Mozambique’s economic prospects rest on the extraction of its LNG reserves
While Mozambique’s economy has been dealt a number of blows in recent years, including a debt scandal in 2013/14, the pulling of aid from international lenders in 2016, and a number of devastating weather events, including cyclones Chalane in December 2020 and Kenneth and Idai in 2019 and a deadly insurgent attack in March this year, the country’s economic prospects remain robust with economic activity expected to surge in the years ahead as the country’s liquified natural gas (LNG) projects come online, despite being delayed due to COVID-19 and the ongoing insurgency in Cabo Delgado.
Mozambique has attracted Africa’s single largest investment bolstering the country’s prospects of becoming a significant force in the global LNG space, where the East African nation has the potential to compete with the likes of Australia, Qatar, Russia and the United States. Mozambique has become known as the home of oil and gas in Southern Africa. Investments into Mozambique’s LNG sector include the $20bn project led by French energy giant Total, the $4.7bn Coral Floating LNG project led by Eni and ExxonMobil and the $30bn Rovuma LNG project led by ExxonMobil, Eni and the China National Petroleum Corporation.
LNG production set to surge in 2024
Mozambique’s current natural gas production is operated by Sasol in the central province of Inhambane, which holds proven reserves of 2.6trn cubic feet. The natural gas is produced and processed at a plant in the town of Temane. The gas is transported via pipeline to South Africa. Note that there is a link to southern Mozambique for domestic use. While these numbers are nothing to write home about, the discovery of over 180trn cubic feet of natural gas reserves in the Rovuma basin by Anadarko (Area 1) and Italian firm ENI (Area 4) in 2010 have put Mozambique on the global map as a major source of LNG. The Area 1 project has since been taken over by a Total led consortium, which despite recent setbacks, still expects to deliver LNG in 2024. On its website, Total said that its plans for the approximately 65trn cubic feet of recoverable natural gas include a two-train project with the ability to expand up to 43mn tons per annum.
Latest round of oil and gas licensing
Minister of Mineral Resources and Energy Max Tonela announced that Mozambique will be holding its sixth oil and gas licensing round this year. Tonela added that the country will open the tender for the licensing round, which was delayed from 2020 due to the coronavirus pandemic. Mozambique has identified 16 areas for licensing round, and the process is expected to be concluded by the 30th of August and the results will be published on the 30th of November. Given that much of Mozambique’s economic prospects rest on the LNG sector, investors will be keeping a watchful eye on developments on this front.
Mozambique’s energy production overview
Mozambique is currently a small producer of natural gas, but substantial natural gas deposits discovered in Area 1 and Area 4 of Mozambique’s deepwater Rovuma Basin, suggest that this will change in the years ahead, with the country expected to be one of the largest LNG producers in Africa by 2024. According to the US Energy Information Administration, Mozambique does not produce any crude oil or have any refining capacity, and it relies on imports to satisfy all of its oil product demand. Mozambique does however produce a small amount of coal but its Tete province is estimated to have large, untapped coal reserves. Developing these resources has been challenging because of limited infrastructure and an unfavourable price climate.
Oil and gas prices to remain elevated
Although oil prices have surged relentlessly over recent months, the outlook is still relatively bullish. The northern hemisphere winter is approaching and demand for burning fuels will remain high, propping up the crude market in the short term. Unless OPEC+ makes a notable change to its policies in the months ahead, we should see oil prices remain supported over the medium term, given the marked decline in crude production in some of the world’s largest producing countries such as the US against the reopening of the global economy.
Robust electricity production underpins Mozambique’s economic prospects
In terms of electricity, Mozambique is a leader in electricity production in Southern Africa, thanks to the government’s push to fully electrify the economy by the end of this decade. Mozambique generates more electricity than it consumes and exports excess electricity to South Africa and Zimbabwe. Total installed capacity in Mozambique is 2.8 gigawatts (GW). Hydropower accounts for 77% of total installed capacity. Reliable and affordable electricity is imperative for any economy to advance.
Short term economic outlook fragile, medium to long term prospects are rosy
While Mozambique’s economy has staggered along in recent years as a confluence of factors dragged on growth, economic activity expanded moderately in 2021 as the insurgency and pandemic continue to constrain growth in certain sectors, such as tourism. That said, economic activity is expected to quicken in 2022, supported by surging coal and aluminum prices and the stabilization of security risks in the northern part of the country. Forecasts suggest that Mozambique’s economy is likely to expand by 5.3% this year to normalize at 5.5% in 2024. In addition to the developing energy sector, the resilient agriculture sector is expected to drive growth in the years ahead. The LNG sector will, baring a black swan event in the country, provide a massive boost to the country’s relatively small economy.
We expect there to be strong spillover effects on other sectors of the economy. Moreover, the anticipated LNG sales will provide a much-needed boost to the country’s coffers and foreign currency earnings, both of which should have a positive impact on the currency. Currently, the mining sector, which includes the extraction of LNG, makes up around 5.2% of the economy. This is expected to increase drastically in the years ahead, with the resource sector expected to contribute to a substantial portion of the economy from 2024/25 onwards. Mozambique’s GDP reached $14.3bn at the end of 2021. On the back of the LNG projects, Mozambique’s GDP is expected to balloon from 2024 onwards.
Downside risks to the economic outlook are elevated but are abating
Besides for the COVID-19 pandemic, the biggest concern for investors, especially those investing in Mozambique’s LNG sector, is the ongoing insurgency in the northern province of Cabo Delgado. Recall that in 2021, a deadly attack led to the downing of tools at Total’s LNG hub in Cabo Delgado and the announcement of a force majeure on the project. Moreover, investments in other large LNG projects have been delayed due to ongoing security concerns stemming from the recurrent insurgency.
Mozambique's hopes of becoming a major player in the international LNG space have been watered down further following reports that Exxon Mobil are debating whether to continue with several major oil and gas projects, including the $30bn LNG development in Mozambique. Exxon should be ready to make the final investment decision once TotalEnergies lifts the force majeure on its work. However, given the bullish outlook for oil and gas prices, we are optimistic that the project will still go ahead.
Italian energy services firm Saipem, a major subsea engineering and construction firm working in Mozambique, said in a statement released on October 2021 that it expects the major project in Mozambique that was put on hold this year for safety reasons to restart around mid-2022. Saipem said that as of end September, the project remains in the backlog for an amount of approximately $4.18bn.
Restoration of peace and calm in Cabo Delgado
While the situation remains fragile, there has been some significant progress in the fight against terrorism in northern Mozambique following the deployment of a SADC contingent of troops in the region. A number of reliable sources have reported that the Mozambican army, together with the assistance of regional troops, have reclaimed lost ground against the insurgents and that peace and calm have for the most part been restored in the region. In a boost to investor confidence, Mpho Molomo, a special representative of SADC’s organ on politics said that SADC troops helping to fight an Islamic State-linked insurgency on Mozambique’s Cabo Delgado province will remain in the country until the situation on the ground is under control. Encouragingly, there have been a number of reports that displaced families are returning to their homes in Cabo Delgado. Moreover, Mozambique has received and influx of foreign aid to rebuild damaged infrastructure in the region.
Bottom line: While Mozambique’s hopes of becoming a significant player in the international LNG space have been dented after the country was struck with a double-edged sword of the COVID-19 pandemic and a violent militia outbreak, the outlook has turned rosier for the country in recent months. The progress made on the vaccine front and in the fight against the insurgency in Cabo Delgado suggests that we are likely to see the construction of the LNG projects fully resume this year. Stakeholders across the board expect the LNG projects to come online between 2024 and 2025. Although the LNG projects have been pushed out by a year or two, there is indeed a light at the end of the tunnel for Mozambique. The economy is expected to benefit significantly from the LNG sector over the medium to longer term.