Multiple Brownfield LNG FIDs Now Needed To Fill New LNG Supply Gap From Mozambique Chaos? How About LNG Canada Phase 2?
Apr 28, 2021
The next six months will determine the size and length of the new LNG supply gap that is hitting harder and faster than anyone expected six months ago. Optimists will say the Mozambique government will bring sustainable security and safety to the northern Cabo Delgado province and provide the confidence to Total to quickly get back to LNG development such that its LNG in-service delay is a matter of months and not years. We hope so for Mozambique’s domestic situation, but will it be that easy for Total’s board to quickly look thru what just happened? Total suspended LNG development for 3 months, restarted development on March 25, but then 3 days of violence led it to suspend development again on March 28, and announce force majeure on Monday April 26. Even if the optimists are right, Mozambique LNG is counted on for LNG supply and the major LNG supply project that are in LNG supply forecasts are now all delayed – Total Phase 1 of 1.7 bcf/d and its follow on Phase 2 of 1.3 bcf/d, and Exxon’s Rozuma Phase 1 of 2.0 bcf/d. It is important to remember this 5.0 bcf/d of major LNG supply is being counted in LNG supply forecasts and starting in 2024. At a minimum, we think the more likely scenario is a delay of at least 2 years in this 5.0 bcf/d from the pre-Covid timelines. And this creates a much bigger and sooner LNG supply gap starting ~2025 and stronger outlook for LNG prices. Thermal coal in Asia will play a role in keeping a lid on LNG prices. But there will be the opportunity for LNG suppliers to at least review the potential for brownfield LNG projects to fill the growing supply gap. The thought of increasing capex was a non-starter six months ago, but there is a much stronger outlook for global oil and gas prices. Oil and gas companies are pivoting from cutting capex to small increases in 2021 capex and expecting for higher capex in 2022. We believe this sets the stage for looking at potential FID of brownfield LNG projects before the end of 2021 to be included in 2022 capex budgets. Mozambique is causing an LNG supply gap that someone will try to fill. And if brownfield LNG is needed, what about Shell looking at 1.8 bcf/d brownfield LNG Canada Phase 2? Cdn natural gas producers hope so as this would mean more Cdn natural gas will be tied to Asian LNG markets and not competing in the US against Henry Hub.
Total declares force majeure on Mozambique LNG, Yesterday, Total announced [LINK] “Considering the evolution of the security situation in the north of the Cabo Delgado province in Mozambique, Total confirms the withdrawal of all Mozambique LNG project personnel from the Afungi site. This situation leads Total, as operator of Mozambique LNG project, to declare force majeure. Total expresses its solidarity with the government and people of Mozambique and wishes that the actions carried out by the government of Mozambique and its regional and international partners will enable the restoration of security and stability in Cabo Delgado province in a sustained manner”. Total is working Phase 1 is ~1.7 bcf/d (Train 1 + 2, 6.45 mtpa/train) and was originally expected to being LNG deliveries in 2024. There was no specific timeline for Phase 2 of 1.3 bcf/d (Train 3 + 4, 5.0 mtpa/train), but was expected to follow Phase 1 in short order to keep capital costs under control with a continuous construction process with a potential onstream shortly after 2026.
Total Mozambique Phase 1 and 2
Total’s Mozambique force majeure is no surprise, especially the need to the restoration of security and stability “in a sustained manner”. Yesterday, Total announced [LINK] “Considering the evolution of the security”. No one should be surprised by the force majeure or the sustained manner caveat. SAF Group posts a weekly Energy Tidbits research memo [LINK], wherein we have, in multiple weekly memos, that Total had shut down development in December for 3 months due to the violent and security risks. It restarted development on Wed March 24, violence/attacks immediately resumed for 3 consecutive days, and then Total suspended development on Sat March 27. Local violence/attacks shut development down in Dec, the situation gets settled enough for Total to restart in March, only to be shut down 3 days thereafter. No one should be surprised especially with Total’s need to see security and stability “in a sustained manner”.
Does anyone really think Total will risk another quick 2-3 month restart or even in 2021? The Mozambique government will be working hard to convince Total to restart soon. We just find it hard to believe Total board will risk a replay of March 24-27 in 2021. Unfortunately, Mozambique has had internal conflict for years. It reached a milestone to the positive in August 2019. Our SAF Group August 11, 2019 Energy Tidbits memo [LINK] highlighted the signing of a peace pact between Mozambique President Nyusi and leader of the Renamo opposition Momade. This was the official end to a 2013 thru 2016 conflict following a failure to hold up the prior peace pact. At that time, FT reported [LINK] “Mr Nyusi has said that “the government and Renamo will come together and hunt” rebels who fail to disarm. The government has struggled to stem the separate insurgency in the north, which has killed or displaced hundreds near the gas‐rich areas during the past two years. While the roots of the conflict remain murky, it is linked to a local Islamist group and appears to be drawing on disaffection over sharing gas investment benefits, say analysts.” This is just a reminder this is not a new issue. LNG is a game changer to Mozambique’s economic future. It is, but also has been, a government priority to have the security and safety for Total and Exxon to move on their LNG developments. Its hard to believe the Mozambique government will be able to quickly convince Total and Exxon boards that they can be comfortable there is a sustained security/safety situation and they can send their people back in to develop the LNG. Total’s board would allow any resumption of development before year end 2021. The last thing Total wants is a replay of March 24-27. The first question is how long will it take before the Total board is convinced its safe to restart. Could you imagine them doing a replay of what just happened? Wait three months, restart development and have to stop again right away? We have to believe that could lead the Total board to believe it is unfixable for years. We just don’t think they are to prepared to risk that decision in 3 months. Its why we have to think there isn’t a restart approval until at least in 2022 at the earliest ie. why we think the likely scenario is a delay of 2-3 years, and not a matter of months.
Mozambique’s security issues pushes back 5.0 bcf/d of new LNG supply at least a couple years. The global LNG issue is that 5 bcf/d of new Mozambique LNG supply (apart from the Eni Coral FLNG of 0.45 bcf/d) won’t start up in 2024 and continuing thru the 2020s. And we believe all LNG forecasts included this 5.0 bcf/d to be in service in the 2020s as Mozambique had been considered the best positioned LNG supply to access Asia after Australia and Papua New Guinea. (i) Eni Coral Sul (Rovuma Basin) FLNG of 0.45 bcf/d planned in service in 2022. [LINK] This is an offshore floating LNG vessel that is still expected to be in service in 2022. (ii) Total Phase 1 to add 1.7 bcf/d with an in service originally planned for 2024. We expect the in service data to be pushed back to at least 2026 assuming Total gives a development restart approval in Dec 2021. In theory, this would only be a 1 year loss of time. However, Total has let services go, the project will be idle for 9 months, it isn’t clear if the need to get people out quickly let them do a complete put the project on hold, and how many people will be on site maintaining the status of the development during the force majeure. Also what new procedures and safety will be put in place for a restart. These all mean there will be added time needed to get the project back to where it was when force majeure was declared ie. why we think a 12 month time delay will be more like an 18 month project delay. (iii) Exxon’s Rozuma Phase 1 LNG will add 2.0 bcf/d and, pre-Covid, was expected to be in service in 2025. We believe the delays related to security and safety at Total are also going to impact Exxon. We find it highly unlikely the Exxon board would take a different security and safety decision than Total. Pre-pandemic, Exxon’s March 6, 2019 Investor Day noted their operated Mozambique Rovuma LNG Phase 1 was to be 2 trains each with 1.0 bcf/d capacity for total initial capacity of 2.0 bf/d with FID expected in 2019 and first LNG deliveries in 2024. The 2019 FID expectation was later pushed to be expected just before the March 2020 investor day. But the pandemic hit, and on March 21, 2020, we tweeted [LINK] on the Reuters story “Exclusive: Coronavirus, gas slump put brakes on Exxon’s giant Mozambique LNG plan” [LINK] that noted Exxon was expected to delay the Rovuma FID. There was no timeline, but the expectation was that FID would now be in 2022 (3 years later than original timeline0 and that would push first LNG likely to 2027. (iv) Total Phase 2 was to add 1.3 bcf/d. There was no firm in service date but it was expected to follow closely behind Phase 1 to maintain services. That would have put it originally in the 2026/2027 period. But if Phase 1 is pushed back 2 years, so will Phase 2 so more likely 2028/2029.. (v) Total Phase 1 + 2 and Exxon Rozuma Phase 1 total 5.0 bcf/d and would have been (and still are) in all LNG supply forecasts for the 2020s. (vi) We aren’t certain if the LNG supply forecasts include Exxon Rozuma Phase 2 ,which would be an additional 2.0 bcf/d on top of the 5.0 bcf/d noted above. Exxon Rozuma has always been expected to be at least 2 Phases. This has been the plan since the Anadarko days given the 85 tcf size of the resource on Exxon’s Area 4. There was no firm in service data for Phase 2, but it was expected they would also closely follow Phase 1 to maintain services. We expect that original timeline would have been 2026/2027 and that would not be pushed back to 2029/2030. (vii) It doesn’t matter if its only 5 bcf/ of Mozambique that is delayed 2 to 3 years, it will cause a bigger LNG supply gap and sooner. The issue for LNG markets is this is taking projects that are in development effectively out of the queue for some period.
Exxon Mozambique LNG
Won’t LNG and natural gas get hit by Biden’s push for carbon free electricity? Yes, in the US. For the last 9 months, we have warned on Biden’s climate change plan that were his election platform and now form his administration’s energy transition map. We posted our July 28, 2020 blog “Biden To Put US On “Irreversible Path to Achieve Net-Zero Emissions, Economy-Wide” Is a Major Negative To US Natural Gas in 2020s “[LINK] on Biden’s platform “The Biden Plan to Build a Modern, Sustainable Infrastructure and an Equitable Clean Energy Future” [LINK]. Biden’s new American Jobs Plan [LINK] lines up with his campaign platform including to put the US “on the path to achieving 100 percent carbon-free electricity by 2035.”. Our July 28, 2020 blog noted that it would require replacing ~60% of US electricity generation with more renewable and it could eliminate ~40% (33.5 bcf/d) of 2019 US natural gas consumption. If Biden is 25% successful by 2030, it would replace ~6.3 bcf/d of natural gas demand. It would be a negative to US natural gas and force more US natural gas to export markets. The wildcard when does US natural gas start to decline if producers are faced with the reality of natural gas being phased out for electricity. The other hope is that when Biden says “carbon-free”, its not what ends up in the details of any formal policy statement ie. carbon electricity will be allowed with Biden’s push for CCS.
Will Cdn natural gas be similarly hit by if Trudeau move to “emissions free” and not “net zero emissions” electricity? Yes and No. Our SAF Group April 25, 2021 Energy Tidbits memo [LINK] was titled ““Bad News For Natural Gas, Trudeau’s Electricity Goal is Now 100% “Emissions Free” And Not “Net Zero Emissions”. On Thursday, PM Trudeau spoke at Biden’s global climate summit [LINK] and looks like he slipped in a new view on electricity than was in last Monday’s budget and his Dec climate plan. Trudeau said “In Canada, we’ve worked hard to get to over 80% emissions-free electricity, and we’re not going to stop until we get to 100%.” Speeches, especially ones made on a global stage are checked carefully so this had to be deliberate. Trudeau said “emissions free” and not net zero emissions electricity. It seems like this language is carefully written to exclude any fossil fuels as they are not emissions free even if they are linked to CCS. Recall in Liberals big Dec 2020 climate announcement [LINK], Liberals said ““Work with provinces, utilities and other partners to ensure that Canada’s electricity generation achieves net-zero emissions before 2050.” There is no way Trudeau changed the language unless he meant to do so. And this is a major change as it would seem to indicate his plan to eliminate all fossil fuels used for electricity. If so this would be a negative to Cdn natural gas that would be stuck within Western Canada and/or continuing to push into the US when Biden is trying to switch to carbon free electricity. We recognize that there is still some ambiguity in what will be the details of policy and the Liberals aren’t changing to no carbon sourced electricity at all. Let’s hope so. But let’s also be careful that politicians don’t change language without a reason or at least with a view to setting up for some future hit. Plus Trudeau had a big warning in that same speech saying “we will make it law to respect our new 2030 target and achieve net-zero emissions by 2050“. They plan to make it the law that Canada has to be on track for the Liberals 2030 emissions targets. This means that the future messaging will be that the Liberals have no choice but to take harder future emissions actions as it is the law. They will be just obeying the law as they will be obligated to obey the law. Everyone knows the messaging will be we have to do more get to Net Zero, that in itself will inevitably mean it will be the law if he actually does move to eliminate any carbon based electricity. So yes it’s a negative, that is unless more Cdn natural gas can be exported via LNG to Asia. We believe this would be a plus to be priced against global LNG instead of Henry Hub.
Biden’s global climate summit reminded there is too much risk to skip over natural gas as the transition fuel. Apart from the US and Canada, we haven’t seen a sea shift to eliminating natural gas for power generation, especially from energy import dependent countries. There is a strong belief that hydrogen and battery storage will one day be able to scale up at a competitive cost to lead to the acceleration away from fossil fuels. But that time isn’t yet here, at least not for energy import dependent countries. One of the key themes from last week’s leader’s speeches at the Biden global climate summit – to get to Net Zero, the world is assuming there wilt be technological advances/discoveries that aren’t here today and that have the potential to immediately ramp up in scale. IEA Executive Director Faith Birol was blunt in his message [LINK] saying “Right now, the data does not match the rhetoric – and the gap is getting wider.” And “IEA analysis shows that about half the reductions to get to net zero emissions in 2050 will need to come from technologies that are not yet ready for market. This calls for massive leaps in innovation. Innovation across batteries, hydrogen, synthetic fuels, carbon capture and many other technologies. US Special Envoy for Climate John Kerry said a similar point that half of the emissions reductions will have to come from technologies that we don’t yet have at scale. UK PM Johnson [LINK] didn’t say it specifically, but points to this same issue saying “To do these things we’ve got to be constantly original and optimistic about new technology and new solutions whether that’s crops that are super-resistant to drought or more accurate weather forecasts like those we hope to see from the UK’s new Met Office 1.2bn supercomputer that we’re investing in.” It may well be that the US and other self sufficient energy countries are comfortable going on the basis of assuming technology developments will occur on a timely basis. But, its clear that countries like China, India, South Korea and others are not prepared to do so. And not prepared to have the confidence to rid themselves of coal power generation. This is why there hasn’t been any material change in the LNG demand outlook
We expect the IEA’s blunt message that the gap is getting wider will be reinforced on May 18. We have had a consistent view on the energy transition for the past few years. We believe it is going to happen, but it will take longer, be a bumpy road and cost more than expected. This is why we believe the demise of oil and natural gas won’t be as easy and fast as hoped for by the climate change side. The IEA’s blunt warning on the gap widening should not be a surprise as they warned on this in June 2020. Birol’s climate speech also highlighted that the IEA will release on May 18 its roadmap for how the global energy sector can reach net zero by 2050. Our SAF Group June 11, 2020 blog “Will The Demise Of Oil Take Longer, Just Like Coal? IEA and Shell Highlight Delays/Gaps To A Smooth Clean Energy Transition” [LINK] feature the IEA’s June 2020 warning that the critical energy technologies needed to reduce emissions are nowhere near where they need to be. In that blog, we said “there was an excellent illustration of the many significant areas, or major pieces of the puzzle, involved in an energy transition by the IEA last week. The IEA also noted the progress of each of the major pieces and the overall conclusion is that the vast majority of the pieces are behind or well behind where they should be to meet a smooth timely energy transition. It is important to note that these are just what the IEA calls the “critical energy technologies” and does not get into the wide range of other considerations needed to support the energy transition. The IEA divides these “critical energy technologies “into major groupings and then ranked the progress of each of these pieces in its report “Tracking Clean Energy Progress” [LINK] by on track, more efforts needed, or not on track”. Our blog included the below IEA June 2020 chart.
IEA’s Progress Ranking For “Critical Energy Technologies” For Clean Energy Transition
We are referencing Shell’s long term outlook for LNG We recognize there are many different forecasts for LNG, but are referencing Shell’ LNG Outlook 2021 from Feb 25, 2021 for a few reasons. (i) Shell’s view on LNG is the key view for when and what decision will be made for LNG Canada Phase 2. (ii) Shell is one of the global leaders in LNG supply and trading. (iii) Shell provides on the record LNG outlooks every year so there is the ability to compare and make sure the outlook fits the story. It does. (iv) Shell, like other supermajors, has had to make big capex cuts post pandemic and that certainly wouldn’t put any bias to the need for more capex.
Shell’s March 2021 long term outlook for LNG demand was basically unchanged vs 2020 and leads to a LNG supply gap in mid 2020s Shell does not provide the detailed numbers in their Feb 25, 2021 LNG forecast. We would assume they would have reflected some delay, perhaps 1 year, at Mozambique but would be surprised if they put a 2-3 year delay in for the 5 bcf/d from Total Phase 1 +2 and Exxon Rozuma Phase 1. Compared to their LNG Outlook 2020, it looks like there was no change for their estimate of global natural gas demand growth to 2040, which looked relatively unchanged at approx. 5,000 bcm/yr or 484 bcf/d. Similarly, long term LNG demand looked unchanged to 2040 of ~700 mm tonnes (92 bcf/d) vs 360 mm tonnes (47 bcf/d) in 2020. In the 2021 outlook, Shell highlighted that the pandemic delayed project construction timelines and that the “lasting impact expected on LNG supply not demand”. And that Shell sees a LNG “supply-demand gap estimated to emerge in the middle of the current decade as demand rebounds”. Comparing to 2020, it looks like the supply-demand gap is sooner.
Supply-demand gap estimated to emerge in the middle of the current decade
Mozambique delays are redefining the LNG markets for the 2020s: Delaying 5 bcf/d of Mozambique new LNG supply 2-3 years means a much bigger supply gap starting in 2025.. Even if the optimists are right, there are now delays to all major Mozambique LNG supply from LNG supply forecasts. We don’t have the detail, but we believe all LNG forecasts, including Shell’s LNG Outlook 2021, would have included Total’s Phase 1 and Phase 2 and Exxon Rozuma Phase 1. As noted earlier, we believe that the likely impact of the Mozambique security concerns is that these forecasts would likely have to push back 1.7 bcf/d from Total Phase 1 to at least 2026, 2.0 bcf/d Exxon Rozuma Phase 1 to at least 2027, and 1.3 bcf/d Total Phase 2 to at least 2028/2029 with the real risk these get pushed back even further. 5.0 bcf/d is equal to 38 mtpa. These delays would mean there is an increasing LNG supply gap in 2025 and increasingly significantly thereafter. And even if a new greenfield LNG project is FID’s right away, it wouldn’t be able to step in to replace Total Phase 1 prior startup timing for 2024 or likely the market at all until at least 2027. Its why the decision on filling the gap will fall on brownfield LNG projects.
And does this bigger, nearer supply gap force LNG players to look at what brownfield LNG projects they could advance? A greenfield LNG project would likely take at least until 2027 to be in operations. Its why we believe the Mozambique delays will effectively force major LNG players to look to see if there are brownfield LNG projects they should look to advance. Prior to the just passed winter, no one would think Shell or other major LNG players would be considering any new LNG FIDs in 2021. All the big companies are in capital reduction mode and debt reduction mode. But Brent oil is now solidly over $60 and LNG prices hit record levels in Jan and the world’s economic and oil and gas demand outlook are increasing with vaccinations. And we are starting to see companies move to increasing capex with the higher cash flows. We would not expect any major LNG players to move to FID right away. But we see them watching to see if 2021 plays out to still support this increasing LNG supply gap. And unless new mutations prevent vaccinations from returning the world to normal, we suspect that major LNG players, like other oil and gas companies, will be looking to increase capex as they approve 2022 budgets. The outlook for the future has changed dramatically in the last 5 months. The question facing Shell and others, should they look to FID new LNG brownfield projects in the face of an increasing LNG supply gap that is going to hit faster and harder than expected a few months ago. We expect these decisions to be looked at before the end of 2021. LNG prices will be stronger, but we expect the limiting cap in Asia will be that thermal coal will be used to mitigate some LNG price pressure.
Back to Shell, does increasing LNG supply gap provide the opportunity to at least consider a LNG Canada Phase 2 FID over the next 9 months? Shell is no different than any other major LNG supplier in always knowing the market and that the oil and gas outlook is much stronger than 6 months ago. No one has been or is talking about this Mozambique impact and how it will at least force major LNG players to look at if they should FID new brownfield LNG projects to take advantage of this increasing supply gap. We don’t have any inside contacts at Shell or LNG Canada, but that is no different than when we looked at the LNG markets in September 2017 and saw the potential for Shell to FID LNG Canada in 2018. We posted a September 20, 2017 blog “China’s Plan To Increase Natural Gas To 10% Of Its Energy Mix Is A Global Game Changer Including For BC LNG” [LINK]. Last time, it was a demand driven supply gap, this time, it’s a supply driven supply gap. We have to believe any major LNG player, including Shell, will be at least looking at their brownfield LNG project list and seeing if they should look to advance FID later in 2021. Shell has LNG Canada Phase 2, which would add 2 additional trains or approx. 1.8 bcf/d. And an advantage to an FID would be that Shell would be able to commit to its existing contractors and fabricators for a continuous construction cycle following on LNG Canada Phase 1 ie. to help keep a lid on capital costs. No one is talking about the need for these new brownfield LNG projects, but, unless Total gets back developing Mozambique and keeps the delay to a matter of months, its inevitable that these brownfield LNG FID internal discussions will be happening in H2/21. Especially since the oil and gas price outlook is much stronger than it was in the fall and companies will be looking to increase capex in 2022 budgets
A LNG Canada Phase 2 would be a big plus to Cdn natural gas. A LNG Canada Phase 2 FID would be a big plus for Cdn natural gas. It would allow another ~1.8 bcf/d of Cdn natural gas to be priced against Asian LNG prices and not against Henry Hub. And it would provide demand offset versus Trudeau if he moves to make electricity “emissions free” and not his prior “net zero emissions”. Mozambique may be in Africa, but, unless sustained peace and security is attained, it is a game changer to LNG outlook creating a bigger and sooner LNG supply gap. And with a stronger tone to oil and natural gas prices in 2021, the LNG supply gap will at least provide the opportunity for Shell to consider FID for its brownfield LNG Canada Phase 2 and provide big support to Cdn natural gas for back half of the 2020s. And perhaps if LNG Canada is exporting 3.6 bcf/d from two phases, it could help flip Cdn natural gas to a premium to US natural gas especially if Biden is successful in reducing US domestic natural gas consumption for electricity. The next six months will be very interesting to watch for LNG markets.