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Mozambique will be transformed by gas reserves in 10 years

Anadarko predicts one of the poorest countries in the world will become the world's third largest LNG exporter

Mozambique's economy will, over the next 10 years, be transformed by the development of its estimated 277 trillion cubic feet (cf) of gas reserves. 

Anadarko, lead operator of one of two pioneer projects in the Rovuma basin offshore the north of the country, predicts Mozambique could become the world’s third-largest exporter of liquefied natural gas (LNG). 

The country’s government does not want just to export, however: it also wants to use of a large chunk its gas domestically through developing downstream industries. But some are warning this could be an economic cul de sac for Mozambique.

The country this year published its Gas Master Plan, outlining how it intends to develop its gasfields. Downstream development is central to the this, with gas-fired power plants, fertiliser plants, and gas-to-liquids facilities all singled out for attention. The strategy of so-called “benefication” was a key theme of the recent Mozambique Gas Summit, a four-day conference held in the capital, Maputo, in December last year. According to a presentation by Benjamin Chilenge, director of planning and development at the Mozambican mineral resources ministry, the plan should ensure “that Mozambique does not become a mere exporter of unprocessed raw materials”. Elfranco van Loggerenberg, senior vice president at South Africa’s Sasol said: “LNG opens up export opportunities, but in-country monetisation is also needed to enable socio-economic development.” But opponents of the strategy have serious reservations, including that such industries will need enormous subsidies to survive in Mozambique.

Mozambique is one of the world’s poorest countries, and Anadarko and Eni’s liquefaction projects alone will require investment of more than double Mozambique’s annual GDP, estimated by the IMF at $16.5 billion in 2014. Bidding is ongoing on a further 15 blocks where the government hopes explorers might find oil. The International Energy Agency expects the government to bring in gas-related tax receipts worth $115bn over the next 25 years. Mozambique seems set to join Nigeria and Angola in the ranks of Africa’s petro-states – but hopes to follow a more inclusive development path.

Domestic gas

A new oil and gas law, passed last year, states that all future oil and gas extraction projects – though Anadarko and Eni’s projects, already under development -- will have to ensure 25% of production goes to the domestic market. Although Mozambique already produces gas, onshore at Pande and Temane in the south of the country, almost all of it - 97% according to World Bank figures released in June 2014 -  is exported directly to South Africa. The new domestic gas requirement means Mozambique needs to see a significant increase in its downstream processing capacity.

Even the Anadarko and Eni projects will make some contribution to domestic gas supplies, through various channels: royalties, which rise from 2% to 6% over the first 20 years, can be paid in kind as well as in cash; state-owned oil company ENH has a stake in both of the project companies, so can divert its portion to the domestic market; and Anadarko has said it is committed to supplying some gas to the domestic market, even absent a legal requirement to do so, in an apparent effort to bolster the country’s interest in seeing the project succeed.

The gas master plan sees gas extracted in the far north of the country fuelling power and gas-to-liquid projects in the region, and being transported in a pipeline the length of the country via a number of “anchor” projects, such as fertiliser and urea plants and more gas-fired power generation, which provide employment and import substitution while justifying the existence of pipeline infrastructure which can also serve households and small and medium-sized enterprises throughout the country. South Africa’s Sacoil has already been engaged by the Mozambican government to carry out an economic feasibility study for the pipeline, including analysing the regional marketplace in south-east Africa.

In December, Chilenge said downstream mega-projects will generate government revenue for the country while acting as “the necessary anchors justifying the investment in pipelines and other gas infrastructures in urban areas, since small and medium enterprises do not always justify such bulky investments”.

The government has already initiated a bidding process to build the anchor projects; Shell is competing with Sasol and Eni to build Mozambique’s first gas-to-liquids plant, while various bids from European and Japanese companies have been submitted to build fertiliser and methanol plants, according to Chilenge. In total, expressions of interest received by the government amount to demand for almost 27 trillion cf of gas per year.

A key moment in generating momentum behind the Mozambique gas projects was the publication of a report by Standard Bank in July last year, laying out the prizes in store for Mozambique if it puts its plans for gas into action. If six LNG trains are built, the bank’s report says an extra $39bn will be added to GDP by 2035 compared to a base case without gas. Real annual GDP per capita, the report says, will go from $650 today to $4,500 – putting Mozambique firmly in the middle income category.

Aside from making clear how gas developments will improve Mozambique’s revenues, the report gives a strong endorsement for planned downstream investment. Unlike previous megaprojects in Mozambique – the most obvious example being the Mozal aluminium plant, which has been criticised for providing limited employment and weak linkages to the rest of the economy – Standard Bank says the gas exploitation “has the opportunity to transform Mozambique’s internal energy position through domestic gas sales”, through “multiple downstream projects” such as fertiliser and methanol production. These projects “would have significant domestic benefits for Mozambique (for example, creating new manufacturing industries) as well as in some cases developing new export industries (which will further boost employment, exports, balance of payments etc)”.

However, Tyler Biggs, a former World Bank Africa economist and Harvard academic, is sceptical. “Mozambique should not be producing these downstream products, like fertiliser, methanol,” he says. “The thinking is that it’s just a natural progression to move from upstream processing to downstream processing because we have the resources. [But] There are a lot of reasons to question this basic idea”.

Firstly, he said, the conditions for world trade have improved so much over recent decades that the source location of a raw material is now far less relevant for where it should be processed. “There’s no argument that because you have the resources, you shouldn’t be paying the transport costs to send them to another place to be processed,” Biggs says.

In the Middle East, where gas producers have successfully implemented downstream processing projects, “they imported everything”, Biggs points out – including the human capital, something that would be politically unpalatable in Mozambique where youth unemployment was a major issue at last October’s elections.

Even if the majority of employees at these developments were Mozambican, it would barely dint the country’s unemployment rate. An IMF analysis of Mozambique’s economy published last autumn pointed out that megaprojects are capital-intensive by nature and so do not create many jobs. Mozal, for instance, “has contributed about 5% to GDP each year, it employs only 0.02% of the labour force”, the fund’s report, Mozambique Rising, said. It argues the same could be expected of other megaprojects envisaged in the gas master plan, concluding “it is unlikely that they will become a large source of employment for ordinary Mozambicans”.

Nevertheless, this is not enough for the IMF economists to argue Mozambique should not proceed with its plan for gas-linked megaprojects. They say instead that these projects will be “less affected by Mozambique’s comparative disadvantage in infrastructure”. Precisely the criticisms that are levelled at projects such as Mozal – it makes little use of the Mozambican workforce, and operates autonomously from the rest of the Mozambican economy – are what allows it to succeed in a country which is otherwise globally uncompetitive.

More labour-intensive development strategies, while able to take advantage of low wages, tend to be in direct competition with similar activities in other countries which might benefit from better infrastructure and a better qualified labour pool, among other advantages.

Megaprojects, on the other hand, often rely on purpose-built infrastructure which, though expensive, can be justified by the scale of the project. A case in point is Brazilian coal miner Vale’s project, now nearing completion, to build a 900 km railway from its coal mines inland Mozambique to a purpose-built terminal on the coast. The IMF concludes that Mozambique’s lack of existing infrastructure means that “foreign direct investment in the form of megaprojects is thus aligned with Mozambique’s competitive advantage”.

Biggs argues, however, that the scale of additional capital expenditure required to build the infrastructure could make the projects uncompetitive. “A fertiliser plant will cost you $1.5bn, a methanol plant will cost you $300bn, and that does not count the complementary infrastructure that has to be built by the government to make these plants viable,” he says. “So the cost factor is determined by comparative advantage, technological advantage, and things like that – not by just the fact that you have natural resources. And you have to ask yourself does Mozambique have the technological advantage to build a big methanol plant and run it here?”

Providing natural resources – that is, gas – at below market prices will, however, be a large part of what makes the master plan viable, which – apart from eating into government revenues now – could mean storing up future problems if the market price falls. Biggs points to the experience of Venezuela in the current oil price crash, which has been “left with industries which have to be subsidised, and don’t employ anybody”. The economy is therefore even more vulnerable to the vagaries of commodity markets than it would otherwise have been.

Subsidised gas has to be paid for by someone, of course – and this is the main concern of Alex Segura-Ubiergo, the IMF’s resident representative in Mozambique. In an interview with Petroleum Economist in Maputo, he said: “If the gas that is sold domestically is sold at a subsidised price, it’s the government who will also be losing, because the government is a shareholder in the project.” When the Eni and Anadarko projects reach maturity, Segura-Ubiergo said, “about 65% of the revenues that this project is going to generate will accrue to the government. So if the government is directing the sales of gas to the domestic market at a lower price, the government will lose revenues.”

The master plan concedes that the projects it foresees, other than liquefaction, will struggle to be viable if gas is provided at the netback cost. Instead, project promoters will bid to have their project accepted, with the price they are willing to pay for gas just one of a number of deciding factors. Others include the project’s location (preferably near major population centres), its plans to employ the local workforce, and the price at which the promoters plan to sell their product on the domestic market.

Sasol’s van Loggerenberg told the Gas Summit that devoting 9 trillion cf of gas per annum to a gas-to-liquids plant could result in 100,000 barrels per day of gas-to-liquids products, of which 75,000 barrels a day could be diesel which could displace all of Mozambique’s imports of the fuel, and create export opportunities in the region.

Standard Bank’s report takes up the fertiliser example, pointing out that Mozambique “currently uses limited fertiliser in its current agricultural production and relies on imported fertiliser”. Biggs counters this, saying improving domestic supply of fertiliser is not the issue. The infrastructure is not in place to distribute it to end users, he argues, and “often these farmers, even if it was there, would not use it because it’s risky”, given the lack of irrigation in Mozambique. “If the rains don’t come, you can put fertiliser all over your farm and get nothing out of it.”

The IMF’s Segura-Ubiergo would not be drawn on the issue, saying only the key issue is that “that priority should not run against a higher priority of maximising the revenues that the government can get”.

Segura-Ubiergo  added: “The resource sector will be a critical sector to sustain growth, to generate exports and revenues. And then, the crucial thing is what will the government do with those revenues, how will the government use those revenues in an efficient and transparent way. Spending on infrastructure, health and education and so forth – and doing it in a gradual way so it doesn’t generate other distortions.”

Once those priorities have been met, the government’s focus should be on diversifying the economy, Segura-Ubiergo said – and that is something Mozambique cannot expect its gas to do. Natural resources, he said, “will not be an engine of diversification, and it has never been an engine of diversification in any country”.

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