Johannesburg/Milan — ExxonMobil and Total are in negotiations over their huge liquefied natural gas (LNG) projects in Mozambique, with each seeking to extract more gas from a shared field that straddles the two developments and cut costs, three sources familiar with the matter say.
The talks between the energy majors also involve the Mozambican government, according to the sources, as it has to give final approval to any new agreement.
The field that straddles the projects happens to contain gas that is thicker and therefore cheaper to extract and convert into LNG than reserves elsewhere in the projects.
The volume each project could extract from the shared area was set out in a 2015 “unitisation” — or resource-sharing — agreement. However US major Exxon and France’s Total are now renegotiating that contract with each other, the sources said.
The companies are looking to cut costs wherever they can, bruised by a Covid-19-induced collapse in global oil and gas prices and facing a worsening security situation in Mozambique.
Across the industry, most companies have been forced to delay decisions on new LNG projects and write down investments in existing production plants, in stark contrast to last year’s record level of approvals for plants.
Success in the talks could be particularly important for Exxon, which still has to woo investors ahead of a delayed final investment decision on its $30bn (about R456bn) Rovuma LNG project, which the sources now do not expect until early 2022.
The final investment decision on Total’s $20bn Mozambique LNG project was made in June 2019.
The contract was signed by Eni and Anadarko. In 2017 Eni sold a stake in the Rovuma venture to Exxon, which is now the project operator, while Anadarko sold Mozambique LNG to Total in 2019. It allows the projects to extract a combined 24-trillion cubic feet of gas from the “straddling” reserves, with a 50/50 share in phase one of development.
Now Exxon and Total are trying to rework the agreement to increase extraction from the straddling reserves as a way to boost efficiency and increase their projects’ annual LNG production, according to the sources.
“They want to use the cheapest gas first, which is the straddling resources,” said one of the sources.
Asked about the negotiations, an Exxon spokesperson said: “As a matter of practice, we do not comment on third-party rumour or speculation. ExxonMobil continues to actively work with its partners and the government to optimise development plans by improving synergies and exploring opportunities related to the current lower-cost environment.”
Total said the operators of the two projects “continue working together to maximise synergies and optimise future phases of development”.
Mozambique’s state oil and gas company ENH, which owns 10% of Rovuma LNG, and 15% of Mozambique LNG, referred Reuters’ questions to the National Petroleum Institute, the body that manages the country’s energy development. The institute did not provide answers to Reuters’ questions.
A Standard Bank study from 2019 revealed Exxon’s Rovuma LNG would use 15.1-trillion cubic feet of straddling gas reserves, above the unitisation cap as it included gas reserved for domestic use and condensate, plus 6.4-trillion cubic feet of non-straddling reserves — to produce 15.2-million tonnes per annum of LNG.
Instead, the source said, Exxon wants to extract only gas from the straddling reserves, increasing the amount it can access from the shared area to about 20.1-trillion cubic feet, which would result in 7.9% higher production, at 16.4-million tonnes per annum, and lower unit costs.
This would mark a considerable efficiency gain for Rovuma's phase one, projected by Exxon to last 25 years.
Mozambique LNG expects to produce the first LNG in 2024, delivering 12.88-million tonnes per annum of LNG in its first phase.
Reuters was not able to establish what Total wanted to change its straddling gas and LNG production figures to.
A fourth source said the two companies had been in talks for some time about how to cut costs and generate synergies at their projects, and confirmed Exxon was looking to increase annual LNG output.
In April, Exxon delayed its final investment decision on the Rovuma project, which had been expected this year, as it prepared to make cuts to capital expenditure across its business amid diving oil prices.
The Mozambique government has said it expects Exxon’s decision next year, but all four sources said it may instead come in early 2022, in line with estimates from Oslo-based research house Rystad Energy, which put it at 2022 or 2023.
In response to questions about whether the decision could be pushed to 2022 or 2023, Exxon said: “We continue to work closely with the Area 4 partners, as Rovuma LNG is a complex project that will take several years to develop.”
Area 4 is the name given to Rovuma LNG’s licence area.
Shadow of insurgency
While Mozambique is impatient for the final investment decision to be taken, there could be advantages for Exxon in pushing it out to 2023.
It would mean the company would not produce its first LNG from the project until about 2028, giving more time for demand to bounce back after the drop caused by the pandemic.
However, the plans are being laid under the shadow of an insurgency on the projects’ doorstep. The security situation has worsened this year and Islamic State has seized and held strategic locations including a town 60km from the gas developments.
Analysts warn the group’s capability to strike the projects themselves is increasing, though it is still unlikely.
One of the sources, a Mozambican gas industry official, said the insurgency was a major threat to the oil majors. “The investment will not be viable without security,” the official said.
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