Why waste a crisis?
Under the pressure of scandal and renewed conflict, Mozambique’s government is keener than ever to speed up its gas-export project
Mozambique has dropped off the map of investors' favourite frontier markets. It's been a rough year for commodity exporters everywhere, and an especially tough one for southeast Africa, which has been hit by a serious drought. But Mozambique's fall from grace has its own drivers that are impossible to overlook.
The first is a return to armed civil conflict. This year is shaping up to be the worst for fighting between the government and opposition group Renamo since a 1992 agreement put an end to their 16-year civil war. International mediators have now joined negotiations in the capital, Maputo, but the conflict-which remains sporadic and low-level-has, if anything, worsened.
On top of drought and conflict, the discovery of shady state-owned companies that borrowed more than 10% of Mozambique's GDP led to an economic shock when donors and the IMF withdrew financial support. Since the government has come clean on the debts, it has become clear that neither it nor the companies that borrowed the money are able to repay it. Default has not yet been officially declared, but Mozambique is now not paying its debts-and has the credit ratings to prove it.
Yet instead of holding back developments in the gas sector, the crises have yielded a fresh impetus. Investors' desire to tap Mozambique's offshore reserves seems undimmed, and the government is desperate for new sources of revenue and to restore the country's reputation in international markets.
Enter ExxonMobil. On 19 July, the company's chief executive Rex Tillerson sat down with President Filipe Nyusi and Claudio Descalzi, chief executive of Eni, in Maputo-a sign that a deal to bring the world's biggest oil company into Mozambique's rich Rovuma Basin offshore areas is imminent. Descalzi now says he expects to sell down part of its offshore assets by the end of the year.
Talk of Exxon buying into Eni's Area 4 has shifted the focus away from talk that the US firm wants Anadarko's Area 1-but has not replaced it. Industry insiders confirm that what Exxon is negotiating with Eni is a deal that leaves the Italian company to operate its floating liquefied natural gas project on the Coral field, while Exxon takes over Eni's portion of the Mamba-Prosperidade complex that straddles the border with Anadarko's block. Exxon is then expected either to do a similar deal with Anadarko to operate its half of the straddling reserves, or to take over operatorship of the whole of Area 1. That would leave Exxon sole operator of the onshore LNG operation, rather than the current situation of two smaller players sharing the project.
The benefits to the government of getting Exxon on board are at least twofold. In the immediate term, the capital gains tax receipts would relieve the almost unbearable pressure on the country's budget and the central bank's foreign reserves. In the medium term, having one big player in charge of the project increases the likelihood of successful financing and execution.
In the meantime, Eni and Anadarko are pressing ahead. Final investment decisions have been repeatedly delayed but Eni is now ready to press the button on Coral FLNG before the end of this year, having won government approval for an offtake deal with BP. Anadarko has replaced its country manager, John Peffer, who had been in place since the Texan company started operations in Mozambique in 2006, with John Bretz, who will work under the guidance of new global-LNG head honcho Mitch Ingram, recently arrived from BG Group. As Mozambique is Anadarko's only LNG project, Ingram's arrival is a sign that the company is still gearing up to operate its project.
While the Rovuma projects hog the limelight, other oil and gas developments have made progress. South Africa's Sasol, still the only actual producer in the country, recently spudded new wells on its concession in southern Mozambique. They should make Sasol Mozambique's first oil producer. Other companies are hoping to join it soon.
In June, industry regulator INP finally published the model exploration and production concession contract allowing the winning bidders on its 5th round auction to start exploring. London-based independent Delonex is likely to be the first to do so and has ordered an environmental study ahead of seismic work to start in 2017.
Two other Rovuma areas are coming back into play. Total has taken over operatorship of two blocks abandoned by Petronas, while Wentworth Resources has won the right to restart work on the onshore Area 1 that was previously operated by Anadarko, and which has yielded gas.
Mozambique's other big commodities story is coal, which seems to be dying a slow death rather than recovering. Reserves are far inland where they're vulnerable to poor infrastructure and, of late, the uptick in fighting between Renamo and the government.
Renamo's key demand is to be given the right to govern those parts of Mozambique where it is more popular than Frelimo. That includes Tete province, where the coal is situated, and Sofala and Nampula where the coal has to travel to reach the ports of Beira or Nacala. Usefully for the gas sector, neither of the two provinces where gas projects are underway is disputed.
Sasol's projects in the southern province of Inhambane are not immune to the unrest, and the company is planning an offshore floating, storage and offloading vessel to export its oil to avoid having to depend on tankers travelling by road to the central port of Beira. In the northern province of Cabo Delgado, however, where the Rovuma projects are based, there is no direct threat from the resurgent civil war.
When the projects do come online, it's safe to assume that the unprecedented revenues will fuel political competition both with Renamo and within the ruling Frelimo. But as things stand, Mozambique's political difficulties seem like they won't stand in the way of its ambition to become a major gas producer.
Tuna boats and gas delays
Ruling party Frelimo certainly needs some good news. It is desperate to slough off international pressure to conduct a forensic audit of the hidden-debts scandal that would likely implicate former President Armando Guebuza and other high-ranking government and defence officials.
In September 2013, Guebuza's government guaranteed $0.85m of borrowing by a newly formed state-owned company called Ematum-an acronym in Portuguese for the Mozambique Tuna Company. It raised the cash on international capital markets, via arranging banks Credit Suisse and Russia's VTB Capital, ostensibly to fund a tuna fishing fleet.
Despite the ludicrous price tag the company was apparently paying for 24 fishing boats, international investors bought the debt as it came with an "irrevocable" government guarantee. It soon transpired that much of the money was to be spent on coastal defence-and the government ultimately took $500m of it onto its own budget. The IMF and European and North American donor countries were not amused.
They were left open-mouthed, however, when this year it emerged-in the process of restructuring the Ematum loan-that Ematum was less than half of the story. A company called ProIndicus, which had been understood to be the naval defence arm of Ematum, was revealed to have borrowed another $622m in 2013 from Credit Suisse and VTB, also to spend on coastal defence. And a third company, Mozambique Asset Management (MAM), borrowed $535m to build shipyards and train personnel. All three companies are majority-owned by investment companies linked to Mozambique's secret services.
The deals brought the total of government-guaranteed foreign borrowing to $2bn-and none of the three companies is yet close to turning a profit. One reason is the lack of gas development: ProIndicus planned to charge offshore rigs $3m a year each to provide security. And if the hoped for government revenue from gas had come on stream by now, the dodgy loans would not have been restructured and might never have come to light.
Outrage over the deals is not confined to the international community. Mozambican civil society and the political opposition say the country should refuse to pay the debts, and even within Frelimo there is enormous discontent. Nevertheless, party unity is mostly holding firm-and President Nyusi seems to think he can guide the country out of the mess without violating the immunity of his predecessor. For that, he needs cash-and the likeliest route is still through Mozambique's gas.