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

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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