Signal Risk in Mozambique – Going Somewhere Slowly

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* This analysis was prepared by the Signal Risk team

The apparent success of the multinational intervention in Cabo Delgado province has started to change the discourse about the liquefied natural gas (LNG) sector in Mozambique and its wider economic prospects. After a period of deep pessimism and uncertainty following the attack on Palma in March, the main actors have recently expressed greater optimism.

A comeback soon

The Minister for Natural Resources and Energy, Max Tonela, was the first to express his confidence in the future of Mozambique’s LNG sector. During a meeting of the Confederation of Economic Associations (CTA) – the country’s largest business association – on August 11, Tonela assured local stakeholders that LNG investors will soon be returning to Cabo Delgado after the recent additions to the Mozambican armed forces and police force (FDS) and their Rwandan counterparts. His confidence was undoubtedly boosted by the liberation of the strategic city of Mocimboa da Praia from insurgent control on August 5th.

Completely energetic

Tonela’s position was confirmed on August 27 by the African Development Bank (AfDB), which has loaned TotalEnergies more than $ 400 million for the multinational’s LNG project in Mozambique. In a statement to Reuters news agency, AfDB President Akinwumi Adesina stated that the continued stabilization of Cabo Delgado province should help the Mozambican LNG project to resume activities within a year to 18 months.

The project was arguably most affected by the activities of the Islamist Al-Sunnah group, as their contractors or those of their partners made up the majority of the non-native community in Palma. Its facility on the Afungi peninsula – which has been under the supervision of local security forces since April – also serves as a refuge for people fleeing the violence in Palma. Unsurprisingly, areas near the concession were frequently attacked by militants. Nevertheless, militants have been evacuated from the surrounding areas since the deployment of the Rwandan armed forces in mid-July. The joint forces have also started the construction of a 25-kilometer-long security cordon around the concession, which is an important prerequisite for the company to resume operations.

TotalEnergies itself has not yet commented publicly on the latest developments; however, his commitment to resuming his project in Mozambique has been demonstrated by recent personnel changes within the company. According to reports on August 30, Maxime Rabilloud has been appointed Country Director for Mozambique, replacing Ronan Bescond. Rabilloud has extensive experience developing hydrocarbon projects in challenging jurisdictions and working with lusophonic stakeholders, having previously headed TotalEnergies’ Brazil office.

The peripheral push

While much of the talk about the LNG sector in Mozambique has centered on TotalEnergies, another investor – Italian-owned Eni – has made steady progress on its endeavor.

On June 17, an Eni spokesperson stated that the company is well on its way to commencing commercial exports of LNG from its Coral South (FLNG) floating LNG facility in 2022. Eni’s facility is roughly 100 kilometers off the coast of Cabo Delgado province, largely untouched by the violence on land, so the company can meet its schedule. Costing around $ 7 billion, the project is expected to produce 3.4 million tons per year (mmtpa), which is significantly less than TotalEnergies’ 13.1 million tpa and ExxonMobil’s 15.2 million tpa Million tpa is. Under an agreement, all Eni gas produced at Coral South will be sold to BP for a period of 20 years.

valuation

The optimism demonstrated by key stakeholders in the liquefied natural gas (LNG) sector in Mozambique is largely rhetorical and does not necessarily postpone the timelines associated with advances in the sector and the associated economic gains. As mentioned earlier, despite the force majeure declaration, there was little to suggest that TotalEnergies would give up its involvement in Mozambique, especially after a significant layoff and the conclusion of numerous financing and distribution agreements. The same goes for ExxonMobil. While the United States (US) energy conglomerate is less exposed to uncertainty (due to lower spending so far) in Cabo Delgado Province, there hasn’t been enough evidence that it is completely separating from Mozambique and looking for a lucrative frontier opportunity. Market would forego. Accordingly, it was determined that safety concerns would delay TotalEnergies’ construction activities – and ExxonMobil’s final investment decision – for at least a year as the companies assess the progress of counterinsurgency operations. As there are currently clear signs of a decrease in the threat to key LNG interests, both companies are likely to move ahead with their respective endeavors.

The delay in construction by TotalEnergies and ExxonMobil will result in slower-than-expected economic growth and consolidation of large accounts in 2021. According to the most recent April publication by the International Monetary Fund (IMF), the domestic economy is expected to grow 1.6 percent in 2021 and recover from a 1.3 percent decline in GDP in 2020. This is in contrast to the forecasts before the security-related disruptions, according to which the Mozambican economy would grow by 2.5 percent in 2021. The currently expected growth will have a slight consolidating effect, whereby the deficit ratio is only expected to decrease from 5.4 percent in 2020 to 4.1 percent in 2021. The debt ratio, on the other hand, will rise from 122.2 percent in the year due to the borrowing of emergency loans 2020 to 125.3 percent in 2021. Mozambique’s current account balance will also remain fragile, with a deficit of 68.9 percent of GDP in 2021, while the country is expected to have a modest stock of reserves in 2021 for the year with an average import cover of 2.8 months. However, the start of Eni’s exports – and the possible resumption of construction by TotalEnergies and ExxonMobil, as well as a recovery from the slowdown caused by the coronavirus – could lead to growth of more than 4 percent in 2022.

Should TotalEnergies begin construction work in 2022 or early 2023, the expected LNG boom in Mozambique will be postponed to the second half of the current decade, all other things being equal. According to TotalEnergies, it will take around three years for construction to be completed and the first commercial exports to take place. This means that if the project starts as planned, it cannot be completed until 2025 or 2026. Should ExxonMobil make its investment decision in 2022 and start construction, there is also consensus that first exports will not be allowed until after 2026. Unless unforeseen events such as natural disasters occur, further delays in the LNG schedule are viewed as increasingly unlikely, particularly given the initiation of processes to establish safety buffers. Fuel companies tend to have a relatively higher risk appetite than other trading companies and have adapted to such uncertain legal systems as Mozambique like Libya and Nigeria. Therefore, once the minimum security requirements of the Cabo Delgado Province companies are met, they will likely begin operations.

However, increasing financial pressures on Mozambique could put pressure on the government to restructure its single Eurobonds and bilateral debt through the G20 common framework. The $ 900 million bond has a term until 2031 and a coupon of 5 percent until 2024, which will increase to 9 percent thereafter. Without the LNG windfall, funding options for Mozambique will be limited, especially given a low-growth environment due to the coronavirus pandemic. Therefore, the Mozambican authorities might be prudent to seek debt treatment. The plausibility of the restructuring was determined by Fitch Ratings in its most recent assessment of July 21. The agency retained its CCC (sub-investment) rating for Mozambique due to existing debt sustainability risks, increased funding needs, unresolved public sector liabilities and possible recourse via the G20.


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