More delays looming for Mozambique LNG?

Saipem’s predictions of a July restart have not borne fruit due to the difficulty of resolving cost disputes with TotalEnergies

WHAT: TotalEnergies and other members of Mozambique LNG have yet to strike a deal with their contractors on cost increases.

WHY: The budgeting dispute has prevented the consortium from resuming construction in July, as Saipem had previously predicted.

WHAT NEXT: The project’s schedule may have to be revised yet again.

The Mozambique LNG project has been on hold for more than two years now. Operator TotalEnergies (France) halted work in the spring of 2021, declaring force majeure after Ahlu Sunna Wa-Jamo (ASWJ), a separatist group with links to Islamic State (Daesh), carried out a series of armed attacks in the vicinity of its onshore construction site.

Since then, the question of when TotalEnergies might resume work on the site, which lies on the Afungi Peninsula in Mozambique’s northernmost Cabo Delgado province, has attracted a great deal of interest. This is not surprising, given that the French major is set to invest $20bn in the development of natural gas fields at an offshore block known as Area 1 and the building of an LNG production and export facility on the Afungi Peninsula. The complex will have two production trains with a capacity of 6.44mn tonnes per year (tpy) each, making it Mozambique’s first large-scale LNG plant.

Generally speaking, TotalEnergies has been very cautious in its responses to questions about plans for a restart. It has declined to commit to any specific target dates, saying instead that it will only go back to work when it has evidence of sufficient improvement in security and humanitarian conditions in Cabo Delgado.

Saipem gets specific

By contrast, Saipem, the Italian oilfield services provider (OSP) that is serving as one of the French giant’s main contractors, has been more specific.

Earlier this year, Saipem’s CEO Alessandro Puliti said he expected work on Mozambique LNG to resume within a few months. “We expect to gradually restart the project, according to the information received by our clients, starting from July this year,” he said during the company’s 2022 earnings call on February 28.

Saipem is the leader of the CCS group, which is providing engineering, procurement and construction (EPC) services for the Mozambique LNG consortium. It has teamed up with McDermott International (US) and Chiyoda (Japan) to implement €3.5bn ($3.86bn) worth of work on the consortium’s onshore natural gas-processing facility.

TotalEnergies tempers optimism

Puliti’s announcement that his company and its partners in CCS were expecting to resume work in July drew a lukewarm response from TotalEnergies.

In March, the French major replied to questions about Saipem’s target date by stating that it was still waiting to read the final report from the independent fact-finding mission it had tasked with assessing security and humanitarian conditions in Cabo Delgado. And even after it received that report in May, it indicated that it would follow the recommendations listed in the report but did not commit to any specific schedule for doing so.

“At this time there is no date for a restart, although the project partners take note of the report and note the security improvements on the ground,” a TotalEnergies spokesperson was quoted by Reuters as saying on May 23. “An action plan has been decided upon based on the report’s conclusions, and this plan will now be implemented.”

Budgeting blues

Despite the French giant’s non-committal stance, Saipem continued to talk about restarting work in July. It should prepare to eat its words, though. July has come and is now nearly gone, and construction has yet to begin again.

This is not exactly surprising, given that Mozambique LNG’s operator and CCS have spent the last few months trying to resolve their disagreements. The two sides are at odds over costs, with CCS (and its subcontractors) asserting that they will need more than the originally budgeted amount of €3.5bn to carry out their work and TotalEnergies asserting that the contractors are using the two-year delay as an excuse to inflate prices.

Patrick Pouyanne, the French major’s CEO, has said that construction will not resume until this dispute has been resolved. “We need the contractors to be reasonable. Some of them are not ... and have tried to benefit from the situation,” Pouyanne was quoted by Reuters as saying during a conference call with investors in late April. “There is no way for us to accept some undue costs. We have paid what we have had to pay because we stopped the project and have to restart. We don’t see why we should pay more than that. So that’s where we are.”

Heading for further delays?

And as of this week, that was where they remained – with the dispute still unresolved and construction still on hold.

To his credit, Puliti has acknowledged the hold-up. He reported on July 27 during a call on Saipem’s interim results that the parties were still trying to negotiate a solution. CCS is working with TotalEnergies and the other shareholders in the Mozambique LNG consortium with the aim of reaching a compromise on cost increases, he stated.

Puliti also declined to reveal how much higher CCS’ new budget was likely to be. “I can’t give a figure, but we are talking about relevant additional costs, on which we are currently negotiating with subcontracts,” he was quoted as saying by Reuters.

Although the budgeting issue remains unresolved, the Saipem CEO is still striving to strike an upbeat note. During the call, he told investors and analysts that TotalEnergies had begun implementing the fact-finding mission’s recommendations, adding that he had witnessed the resettlement of residents of a village near the LNG plant’s construction site during a visit to Mozambique earlier in July.

“I spent a day in Afungi ... The relocation activity is almost completed, and all the social sustainability [work] that the Mozambique [LNG] joint venture is doing is very impressive,” he said, according to Reuters.

This is certainly good news for the residents of the Afungi Peninsula, which has, like other parts of Cabo Delgado, suffered greatly ever since ASWJ launched its separatist campaign in 2017. Even so, it is not a sign that construction work will be underway soon. Instead, it may indicate that TotalEnergies and its partners in Mozambique LNG are heading for further delays, meaning that the project’s earliest possible start date will now fall after 2027.