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AfricaSeptember 1 2016

Energy finds fuel hopes of a Mozambique boom

Boasting major gas discoveries, Mozambique is nursing ambitions to become both a regional energy hub and a key exporter to Asia. But the government must act fast to attract investment in an increasingly competitive market, writes James King.
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In the space of a few short years, Mozambique has become one of the world’s hydrocarbon heavyweights. Following the discovery of massive natural gas reserves in the offshore Rovuma basin in the country's far north, its long-term economic growth prospects have materially changed.

The latest figures from the International Monetary Fund (IMF) estimate total reserves at 5000 billion cubic metres, roughly equivalent to the gas reserves held by Nigeria, which has the largest proven reserves in Africa.

For a $15bn economy, this is undoubtedly a game changer. The gas fields are split into two primary concession areas, with Italy’s Eni operating so-called Area 4, and US independent Anadarko the lead concessionaire of Area 1.

Hopes for growth

Based on current reserve estimates, Mozambique’s offshore gas fields and associated developments, including liquefaction and transport facilities, will require about $100bn in investment. As these projects accelerate, the economic benefits will be considerable.

“Although this short-term economic pressures are pronounced, it is expected that the economy will recover its robust growth rates from 2018, with annual gross domestic product growth figures expected to hit 8% as a result of the huge investment flows from the gas sector. This will shrink the current account deficit and boost growth,” says Dr Tomas Matola, chief executive of Banco Nacional de Investimento, the country’s state development bank.

Depending on the scale of the development, including the number of liquefied natural gas (LNG) trains that are built, revenues have the potential to reach about $212bn up to 2035, according to comments by the chairman of the national hydrocarbon company, ENH, in October 2015. Meanwhile, research from South Africa’s Standard Bank has indicated that foreign direct investment in the Rovuma basin could reach about $35bn between 2017 and 2022, once the major operators conclude their final investment decisions (FID).

But herein lies the challenge. Both Eni and Anadarko are yet to approve their FIDs as negotiations with the government, and each other, have dragged. The collapse in the price of oil has not helped, as LNG contracts are often indexed against the commodity. While this is an effective way of locking in off-take agreements that support the high development costs of most gas projects, lower prices are now squeezing developers looking to secure agreements with major export markets.

A report from Reuters at the end of July indicated that Eni was close to approving its FID, as discussions with the government and various contractors had progressed. The report suggested a decision would be taken on October 31 covering the development of the Coral gas field, one of two dominant positions in the company’s concession along with the Mamba field. An FID on the Mamba field is expected in 2017.

Awaiting decisions

Anadarko’s FID is not expected to take place in 2016. Both companies are nevertheless in a race against time to start production. Even if Eni were to execute a FID later in 2016, production is not expected to begin until the early 2020s. Both players, as well as the Mozambique government, are aware that the market for natural gas is set to become more competitive in the near future.

Massive investment to increase the natural gas export potential of markets such as the US, Canada and Australia is currently under way. But other players are also emerging with, for example, recent gas discoveries off the coastline of Mauritania and Senegal.

“The government will have to develop the country’s gas potential quickly. New, if more significant, discoveries are being made all the time, which increases competition,” says Mohamed Zine, regional director for Africa at analyst IHS Markit.

For Mozambique, the big prize in the global market is the economies of Asia. Here, the proximity of the Indian sub-continent and easy maritime access to the Middle East and Far East provide the country with notable competitive advantages. “The main objective of Mozambique’s gas production is to export to markets in Asia. Although Eni and Anadarko are operating most of the concessions, they are partnered with Asian groups who have bought smaller stakes in these blocks,” says Mr Zine. 

But plans are also afoot to make use of this offshore gas production closer to home. The development of the 2600 kilometres African Renaissance Pipeline is awaiting sign-off from all government and commercial partners. If completed, this will transport gas from the north of Mozambique to South Africa’s commercial hub, Gauteng province.

“The domestic and regional consumption of Mozambique’s gas potential is a big part of the government’s plan moving forward. The development of the African Renaissance Pipeline will, in the long term, go hand in hand with efforts to distribute the gas across the country and to our neighbours,” says Salvador Namburete, Mozambique’s former minister of energy.

Need for finance

With energy-hungry neighbours across the Southern African Development Community, including Malawi and Zimbabwe, Mozambique is aiming to position itself as the power hub of the region. Yet directly financing the constituent projects in this strategy will be a challenge, particularly as local lenders lack the necessary firepower to support their rollout. To date, various export credit agencies and international lenders have stepped in to fill the void.

“Local banks have limited capital resources for directly financing the so-called ‘mega-projects’. In order to benefit from the investment in those areas, local banks should focus on the supply-chain funding associated with mega-projects, especially those in the mining and gas sectors. Millennium bim intends to capture a lot of business in those areas as befits our dominant position in the market,” says José Reino da Costa, vice-chairman of the board of directors at Millennium bim.

For the government, this longer term vision offers clear opportunities. But transforming these lofty ambitions into reality will not be easy. Hard policy choices will need to be made, including measures to augment transparency and reforms to the investment environment, including long-standing issues over land ownership, which have blighted foreign investment. For now, at least, the government appears to be making the right noises.

“Mozambique has developed a bilateral platform for the government and private sector to sit together and to discuss the investment environment. These conversations help to hold the government to account, and to ensure that the private sector is meeting its responsibilities too,” says Lourenco Sambo, director-general of Mozambique's investment promotion centre.

CGT boon

But beyond this long-term vision for natural gas development, more immediate benefits for the government are looming. Faced with a foreign currency liquidity crunch, yawning current account deficit and a growing sovereign debt emergency, the government could be about to receive billions of dollars in capital gains taxes after Eni reportedly reached an agreement to sell a stake in its LNG development plans to supermajor ExxonMobil. While the agreement is not expected to be made public for months, and has only been reported by Reuters to date, it could offer the government a huge tax windfall at just the right time.

“The government is very keen for Exxon to agree a purchase with Eni. This deal would certainly help the authorities handle some of their current fiscal challenges,” says Mr Zine.

In Maputo, a member of the current administration told The Banker that the country was condemned to be rich. While this was said in jest, clearly Mozambique has been blessed with plenty. But as ever, the greatest challenge will be to ensure that these riches are not squandered, and some analysts fear that government infighting and political instability might emerge as a by-product of the competition for these spoils.

Yet if Mozambique can get it right, the country has much to gain. For one, the economy is expected to triple in size in the coming years, which for a citizenry that is one of the poorest in the world can be only good news. If it establishes the right social and economic development initiatives, the country has the potential to achieve a meaningful transformation in the coming decades. The next few years will be vital in shaping that trajectory.

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