The time is now for Mozambican LNGJanuary 18, 2022
The year is off to a great start for the Mozambican LNG projects as the Coral-Sul FLNG vessel to be used in Area 4 of the Rovuma Basin has just arrived in the country. Production is now expected to start by midway through this year. This is truly a milestone for the project, and it comes at a pivotal moment from both domestic and international market perspectives, as we will seek to demonstrate.
Across the global market the price of natural gas (NG) and liquefied natural gas (LNG) have risen to record prices in some parts of the world, while in others they reached the highest market price seen in years. In the United States, an NG producer and exporter, prices stand at approximately USD 6 per million Btu, whereas in Europe the trading price has risen to four times that of the US with European markets trading at an all-time high of approximately USD 42 per million Btu. While Asian countries were stocking up NG reserves for the winter, their NG trading prices have reached as high as approximately USD 39 per million Btu.
CAUSES FOR THE SURGE IN GLOBAL PRICES OF NG: There are arguably several factors causing the surge in prices globally. The main line of argument seems to be that there is a global supply crunch for energy in general. Several factors have contributed to this scenario. One such example is the global economic recovery: as Covid-19 measures tend to ease (particularly since last fall), the overall level of energy consumption has risen and thus the demand for energy. Now that the winter is here, this trend is expected to continue, even if the pandemic-related measures are tightened again. However, energy production has not shared the same rebounding trend.
In the US, new domestic climate policies have led to a decrease on the production of NG and LNG. The country is already exporting what it can to the global market to benefit from the current macroeconomic situation but this is drying up domestic NG stockpiles faster than anticipated. This has the effect of setting a production and export cap on NG and LNG, which in turn is influencing global supply and subsequently the market price.
Europe has arguably felt deeper effects of the supply crunch than other NG importers.
European NG reserves are far below the level they have been in previous years. Russian cutbacks on gas shipments across Ukrainian pipelines to Europe have coupled with greater competition for LNG from Asian markets to maintain the struggle to fill reserves.
Wind energy usually produces about 22% of the EU energy mix, but this year it produced a mere 5%. Wind and solar energy, at this point in time, are incapable of filling the gap left by NG, meaning Europe continues to rely on NG, which, due to lack of production, is subsequently forcing the price upwards at an unprecedented rate. The price increase, coupled with European reliance on NG, has gone hand-in-hand with the 280% increase of wholesale electricity prices over the past year.
AN OPPORTUNITY FOR MOZAMBIQUE: At the present time, while developments of renewable resources remain a steady process, the quick response to the supply crunch is to increase the supply of NG and LNG to the global market. Perhaps unsurprisingly, the European Union just proposed to label (some) gas and nuclear energy projects as “green energy,” which will certainly give a push to all gas projects around. However, with US production in its current state and Russia tightening the taps, the question arises as to where to find this supply.
The answer could be in the extensive 100 trillion cubic feet, which is expected to double after the prospection phase, of NG reserves in Mozambique. LNG offers a huge economic, but arguably more importantly development opportunity for Mozambique. The Rovuma Basin alone has the capacity to boost Mozambican GDP by up to USD 18 billion per annum. The projects offer the potential to create over 300,000 employment opportunities alone, and in order to meet the mega-project’s needs, Mozambique will have to improve their water, road and electricity infrastructures, adding to the development benefits of these types of projects.
Mozambique had already initiated the process of developing LNG for export before the ongoing insurgency in Cabo Delgado province forced a force majeure event. While significant steps have been made by Mozambican, Rwandan and SADC Forces in improving the security situation, the economic and development opportunities of LNG projects should give the country and the SADC region an even greater incentive to resolve the conflict.
NG producers will also be the big winners from the development of LNG projects in Mozambique as increased demand, market factors and low supply have created a supply crunch for NG and LNG that provides an exceptional opportunity for producers to enter into the market to fill this gap and benefit from the current price. NG producers can expect to generate greater profits and enter into more valuable contracts than were expected in the past few years. If production and development can begin in Mozambique, a country that is aiming to export most of its LNG output, then producers may be looking at incredibly profitable projects.
The 26th UN Climate Change Conference (COP26), introduced new and ever more ambitious global commitments to mitigate the climate crisis, and is proving to be a decisive moment for energy transition. A significant takeaway from COP26 for NG and LNG producers is the commitment by a group of 25 countries including Italy, Canada, the United States and Denmark, together with national financial institutions, to end international public support to the unabated fossil fuel energy sector by the end of 2022.
While the European Commission may seem to be running another path, this global commitment further enhances the importance of acting as soon as possible to guarantee the development of LNG in countries like Mozambique.
For Mozambique, COP26 provided the opportunity to be a part of the global commitment to clean energy as the country already stands out as one of the greenest in Africa. The country has set out a clear aim that by 2030, and in line with the first of the “Glasgow Breakthroughs,” it will have 62% of its energy mix originating from renewable energy sources, particularly hydro, solar and wind. The country’s vow is aligned with the global goal of a cleaner world but simultaneously conscious of the country’s lack of financial and technological capabilities to help achieve these goals. In this transition phase, it is assumed that NG and LNG will be vital to its energy transition.
THE TIME IS NOW: The current roadblock impeding the development of LNG projects in Mozambique is the force majeure event, although hope has returned of a stable situation which would allow for the development/resumption of LNG projects in the country.
The window of opportunity for producers and Mozambique will not always be present as costs for producing renewable energies fall, making them a more attractive option for a more prominent part of the energy mix. NG and LNG market prices and demand will also eventually fall and the opportunity will subside. While it is still too early to claim that Mozambique’s internal struggles have been resolved, the current global macroeconomic landscape for NG and LNG is a fantastic incentive for both the Mozambican government and NG producers to move forward with contractual renegotiations essential to reestablishing contractual balance in order to advance with the development of these projects in the country.
For the in-country LNG production majors, such as TotalEnergies, Exxon or Eni, this is the time to step up, a leap that some may have already begun to take.