03/04/2013 06:25 pm ET Updated May 04, 2013

LNG: Mozambique's Magic Potion?

Mozambique recently made news with the discovery of astonishing amounts of offshore natural gas in the far north of the country. The region (which includes southern Tanzania and is roughly the size of Ireland) has exceeded expectations, with almost no dry wells from exploration activities since the start in the early 2000s. In 2012 alone, major operators announced combined discoveries of 100 trillion cubic feet of natural gas in northern Mozambique.

Twenty years ago, gas discoveries in a country as remote as Mozambique would have been less attractive due to logistical hurdles and export restrictions. Natural gas transportation used to be confined mostly to pipelines, but recent advances in liquefied natural gas (LNG) technology, combined with the country's relative proximity to the gas-hungry Asian markets, could propel Mozambique to the frontline of natural gas exporters like Qatar or Australia.

Eni and Anadarko, currently the major stakeholders in the Mozambique gas business, have been pushing for the construction of LNG trains -- the facilities needed to liquefy natural gas -- to facilitate exports. Restricted local capacity however, has stalled these projects for now, but if Eni and Anadarko have it their way then Mozambique will be an LNG exporter starting in 2018.

LNG demand has been on the rise in the post-Fukushima world. Some European countries will need to replace nuclear energy with natural gas due to changes in energy policy. But particularly in Asia, LNG demand has been projected to grow significantly. In 2012 Bernstein Research expected LNG demand to double over the next decade to 408 million tons a year.

Rising natural gas demand, however, has been met by a surge in supply. The media hype about U.S. shale gas has increased expectations, in particular for LNG exports. But the shale gas boom has started to catch on in other countries such as Turkey, the Ukraine, China, India and the UK. Last week, even German Chancellor Angela Merkel announced that Germany of all countries might start developing its large shale gas reserves.

Due to its geographic proximity, Mozambique has a competitive advantage in supplying LNG to Asian countries vis-à-vis America and European countries. It comes as no surprise therefore that the U.S. government has started to monitor Mozambique more actively.

The LNG demand outlook across Asia is still dynamic, but there are key uncertainties such as policy issues in countries like India, gas prices, the pace of shale development in China and India, and nuclear policies in Japan, South Korea and Taiwan that have to be accounted for the Mozambican production equation. Even more important are future LNG supply outlooks. If exploration and production keep pace with those of past years, rising supply might outstrip demand, effectively making the LNG business less attractive.

Even if LNG is one of the fastest growing segments in the gas market, investments are largely going to depend on the economics of LNG production, that is whether gas prices will be high enough for producers to recover their investment costs. Yes, proven gas reserves are very large and thanks to new technologies, large shares of these reserves have become recoverable. But with gas prices being at a historic low (at least in the U.S.), and some analysts forecasting persistent low prices, the economics of LNG projects may no longer add up.

This has a series of important implications for Mozambique. While Asia's hunger for energy could potentially make Mozambique very rich, only time will tell if it really pans out.

In the case, for example, of a supply surge in Europe, natural gas from Russia and other supplies will become available and search for new markets. These supply surpluses might become a competition for Mozambique's LNG. The US and Japan have increased their talks on LNG exports from the US to Japan; another potentially large consumer that might be lost to Mozambique.

Additionally, the construction of LNG trains is very expensive and requires huge capital investments. Allegedly the floating LNG facility in Australia will cost Shell around $50 to $60 billion. If gas prices are low, there will be downward pressures on revenues from Mozambican LNG projects.

Whether natural gas demand will outstrip supply or not will be crucial for the future of many LNG projects. Natural gas prices are still significantly higher in Asia than they are in the US, but only time will tell whether this will hold. In any case, Mozambique should be aware of the two future scenarios: one of natural gas demand surplus and one of supply surplus. Better safe than sorry.