MOZAMBIQUE: Growing investment woes amid combination of reputational, political, and security risks to extractive industries

MOZAMBIQUE: Growing investment woes amid combination of reputational, political, and security risks to extractive industries

The combination of an expanding Islamist threat in Cabo Delgado, growing Sino-American tensions, and campaigning for greener energy in Western countries poses growing reputational risks for companies involved natural gas production projects in Mozambique. 

Recent indicators of the expanding terrorist threat:

7 July: Islamist insurgents kill seven non-security contractors, near Md

12 August: Islamist insurgents occupy Mocímboa da Praia for a second time

12 September: Islamist militants target two islands of Palma, near major onshore LNG operations

24 August: Total signs MoU on security with the government, expanding mandate of deployed private military contractors

Since a first major assault and one-day seizure of Mocímboa da Praia (MdP) in March, Islamist militants have intensified and expanded operations in several districts of the northern Cabo Delgado province. On 12 August, the Islamic State-affiliated militants, commonly referred to as Ansar al-Sunnah wal-Jammah (ASJ), seized the strategic port town for a second time this year. At the time of writing, the Mozambican armed forces have still not re-taken control of the town. Furthermore, throughout the beginning of September a series of attacks and killings were carried out by the insurgents in areas close to MdP as well as the town of Palma, some 65km to the north. Palma is another strategic location, where an extended air strip was recently completed and where French energy group Total is building two liquefied natural gas (LNG) plants on the Afungi peninsula.

The latest assault and continued attacks confirm our repeated warnings of ASJ’s ostensible ambition to hold territory and conduct increasingly bold attacks on government targets in addition to non-security  private contractors.

A recognition that the expanding Islamist insurgency in Cabo Delgado was threatening the development of LNG production received formal confirmation in late August, after Total signed a memorandum of understanding (MoU) with the Mozambican government to establish a Joint Task Force, in an effort to bolster security measures. Under the MoU, whose details are likely to become clearer in the coming six months to a year as talks are ongoing, Mozambique LNG will co-operate to ensure security near its onshore LNG production site at Afungi, just outside of Palma. Mozambique LNG is a consortium comprising Total and oil companies from Mozambique, Japan, and India, among others, which will extract natural gas in the deep-water Rovuma Basin and build an LNG facility on land from where the commodity will be exported. While a final investment decision (FID) for a USD20 billion project was signed in June 2019 for that project, other energy majors appear less confident amid the current geopolitical and macroeconomic environment.

In April this year, US energy group ExxonMobil  delayed its FID in Mozambique indefinitely. The company cited mounting debt and declining revenue due to the slump in benchmark oil prices amid the COVID-19 pandemic. The delay also follows a series of other capital-intensive investments made over the past few years which have not yielded the intended returns on investment. An investigation published by Reuters news wire has estimated the company’s  shortfall to be USD48 billion through 2021, making it highly unlikely that the company will announce an FID in the coming year.

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Geopolitical tensions and environmental concerns pose long-term woes

While the current macroeconomic outlook may indeed be one explanation for a decline in investor confidence, the deteriorating security environment and growing tensions between the US and China, combined with attendant sanctions risks, may be other factors.  Should US President Donald Trump be re-elected as president in November, it is very likely he will intensify his campaign against China, an important political and commercial partner to Mozambique. However, while his Democratic opponent Joe Biden may pursue a less aggressive policy towards China, there is large support for a tougher stance on Beijing also among the Democrats, suggesting some continuity in US policy is likely even in the event of a change of government. Russia, which has slowly been advancing its interests in several African countries including Mozambique over the past five years, may be another US target. Both Chinese and Russian state-owned companies are major players in Mozambique’s natural gas boom, which some anticipate will double the country’s gross domestic product from its current USD15 billion by 2030. However, production is unlikely to begin before 2023 or 2024, and will likely reach full capacity six years later if not more.

In parallel, campaigning for greener energy in the West may hamper some financing efforts by Mozambique’s international partners. This includes the UK; some British companies have signed long-term purchasing agreements for Mozambican gas, and campaigners are planning to lodge legal reviews against the British authorities’ commitment to the projects. Similar campaigns targeting Western companies and other European governments involved in LNG projects in Mozambique are also likely to intensify over the coming year.

The combination of mounting security threats, declining demand for non-renewable energy, and growing geopolitical friction will not completely deter the major corporations from investing in Mozambique. However, it is likely to lead to increased legal costs, compliance burden, and political pressure in companies’ home jurisdictions. They may also attract protest activity outside their Europe-based head offices, with groups raising concerns about Western businesses conducting business in a conflict zone as well as against their governments’ pledges to tackle global warming.


Also in this edition:

SOUTH AFRICA: Violent protests against ‘racist’ advert highlights need for cultural awareness in communications

TANZANIA: Probable re-election of incumbent likely to lead to policy continuity