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Mozambique: Mobilizing Extractive Resources for Development May 2013 inflows to build up the extractive sector, together with the windfall revenues projected from the export of natural gas and coal, have crucial implications for Mozambique’s economy. To put this into perspective, depending on how they are valued, recent offshore natural gas discoveries could potentially increase the overall share of megaprojects in GDP to around 40-50% in the coming decades – representing a fivefold increase from current levels. 15 This enormous influx of revenue poses staggering economic challenges. The Government’s ability to manage the extractive industry’s growth will determine whether or not Mozambique avoids the perils of the resource curse. Economics of the Resource Curse The last quarter of the twentieth century is replete with examples of how the resource curse, broadly understood as the failure of resource-rich countries to benefit from their natural wealth, has had a detrimental effect on low-income countries. The underlying economics of this trend can be better understood by examining two key macroeconomic dynamics: (1) “Dutch Disease”: Large inflows of foreign exchange resulting from a sharp rise in natural resource exports will typically cause an appreciation in the real exchange rate, which will subsequently reduce the international competitiveness of the country’s non-resource (agricultural and manufacturing) exports and may also reduce employment in these other sectors. This will in turn have a detrimental impact on labor, because low-skilled workers have difficulty moving from one sector to another. A lack of intersectoral labor mobility is largely due to limited educational opportunities, leaving workers without the skills they need to transition from agricultural/manufacturing sectors into more knowledgebased/services-oriented sectors of the economy. As a result of Dutch Disease, there tends to be an adverse welfare effect on income distribution. 16 Mozambique should be wary of this reality, as its agriculturally intensive economy is already heavily predisposed to the conditions of Dutch Disease. (2) Revenue volatility: Earnings from the extractive sector are more subject to the disruptive economic effects of world commodity price fluctuations. Volatility is transmitted to resource-based economies, where the largest share of government revenues is derived from natural resources. This volatility, which can also stem from variation over time in rates of extraction or variability in the timing of payments by corporations to states, makes it difficult for governments to pursue a prudent fiscal policy. Too often, windfalls are consumed rather than invested during export booms; indeed, overconsumption tends to go hand-in-hand with underinvestment. Governments tend to borrow against the value of an abundant resource and maintain expenditures at the same level during downturns, resulting in deficit spending and increased indebtedness. 17 In these so-called “boom-bust cycles,” the benefits in the good years are transitory, whereas the problems generated during the bad years endure. 18 A country’s optimal expenditure path depends on how well it can balance the adverse macroeconomic consequences of large inflows of foreign exchange earnings with the need to invest in other sectors in order to achieve high growth rates in the long run. 19 Recommendation 1: The Government of Mozambique must adopt a sovereign wealth/natural resource fund in order to effectively manage abundant natural resource revenues from its extractive industries and counter the ill effects of Dutch Disease and revenue volatility that are associated with the resource curse. This mechanism is discussed in greater detail in Section 9: Managing Wealth: The Sovereign Wealth Fund. 26
Mozambique: Mobilizing Extractive Resources for Development May 2013 1.2 Natural Gas Exploration and Development This section provides details regarding Mozambique’s natural gas reserves, including its recent prolific offshore finds. As of the date of this report, offshore natural gas development is still in the early stages of exploration and appraisal drilling. Onshore Reserves: Partnering with South Africa Mozambique initially discovered natural gas in the 1960s, but these reserves were not commercially developed until 2004. Mozambique’s Empresa Nacional de Hidrocarbonetos (“ENH”), along with a consortium of other companies headed by South Africa’s SASOL, facilitated the development of onshore reserves located in Inhambane province. These gas fields, Pande and Temane, have proven reserves of approximately 3.5 trillion cubic feet (Tcf). 20 In addition to meeting Mozambique’s limited domestic needs, this gas is also currently being exported via pipeline to South Africa, where supplies are allocated under long-term contracts to buyers in the country’s petrochemical industry. SASOL’s role in Mozambique’s energy sector is set to expand, as it also owns a number of gas exploration licenses to look for gas in the Mozambique Basin, in the offshore region of the port city of Beira. The real ‘gamechanging’ volumes of natural gas, however, were only recently discovered in the deep waters of the Rovuma Basin, some 30-40 miles (50-65km) off the coast of Mozambique’s northeastern Cabo Delgado province. Offshore Reserves: Huge Discoveries in the Rovuma Basin In 2011-2012, exploratory drilling in Mozambique’s offshore Rovuma Basin by Anadarko (a U.S. upstream oil and gas company) and ENI (Italy’s energy conglomerate) uncovered the world’s most significant discoveries of natural gas in over a decade. When the operators’ high estimates are combined, gross volumes exceed 100 Tcf in recoverable reserves. 21 Geologic data indicates that there is in fact much more gas in the region. Based on industry estimating practices that infer statistics from what has already been discovered, Mozambique has close to an additional 150 Tcf of undiscovered resources, putting the total resource base of both discovered and undiscovered gas at over 250 Tcf. 22 To put this 27
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