Sasol’s gas projects: time to clear the air
Civil society organisations say Sasol’s gas projects are ‘milking’ Mozambique. This will put pressure on the group to renegotiate its contracts with the government or at least increase transparency
The reports on Sasol’s Mozambique activities released by Oxfam and the Centro de Integridade Publica (CIP) last week were riddled with emotive language and misunderstandings, but they made an important point: Sasol needs to do more work in Mozambique on transparency and communications.
The two reports, "Sasol will continue to milk Mozambique" and "Sasol’s development plan under the Production Sharing Agreement is problematic", raise other serious issues. They show a perception that the Mozambican government is not monitoring tax revenues, so Sasol is getting away with the greater share of profits from exploiting the Pande and Temane gas fields, as well as the new gas fields under development at Inhassoro. Communities also feel — as all communities next to mines do — that they are not getting enough jobs and local economic development.
Sasol needs to disclose what it is paying the government, justify its costs, and explain where and why it is falling short of its social commitments. If it is falling short, the Mozambican government must explain to its citizens why it is letting Sasol get away with it.
Even with more transparency, the pressure is building for Sasol to renegotiate its agreements, as governments regularly try to do once they perceive extractive resources companies are making a profit. They forget how they bent over backwards to attract those companies in the first place. Is it fair to backtrack on agreements? No. But can resources companies afford to pay more? Yes, when prices are high, but there must be a formula ensuring that governments share in the downside when prices slump.
Edson Macuacua, a member of the Mozambican parliament, says the context has changed since Sasol first signed its Petroleum Production Agreement with the Mozambican government in 2000.
Then, Mozambique needed to start its extractive industries from nothing. Today, its objective is to maximise the benefits of its natural resources for its people. To do so, it needs different deals and policies.
It needs a better way of sharing information among all its stakeholders so it is working with accurate information. It needs assistance to build up capacity within government to monitor and enforce agreements as well as verify tax revenues.
He stresses these are his personal views. Mozambique’s policies and laws have to be formulated with input from the various arms of government.
The CIP’s reports accuse Sasol of paying too little income tax from the Pande and Temane gas fields because it inflated capital costs, including by US$400m on an expansion of the central processing facility. CIP says operating costs were about 50% of the revenues and Sasol was selling Mozambique’s gas to itself at an artificially low price (which the CIP erroneously calls abusive transfer pricing).
Some of the conceptual errors in the CIP reports are that it compares the cost of the expansion of the central processing facility with the initial cost, and concludes the initial cost was inflated. But initial costs in a greenfields site include site preparation and establishing basic infrastructure and logistics, so they will be larger. The CIP is also under a misapprehension on how gas is priced. It compares Southern Africa’s gas prices to international gas and oil.
Though there is some correlation with oil, gas pricing is regional since an important element is logistical cost. Southern Africa has no established regional market for natural gas, other than the market Sasol has built up in the past two decades. Establishing a new market from scratch is very expensive and in Sasol’s case includes the cost of building a 900km pipeline between Mozambique and Secunda.
Another problem with CIP’s analysis is that it does not factor in some of the wider contributions that Sasol has made to the Mozambican economy, beyond paying corporate taxes. These include creating employment and generating employees’ taxes, building infrastructure, generating support services and proving to other investors that Mozambique is a country in which business can be done successfully.
Fatima Mimbire, programme officer at CIP, says the organisation acknowledges that Sasol brought wider benefits to Mozambique but this analysis focused only on its revenue contribution and the fact that it was below projections, as was Sasol’s contribution to local economic development.
For example, according to the CIP report, when Sasol spent $30m to build housing for senior staff at Nyamacunda, the contract was awarded to an SA company, SMH Construction, not a Mozambican company.
The researchers acknowledge that Mozambican small and medium enterprises are not competitive with SA companies in size, quality and capacity. But they say when business is awarded to Mozambican entities, these are existing elites, not local community businesses.
This is a valid grievance. SA has heard it about Transnet’s procurement, too. But it relates to very wide-ranging problems about local capacity and unequal access to opportunities that are beyond Sasol’s power to address in the short term.
Macuacua says it is essential that local communities should benefit from natural resources projects because if they don’t, it becomes a major source of conflict.