Slicing the pie

In an attempt to add some substance to what has been, up to now, a predominantly speculation-fuelled debate, Standard Bank released a macroeconomic study on Mozambique LNG with a focus on Anadarko’s Area 1 in the Rovuma Basin. The numbers are staggering. 700,000 jobs, $55bn investment over 20 years for 6 LNG trains and an estimated GDP total of $126bn by 2035 (high-case scenario including 6 trains, Area 4’s estimated potential and Domestic Gas Sales). To put these numbers in perspective, Mozal, up to recently considered a Mega-project, required a total historical funding of $2bn. The GDP estimate of $126bn means that a child born in Mozambique today, a lower income country, will be living in a middle-income country by his 20th birthday. Government revenues are also expected to be considerable, roughly a whopping $210bn (again, considering Standard bank’s high-case of 6 trains).

These numbers of course cause great excitement. Yet once recovered from the initial shock, our more cynical and pragmatic side starts to take over. Are these numbers realistic? If they are, do we have the institutional and economic capacity to absorb this type of inflow? Will the Government manage these revenues in a way that generates broad-based development? What about the dreaded Dutch Disease?

All of the above are valid concerns and are issues that should be at the forefront of public debate involving all stakeholders, and should also start generating the formulation of concrete action-oriented plans in a multitude of spheres: infrastructure investment, education programming, monetary policy and business planning.

One issue that is frequently raised is that of absorptive capacity. It’s true that for an economy of $15bn, to be confronted with a $26bn investment figure (the estimated capex for 2 trains for Area 1 alone) can be quite daunting. The first thing that comes to mind is upward pressure on the real exchange rate and its potential to cripple Mozambique’s small and still incipient export sector. This is a valid concern, however, one that should be tempered by having a closer look at the numbers. Let’s take a sharp knife to this overwhelming pie of cash: starting with Andarko’s own estimate of $26bn all-in cost for a 2-train LNG plant (including exploration, production, capitalised interest, LNG plant construction, etc.). The costs up to the LNG plant, things such as exploration and development drilling (and all associated services such as well completion and logging), FEED studies, the Floating Production Unit and Subsea engineering and design are all highly specialized, highly sensitive and capital intensive services dominated by a small group of large international contractors such as Schlumberger, Halliburton, Baker Hughes and Transocean, to name a few. That brings the number down to roughly $10bn, still a pretty big number so let’s have closer look. A typical LNG plant cost breakdown shows a range of around 30%-50% for construction (depending on location, complexity, labour cost, etc.). I’ll assume 40% for construction because the project is “greenfield”, hence extra costs should be considered for supporting infrastructure (marine and storage facilities), and I’ll use 20% for materials and non-core services.  The rest of the plant cost is again comprised of highly specialized equipment and services with very high technological and capital barriers to entry. An extreme example is that of refrigeration compressors, which are almost exclusively supplied by a single company (GE/Nuovo Pignone) and that of cryogenic heat exchangers, also only supplied by about 3 companies in the world.

All of the aforementioned ultra-specialized, high technology and capital intensive products and services are likely to be captured by the large international players in global contracts settled outside of Mozambique.

But even this back-of-the-envelope calculation (performed to prove a point rather than for technical rigour) renders a figure of $6bn that is likely to be available to Mozambique for construction, materials, camp management, telecommunications, solid waste management, healthcare, logistics, security, catering, IT support and a host of other areas associated with, in this case, a single operator’s 2-train LNG plant. Now such a scenario is easier to digest and should cause us to start thinking of creative ways to capture these opportunities rather than stand paralyzed by the sheer scale of the numbers. It should cause us to start seeing the linkages across regions and value chains, explore joint-venture opportunities, assess the skill gaps that need to be addressed and seek ways to become competitive on quality, price and schedule.

Tackling this billion dollar pie is undoubtedly going to be challenging and Mozambican businesses need to move fast, but if they focus their resourcefulness, energy and creativity on identifying and capturing the opportunities this era presents, there should be a slice for everyone.