LNG’s long-term strengthMay 11, 2020
Ben Holland, head of oil and gas at Standard Bank Mozambique, talks to The Energy Year about how the bank’s role is likely to evolve in the midst of the Covid-19 pandemic and why Mozambique’s energy industry is poised for resilience in the face of the crisis. Standard Bank offers banking and financial services to individuals, businesses, institutions and corporations in Africa and abroad.
How is the bank’s role as mandated lead arranger, facility agent and onshore bank for several international players likely to evolve in the midst of the Covid-19 pandemic?
Obviously, we are in unprecedented times; this was evident when we saw the WTI May futures contracts fall into negative territory. Covid-19 and the oil price collapse have had a dramatic impact on oil and gas market dynamics. What encourages us as primary bankers and strategic partners of many of our clients – the key international oil and gas players that you allude to – is the very robust response we have seen from them. We see this in project and capital prioritisation, stringent cost control and the tapping of the international bond market to raise “rainy day” funds.
That being said we still believe there are pools of capital available for the right projects – examples of these are Mozambique LNG, Rovuma LNG and the Total/MGC [Matola Gas Company] FSRU project.
When the right hydrocarbon, sponsors and market dynamics are present, these projects are still very positive. And as the leading oil and gas CIB [corporate and investment banking] franchise in Africa, we are delighted to support these. Finally, we believe there will be a significant requirement for strategic advisory work, as consolidation and opportunistic asset purchases become a feature, noting the low price environment.
How resilient is Mozambique’s energy industry as it aims to quickly recover from the dual shock of the Covid-19 pandemic and the oil price collapse?
Mozambique’s energy industry is still in its infancy (with the exception of the Pande/Temane natural gas produced by Sasol), so the negative impact as a result of Covid-19 and the oil price collapse will be relatively muted compared to that seen in mature energy sectors.
Additionally, Mozambique is fortunate to have in large quantities a hydrocarbon with robust long-term supply/demand fundamentals; the final product being LNG of course. Although there has been an expected short-term demand shock for LNG, the long-term narrative is still compelling. LNG produces roughly 10% of the air pollutants of coal when used to produce electricity, and this combined with the current low LNG price environment we are seeing is driving coal-to-gas switching, especially in Asia.
Finally, Mozambique has exceptional sponsors and operators to develop its nascent LNG industry. Total and Exxon are incredibly experienced and savvy international players, and possess the financial resources and the long-term vision to see this through.
How is the current crisis likely to affect the commitments made to Mozambique’s ongoing and planned oil and gas mega-projects?
Following from my previous answer where I touched on LNG’s attractiveness, Mozambique has two significant projects in play – Mozambique LNG and Rovuma LNG. It’s public knowledge that the Rovuma LNG project has deferred its upcoming FID, but we believe that the RLNG partners will revert in the coming months with more certainty around a future date once the effects of Covid-19 subside.
Further down the road is the Total-led Mozambique LNG project, which declared its FID in June 2019. We are seeing the Mozambique LNG partners really continue to drive this project forward, to the extent that the partners are still committing to their original project and financial close deadlines, and we at Standard Bank are equally committed to supporting their efforts.
Total is a vastly experienced operator, particularly in Africa, and their robust commitment heartens us all. We are aware that this is a global priority project for them. We are also very excited about the Total/MGC FSRU project, which seeks to regasify LNG at Maputo – providing power to industrial users in Mozambique and even South Africa. This is a visionary project and could be a key energy unlocker for South Africa.
What steps has Standard Bank taken to provide financial support to local businesses that are manufacturing goods and medical equipment to help fight the virus?
We are actively involved in providing support to institutions importing equipment to combat Covid-19. Something I cannot comment on right now, but equally important, is supporting one of our incubator SME clients, who will shortly be rolling out the production and supply of PPE, e.g. Covid-19 face masks, for a major IOC operating in Mozambique.
How do you foresee the long-term impact of the pandemic on the oil and gas market of East Africa and what role will consolidation play in the recovery of the sub-Saharan Africa energy industry?
I think we are seeing these themes play out already, again citing a major Mozambican player and client, Total, as an example. We saw Total’s purchase of Tullow’s assets in Uganda as recently as last week. As mentioned earlier, commercially viable projects are still attractive, especially in today’s low price environment and with the right government support. Companies who have a relatively strong financial position and long-term vision can pick up attractive assets at the bottom of the curve.
Finally, I imagine that we will see a growing trend towards more latitude and flexibility from governments and regulatory bodies as they compete for major energy investments.
How will the current downturn impact investors’ appetite to embrace sustainable development goals and enhance the green energy transition across Africa?
To be honest, I don’t have a clear view on this yet. I think we all embrace the drive towards greener energy and sustainability. For example, Standard Bank is committed to supporting Mozambique LNG’s and Rovuma LNG’s local content initiatives, and by looking to finance LNG projects we are choosing to support a hydrocarbon that emits less pollution and greenhouse gas. I do, however, think it’s too early to say how the current downturn will impact this trend.