Anadarko (NYSE:APC) has struck a deal with India’s Oil and Natural Gas Corp. (ONGC) to sell its 10% stake in an offshore Mozambique gas field for $2.64 billion.  The all-cash deal is expected to complete by March next year. Earlier this year, both Anadarko and Videocon, an Indian consumer electronics company, had jointly put up their 20% stake for sale in an offshore Mozambique gas field.  In June this year, two state-backed Indian energy companies, ONGC and Oil India Ltd. (OIL) struck a deal with Videocon to buy its 10% stake in the Mozambican Rovuma basin gas assets for $2.5 billion. 
Anadarko will continue to remain the operator of Offshore Area 1 where these reserves are located, with a 26.5% share of the fields even after the sale of its 10% stake in the project. Its current partners are Mitsui of Japan with a 20% stake, Bharat Petroleum Corporation Limited (BPCL), an Indian oil marketing firm that holds 10% stake and PTT of Thailand that holds 8.5%. ONGC will also hold 10% stake in the project as a result of the recent deal with Anadarko. Apart from that, Videocon’s stake sale has also brought in ONGC and OINL that will together hold 10% stake in the project as well. The Mozambican government is represented by its national oil company, Empresa Nacional de Hidrocarbonetos, which holds a 15% stake in the fields.
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How Important Are Mozambique’s Gas Reserves?
Many large natural gas discoveries have been made since late 2011, off the coasts of Mozambique, Tanzania and most recently Kenya. So far, some 150 trillion cubic feet of gas has been discovered in the waters of Mozambique, which might supply a country like Japan for 35 years. These discoveries have transformed East Africa into one of the world’s most promising energy provinces so much so that the region may emerge as a strong competitor to Qatar and Australia in the battle to capture key export markets in Asia. However, before that can happen, a huge challenge is to build facilities on land to turn the reserves into liquefied natural gas (LNG), which can then be shipped to Asian markets. That is where a new player with deep pockets can make a big difference.
Why Did Anadarko Reduce Its Stake?
While the project is certainly attractive, it comes with a huge price tag. For the development and construction of a new offshore two-train LNG terminal alone, Anadarko has estimated the total cost at $15 billion. The company will be constructing the LNG terminal jointly with EnI of Italy, which also has huge gas reserves in the region. This will reduce its cost burden to some extent. However, there would certainly be additional costs involved in the development of reserves. Given that Anadarko is a high-debt company keen to reduce its debt obligations, it makes sense for the company to monetize the potential of its reserves. The money raised could be used for the twin purposes of financing further project development and paying off debt. The company had a long-term debt of approximately $13.5 billion on its balance sheet on June 30, 2013. 
According to Anadarko, the target is to begin construction of LNG plants in 2013, with the goal to bring the resources to market in 2018. Hence, for the next five years, Anadarko will have to keep putting up significant money without generating returns. This will certainly increase the debt burden unless financed using stake sales. Internal accruals are by far insufficient to meet project costs.
The demand for gas in Asia is expected to shoot higher going forward, especially in India and China. The Mozambique gas should thus find ready buyers. Natural gas prices in Asia also tend to be higher than in the U.S. due to greater demand. While a supply glut in the U.S. is causing natural gas to be sold below $4 per million British thermal units (mBTU), the price in Asia could be as high as $20 per mBTU. Mozambique also has a competitive advantage over America and European countries in supplying LNG to Asian markets due to geographical proximity.
Also, considering the scale of resources and lack of experience and skill within the Mozambican government in this area, the times ahead are sure to be challenging. A number of legal, bureaucratic and financial hurdles will have to be overcome in close coordination with the government. This raises the risk profile of the project and financing from external sources will therefore be expensive. A higher number and quality of project partners will ease the capital burden of individual players, reduce project risk, and thus improve chances of cheaper financing.
We currently have $100 price estimate for Anadarko, which is around 10% above its market price.Notes:
- Anadarko Announces $2.64 Billion All-Cash Transaction for Portion of Offshore Mozambique Block, anadarko.com [↩]
- Anadarko, Indian tycoon launch $4.5 bln Mozambique gas sale-sources, reuters.com [↩]
- Oil India, ONGC to Buy Stake in Mozambique Gas Field, wsj.com [↩]
- Anadarko SEC Filings, anadarko.com/investor [↩]