Mozambique Faces A Challenge With Its New Gas Find

June 7th, 2012

In May, the Italian energy plant Eni discovered around ten trillion cubic feet of natural gas off the shore of Mozambique, increasing the estimated reserves of Mozambican gas above 50 trillion cubic feet. This discovery placed the East African nation in the spotlight of economic development and energy production. On the other hand, Mozambique’s new intra-regional competition with Kenya and Tanzania, investment by Europeans, and lack of solid economic foundations create the possibility of corruption. Therefore, as the country enjoys a boost to its GDP, only an effective, transparent control of finances will ensure a parallel benefit to its population.

According to the Associated Press, worldwide natural gas consumption is expected to rise 17% in the next five years, as China’s need for the resource will likely double. This dramatic increase indicates the potential volatility of the non-renewable resource and the finances behind it, as scarcity will eventually inflate the gas’s price and the income of its harvesters:

Natural Gas Reserves of African Countries in Millions of Cubic Meters (2009)*

Already, the British company Aggreko and the South African company Sasol have struck multi-million dollar deals with Mozambique, the latter including a 573.5 mile pipeline between the southeastern African countries. With such rapid foreign investment, Mozambique must protect itself from illicit capital outflows by following through its commitments as part of the Extractive Industries Transparency Initiative (EITI), publishing its figures, preventing trade mispricing, and defeating the ultimate threat of Mozambican capital outflows.

A 2005 report by the U.S. Agency for International Development (USAID) observed “favoritism and nepotism in public appointments and procurements, conflicts of interest and insider dealing that benefit friends, relatives and political allies, and political party and electoral decisions.” Further, Transparency International named Mozambique the world’s 64th most-corrupt country in 2011. Compared to that of other African countries, the average of US$60 million illicitly flowing out of the country per year seems relatively minimal, yet the dangerous combination of corruption and energy resources could doubtlessly boost this sum.

Because of the enormous costs of such production, the level of extraction that will boost the Mozambican economy will not be visible for several years. Therefore, Mozambique has a small amount of time to prepare for its expansion. At the same time, gas deals, such as those with European oil giants, could potentially sabotage the country’s development before it begins.

Perhaps the most effective means for avoiding this outcome is by making oil deals public, curbing the ability to undermine development and even minimizing the already-present problem of corruption. As Task Force blogger Ann Hollingshead argues about oil discoveries in Kenya, Mozambique must “show a willingness to carefully consider the downsides of oil exploration and production and to proceed cautiously. There is no rush. The [gas] isn’t going anywhere.”

Such extractive industries transparency legislation has already been passed in the United States in Dodd-Frank Section 1504, which focuses on oil, mining, and gas industries. According to the provision, records of payments from natural gas companies must be disclosed to governments. However, the Securities and Exchange Commission (SEC) is over a year overdue on enforcing the provision. Implementation of the rule would go a long way toward allaying Mozambican fears that the proceeds of the newfound resource wealth will disappear into a black hole of corruption on the part of public officials.

The World Factbook All data is from 2009 unless otherwise noted.

Written by Kyle Hunter

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