Moody’s: Investments of Asian E&P Companies in Mozambique LNG Are Credit Positive

Moody’s Investors Service says that the investments of Asian exploration and production (E&P) companies in a Mozambique LNG project are credit positive and will diversify the long-term production and reserves of the firms.

“The Rovuma basin has a large amount of high-quality natural gas reserves, particularly in Areas 1 and 4, where dry clean gas with no significant impurities has been discovered. As a result, the associated production and processing costs are lower,” says Simon Wong, a Moody’s Vice President and Senior Credit Officer.

“The project will also benefit from its accessibility to both Atlantic and Pacific markets. Mozambique’s proximity to India and key North Asian LNG buyers means delivery times will be shorter and transportation costs lower than projects in North America and Australia,” he adds.

Wong was speaking on a just-released Moody’s report titled, “Mozambique LNG Project Will Diversify Production, Reserves for E&P Companies.”

According to the report, five Asian E&P companies have made a combined investment of more than $14 billion over the past 12 months to acquire stakes in the offshore Rovuma basin in Mozambique.

In Areas 1 and 4 of the basin off Mozambique’s east coast, project operators Anadarko Petroleum Corporation (Baa3 stable) and Eni S.p.A. (A3 negative) expect that the two LNG liquefaction facilities will produce 10 million ton per annum and begin exporting LNG in 2018, supplying about 5% of LNG demand in North Asia (Japan, Korea and China).

Of the three rated Asian E&P companies involved in the project, PTT Exploration and Production Public Company (Baa1 stable) will likely see the biggest annual increase in production (3%-4%) when the project begins commercial operations. But, as the smallest company with the least debt headroom, it will face greater pressure from further large debt-funded capital spending on the project and potential cost overruns.

Oil and Natural Gas Corporation Ltd (local currency: Baa1 stable, foreign currency: Baa2 stable) will see the biggest gain in geographic diversification, because just 12% of its production came from outside India in the fiscal year that ended on 31 March. China National Petroleum Corporation (Aa3 stable) has the strongest credit profile among the three companies, with significant financial flexibility to manage cost overruns.

Moody’s believes that the project will face a number of financial, regulatory and operational challenges, and estimates it will begin exporting LNG in 2019-2020. Greenfield LNG development projects heighten the business and financial risks for E&P companies owing to the large funding requirements and potential execution delays or cost overruns, which are increasingly common.

Additional risks in Mozambique include the remote location of the proposed LNG park, lack of supporting infrastructure, and reliance on imports for the majority of the skilled labor, equipment and other resources.

Other resources-development projects in Mozambique or neighboring countries could also be competing for skilled labor, equipment and other resources.

“We are also concerned with the political and regulatory stability in emerging countries. Mozambique’s planned presidential and parliamentary elections in early 2014 could delay project approval if a new government imposes additional hurdles,” Wong says.

Even if the ruling party remains in power, the government still has to manage other domestic priorities, such as reducing the country’s high poverty level, which could result in changes to energy regulation and royalty and tax frameworks for energy exports.

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Source: Moody’s, August 22, 2013