 percent) ONGC (16 percent), Bharat PetroResources (10 percent), PTTEP (8.5 percent) and Oil India Limited (4 percent). The partners of Area 1 and neighbouring Area 4 signed a unitization agreement that will see the operators working in tandem to develop the Mamba and Prosperidade gas reserves and related onshore facilities.
Coral South FLNG
Coral floating LNG, designed to rapidly commercialize Area 4 gas, is one of only three LNG projects globally expected to reach FID in 2017. The development program was approved by the government in February 2016 and FID reached in June 2017, with plans to plans to bring 140 bcm of gas into production. Six subsea wells will be connected to the FLNG facility, which will have a capacity of about 3.3 MTPA.
ExxonMobil announced plans to plans to acquire a 25 percent indirect interest in Area 4 from Eni for $2.8 billion in 2017. This would see Eni continue as
the operator of Area 4 and leading the Coral FLNG development. Exxon would lead the construction and operation of LNG facilities onshore. If the deal goes through, ownership would be as follows: Eni (25 percent), ExxonMobil (25 percent), CNPC (20 percent) and Kogas, Galp and ENH (10 percent each).
In 2016, ENI and its partners signed an agreement with BP to sell the entire volume of LNG produced from the Coral project for 20 years.
AFRICA ENERGY FRONTIERS
Mozambique is emerging as a major gas player on the global stage, but has infrastructural limitations until planned LNG facilities are built. Domestic gas infrastructure needs to be further developed to ensure that the country can profit from its resources. Certainly the gas discoveries are a game-changer for Mozambique, and with strong government support and major international investors pushing the projects forward, the outlook is promising.
Mozambique expects over $35 bn in oil and gas investment by 2035
Estimated gas reserves of up to 180 trillion cubic feet
39 percent of the population has access to power
180 billion cubic feet per year from Pande and Temane fields
CORAL SOUTH FLNG
FID was reached in 2017 by ENI, operator of Area 4, and partners. ExxonMobil is expected to take a 25% stake.
The Coral field was discovered May 2012, with est. 16 tcf in place. Development wells to be drilled starting 2019.
Technip FMC has the contract for EPC and start-up. Capacity will be 3.4 million tpa.
The floating LNG vessel will be moored in Area 4 at 2,000 meters water depth.
The Pande and Temane gas fields entered production in 2009 and 2004 respectively.
Gas is exported to South Africa by 865 km pipeline. An extension to Ressano Garcia was commissioned in 2015, feeding a 175 MW gas-to-power plant.
Sasol operates and owns 70% of the project. ENH subsidiary CMH owns 25% and the IFC the remaining 5%.
A new $1.4-bn oil, gas and LPG project at Inharosso, adjacent to Pande and Temane, will come onstream in 2019.
Mtwara Area 1
Anadarko operates Area 1 with partners ENI, Mitsui, Bharat Petroleum, PTTEP, ONGC and Oil India
Mozambique LNG will be East Africa's first major LNG facility, with two initial 6 mtpa trains
A unitization agreement for fields straddling Areas 1 and 4 will allow gas development in tandem.
Area 1 estimated to hold 75 trillion cubic feet of natural gas
Mozambique LNG will monetize gas from Area 1 through an onshore plant.