Can Mozambique Utilise Their Resource Wealth?
An Anadarko ship off the coast of Mozambique, Source: Anadarko Petroleum
In early July a consortium led by French energy giant Total SA finalised the securing of $15.8bn in funding for what will be Africa’s largest private investment. The funding makes up the bulk of a $23bn project which aims to utilise Mozambique’s abundant natural gas reserves in the oceans off the north east of the country.
The consortium is aiming to begin exporting the gas to the lucrative European and Asian markets by 2024 although has already experienced a series of issues in the projects infancy and these are likely to persist as the project develops. With rising Islamic militant insurgency which has become increasingly violent, the spread of COVID-19 and collapsing energy prices the project is under threat on multiple fronts and this development is at serious risk of failure should these issues fail to be kept under control.
The consortium led by Total will pump gas from deep offshore wells, liquefy the gas and then ship globally, targeting the Asian and European markets. The project has the potential to transform the Mozambican economy with estimates of the value of the project to Mozambique ranging from $38bn to $50bn – this could represent a radical development for a country who have a GDP of just under $15bn.
Based in the Rovuma basin just off the Cabo Delgado province in the north east it is estimated there is 65 trillion cubic feet of natural gas available which is the equivalent of 12 billion barrels of oil. Discovered in 2010 by American petroleum firm Anadarko the reserves represent one of the largest natural gas discoveries in recent years. Further exploration from Italian energy firm Eni SpA uncovered a further supply in Mozambican waters in 2011 making it one of the worlds largest sources of natural gas.
Total’s project who confirmed $15.8bn of funding from over 20 banks in early July is not the only one in the region with Exxon Mobil set to lead an even bigger project in the region. The US firm however have delayed their final investment decision on their $30bn project with falling energy prices and instability in the region raising questions over the profitability of the project. However, the concerns have not dissuaded Total’s backers which include major investors from the UK, Japan and India.
The beginning of Total's construction in Afungi, Mozambique. Source: Total
Arguably the biggest threat posed to the project is the rising insurgency in the region, and to successfully harness the natural gas resources developers will need to operate in the Cabo Delgado province which is amongst the most adversely affected regions. Recent months have seen a spike in the violence with a 300% rise in the number of Islamist extremist attacks in the first 4 months of 2020 compared to 2019.
Since the first attack 3 years ago 1300 people have been killed by the Islamic State (IS) affiliates, most notably a group named Ahlu Sunnah Wa-Jamo (ASWJ). IS have expressed a desire to establish a caliphate in the country and in a recent newsletter called on energy firms to back away from the investment claiming it was delusional for them to believe the Mozambican government could protect the development from the militia in the region.
Attacks have become more violent and ambitious with 52 civilians killed in the town of Xitaxi in April and insurgents seizing and occupying Mocimboa da Praia for 3 days in late June – this is particularly concerning for investors as the town is an important port-town 60km south of the project site. The government so far have been ineffective in their attempts to reduce the spiralling violence, soldiers are poorly equipped and demoralised and oppressive attempts by the government to regain control have only furthered radicalisation amongst the young population of the northern provinces who have grown frustrated at the lack of opportunity to escape poverty.
The Mozambican government have sought alternative measures to control the violence by introducing private security groups to the region. However, this has not been particularly successful – Russian Wagner group withdrew from the region after suffering casualties engaging with the insurgents and their South African replacement in Dyck advisory group have failed to quell the rapid rise in attacks. If this issue cannot be addressed then it becomes increasing less likely that Exxon will go ahead with their project and may impact the boost to the Mozambican economy of the Total development. It is therefore essential for Mozambique that they find a way of controlling this violence if they want to remain an attractive place for investment.
COVID-19 has also added to the nation’s problems – and it has hit the project hard with Total’s site responsible for a major proportion of cases in Mozambique, at one point three-quarters of the confirmed cases in Mozambique were on Total’s site. It has since been cleared of infections and the pandemic has had far less of an impact in Mozambique than it has in more developed countries. However, whilst travel remains restricted and fears of virus linger the project is likely to be slowed as it relies on workers and equipment from abroad.
COVID-19 has also brought collapses in energy prices with widespread falls in global demand as well as oversupply of oil as OPEC stalled on agreeing a deal to cut production. Natural gas prices hit 25-year lows in late June and with a supply glut persisting it can be expected that prices will remain low which will impact the return on Total’s development. The Mozambican government are determined to ensure the success of the project with the lucrative reward it has the potential for. Not only could the exportation of liquefied natural gas (LNG) help lift the country out of poverty but could also offer a lifeline to help the government struggling in a debt crisis.
Having already suffered sovereign defaults and a loss of credibility following a loan of $2bn for a fishing fleet that has not materialised president Filipe Nyusi is desperately attempting to repair international reputation of the government. Mozambique have a Eurobond restructured in 2019 that will see the coupon on the $900m debt double to 9% in 2024 – it is imperative therefore that the LNG project stays on track and exports have begun by then. Nyusi has claimed the state are “working day and night” to combat the insurgency and is adamant that they can contain it, although their dire track record means doubts cloud the future of the project.
President Filipe Nyusi, Source: AP Photo
As well as the internal issues that plague the development there are also international criticisms of the project. The main critics are environmentalist groups who say the project locks in the use of fossil fuels for the foreseeable future, this has been countered with the argument that natural gas acts as a transition fuel as releases less harmful emissions than other fossil fuels and can be used to bridge the gap as the world moves to cleaner energy sources. Critics have also claimed that the project will not bring the touted benefits to the local population.
With many African countries that have a wealth of natural resources their exportation has led to massive inequality, corruption and violence with only a small minority profiting from the resource, in other cases foreign corporations have exploited the resource and used foreign labour and capital which has therefore meant that local communities have enjoyed little benefit from the resources. Total have pledged to involve the local community in their development claiming $2.5bn of the funds raised will go to local firms and 5,000 out of the 14,000 hired workers will be Mozambican. Whether these pledges will materialise remains to be seen but it does highlight the emphasis Total are placing on ensuring the project is of benefit to the locals.
Mozambique’s abundance of natural gas offers a chance for the company to escape poverty, however, to ensure they can efficiently utilise this resource they need to purge the multitude of issues that threaten the success of the Total project and whether the Exxon project will go ahead. If the previously troubled government can control the violence and ensure the safety of the project there is every chance that Mozambique can flourish. However, it seems unlikely that the struggling government will be able to quell the insurgency and there is little they can do about the other issues that the project faces in low energy prices and the global impact of the COVID-19 pandemic.
Africa’s biggest investment has the potential to bring great wealth to a struggling region but with all the obstacles the project faces it is difficult to envisage a situation where Mozambique enjoy the full potential of their natural gas reserves.