Snake or ladder: Is gas the best route to development in Mozambique?

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Should Mozambique’s vast gas reserves be used for electrification and economic development in Mozambique? Or do the effects of the “resource curse” — as well as the impact of the global transition away from fossil fuels towards renewable energy —  make the investments too economically and politically risky? Two reports out this month offer different perspectives on the role gas should play in a “just transition” towards carbon neutrality in Mozambique.

Is gas a development imperative for Mozambique?

“Harnessing the transformative power of gas is a developmental imperative that serves people, prosperity and planet, while acknowledging the rightful aspirations of Mozambicans,” according to a report by the Tony Blair Institute (TBI) , A Just Transition for Africa: Championing a Fair and Prosperous Pathway to Net Zero.

The planned 30m tonnes per year of LNG exports from the Rovuma Basin gas fields in the far north of Mozambique could increase the country’s annual gross national product by between $10bn and $14bn, the report estimates. Gas has “paved the way for unprecedented development pathways that could see one of the poorest nations in the world transform into a thriving middle-income economy within a generation,” it says. 

That was at least the hope. The reality is likely to be somewhat different, according to the latest report from Oil Change International (OCI), The Sky’s Limit Africa: The Case for a Just Energy Transition from Fossil Fuel Production in Africa. Gas is unlikely to drive equitable social and economic development in Mozambique, it argues, in part because a combination of the global energy transition away from fossil fuels, the pandemic and associated global recession, and the conflict in the Cabo Delgado, where the gas projects are located, have thrown the profitability of the projects into doubt. Moreover, the effects of the phenomenon known as the resource curse mean that the revenues that do accrue are unlikely to benefit ordinary Mozambicans.

Even the oil majors may be starting to doubt the economics of the projects. Last week, sources told the Wall Street Journal that some board members of ExxonMobil, the company that plans to develop the $30bn Rovuma LNG project, had expressed concerns about whether it would return the billions in upfront investment it would require. These doubts “point to how unlikely doubling down on these projects is to generate revenues for Mozambicans in the long term,” OCI report author, Bronwen Tucker, told Zitamar.

Recent analysis from independent think tank Open Oil suggests that if oil prices remain at or around current levels, revenues from the LNG projects that have already been sanctioned — Eni’s Coral South floating LNG project and TotalEnergies’ Mozambique LNG project — will be little more than half of the $49.4bn projected by the government in 2018.

Even before covid-19 and the war in Cabo Delgado led to project delays, significant government revenues were not expected from the project until after 2030, even by the government’s own estimates. “Poor contract terms that see more early profits flow to multinational companies rather than the government cause this lag in the potential for revenues to accrue,” OCI says. “Consequently, more government than company profit will be at risk later in the projects’ lives, as the assets become increasingly likely to be stranded due to climate action.”

And even if the full projected revenues do reach public coffers, it is unlikely to benefit most Mozambicans. “Recent trends in Mozambique’s economic policy raise doubts about the likelihood of the government to pursue pro-poor spending,” OCI says. It points to a review completed by the United Nations Conference on Trade and Development (UNCTAD) in 2012 that found that megaprojects had failed to benefit the people of Mozambique, despite the large economic growth and foreign investment they have generated.

Rather than bringing economic development to Mozambique, the projects have led to increased debt and austerity, OCI writes. The country’s debt-to-GDP ratio jumped from 46.8% of GDP between 2010 and 2015 to 99.8% in 2016 and still more than 90% in 2020, according to the IMF. This debt “was in no small part” a result of Mozambique’s so-called “hidden debts” scandal, OCI says, when $2bn in government-guaranteed secret loans were taken out by companies linked to Mozambique’s state security services to finance a maritime security project, on the assumption that they could be paid back with revenues from LNG exports. The high level of debt has led the government to decrease public spending per person by 30% between 2014 and 2019. 

Since 2017, violence and militarisation has escalated in Cabo Delgado, the province slated for gas development, with at least 2,600 deaths and 670,000 displaced. TotalEnergies completely suspended the project in April 2021, following attacks on Palma, a town close to the LNG site. “Grievances around the unfulfilled promise of gas wealth are a key driver of the violence,” OCI writes. “In particular, local organizations have raised concerns that the Mozambican government has expanded military presence in the area in order to protect foreign investment from vandalism from insurgents.”

Who benefits from concessional finance?

The TBI report argues that high-income countries (HICs) should continue to support gas development in Africa as it is one of the cheapest and quickest ways to increase power supply and drive industrialisation. 

HIC support for such projects usually comes through cheap loans and grants offered by financial institutions like development banks, national export credit agencies, and multilateral funds. An increasing push to phase out this kind of funding for gas-fired power by rich countries, fails to strike “an appropriate balance between climate needs and development needs,” the TBI says. By prioritising climate mitigation over Africa’s development and restricting development choices, rich countries are “‘kicking away the ladder’ that they themselves have already climbed,” it says.

However, OCI questions whether these subsidies are actually for the benefit of Mozambique.  “So far international public finance for gas in Mozambique has prioritized donor countries’ companies’ own interests and there’s no signs of that changing,” Tucker told Zitamar. OCI’s Shift the Subsidies Database shows that Mozambique received the second most public finance for fossil fuels between 2018 and 2020 from G20 institutions and multilateral development banks; $18.5bn. “But 98.5% of this was for extraction or export-oriented projects without components to support domestic consumption,” she says. 

Should gas be used as a bridging fuel?

A long-standing narrative is that gas should be used as a bridging fuel until countries are in a position to support more renewable energy on their grids. Gas-fired power will at first substitute, and then facilitate the gradual penetration of intermittent solar and wind into the energy mix in Mozambique, TBI says. It should also be used to develop fertiliser and fuel projects. “In the short term…gas will be critical to support industrialisation, food and power production,” the TBI says.

However, OCI notes that gas developments are never “short term.” The cost of gas production and processing infrastructure means that downstream gas industrialisation and power projects need to operate for decades for project developers to earn back the cost of their developments, it says. 

“Given the speed of the global energy transition, it is no longer advisable for African fossil fuel producers to invest in long-lived refining capacity or petrochemical plants (investments that have typically allowed for more local consumption and “value-added” exports in other producing countries in the past),” OCI argues.

As well as locking the country into the gas sector for the coming decades, a gas-fuelled development pathway will also “reduce available public and private finance for cleaner and more job-creating renewable energy projects,” it adds. 

OCI data show that between 2016 and 2019, G20 countries provided $47bn in public finance for fossil fuels in Africa — 3.7 times the amount provided to renewables. 

In countries like Mozambique, large investments in gas infrastructure, long-term gas contracts with poor terms, and the political incumbency of the gas industry “have worked in combination to crowd out renewable energy investments,” it says.

Is gas the cheapest way to produce power in Mozambique?

“Traditional fossil fuels such as gas remain the least-cost approach to providing the stable power that businesses need in many countries, and they are often half the price of renewable alternatives such as solar-plus batteries,” former British prime minister Tony Blair writes in the introduction to his institute’s report. 

This is the reason why, despite the British government committing to end public financing for oil and gas projects abroad, its development finance institution, CDC, has said it will still make limited exceptions for some gas-fired power projects in developing countries.

CDC considers the 450MW Central Termica de Temane (CTT) power plant in Inhambane to be an exception. It is developing the $700m project through its subsidiary, Globeleq. In this case, “​​there are no viable renewable alternatives for Mozambique meeting its power needs and avoiding the projected shortfall in electricity production by 2024 and possibility of blackouts,” a CDC spokesperson told Zitamar.

The OCI report did not look at the case of the CTT, but notes that where electricity grids already exist or where grid-based systems are the best solution, “building or extending these with renewable energy is already cheaper than fossil fuels in almost all cases, and costs are continuing to fall.” This cost comparison considers storage and other measures to ensure reliability given the variability of renewable energy, it says.

These assumptions are shared by other development agencies. The UN Sustainable Energy for All initiative includes a core recommendation to terminate the financing of fossil fuel projects as a way of closing the energy access gap, which it says are no longer the most cost-effective means of providing electricity and rarely target the most rural areas or off-grid urban areas. 

Given the low — and falling — costs of renewable energy, Even if Mozambique could convince development finance institutions to build more domestic gas power plants today, there is then a new significant risk of these plants and the infrastructure they need becoming stranded and creating new debt and clean-up for Mozambique,” Tucker told Zitamar.

“And we can also look at how [gas power development]has gone in other countries,” she continues. “For example the World Bank pushed for the development of gas in Ghana and helped design the legal frameworks. Rather than create cheap abundant gas for local consumption, the contracts had ‘take-or-pay’ clauses which have driven new Ghanaian debt.”

The “take-or-pay” clause for Sankofa, Ghana’s first gas-only field, means the government has to pay operator Eni a set amount for gas every day, regardless of whether it takes the gas. Since Sankofa started operations, Ghana has paid between $250m-$500m a year for gas it does not use.

Ghana is similarly obliged to pay for power it doesn’t use from long-term, gas-fired power contracts signed in 2015. These contracts oblige the government to pay private electricity producers about $500m a year for unused electricity. “In total, in 2019 the cost of these take-or-pay clauses in gas and power contracts almost outweighed the government’s reported $937 million in overall revenues from the country’s oil and gas extraction,” the OCI report says.

Ghana now estimates accumulated energy sector debts will reach $12.5bn by 2023 without contract renegotiation or the completion of new infrastructure. 

“A much lower amount of money could be used to build distributed renewable energy (off grid and mini grid connections) to reach universal energy access, and these projects would also not be at risk of becoming stranded, facing commodity price spikes, hurting existing livelihoods by causing pollution, or being damaged or going offline in disasters,” Tucker told Zitamar.

Is gas-fired power needed to balance out intermittent renewable energy?

In the short to medium term in Mozambique, “base-load energy from gas will substitute and then facilitate the gradual penetration of intermittent solar and wind into the energy mix,” according to the TBI report.

While in the future, batteries may displace gas, “at present, they cost two to three times more,” it says.

OCI disputes that gas is the best resource for balancing wind and solar power — or that batteries are too expensive. In many circumstances, battery storage is “already competitive” with gas plants designed for balancing renewable energy supply — known as peaking power plants, or simply “peakers” — and costs are falling rapidly, it says. 

“Wind and solar plants coupled with battery storage are also becoming a competitive, ‘dispatchable’ source of energy,” according to the report. It notes there are also other ways to manage high levels of wind and solar on the grid, such as managing demand response and transmission.

What about jobs?

“A quarter of Mozambique’s future gas has been set aside for domestic use. Investment in the production of gas-based fertilisers, fuel, electricity and petrochemicals holds the promise of industrialisation and jobs, triggering a virtuous circle with far-reaching benefits spanning food security, livelihoods and the economy,” says TBI.

Driving gas-driven industrialisation and job creation in Mozambique was the intention behind the country’s 2014 Gas Master Plan. Following the 2016 domestic gas tender process, Shell was selected to build a 38,000 barrel per day gas-to-liquids project that would generate employment and reduce the government’s hefty fuel import bill, while Yara was picked to build a 1.2mtpa fertiliser project, the output of which would help boost agricultural production throughout the country. However, both companies have since abandoned these projects, partly because the government has failed to guarantee domestic gas in sufficient volumes or at a low enough price to make them economic.

The third domestic gas tender winner, GL Africa Energy, appears to be moving ahead with its 250MW gas-fired power plant, but sources have raised doubts over the project’s credibility. GL Africa Energy would not clarify to Zitamar how it will get the gas from Afungi, where the LNG projects are based, 670km south to Nacala, where its power plant will be built. Nor has it said where it will source gas for the projects during the initial years of operation, given the delays now facing the start-up of gas production in the Rovuma Basin. 

In any case, OCI analysis suggests that Mozambique would be better served from an employment perspective by replacing this gas-fired power plant with a wind or solar project.

“Globally, every dollar of renewable energy investment generates two to five times more jobs than the equivalent investment in fossil fuels,” the report says. “Other green economy investments like conservation agriculture, climate adaptation, public transit and energy-efficient building retrofits provide 5 to 25 times more jobs.”

It notes that in Mozambique, the promised coal boom and gas development to date have brought “much smaller local job creation than promised.”

Who should pay to keep it in the ground?

Despite the differences in the reports over the role gas should play in Mozambique, both are in agreement that rich countries need to move first and fastest at phasing out their own gas production. They also stress the need for HICSs to increase development financing in Mozambique, which should be as well as, not instead of, funding for climate mitigation and adaptation. 

“The climate-finance obligations of HICs should not cannibalise their existing development commitments if they are to sincerely partner with African governments. Specifically, HICs must commit to increasing the volume of climate finance,” the TBI says.

The TBI suggests that if HICs are not prepared to finance gas developments in countries like Mozambique, “they should make a credible, legally binding commitment to compensate African countries for leaving those deposits in the ground and support them to industrialise without fossil fuels.”

With TotalEnergies’ project suspended and rumours of Exxon’s uncertainty over whether to move forward with the project, the Mozambique government may still have the opportunity to negotiate a deal like this.

“It is increasingly risky to bet that LNG will still be profitable at this point,” Tucker says.  “Getting out now means no further debts or risky contracts can be added.”

Editor’s Note: The Tony Blair Initiative declined to comment for this article.

© 2021, Zitamar LTD. All rights reserved.

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