Mozambique LNG on hold

Total issues declaration of force majeure, citing deteriorating security conditions in Cabo Delgado

WHAT: The French major has suspended work at the site of its onshore complex on the Afungi Peninsula.

WHY: Total had hoped to resume work in late March, but has been stymied by a series of attacks on local communities.

WHAT NEXT: Mozambique LNG may have to postpone the start of production by at least a year.

France’s Total has issued a declaration of force majeure on the Mozambique LNG project, citing deteriorating security conditions in Cabo Delgado, Mozambique’s northernmost province. In doing so, it signals that its attempts to restart work on the project have come to an end – at least for now.

In a statement dated April 26, the company confirmed that it had withdrawn all project personnel from the site on the Afungi Peninsula where it is building an onshore complex and natural gas liquefaction plant. It expressed “solidarity with the government and people of Mozambique” and said it hoped that “the actions carried out by the government of Mozambique and its regional and international partners will enable the restoration of security and stability in Cabo Delgado Province in a sustained manner.”

Total has not said when it might resume work on the LNG plant, which will eventually have two production trains capable of turning out 12.88mn tonnes per year (tpy). A spokesman for the French major informed Upstream earlier this week, though, that the declaration of force majeure would not be lifted until Mozambican authorities succeeded in restoring “safety and stability in a verifiable and sustainable manner.”

According to the spokesman, Total took this step because it has not been able to operate safely or efficiently since late March, when Ahlu Sunnah Wa-Jamo (ASWJ), an Islamist group with ties to Islamic State (Daesh), mounted a series of vicious attacks on Palma and other villages near the construction site. Under these circumstances, he said, the company cannot resume work or allow personnel for the Mozambique LNG project to remain on the Afungi Peninsula.

Contract cancellations

Total’s spokesman did not comment directly on his company’s relationships with its contractors.

According to S&P Global Platts, the French firm began reviewing agreements with several of its service providers last week, shortly before issuing declaring force majeure. It is likely to cancel some of these contracts soon, as the declaration gives it the legal right to do so.

Together, the declaration and the review of service contracts appear to signal that the $20bn scheme will be on hold for at least a year, with first production pushed back to 2025 instead of 2024. (Total has not commented on its timeline, and its spokesman only told Upstream that recent events would have “a consequence” for the Mozambique LNG work schedule.)

Meanwhile, the problems are not confined to the onshore construction site. Carlos Zacarias, the chairman of Mozambique’s National Petroleum Institute (known locally as INP), was quoted by Upstream as saying earlier this week that Total had also stopped work on the upstream portion of the project – namely, preparations for gas production at Golfinho and Atum, two fields within the offshore block designated as Area 1.

According to Ian Simm, principal advisor at the IGM Energy consultancy, delays are probably inevitable under current circumstances. “The declaration of force majeure eases the strain on the Mozambique LNG partners, pausing the drawdown of debt and freezing contracts for associated development works. This will be of little consolation to contractors, as the partners are likely to be freed from certain contractual obligations and may eventually cancel deals, depending how long force majeure remains in place,” he told AfrOil earlier this week. “Exporting gas by the late 2024 target now appears to be unlikely, and financiers will need to recalculate their anticipated returns. Much will depend on how quickly the security situation can be improved, but with several militant groups appearing to have joined forces, matters have become more complex.”

Total not exiting Mozambique

Despite these setbacks, Total has stopped short of withdrawing from the project.

The company’s spokesman stressed this point, telling Upstream that the company “remains committed” to developing Area 1’s gas reserves and building the onshore LNG plant, “when conditions allow.” He also said Total would “continue to follow the evolution of the situation with great attention, in close contact with the [Mozambican] authorities.”

This stance seems to have reassured the African Energy Chamber (AEC), an industry group that advocates for oil and gas development in Africa. “While the force majeure declaration by Total is a legal instrument at its disposition to procure its objectives and compromises with its lenders and the government, we firmly believe that Total will do whatever it takes to stand with Mozambique and its people,” the AEC wrote in a statement later on April 26.

It continued: “Total is not only an international company. It is an African company as well, as it is one of its most prominent investors and employers. Total’s connection to the African people goes far beyond its investments at a macro level. While many other multinational companies have left the continent, Total has remained, and we believe this commitment to the continent and Mozambique specifically will continue to remain.”

Economic impact

Even if Total goes forward with the project, however, the delays and contract cancellations stemming from the declaration of force majeure will hurt Mozambique’s economy.

In the near term, they will reduce the volume of money flowing into the country and the number of local workers and companies hired. But they will also push back the date at which Maputo will be able to start collecting its share of earnings from Mozambique LNG. According to previous reports, the scheme is expected to generate nearly $31bn in budget revenues over a period of 25 years.

Furthermore, Total’s decision to declare force majeure on Mozambique LNG could influence ExxonMobil’s approach to the proposed Rovuma LNG project, which targets offshore gas fields near Area 1. The super-major has already slashed its capital expenditure budget this year and has indicated that it will focus on a handful of its most profitable projects. This bodes ill for Rovuma LNG, as the turmoil in northern Mozambique makes the way forward for the project even more challenging.

Global context

Outside Mozambique, Total’s woes may come as a relief for competitors in other regions that are hoping to build new liquefaction capacity in time to meet demand from the middle of the decade.

Competition has increased dramatically in the LNG market in recent years, with new projects starting up in several countries, including the US, Russia and Australia. Now Qatar is trying to regain its dominance of the LNG market by expanding capacity while slashing costs.

Indeed, Qatar Petroleum’s recent final investment decision (FID) on the North Field East (NFE) expansion is set to raise the country’s liquefaction capacity from the current level of 77mn tpy to 110mn tpy by 2026. QP has described NFE as the largest LNG project ever to be sanctioned, and it is planning to raise its liquefaction capacity even further to 126mn tpy later in the decade.

These aggressive Qatari expansion plans make it more challenging for LNG projects elsewhere to proceed. Indeed, two of the proposed liquefaction projects on the US Gulf Coast have been scrapped since the start of this year. The cancellation of one of these, Galveston Bay LNG, has been attributed to challenges related to its location; however, market conditions remain challenging for many proposed new LNG export plans.

The US is not the only country where developers are backing away from LNG project proposals. In March, Chevron announced that it had ceased directing any further funding to the proposed Kitimat LNG project in Canada, having tried and failed to sell its 50% stake in the project.

All of these developments suggest that despite LNG’s relative resilience during the early months of the coronavirus (COVID-19) and the dramatic spike in demand for the super-chilled fuel over the Northern Hemisphere’s winter, conditions remain challenging for developers. And in that context, the deferral – or even loss – of Mozambique LNG’s projected volumes of 12.88mn tpy may boost competitors’ medium-term prospects.

Analysts including Tudor, Pickering, Holt & Co. (TPH) anticipate that LNG supply could overwhelm demand over the 2026-2030 period. Similarly, the Norwegian consultancy Rystad Energy has previously warned that if Qatar pushes ahead with its LNG expansion ambitions – as it is now doing – potential projects elsewhere in the world could face a grim outlook in competition against Qatar’s low break-even prices.

In the longer term, however, the outlook is different. Another consultancy, Wood Mackenzie, recently warned of a supply gap of 50mn tpy in 2030, and its director of LNG, Giles Farrer, has said he expects the shortfall to widen to more than 170mn tpy by 2035.

In the shorter term, though, LNG producers rely in large part on off-take agreements to underpin the financing plans for their developments, and while there has been anecdotal evidence of more demand for the fuel since the winter, few new long-term supply deals have been announced. Indeed, Qatar has dominated the handful of long-term supply deal announcements that have been made in recent months.