Anadarko's Controversial Mozambique Project Shows Appetite for Natural Gas
Endeavor Could Cost Tens of Billions of Dollars, Far From Viable Customers
Texas-based Anadarko has cleared this portion of forest in Mozambique for a new onshore drilling site. So far, its gas-export project has cost roughly $1 billion as Anadarko tries to finalize deals to sell the gas. MUSTAFAH ABDULAZIZ FOR THE WALL STREET JOURNAL
PALMA, Mozambique—Few roads lead to this fishing village on the eastern shores of Africa. Drinking water and electricity are in short supply. Hazards include venomous snakes, malaria-bearing mosquitoes and gun-toting antigovernment rebels.
But this is where Anadarko Petroleum Corp. wants to build one of the biggest projects ever attempted by a Western energy company. It has pledged to install acres of air-conditioned housing, an airstrip and a port—and to relocate almost 3,000 villagers currently living in mud huts.
The search for oil has drawn companies to remote locations throughout the petroleum industry's history. But Anadarko isn't here for black gold. The American company is after something more abundant, albeit less lucrative: natural gas located about 30 miles offshore.
There is more than just one catch, though, with one of the largest energy discoveries in decades. The nearest viable customers are a hemisphere away. And it may cost tens of billions of dollars to tap the gas. Deep-pocketed buyers have expressed interest in the project, but some have yet to commit.
"Oil is probably easier," concedes Don MacLiver, the executive in charge of the Mozambique project's development. But like many major oil companies, Texas-based Anadarko has to go with the opportunities available. These, he says, include "large gas discoveries in remote locations."
This is the challenge for many of the biggest energy companies operating around the globe: Natural gas, not oil, accounts for two-thirds of the petroleum reserves discovered over the last decade, according to data from consulting firm IHS Inc. And many of the largest finds are nowhere near homes and businesses that can burn the fuel.
The Mozambique project, which has run up about $1 billion in costs for Anadarko thus far, is among the most extreme efforts to convert such huge discoveries into marketable energy. With customers so far away, Anadarko plans to build giant freezer-like devices to chill the gas to the temperature of the ice-encrusted moon that orbits Jupiter. The process converts gas into a liquid state so that it can be loaded onto refrigerated tankers and shipped by sea, like oil.
Exporting this fuel can provide companies with a longer, steadier stream of cash flow than pumping oil, but without crude's heftier profit margin.
Other big energy outfits are working on similar projects. Italy's Eni SpA, for instance, is planning one adjacent to Anadarko's.
Companies including the U.K.'s BG Group and Norway's Statoil ASA are planning another such venture to capitalize on gas they've struck off the coast of Tanzania, Mozambique's neighbor to the north.
Many analysts estimate the global demand for liquid natural gas, or LNG, will double in 20 years, led by fast-growing economies in Asia. Europe's demand for ocean-borne gas imports may also rise as countries look for alternatives to gas piped in from Russia.
"We've never seen in the history of the industry this amount of planned capacity," says Chris Holmes, senior director of IHS, referring to liquefied-gas export projects.
"A giant liquefied natural gas plant in the fishing village of Palma, Mozambique promises to raise the quality of life for residents. But the project comes with concerns. Photo Mustafah Abdulaziz for The Wall Street Journal"
But the projects in east Africa will have to compete against many others, including some in similarly remote but less politically challenging areas, like Australia and Alaska. Mozambique's gas will also face competition from shale gas in the U.S., where existing infrastructure lowers the cost of exporting it.
Anadarko's bet on Mozambique is particularly bold. With a market capitalization of $54.9 billion, it would become the first U.S. company of its size to tap, liquefy and export gas. Such projects have previously been the domain of giants like Exxon Mobil Corp. andRoyal Dutch Shell PLC, which pull in 30 times the revenue of Anadarko.
The expected tab for drilling the wells and building the initial two plants to chill the gas in Palma—as much as $16 billion—is more than Mozambique's $15.3 billion gross domestic product in 2013. With a 26.5% stake, Anadarko's share of the costs would be roughly $4.2 billion.
The company harbors some even grander plans. Over the next few decades, it envisions building as many as 14 refrigerated plants here, says Mr. MacLiver, the Anadarko executive. Such a scale could rival the world's biggest hub for exporting liquefied gas in Qatar.
But the price tag could rise considerably. Since 2000, the cost of building LNG projects has more than tripled, according to consulting firm Merlin Advisors LLC. The LNG projects in east Africa won't have the foreign-exchange risks of plants in Australia, where costs have ballooned, and some analysts don't expect to see similar cost blowouts. But rival projects in the region could stretch the market for skilled labor and materials and push up prices.
Anadarko executives say they are confident they can control costs in Mozambique, noting that its gas is closer to shore than rival projects and the wells are more prolific.
Still, making LNG is so expensive that Anadarko and its partners won't commit to it without some guarantee they can turn a profit. They are currently trying to sign up Asian buyers for about 60% of the LNG, using contracts that extend over decades. So far, however, the consortium—including companies from Japan, Thailand and Mozambique's state-owned energy firm—has disclosed only tentative deals with buyers.
"We're engaged with the notion of getting married," Al Walker, Anadarko's chief executive, said of the agreements in May. Final contracts would leave around 40% of LNG to be sold on the open market.
Anadarko has still managed to come out ahead on its roughly $1 billion Mozambique investment. The company earlier this year sold 10% of its interest to India's ONGC Videsh Ltd. for $2.6 billion.
Anadarko had planned to make a final decision on moving forward with the project later this year, but a spokesman now says it may take until 2015. Similarly, the company's goal of selling LNG by 2018 could slip into 2019—a target that some analysts still consider too ambitious.
Meanwhile, complications on the ground remain. Palma is among the least developed regions in this former Portuguese colony. Even today, women carry buckets of water on their heads as they return from communal taps. Fishermen work from small wooden boats and dry their catch along the beach on raised nets.
But the discovery of natural gas in 2010 has begun to visibly change life here. Men on bicycles share the road with four-wheel-drive pickups bearing the Anadarko logo.
"The gas is a promise of development," says Abdul Razak Noormahomed, Mozambique's deputy minister of mineral resources. The government, he says, wants some of the gas to stay in the country to spur industrial development.
In 2012, Anadarko began paying the country for annual rights to use about 17,000 acres inhabited by several small villages. Nearly 3,000 villagers will have to be resettled, losing their land, crops and ancestral gravesites. Anadarko is working on a plan to compensate them, including building new homes and clearing land for farming.
The resettlement, derided by local critics as a land grab, isn't going over smoothly. Local rights group Centro Terra Viva said that last year villagers in one of the most populated areas that will be affected by the resettlement refused to meet with government and Anadarko representatives who had come to speak to them about the process.
Anadarko's in-country head John Peffer says the company takes concerns about the community seriously and that it does need the community support.
Similar efforts at resettlement in Mozambique have backfired. In Tete, an inland province with rich coal deposits, thousands of people who lived near mines say they were moved by U.K.-based Rio Tinto PLC and Brazil's Vale SA to a place ill-suited for agriculture and too far from water. Protesters have demonstrated frequently outside the mines and blocked railways to disrupt coal shipments.
A spokesman for Rio Tinto says the company was working with the resettled communities and providing training to help with local crop development. At the end of July, Rio Tinto announced plans to exit the troubled mine altogether and agreed to sell the coal mine to India's International Coal Ventures Pvt. Ltd. for $50 million. A spokeswoman for Vale says the company is trying to improve infrastructure in the area.
Compounding local angst, few in Palma have the skills to land a job working on the gas project. And while the influx of workers has been good for fish prices, Ali Mequit, a 30-year-old fisherman, says he worries that gas drilling is pushing fish farther out to sea.
And then there is the question about what will happen if the project comes to a halt and the workers and companies leave. "They will move on," says Mr. Mequit, "but our lives will have been disrupted."
