The new African gas producers

This post first appeared on GE LookAhead.

The discovery in 2010 of enormous natural gas reserves offshore Mozambique and Tanzania (120tcf and 47tcf of recoverable gas reserves, respectively) represents a potential economic game changer for the two countries. While large- scale production is still years away, government revenues from liquefied natural gas (LNG) alone could generate some $7bn a year over a 30-year period (assuming six LNG trains) for Mozambique, according to Standard Bank — with perhaps about half of that amount for Tanzania, depending on the number of trains, pricing and contracts.

These are enormous sums relative to the size of these countries’ economies; notably for Mozambique, whose GDP stood at $16bn in 2014. And therein lies the challenge. For while large additions to GDP and government revenues create a chance to fight poverty (60% of Mozambicans live on under $1.25 a day), such cash inflow — and the temptations it creates — has led more than one emerging economy astray, victim of the infamous “resource curse”.

One obvious risk is corruption. This is a challenge Mozambique and Tanzania are working to address. Since 2012, both countries have been compliant members of the Extractive Industries Transparency Initiative, which requires governments to “disclose information on tax payments, licenses, contracts, production and other key elements around resource extraction”. Tanzania’s Extractive Industry (Transparency and Accountability) Act of 2015 also mandates that new contracts, concessions and licences be published. While these are positive steps, more work lies ahead –  both countries rank poorly on Transparency International’s Global Corruption Perceptions Index, for example.

Lack of economic diversification is another challenge, exposing budgets to commodity price swings and constraining the economy to low-added-value activities that offer limited employment opportunities. Planning for industry linkages and local-content laws can help address this challenge. Mozambique’s Gas Master Plan, for example, envisions making use of some of the gas for domestic industrialisation and power generation — gas accounts for just 8% of total electricity generated at the moment.

Such diversification can take decades to achieve, however.  Malaysia needed nearly 40 years to establish a viable local supply chain for its natural gas sector, for instance. A more pressing concern for emerging producers is often how to manage the rise in revenues in economies with limited absorptive capacity. Overspending can, in fact, lead to currency appreciation that adversely affects export industries. An effective way to address this risk is to establish a sovereign wealth fund — a strategy both Mozambique and Tanzania have decided to pursue.

Last but not least, of course, is how the funds are spent. Tanzania’s Oil and Gas Revenues Management Act of 2015, for instance, aims to spend the money on maintaining macroeconomic and fiscal stability, on guaranteeing investment in oil and gas, on enhancing economic and social development and on safeguarding the resource for future generations. Keeping the balance among these objectives over time can prove difficult. One country that is widely seen as having succeeded is Botswana. Its use of a sustainable budget index (SBI), which tracks the balance between investment and non-investment spending and locks in spending on education and health, has notably helped the country to keep its focus on the investment side for the past three decades while increasing its human development index by 45% during the same period. A similar approach could help new producers like Mozambique achieve these goals, says Peter Bechtel, independent consultant to the IFC in Maputo, Mozambique.

Quite a programme, then, lies ahead before the first dollar from LNG exports is realised. But with LNG likely to face a competitive pricing environment as new projects in other parts of the world come online, it will be more important than ever for Mozambique and Tanzania to get their framework right if they want to achieve long-term economic development.

Publication does not imply endorsement of views by the World Economic Forum.

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Author: Charles Esser writes for GE Look Ahead.

Image: A Tanzanian engineer walks at the Songas gas processing plant in Songo Songo Island, 225 km south of the Tanzanian capital [Dar es Salaam]. REUTERS/Emmanuel Kwitema.