Mozambique liquefaction funding gathers momentum

Melanie Lovatt's picture
Melanie Lovatt, Finance Advisor, Poten & Partners
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The next year and a half is going to be busy for liquefaction project finance in Mozambique. After the 3.4-MMt/y Coral South floating liquefaction (FLNG) project was successfully funded last year, the East African country’s first two land-based schemes, which could each cost over $20 billion, are being prepared for an approach to financiers.

The Area 1 partners, led by Anadarko and their financial advisor Societe Generale, are meeting with commercial banks this month to gauge lender appetite for their 12.88-MMt/y Mozambique LNG project as offtake arrangements are nearly complete. They will seek around $14 billion-$15 billion in debt for the mega-project. Anadarko’s first onshore LNG plant will consist of two circa 6-MMt/y trains in Afungi to monetize the Golfinho-Atum field, located entirely in 75-Tcf offshore Area 1.

Area 4 partners, led by ExxonMobil and Italy’s Eni, are also looking to make a final investment decision in 2018 or 2019 on their LNG export project, which will monetize part of the Mamba reserves located entirely in 85-Tcf Area 4. This is also expected to consist of two 6-MMt/trains. Given the structuring work carried out on the $8.2-billion Coral South FLNG project, the Area 4 partners and their financial advisor, Credit Agricole, should be able to move quickly on a project financing for their land-based liquefaction plant. It is possible that a formal approach to commercial banks for funding could be made this year.

Both land-based liquefaction projects are expected to make extensive use of export credit agencies. They provide direct funding and also comprehensive cover, for which the banks will supply the underlying funding.

ECA use is typically determined by the nationality of the sponsors, EPC contractors, equipment and materials providers, and possibly LNG offtakers. Instead of Mozambique risk, an ECA-covered tranche carries the risk of the ECA itself. ECAs, usually from OECD countries with high credit ratings, mitigate risk in emerging market transactions and can also provide extra liquidity needed in multibillion-dollar deals.

Risk mitigation provided by ECAs has become more important in recent years as bank guidelines have toughened, requiring more capital to be applied against long-tenored loans. Lower risk ECA-covered loans reduce the amount of capital banks must apply to these loans.

Fundraising for the Mozambique liquefaction projects will not be affected by the Mozambique government’s ongoing debt crisis. Area 4 partners were able to raise financing for Coral South FLNG even as they found themselves within the eye of the debt crisis storm last year. At the end of May last year five ECAs and 15 banks agreed to provide $4.7 billion of loans to the project.

While the risk reduction offered by ECAs helped bring in banks, use of limited recourse project finance structures affords lenders special protections. These types of financings in developing countries will typically include a provision for offshore debt servicing. In classic liquefaction project finance, lenders will also be drawn by the uplift from the credit strength of the offtakers. In Coral South FLNG’s case, UK major BP was the customer for all of the production. BP carries a high investment grade rating of A1 from Moody’s, A- from Standard & Poor’s and A from Fitch.

Fundraising for LNG mega-projects in Mozambique started – and can carry on – against a debt crisis backdrop. But Mozambique’s government is making efforts to put the crisis in the rear view mirror.

An audit of Mozambique’s debt that was carried out last year by corporate investigations company Kroll with government cooperation. It was welcomed by the International Monetary Fund (IMF). A detailed summary of the audit was released in June 2017.

The IMF also welcomed the government’s plans to resume discussions with private creditors and stressed that progress would be an important step to debt sustainability. Debt sustainability is a desirable goal and best tackled expediently, even if an LNG windfall is on the horizon.  

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Image courtesy of Poten & Partners