Mozambique: $100Bn Windfall Anticipated From The Oil & Gas Industry-But Where Will The Money Go?

Mozambique still has no plans for how to spend the $100bn it is expected to receive over the next 25 years thanks to oil and gas exploration by foreign oil and gas giants. The lack of a clear strategy for the use of the revenues puts the corrupt country in a vulnerable situation where the money can be spent without transparency. To avoid abuse of increasing wealth, institutions must be created to control and distribute the wealth from natural resources.

By Jorge Joaquim

Mozambique is already a producer of Liquefied Natural Gas and the first export took place on November 13. The valuable resource is produced on a floating platform Coral Sul FLNG which was later officially inaugurated on November 23rd by Mozambican President Filipe Nyusi. Following the start of production, the government is preparing to pocket millions of dollars from taxes and more costs from that project. This year, for example, the Mozambican executive expects to collect for the state coffers $32m in revenue from the new Coral Sul floating platform.

The project is led by Italian oil company Eni and is known as Coral Sul Floating LNG. Gas production and the conversion of that gas into LNG will take place offshore. The facility is designed to produce about 3.4 million tons of LNG per year. Coral FLNG’s production is being sold to the British fuel company BP on the basis of a 20-year Gas Sales Contract.

Coral FLNG was the first of Mozambique’s projects to achieve a Final Investment Decision and the first project to export LNG. The first shipment was made by the British Sponsor cargo ship heading to Europe. The Coral Sul project raises expectations for anyone because of the size of its investment, valued at $8bn, and its value in the international market.

The Government of Mozambique has long praised LNG revenues as a driver of economic change for Mozambique. LNG has the potential to provide substantial revenues for the government. The outlook for government revenues from FLNG is increasingly important due to external debt challenges and declining donor support.

Overall earnings for the state are expected to reach $20bn over the next 25 years of the life of the South Coral FLNG project. Added together with other oil and gas exploration projects, Mozambique is expected to cash in on more than $100bn. So far, the floating project is the only one that is operational. TotalEnergies’ $20bn project, which is among the three largest in the country, was already underway, but was suspended in March 2021 due to terrorists attacks in Cabo Delgado.

While the government is announcing with pomp and circumstance the start of LNG production and export, civil society is frustrated that there is no clear plan on how the billion-dollar revenues will be applied. The transfer of the natural gas revenues to a specific account, as an example of a sovereign Sovereign Wealth Fund, would give guarantees of greater transparency.

What is known so far is that the government will allocate 10% of the tax revenues from the exploitation of natural resources to the development of the provinces where extraction takes place. The money is to be used exclusively for financing infrastructure projects and development programs that have a multiplier effect on the local economy.

Warns against exaggerated gas expectations

 Mozambican President Filipe Nyusi has warned against exaggerated expectations of the revenue that will be generated by liquefied natural gas from the gas fields in the Rovuma Basin, off the coast of the northern province of Cabo Delgado. He said that the revenue expected from LNG between now and 2024 will not even be enough for the full rehabilitation of the main north-south highway.

“This is a problem that must be understood, comrades”, said Nyusi. “The gas from the Coral South Floating LNG Project is not even enough to repair the EN1. What we will receive, if we are lucky, is no more than $30m this year”.

Gas revenue in 2023 and 2024 will be higher, but Nyusi put it at no more than $100m a year. “If we obtain $100m a year, that will be very good”, he said, “but that may not always happen”. So, the President urged the Mozmabvican people not to place all their hopes in LNG.

Revenue collection for 2023 is projected at $5.5bn, but only 0.3% of this will come from LNG industry.

Nyusi warned that it will be another ten years before really large sums from LNG start flowing into the state’s coffers. Nor was it true that the planned Sovereign Wealth Fund would miraculously produce a flood of money for the state budget. The only way forward, Nyusi insisted, was to diversify the Mozambican economy. “If we don’t, we shall be killing ourselves in vain here for something which is not as big as we imagine”.

Despite these good prospects, it is important that Mozambicans do not consider gas exploration as the only and greatest solution for the project to develop Mozambique. There is a need to increase production and productivity in traditional activities such as agriculture, fishing, tourism and power generation projects, among others. There are many more opportunities in other areas of the economy for revenue generation and with high potential for creating a considerable number of employment opportunities.

 Opportunity for attracting foreign investment

The proposal to create the Sovereign Wealth Fund has been sitting in the Mozambican parliament for some time and it has caused many people to be astonished that production and export has started before a transparent mechanism is in place to manage the money that will come from the oil and gas projects. Many Mozambicans have welcomed the start of liquefied natural gas exploration, but demand a transparent management of the revenues for the benefit of the national economy.

Mechanisms for the distribution of wealth are needed in order to avoid mismanagement of resources, and a lack of diversification of the economy based on concentration on the exploitation of raw materials, that is, an economy that reinforces poverty and violence. The Mozambican government should explain the benefits of gas exploitation, since the resulting revenues should serve to improve the standard of living of the population. The government must explain what income the country will earn, not only from gas, but also from the exploitation of other national resources.

Exacerbated corruption in Mozambique has caused many investors to lose confidence, but the new billion-dollar gas projects could turn things around when the revenues from the deal are well managed. The implementation of the projects will also have a positive impact on economic growth, as well as from the point of view of public accounts and balance of trade.

In summary, these developments raise the bar for confidence and expectations for the future, in the sense that Mozambique can take a significant position as an exporter of LNG in the energy transition phase and improve its economy. The start of gas production confirms the good moment the country is experiencing as a recipient of billionaire foreign investments after a period when few believed in Mozambique, especially investors, multinationals and economic institutions, due to various factors dominated by corruption.

Major consumers of gas worldwide are seeking new supplies to support energy security, and this could be an opportunity for Mozambique given the enormous gas deposits it has.

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