In spite of downward shifting expectations in the LNG industry, opportunity persists in Mozambique for smaller producers which lack the over-exposure of large gas multinationals to market forces such as overcapacity in infrastructure or depressions in global prices.
Mozambique is currently one of a number of countries where recent natural gas (LNG) discoveries have prompted the schedule of ambitious export projects over the next decade – but also where experts are advising a cautious approach towards large-scale investments.
“There is always so much talk about these big LNG projects around the world, but only a small fraction of them will get built,” Matthias Bichsel, Royal Dutch Shell’s director of projects, told The Peninsula daily newspaper in Qatar, the GCC’s leader in LNG production.
“Costs in the oil and gas sector are still on the rise and outpacing inflation, and gas projects are extremely price-sensitive because the margins are so thin,” he continued.
Indeed in Asia, where 70% of LNG trading takes place, LNG prices have fallen more than 35% this year – to their lowest since late 2012 – and if new producers entering the markets cause this trend to persist, it could severely diminish the industry’s returns on its investments.
However, in countries like Mozambique this could in fact benefit smaller companies that have lower overheads and which are less exposed to large-scale investment concerns.
“Smaller companies get on with things and have a big role to play. We bring in the medium companies, who draw in the large ones,” explained Max Birley, chief executive of Taipan Resources, which is based in Kenya and listed in Canada, in comments to Kenya’s Standard.
“We may not have big pockets but we employ bright people who are aggressive about exploration and we drill wells which some of the majors won’t drill,” he added, noting that the $50m capitalised company hopes to start drilling in northeast Kenya from next year.
But larger developers will likely struggle to find financing as consumers hold off on signing 20-year deals given widespread expectations that prices will soon enter a period of decline.
“I believe the speed with which the East African projects have been promised is somewhat ambitious since all infrastructure there has to be built from scratch,” noted Bichsel.
Nonetheless, Africa’s internal markets look strong, with the latest report from the International Energy Agency’s latest anticipating the need for an investment of $16bn each year over the next two decades for the continent to keep up with its soaring energy demand.
This amounts to 4.5% of Africa’s collective GDP – the highest proportion in the world – and LNG exports are expected to be the main driver of the production increases in Sub-Saharan countries, while East Africa’s export capacity specifically is expected to reach 40 bcm (billon m3) by 2035.