The largest ever foreign direct investment into sub-Saharan Africa has been secured by Mozambique, and even more commitments in the LNG sector are underway. The country’s long-struggling economy is already witnessing signs of a recovery in anticipation of more foreign exchange revenue. But in order to participate fully in its own LNG sector, the government will have to restructure its debts, nullify some loans, and bring in IMF support.

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On 18 June, US energy firm Anadarko Petroleum Corp confirmed it had given final investment decision (FID) on a USD 20 billion gas liquefaction and export terminal in Mozambique. Anadarko has agreed to be taken over by Occidental Petroleum Corp. Once that deal goes ahead, Occidental has agreed to sell assets including the Mozambique LNG project to French oil major and large LNG trader Total SA.

Anadarko’s FID marks the largest single LNG project approved in Africa, with 12.88 million tonnes per year (mtpa) production capacity. Natural gas use is growing rapidly around the world as countries seek to meet rising energy demand and wean their industrial and power sectors off dirtier coal. Earlier this month, the International Energy Agency said global gas demand is expected to grow at a rate of 1.6 percent a year until 2024, fuelled by Chinese consumption which will account for over a third of the demand growth during the period. The Asia-Pacific region will remain the largest source of gas consumption growth in the medium term with an average rate of 4 percent per year and will account for around 60 percent of the total consumption increase until 2024.

Anadarko’s project has committed long-term supplies to utilities, major LNG portfolio holders, and state companies around the world, including a co-purchase agreement with Tokyo Gas and Centrica. The liquefaction plant will be able to sell LNG to both the Asian market, which accounts for 75 percent of global LNG demand, and to the European market. Anadarko’s partners in the Mozambique LNG project are Mitsui, Mozambique state energy company Empresa Nacional de Hidrocarbonetos (ENH), Thailand’s PTT, and Indian energy firms ONGC, Bharat Petroleum Resources, and Oil India.

Last year, the USD 8.6 billion Coral South Floating LNG project operated by Italy’s Eni brought together some 16 commercial banks to raise USD 4.63 billion debt for the project. ENI’s partners in Coral South are ExxonMobil, the China National Petroleum Corporation (CNPC), ENH, Kogas, and Galp Energia. However, Anadarko’s project for the development of the Golfinho/Atum fields faces a different risk outlook as it is onshore. Attention is now turning to when ExxonMobil will make FID on its even larger 15.2 mtpa LNG project. Expectations are this will happen before presidential elections in October.

Economic imperative

The establishment of an extractive industry has been a key political priority since the 2010 discovery of approximately 20 million barrels worth of LNG deposits in Rovuma by the Anadarko and ENI oil consortiums in areas 1 and 2 of the basin. Mozambique’s economic decline in subsequent years has only served to hasten the imperative of such an industry. The FID on Anadarko’s project, and the impending decision by Exxon, come at a critical time for Mozambique, which is recovering from a lengthy economic and financial crisis and has recently been hit by twin cyclone storms.

 

According to assessments by Standard Bank, estimated stocks of LNG – which are only a fraction of the total resource endowment – could inject approximately USD 39 billion into the Mozambican economy. For a country that ranks among the poorest in the world, with a GDP of approximately USD 11 billion and public debt in excess of that amount, the windfall could fundamentally transform the country’s economic landscape. This is not to mention the potential residual benefits in employment, infrastructural development, and general economic welfare in proximate communities. The government of Mozambique believes the Anadarko project is expected to create more than 5,000 direct jobs and 45,000 indirect jobs.

The impending influx of dollars is already making itself felt — with the Bank of Mozambique last week cutting interest rates for the first time in 2019, thanks in part to the anticipation that investment in the LNG project will eradicate future foreign exchange shortages and calm inflation. Mozambique’s international reserves currently stand at over USD 3 billion, which amounts to six months of import cover of goods and services, excluding the transactions of the foreign investment mega-projects.

The government aims to create a sovereign wealth fund to channel LNG sector revenues, which has calmed investor fears that state revenues might be squandered. The metical local currency has been gradually appreciating against the US dollar and the South Africa rand, which reflects the improvement in the current account deficit in the first quarter of 2019, combined with the measures taken by the central bank to ensure greater discipline and transparency in exchange operation.

There remains a risk from declining state revenues due to the twin cyclone storms that hit devastated parts of northern and central Mozambique earlier this year. International donors pledged to contribute USD 1.2 billion to help rebuild areas and infrastructure destroyed by cyclones Kenneth and Idai in Mozambique. However, much of these pledged funds have not yet been disbursed and the timeline for disbursement remains uncertain. Even so, the pledged funds remain insufficient for recovery efforts. Mozambique needs a total of USD 3.2 billion for post-cyclone reconstruction in the provinces of Sofala, Manica, Tete, Zambézia, Inhambane Nampula, and Cabo Delgado, where Anadarko’s gas project is located. Meanwhile, the central bank has acknowledged that it may struggle to find sufficient funds to finance this year’s elections due in October (See SPECIAL REPORT: THE LONGER TERM IMPLICATIONS OF CYCLONE IDAI IN MOZAMBIQUE).

Meanwhile, the government is trying to close a deal on a USD 2 billion package of financing for state petroleum company ENH, which will require a sovereign guarantee. The risks of ENH defaulting is low, yet it still adds another USD 2 billion in sovereign–guaranteed debt to Mozambique’s already strained debt burden. Mozambique’s bondholders will be reluctant to agree to a restructuring that would allow Mozambique to take on even further debt. French financial consultancy Lazard Freres is advising the government on its debt restructuring, including the ENH debt requirements to develop its concessions.

Debt restructuring progress

Earlier this month, Mozambique’s Constitutional Council ruled that a government-guaranteed USD 850 million Eurobond issued by state-run tuna-fishing company Ematum in 2013 was illegal, since neither the bond nor the guarantee were ever appropriately noted in the country’s budget. In 2016, Mozambican officials agreed to swap the bond’s outstanding USD 697 million for a sovereign Eurobond. The court judgment may frustrate efforts by the Mozambican government to restructure the bond again. Even though the ruling was made by the country’s highest court, bondholders do not expect any impact on the bond’s restructuring process currently under way. The restructured Eurobond bonds had been approved by the country’s parliament in line with the constitution and within the limits of the budget law.

A few days before the ruling, Mozambique’s finance ministry said it had reached a restructuring deal in principle with holders of its defaulted 2023 bonds (See MOZAMBIQUE: NEW DEBT DEAL INCHES FORWARD). According to the proposal, Mozambique’s government will issue a USD 900 million bond maturing in September 2031, paying a 5 percent coupon rate until 2023, after which the coupon steps up to 9 percent. Mozambique will also make a cash payment to eligible bondholders of up to USD 40 million. This includes a consent fee and an exchange payment. The restructuring of some USD 726.5 million of Eurobonds is expected to be completed by 1 September, according to the ministry. That timeline may now be frustrated by the Constitutional Court ruling since the restructuring negotiations may face further legal challenges.

According to the latest proposal, bondholders will no longer get access to the country’s future natural-gas revenue. A previous proposal included extending maturities and sharing future revenue from offshore gas projects through implementing a new Value Recovery Instrument (VRI) capped at USD 500 million. However, the Mozambican government has been reluctant to proceed with the initial proposal and has lobbied bondholders to ditch the VRI. The main difference between the agreements is that the government will no longer pay bondholders about USD 500 million of earnings from liquefied-natural-gas projects, while the coupon rates have also changed. Essentially, the VRI has been replaced by a shorter maturity and higher coupon past 2023.

Under the previous deal reached in November, the government would have paid back the bond’s USD 900 million principal in five equal annual instalments, starting in September 2029 and ending September 2033. The new agreement envisages eight equal semi-annual payments of USD 112.5 million from 2028 to 2031. At least four creditor committee members have agreed to the proposal. Together these institutions control around 60 percent of Mozambique’s 2023 bond. Support from creditors holding 75 percent of the bond will be needed to activate the collective action clauses. The fifth group of creditors had been due to review the initial agreement, although the timeline may now be delayed given the court ruling.

INSIGHT

The FID on Anadarko’s massive foreign direct investment, as well as the expected decision by Exxon, will mark a highly significant turn-around for Mozambique’s failing economy. Low prices for the gas in previous years prompted fears FIDs such as Anadarko’s would be delayed or scrapped. But the US company has gathered enough long-term buyers to underpin the financing of the project. The takeover of the project by the highly experienced French major Total may also be a positive indicator for the project.

Initial indicators show that Mozambique’s economy is recovering on the back of the FID, given the expected boost to foreign exchange levels derived from direct royalties, taxes, carried interest, and other financial contributions, as well as indirect benefits to the broader economy. A sustainable recovery path will also depend on progress in restructuring the debt deals. The deal is also being motivated by a stronger desire by the Mozambican government to reengage with the International Monetary Fund (IMF), because the state needs billions of dollars in loans to fund its own participation in the natural gas concessions. The Fund is considering giving Mozambique a shadow programme, which would be a step towards securing financing from the IMF after the freeze in 2016. The IMF has insisted that any agreements with holders of previously undisclosed debts should be consistent with returning Mozambique’s debt position to a sustainable path.

That provision will shift the attention towards a restructuring of a USD 535 million loan to Mozambique Asset Management (MAM) and a USD 622 million facility for ProIndicus, a state-owned maritime security company. Bondholders complain that loan arranger Credit Suisse was not transparent with them about its other lending commitments to Mozambique, only revealing its loan to Proindicus when forced to do so during the 2016 debt exchange. Mozambique’s Attorney-General has filed a lawsuit in the UK to nullify the alleged criminally obtained government guarantee to the loan contracted by ProIndicus. Last month, a former Credit Suisse banker pleaded guilty to a US charge that she helped launder money. Meanwhile, the IMF says that Mozambique’s restructuring discussions with Russian lender VTB over the loan to the state-owned MAM are ongoing.

Moreover, the IMF insists that Mozambique should hold officials accountable for previously undisclosed debts, which may remain a real stumbling block to any eventual new credit facility. The IMF still insists on the need for Mozambique to fill the information gaps before any progress can be made towards re-engagement. The Fund is unlikely to change its stance until the full completion of an audit. Yet the audit remains stalled, not least by Attorney General Beatriz Buchili, who claims the audit is being frustrated by a lack of cooperation from other western countries. There is a lack of political will in Mozambique and among donor countries to continue the probes into Mozambique’s previous borrowing practices and allegations of embezzlement, as the momentum for investment into the natural gas sector accelerates.

This briefing does not mention the security challenges facing the LNG sector in northern Mozambique, which have been covered extensively by EXX Africa in a series of briefings in recent months. Another update is due next week (See SPECIAL REPORT: ISLAMIST INSURGENCY RESUMES IN NORTHERN MOZAMBIQUE AFTER CYCLONE).

SEE COUNTRY OUTLOOK: MOZAMBIQUE