High Stakes in Mozambique

Local and international delegates gathered in Maputo earlier this month to discuss monetization strategies for Mozambique’s immense gas reserves. To Jenik Radon, a lawyer and adjunct professor of international and public affairs, the central question was obvious. “Monetization,” he said, “but for whom?”

He was speaking at Mozambique’s first regional summit of this kind, which presented staggering findings regarding the country’s gas reserves; current estimates suggest they will transform Mozambique into one of the top five global natural gas producers by the end of the decade, joining established players like Qatar, Australia, and Nigeria. To financiers and industry representatives, it was a foregone conclusion that energy firms would extract the gas as soon as possible, and this conference was a chance to discuss specifics.



Professor Radon maintained a different approach. “If you look at the composition of the panels, it was very corporate-oriented,” says Radon. “I think they have a very valuable role to play. They are efficient, return money to their investors. But when I looked at the conference, I felt there was a gap in the dialogue: where is the interest of the resource-rich nation and its people?”



By the middle of the conference’s first morning, those two main perspectives had crystallized. The financiers discussed technical ideas on contract clauses, complementary investment strategies, and creative project financing options to implement quickly and squeeze out more profits. Mozambique, participants heard, must take advantage of white-hot demand for natural gas in Asia; usage in China could double by 2020, and demand in other countries, including Japan and Taiwan, will also rise quickly. The best way forward was to invest quickly and massively in liquid natural gas (LNG) production, which would enable Mozambique to ship globally, taking advantage of its prime shipping location.



One major complication, however, was timing. It would take about five years to install the infrastructure for Mozambique to export LNG, which means parties would have to agree to investment deals immediately. Additionally, introduction of other energy sources like shale gas and renewables into the world market threatened to drive energy prices down, causing Mozambique’s gas to lose value even before it was extracted.



And then there was the cost.



LNG requires specially outfitted ports for transport, which would require an upfront capital outlay of about $20 billion to install. It is hard to see how the Mozambican government will find those funds, raising questions about how much the Mozambican people will actually benefit in the long term.



Because the cost of LNG investment is so high, the stakes for the government of Mozambique are equally high. Each energy firm, Radon said, “should be a trustee as well as a service provider,” in order to protect Mozambique’s natural wealth and ensure a credible return.



At heart, the underlying disagreement is about sequencing: is it business first, or should all issues—including governance, environmental protection, and social guarantees—be addressed from the start?



Radon, for one, wants companies to start monetizing Mozambique’s natural gas—but only if the laws are sufficiently strong to regulate that activity.



“Success for me would be rewriting the laws in the most protective but open way to attract business,” he said.



Marc de Saint-Gerand, project finance director at Standard Chartered Bank, believes early-stage revenues would empower energy companies to tackle other concerns. The priority then is to jump in with project proposals so they can get funded.



De Saint-Gerand says to “go for it”—companies should launch their projects because the market is eager to finance them, and “secondary issues” like corporate social responsibility and social and environmental effects, will be resolved once extraction has begun.



This perspective recalls “trickle-down” economics, under which profit-driven economic activity is supposed to bring collateral benefits to other sectors. But in the case of natural gas extraction, that logic may not hold.



For instance, foreign investment often translates into jobs for local residents. In Mozambique, while construction of LNG ports may employ several thousand laborers for a few years, some of the participants point out that once completed, those projects won’t sustain the workforce. Natural gas extraction requires skilled workers like engineers—and hundreds, not thousands, of them. The projects will come too soon to train Mozambican engineers for the job.



But the speakers did retain hope for finding areas of compromise.



André Almeida Santos, principal country economist at the African Development Bank’s Mozambique office, said the banking sector is one area where collaboration is possible. Without a diverse mix of regional banks along with international agencies or commercial banks along with multilaterals like the African Development Bank, there is simply no way to finance Mozambique’s LNG project. Santos sees this moment as an opportunity for Mozambique’s financial services sector to reach higher standards and operate internationally alongside more developed nations.



The conference, which assembled over 50 energy firm representatives, finance professionals, civil servants, and other delegates, has left investors and other stakeholders watching closely to see where this is all going, and what it means for this resource-rich country.

— Jefferson Mok MIA ’14

A version of this article can also be viewed at ClubofMozambique.com, a business-oriented website.

photo credit: Jefferson Mok MIA ’14