Dr Elizabeth Stephens gives an insight into the domestic challenges that ought to be navigated to bring East African LNG to global consuming markets.
With elections providing the most direct correlation with spikes in political violence, the region and the international community breathed a collective sigh of relief when the Mozambique election passed with minimal disruption and was endorsed as broadly acceptable by international observers.
After ruling the country since independence in 1975, the Mozambique Liberation Front, Frelimo, faced its toughest election yet. The opposition Renamo party topped the vote count in several central and two northern provinces, and while Frelimo maintained its majority in the 250-seat parliament, it ended up with some 50 seats fewer than it won in the 2009 elections.
Along with its East African neighbours, the discovery of natural resources has raised the stakes in national elections. Corruption is already a problem in Mozambique and any situation where billions and billions of dollars are floating around is fraught with temptation. Revenue may reach as much as US$212bn over the life of the project. As liquefied natural gas (LNG) production comes on stream, of greater concern than the corruption itself will be the political jostling for the privilege of being corrupt; over who gets to eat from the biggest feast in Mozambique’s history.
A week after the elections, Mozambique opened up 15 new offshore and onshore areas for gas and oil exploration and production in its north, centre and south. The blocks on offer in the latest licensing round launched in Maputo and London included three new areas of the northern Rovuma Basin, where US oil major Anadarko Petroleum Corp and Italy’s Eni are already developing multi-billion-dollar LNG export projects.
There’s also great anticipation amongst international energy companies over the prospect of developing the world’s largest natural gas discovery in a decade 30 miles off Mozambique’s northern coast. Anadarko has pledged to construct one of the biggest energy projects ever attempted by a Western energy company.
Exploiting these natural gas reserves come with several challenges, a major obstacle being that the nearest viable consumer market is a hemisphere away. Nearly two-thirds of petroleum reserves discovered in the past 10 years are natural gas, not oil, and most are located in remote regions, far from the homes and businesses that can burn the fuel.
Anadarko intends to liquefy the gas and ship it by sea, like oil, but without crude’s bigger profit margin. It is a bold move for a company of its size, with oil giants like Royal Dutch Shell and Exxon Mobil having the monopoly on such projects. Italy’s Eni is planning a similar project in a bloc adjacent to Anadarko’s. Norway’s Statoil and the UK’s BG Group are planning similar ventures off the coast of neighbouring Tanzania.
While projections are for global demand for liquefied natural gas to double in the next two decades, East Africa’s projects are competing against less politically challenging, although still geographically remote, projects in Australia and Alaska. US shale gas is also a game changer that is reshaping price points as the country’s existing infrastructure lowers the cost of exporting the gas. In the near future, 40 million metric tonnes of exports from the US may come online, impacting demand from other exporting nations.
To offset the high costs of making LNG, consortiums in East Africa are trying to sign up Asian buyers to offtaker contracts that extend over decades, ahead of developing the fields.
Managing local communities
A challenge confronting investors in natural resources projects along the East African coast is managing the impact on local communities and land rights issues. Anadarko began paying Mozambique annual rights to use 17,000 hectares of land in Palma, in the furthest reaches of the country, to develop the LNG facilities. While the host government supports the project, 3,000 villages will have to be resettled, in doing so losing their land, crops and ancestral gravesites – and they don’t want to move. Resettlement projects have failed in other areas of Mozambique. In coal rich Tete, thousands of villages were moved away from mining sites and now frequently demonstrate outside the mine and block railways to disrupt coal shipments. Rio Tinto is exiting the mine and selling its stake to India’s International Coal Ventures for US$50mn.
Similar issues may be encountered in Kenya in the development of the country’s oil finds. Kenyan oil is located in Turkana, the northernmost region, at the end of a bone-jarring drive along a shattered road the desert is trying to reclaim. The area is a battlefield where two Nilotic cultures have been engaged for centuries in cattle raids that escalated into far deadlier conflict with the influx of small arms across the borders with Uganda, Ethiopia and South Sudan.
Livestock is the local currency and wealth is determined by the size of the herd. While aid agencies have been encouraging the Turkana to join the cash economy, selling their livestock ahead of droughts and buying more afterwards, or settling near irrigation channels and growing maize, like the villages in Palma and Tete, the local community do not want to change their traditional way of life. To those on the ground, oil and gas production does not signify progress; rather disruption and destruction.
A significant challenge for investors is that host governments cannot be relied upon to reach agreements with those local communities who will actually be impacted by the projects.
Natural resources are most beneficial to a nation when its government already enjoys democratic accountability, fiscal discipline and a bureaucracy that is based on merit and relatively free of corruption. Norway’s effective management of its natural resources wealth, invested to create the world’s largest sovereign wealth fund, is the envy of the world. In many African nations, such as Nigeria, oil revenue has simply disappeared into the overseas bank accounts of presidents and their cronies. Oil is particularly corrupting because it is hard to keep track of and easy to turn into cash.
Kenya does benefit from democratic institutions and the recent strengthening of the judicial system and the rule of law. With a sizeable middle-class population, there is potential for civil society activism to maintain a check on the government’s behaviour.
In neighbouring states these institutions are weaker and more prone to abuse.
The Mozambique government has already begun reaping the benefits of the nascent gas industry, receiving around US$1bn in taxes from gas-related deals in the past 12 months. There is concern deals with oil companies may be flawed given the private interests of members of Frelimo and government officials.
Bonanza hinges on LNG laws
Legislation is crucial for the development of oil and gas reserves to continue. In Mozambique, Anadarko and Italian, which have found gas in a neighbouring block, can’t start development until the government completes legislation setting the terms for exports. Effective laws governing the oil and gas sector provide investors, financiers and LNG buyers with an enhanced risk profile and will improve the country’s ability to compete against established players.
While investors are pushing for the finalisation of the law, the government is increasingly focused on wanting to increase its stake in the projects. The history of forcible renegotiation of natural resources contracts demonstrates the importance of agreeing equitable stakes between the host nation and investors at the onset. One of the main points of contention over the decree law is the time before terms can be renegotiated. Parliament is pushing for 10 years, investors have requested 30 years and the government has accepted 15. The implication for companies investing in the projects is that host governments might demand more favourable terms when output peaks.
Similar steps are underway in neighbouring Tanzania, where the government plans to review natural gas and mining sector contracts signed with foreign investors. The review will involve the renegotiation of all production sharing agreements in the natural gas sector as well as mining development agreements. The Tanzania Revenue Authority (TRA) said “the main objective of the proposed renegotiations is to secure for the country an enhanced and fair share [of revenue] from the extraction of non-renewable natural resources”.
Little has been said by the government about the US$20bn to US$40bn in investment the World Bank estimates will be required to develop Tanzania’s natural gas resources or the huge up-front costs of discovering gas in the first place. Against that backdrop, the proposed renegotiations will put pressure on government relations with investors ExxonMobil, Statoil and BG Group.
Two state officials, including the chairman and director-general of the Tanzania Petroleum Development Corporation, were arrested in early November 2014 for refusing to comply with demands of parliamentarians to release details of 26 contracts. While quickly released, the dispute will further delay legislation for the industry and exacerbate concerns over controversial plans to introduce a new constitution before the 2015 elections.
Contractual terms have become a point of contention in the upcoming election. If they are published, the opposition will automatically claim the incumbent administration secured a poor deal for the country and public opinion will force their renegotiation.
In Kenya, devolution of power to the 47 counties is complicating the investment environment, with mineral-rich county governments attempting to introduce new taxes on mining and oil companies. Although production-sharing agreements are signed with the national government, on a day-to-day basis, companies have more exposure to local government entities. Under pressure from constituents, county leaders take at times aggressive stances against exploration companies, especially if constituents criticise companies for not prioritising communal development. While national law may trump county law, the pattern of local authorities trying to circumvent the national government in relation to the extractive industries is set to continue