A large advertising hoarding at Maputo Airport claims Mozambique has the best prawns; one of the most hackneyed boasts in Africa. Mozambique has a deep, sheltering, offshore ridge stretching along the floor of the Indian Ocean. In these fertile waters prawns thrive in the warm flow of the gulfstream to become big, juicy, and world famous.
Under the sea bed in these same blue waters is another natural resource that could make Mozambique more famous than it is for prawns.
Twenty-two years after the guns of a bitter civil war fell silent over this poor and weary land, Mozambique is on the cusp of an energy boom. In a generation, this boom could transform the country into a rich player in the lucrative business of supplying an energy hungry world.
Energy appears to be a field where African prosperity could lie. It is a sign of the times that when FORBES published its list of the world’s top 10 oil and gas finds in 2013 – six of them were in Africa &#8211; a remarkable number in year of scarce finds, called lackluster by the industry; in a year when exploration giant, Tullow, drilled 20 holes only to find them dry.
The biggest find of 2013 was 80 kilometers off the shores of Mozambique. Italian energy company, ENI, struck gas more than six kilometers under the sea in the Agulhas field. The company says it has between five to seven trillion cubic feet of gas (tcf), worth the equivalent of 700 million barrels of oil (BOE). That’s about two years’ worth of Nigeria’s oil production.
This rich find is merely the tip of the iceberg. Industry estimates say Mozambique has the world’s fourth largest gas reserves after Russia, Iran and Qatar. This year, the energy giants from Texas, Anadarko and partner ENI, will decide whether to build one of the world’s largest liquefied natural gas facilities in the world, off the coast of Mozambique. The complex would pave the way to tapping deep off-shore gas fields that could rival Australia and Qatar as the largest liquefied natural gas reserves in the world.
Mozambique’s hopes will enrich an economy rated by the United Nations as the fourth poorest in the world, with most of its more than 23 million people living on less than a dollar a day.
It is likely to prove a long and expensive road to prosperity. Mozambique has a huge skills and infrastructure gap coupled with meager state coffers. One look at the potholed roads of the capital, which turn into a river of mud in heavy rain, will tell you how far Mozambique has to go. An encounter with corrupt policemen on the street will tell you why hard work and enterprise could also struggle.
These are among the many obstacles to vast and unimagined wealth lying under the sea. The most promising discovery is in the massive Rovuma Basin, which is 30,000 square kilometers – about the same size as Lesotho. Since 2010, there have been 10 offshore discoveries in the basin promising 190 trillion cubic feet (tcf) of natural gas. The industry believes a supply and demand gap for natural gas will open up by 2020, sending prices soaring. If Mozambique can get its industry together by then it will be able to compete, albeit from a low base, with the big world players like Russia, Australia and Canada.
A senior government advisor in Maputo told me that Mozambique aims to be shipping gas to Thailand, South Korea, Japan, South America and the United States by 2019. The infrastructure bill for this dream is likely to be immense. One of the reasons why investors often fight shy of gas, unlike coal and oil, is because it is difficult to move it to market.
It is a sobering thought that investors have sunk more than $1 billion into extracting Mozambique’s gas with very little to show for it – it is going to take many billions more in foreign investment. This, at a time when the new Basel III banking rules are tightening around the world and it is getting tougher every year to summon up interest in this kind of 20-year, high-risk, infrastructure.
The next step on the road to gathering this foreign investment is the fifth round of licensing bids, expected this year, most of which will be for the Rovuma Basin. Exploration data is doing the rounds among interested investors, but a few are also looking at their watches.
“This is all taking too long for us,” one investor told me in Maputo.
One reason why it is taking so long is that Mozambique has little experience in running an energy industry and wants to make sure the national exchequer gets its fair share. Mozambique has studied how other African nations have been by-passed by their resources booms and is tightening legislation.
The fear in Maputo is: most of the revenue will flow overseas; the equipment will be bought in from elsewhere, as will highly paid expatriates, leaving the people of Mozambique as bystanders in a land where their government owns all the mineral rights.
“We are striving to make the market more stable and predictable for investors… If you align your project with Mozambique’s priorities, you will have a strong chance of success,” says Leopoldo de Amaral, the manager of natural resources for the Maputo legal company Sal and Caldeira Advogados, told the MMEC conference on mining and energy in Mozambique in March.
These priorities will be laid out in the amendments to the Petroleum Bill, on its final passage through parliament, which will lay down new rules for foreign investors. The bill is expected to be published in the next few months, before parliament dissolves ahead of elections on October 15, and has a tough job ahead of it. The plan is to maximize revenue for Mozambique and provide certainty and clarity for investors, without jeopardizing competitiveness.
Under the bill, crude oil will be subject to 10% production tax and for natural gas, 6%. It stipulates that 5% to 20% of the capital of foreign companies be placed on the Mozambique Stock Exchange, within five years, for sale to locals.
Furthermore, investors must inform the state of discoveries within 24 hours and remit the proceeds of exports back to Mozambique within 90 days. Ample discretionary power is given to the minister, giving he or she a say over the transfer of mining rights and the right of the state to participate in projects. This is unlikely to impress foreign investors.
Another worry for foreign investors is a hefty capital gains tax of 32% that came into force on January 1. The rules stipulate that the tax will be levied on the sale of equity in any operations in Mozambique, no matter where in the world transactions take place.
On top of this, foreign companies will have to set aside a hefty budget for training. The bill says foreign companies, operators and subcontractors alike, must train workers from Mozambique: 5% for big companies; 8% for medium-sized companies and 10% for small companies.
Mozambique also plans to take advantage of the end of a 10-year agreement with energy giant Sasol, to supply cheap piped gas to South Africa in order to encourage the building of infrastructure. Under the agreement, Mozambique was selling around $700 million of gas to Sasol at around one fifth of the price. According to the watchdog, Centre Integridade de Publica de Mozambique, the country was making as little as $10 million out of the deal.
With the expiry of the deal in March, Mozambique will be able to reap more from its gas and there will be more space on the pipeline to do so. Sasol is going to spend $190 million on the 865 kilometer pipeline, from Pande to Secunda, in South Africa, to increase its capacity by up to 30%. The energy giant is also going to spend $135 million on a new processing plant to be opened in 2015. Sasol is having to revise its prices now that the sweetheart deal from Mozambique is over and is already suffering a volley of criticism from customers.
The very fact that one of the biggest energy players in Africa is prepared to put its millions into Mozambique bodes well for investor confidence. Despite this, many investors are likely to look at the country’s new rules and scratch, if not shake, their heads.
Mozambique, rated as the fourth poorest nation on earth, has a long, long, way to go before it can become a player in the world energy market and become more famous for power than prawns.

Tag: natural resource

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