Mozambique, a country home to more than 27 million people and covering an area larger than France and the United Kingdom combined, has faced many political and economic challenges since its independence from Portugal in 1975. From 1977 to 1992, Mozambique was immersed in a civil war, supported by the military aid from the Soviet Union in its ever-expanding efforts to disseminate the communist ideology across the world. The fight between the pro-communist government in Mozambique and the anti-communist Mozambican National Resistance (RENAMO) devastated the country and was responsible for the death of near one million Mozambicans and the displacement of 4.5 million to neighbouring countries.
The Mozambican Story
Mozambique, a country home to more than 27 million people and covering an area larger than France and the United Kingdom combined, has faced many political and economic challenges since its independence from Portugal in 1975. From 1977 to 1992, Mozambique was immersed in a civil war, supported by the military aid from the Soviet Union in its ever-expanding efforts to disseminate the communist ideology across the world. The fight between the pro-communist government in Mozambique and the anti-communist Mozambican National Resistance (RENAMO) devastated the country and was responsible for the death of near one million Mozambicans and the displacement of 4.5 million to neighbouring countries1.
After many years of chaos, Mozambique finally experienced a period of blossoming economic growth following 2001. Several major foreign investment projects, continued economic reform, and the revival of the agriculture, transportation, and tourism sectors were key factors propelling the country towards a sustained annual GDP growth greater than 5.8% since 2005, and over 7.0% from 2011 onwards. According to the World Bank, the forecast of the annual GDP growth until 2017 in the country is greater than 7.4%.
Adding to this economic boom, the discovery of immense natural gas reserves came as a sign from above that prosperity in Mozambique would be unstoppable. One decade ago, no one would have guessed that Mozambique would be among the countries with the largest natural gas reserves in the world. The country has proven reserves of 100 trillion cubic feet, and in 2014 it ranked 14th among the countries with the largest natural gas reserves, according to the Central Intelligence Agency (CIA)2.
The huge potential resting in Mozambique‘s subsurface is still to be fully exploited. Currently, Mozambique’s natural gas production is only 152 Billion cubic feet per year, making the country the 54th largest producer in the world3. It takes time and heavy investment to develop the infrastructure necessary to extract, transport, refine and ship the natural gas. In contrast to crude oil, natural gas has to be cooled to -162oC (-260oF) and transformed into liquid in order to be exported to other countries, through cryogenic vessel tanks or liquefied natural gas (LNG) tankers. This process is very capital intensive; oil and gas companies balance the potential revenues against the risks of investing in a country where the lack of transparency is still present. The crash in the gas price, which more than halved in the past 12 months, was an additional setback, making O&G operators extra careful before making a final investment decision (FID) on greenfield projects.
Anadarko and Eni, two oil majors from the USA and Italy respectively, signed an agreement in December 2012 to build onshore LNG liquefaction facilities in the Cabo Delgado Province of northern Mozambique. The companies operate two offshore blocks in the Indian Ocean, called Area 1 (Prosperidade and Golfinho/Atum complexes) and Area 4 (Mamba complex and the Coral site)4. The joint agreement aims to explore the fields, which in total contain 75 trillion cubic feet of recoverable natural gas. The development of all the infrastructure and the continuous exploration and production of this resource, is estimated to generate 700,000 direct and induced employment opportunities for Mozambicans by 2035. It will be an opportunity for substantial tax and revenue generation for Mozambique. During this development, local infrastructure will be expanded and improved: the transport infrastructure will be increased (roads, air and ports), water and electrical distribution will be extended, and social support systems, such as housing, health care facilities and schools, will be developed.5
Although the decision to jointly develop the infrastructure and explore the natural gas was made when oil and gas prices skyrocketed, both companies still remain committed to the original goal of developing gas exploration and processing infrastructure.
In August 2015, Anadarko obtained 90% of the heads of agreement, or non-binding accords, it needs to finance an onshore liquefaction plant. The company secured sales of gas contracts for 8 million metric tons a year with customers in Japan, China, Thailand and Singapore6. Now it is only a matter of how much time the government will take to agree with the legal and contractual framework and approve the necessary permits7. More recently, in October 2015, ExxonMobil, Eni and South Africa’s Sasol won bids to explore new natural gas blocks offshore Mozambique, in the northern Rovuma Basin. As for now, more than US$30 billion is expected to be invested in the natural gas sector to build capacity to produce 20 million tonnes per year of liquefied natural gas (LNG), with first exports due to start in 2019-20208. The International Monetary Fund (IMF) forecasts that the country is expected to grow an additional 2 percentage points until 2023 as a result of the potential natural gas production.
In the wake of all this impending boom of growth, port infrastructure is being built in Pemba and Palma. Palma is located in the north, near the border with Tanzania, while Pemba is located 350km to the south. Pemba will be the main energy hub, while Palma will hold up to 14 gas-to-liquid plants to liquefy natural gas. Two initial plants will be built at a cost of more than US$16 billion. For a comparison, Mozambique’s GDP in 2014 was US$16.4 billion.
Pemba, once a sea of tranquility, is bursting with new businesses nowadays. Real estate is being developed and all sorts of businesses to support the natural gas exploration are being born. The development is creating jobs and attracting Mozambicans from all corners of the country9.
Palma is a small town up north with unpaved roads, houses built on bamboo poles and covered with grass-type roofs, very limited electricity and water systems, and an economy centered on fishing. As such it is one of the least developed regions in this former Portuguese colony. The development of this small region is happening fast. More than 17,000 hectares of inhabited land will be used in the development of the natural gas exploration infrastructure; 11 communities, with 3,000 people, will have to be resettled10. In 2014, the Directorate of Infrastructure of the District of Palma received more than 600 applications for land purchase, of which 100 was for investment and the remaining for multiple purposes. Land set aside just for housing totaled 11,000 hectares11.
The resettlement process is not going smoothly though. In May 2015, an assessment was conducted by retired Supreme Court judge, João Carlos Trindade, on the legality of the land use rights granted to Anadarko and to the Mozambican publicly owned National Hydrocarbon Company (ENH). The rights deal with the use of 7,000 hectares of land in the Afungi peninsula to build LNG plants. The basis to question the legality of the permits is centered on the fact that they were not granted directly to Anadarko and ENH, but to a shell company formed by the two companies. Although it is looked at as a minor argument, a court case might conceivably delay work on building the LNG factory12.
Centro Terra Viva (CTV), a Mozambican NGO focused on preserving the environment integrity of the country, joined the case by reinforcing legal loopholes Anadarko and ENH are incurring13. They also alleged that members of the institution have been harassed and intimidated by the local government, in order to keep them from creating controversies within the communities where the natural gas projects will take place14.
There is a lot of anxiety and expectation in the air. Palma, Pemba and the other cities will evolve from fishermen villages to a complex system that will be one of the largest natural gas exporters in the world. This unexpected discovery can bring lots of wealth to Mozambicans, but it certainly brings a good amount of disputes too.
The Tanzanian Gas Discoveries
Heading north, gas plans in neighbouring Tanzania are unfolding at a much slower pace. With potential natural gas reserves of 55 trillion cubic feet, the country has enough to meet about 11 years of demand from U.S. homes15.
Tanzania has just held its 2015 presidential elections, with the ruling party candidate, John Magufuli, declared the winner. The defeated party does not acknowledge the results and demands a clearer vote counting system. The parliamentary elections, held at the same time, saw the ruling party failing to secure several seats in the national assembly16. The dominant party is losing power and, although this may result in a stronger democratic Tanzania, in the international investors’ eyes, this is seen as uncertainty in the short term.
Ninety percent of the natural gas reserves in Tanzania are located offshore. This makes extraction difficult and more costly. The plan, as for now, is to construct an LNG plant with a capacity of processing 10 million tons of gas per year; it will be up and running by 2020. However, fiscal and regulatory uncertainties, the low gas prices and higher exploration and production costs compared to neighbour Mozambique, will likely delay this date. The Bloomberg New Energy Finance (BNEF) report from August 2015 says that the start of exports will probably be pushed to 2025 at the earliest. The natural gas production would be consumed internally; any surplus would be sold to neighbouring countries, including Rwanda, Burundi and the Democratic Republic of Congo.
As part of the investments to use natural gas within the country, Tanzania is building a gas processing plant and a 532 km gas pipeline connecting the city of Mtwara, near the border with Mozambique, to its commercial capital, Dar es Salaam, in the north. Gas will be pumped to Dar es Salaam and help relieve chronic power shortages in the city. The US$1.33 billion project, largely financed by a Chinese loan, is part of a plan to add about 2,000 megawatts of new gas-fired electricity generating power by 2018 to increase Tanzania's generating capacity to 10,000 MW by 202517.
McKinsey estimates a regional potential of about 400GW of gas-generated power by 2040, with Mozambique, Nigeria and Tanzania accounting for 60% of the total.
Impact on Mozambique and Tanzania
Tanzania and Mozambique face a unique opportunity, i.e. to blossom and experience a boom in development. But will these countries be able to manage the immense and sudden influx of wealth the “gas dollars” will bring? Or will they fall victim to the “resource curse”?
There is a good chance the natural gas exploration will increase inequality in both these countries, and, even more seriously, it could raise the potential for conflict. Both Mozambique and Tanzania have been experiencing signs of political upheaval in the recent years. This is very likely to intensify with the increase in gas revenues. In Mozambique, once gas starts being exported, estimated to be in 2020, the government is expected to earn around US$20 billion a year from the developments, which is triple the country's current annual budget.
International investors are doubtful whether the governments of these countries will be able to handle such amounts of money, given the relatively underdeveloped institutions to ensure transparency and accountability.
In 2012, the government of Mozambique issued a US$850 million bond to start Ematum, a state-owned tuna-fishing company. It was found that US$500 million of this amount ended up being channeled to defense spending. In addition to this, Mozambique's total debt has risen to 58% of its annual economic output, up from 37% in 2013. As a result, Standard & Poor's downgraded Mozambique's credit rating in July 201518.
A strong and consistent improvement in education, an expansion of social welfare, and a realistic plan to diversify the economy assuring continuous growth when the gas boom ends, are paramount. Otherwise Mozambique and Tanzania risk following the path of countries such Angola, where an International Monetary Fund fiscal audit was unable to account for hundreds of millions of dollars of oil revenues. Or Nigeria, Cameroon and the Republic of the Congo, where the oil wealth has failed to generate development, and has instead generated deep-seated corruption that retards growth19.
The Singapore Connection
At the same time Mozambique and Tanzania make these first steps into becoming major natural gas exporter, 4,500km away, Singapore has daring plans to grow into the preferred trading hub for Liquefied Natural Gas (LNG) in Asia.
Singapore’s location is strategic to take advantage of the future gas exports from East Africa and, currently, it is already trading LNG from exporting regions such as Australia. The country is already Asia’s leading oil pricing and oil trading hub and therefore already has considerable infrastructure in place: it gathers major buyers, sellers and decision makers in a same place; it has a pool of highly-skilled human capital in a multi-lingual environment; it has wide availability of financial and trading instruments; internationally recognized legal, regulatory and tax frameworks; and attractive fiscal policies and incentives.
Singapore imported its first LNG in March 2013 and currently has 3 storage tanks with total throughput capacity of 6 million tonnes per annum (Mtpa). Further expansion began by the end of 2014, with regasification facilities to be completed by 2017 and a fourth storage tank by 2018, increasing the annual capacity to 11 Mtpa.
In December 2014, the Singapore Energy Market Authority (EMA) received nine bids from suppliers, from which three will be shortlisted to become LNG aggregators in the city-state20. Diversification is important as 95% of Singapore’s electricity is generated through natural gas21.
By January 2016, Singapore Exchange (SGX) plans to launch a mix of financial instruments to allow more flexibility on the contracts for liquefied natural gas. These contracts will be the first based on a price index created in Singapore and expected to become the new benchmark for LNG pricing in Asia. It is called after Singapore’s most famous drink: SLInG22. The Singapore SLInG will be used to develop products such as financial swaps for hedging purposes, and eventually in developing a physical delivery mechanism in Asia23.
The plan to become an LNG hub in the region gains momentum with the growing trend in Southeast Asia to adopt small scale LNG solutions. The region has numerous small and remote islands, and as such small LNG processing plants would be the only way to provide gas to locations not connected to the gas pipelines network.
Singapore will use its growing storage capacity to receive large LNG shipments and distribute them to smaller LNG tankers that will then supply the regional market. The past years saw a growing demand for LNG contracts on volumes smaller than one million tonnes a year24. Pavilion Energy, the LNG unit of Singapore's state-owned investment company Temasek Holdings, and companies such as Shell, Tokyo Gas and Indonesian Pertamina, are investing heavily in small scale LNG solutions.
In September 2015, Indonesia's state-run utility, Perusahaan Listrik Negara (PLN), had lined up 11 bidders for a tender to supply and ship liquid natural gas to small-scale LNG plants to be built across 32 locations in the archipelagic nation. The project will distribute 35,000 MW in Indonesia25.
Singapore will link the natural gas producers in East Africa to the buyers in Asia, providing an organized marketplace for LNG in the region, and as such following a switchboard business model. Mozambique and Tanzania will be the main players in the West, now just a few years away from having all the infrastructure and production ready to start pumping natural gas to the LNG tankers in port terminals in East Africa. By that time, Singapore will be the major LNG trader in Asia, holding a strategic position in the storage and distribution of LNG in the region.
The writer,Otavio Veras, is an adjunct researcher of the NTU-SBF Centre for African Studies at the Nanyang Technological University.
 Standard Bank – Mozambique LNG Macroeconomic Study