Omar Mithá – Chairman and CEO, National Hydrocarbons Company (ENH), Mozambique (Part II)
In Part II of an exclusive two-part interview (click here for Part I), Omar Mithá, chairman and CEO of Mozambique’s national oil company, the National Hydrocarbons Company (ENH), discusses how Mozambique fares in relation to its regional competitors, its evolving relationship with South Africa, and future priorities.
How does Mozambique fare in terms of its competitors locally? Tanzania is on your doorstep and making similar claims to massive gas plays, so what are Mozambique’s relative strengths?
“We have a good relationship with Tanzania and we respect them, but when it comes to business, we are far more advanced”
Mozambique offers a significant competitive advantage over Tanzania. We have made significant strides in the legal framework – enabling IOCs to come and find a good environment for everything involved in financing and investing in complex oil and gas projects. In terms of the first-move advantage, Mozambique is already there and we already have infrastructure in development. We also have previous experience with Pande & Temane project – the first on the east coast of Africa – in our earlier history, with the development of an 850km pipeline. We have a good relationship with Tanzania and we respect them, but when it comes to business, we are far more advanced.
Tanzania has ExxonMobil, Shell and other companies that are strong, but we have ExxonMobil, ENI, Anadarko and Shell, on the downstream side. Speaking of the region, Mozambique has capitalized and has a very favorable geographic location with a long coastline that it allows some of the landlocked countries in Africa to access energy. Mozambique has a free corridor and plays a role as a gateway for its landlocked neighbors and can transform those corridors into gas corridors and supply those countries. We can be a first mover and grab a huge market share in those countries.
Since 2004, South Africa has been importing practically all of its natural gas via a transmission pipeline from Sasol’s Pande and Temane gas fields in Mozambique What is Mozambique’s evolving relationship with South Africa in terms of exporting natural gas?
The situation as it is today, most of our power comes from the hydroelectric power of Cahora Bassa Dam. The main off-taker of this power is South Africa. We also have fields in southern Mozambique where operators struggle and the main off-taker is also IGAS from South Africa. A good chunk of our energy resources are already being placed in South Africa.
What we have to be careful about is, in terms of beneficiation of in-country monetization, Mozambique should also pay attention to secure benefits for itself and ensure access to premium products within the country. When it comes to refineries, South Africa is very well placed. We do recognize the importance of South Africa within the region and it is always necessary to consider that South Africa has the potential to absorb our huge reserves.
The question comes in terms of how South Africa considers itself in terms of its policy for power. We have seen mixed signals, but not yet a clear picture and line of direction – is the country going into nuclear? Renewables? Or even coal?
The appointment of Cyril Ramaphosa is obviously a good sign, but there is still a long road to travel from words and speeches to action. We have commissioned a study, together with the DESA, to scope out the market profile in Southern Africa. We also have a conceptual project for a North-South pipeline, but the business worthiness of such a venture needs to be carefully calculated prior to investments being placed.
Could you please elaborate upon that? What specific criteria need to be evaluated before pressing ahead with extending South African pipeline connections 2,500km further north so as to tap into the Rovuma Basin?
The basic question remains: is it more economic to build a 6 million dollar pipeline for 2,500 kilometers or to invest in the purchase of LNG transport vehicles and rely upon South Africa building up its own regasification facilities. Pipelines take a long time to construct and there would likely be security issues to surmount all along the line. The advantage however is that we would be able to extend out such a project and establish a foothold right across the region with horizontal pipeline branches serving the mining industry in places like Zimbabwe and Zambia.
The LNG solution, meanwhile, would likely entail deploying small, specialized ships to sail around to a port like Cape Town. The benefits of a virtual supply chain like this are that it is easy to adjust them to shifts in the pattern of demand so you have an inherent flexibility advantage. You can also command a higher price for LNG.
ENH doesn’t have a particular preference between these competing models. An in-depth economic assessment needs to be conducted that weighs up the different trade offs. We are happy to pursue whichever pathway gins the greater traction.
How synergistic is the South African market in relation to Mozambique (given that it acts simultaneously as a strong service sector hub providing useful infrastructural support, and as an evermore thirsty consumer of natural gas)?
In terms of consumption, South Africa holds great potential, but we would be unwise to place all our eggs in the same basket, when the political winds can prove unpredictable. Logically South Africa should be an enduring consumer of our energy, but it makes sense from our perspective to establish a diversified client base. Our hope is very much to access premium LNG markets in the Far East by signing contracts with big-ticket importers such as Japan. Despite the obvious competition from LNG producers such as Australia, Qatar and increasingly the United States, we believe that our offering can be competitive. After all, importers like Japan are very concerned about security of supply and realize that it is in their own interest to spread risk across a variety of source countries so as to minimize any possibility of disruption to their supply chains. The sheer volume of reserves that we have at our disposal means we can be a reliable provider for upwards of 30 years from now.
South Africa undoubtedly poses as a strong service sector hub for the hydrocarbons industry and we can see that from the proliferation of South African service providers operating in the southern parts of Mozambique. They are significantly more developed than us when it comes to engineering, construction and auxiliary support functions such as logistics or catering so it is natural that you will often see them taking the lead. When it comes to expertise in LNG, however, they have little track record or historical basis. This means that we have to look further afield when we’re looking for technology transfer and sharing of know-how. If we are going to really make a success of LNG then we are going to have to look beyond the region and start engaging international enterprises from around the world. Collaborating closely with entities from Spain and Italy, both of which are countries that have been importing LNG for quite some time, can be a good starting point.
“We have to be very smart and learn from the examples of others”
We have to be very smart and learn from the examples of others. We are conscious of the mistakes of some sister countries in Africa. Already we are taking steps to cultivate homegrown expertise in LNG by sending Mozambican nationals to the sorts of places where LNG technology is being innovated such as Australia and Indonesia. We seek to train up a cadre of young experts who can ultimately come back home and pioneer the industry in Mozambique.
The ENH, Mozambican Chamber of Commerce and the Association of Small and Medium Enterprises (APME) signed a three-way Memorandum of Understanding last year with a view to promoting local content development. How are attempts to cultivate indigenous know-how around oil and gas progressing?
“Raising the participation of local content in a meaningful way is one of our core objectives”
Raising the participation of local content in a meaningful way is one of our core objectives because ENH has a social mission and moral obligation to harness our natural resource endowments for the benefit of the nation. Our vision is very much that momentum in the hydrocarbons segment can be a catalyst for the birth of cluster industries that provide high-value employment and sustainable livelihoods for Mozambican citizens. To this end, we are doing all that we can to promote the use of local content and local supply chains as much as possible.
It is not enough, however, just to influence IOCs operating locally to hire indigenous human capital and services. We have to ensure that our homegrown SMEs are of the appropriate standard. We have therefore been holding workshops in which we explain the procurement plans and expectations of the IOC and assist local businesses in raising their game. Often it comes down to correcting information asymmetries around the nature of goods and services that will be required and brokering joint ventures with international enterprises. We can identify, for example, where there is likely to be a shortfall in expert welders and take mitigating steps to ensure that a new cohort of graduates are properly trained so as to be ready to step up to the plate when called upon. This may mean collaborating with stakeholders to revise the curriculum of Mozambique’s national education apparatus.
Plans are also underway to establish a “City of Gas” at the coastal location of Palma. Covering 18,000 hectares and projected to house around 250,000 people, the planned conurbation will be home to a giant GTL plant and a range of energy-intensive ventures as well as the site of many of the cluster industries that comprise a vibrant oil and gas value-chain. The design will likely include investments in value-added industries like refineries and petrochemical plants. All of this naturally serves to support local job creation and to spread the proceeds of our natural resource wealth.
Rumors are rife that ENH is on the brink of appointing Lazard Frères and Lion’s Head Global Partners as advisers to help raise as much as $2 billion to refinance its portions of two gas-development projects: a 10% stake in Eni’s Area 4 venture and 15% of Anadarko’s Area 1. What makes this the optimum moment to launch a fundraising road-show and bring in international consultants?
The bidding process is still ongoing and the winner or winners have yet to be determined. The rationale is quite simple. ENH simply does not have the liquidity and balance sheet to invest its equity portion in such large projects and our shareholder – the government and State of Mozambique – does not have the reserves either. Back in 2015, when the market was oversupplied and the global oil price depressed, there was very little appetite and willingness on the part of institutional investors and financial lenders to sink money into upstream development when there was no line of sight for when FID would happen. Our backstop option was therefore for our IOC partners to fund our portion.
Now that investor confidence has improved and now that we are closing LNG commitments and client purchase agreements, we view this as an appropriate moment to go back to the market and persuade institutional investors to refinance our portion so that we can pay back the IOCs.
Looking forwards, what do you identify as your priorities?
Our main challenge right now is to secure the requisite financial resources. By default, as the national oil company, we are present in all plays and that means that we are in need of considerable financial firepower. The second big issue we need to deal with is building up Mozambique’s human resource capacity and institutional capabilities in order to meet the industry demand and challenges. Managing expectations will be crucial. As a country, we are blessed with bountiful reserves of gas, but there are a lot of gaps that need to be filled before we can reap the full rewards of this endowment. That is very much the task at hand for ENH.