LNG investors increasingly concerned about security and climate change
Image credit: Copernicus Sentinel-2 satellite images
A new report suggests investors are increasingly nervous about new LNG investments, with delayed investment decisions driven by security problems and aversion to the risks associated with global warming.
The report by Global Energy Monitor (GEM) suggests that more than one-third of proposed new global LNG terminal capacity is facing financing and project delays, and highlights some of the concerns that are spooking investors.
At the end of 2020, the Islamic State (IS) militant group increased its activity around the Afungi peninsula in Cabo Delgado's Palma district, in the northernmost province of Mozambique.
The area is home to some of the most extensive and most expensive liquefied natural gas (LNG) projects across Africa. Concerns over the security situation didn't only worry companies, who started suspending work. Investors also started to fret. An incident in April then confirmed their fears and shook the global LNG sector to its core.
On 26 April, Total, a large French multinational fossil fuel company running the Mozambique LNG project, declared 'force majeure' after insurgents attacked the site.
The company removed all its staff from the Afungi site. It cited severe deterioration in southern Africa's security situation. In late April, Bloomberg reported that Total had started to terminate contracts with certain contractors and that small and medium-sized business had already lost around US$90m since the attack by insurgents on Palma in March.
Some analysts think the ripple effects of this debacle might be felt across the globe, potentially for years into the future. Kaushal Ramesh, an LNG analyst at Rystad Energy, wrote in May that Total's Mozambique LNG might start production only in 2026, with construction "unlikely to resume without demonstrably stronger security arrangements at the Afungi site".
Deteriorating security levels in the area have been known for some time. Over the past four years, problems have mounted since in 2017 an armed insurgency started targeting the Cabo Delgado Province, where Total's project is based.
With delays at both Afungi and an ExxonMobil LNG project in Mozambique, Rystad's analysts expect 2029 to see a supply deficit of 5.6 million tonnes per year. Mozambique's LNG sector was once expected to catapult into the upper ranks of global LNG producers by the middle of this decade.
Mozambique's LNG projects have also caused environmental health and social problems. Last year the workers' camps became the centre of the severest Covid-19 outbreak in the country, curators of the Environmental Justice Atlas (EJA) point out in their Mozambique country overview. The offshore gas development in Cabo Delgado helped to displaced farming and fishing communities, EJA says. Biodiversity, including wildlife and agro-diversity would have suffered, together with effects on global warming, deforestation and loss of vegetation cover, and noise pollution.
Country representatives say Mozambique's future depends on the success of these LNG projects, including Total's operation. Critics say they have added to the problems in the region, including forcibly relocating villages sometimes with little compensation efforts for their losses, according to Uppsala Conflict Data Program (UCDP), part of the department of Peace and Conflict Research at the University of Uppsala, which monitors conflicts and organised violence.
UCDP says LNG projects in the conflict zone, which includes the three largest of this kind across Africa, are valued at around USD$55bn, a tenth of the global LNG supply.
Attacks have triggered fears for the future development of Mozambique's LNG extraction across the Rovuma basin and offshore from the Afungi peninsula. Since the deposits were discovered in the early 2010s, large investments kept flowing in. But now, with a compromised conflict situation, investors are bleeding money. Early investors started withdrawing even before the April insurgents attack.
The UK's Health and Safety Executive cites terrorist activity as a major security concern and states that under COMAH (the Control of Major Accident Hazards Regulations 1999) safety reports should consider the risks arising from trespass of an ordinary member of the public.
For analysts at the Global Energy Monitor (GEM), Total's LNG project in Mozambique is a harbinger for how the LNG sector could fare in the coming years.
An LNG trade pipeline is increasingly plagued by security issues and a growing awareness of climate change-related problems with LNG production itself. It affects the financing of these projects. GEM writes in its report that globally 21 LNG export terminal projects "continue to report final investment decision or other severe delays". It accounts for more than a third of total export capacity globally under development.
Total's force majeure incident at its Mozambique LNG terminal would have highlighted the vulnerability of terminals priced in the tens of billions of dollars. "What makes the Mozambique crisis particularly significant is that LNG itself has long been sold as a solution to energy insecurity", the report authors Lydia Plante and Ted Nace write.
The gas industry often labels LNG as a suitable transition fuel towards renewable energy sources. But researchers point out that it offers minimal emissions reductions and, when burned, releases methane, a very potent greenhouse gas, 34 to 36 times more effective than CO2.
Testament to growing worries among investors is that only one LNG export project has managed to reach a final investment decision in 2020.
Costa Azul LNG terminal on the Pacific coast in Mexico made it but researchers who examined an LNG project in the area in 2014 found its location was just three kilometres from Bajamar, a tourist complex, claiming it exposes the inhabitants to accidents from the terminal.
LNG hopes in Europe
Over the past six years, US diplomats have promoted American LNG imports to reduce European dependence on Russian gas. However, despite a desire to pivot away from natural gas in the power sector due to Russia's dominance, Europe seems still keen to give LNG a chance if it continues with its plans. According to GEM data, Europe accounts for 14 per cent of operating LNG import capacity but holds 20 per cent of LNG import capacity under development.
Transport and Environment (T&E), a Brussels-based think tank promoting sustainable transport in Europe, has reviewed leaked proposals for an EU law to promote green shipping and concluded that under its proposals more than half of the energy used by ships calling at EU ports could be from LNG and biofuels by 2035, effectively making it impossible to meet zero-carbon targets by 2050.
Faig Abbasov, T&E's shipping programme director, says: “This supposedly green fuels law would push the cheapest alternatives, which are also the most destructive. Counting fossil gas and biofuels as green will lock shipping into decades of further pollution while we should be promoting renewable hydrogen and ammonia."
Meanwhile, an export boom of LNG in the US and falling prices have provided 'a catalyst for a more liquid global gas market', according to the International Energy Agency.
Sign up to the E&T News e-mail to get great stories like this delivered to your inbox every day.