Gas Resources & The Quest for Economic Development

5
Jul

Gas Resources & The Quest for Economic Development

MOZAMBIQUE’S NATURAL GAS RESOURCES AND THE QUEST FOR ECONOMIC DEVELOPMENT.

Introduction

Mozambique is a country endowed with mineral resources and discovered massive offshore natural gas. The country is also strategically located because four of the six countries that border it are landlocked, and hence dependent on it for their link to global markets. Mozambique’s strong connection to South Africa, the region’s economic power, accentuates the strategic importance of its economic, political, and social development to the stability and growth of the entire Southern Africa region.

 

The macroeconomic conditions of the country are improving, but the economic performance is still slow, yet to meet the expectations of the government and international development partners. Real gross domestic product (GDP) growth is estimated at 3.3% in 2018, down from 3.8% in 2016. A slight recovery in growth is expected, projections stood around 4% of GDP for 2019 and may be higher in the medium term if gas production investments are realized. From 2023, official estimates expect real GDP growth to reach 8 to 10 per cent annually to be boosted by LNG net exports that could attain $7.4 billion annually. In her quest for economic development and growth, Mozambique, no doubt, will count on the exploitation of its natural resources to undertake the needed economic reconstruction of the infrastructures that were severely damaged by the effect of the two Cyclones that devastated the country and affected 1.5 million people in March and April this year.

 

Discovery and Development of Natural Gas Resources

Although Mozambique currently produces no oil, Anadarko and Eni discovered vast quantities of gas since 2010 offshore Rovuma Basin, near the border with Tanzania. The county’s current natural gas production comes from Sasol operated blocks in Inhambane Province, which holds reserves of around 2.6 Tcf. Recent estimates put Mozambique’s proven natural gas reserves at 100 Tcf, compared to only 4.5 Tcf in 2011. This means that Mozambique is Africa’s third largest proven gas reserves after Nigeria and Algeria. Depending on when the projects are completed, it could also become the world’s third-largest LNG exporter after Qatar and Australia.

 

The International Energy Agency (EIA) believes that Mozambique could receive over US$115bn in gas revenues over the next 25 years. Since the discovery of natural gas reserves in Mozambique, it has generated profound excitement among the people and the government. For the country, one of the world’s least developed countries, the finds have promised to make a real difference in the economic situation of the people. However, early hopes that two major LNG projects could come onstream in 2018 have been dashed by deteriorating global conditions and domestic factors. Fresh LNG momentum Development of the Rovuma natural gas reserves, which contain around 75 trillion cubic feet (Tcf) of recoverable gas in Area 1 and some 85 Tcf of gas in place in Area 4, has been slow in its take off.  Initially anticipated to come onstream in 2018, official projections now expect LNG production to start in 2023, with gas exports reaching 18 billion cubic meters around 2024.

 

Resolving Fiscal and Debt Challenges with LNG revenues

The country’s status as an emerging LNG producer will fundamentally reshape its political economy, all the more so because the LNG ventures are the only hope of the government of resolving its fiscal and debt challenges over the next two decades. However, the real revenue windfall is not expected to occur before the early 2030s. Nevertheless, the government’s fifth licensing round highlighted regulatory uncertainties over changes to the Petroleum Law, including domestic market obligations and local content regulations. Deals with international players (ExxonMobil, Eni, and Sasol) are finally within reach after the government agreed to amend regulations requiring upstream companies to list on the local stock exchange. In the long term, a tight fiscal and debt outlook into the late 2020s, combined with growing public pressure to spread the benefits of the LNG revenue windfall, could lure the government to tap the country’s most important income source in the production phase. Resolving the fiscal and debt challenges is very critical to using the natural gas resources for the economic development of the country.

 

Economic Development Challenges

Economic growth is likely to be sharply weakened this year due to the devastating impact of Cyclones Idai and Kenneth. The country’s large fiscal deficits and heavy public debts, which are likely to worsen as a result of emergency assistance and reconstruction costs of the storms, dampen the short-term outlook. In June 2019, some analysts see the economy growing 1.6% in 2019, which is down 1.0 percentage point from an earlier forecast, and 4.1% in 2020. The government estimated that funding for post-cyclone reconstruction will require $3.2billion.  Even though the international development and donor partners have pledged total funding of $1.2billion to rebuild infrastructures across the country, the funding gap for reconstruction will definitely be met by revenues from the exploitation of natural gas resources.

 

Mozambique held its 7th oil and gas licensing round in the first half of 2018. This should accelerate the development of its natural gas reserves in a period of growing supply and stabilizing low global commodity prices. Moreover, there is now competition from Tanzania as it also seeks to become an LNG producer. Looking ahead, there are large supplies of natural gas in the global market, in addition to low regional and domestic demands, which means that exploration and investment may be slower than the Mozambique government would like.

 

In the quest for using the natural resources for developing the economy, the main challenges include maintaining the macroeconomic stability, considering exposure to commodity price fluctuations and upcoming general elections, and reestablishing confidence through improved economic governance and increased transparency in the management of the country. Besides, structural reforms are needed in support of the currently struggling private sector.  Another major challenge for the economy is to diversify away from the current focus on capital-intensive projects and low-productivity subsistence agriculture toward a more diverse and competitive economy.  There is the need to strengthen the key drivers of inclusion, such as improved quality education and health service delivery, which could, in turn, improve social indicators.

 

Mozambique will have to wait until 2023 to achieve economic growth of 7.5%, according to forecasts by the Economist Intelligence Unit (EIU).  In the latest report on the country, which covers the period between 2018 and 2023, the EIU analyst expects a smooth progression of the growth rate, which at 5.0% in 2022 is projected to increase by 2.5 percentage points the following year, when the beginning of exploration of large deposits of natural gas is expected.  In 2018 the EIU projected a growth of 3.5%, but the following year estimated a small contraction to 3.4%, due to the fact that agricultural producers will find it difficult to obtain financing as well as the fall in coal prices. The report said that the government’s fiscal and debt problems, coupled with late payments to government contractors, will continue to play a significant role in the financial system and undermine the confidence of potential investors. The same document predicts that gross fixed capital formation or investment, which was expected to fall by 12.5% in 2018 will recover to a positive rate of 8.2% in 2019, and then jump to rates of between 60.0% in 2020 and 35% in 2023.

 

The World Bank observed that “the extractive industries will not be enough. An intensive and ambitious focus on achieving diversification, increasing rural productivity and providing more widespread access to services in national development efforts is essential for inclusive growth”. No doubt, the economy will receive a boost once major LNG projects come online, with significant export opportunities and inward investment. Despite the country’s current fiscal and debt crisis, the projected economic boom associated with the development of the natural gas sector is expected to have multiple positive externalities for the rest of the economy.

 

Future Prospects

Despite the development challenges facing Mozambique, the prospects of using the natural resources to transform the economic and social life of the people remains promising.  Recently, Reuters reported that the U.S. energy firm Anadarko Petroleum Corp gave the green light for the construction of a $20 billion gas liquefaction and export terminal in Mozambique, the largest single LNG project approved in Africa. In announcing the Final Investment Decision (FID) for the project, the CEO of Anadarko declared that “As the world increasingly seeks cleaner forms of energy, the Anadarko-led Area 1 Mozambique LNG project is ideally located to meet growing demand, particularly in expanding Asian and European markets. According to him, natural gas use is growing rapidly around the world as countries seek to meet rising energy demand and wean their industrial and power sectors off dirtier coal”. The project, which has committed long-term supplies to utilities, major LNG portfolio holders and state companies around the world, underscores the industry’s conviction that LNG demand will soar in years to come despite a slump in prices this year.  Commenting on the FID, Frank Harris, the head of LNG Consulting at Wood Mackenzie said that “flexible commercial arrangements, including an innovative co-purchase agreement with Tokyo Gas and Centrica, have been instrumental in securing the project a roster of high-quality customers in a crowded LNG market”. Anadarko’s partners in the Mozambique LNG project are Mitsui, Mozambique state energy company ENH, Thailand’s PTT and Indian energy firms ONGC, Bharat Petroleum Resources and Oil India.

 

The gas liquefaction and export terminal is also expected to be transformational for Mozambique, one of the poorest nations on earth beset by fiscal and debt challenges and the devastating effects of two cyclones in the country, whose annual gross domestic product is only $13 billion. The government of Mozambique said the project is expected to create more than 5,000 direct jobs and 45,000 indirect jobs. With a 12.88 million tonne per year (mtpa) capacity, Mozambique LNG is one of the largest greenfield LNG facilities to have ever been approved. It involves building infrastructure to extract gas from a field offshore northern Mozambique, pump it onshore and liquefy it, ready for further export by LNG tankers. On the African east coast, the liquefaction plant will be able to sell LNG to both the lucrative Asian market, home to 75%of global LNG demand, and to the flexible European market, which helps balance global LNG trade by soaking up excess supply. The implementation of the project will no doubt boost the economy of the country in the near future.

 

AMETRADE has been supporting the efforts of the government to use the country’s natural resources for promoting economic development. It does this through the bi-annual Mozambique Mining, Oil and Gas and Energy Conference and Exhibition (MMEC). The past editions of MMEC have been focusing on key developments, policies and projects in Mozambique’s extractive industries; becoming an important platform for networking by all stakeholders and showcasing the huge opportunities in these critical sectors of the economy. The main theme for 7th edition in 2020 is “Utilizing Natural Resources as the Catalyst for Economic Development and Diversification”.  This is aimed at presenting Mozambique as a business-friendly country where policy reforms are being implemented to encourage the flow of domestic and foreign direct investment into the extractives industry. For more information please visit; https://ametrade.org/mozmec/ or contact Mahadahmed@ametrade.org

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