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2 October 2013

A Boom for Whom? Mozambique’s Natural Gas and the New Development Opportunity

Catembe, Mozambique, 2009
Creative Commons - Attribution-Share Alike 2.0 Generic Creative Commons - Attribution-Share Alike 2.0 Generic

Catembe, Mozambique, 2009

Will recent natural gas discoveries help Mozambique become an economic powerhouse? Ichumile Gqada is optimistic but knows that resource wealth doesn’t automatically lead to socio-economic development. Indeed, that will require a commitment from all the country’s stakeholders.

By Ichumile Gqada for South African Institute of International Affairs (SAIIA)

from A Boom for Whom: Mozambique's Natural Gas and the New Development Opportunity

Introduction

Since 2010 the government of Mozambique (GoM), along with international companies involved in hydrocarbons prospecting, has made a series of announcements of natural gas discoveries. Currently, estimates from two of the five exploration blocks in Cabo Delgado Province, where Mozambique meets Tanzania, indicate that the country possesses well over 100 trillion cubic feet (tcf) of natural gas.[1] These announcements have given rise to much excitement; ‘ordinary’ Mozambicans are hoping for improvements in their living conditions, while their government is looking forward to billions of dollars in export revenues and foreign direct investment (FDI). Government departments involved in the gas sector have made repeated statements of their intention to use these funds for national development.[2] Along with this commitment the government has taken steps to improve the regulatory environment for hydrocarbons, including gas, through a review of Petroleum Law 3/2001 of 21 February. It also commissioned a Natural Gas Master Plan for Mozambique (the ‘Master Plan’) that will outline scenarios for utilisation of the resource once production starts in 2018.[3] Early indications are that the government is considering two options for the gas. The first is to sell all of it in liquefied form on the international market, and the second is to use a portion of the resource for domestic gas-based industries, and export the rest. A key policy question is how to optimise the balance between the two, to meet the twin objectives of economic growth and sustainable development.

The argument for general development of the gas sector hinges on the belief that it will bring in foreign revenues, create jobs and boost economic growth. [4] GoM considers that these benefits will in turn contribute to poverty alleviation, one of Mozambique’s key priorities. Although the logic of this is understandable, given the country’s low socio-economic status, experience in many resource-rich African countries points to the fact that natural resource wealth does not per se translate into economic and human improvement. Countries such as Nigeria, Sierra Leone and the Democratic Republic of Congo, which have abundant natural resources, have been less than successful in using their endowments to make the transition from low- to middle-income economies, or to reach acceptable developmental indices.[5]

Pitfalls attending resource extraction have been widely documented. The phenomenon of resource abundance existing alongside poor economic indicators, also known as the ‘resource curse’, threatens to overshadow the hopes and possibilities that come with large resource discoveries. Export of a single commodity, particularly petroleum, frequently crowds out other economic sectors and strengthens the national currency, while having a concomitant inflationary effect on other non-resource export commodities (a phenomenon known as the ‘Dutch disease’). This situation renders the national economy overly reliant on natural resource exports, which in turn increases its vulnerability to external shocks.[6] Much of the literature on the resource curse has focused on oil, largely due to its dominance in the fossil fuels industry, and it is possible that the theory may not necessarily function in exactly the same manner when dealing with gas. This caveat notwithstanding, a range of challenges associated with resource discoveries and booms has been widely ventilated. There is a convergence of opinion that sound economic policy and law-making, a political will and governmental commitment to development, and good and transparent governance of the petroleum sector, can do much to ensure that the exploitation of petroleum resources leads to broader economic and social development in the face of challenges that in the case of Mozambique among others include poverty, poor access to energy, limited infrastructure, unemployment and an unskilled workforce.

In the past two decades gas has emerged as a major component in the global energy mix. It is increasingly seen as an attractive fossil fuel alternative to crude oil and coal, because it is cleaner burning than either and sufficiently versatile to be used as direct domestic and industrial heating and power generation; as a direct fuel source for vehicles; and as industrial feedstock for liquid fuels and other chemical products. According to the International Energy Agency (IEA) natural gas is ‘poised to enter a golden age’.[7] A significant proportion of the coming gas boom will be from unconventional resources such as shale gas and coal-bed methane, provided that the social and environmental impacts associated with their extraction can be ameliorated. By 2035 gas will overtake coal as a primary energy source, to comprise 25% of the global energy mix – second only to crude oil.[8] Similarly, it has been argued that ‘gas is the only fossil fuel set to increase its share of energy demand in the years to come’.[9] Whereas the gas boom relies primarily on unconventional gas, conventional gas resources such as those in northern Mozambique certainly have a role to play. Currently, successive discoveries of conventional and unconventional gas resources suggest a revolution in the global energy industry may be at hand. What this will mean for governments and national economic development depends on the governance mechanisms and management systems put in place to ensure that the resource is transformed into tangible social benefit.

Whether GoM will be able to keep to its objective of using gas for development, either through revenues from exports or the creation of domestic gas-based industries or a combination of both, largely depends on the way in which the sector is governed. It is too early to state with any certainty that the exploitation of this finite resource will benefit the majority of Mozambicans. Given the adoption and implementation of sound governance policies, however, together with competent and transparent administrative processes, effective, functional and independent oversight institutions and a commitment to directing profits toward socio-economic development, GoM can go some way to avoid the resource curse and its consequences while advancing its stated developmental goals.

This paper sets out to consider the implications of the gas discoveries for Mozambique’s socio-economic development. It examines the extent to which GoM has conceptualised and understood development since the end of the civil war in 1992, in order to suggest how it might facilitate future development in the petroleum sector and the economy in general. In doing so it draws on field research conducted in Mozambique, policy documents, international best practice guides and existing literature on various aspects of Mozambique’s development.

Background

The 11 provinces and 128 districts that make up Mozambique lie behind the Indian Ocean coastline of south-eastern Africa. The country shares borders with Tanzania, Malawi, Zambia, Zimbabwe, South Africa and Swaziland and covers a surface area of 799 390 km2, of which 786 390 km2 and 13 000 km2 are respectively firm land and inland waters. Its coastline runs 2 700 km from north to south, and the country’s climate ranges from tropical to subtropical. Mozambique’s coastal position gives it a geographical advantage over its inland neighbours, which use its ports as entry and exit points for their international traffic. The national capital, Maputo, is in Maputo Province, along the southernmost tip of the country and bordering South Africa and Swaziland. The great majority of the country’s 24 million inhabitants are rural dwellers, more than 50% of them living below the $1.25 a day poverty line. The official language is Portuguese, although English is used extensively as the business language in the main cities. Among the many other languages spoken are Makhuwa, Ndau, Tsonga, Lomwe and Sena.[10]

Mozambique gained independence from Portugal in 1975. Since then the country has been governed by Frelimo, the Frente de Libertação de Moçambique (Front for the Liberation of Mozambique). Mozambique has had a multi-party democratic political system since 1990 and held four rounds of general elections between 1994 and 2009 and three rounds of municipal elections between 1998 and 2008. The main opposition party is Renamo, the Resistência Nacional Moçambicana (Mozambican National Resistance), although the newly-formed MDM, the Movimento Democrático de Moçambique (Democratic Movement of Mozambique) is growing in numbers and holds the mayoral seats in Beira, Sofala Province and Quelimane, Zambezia Province.

Mozambique’s economy includes services sectors (taking in transport), some manufacturing, fisheries and agriculture as well as electricity exports to neighbouring countries, including South Africa. Donor aid is the single biggest contributor to the national budget, at around 50% in 2010. [11] The contribution of extractive industries to the fiscus is, however, growing rapidly. According to Minister of Mineral Resources, Esperança Bias, in 2011 gross domestic product (GDP) increased to $13,740 billion from $10,420 billion the previous year [12]. Although the value of exports began to decline from 2010, in 2011 the economy grew at an annual rate of 7.2%, up from 6.8% in 2010[13]. In recent years the country has emerged as a resource haven. In addition to rich deposits of coal and natural gas Mozambique has significant deposits of heavy mineral sands; limestone; bauxite; rare earths; graphite; gold and base minerals, among others. Depending upon how they are managed, such natural resources could lift Mozambique into middle-income status.

Gas has been discovered in two areas: the Rovuma Basin off the coast of Cabo Delgado Province, and the Mozambique Basin, an on- and offshore area spanning the coastal provinces of Inhambane and Sofala (see Figure 1). Currently, gas is being produced (by the South African integrated energy and chemicals company Sasol Ltd) only at the Pande and Temane fields in Inhambane Province but plans are under way for production in the Rovuma Basin to begin by 2018.

Preliminary indications point to the possibility that gas development and production might adversely affect other economic sectors. Cabo Delgado, for example, is a tourist destination and ecological hub and the location of the protected Quirimbas National Park. A representative of the World Wildlife Fund (WWF) in Maputo believes the rich ecology and its attendant tourist trade may be negatively affected by gas production planned for the area. [14] The international environmental network Friends of the Earth affiliate, Justiça Ambiental, conducted field research in the Rovuma Basin in 2009. The study cites compelling evidence that seismic studies (used in preliminary investigations to determine whether rock formations contain oil or gas) already may have harmed marine animals, while also resulting in a loss of income to local artisanal fishermen due to fish stock deaths and migration.[15] Similar concerns have been expressed regarding gas development for the central coastal areas of Mozambique, where coastal communities derive their livelihoods from artisanal fishing.

Resource extraction necessarily has an impact on the environment and for that reason achieving complete environmental balance and harmony is to all intents and purposes impossible, nevertheless all activities should aim to limit any environmental degradation that might result. This approach is already addressed in law and in environmental impact assessments: maintaining environmental integrity should not be sidelined as the resource revenues threshold draws nearer and the stakes get higher. There is a further fear that as the date looms for initial production in the Rovuma Basin, fisheries and agriculture, which are important subsistence sectors, may be neglected in favour of the more profitable petroleum sector. [16] The GoM should try to allay such fears through a genuine commitment to further developing these sectors, not only because they are activities that traditionally have supported livelihoods but also because of the risks inherent in over-reliance on exports of a single natural resource commodity.

Mozambique’s Hydrocarbons Sector

Exploration in Mozambique’s hydrocarbons sector dates back more than a century, to the 1904 discovery of onshore sedimentary basins in the Mozambique Basin; financial and technological constraints prevented its development. Between 1961 and 1967 further onshore discoveries by multinational oil companies at Pande, Buzi and Temane in the Mozambique Basin proved the presence of hydrocarbons reserves, although at that point their commercial viability remained untested.[17] Political unrest during the struggle for independence followed by the civil war between Frelimo and Renamo halted further exploration or development of the hydrocarbons sector (at the time, also, international interest in petroleum resources was focused on the more lucrative crude oil sector). Recognising the potential of hydrocarbons as an energy input, however, the GoM established a national oil company, Empresa Nacional de Hidrocarbonetos de Moçambique (ENH), in the 1980s. This was followed by a mapping and appraisal exercise at Pande, where gas had already been struck in the 1960s.[18]

In the early 2000s Sasol drilled and successfully appraised the Pande and Temane fields, proving the commercial viability of gas reserves of around 2.7tcf, equivalent to 25 years’ production.[19]At an initial cost of $1.2 billion, Sasol, the South African government and the GoM together signed an agreement in 2000 allowing for the introduction of Mozambique’s gas into the South African market. [20] Project work on the venture began in 2002 and first production and export to South Africa took place in February 2004. With a total lifespan of 25 years, the project is structured in three eight-year phases. In the first of these (2004–2012) Sasol’s production capacity was 120 million gigajoules of gas a year (MGJ/a). The bulk of the product was exported to South Africa through an 865 km pipeline connecting the central processing facility near the Pande and Temane fields to Sasol’s facilities at Secunda in South Africa’s Mpumalanga Province. [21] The second phase, beginning in early 2012, has a production capacity of 183 MGJ/a, most of which will be exported to South Africa. A smaller proportion (27 MGJ/a) will be sold on the Mozambican market and 9 MGJ/a will remain in Mozambique as royalty gas. [22]

Figure 1. Natural Gas Fields in Mozambique: Operational and Proven Reserves

Figure 1 Natural gas fields in Mozambique operational and proven reserves
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The situation in the gas industry has changed since Sasol began its production and exports. In Mozambique, game-changing discoveries of conventional gas have been made in the Rovuma Basin, which could earn Mozambique billions of dollars in FDI and export revenues. Internationally, the use of relatively new technologies in the extraction of unconventional gas has given greater access to a previously inaccessible resource, thereby raising the profile of gas as an energy input in the fossil fuels market. In July 2005 the National Petroleum Institute (NPI), which is responsible for managing Mozambique’s petroleum resources and administers operations, announced Mozambique’s second petroleum licensing round, ‘focused on the Rovuma Basin off the coast of Cabo Delgado Province’.[23] Since that announcement multinational petroleum companies have entered Mozambique in search of opportunities in the gas sector. Subsequently two other licensing rounds were opened, with a fifth expected in 2013. To date, most of the interest in Mozambique’s hydrocarbons centres on the Rovuma Basin and on the Mozambique Basin in the central on- and offshore area. Current estimates from exploration by US company Anadarko Petroleum Corporation and the Italian integrated energy company, ENI, are that the Rovuma Basin alone holds in excess of 100tcf of the gas resource in place.[24]

 

The four petroleum licensing rounds to date have resulted in the GoM’s awarding several concessions for hydrocarbons exploration in 11 areas in the Mozambique and Rovuma basins. In accordance with the provision in Petroleum Law 3/2001 that ‘the State reserves itself [sic] the right to participate in Petroleum Operations in which any legal person is involved’,[25] ENH, as Mozambique’s national oil company, has a stake in each of the exploration blocks, allowing for direct representation of the national interest at decision-making level in every consortium. [26] The government, with ENH as its vehicle, expects to carry its shareholding through to the development of each of the blocks, a provision also enshrined in law. Despite current record annual economic growth rates, financially this undertaking will represent a major challenge for the GoM. ENH, however, believes that finance will not be a significant obstacle, and is ‘looking to banks and re-evaluating its assets’ to find ways of financing the next stage of development in the exploration blocks.[27] The company believes that it is in the national interest that it maintains a shareholding in the concession blocks, which can be used by the government to maximise the benefit of the gas revenues for the people.[28]

Tables 1 and 2 show each of the exploration blocks by operator and the share held by ENH as ‘GoM’s representative in the oil and gas industry’. [29]

Major discoveries in Area 1 and Area 4 have resulted in fierce bidding for stakes in each of the blocks as some companies have sought to relinquish their shares and others seek entry into this frontier area. As an example, in 2012 London-based Cove Energy PLC sold its 8.5% stake in Area 1 to Thailand’s national oil company PTT EP for $1.9 billion. In the first quarter of 2013, ENI committed itself to selling 20% of its stake in Area 4 to the China National Petroleum Corporation (CNPC), and currently a deal is pending on the sale of a 20% stake on offer in Area 1. As exploration begins in the other blocks in the Rovuma Basin there is a strong possibility that the trend towards trading stakes will continue.

Table 1: Exploration blocks in the Mozambique Basin

Block

Operator

ENH share

Sofala

Sasol

15%

M-10*

Sasol and Petronas (Malaysia)

15%

Areas 16 and 19

Sasol

15%

Area A

Sasol

10%

Buzi

PT Kalila Energy (Indonesia)

25%

Inhaminga

DNO International (Norway)

20%

* The well drilled by Sasol in Block M-10 has since been plugged and abandoned as it did not encounter any significant hydrocarbons. Preliminary exploration activities continue in the other blocks.

Source: compiled by author.

Table 2: Exploration blocks in the Rovuma Basin

Block

Operator*

ENH share

Onshore Area

Anadarko Petroleum

15%

Offshore Area 1

Anadarko Petroleum

15%

Blocks 2 and 5

Statoil (Norway)

10%

Blocks 3 and 6

Petronas

10%

Area 4

ENI

10%

*Most of the operating companies are in consortium with other international petroleum companies in their respective exploration blocks but these have not been listed.

Source: compiled by author.

The Rovuma Basin holds most of the gas resource so far discovered in Mozambique. Anadarko and ENI, the companies leading exploration in the Basin, have indicated that the volume of proven gas reserves justifies construction of a liquefied natural gas (LNG) facility on the coast. In December 2012 the two companies signed a Heads of Agreement that will allow for co-ordinated efforts in developing a LNG plant to receive gas from the offshore fields, and pre-treat and process it in preparation for storage and export.[30] There is a fair measure of certainty that most of the gas from the Rovuma Basin will be sold on the international market and Asian countries have already been identified as its primary customers.

There have been calls, however, from within government and from civil society, to ensure that the gas is also used domestically to address some of Mozambique’s pressing socio-economic challenges.[31] These problems in part have been inherited from Mozambique’s colonial past and from post-colonial socialist policies that failed to address the legacy of the long Portuguese occupation, 16 years of civil war between Frelimo and Renamo that began two years after independence, and post-transition policies that to date have been less than entirely successful in addressing major socio-economic problems.

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[1] Verma N, ‘Mozambique to offer new blocks in Q1 2013-ministry’, Reuters, 16 October 2012, http://af.reuters.com/article/investingNews/idAFJOE89F01D20121016.

[2] Personal interview, senior official, National Department of Mineral Resources, Maputo, 15 May 2012; personal interview, senior official, National Department of Planning and Development, Maputo, 17 May 2012.

[3] ICF International, ‘National gas master plan for Mozambique: Draft report executive summary’ was submitted to the Government of Mozambique Steering Committee 26 August 2012 with the full document expected in 2013. The document presents a summary of options available in utilising the gas as liquefied natural gas exports or for local industry. It recognises the need to benefit a broad base of society.

[4] Personal interview, senior official, National Department of Planning and Development, Maputo, 17 May 2012.

[5] Bucuane A & P Mulder, ‘Expanding exploitation of natural resources in Mozambique: Will it be a blessing or a curse?’ in De Brito L et al., (eds), Reflections of economic questions, papers presented at the inaugural conference of the Institute for Social and Economic Studies. Mozambique: IESE, 2007, p. 104.

[6] Ismail K, ‘The Structural Manifestation of the “Dutch Disease”: The Case of Oil Exporting Countries’, IMF Working Paper 10/103. Washington, DC: International Monetary Fund, April 2010, p. 4.

[7] IEA (International Energy Agency), ‘Golden rules for a golden age of gas’, World Energy Outlook on Unconventional Gas. Paris: IEA, 2012, p. 9.

[8] Op. cit. p. 10.

[9] Wright S, ‘An unconventional bonanza’, The Economist, 14 June 2012, http://www.economist. com/node/21558432.

[10] CPI (Centre for Investment Promotion in Mozambique), http://www.cpi.co.mz/; CIA (Central Intelligence Agency), Langley, https://www.cia.gov/library/publications/the-world-factbook/ geos/mz.html.

[11] Rasmussen HL, ‘Donors put brakes on Mozambique aid’, Mail and Guardian, 1 June 2010, http://mg.co.za/article/2010-07-01-donors-put-brakes-on-mozambique-aid.

[12] Bias E, ‘Exploration and mining opportunities in Mozambique’, presentation, Mining Indaba 2012, Cape Town, 6–9 February 2012.

[13] Ibid.

[14] Personal interview, Researcher, WWF (World Wildlife Fund), Maputo, 16 May 2012.

[15] Ribeiro D & J Dimon, Oil or Development: Results from a field study on the environmental and social impacts of oil exploration along the northern Coast, Justiça Ambiental, September 2011.

[16] Personal interview, researcher, WWF, Maputo, 16 May 2012.

[17] Noormahomed AR, ‘Overview of Mozambique’s natural gas and oil potential’, Presentation, Washington, DC, 29 November – 1 December 2006.

[18] NPI (National Petroleum Institute), ‘History of petroleum exploration in Mozambique’, http:// www.inp.gov.mz/Exploration-Production/History-of-Petroleum-Exploration-in-Mozambique2, accessed 10 July 2012.

[19] Sasol, Annual Review, Johannesburg: Sasol, 2004, p. 38.

[20] Sasol, ‘Presidents Chissano and Mbeki inaugurate natural gas venture in Mozambique’, Sasol News Centre, 1 June 2004, http://www.sasol.com/sasol_internet/frontend/navigation.jsp?articl eId=8500001&navid=4&rootid=4, accessed 10 July 2012.

[21] Personal interview, senior manager, Sasol Mozambique, Maputo, 17 February 2012.

[22] Esterhuizen I, ‘Sasol opens expanded gas processing facility in Mozambique’, Engineering News Online, 30 May 2012, http://www.engineeringnews.co.za/article/sasol-opens-expanded-gasprocessing- facility-in-mozambique-2012-05-30.

[23] NPI, Press release, http://www.inp-mz.com/Press.htm, London, 15 July 2005.

[24] Pretorius, op. cit.

[25] Republic of Mozambique, Petroleum Law No 3/2001 of 21 February, p. 6.

[26] Personal interview, senior manager, Empresa Nacional de Hidrocarbonetos de Moçambique (ENH), Maputo, 15 May 2012.

[27] Ibid.

[28] Ibid.

[29] Ibid.

[30] Anadarko Petroleum Corporation, ‘Mozambique: Developing natural gas’, Texas: Anadarko, nd.

[31] ICF International, ‘Natural gas master plan for Mozambique: Draft report executive summary’, Fairfax: ICF International, 26 August 2012, p. 1.


Ichumile Gqada holds a Master of Social Science degree in Global Studies from the University of Cape Town. A former researcher with the SAIIA Governance of Africa’s Resources Programme, she currently works at the Petroleum Oil and Gas Corporation of South Sfrica (PetroSA), where her research centres on the global hydrocarbons sector, with particular focus on natural gas.

Editor's note:

This is an excerpt from A Boom for Whom? Mozambique's Natural Gas and the New Development Opportunity, originally published by the SAIIA in August 2013. It is also available in the ISN Ditigal Library.

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