For Mozambique, A Much-Needed Energy Windfall

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Written by Uju Okoye

Earlier this month, Italy’s Eni finally completed talks to sell part of its stake in Mozambique’s liquefied natural gas (LNG) fields to Exxon, even though industry sources say the deal won’t be formally announced for several months. Ever since Eni and some of its industry rivals (like the American Anadarko Petroleum) discovered rich natural gas deposits off the East African nation’s shores in 2010, the promise of energy wealth has helped buoy hopes of further economic progress in one of Africa’s poorest nations. In that light, the Eni-Exxon agreement represents an important milestone in what could prove to be a game-changing enterprise for Mozambique.

Of course, locals in Mozambique are hardly the only interested party. Between them, Eni and Anadarko have already discovered 160 trillion cubic feet of LNG in the Indian Ocean’s Rovuma Basin. By buying its own stake in these rich reserves, Exxon joins China’s CNPC, BP and other oil majors that have invested in Mozambique’s energy resources. Across the table from them sits ENH, Mozambique’s own national oil company, with its 15 percent stake in the Anadarko consortium and 10 percent stake in the ENI project. ENH is also part of the consortium planning to build a pipeline to carry Mozambique’s as-of-yet untapped natural gas to energy-hungry South Africa, alongside the South African firm SacOil, the Dutch Profin, and China’s Petroleum Pipeline Bureau.

Standing in the way of Mozambique leveraging these assets, though, are a whirlwind of debt, market, and social pressures that have conspired to keep the country from fully moving past its civil war. Even though the long running conflict ended in 1992, tensions between the warring sides of that era continue to run deep. Outside groups like the IMF have pointed to renewed fighting between government forces and the Renamo opposition group, or what they refer to as “political tension,” as the greatest threat to what has otherwise been one of Africa’s fastest-growing economies. With a poverty rate that stands at 54 percent and over 10 million rural poor (out of a total population of about 26.5 million), Mozambique urgently needs the wealth its natural gas can provide. Without its own capital to finance the extensive infrastructure required, Mozambique is also dependent on outsiders like Eni and Exxon to tap into Rovuma Basin resources on its behalf.

Among Mozambique’s greatest challenges is the delay in delivering its extensive offshore LNG resources to a global market that has seen energy prices fall dramatically. Even though its offshore resources rival those of Nigeria and Algeria, and industry estimates suggest there is enough LNG now under Eni’s control to meet United States-scale demand for two whole decades, low prices for natural gas and rapidly expanding production in North America has helped delay exploitation.

Mozambique’s LNG future in context

Mozambique also faces mounting debt hurdles, with $1.35 billion in controversial loans it is struggling to repay and the IMF suspending aid payments after revelations the state concealed that borrowing. Much of the country’s underlying debt can be traced to the civil war that dragged on for nearly 20 years, in the shadow of the Cold War and outside machinations. Nearly a million people died during the civil war, with another 5 million displaced before the conflict finally ended in 1992. Mozambique, already among the poorest and least developed nations on earth, emerged from the war years saddled with billions more in debt. It was the first African nation to receive debt relief from the IMF and the World Bank under the Heavily Indebted Poor Country Initiative, making the precariousness of its current financial state all the more troubling. Debt service continues to steal dollars away from any other social and economic advances.

In that context, the Eni-Exxon announcement could not come at a better time. Developing the LNG reserves holds out the promise of much-needed tax revenues, financing, and investment into the struggling economy. Given the government’s inability to finance expensive projects on its own, however, the need for infrastructure investment can’t be overstated: the proposed 2,600-kilometer (1,616 mile) pipeline from Mozambique to South Africa, for one, would cost $6 billion, with most of that money coming from Chinese banks.

With foreign entities needing to put so much capital forward in order to take advantage of Mozambique’s offshore resources, maritime security is also going to be a major question. The political conflict on land is an issue in and of itself, but Mozambique’s East African neighborhood has a notorious legacy of piracy and West African energy producers (notably Nigeria) are all too familiar with seaborne bandits seizing tankers and taking hostages in poorly-patrolled waters. Using some of the funds that have since gotten it into hot water with the IMF and international creditors, Mozambique responded to rampant illegal fishing by predominately Chinese vessels in its waters by purchasing a small fleet of patrol boats purchased for the tuna fishing authority, or EMATUM. Where the country had precious little capacity to police its own coastline just a few years ago, those vessels could be now key to protecting the valuable (and vulnerable) infrastructure Eni and its partners will be building in Mozambican waters.

In this, Mozambique will again need help in demonstrating to partners that its trade routes, industry facilities, and infrastructure are secure. The United States has provided assistance in the past, while France, India and notably South Africa have all cooperated with Mozambique to help safeguard sovereignty over its waters – Indian premier Narenda Modi made a point on his recent visit to East Africa to stress a greater role for India in maritime security in their shared Indian Ocean. With so much at stake, and with market competition pressures arising from Tanzania and other global players, the Eni-Exxon deal may be a spark that gets Mozambique back on track with its energy production plans and the sorely needed promise they hold.