Source: ChEnected
Like many other African countries, Mozambique has enormous potential, but there are many gaps to fill. Led by its natural resources, the economy has been booming with real GDP growth reaching 7.4 percent in 2012, seven percent in 2013 and is predicted to reach 8.5 percent between 2014–16, according to the World Bank. London based African Monitor International stated that Mozambique will see the fastest economic growth over the next decade in sub-Saharan Africa.
Economic growth, however, is not a guarantee for improved livelihoods of the nation’s 25 million people. Other nations have squandered large influxes of capital and resulted in corruption, environmental degradation, local conflicts, among various issues. The country’s high poverty level could be reduced with concrete changes to energy regulation and royalty and tax frameworks for energy exports. Billions of dollars of new government revenues could support investments in infrastructure and social services.
Mozambique still remains one of the poorest nations with GDP per capita a starkly low $600 and a $15 billion national GDP in 2012. Making matters more uncertain is the dearth of skilled workers and the unresolved situation involving the rebel group Renamo.
The new bounty
Off the coast of Mozambique, more than 100 trillion cubic feet (tcf) of high-quality natural gas has been discovered – it could be the world’s fourth or even third largest deposit and hold enough gas to meet global demand for more than two years, according to Empresa Nacional de Hidrocarbonetos (ENH), the national oil company. Mozambique has turned into one of the most promising future suppliers of natural gas, especially as global demand continues to grow rapidly.
These massive finds are in the Area 1 and Area 4 blocks of the Rovuma field, which is located off the Northern coast sharing a border with Tanzania.
In 2006, the Government of Mozambique signed an exploration and production concession contract (EPCC) with American company Anadarko (operator of the project) for Offshore Area 1 of Rovuma, which spans approximately 2.6 million gross acres with estimated reserves of 35-65 tcf, and with Italian firm Eni for Offshore Area 4 of Rovuma, three million gross acres in depths up to 8,600 feet of water. Eni estimates Area 4 has potential reserves of 75 tcf—according to Bernstein Research that is equivalent to about four years of total European gas demand. Eni also has said it has had a 100 percent exploration success rate to date.
Anadarko now operates and holds 26.5 percent of Area 1 (after selling stakes) alongside Mitsui & Co. (20 percent), India’s Oil and Natural Gas Corp, (ONGC – 10 percent) and Oil India Ltd. (10 percent), Bharat Petroleum Corp. Ltd (BPCL – 10 percent), ENH (15 percent), and Thai state oil company PTT Exploration and Production (PTTEP – 8.5 percent).
The consortium for Area 4 is led by operator Eni (50 percent stake), China National Petroleum Corp (CNPC – 20 percent), ENH (10 percent), Galp Energia (10 percent), and Kogas (10 percent). Last May Eni sold GNPC its 20 percent stake, and 28.6 percent stake in Eni subsidiary Eni East Africa, for $4.21 billion. Eni’s CEO Paolo Scaroni has hinted the company may sell more of its share and China may continue to ante up as its natural gas demand will more than quadruple between 2011 and 2035, according to the International Energy Agency, drastically outstripping domestic production. (According to Dealogic, Chinese companies have made 93 acquisitions of oil and gas assets in other countries since the beginning of 2008 worth a total $107 billion.)
The longer-term vision for the Rovuma is to build up the capacity and infrastructure to have 12 liquefied natural gas (LNG) trains for export, making it the largest LNG export site after Ras Laffan in Qatar. The President of Anadarko Mozambique John Peffer has said about the LNG vision that the company expects to invest about $15 billion to complete the initial two trains. ENI and Anadarko are designing the onshore LNG facility in Afungi in Cabo Delgado Province utilizing Area 1 and 4 in the Prosperidade complex.
There will be numerous challenges to overcome to realize this new found potential for the developing nation. Adriano Nuvunga the Executive Director Center for Public Integrity in Mozambique bluntly stated that the targets are not realistic during an event hosted by the Brookings Institution and Oxfam.
Obstacles as simple as not having appropriate road linkages to transfer imported equipment to the proposed remote project site and a lack of skilled labor provide a logistical nightmare. In addition, it would require the resettlement of about 3,000 people living in the area, which would also need to be negotiated.
About 10,000 workers would be needed on the site at the peak of the construction phase, many would be foreigners.
International Players
Mozambicans are planning to benefit domestically from the vast reserves and foreign countries are trying to expand their relationships to be in line for the gas also. The Mozambican Minister of Mineral Resources Esperanca Bias embraced this recently while discussing an Indian partnership he stated: “If the Indian government, or anybody, wants to buy LNG from Mozambique, we are ready to meet the demand.”
Newly minted stakeholders in Area 1 ONGC and Oil India join BPRL (all Indian companies) to represent the largest single share in the consortium summing to 30 percent. The group does not have equity in the gas but will have the ability to market it to India in the future. India currently has 18,000 megawatts (MW) of power capacity idled due to a gas shortage, with another 10,000 MW in the pipeline waiting commissioning. Noting the importance for India, ONGC Chairman Sudhir Vasudeva said in a statement: “Considering the growing importance of natural gas in the primary energy basket, this acquisition is a significant step towards the energy security of our country.” The Rovuma’s find is 20 times India’s current annual gas consumption.
India has also committed to train Mozambican personnel in the gas sector as its domestic skilled labor is substandard.
Japan is the latest entrant to attempt to establish a foothold for the gas as Prime Minister Shinzo Abe visited the country in January, the first such visit by a Japanese premier in eight years. Japan is already the biggest importer of LNG in the world and continues to search for alternate sources of energy since shuttering its nuclear program post Fukushima. Mr. Abe came with a delegation of 28 companies and organizations.
“We signed some important protocols to strengthen the bilateral relationship,” Mr. Abe said as Japan agreed to lend Mozambique $672 million over five years for development programs. There will be $167 million loan to build a 100 MW natural gas power plant in Maputo to help the country keep up with electricity demand that is growing at a rate of eight percent a year, which current generation capacity cannot meet. The plant is scheduled to be completed in 2018.
According to the Minister of Energy Salvador Namburete in June 2013, 38 percent of the population has access to electricity (up from seven percent in 2004).
Onshore, in the Buzi block, which is surrounded by the Pande and Temane blocks, there is 283 billion cubic feet (bcf) of proved and probable gas reserve. Indonesia-based independent company PT Energi Mega Persada Tbk. (ENRG) agreed to a 75 percent stake for $175 million of Buzi. The remaining 25 percent will be held by ENH. ENRG President Director Imam Agustino mentioned the purchase proves Indonesian companies can compete in the international arena. The start of production is expected in 2017.
Despite being the neighbor to the south and importing electricity from the Cahora Bassa Dam and having a role in new gas plants such as Kuvinga and Ressano, South Africa is not joining the party. Johan de Vos, CEO of the energy firm Gigajoule, has accused the South African government of ignoring the natural gas reserves in Mozambique in the revised 20-year Integrated Resource Plan (IRP). Mr. de Vos said importing the gas could solve the internal energy crisis and would avoid the need to build additional coal-fired power stations. The outcome of a commissioned feasibility and technical survey found a 2,450 km from the Rovuma Basin to Richards Bay in South Africa would tally $5 billion and a power plant with a power capacity of 5,000 MW would cost an additional $5 billion.
There is coal too
In addition, multinational mining and power companies are being drawn to the country. The former Portuguese colony, which exported its first coal overseas in 2012 after two decades, has the world’s fourth largest untapped reserves of coal, estimated at two billion tons. Security threats and lack of infrastructure and rail has been holding up exporting in greater quantities.
Mining majors Rio Tinto and Vale do have strong presence within the country and are ramping up their operations. A consortium, including Vale, recently agreed to a new 600 MW coal-fired power plant to cost $1 billion in the western province of Tete. Construction is expected to take three years and be built in two phases. From phase 1, Electricidade de Mozambique (EDM), the state utility, will add 50-100 MW to the grid or the balance of the 200-250 MW Vale needs to maintain its mining activities.
Mozambique may raise its royalty taxes for coal, according to the deputy mines minister. Currently, royalty taxes for coal stand at three percent, lower than the five percent for base metals and 10 percent of diamonds. Mozambique has planned a flat rate of 32 percent capital gains tax on transactions in the mining and energy sectors for 2014.
Where will the windfall go?
Some analysts put Mozambique’s first potential LNG exports at around two tcf/year, which would amount to annual revenues of over $30 billion at current spot LNG prices paid in Asia, where Mozambique plans to sell and is situated advantageously geographically.
Finance Minister Manuel Chang said the government’s first priority is to clear the Value Added Tax (VAT) rebates owed to companies and to expand capital expenditure in needed sectors where funds are currently unavailable. He did not rule out a sovereign wealth fund down the road.
The IMF predicts the development of LNG and the accompanied industrial sector will push up GDP/capita to $963 by 2017, and possibly eradicate the extremes of poverty and unemployment. Moreover, cash flows can overtake donor assistance within five years.
Looking ahead
If the slew of challenges is overcome, ENI and Anadarko (and minority partners) expect to begin commercial natural gas production around the end of 2018. Total development costs for the drilling and onshore export facilities are estimated to be around a whopping $50 billion. Wood Mackenzie estimates LNG export by 2019.
With the lag time before export, royalties and taxes cannot be relied upon in the near term. However, the block sales detailed above have a capital gain tax attached which will accrue with the government. The government should concentrate on additional industries now, especially agriculture as it employs 80 percent of the population, as the anticipated large sums of money should start flowing at the end of the decade.
If the government revises its legal and fiscal regulation appropriately for exploration and production, and formulates and ratifies a strong new petroleum law, the boom can provide a path towards growth and development, and for Mozambique to be an example how to harness resource wealth. The World Bank has said harnessing the emerging extractive industry could provide the means for Mozambique to reach the status of a middle-income country by 2025.
