SIM Report: Natural gas plans in Mozambique's Cabo Delgado are running out of steam

SIM REPORT: East & Southern Africa, issue 12

The ramifications of the assault on Palma in Cabo Delgado between 24 and 26 March continued to play out throughout April and May, while sporadic fighting continued between insurgents and the armed forces near Palma and other districts.

While the precise number of casualties still remains unclear, estimates now hover around 90 people, while about 30,000 people were displaced. This adds to the total 668,000 internally displaced people since the Islamic-State affiliated insurgency Ahlu al-Sunnah wal-Jamaah (ASJ) staged its first attack in October 2017.

Growing investor hesitancy

Most foreign businesses have now abandoned the area. And French energy giant Total – the largest foreign investor in Cabo Delgado – declared force majeure on the Mozambique LNG project and evacuated all its staff on 26 April. The company said it expects work to be interrupted for at least one year. Three days later, the Joint War Committee of Lloyd’s Market Association – one of the world’s most influential insurance underwriter organisations – added the Cabo Delgado coastline to its list of war, piracy, terrorism and related perils. To top it off, US oil major ExxonMobil – another major investor in the area – faces an upswing from activist shareholders who are demanding accelerating divestment from fossil fuels, signalling long-term strategic and political risks.

Delays and mounting costs pose further threats to LNG industry

The former two moves signal significant delays to the massive infrastructure projects currently being built for the commercial production of liquefied natural gas (LNG) in the region, and increased costs for stakeholders. In and of themselves, the moves were unsurprising given the exponential growth of insurgent activity in 2020, a trend that culminated in the Palma assault. In February, and prior to the Palma attack, we warned that companies such as Total had already implicitly admitted that security risks would require increased spending, which will now likely increase a lot more. In the immediate term, shipping goods to the Cabo Delgado coast, specifically to the port town of Pemba which serves as a logistical hub for the companies operating in Palma, will become more expensive as a result of LMA’s war risk designation. Furthermore, sub-contractors that were participating in construction projects in the province could now see large contracts and associated payments also suspended, creating potential cash flow issues in the coming year or two. In the longer term, companies operating in and around Palma will likely need to spend more on physical security upgrades. While financing such physical security upgrades may be done on a collective basis, this will nonetheless likely inflate real-estate costs and securing transport to and from Palma.


The long-term impact of continued delays

Although it is impossible to tell with certainty how long the projects will remain suspended, the delays and increased operating costs means that companies with interests in Cabo Delgado’s nascent gas industry could face other, external political risks in the coming years. Firstly, it appears increasingly clear that the plans to start production in 2024 are unlikely to materialise, with some estimates putting 2026 or 2027 as a more likely start. As consumer and investor demand in Western countries is now shifting increasingly towards renewable energy, this indicates that demand for natural gas may be slowing, which in turn may undermine forecast revenue and performance for Cabo Delgado’s gas. US oil major ExxonMobil has repeatedly delayed its final investment decision since 2018, and is unlikely to sign one before security has been re-established to levels the company’s corporate security department and senior management find acceptable. The growing activism among its shareholders may also derail its previous plans for developing natural gas, forcing the company to focus more on green energy like solar or wind.

Secondly, the longer work is delayed the greater the risk that contracts previously signed may need to be renegotiated, increasing financial and operational uncertainty for managers of other firms, for instance in retail and real-estate sectors that were due to spring up in conjunction to the large influx of foreign workers. Thirdly, as the projects are further delayed, the underlying grievances fuelling the insurgency, including poverty, corruption, and marginalisation, are likely to become more accentuated and may provide more recruitment ground to ASJ over the coming year. The number of recruits may also increase in the case of a major international military intervention, such as that proposed by the Southern African Development Community (SADC), which will raise the profile of the conflict to Islamic State’s central command.

ASSESSMENT – Resisting interference: a losing strategy

The end-March assault on Palma was the culmination of an escalating trend observed over the past two years, whereby tactics have become increasingly sophisticated and deadly. The attack also confirmed the longevity of ASJ militants, in line with our previous warnings, and highlighted an urgency to combat the indicated that the Mozambican government must act sooner rather than later. Nevertheless, so far Maputo has continued to drag its feet with regards to a multilateral military deployment by the SADC despite the government’s blatant inability to counter the growing threat. President Filipe Nyusi has welcomed bilateral training missions from Portugal and the US, and new capacity building and support from South Africa’s Paramount Group, while refusing to renew the contract of Dyck Advisory Group (DAG) which expired in April.

Such moves indicate a narrow response and focus on counter-insurgency operations which is unlikely to adequately address the underlying grievances fuelling the conflict, which include the lack of opportunities for local communities and ethnic marginalisation by the Makonde ethnic group and ruling FRELIMO party members. Most likely, government’s narrow focus is intentional and an attempt to remain in control, but it now appears increasingly unlikely that foreign investors will accept coming back without serious assurance that security of Palma and surrounding areas will be secure.

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