The development of major gas industries in the Rovuma basin may fail to boost the country’s economy as predicted, with demand from European markets far from guaranteed, new research reveals.
Mozambique’s liquefied natural gas (LNG) deposits were heralded in 2010 as a sure path to economic prosperity for the country – one of the poorest in the world – when it was first discovered. In 2016, the International Monetary Fund (IMF) estimated that total revenues could reach 500 billion dollars by 2045. But that figure now appears to be “out of touch with reality”, say the authors of a new report, ″Navigating the Decisions: The Risks for Mozambique from Liquefied Natural Gas Export Projects″.
Instead, the report warns, the country’s LNG plans could ultimately backfire, with three underlying risks: undermining Mozambique’s economy and sovereignty, affecting the environment and worsening tensions.
“Mozambique’s LNG bonanza looks increasingly risky,” says Richard Halsey, policy advisor at the International Institute for Sustainable Development (IISD) and lead author of the report.
In this edition, Carta brings the incidences and recommendations of the study and the main risks for Mozambique.
Analysing experience with existing LNG projects suggests three main risk areas and policymakers should seriously consider whether the potential benefits outweigh the risks.
Risk 1: Uncertainty about long-term demand for Mozambique’s LNG
LNG revenues depend on demand over the next 20 years. Mozambique’s existing LNG projects are structured in such a way that most of the potential tax revenues for the government will not arrive until the 2030s and 2040s.
Given that the majority of revenues will be generated from profit sharing, if LNG operations become only marginally profitable, revenues could be very low. To assess this risk, we have to look at the forces that will influence the LNG market in the 2030s and beyond.
Firstly, the transition from fossil fuels to renewable energies will gradually reduce demand for all fossil fuels, including gas. For example, in March 2023, the EU reached a provisional agreement to increase the binding renewable energy target to 42.5 per cent by 2030, approximately double the percentage compared to 2019 (European Commission, 2023).
In addition, the EU document “Going Climate Neutral by 2050” proposes renewable energy of more than 80 per cent by 2050 (European Commission, 2019). If this is implemented, the unprecedented use of renewable energies will drastically reduce the fossil fuel market in the 2030s and 2040s. This trend could be replicated globally for gas sooner than many previously assumed.
Global reductions in gas demand decrease LNG trade, which in turn influences decisions on LNG export projects in Mozambique.
The IEA’s World Energy Outlook 2023 reports that global net trade in LNG was 479 billion cubic metres (bcm) in 2022 (IEA, 2023). In the Zero Net Emissions (NZE) scenario by 2050, this trade is expected to increase to 507 bcm by 2030 and decrease to 121 bcm by 2050. If this scenario materialises, the fall in trade after 2030 will lead to a ″serious″ overcapacity, and the IEA estimates that in this scenario around 75% of new LNG projects would not be able to recover their initial capital. The IEA has also produced scenarios based on Stated Policies (STEPS) and Promises (APS). In all scenarios, natural gas demand is estimated to peak before 2030. Consequently, the LNG capacity currently in operation or under construction is sufficient for all scenarios until after 2040. In the NZE scenario, projects under construction are no longer needed (IEA, 2023).
Secondly, even if gas demand remains robust in the 2030s, other gas suppliers could supply important markets. Piped gas, when available, is generally cheaper than LNG. The war in Ukraine has resulted in a reduction in Russia’s piped gas exports to Europe; and while this may mark a permanent reconfiguration, it could be partially reversed in the future. In development, gas assets closer to markets could reduce Mozambique’s demand for LNG.
For example, the UK’s planned expansion of gas production in the North Sea could lead to reductions in imports (UK Government, 2023).
Risk 2: Uncertain revenues for the government
LNG revenues are tied to volatile gas prices. Predicting commodity prices in the distant future is notoriously difficult. If global ambitions to phase out fossil fuels are realised, the value of LNG could plummet as countries phase out fossil fuels. Global reductions in demand for fossil fuels, geopolitics, the possible development of piped gas infrastructure, and the entry of new competitors could create downward pressure on LNG prices, potentially leaving Mozambique with “impossible” LNG assets that will no longer be operated profitably.
LNG has been promoted as an economic saviour for Mozambique, but a fundamental problem is that revenue estimates for LNG projects are usually provided by the gas industry or other parties with an interest in fossil fuel extraction. As such, revenue projections can be exaggerated or details of the revenue structure omitted. Despite the uncertainties surrounding natural gas prices, the government has estimated revenues of between 35 billion dollars and 63.6 billion dollars for projects commissioned during its term.
The natural gas markets were disrupted by Russia’s invasion of Ukraine. The sharp reduction in pipeline supplies to Europe has squeezed global gas markets, resulting in record prices and a drop in global demand of around 1 per cent by 2022. Demand fell by 13 per cent in Europe, but there were also cascading effects in emerging markets and developing economies in Asia, where aggregate demand fell for the first time. The main gas producing regions showed resilience, with production increasing in the Middle East by 3 per cent and in the United States by 4 per cent.
The crisis has caused gas-importing countries around the world to scramble to secure supplies. This has increased the short-term prospects for additional investment, especially for liquefied natural gas (LNG) export projects. But responses to the crisis have also laid the foundations for a more rapid shift away from natural gas in Europe and the United States, while more optimistic projections for renewables imply weaker growth in natural gas demand, especially in the emerging markets of Asia.
Global natural gas demand for 2000-2050 scenario
Each scenario projects the end of gas growth; future prospects depend largely on the pace and scale of growth in clean energy, electrification and efficiency improvements.
In STEPS, natural gas demand growth between 2022 and 2030 is much lower than the average growth rate of 2.2 per cent observed between 2010 and 2021. It peaks in 2030, maintaining a long plateau before gradually declining by around 100 bcm by 2050.
In comparison, an independent 2021 analysis by Open Oil for the same projects, using open source modelling and data, puts lifetime revenue at just $18.4 billion.
The effect of increased competition in the LNG markets
In 2019, when the final investment decision was made for Mozambique LNG, Rystad indicated that the break-even price for this project was US$5.5 per mmbtu (The American Oil and Gas Reporter, 2019), and McKinsey estimated that new market entrants should be priced at US$7 per mmbtu to remain competitive (Chong et al., 2019). While this type of analysis indicates that projects can remain solvent, it does not address the level of profit and therefore government revenue that will be generated.
Given the potential overcapacity in the LNG market (as future demand for LNG decreases), prices are likely to be subject to downward pressure caused by competition between suppliers. When demand is restricted, the most expensive projects may be forced to cease operations. In this circumstance, all projects must accept lower prices on the market, unless long-term purchase agreements are in place. The pricing mechanism in the purchase agreements for LNG projects in Mozambique is confidential (Ministry of Economy and Finance, 2018).
The conflict could jeopardise future gas revenues
Both the Mozambique LNG and Rovuma LNG projects would liquefy gas in the Afungi complex, which is close to Palma and other locations that have been targeted by insurgents. If the conflict in Cabo Delgado continues (or is aggravated by the presence of the gas projects), future LNG exports could be jeopardised, security-related costs could increase and the potential for any significant revenue for the state could be further eroded.
Revenue diversion and misappropriation
Mozambique has been supplying piped gas to South Africa from Pande and Temane since 2004, but government revenues have been minimal due to poor contract terms and rent-seeking by Mozambique’s ruling elites (Centre for Public Integrity, 2013; Salimo et al., 2020). Similar factors could reduce revenues from LNG projects.
Risk 3: Erosion of sovereignty
The protection of LNG projects at the expense of Mozambique and powerful players in Mozambique’s economy are creating governance risks. These companies secure the best terms for their operations, while limiting the government from collecting project-based revenues or introducing regulations. Legal protections for investors even restrict government action around fiscal, energy and security policy.
International laws protect investors
International investment law allows for the development of agreements that specify the form of economic protection that foreign investors have in host states. The dispute settlement system (ISDS) then allows investors to seek monetary compensation if agreements are violated. All LNG projects have access to ISDS, and the Rovuma Basin Special Legal Framework essentially guarantees (through ISDS) that the government will not adopt any laws that could economically jeopardise (defined as greater than USD 5 million) investments in the Rovuma Basin (Di Salvatore, 2022).
The main LNG operators in Mozambique (TotalEnergies, ENI and ExxonMobil) have used ISDS in the past to overturn court decisions or regulations (Di Salvatore, 2021).
Given that environmental and climate change regulations tend to reduce the profits of LNG projects, this access to ISDS could prevent improvements in environmental and climate issues (Di Salvatore, 2022). Other state regulatory activities could be similarly threatened by ISDS.
Some of the bilateral agreements also contain highly problematic clauses, including a stabilisation clause that Mozambique cannot change its hydrocarbon laws without the consent of the companies involved for 35 years and, if they do, any economic consequences fall on the government to compensate. In a context where Mozambique has high economic liabilities, the consequences of changing any of the conditions are enormous. In addition, TotalEnergies has agreements whereby all losses due to war, insurgency and social instability must be compensated by the Mozambican government.
Gas security at the expense of people
When the insurgents attacked Palma, the town was not protected, but the Afungi complex had 800 soldiers for defence (Hanlon, 2021). This is an example of a general trend in which the government has consistently prioritised the protection of gas investments over the population, and this trend looks set to continue in the Cabo Delgado Reconstruction Plan (Nhamirre, 2022). The EU’s effort to increase Mozambique’s LNG exports could further this security imbalance at the expense of local communities (Ndebele, 2022).
Further erosion of state power
In the region surrounding the Afungi facility, where the weakening of state capacity has led to an increasing inability to provide basic services, these have been supplemented or even replaced by TotalEnergies and humanitarian organisations. In this context, TotalEnergies has embarked on a huge role, blurring the line between state responsibility and corporate responsibility. While the work itself is beneficial for people and the local economy, there is now confusion around the coordination and sequencing of initiatives (Feijó, 2023a). In this context, where power has shifted to TotalEnergies, the company will be able to exert undue influence and control in the province.
These two processes, whereby multinational companies take over some of the functions normally provided by states and expand the areas in which they operate, present a risk that decisions affecting residents are being made by companies and not by the authorities.
The irony is that the presence of the gas projects probably fuelled the insurgency in the first place.
Conclusions
Since the announcement of large gas reserves off the coast of Cabo Delgado in 2010, Mozambique’s development strategy has relied heavily on financial returns from gas projects. It was hoped that the economic windfall would increase GDP, stimulate industrialisation and create jobs. Twelve years on, that hasn’t happened. In fact, the country is in a worse socio-economic position than it was in 2010. GDP growth has slowed, while debt, inequality, unemployment and poverty have increased. As a province, Cabo Delgado has been the most affected (Gaventa, 2021). This means that “Gas for Development” has not yet happened.
Although there have been other factors, such as the corruption scandal that resulted in several donors withdrawing direct financial support to Mozambique in 2016, LNG has not yet provided the expected positive boost to the economy (Wensing, 2022). As an LNG, exports began in 2023, but the question is whether it is still reasonable to expect that these LNG projects can or will provide enough future benefits to offset the negative impacts.
In this respect, the expansion of LNG projects could be detrimental to Mozambique. Given the structure of the existing LNG business and the uncertainties in the LNG market, there is no plausible scenario that revenues from LNG production will become transformative.
Government planning must consider this scenario and its implications for economic strategy.
The risks described in this report show that future demand for fossil gas is uncertain and that revenues from any volume of LNG exported could be substantially lower than industry projections or government expectations. Furthermore, LNG projects could be part of the reason for the increase in violence in Cabo Delgado, and more investment in these projects will not address the root causes of the conflict. LNG projects have a revenue stream that prioritises the consortia involved in their operation and a legal framework that could turn them into a liability for Mozambique. An expansion of these EU-led LNG projects will feed into this existing configuration, in which most of the benefits are taken out of the country, while most of the risk falls on Mozambique.
Taken together, these risks also increase the likelihood of:
- Stranded assets: the government has capital positions paid for with debt, and unprofitable projects can become a net liability.
- Gas resources become a “curse”: struggles for control of gas assets become politically divisive and breed corruption, concentration of wealth exacerbates inequality and a less diversified economy, and non-gas industries face neglect.
- An erosion of sovereignty: legal protections allow gas companies to restrict energy, security and economic policy and push economic responsibility onto the state.
Mitigating the Negative Impacts of LNG Projects
The government must ensure that TotalEnergies deals with unresolved issues related to the Afungi complex, including relocation and compensation for communities and damage to the ecosystem.
Ongoing security interventions in Cabo Delgado must additionally protect the local population from the LNG infrastructure and the Afungi complex.
Since the EU is linked to these LNG projects and has financed military actions in Cabo Delgado, it should also support the necessary repairs.
Mozambique should carry out a full and independent financial reassessment, considering the risks raised in this report. At the very least, Mozambique should investigate the contractual revenue structure and elements of ISDS so that the country receives significant financial resources and fair treatment in all years of operation.
LNG exports are likely to get even worse as the global low-carbon energy transition accelerates.
Mozambique should instead pursue projects with long-term sustainability and low environmental impacts, and which directly improve socio-economic issues in the country. Identifying the best opportunities will require a thorough analysis of the entire economy.
The role of the EU
The EU (including member countries and EU-based companies) can promote new LNG technologies in Mozambique by investing in new facilities, supporting LNG exports, signing long-term agreements to buy LNG or financing military protection.
Agreements that are of little benefit to the people of Mozambique and undermine sovereignty are a form of unfair resource extraction. Furthermore, encouraging or facilitating the development of new LNG capacity is incompatible with efforts to tackle climate change. The EU should align energy and climate policy with its influence in Mozambique and support low-carbon policies.
Economic Diversification
All development and infrastructure projects (including alternatives to LNG investment) should address social and environmental impacts and have favourable financial arrangements for Mozambique. In these sectors, Mozambique should try to gain as much along the entire value chain as possible. Many distributed initiatives usually benefit more local people – with fewer risks – than mega-projects.
Lessons learnt from LNG projects could help avoid similar mistakes in future projects in other sectors.
Mitigating Social and Environmental Impacts
Mozambique must implement well-managed community involvement processes to achieve equitable results. These require qualified and reliable intermediaries, as well as access to easy-to-understand information in the appropriate language.
Mozambique should initiate transparent HRDD processes at the start of the project and continue them throughout the life of the project. This will reduce the company’s liability for human rights violations.
Mozambique must strengthen environmental and emissions regulations to reduce their impact and improve monitoring.
In Cabo Delgado, it is particularly important that development projects address underlying issues of poverty and inequality, as these are causes of conflict. This includes provision for local employment and skills development.
Contracts and agreements with international partners or companies
Fair proportion and timing of financial rewards: deals with foreign companies should not take most of the profits abroad in the early years and delay payments to Mozambique.
Companies must be subject to standard tax laws and not be authorised to evade taxes. Very careful and rigorous evaluation of contracts to ensure that international investment does not impose unfair restrictions, risks or responsibilities on Mozambique and its people.
Carta de Moçambique
