Mozambique matters to an SA gas market heading into deficit

If the recent call for an end to new oil and gas exploration by the International Energy Agency, long the most loyal friend of the oil industry, did not underscore that the world is changing, “Black Wednesday” made it inescapable.

On the same day that a court in The Hague ordered Shell to accelerate the shrinking of its carbon footprint, shareholder revolts imposed emissions targets at Chevron and placed climate activists on the board of Exxon. Then a Belgian court found that the country’s failure to meet emission reduction targets violated human rights. 2021, when the world will gather in Britain for a global climate summit, is shaping up to be the one that sets the end-date for fossil-fuel based energy.

SA likes to swim against the tide, and its government might think it has control over the country’s energy mix, but it will get harder to do so in the coming years. In addition to growing international pressure from Western governments and activists, the country’s fondness for carbon-intensive electricity faces a fast-moving and ever-more hostile investment and trade environment.

Coal and oil fuel an unsustainable 90% of electricity generation. The government has committed to reducing dependence on coal by half in 2030, but this is insufficient, and it will undoubtedly be forced to further reduce it sooner than planned.

Natural gas is one of the options as a medium-term option for the country’s imperative, urgent and unavoidable transition to renewables. While growing pressure is being exerted on this fossil fuel, there will be a transition window for comparatively clean gas if government acts rapidly.

Mozambique’s gas fields at Pande and Temane currently supply much of SA’s demand through the 850km Republic of Mozambique Pipeline Company (Rompco) pipeline, its share of which Sasol has just sold. However, they are heading into long term decline, and Sasol’s exploration in the Inhambane on and offshore areas has not turned up sufficient reserves.

SA will thus need new sources as the market enters deficit next year, and the transition away from coal and oil through gas requires a quantum leap in supply. The country’s gas market is entering a period of significant and lasting change, with risks and opportunities.

Domestic gas exploration is delivering results, with Total leading the discovery of offshore reserves estimated at about 60-trillion cubic feet (TCF). This alone would fulfil half of current demand, solving the incoming deficit but falling well-short of future requirements. Again swimming against the tide,  government is also taking a second look at shale gas as the world moves away from it. In addition, liquefied natural gas (LNG) imports can bring gas at a competitive price as the only alternative. At least two projects are currently in the offing: Transnet is looking at the investment case for a terminal at Richards Bay; and Total is involved in the Gigajoule terminal in Mozambique’s capital, Maputo, which can supply SA through Rompco.

Critical policy and investment decisions are needed soon that will shape the local and regional gas market for decades and have huge implications on the economy. But mitigating against timely and sufficient domestic production are the two perennials of SA: infrastructure deficit and strategic policy dithering.

This makes what is happening in Mozambique of much greater importance than just its security crisis, which is already a considerable risk, as we highlighted in the first article in this series. The country will continue to feature prominently as a supplier for decades to come. Indeed, the reserves discovered in Mozambique’s Cabo Delgado province, at 150-170 TCF, are simply too large to ignore — regionally and globally.

The three LNG projects under way involve oil and gas majors, including Exxon, Total, ENI, China National Petroleum Corporation, Japan’s Mitsui and national companies from India, Thailand and Portugal. Each of the projects involves initial multi-billion dollar investments as well as follow-on expansions for a decades-long investment rollout of $100bn (R1.3-trillion). Revenue estimates currently hover around $500bn (R6.5-trillion). To put this in perspective, Mozambique’s GDP was $15bn (R220bn) and SA’s was $220bn (R3,15-trillion) in 2019. These reserves thus amount to over 30 times and 2.3 times the respective GDPs of Mozambique and SA.

Reserves of such magnitude, with more discoveries anticipated, will create a global energy player on par with Algeria and Nigeria on SA’s doorstep. This will be a game-changer with profound economic and geopolitical implications for the region. Mozambique is thus a vast opportunity for SA. Its sophisticated private sector alone, already a key player in Mozambique, stands to greatly benefit through its expertise and product exports from the rise of a new economic powerhouse.

But none of this will come to pass if the grave security crisis is not resolved. Rapid escalation has forced Total to declare force majeure on its Cabo Delgado project. Exxon has delayed a final investment decision on its Rovuma LNG project. Though the ENI-led Coral offshore LNG project is insulated from most security concerns and is on track for production to begin by late 2022, it represents a mere 5% or so of Mozambique’s reserves.

Unless it is prepared to sidestep natural gas entirely in its urgent energy transition, and unless it is willing to let an IS-affiliated Islamic insurgency take hold and expand under its nose with the grave implications this entails, Mozambique is now SA’s — the region’s “superpower” — problem … and its opportunity.

• Mason, a Mozambique analyst, is an associate of resilience advisory firm Eunomix. This is the second article in a four-part series. The series has been produced by a team of expert associates from Eunomix, with deep experience in Mozambique, resource economics and fragility, supported by extensive data analysis and consultation.