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TotalEnergies says it will only end force majuere and restart the gas project if the government pays the $4.5bn cost of the closure, takes on more of the risks, and allows TotalEnergies significantly more profit. In a statement Tuesday 28 (October) after the Council of Ministers meeting, government recognised that there will be more negotiations.
The demands were made in a 24 October letter from TotalEnergies head Patrick Pouyanne to President Daniel Chapo. Some in the Presidencia clearly thought the demands were so outrageous that the letter was quickly leaked to the press.
The Pouyanne letter sets six conditions to end force majuere:
1. Mozambique accepts all security costs including paying for Rwandan troops. The letter implies that Mozambique will be charged for any security violations, at a time when the war is moving closer to the gas area.
2. Mozambique accepts that the cost to TotalEnergies of force majeure is $4.5bn. This is subject to negotiation and an international team of advisors arrives in Maputo next week to look at this.
3. The $4.5 bn is to be included in construction and exploration costs which are paid off before Mozambique receives serious income.
4. “However, in order to compensate partially the economic impact of the extended Force Majeure,” 10 years should be added to the contract, Pouyanne demands. Renegotiation at the end of a contract normally involves substantially increased payments if the project is running smoothly, so Mozambique would lose substantial income after 2054.
5, “Partially” surely implies more demands to come
6. There is a demand to renegotiate the contract with Empresa Nacional de Hidrocarbonetos (ENH), which is the government shareholder in the gas project.
Pouyanne says the production will start in 2029, which is a delay of five years.
The graph below shows Ministry of Finance income projections made in 2018 and assuming the 2024 start, for what is now the TotalEnergies zone (Area 1). Income from the gas sold is divided in three parts – royalties (2%), “cost gas” which repays the capital costs (65% of gas sales until costs are repaid) and “profit gas” (33%, of which approximately 7% goes to government through taxes and profits to both government and ENH). Government profits climb steeply over time.
For the first nine years after production starts, Mozambique’s income was projected at about $350 mn per year. By nine years when the initial costs are paid, “cost gas” would be minimal and “profit gas” much larger. Mozambique’s projected income would jump to $2bn per year.
Industry assessments of state income are somewhat higher: over $500mn per year from the outset.
Due to the five year delay, this graph needs to be shifted to the right, because production will only start in 2029. But the shape remains the same. If the Pouyanne proposal were accepted, the period of lower payment would be extended by two to three years, to also pay off the force mejuere costs. So the initial low-revenue period would be 2029-2040. Billion dollar payments would be 15 years away, long after the departure of President Chapo.
A key negotiating point, perhaps on offer from TotalEnergies, would be to spread out the repayment period of initial costs which would in early years increase the amount of “profit gas”, from which the state gets its initial 7%. In the first year of production, 2029, when Chapo will be standing for re-election, state income could be over $1bn. TotalEnergies would gain back that money from the extra decade of the contract. Pressure on Chapo from inside Frelimo will obviously be to accept the idea of reducing “cost gas” and increasing “profit gas”.
The vagueness of the letter in several places suggests that it is really a first position for negotiation. “Compensate partially” is such a phrase. Mozambique will surely try to remove any vague commitments for future liabilities.
Continued negotiations were confirmed by Inocêncio Impissa, Minister of State Administration and spokesperson for the Council of Ministers, on Tuesday (28 October). He also expressed anger at the release of the Pouyanne letter, saying negotiations should be kept “within the established channels” – that it, in secret.
The publication of the letter will make it much harder for Chapo and Frelimo to make a secret deal with TotalEnergies.
Two other points should be made. First, negotiations have been personal, between Chapo and Pouyanne, which gives an advantage to the TotalEnergies head who knows this project in detail, while the new president has many things on his mind and is still assembling a team of advisors.
Second, the Cabo Delgado war is central to the proposed agreement. In part exchange for the 10-year extension, Chapo could demand a major job and training programme now. But Frelimo only seems to be interested in money.
For those with an interest in detail, the original 2006 contract is on https://www.resourcecontracts.org/contract/ocds-591adf-3014563630/view – /pdf
