by Anthony Guida and Ryan McKinley

The world-wide search for natural gas has led to new findings in some of the most underdeveloped areas on the globe. Twenty years ago, a relatively obscure Mozambique would be one of the last places you would expect investors stepping over one another to claim their stakes.

Mozambique gained independence from Portugal on June 25th, 1975 after a prolonged struggle with its colonial overlords.  The military leaders, who lead a 12-year resistance against Portugal, quickly established a one-party state and allied themselves with the Soviet bloc. The first decades of independence were dominated by civil war and by the government’s inability to create stable institutions. According to a BBC Mozambique profile, Mozambique has emerged as one of the world’s fastest growing economies, despite its tumultuous past, with government reforms and influxes of foreign investors showing interest in the country’s gas reserves. For now, it seems Mozambique is poised to become a key international gas exporter, all the while seeking help from external actors to avoid the dreaded ‘resource curse’.

IMF predicts Mozambique’s GDP per capita to rise from $579 in 2012 to $963 by 2017.

The potential impact on the countries GDP is expected to be drastic. In 2012 there was a GDP growth of 7.5%. That number will likely reach 8.5% in 2013 with the IMF predicting GDP per capita to rise from $579 in 2012 to $963 by 2017. Overall, projections of GDP indicate an increase somewhere on the order of 6-9 times its current level, rivaling many of that of many of its neighboring countries.

Taking Inventory: Mozambique’s Gas Assets and the Competition for Control

As of 2012, Mozambique is estimated to be sitting on anywhere from 104 to 250 trillion cubic feet (Tcf) of natural gas reserves, making it potentially the third largest natural gas exporter. Put into perspective, this amount is enough to supply Germany, Britain, France and Italy for roughly 15 years. The majority of these reserves are found in two areas: the Rovuma Basin (harboring the lion’s share of resources), located offshore on the Tanzanian border, and the Mozambique Basin which includes assets: on and offshore, located near the coastal provinces of Imhambane and Sofala. The location of these reserves augments Mozambique’s competitive advantage as they are located on the coast, allowing for easier exports to international markets. Even the most conservative estimates of proven gas reserves are substantial. Rovuma-4 has alone identified gas reserves of 75Tcf, larger than the total proved reserves of Norway and Kazakhstan at 73Tcf and 66Tcf respectively.

Government Control: The Role of Mozambique’s National Oil Company

According to Mozambique’s petroleum laws, the state reserves the right to participate in petroleum operations. Mozambique’s national oil company, Empresa Nacional de Hidrocarbonetos (ENH), was established in 1982 and is the tool the government uses to ensure it has a stake in each of the exploration areas. The government also participates in the hydrocarbon sector through two other publicly owned corporations via the Mozambique Hydrocarbon Company and Mozambique Company for the Gas Pipeline, both of which are subsidiaries of ENH.

Rovuma-4 has alone identified gas reserves of 75Tcf, larger than the total proved reserves of Norway and Kazakhstan at 73Tcf and 66Tcf respectively.

Given the country’s turbulent history, it is critical for investors that Mozambique have a well-established and stable state infrastructure. ENH is essential in this regard, because it serves as a legitimate institution with which investors and other foreign entities can interact. ENH intends to serve as a catalyst for gasifying Mozambique and meeting the socio-economic goals of the country. ENH is able to maximize the benefit of the gas revenues for the people of Mozambique, it claims, by maintaining its stakes in each of the exploration areas. ENH holds anywhere from 5% to 30% of shares in each area, and owns subsidiaries that manage national interests in the Pande and Temane gas fields, as well as the pipeline from Pande-Temane to South Africa. While the company’s primary focus may be improving the lives of Mozambicans, the Chairman and CEO of ENH has made ambitious plans to export gas to prime markets located in the Far East and Asian-Pacific.

Mozambique LNG Scope

At the turn of the millennium, the Asian region constituted nearly three-quarters of world-wide LNG trade; such domination is expected to continue up to 2020, maintaining 50-60% of global market share, even as Atlantic and Middle East demand rise. Since 2006, Qatar has replaced Indonesia as the world largest LNG exporter, accounting for roughly 30% of global trade in 2011. The annual average growth rate (AAGR) of global LNG imports is projected to exceed the 400mt mark by 2020. The gap between production and consumption combined with the geographic isolation of the Asia/Pacific region makes it an attractive market, as dependence on gas imports is extremely high.

In mid-December, ENI, an Italian NOC partnered with Anadarko, a North American oil and gas exploration company signed a Heads of Agreement, formalizing the cooperative development of upstream infrastructure, pooling resources to reduce costs, a move highly encouraged by the government which sought to protect its ENH’s project stakes. Having not yet defined fiscal and royalty policies, a looming question for Mozambique is when these projects will reach a FID. Estimates foresee the first sales reaching the market in 2018/2019.

The government plans call for two LNG trains to be operational by 2018 with the addition of two trains every two years to total at least 10 LNG trains by 2026 for a total capacity of 50mtpa.

In recognizing the possibility of Australian and N. American LNG competition, the government has set aggressive development targets (considered optimistic in relation to operator timetables) though the declared 100Tcf and undiscovered 250Tcf give space for wishful thinking: the government plans call for two LNG trains to be operational by 2018 with the addition of two trains every two years to total at least 10 LNG trains by 2026 for a total capacity of 50mtpa. The way Mozambique indexes its gas will impact its level of competitiveness. Given the discontent between world oil prices and hub indexed gas prices in North American and Europe, Asian buyers are fighting for the inclusion of hub indexation in LNG LTC-supply contracts.

The companies that already hold significant interests in exploration permits include: Anadarko, ENI, Petronas, Statoil, and Total, and Maurel & Prom.

Asset Bidding wars

Natural gas is, for the moment, being produced by South African company Sasol Ltd only at the Pande and Temane fields in the Inhambane Province. With substantial gas discoveries in Rovuma-1 and Rovuma-4 and production expected to begin in 2018, conditions have created a bidding war for stakes in each block as some companies are seeking to let go of their shares. Anadarko, for example, generally sells off its stakes in large projects that require years of work and large investments to begin production, so that it can invest in projects that offer much faster returns. The company is currently seeking to sell off its shares in Mozambique to raise money for investments in unconventional oil formations in the United States. The companies that already hold significant interests in exploration permits include: Anadarko, ENI, Petronas, Statoil, and Total, and Maurel & Prom.

As of now, the biggest bidding war has been between Shell and PTTEP for stakes in Rovuma-1, at the time holding an estimated 35Tfc, with PTTEP beating out Shell for an 8.5% stake, estimated at 12 Tcf of gas, with a bid of $1.9bn. Since then, the estimated recoverable resources of Ruvuma-1 have doubled to 65 Tcf. Nationally owned companies have also acquired major stakes in the gas fields, most notably from China and India. Indian companies OVL and Oil India are expected to close on a $2.47bn and $2.64bn deal in Ruvuma-1 by the end of 2013. Chinese CNPC acquired a 28.57% stake from ENI East Africa with an investment of $4.21bn, giving it access to a 20% stake in Ruvuma-4.

Role of the Domestic Market and Regional Demand

Gas reserve extraction is predicted to create about 70.000 additional jobs. By this month of writing, November, 2013, ENH hopes to have installed a working grid capable of supplying gas to industries, hospitals, hotels and residential users. Due to the lack of data, it is difficult to forecast gas use in Mozambique, keen on increasing natural gas use in power generation. The government is expecting growth in energy consumption and intensity. With an electrification percentage of 16%, Mozambique must increase its power capacity and encourage additional growth stimuli for alternative power generating sources such as hydropower (responsible for 99% of generation in 2010) and coal (large untapped reserves).

With the exception of South Africa, the scarcity of regional gas demand foreshadows slim opportunities for pipeline developments within the East African region.

The Ministry of Mineral Resources stated that all concession holders are obliged to commit a portion of their production to domestic markets (DMO, Domestic Market Obligation). Depending on what the domestic market price is, such maneuvers could impose additional pressure on existing projects; high LNG prices would force domestic buyers to seek upstream suppliers forcing the government to subsidize the difference as part of its social policy (selling royalties and profits below the gas’s expected international price) to encourage gas use in local SME’s.

In 2012, South Africa imported 3.3bcf from Mozambique. Calls for the South African government to reconsider its energy policy have increased dialogue between the two countries. During the same year Michael Bagraim, president of the South African Chamber of Commerce announced that natural gas imports from Mozambique may eliminate the need for nuclear power and concretely diminish C02 emissions.

The Natural Gas Master Plan estimates total project revenues at $5.2 billion per year up to 2016 (the GDP in 2011 equaled $12.8bl); although fiscal terms still need to be adopted, royalties and taxes are predicted to generate circa $3 billion per year.

With the exception of South Africa, the scarcity of regional gas demand foreshadows slim opportunities for pipeline developments within the East African region. From 2009 to 2010, only Congo consumed gas (3.3bcf); combined with Burundi and Rwanda the electrical consumption was less than 1bn KWh. Such regional scarcity equates to insufficient demand for making pipeline and grid development unfeasible.

Government intervention regarding gas resource management

As trading greater volumes implies greater revenues, effective resource management will be paramount in directing new income towards infrastructure and improving the domestic economy. There are numerous instances where this has been overlooked. One example of resource mismanagement is Nigeria, comparable by oil export volumes, which underwent enormous hardships once it began exporting its resources. Norway, as a counter example, could potentially be a model for the Government of Mozambique (GoM) to follow by placing an emphasis on effective resource and revenue management. In short, the government needs to manage its hydrocarbon resources effectively to minimize the potentially negative effects of its resource endowment.

Financing and Revenues

The expression ‘money makes the world go round’ stresses the need for a reliable financial framework. ICF international, an organization which helps nations with management, technology, and policy issues, has guided the GoM through the creation of a Natural Gas Master Plan. This plan essentially segregates and directs the finances of Mozambique appropriately, while ensuring that the business climate remains stable and transparent. Currently, Mozambique, which has established a set income tax of 32%, has an investment rate of 22% (10% private, 12% public). The financial plan acknowledges the proposed LNG development (exploration, production, processing, and liquefaction, export) to be financed by ENI and Anadarko. Transportation infrastructure however, might involve elements of public funding and/or PPP’s (Public Private Partnerships). Local government budgets or micro-credit institutions would be responsible for financing distribution infrastructure needed for small or medium sized enterprises (SMEs) public facilities and residences. The Natural Gas Master Plan estimates total project revenues at $5.2 billion per year up to 2016 (the GDP in 2011 equaled $12.8bl); although fiscal terms still need to be adopted, royalties and taxes are predicted to generate circa $3 billion per year. Three basic options have been identified by the Natural Gas Master Plan as strategies to direct prospective gas revenues towards societal development. Unfortunately, details on this plan are minimal as it is still being drafted.

Option 1: Using royalties revenues to finance public-private investments projects under Mozambique’s new PPP law.

Option 2: The creation of a Sovereign Wealth Fund (SWF). This would invest within the local economy, and in external markets where returns may be higher.

Option 3: The creation of a National Development or Transformation Bank (NTB). This option would use royalty revenues to establish a development bank to be used as vehicle to direct investments in development projects.

Liquid Petroleum Goods Diversification

The Natural Gas Master Plan for Mozambique characterizes LPG anchor goods (primarily methanol and fertilizer) as ‘mega-projects’, hypothesizing the potential in the manufacturing of value added products on national territory to then be exported to foreign markets.

Investing in LPG products can therefore be considered as a safety net (product diversification) in response to increased competition.

Despite requiring an airstrip and being a 3 day, 2,800km drive from the capital Maputo, Palma, known for basket weaving and rug making, is conveniently located within proximity of the Rovuma field. To minimize midstream expenditure and obtain the earliest gas commercialization revenues, all projects (LNG & LPG) would be hosted in the village.

The primary purpose of methanol lies within industrial chemical production, an industry with exceptionally high demand in China. The GoM has estimated the returns at $180ml in government revenue. Even more lucrative is the potential for fertilizer, a product correlated to population growth and increased agricultural production. The foreseen income of fertilizer production is $220ml in government revenue. In reaction to the U.S. shale gas revolution, China, India, South Africa and Australia have prioritized shale gas E&P, hoping to increase their shares in global LNG trade. These countries’ favorable geographical position increases the chance of displacing volumes from Mozambique. Investing in LPG products can therefore be considered as a safety net (product diversification) in response to increased competition.

Conclusion

Government stability plays an important role. Resources rich countries often become more vulnerable to violence, and interchanging political powers will reduce the scope for effective policy planning. Stable investment infrastructure coupled with legal and regulatory frameworks will protect investors (and lower interest rates) against earnings inflation and exchange rate instability. Mozambique has found a rare opportunity to integrate into global markets. Current events reflect the nation’s interest in collaborating with international communities to become efficient and effective: both in extracting and exploiting natural gas, and in improving the economic situation to benefit its population. Whether or not Mozambique will develop into an African state role model will be determined by its ability to put its plans into action.

Anthony Guida and Ryan McKinley are MA students in the ENERPO Program at European University at St. Petersburg.

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