None of Africa’s natural resources can match the controversy, drama and conflict of the oil and gas sector. It promises so much, yet so often dashes the hope it raises. Will the huge gas finds off the coast of Mozambique break the cycle? Otavio Veras reports.

Mozambique, home to more than 17m people and covering an area larger than France and the UK combined, has faced many political and economic challenges since its independence from Portugal in 1975. From 1977 to 1992, Mozambique was immersed in a civil war which led to the death of nearly one million Mozambicans and the displacement of 4.5m to neighbouring countries.

After many years of chaos, Mozambique finally experienced a period of sustained economic growth from 2001. Several major foreign investment projects, continued economic reform and the revival of the agriculture, transportation and tourism sectors were key factors propelling the country towards an annual GDP growth greater than 5.8% (from 2005), and over 7% from 2011 onwards. According to the Word Bank, GDP growth is forecast to grow at 7.4% until 2017.

However, this growth comes from a very low base and the country still remains one of the poorest in Africa. However, the discovery of immense natural gas reserves and the possibility that this southern African country can become one of the world’s three largest exporters of natural gas, is seen as a ‘sign from above’ that Mozambique’s decades of suffering are over and a new dawn of prosperity is about to rise.

The country’s planners are talking about the ‘transformative power’ of their gas reserves and how the revenue flows will enable the state to put in place all the infrastructure, including soft infrastructure such as human capacity development, for the great leap forward.

But all this will unfold in the near future. What is the current situation? Less than a decade ago, hardly anyone could have believed that Mozambique would rank among countries with some of the world’s largest natural gas reserves. It has proven preserves of 100 trillion cubic feet, making its reserves the 14th largest in the world.

Currently, Mozambique’s natural gas production is only 152bn cubic feet per year, making the country the 54th largest producer in the world. The real payout will begin when Mozambique begins to export liquefied natural gas (LNG) to other countries. Experts believe it could become the third-biggest LNG exporter in the world, after Qatar and Australia, once it hits peak production around 2028.

However, it takes time and heavy investment to develop the infrastructure necessary to extract, transport, refine and ship the natural gas. In contrast to crude oil, natural gas has to be cooled to -162oC (-260oF) and transformed into liquid form in order to be exported to other countries, through cryogenic vessel tanks or liquefied natural gas (LNG) tankers.

This process is very capital intensive; the cost of setting up an LNG plant can be around $8bn or more. This presents many complications in the investment decisions made by oil and gas companies.

Companies have to weigh up potential revenues against the risk of price drops – for example, the price of gas was slashed by almost half over the past 12 months. In addition, the perceptions of political risks and the lack of transparency in many African countries further complicate matters. This makes oil and gas operators extra careful before making final investment decisions on greenfield projects.

Sign of confidence

Nevertheless, as a sign of confidence in Mozambique as well as the continuing global demand for gas, two oil majors, Anadarko from the US and Eni from Italy, signed an agreement in December 2012 to build onshore LNG liquefaction facilities in the Cabo Delgado Province of northern Mozambique.

The companies operate two offshore blocks in the Indian Ocean, called Area 1 (Prosperidade and Golfinho/Atum complexes) and Area 4 (Mamba complex and the Coral site). The joint agreement aims to explore the fields, which contain 74 trillion cubic feet of recoverable natural gas.

The development of all the infrastructure and the continuous exploration and production of this resource is estimated to generate 700,000 direct and indirect employment opportunities for Mozambicans by 2035. It will also be an opportunity for substantial tax and revenue generation for the country.

During this development, local infrastructure will be expanded and improved; the transport infrastructure will be increased (roads, air and ports), water and electricity distribution will be extended, and social support systems, such as housing, healthcare facilities and schools, will be developed.

Although the decision to jointly develop the infrastructure and explore the natural gas was made when oil and gas prices skyrocketed, both companies still remain committed to the original goal of developing gas exploration and processing infrastructure.

In August 2015, Anadarko obtained 90% of the heads of agreement, or non-binding accords, it needs to finance an onshore liquefaction plant. The company secured sales of gas contracts for 8m metric tons a year with customers in Japan, China, Thailand and Singapore. Now it is only a matter of how much time the government will take to agree with the legal and contractual framework and approve the necessary permits.

Boom time

More recently, in October 2015, ExxonMobil, Eni and South Africa’s Sasol won bids to explore new natural gas blocks offshore Mozambique, in the northern Rovuma Basin. As for now, more than $30bn is expected to be invested in the natural gas sector to build capacity to produce 20m tonnes of LNG per year with first exports due to start in 2019 -2020.

The International Monetary Fund (IMF) forecasts that the country’s economy is expected to grow an additional two percentage points a year until 2023 as a result of the potential natural gas production.

In the wake of the impending growth boom, port infrastructure is being built in Pemba and Palma. Palma is located in the north, near the border with Tanzania, and Pemba is 350km to the south. Pemba will be the main energy hub, while Palma will hold up to 14 gas-to-liquid plants to liquefy natural gas. Initially, two plants will be built at a cost of more than $16bn. For a comparison, Mozambique’s GDP in 2015 was $16bn.

Pemba, once a sea of tranquillity, is bursting with new businesses nowadays. Real estate is being developed and all sorts of businesses to support natural gas exploration are being born.

The development is creating jobs and attracting Mozambicans from all corners of the country.

Palma is a small town in the north with unpaved roads, houses built of bamboo poles and covered with thatched roofs, very limited electricity and water systems, and an economy centred on fishing. It is one of the least-developed regions in this former Portuguese colony. The development of the small region is happening fast – some say too fast. More than 17,000 hectares of inhabited land will be used for gas exploration infrastructure and 11 communities, with 3,000 people, will have to be resettled.

In 2014, the Directorate for Planning and Infrastructure of the District of Palma received more than 600 applications for land purchase – 100 applications for investment and the remaining for multiple purposes. Land set aside just for housing totals 11,000 hectares.

The resettlement process is not going smoothly though. In May 2015, an assessment was conducted by retired Supreme Court judge, Joao Carlos Trindade, on the legality of the land use rights granted to Anadarko and to the Mozambican publicly owned company, National Enterprise of Hydrocarbons (ENH). This involves the use of 7,000 hectares of land in the Afungi peninsula to build LNG plants.

Questions over the legality of the permits are centred on the fact that they were not granted directly to Anadarko and ENH, but to a shell company formed by the two companies.

Although it is looked at as a minor argument, a court case might conceivably delay work on building the LNG factory.

Centro Terra Viva (CTV), a Mozambican NGO focused on preserving the environmental integrity of the country, joined the case by pointing alleged legal loopholes being employed by the companies. They also alleged that their members of the institution have been harassed and intimidated by the local government in order to keep them from creating controversies within the communities where the natural gas projects will take place.

Curse or blessing?

There is a lot of anxiety and expectation in the air. Palma, Pemba and the other cities will evolve from poor fishing villages to becoming the bases for a complex system housing one of the world’s largest gas export schemes.

It is likely that the lives, livelihoods and even cultures of the people will change beyond recognition. While this transformation is almost certain to usher in an era of prosperity, it will also drag its fair share of disputes in its wake.

While Mozambique has enjoyed a degree of economic growth as a ‘peace dividend’, it remains a poor country. The massive gas discoveries have the potential to transform the economy and set it on a modern path of sustainable growth in which all its citizens can share.

No amount of resource revenues on their own will bring this about; for it to happen, the state will need to yoke the bonanza of its gas reserves to a carefully crafted economic transformation strategy – and bend all its will to implement it piece by piece.

In Mozambique, once gas starts being exported, estimated to be in 2020, the government is expected to earn around S20bn a year from this sector, which is more than the country’s current annual budget.

There is a good chance that the natural gas boom will increase inequality in the country, and, even more seriously, it could raise the potential for conflict, unless this can be headed off by skilful governance and inclusive policies.

Another country in Africa’s eastern seaboard, Tanzania, is also sitting on a vast reserve of natural gas. Both Tanzania and Mozambique face a unique opportunity – will either or both of these countries be able to manage the sudden influx of ‘gas dollars’ and push through their economic transformation agendas, or will they, like so many others, fall prey to the ‘resource curse’?

Otavio Veras is an adjunct researcher at the NTU-SBF Centre for African Studies at the Nanyang Business School, Singapore.

This article was first published in the African Business, March 2016.

 

 

 

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