Momentum grows in Mozambique mega gas projects, but multiple challenges lie ahead
Momentum has been building in Mozambique to capitalise on the vast quantities of high quality gas which have been discovered in the Rovuma Basin off the northern Cabo Delgado province.
The National Oil Company, Empresa Nacional de Hidrocarbonetos, (ENH) estimates that two adjacent blocks, known as Area 1 and Area 4, have 180 trillion cubic feet of gas between them. Put into context, this would be sufficient to supply the USA for almost 7 years.
However, progress on starting construction has been slow with only one LNG project having reached final investment decision (FID) in the past year. There are a number of financial, infrastructure and logistical issues affecting Mozambique’s ability to transform their economy from the massive gas reserves. This article examines the multiple challenges facing the country and offers an insight into the key drivers for success for those willing to invest in natural resources and infrastructure in Mozambique.
Over 50 billion dollars of investment in gas projects are under development, but can the country cope?
The ENI operated Coral South offshore floating LNG (FLNG) project in Area 4 is the first project to achieve financial approval for the 8.6 billion USD facility. The 3.4 million tonne per annum (MTPA) FLNG is currently under construction in South Korea and is anticipated to achieve first gas in 2022, with BP signing an agreement to purchase the entire production of LNG over the next twenty years. Coral South will be the first FLNG facility in Africa and only the third globally.
Three more mega projects are under development to monetise the remaining gas reserves, with total capital expenditure (capex) from all projects reaching over 50 billion dollars. Each of these planned projects, if they proceed, would be built onshore, with the bulk of the production slated for export.
- Anadarko is designing an onshore two-train LNG plant with a total capacity of 12.88 MTPA at start-up but with room to expand to four trains. The government has approved the development plan and FID is anticipated within the next 12 months, however this is dependent on when the financing agreements are concluded and the SPAs (sales-purchase agreements) are confirmed. Assuming FID next year, it could be possible to start-up around 2024. Capex for the two-train plant in the Afungi Peninsula in Palma is expected to be around 20 billion USD. Resettlement and site clearance has commenced.
- ENI, along with partners ExxonMobil, have a second project under FEED development in Area 4, called Mamba. This will also take the format of a two-train 10-15 MTPA onshore LNG plant. FID is currently anticipated 4Q2019, with start-up also in 2024. Capex is around 19 billion USD. ENI will operate the offshore fields, while ExxonMobil will manage the construction and operation of the onshore liquefaction plant.
- Shell has completed a feasibility study for a 5 billion USD gas-to-liquids (GTL) plant and is currently in the concept selection stage. They are the global leader in this technology, however their key challenge is securing supply of gas feedstock to the GTL plant. Without any supply of their own, Shell will be reliant on output from one of the LNG facilities. Timing of FID is therefore dependent on approval of at least one of these projects and signing the relevant sales-purchase agreements. As a result, we would not anticipate FEED starting before early 2020 with a subsequent FID not until 2022. This may be rather strategic for Shell, as many of the logistical, infrastructure and skilled workforce issues should have been resolved by then.
Next to the LNG plants, the government has plans for a major urbanisation project of some 18 million hectares. This will include both industrial and business centre infrastructure as well as housing, hospitality and green areas.
Notwithstanding the global demand for LNG and whether this can or should be supplied from competing projects in other countries, there must be serious concerns of whether a country such as Mozambique can manage multiple mega projects at the same time. Past history has shown that Australia encountered significant cost overruns when building three competing onshore LNG projects side-by-side on Curtis Island on the East Coast several years ago.
Mozambique is a low income country of some 29 million people, with 69% of the population living in poverty according to the United Nations. Literacy rates are only 58%, with Portuguese the official language and many speak little English. However, the country is politically stable, having emerged from two decades of conflict in 1992, with the next Presidential elections due in 2019. Strategically, Mozambique has the perfect location for the Asia export market as well as exporting to neighbouring land-locked African countries. In addition, the gas reserves are high quality. Therefore huge opportunities are available, as long as the risks are well understood and mitigated where practical.
There are 3 key issues to consider:
1 Local content: What is the minimum requirement versus what is expected, and what are the quality issues?
2 Resources: How many, what skills are available locally and what is the cost of resources? What training will be required?
3 Infrastructure & logistics: How will you get people, materials and equipment etc. into Mozambique and to site during the construction phase? How will you get LNG and oil products out of Mozambique?
Security, social and environmental issues are also key to consider, but out of the scope of this article. [At the time of posting this article in June 2018, Anadarko was quoted to have said in recent days “We take very seriously any potential threat to the safety of our employees and we continue to closely monitor the situation in the Palma area,” after news reports of Islamist militants attacks nearby. It is unknown at this time if work on the Palma site clearance has been suspended.]
While the national petroleum sector has an established regulatory framework for local content, according to recent comments made by National Oil Company ENH the specific requirement for local content on the Rovuma LNG projects has not yet been set in stone. Regardless, it is anticipated that all operators will follow the ethos of:
- Employment of Mozambican citizens with appropriate qualifications at all levels of its organization or as sub-contractors;
- Development and implementation of effective training programs for Mozambican employees in each phase and level of operations in Mozambique or overseas;
- Preferential purchasing of local goods and services when internationally comparable in terms of quality, availability, quantity and price.
It must also be expected that the safety requirements of the operators of these projects will require work to be completed to international standards, while remembering that local suppliers and resources will have little knowledge or experience of these standards.
The process equipment, heat exchangers, refrigerant compressors and cryogenic pumps required for an LNG plant use proprietary technology and is highly specialized, therefore it cannot be sourced locally. Other items such as electrical and instrument bulk materials and the control and safety systems are also specialty pieces which will be procured in very large quantities from international manufacturers. The quantity of heavy section structural steel required for two LNG liquefaction trains is likely to be in the order of magnitude of 25,000 tonnes; again this could not be supplied within Mozambique.
As a result, local content requirements may have to be applied only to scopes appropriate to the local environment and their existing capability, an example from other regions would be catering, equipment & office supply, logistics service and basic civils works. Simple things such as finding sufficient supplies of quality paper for printers in the offices will need to be considered. Feeding over 10,000 resources on the construction sites should not be underestimated – consider the need for 50,000 eggs and 6 tonnes of rice per day.
One obvious solution will be partnerships between local and international companies, particularly to help with red tape and understanding of local culture. It will be essential to have a registered office in the country for the entity, JV or consortium. In addition, the use of independent professionals in-country can help support with:
- Firming up building plans and local permits, planning approval
- Taxes, local taxes and work permits
- Understanding varying legal and contractual requirements on local content
- Understanding local decision making
- Understanding of local language and culture e.g. what does “your email is well received” mean?
When considering local content requirements, it is vital to set up a long-term sustainable solution which will provide knowledge for future Mozambican generations.
The onshore contractor chosen for the Anadarko project CCS-JV (a joint venture between CB&I, Chiyoda and Saipem) has estimated that there will be a need for 10,000 people living in 3 camps during the construction phase, with a peak requirement of 13,000. 100 million man hours of construction are forecast. With the Mamba LNG plant a similar size, and starting execution perhaps only a year after Anadarko, this could result in resource requirements reaching 20,000-25,000 at the same time for at least a period of the projects. There are huge risks with managing camps of these sizes, including hygiene, dietary needs, security and avoiding/managing discontent.
Such a manpower requirement cannot be supplied only from Mozambique. Currently 75% of Mozambicans in employment are employed in the agriculture industry, with less than 5% working in industry (source: United Nations), so there are not enough competent people to do the work required. We expect to see a significant import of labour, such as from neighbouring countries including South Africa, as well as expats. For locals, training will need to be provided for work readiness, safety and technical skills as well as training foremen and supervisors. To manage this, training centres will need to be built, with one already established in 2013 in the Afungi peninsula. It’s not just work related skills that will be needed though; many will have also have to improve literacy, learn personal money management skills, and indeed learn how to manage their personal and occupational health.
Infrastructure & logistics
Mozambique enjoys an enviable location strategically to export LNG and oil products both to neighbouring African countries as well as to Asia, but the infrastructure required for the volumes expected currently does not exist. This situation will be greatly exacerbated during the construction phase of the onshore LNG plants in the North East of the country when vast quantities of materials and equipment will need to be imported. Investment in ports, roads and air transport is urgently required.
While Maputo is the busiest port in Mozambique and the primary hub for imports, the only ports in the North-East of the country where the onshore LNG plants will be built are located at Pemba (shown on the map on the front page) and Nacala, 210 km south of Pemba. Both ports are small coastal breakwater harbours, with a maximum lift size of 49 tons and as such, of no use for the LNG projects.
Therefore, there is an urgent need to build port facilities for importing millions of tonnes of materials, equipment and supplies. The Mozambique Government Minister for Transport and Communications, Carlos Mesquita, has announced an intention to build a new commercial port at Palma in the Afungi Peninsula (close to the Tanzania border) which is the planned location of the Anadarko LNG facility. At the time of writing, no further details on the financing or progress of the port was available, however, it is noted that previous port contracts for Beira port were awarded to members of the Mesquita family.
We have to wonder how the onshore projects can progress without addressing the major challenge of lack of port facilities. This is not a new problem; the Australia Gorgon LNG project faced early logistical complications, and their lack of material offloading facilities on Barrow Island created a delay in completing their early works programme. Industry experts talked of supply boats having to be effectively “beached” to offload via temporary cranes reducing the volume that was able to be shipped to the workfront. Lessons learned from that project logistical approach must be shared to avoid repeating the same mistakes in Mozambique.
While Anadarko will most likely receive a waiver and be allowed to build a port facility for themselves, it is unknown at this stage if they would build a temporary material offloading facility (TMOF) or something more permanent. Key considerations would be that a TMOF is unlikely to have the heavy lift ability required. The next challenge could then concern what may or may not move through that facility, for example provisions or Mozambique workers. The question of harbour and port licenses will complicate the process further.
The lack of port is not the only issue, however. Once materials and equipment are imported into Pemba or a new Palma port, the next challenge is that they have to be moved by road to site. Mozambique has one of the least developed road transport infrastructures in the Southern African region. With the exception of major arteries, overall road conditions in Mozambique are of poor quality and some bridges on the road from Pemba to Mocimboa da Praia can only take loads of 8 tonnes. Road conditions, if not upgraded sufficiently, could cause a significant bottleneck in moving goods across the region. Traffic accidents are common due to the condition of the roads, poor driving and vehicle standards.
Investment is being made (and a contract awarded) in the Palma to Ufungi Highway to ensure transport of large modules to site. The challenge is that the entire area is a large flood plain, so the road need to take this into account, which would add considerable cost to the project.
Airports and air transport also do not seem to adequately serve the country’s needs. Again, Maputo has the main international airport, with a much smaller local airport at Pemba. Will the lack of air transport hinder progress on the LNG projects? It is our understanding that Anadarko has approved a plan for their own landing strip, but questions remain about the customs laws regarding imports. The projects will also have to consider the movement of people, for example, people on rotation, people travelling in and out of the country and the need for work permits/visas etc.
The logistics of importing goods and services will require more than just the correct infrastructure in place. Contractors will need detailed knowledge of customs clearances and the time that will take, as well as local compliance and environmental requirements. In a recent meeting with Lars Greiner of international freight forwarding experts Bertling, he explained, “Mozambique has some of the most challenging set of customs laws, especially in terms of temporary imports, and this needs to be considered from the very start. This could pose a challenge for the project, especially for heavy and specialised equipment that will come into the country for the building phase and then needs to be re-exported”. He added that, “it is essential that everything is submitted, checked and confirmed beforeshipment is greenlighted. If everything is perfect, you may be able to clear in two to three days, however one should always allow seven. If anything is missing or incorrect, or not in Portuguese, the process can be well delayed”.
Our 5 key lessons to share
Too often, international companies think that they can repeat a European or American strategy in an African country. Our experience across Africa has shown that project teams typically underestimate the following five challenges that will lead to project delay and cost overruns;
1. Getting equipment/materials/supplies to site is not straightforward. Limited local supplies. High cost and complicated customs rules to import goods/equipment. Unable to offload/transport large modules and bridges/roads unable to carry loads. Average waiting times for border crossing can be around 15 hours. If you can’t get materials to site your project progress will be halted. Alternatively, long lead items land before site is available and/or design not fit for site conditions.
2. It takes a long time to do anything. While it may only take a couple of days to clear customs when importing into an Asian port, the average time to clear customs in an African port is 42-60 days. Construction permit applications is mostly manual in Africa, and can take up to 24 weeks. Red tape and not understanding local approvals and legal requirements will hold back progress further.
3. The required infrastructure may not exist. Typically there is no government funding to provide power/water/utilities. To generate power for LNG, you will need to build gas turbines. There can be significant unanticipated infrastructure costs post FID.
4. Huge resources are required from an unskilled workforce. Training and supervision will be required. Import of labour. Low productivity.
5. Misunderstandings of local culture and how to do business in Mozambique. Taxes, local taxes, licenses, customs and work permits/visas. Understanding varying legal, contractual and ethical requirements on local content. Partnering with a local company who understands the intricacies of working in Mozambique will be essential.
Beyond delays and cost overruns, the impact of poor planning can lead to much more serious consequences:
- Legislation/legalities and major claims
- Contractors stop working altogether
- Tarnished local government relationships
- Fines and/or arrest
Therefore, it’s essential that those looking to do business in Mozambique are realistic of their knowledge of the country, and take into consideration the limitations of Mozambique’s supply chain. Without exception, always make provision for people on the ground to oversee and assure your project with regular reporting and appropriate detail for projects being managed remotely. Adapt your contracting strategy to work within one that locals have used successfully before and finally, surround yourself with relevant companies that have in-country experts and can deliver consistency.
A common mistake is trying to shoehorn a European/USA solution to an African problem
A local partner - Turner & Townsend Mozambique
Turner & Townsend has a registered company in Mozambique and more than a decade of experience working in Mozambique. We are able to deploy the right resources quickly and effectively. A significant number of our people speak Portuguese and are complimented by a core of leads who have a deep understanding of the specialised disciplines required to delivery large, complex projects.
This means that we can make the difference for our clients as we are able to work seamlessly as an integrated member of our client’s team to achieve their goals. We proactively support local contractors in understanding and applying our client’s requirements and international best practice.
Our reputation is founded on a commitment to add measurable value as we provide clients with commercial assurance and reduce the risk of delivering projects in Mozambique.
We have supported many of the international investors who have helped to fast track the Mozambique economy, including Anadarko, BP, Eni, Rio Tinto, ENRC, PetroSA, Barclays, M Cell and Sasol.
More than 80% of our business in Mozambique is repeat work with existing clients who recognise that Turner & Townsend understands the challenges of working in country.
We reduce the commercial risk and increase the assurance for projects in Mozambique because our local service offering is built to fit African projects and is:
- Realistic - We have extensive experience with African challenges and the ability to deliver consistency for global clients
- Robust - Making sure that sufficient levels of reporting and relevant project details are produced to enable appropriate management of projects within country and remotely
- Scalable - Adapting resource requirements to suit a project’s changing environment and logistical challenges
- Competitive - By using our local people that leverage global best practice methodologies and processes
For more information, please contact Mark Haselau, Managing Director, East, West & Central Africa, +27 11 214 1457, [email protected]