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    Financing Still a Problem for Mozambique's LNG Plans

Summary

Mozambique's default on debt will push up financing costs

by: William Powell

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Financing Still a Problem for Mozambique's LNG Plans

Financing Mozambique's two LNG projects is an obstacle in the way of the east African country's economic turnaround, according to a report by AKap Energy, a consultancy, published April 12.

The paper, “Economic Analysis of Mozambique’s LNG projects”, looks at Mozambique’s LNG projects, one led by US ExxonMobil and Italian Eni and the other by US explorer Anadarko with in-depth analysis on the costs, revenues and financing of the projects. The combined costs are likely to be over $50bn, of which two thirds could be project-financed, but LNG exports could bring in $100bn for the country in cashflow.

The burgeoning revenues from the projects are potentially transformational for Mozambique, if it can establish the right political and economic environment to move the projects forward, says the consultancy, set up by former USB and Tudor Pickering Holt equities analyst Anish Kapadia.

The report notes that with final investment decision for the two projects expected to be passed this year, a crucial element that still needs to be completed is the financing of the projects. AKap highlights two key financing challenges: first, the ability of the partners to raise project financing debt; and second, the funding of state oil company, Empresa Nacional de Hidrocarbonetos’s (ENH) obligations (both debt and equity).

The report calculates that ENH’s total required investment into the projects is around half of Mozambique’s current GDP, with possible further funding required for other blocks and developing domestic gas. The report summarises the importance for the government to have a clean financial bill of health, as it will need to rely on the debt market over the next decade to support itself, ahead of the future cash windfall in the 2030s.

Between 2022-2030 the projects combined will generate around $70bn in total pre-tax operating cashflow. However, in this period, less than $5bn of this will go to the government as most of the funds will go to repaying the capex and compensating the equity holders. In the 2030s, the government take increases to less than $4bn/yr.

AKap Energy highlights that it is not helpful that the government is in a default situation, when companies are trying to raise about $30bn in project financing. The partners are likely to see a higher cost of project financing debt facilities as a result, cutting overall earnings.