Anadarko Corp. (NYSE:APC) is talking to buyers about supplies of gas from its planned project off the coast of Mozambique where some of the world’s biggest gas reserves have been discovered since 2011. Global demand for natural gas is expected to grow by more than 2% annually over the coming years as it is expected to increasingly replace coal in power generation.  The fact that most of this growth in natural gas demand is expected to come from the fast-growing Asian markets makes the location of Mozambique gas reserves extremely attractive for investment. However, signing long-term supply contracts is crucial to raising the huge capital required to finance the liquified natural gas (LNG) project. The company is positive on being able to sign these contracts through the rest of this year and 2014. It is also sticking to its target of shipping the first LNG cargo in 2018. 
Anadarko primarily operates in three segments: oil & gas exploration and production, midstream and marketing. Its asset portfolio includes positions in onshore resource plays in the Rocky Mountains region, the southern United States, and the Appalachian basin. The company is also an independent producer in the deepwater Gulf of Mexico and has production and exploration activities globally, including positions in high potential basins located in East and West Africa, Algeria, China, Alaska and New Zealand.
East Africa Natural 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 have 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.
Anadarko’s Reserves In The Area
Anadarko is the operator of Offshore Area 1 which covers approximately 2.6 million acres in the deepwater Rovuma Basin. The company and its partners have drilled more than a dozen successful wells on the block, which are estimated to hold around 35 to 65 trillion cubic feet (tcf) of recoverable natural gas. Additional discoveries can further increase the estimated resource base in the region, which can potentially enhance future development options as well.
Anadarko holds a 26.5% share of these resources even after the sale of its 10% stake in the project recently. (See: Anadarko Rakes In $2.6 Billion From African Asset Sale) 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.
Importance of LNG Supply Contracts
The natural gas reserves off East Africa are so massive that they easily dwarf demand from the local markets. Therefore, liquifying and exporting natural gas is the most viable way to tap these resources. However, before that can be done, a huge challenge is to secure capital for building a framework that can convert natural gas into LNG, which can then be shipped to the international markets. The development of offshore fields, construction of LNG trains and supporting infrastructure, such as pipelines to transport the gas produced from offshore fields, requires significant investments.
Also, considering the scale of resources and lack of experience and skill within the Mozambican government in this area, times ahead are sure to be challenging for Anadarko. 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 is therefore expected be expensive. Anadarko estimates the Mozambique LNG project to cost between $25 and $30 billion. 
In the absence of a global LNG price index and a large variance in natural gas prices across the world, there are huge uncertainties associated with any LNG project. Therefore, in the commercial development of an LNG project, the developers first need to confirm sales to the downstream buyers and then sign long-term contracts (typically 20–25 years) with them outlining strict terms and structures for gas pricing. Only when the customers are confirmed and the project is deemed economically feasible, capital financing of the project can move forward. Therefore, this phase of signing long-term contracts at best possible prices is extremely crucial to economic feasibility of the Mozambique LNG project as well as the value it can add to Anadarko’s portfolio.
We currently have $100 price estimate for Anadarko, which is around 10% above its market price.Notes:
- Exxon Mobil Predict Natural Gas Demand to Grow 65% in 30 Years, oilprice.com [↩]
- Anadarko expects to sign Mozambique gas supply agreements this year, reuters.com [↩]
- Anadarko estimates Mozambique LNG cost at $25 – $30 billion, arcticgas.gov [↩]