From conflict and long deferred revenues to falling gas demand, there are many reasons to believe Mozambique's LNG deal has become a liability.
Ever since major natural gas deposits were discovered off Mozambique's northern coast in 2010, there have been high expectations that the find will bring economic prosperity to the country.
In 2016, for instance, an International Monetary Fund (IMF) report predicted that the export of liquid natural gas (LNG) would transform Mozambique's economy. It projected a total revenue of $500 billion by 2045 and an average real GDP growth rate of about 24% between 2021 and 2025. For a country mired in debt and ranked as having the 181th lowest human development index in the world (out of 188), this was momentous.
14 years on from the discovery of gas, however, economic development in Mozambique has not improved. Rates of extreme poverty remained at 61-63% between 2016 and 2023. In fact, in Cabo Delgado, the province where LNG facilities are under construction, poverty has gotten worse.
Hope that natural gas will bring in vast sums of money and improve quality of life remains high in Mozambique. Yet people in many African countries have held similar hopes in extractive projects only to be left desperately disappointed.
Is it still reasonable for Mozambique to expect LNG to deliver massive economic development in the future, especially when the world is shifting away from fossil fuels?
Project design concerns
A recent analysis by the International Institute for Sustainable Development (IISD) highlights several important concerns with the design of Mozambique's gas projects.
Firstly, the LNG deals were structured so that, in the initial years, revenue primarily goes towards foreign companies to help them recover their investments. As a result, most of the revenue for Mozambique is only set to come in the mid-2030s and 2040s. Given project delays, this will now be even later.
The potential economic benefit to Mozambique therefore depends heavily on the international LNG market in the late-2030s and beyond. Given global climate change commitments, much gas will likely have been replaced by lower carbon options by this time.
Secondly, the gas extraction consortiums who are part of the project have reportedly set up special-purpose vehicles in Dubai to avoid paying withholding tax on dividends or interest. This means that the 20% tax that would be paid under Mozambique's fiscal system may never materialise.
Thirdly, Mozambique has very limited involvement in the LNG value chain. While foreign companies make money at all the stages of project - from extraction to processing, shipping, storing, and trading - Mozambique is only really involved in the first step.
Revenue risks
Along with the project design putting the country on the backfoot, IISD's analysis raises two further sources of concern.
The first is uncertain long-term demand for LNG from Mozambique. The International Energy Agency (IEA) published scenario analyses in 2023 on how the world can reach net zero greenhouse gas emissions by 2050. In its net zero scenario, LNG projects under construction are no longer necessary and around 75% of new LNG projects fail to recover their initial capital costs. Even if one ignores climate change goals, all the IEA's scenarios see a peak in global natural gas demand by 2030.
If these projections prove wrong and demand for gas remains robust into the 2030s, Mozambique's LNG hopes may still be in peril from other suppliers. Piped gas, where available, is generally cheaper than LNG. Moreover, developing gas assets that are closer to markets could reduce demand for LNG from Mozambique. The UK's planned expansion of gas production in the North Sea, for example, would lead to reductions in imports.
Secondly, projections of LNG revenues are unreliable, to say the least. Revenue estimations are often provided by the gas industry itself or other parties with a vested interest. As such, they may be overstated. For example, the Mozambican government in 2018 estimated that the revenues of two commissioned projects could reach $63.6 billion over their lifetime. In contrast, independent analysis of the same projects by the company Open Oil predicted revenues of only $18.4 billion.
Further uncertainties come from inherent variables in the international gas market including volatile prices, currency fluctuations, and competition from established producers - not to mention global goals to phase out fossil fuels. If this latter ambition is realised, the value of LNG will fall, potentially leaving Mozambique with "stranded" assets that can no longer be profitably operated.
Armed conflict
Compared to other LNG producers, Mozambique has an additional disadvantage: ongoing armed conflict in Cabo Delgado. A violent insurgency, which started in 2017, led TotalEnergies to declare force majeure, halt operations, and withdraw all staff from its LNG facility construction site in April 2021. Even if the project restarts in 2024, earliest production is now estimated at 2028. The violence, which has claimed 4,849 lives as of February 2024, is an ever present threat to LNG operation, and security requirements may increase the cost of production, eroding potential revenue.
Reduced revenue is arguably better than none, but this is where international investment law could make things even worse. All the LNG projects in Mozambique have access to an investor-state dispute settlement (ISDS) system, which allows investors to seek monetary compensation if the agreements are breached. The LNG operators in Mozambique (TotalEnergies, ENI, and ExxonMobil) have used ISDS in the past to overthrow court decisions or regulations in other jurisdictions. They could potentially use the mechanism again to claim compensation from Mozambique for losses due to war, insurgency, and social instability, claiming the government failed to uphold its obligations to provide a stable operating environment. This could make LNG projects a further liability for the state.
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A way forwards
In addition to the economic risks for developing LNG in Mozambique, the climate science is clear that to remain within a 1.5ºC average global temperature increase, there can be no further development of new gas fields. This includes LNG facilities that are planned or under construction.
Once thought to be a sure means for the country to get rich quickly, the scheme increasingly resembles a smash and grab by foreign interests, rather than the bedrock of a bankable future for Mozambicans. On both financial and environmental fronts, Mozambique must rethink its reliance on LNG for economic development.
The government should conduct a full, independent reassessment of the only operational facility (Coral Sul). At a minimum, Mozambique should seek to adapt the revenue structure and ISDS elements so that it receives significant financial benefits and fair treatment in all years of operation. When it comes to other LNG projects that are delayed and under construction, there is a strong argument that Mozambique should focus on pursuing alternative initiatives with long-term sustainability, few environmental impacts and a that directly improve socio-economic issues in the country.
Identifying the best opportunities will require thorough, economy-wide analyses.
Richard Halsey is a policy adviser on the South African energy team at the International Institute for Sustainable Development.
