The Fuse

Abundant in Natural Gas and Debt, Can Mozambique Avert the Resource Curse?

May 11, 2016

Guest Post by Brennen Drysdale |

Brennen Drysdale is Coordinator of Global Development and Foundation Relations at Rare.

Mozambique is endowed with an abundance of natural resources, mostly notably, natural gas. Since 2010, natural gas deposits off the coast of Mozambique have drawn the interest of international hydrocarbon companies such as ENI, Statoil, Exxon and Rosneft. Understandably so, as it was reported by Oil & Gas Journal in 2014 that Mozambique’s proven natural gas reserves were at least 100 trillion cubic feet, which would make them the third largest in the Africa. Even with energy prices currently at a thirteen-year low, the revenues from these offshore reserves are being touted as a new era for the country.

The investment and tax revenues received from companies operating in Mozambique’s territory are seen as a means to transform the predominantly subsistence economy into one with thriving infrastructure and development in multiple sectors. In offshore blocks 1 and 4, situated in the north of the country in the Rovuma Basin, the investment could be as much as $31 billion in the next five years, according to Stratfor. The IMF has estimated that investment and production from 2013-2023 would result in an added 2 percent to GDP growth a year. Neighboring countries are showing their intent to benefit from these reserves as well. SacOil Holdings and SAgas have signed a MOU with their Mozambican counterpart, the Mozambican National Hydrocarbon Company (ENH) in partnering to build a $6 billion, 1,600-mile long pipeline from the Rovuma Basin to South Africa. Also involved in this deal is The China Petroleum Pipeline Bureau, who will be responsible for 70 percent of the total project cost.

Needless to say, the international community will be watching Mozambique in how it responsibly deals with this windfall of cash. So far, the evidence is not encouraging.

Mismanagement during previous and current administration

In the last three years there have been multiple instances of financial mismanagement by the government, which has drawn the scorn of the rival political faction, RENAMO. There has also been an increase in violence, which has seen thousands of refugees fleeing over the border into neighboring Malawi and Zimbabwe.

In January of 2016, the leader of RENAMO, Afonso Dhlakama, said he and the military wing of the political party would take control of the six most northern provinces in March. He stated that energy production would not be affected and one can only assume he intends to use the revenues from energy production to fund his political movement. An unrealistic thought, but a dangerous one nonetheless.

The discovery of $1.35 billion in undisclosed debt resulted in the immediate discontinuation of aid from the IMF, World Bank and the United Kingdom.

Additionally, tensions were recently exacerbated with the defaulting of an $850 million tuna development bond, in which $500 million was spent on military equipment. Much of this was spent by ProIndicus, a security service, which borrowed $622 million to fund the purchase of navy ships and radar installations to protect the tuna industry against pirates and illegal fishing. ProIndicus is partially owned by Mozambique’s secret service, SISIE, which is also a shareholder in Empresa Mocambicana de Atum (EMATUM)—Mozambique’s state owned Tuna Company.

Not to be outdone, the discovery of $1.35 billion in undisclosed debt soon followed, which resulted in the immediate discontinuation of aid from the IMF, World Bank and the United Kingdom.

In 2013 Credit Suisse and BNP Paribas along with a consortium of banks raised $500 million with an additional $350 million raised by Russia’s VTB bank, for EMATUM. Most observers considered the bond yields to be overprescribed, which were set at 8.5 percent and set to mature in 2020.

The deal was destined to fail before the company put the first boat in the water. Poor management and planning of multiple features pertaining to the bond forced it to fail, including the fact that the $850 million in bonds were guaranteed by the government—dramatically in violation of the $6 million dollar cap stipulated in the budget law. The deal was eventually restructured in early 2016, with the bonds being converted into sovereign bonds, maturing in 2023 with a yield of 10.5 percent.

This already messy situation was made worse by Credit Suisse failing to disclose to investors that they had made another loan to the government at the same time investors agreed to a restructuring of the bonds.

Less than a week later, the IMF cut off all loan payments to the country due to another undisclosed debt amount, in the form of $1.35 billion dollars that was also guaranteed by the government. This debt is believed to have been procured in 2013 under the watchful eye of the former administration and is connected to the defense and security sectors. To date, none of the mismanaged funds have been linked to hydrocarbon extraction, but the already worrying signs of financial mismanagement in other sectors sets a poor precedent. Issues pertaining to the hydrocarbon sector may be at risk, such as the resettlement of individuals.

Resettlement of population presents significant risks

In 2014, the government passed Petroleum Law No. 21/2014 which was applauded by the IMF for its fiscal and social framework. This law put forth a framework pertaining to numerous aspects of hydrocarbon extraction such as taxes, allocation of domestic supply of which 25 percent of total production is reserved for local consumption, and resettlement compensation. Even with the public praise, the resettlement of individuals is a controversial one with a plethora of issues.

Even though compensation is significant and the framework for repayment is thorough, many within the local population remain concerned that the loss of their livelihoods will not be offset by compensation.

The framework for compensation is explained in detail in the Resettlement Plan, which was developed in partnership between the Mozambican government, ENI and Anadarko. This plan will see over 6,000 people displaced for the construction of an LNG terminal that will occupy 4,578 hectares near the town of Palma in the far north of the country. Of these, 471 households (2,028 individuals) will be physically displaced and 3,156 will be economic displaced by the loss of their livelihoods such as farming and fishing. The overall cost of relocation is calculated to be between $150 and $180 million.

Even though compensation is significant and the framework for repayment is thorough, many within the local population remain concerned that the loss of their livelihoods will not be offset by compensation. There has been an increase in rates of prostitution and violence in the areas near hydrocarbon activity, a common occurrence even in developed countries. Furthermore, there are further plans for a massive 180km2 LNG plant that will include an airstrip, golf course and shopping malls. One can only assume that this will negatively impact more people due to the size alone.

The rights of the local population have already been violated over the construction of this LNG plant, also owned by Anadarko and Eni. According to the World Resources Institute, villagers on the Alfungi peninsula were caught by surprise when company trucks began bulldozing their fields, cops, and trees, without warning. Company representatives did distribute some compensation funds to the displaced villagers, but the locals were not given clear guidance on how their land was acquired and how their compensation was determined. Additionally, project operations began before environmental impact statements and community consultations were completed.

Signs of resource curse already emerging

While much of the mismanagement of funds originated under the former administration, some incidents have taken place under the current. Namely, the failure to disclose new loans from Credit Suisse and the debt from the previous administration is what caused the IMF to freeze all loans. Collectively, the decisions of the previous and current administration are likely to undermine Mozambique’s political stability. Potential outcomes could be an increase in violence, especially in the north where major hydrocarbon activity is located, which would likely cause Maputo to crack down. Based on what’s been seen in other resource-cursed nations, this could be in the form of suppression, and a decrease in transparency and dialogue as the government attempts to stabilize any issues that foreign companies may find unfavorable.

Mozambique, once seen as a shinning example of potential in Africa, now seems all but that.

This will be further exacerbated since the chairman of ENH was quoted in saying that “the exploration of natural gas in Mozambique needs to accelerate because, otherwise, the country may miss the opportunity.” Ironically, on April 25, SacOil decided to delay signing an agreement to build a pipeline, mentioned earlier, due to the fact that the company felt they did not want to rush the process.

While proper management of natural resource revenues is vital for substantial and safe economic growth, little is being done to plan for a post-hydrocarbon economy in Mozambique. With such large quantities of resources, Mozambique needs gradual public investment to anticipate future LNG revenue, which would balance the infrastructure investment that is desperately needed.

Mozambique, once seen as a shining example of potential in Africa, now seems all but that. The mismanagement of funds has lead to a downgrade of their credit and a possible lawsuit by investors of the aforementioned tuna bond. At the end of the day, governments are responsible for how revenues and laws are conducted pertaining to its finances; hopefully Mozambique will find a silver lining and learn from its lessons.