beyondbrics

Eni SpA, the Italian energy company, has made a “giant” gas discovery off the coast of Mozambique that could change the fortunes of one of the world’s poorest countries… eventually.

Although the find could represent a much needed windfall for the east-African country, questions of infrastructure, politics and how the wealth will trickle down to the average citizen all mean this pay-day is many years off.

The find, which Eni (ENI:MIL) says may contain some 425bn cubic metres of gas, is located about 45km off the country’s northern coast. ENI owns 70 per cent of the field, dubbed Mamba, with Galp Energia of Portugal, KOGAS of South Korean and ENH, Mozambique’s state oil company, taking 10 per cent each.

To put the size of the find into context, the International Energy Agency’s chart below shows that Japan, the world’s largest net importer of gas in 2009, took in 93bn cubic metres, less than a quarter of Mozambique’s total potential output:

If the gas does come on stream it will give a substantial boost to Mozambique’s economy. As Anne Fruhauf of Eurasia Group, told beyondbrics: “Domestic demand for oil and gas is relatively low and is not expected to rise significantly. The country has a massive hydroelectric, and some coal-based, power generation industry and is one of the only net exporters of energy in the region.”

That should allow the country to benefit enormously from exports (probably to Asia) both via its direct 10 per cent stake in the field (which Fruhauf says is a “relatively clear and predictable” arrangement) and through taxes and royalties. ENI said it was too early to say how much these would amount to.

However, ENI told beyondbrics that production would not begin until 2016 and as Fruhauf noted: “The civil war [of 1992] had a devastating impact on the countries infrastructure – there is basically no infrastructure in the north of the country.”

ENI said it was too early to discuss infrastructural plans or requirements but that the amount of gas discovered “might justify” the construction of “up to three” liquefier plants in Mozambique.

Then there are the  political and social risks associated with a find of this size. Natural resources can threaten a country’s stability if solid institutions are not already in place – see Sudan, Angola and Nigeria. This is particularly true of oil, which is easier to monetize, but can still be true of gas.

So Mozambique’s challenge will be to avoid what Fruhauf called “a repeat of the resource curse” because as the gas comes on stream “the question of the trickle down effect will become much more pressing and the effect on the population will be increasingly important”. That’s particularly so because “those provinces where the gas is located are the poorest regions in an already very poor country”.

Mozambique is an exceptionally poor country. Its GDP per capita is one of the smallest in the world. Just last year a threatened 30 per cent increase in the price of bread resulted in riots that left dozens dead and most of its people get by on less than $1.25 a day. It is still recovering from a brutal civil war, which ended in 1992 just 27 years after the country gained independence from Portugal.

That said, Fruhauf was optimistic about Mozambique’s institutional infrastructure: “Mozambique was an ugly duckling of the investment world but is increasingly being seen as a go-to country, particularly for resource investors… There is a basic institutional infrastructure in place which has a good reputation, particularly at the higher levels. Investors have demonstrated quite high confidence in Mozambique and it is becoming a little bit of an investor model – notably for large-scale projects.”

However, according to Fruhauf, “it is in infrastructure investment that there is concern as there are state-owned and private companies – with political connections at the highest levels – involved in public-private infrastructure deals. Recently, Vale, the Brazilian miner, experienced quite a lot of wrangling about the Nacala railway line and had to buy into it to gain control of the infrastructure build-out vital for its coal exports.”

Considering the enormous investment that will be needed to get this gas-treasure going, that is not very reassuring.

Related reading:
Special Report: emerging Africa, FT
Gas: What to do with a lavish endowment, FT