financing domestic gas & gas-based industries · palma power 353mw 2020 0.5 12% 1.2 palma...
TRANSCRIPT
Financing Domestic Gas & Gas-Based Industries Paul Eardley- Taylor, Oil & Gas: Southern Africa
22 September 2015
1 Contents
Section Page
1. Introduction 2
2. Mozambique LNG 5
3. Domestic Gas Projects 10
3
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Over the last 30 years the demand for the use of gas as a substitute for coal and oil as an energy source (especially as
feedstock for power generation) has increased globally
Southern Africa is in the process of catching up on this trend. In recent years we have seen significant gas discoveries in
Mozambique and Tanzania (say 240 Tcf combined) with South Africa estimated to have large quantities of indigenous
hydrocarbons with a plan underway to develop LNG imports for power generation as the key unlocking step
Mozambique specifically has reached ‘’The Tipping Point” (Gladwell, 2013) on its LNG and other gas developments. The
following highlights:
June 2014 – the Gas Master Plan (‘’GMP’’) was approved by the Council of Ministers
August and December 2014 – the Enabling and Decree Laws were passed facilitating Project development
18 May 2015 – the Chicago Bridge & Iron (‘’CB&I’’), Chiyoda Corporation and Saipem joint venture was selected as
Area 1 onshore EPC Contractor to build Mozambique LNG’s first 12 MTPA at Palma. This has boosted other in-
country LNG and gas developments;
September 2015 – From interaction with Area 4 consortium, they continue to aim to make a Final Investment
Decision for their Floating LNG (‘’FLNG”) Project by December 2015
Introduction
Overview
Mozambique seems
to be at the ‘Tipping
Point’’ of developing
a natural gas-driven
economy…..
Mozambique has made some good progress over the last year with regards to Area 1 & 4,
noting as context the Brent price fall from USD 115 bbl (Jul 14) to USD 48 bbl (yesterday)
Mozambique LNG
Standard Bank Macroeconomic Study (‘’Report’’) Key points
Preliminary
work begins
May/June
Enabling
Law
Assembly
Decree
Law
Council of
Ministers
FID
APC
Standard
Bank
Report
APC
Negotiations
APC
Advisors
Specialist
Economists
Mozambique
Political/Economic
Expert Input
Sustained , Two-
way APC
Engagement
Standard Bank
Analysis
Private
channels –
1 August
Public
(indirect)
channels –
19 August
2015/2016 2020
Ongoing
negotiations for
two years
Passed –
20 August
Completed 31 July
Some key success factors emerged:
• Transparency in analysis and data sources
• Consideration and alignment with
Government priorities
• Alignment with mainstream development
literature
• Direct input from key Mozambican insiders
• Conveying insights from the above to client
• Leveraging our in-country expertise and
network
The Macroeconomic Study made a major contribution to the Project debate, with the highest
stakeholder level aware of the study and its key conclusions
In developing the
Report, SB combined
rigorous analysis with
expert input on the
Mozambique economy
and political
landscape
Sustained
engagement with
client help guided the
Report as well as
influenced the client’s
own strategy
Opportunity for key
stakeholders to
consider findings
before public release
In under 3 weeks, the
Report helped
advance 2 years of
protracted
negotiations
25 Nov approved by
Council of Ministers;
ratified by Assembly
The Macroeconomic Study on Mozambique LNG examined the financial and economic impact of the Project on Mozambique
As well as Real GDP (per below), employment, fiscal and balance of payment impacts were also analysed
Standard Bank had access to APC data and used the study to provide a detailed and transparent assessment of
Mozambique LNG’s fiscal and economic impacts. This facilitated the advancement of the Project within the country
significantly, which at times was not well understood by all decision makers
Standard Bank specifically included an analysis and modelling of Domestic Gas Sales (“DGS”) which allowed local industrial
projects to be developed with private capital and fuelled by a percentage of offshore gas not transformed into LNG but which
was sold to domestic buyers
15
54
82
93
126
0
20
40
60
80
100
120
140
2014 GDP 2035 No Project 2035 6 trains 2035 6 trains and DGS 2035 6 trains, DGS and Area 4
Mozam
biq
ue G
DP
(2013 U
SD
Bill
ion)
GDP Base Case Area 1 - 6 trains DGS Opportunity Area 4 (assumption)
Standard Bank
produced a detailed
report on
Mozambique LNG
Domestic gas was a
significant
component of LNG
opportunity for
Mozambique
Standard Bank Involvement continued…
Mozambique LNG continued…
Real GDP increases per the above. In parallel, Mozambique Inc secures between 62%-65% of
Project cash flows which increases to 84-88% on a discounted basis
8 Mozambique LNG continued…
Natural gas sold by Concessionaire at cost of production (with Project return - but insulated from global prices) will transform
Mozambique
Downstream projects were modelled such that private funding could be obtained for their development
Standard Bank assumed domestic gas price of USD 3.25 / MMSCF (broadly equivalent with Henry Hub, whose low price
has driven manufacturing growth in the US)
Total tax from projects USD 34 billion
No assumptions on location after Project comes on-stream. We assume a pipeline only fuels a power station but could also
transport gas for GTL, Methanol among others. We also believe SMEs will be a key beneficiary of domestic gas – but not
modelled given variation in scope and small size
Standard Bank anticipates large employment and GDP impacts from gas-based SME development
Standard Bank Modelling of Domestic Gas-Based Projects
Project Capacity Project
Operations
All-In Capex
(USD bn) IRR
Total Income
Tax (USD bn)
Palma Power 353MW 2020 0.5 12% 1.2
Palma Fertiliser 1 165 KT p.a. 2020 1.9 17% 4.2
Petrochemicals 3 368 KT p.a. 2025 4.7 15% 10.3
GTL 47.9 kbbl/d 2030 19.2 9.4% 17.4
Pipeline (Maputo Power) 400m GJ/year 2035 9.4 -1% 1.3
Domestic Gas will create major comparative advantages for Mozambique. This will have
huge transformational potential and drive growth and employment creation
Large potential for
gas industry
development from
low-cost domestic
gas sales from the
Project – as in US or
Qatar
Create comparative
advantage for
Mozambique
Will drive
industrialisation, job
creation and
economic growth
Most can be funded
from private capital
– reducing cost and
risk to Mozambique
As with Oman and Qatar, Mozambique is likely to develop a strong domestic gas sector to
broaden and deepen its national economy
0
20
40
60
80
100
120
140
QNB CBQ Bank Muscat Republic Bank
US
D B
illio
n
Total Asset Growth: Selected Qatari, Omani and T&T Banks
2003 2008 2013
Fiscal Take of Government will flow through Mozambican banking sector
This amounts to USD 212 billion directly from 6 train case over life of Project
Amount will be significantly more when considering APC expenditure, Eni LNG developments and induced effects
As such, banking sector will grow not only from retail perspective, but also see increasing demand for investment banking
products as well as require more sophisticated product offerings in country
These cannot occur if there is not related reform and development of the institutions and regulatory framework governing the
Mozambican banking sector
Qatari, Omani and T&T banks experienced total asset CAGRs of 26-30%, 19% and 11% respectively over period 2003 -
2013
Mozambique LNG continued…
Case Study: Banking Sector Impact of Selected LNG Comparators
Source: Company Data
Between 2003-2013, the leading Qatari banks grew their balance sheets at a 29% CAGR,
showing the transformational affect of LNG
Large revenues that
will flow through
banking sector
resulting from LNG
Project will increase
demand for banking
services and require
more sophisticated
banking product
services
Important regulatory
and institutional
sophistication will
be required to
unlock banking
sector potential
Other LNG
jurisdictions
demonstrate what
may be possible
Section 3:
Domestic Gas Projects
11
Overview
Domestic Gas Projects
We assume that DGS will be used as a feedstock for domestic projects. Per the GMP, Mozambique’s priority sectors are power,
diesel, fertiliser and petrochemicals.
We assume that the earliest projects can come online in 2020, with more projects possible with additional trains. We assume
pricing would be broadly at landed cost, inclusive of an upstream return
An assumption is made that the DGS will arise from a standalone field development without interaction with fields dedicated for LNG
exports. For example, if a domestic gas project is late this could affect LNG production and there is also the case of Eqypt to
consider.
Given ENH’s role in the O&G sector either directly through a subsidiary or through a newly created SPV, will become the buyer of
the domestic gas on behalf of the country (“Aggregator”) as set out in the Decree Law. ENH will then on-sell the natural gas to
different domestic gas project concessionaires in Mozambique at a TBA tariff, an option is also to sell the gas to neighbouring
countries (for example SA, although not expected for a while).
Trains 1 & 2 are expected to reach full FID in Q2 2016, we expect LNG production (train 1) first gas by 2020. This means
construction for domestic projects, fertiliser or power, need to commence in 2017 to be able to receive gas for commission in 2020.
This leaves 18 months from now for the execution of a bid selection criteria, requesting of proposals from different domestic projects,
selection of successful projects and for the projects to reach financial close by [June 2017].
We would expect multiple bidders for fertiliser and power, noting that key strategic choices must be made for fertilisers (will the
concept be one of standalone projects or projects linked to methanol/petrochemicals possibilities). Other markets are naturally more
limited in players (e.g. GTL).
ENH/ENH
subsidiary/SPV will be
the single buyer for
domestic gas from
Anadarko/ ENI – we
assume carrying
responsibility to
negotiate sales
contracts
Single buyer will on-
sell gas to the
domestic gas projects
at TBA tariffs
Revenues from
domestic gas sales
can be utilised to
service costs incurred
for the purchase of
gas from the LNG
Upstream Project.
What will the margins
be?
12 Domestic Gas Projects continued…
Although a simple concept, there are a huge number of variables to consider, inter alia:
– Concerning the volume of domestic gas supply:
► Mozambique has dry gas (implications for petrochemicals among others) and the long-term price of Brent Crude oil (for
example long-term LNG pricing slopes and henry Hub alternative);
► The number of trains to be developed by Anadarko and ENI (including the spare capacity at the fields that supply the
trains) and applicable capital costs, infrastructure; and ultimately the global demand for LNG.
– Agreeing a DGS strategy and documentation with each of the Area 1 and Area 4;
– Determining the priority and sequencing of DGS allocation across individual Domestic Gas Projects, including their
commercial allocation process (for example tender process). Key Issues to think about;
► What is the schedule of gas likely to be available at what price? (When the number of trains are not all known)
► Where will projects be located? The LNG landing point is known. There is a natural possibility of building the DGPs
around Palma (the industrial city model) but this first mover advantage could inhibit later development elsewhere
► If development is sought elsewhere, there are implications for transport costs, funding and project economics which
may challenge project start dates
► Who will run the tender process? The Ministry or ENH?
► What type of industry is desired? For example, standalone fertiliser projects could be developed (Mozambique has a
shortage of fertiliser, low usage and badly needs a distribution industry). Alternatively, integrated fertiliser and
petrochemical developments could be planned in time (but this has to be considered when building the initial fertiliser
project). There are implications for the number of applicable forward linkages
– Determining the price at which DGS would be on-sold to individual projects. Per the Macroeconomic Study, Standard Bank
assumed that the DGS landed cost would be USD 3.25 MMSCF (flat). If, for example, there is a potential price of 3 USD per
MMSCF, will this be indexed? Whilst this price may work for Projects? will their be a cross- subsidy for fertiliser or GTL (who
may need a lower price)?
Many Variables
Executing DGS
requires multiple
issues to be solved
in a short timeframe
13 Domestic Gas Projects continued…
– Carefully considering how Area 1 and Area 4 can develop their initial LNG trains in parallel with the initial provision of DGS. For
example, the two concessionaires’ building four trains of LNG in parallel (say between 2018 – 2020) will utilise significant
resources and impact the Mozambique construction industry to an extent it may take away resources from any domestic project
planned in early time periods (for example, fertiliser, power, GTL). For example in 2018, there could easily be 40,000 construction
jobs within Palma (e.g. two onshore LNG developments plus Domestic Gas Projects under construction);
– Carrying out a detailed regional Spatial Development Initiative (‘”SDI’’) scan of how the development benefits arising from DGS
could be allocated across industries and regions. This issue is potentially tricky given the timing readily at which gas will be
landed at a specified place (Palma) at a specified time (2020). For example, in the case of power:
► There is limited transmission infrastructure in the North which may impact upon generation (until EDM/Others can afford to
build a backbone)
► However, a Floating Storage and Regasification Unit (‘’FSRU’’) is possible at Matola (which can facilitate a major gas to
power project and provide a core of demand for a future pipeline, e.g. GASNOSU. Power can also be supplied to South
Africa in parallel (e.g. through the Gas RFI process).
– Determining and negotiating the contractual arrangements under which gas would be sold by Area 1 and purchased by the Single
Buyer (ENH), and the political, legislative and regulatory underpinning of this;
– Determining the domestic gas industry (and physical) structure as to how the gas would be sold from the Single Buyer through the
value chain (owned by who? Funded by who?) to end users (individual projects);
– Determining the optimal capital structure for such domestic projects and assisting where required in the raising of funding. Whilst
we are confident on Mozambique’s long-term trajectory the applicable sovereign rating (B- / B2 / Category 7) and in-country
resources will constrain funding for some time;
Many Variables
Executing DGS
requires multiple
issues to be solved
in a short timeframe
14
Many Variables
Domestic Gas Projects continued…
– Turning to GTL:
► Which GTL project will be selected? And how? There are two. And how will the Gas Price be determined? Would
domestically produced diesel be sold at a concessional price domestically? Would this skew behaviour and economics?
How would surplus product be exported?
– There are also numerous challenges for ENH:
► If ENH positions itself as the Aggregator, to reduce the risk of one party having a monopoly over the gas projects (e.g. it
may be appropriate for ENH not to participate as a bidding party (or only as a passive minority for all bidders).
► Could the [Ministry] be placed in charge of establishing the policies to govern the tender process regarding which parties
are awarded contracts and ENH be responsible for negotiating the contracts. Currently the Decree Law states ENH as the
Aggregator and also as the Government body which is responsible for participating in the entire value chain. What does
this mean in practice?
► At what price will the gas be sold to ENH? What is the price that ENH will pay to project developers or SA if gas is
exported? Will they make profits or recover costs? How will margins be determined? In short, does ENH’s Aggregator
role need to be independently regulated to unlock Domestic Gas Projects? The example of NNPC or Eskom looms
large
► How will ENH raise its funding? As well as Trains 1 & 2, there is FLNG, Pande/Temane/Inhassoro, Trains 3&4 etc. It is
easy to see how USD 4 – 5bn of funding and contingent support is needed by 2016 alone (c. 20-25% of GDP))
Nonetheless, to tee up the panel we note on the next slide a strawman slide for funding the
Domestic Gas Projects
Executing DGS
requires multiple
issues to be solved
in a short timeframe
15
Financing Strawman
Domestic Gas Projects continued…
1. Achieve FID and Financial Close on Trains 1 and 2 of Mozambique LNG
Assumed to include Domestic Gas Sales to Mozambique. Roadmap also agreed for future Domestic Gas Sales from Trains 3&4,
5&6 etc (gives more certainty on volumes, price and schedule albeit execution depends on LNG conditions)?
FLNG generates cash flows for Mozambique but does not result in domestic gas
2. Determine role of ENH
Aggregator Role has potential for conflicts of interest (intentional or unintentional, see NNPC/Eskom for examples)
Independent regulator announced (?) Focus on pricing and market structure?
3. Determine tendering process for DGPs
Focus on attracting high quality and creditworthy project developers (Why? Experience and balance sheet ability in a B- / B2
market (for a time), vital to have investment ability, bank relationships and ability to attract funding, promoting ability to close)
As well as Gas Price, need to ensure maximum forward-linkages (e.g. link fertiliser to petrochemicals, involve developers in
downstream distribution etc)
Mix of tendered projects (e.g. IPPs) plus negotiated for small markets (e.g. GTL) ran by the Ministry?
4. Determine financing conditions for Domestic Gas Projects
Focus on ensuring full funding of each DGP upon confirmation of preferred bidder (as first prize)
Each project should be able to be financed on a standalone basis
Construction of the
first DGPs need to run
in parallel with the
construction of the
LNG upstream plant
Suggest strict
selection criteria for
awarding DGPs
The above principles may leave a residual challenge – funding common / social / household
infrastructure, gas vehicles etc
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