Johannesburg and London listed SacOil Holdings Limited announced on 8 December plans to develop a natural gas processing and distribution plant and a 2,600-kilometre terrestrial gas pipeline between Mozambique and South Africa. If the project is implemented, it will carry significant socio-economic benefits for both countries.
IHS perspective | |
Significance | The pipeline is a major project supplying Mozambican gas to electricity-starved South Africa. |
Implications | The pipeline would bring industrial development to South Africa and facilitate part-privatisation of the power sector. Local development in Mozambique will be constrained. |
Outlook | The project faces risk of arbitrary and preferential tendering and violent risks from frustrated local residents. |
A joint development agreement (JDA) became effective on 3 December relating to a technical and commercial feasibility study for the pipeline project. The JDA was signed by SacOil, South African government-owned financial management firm the Public Investment Corporation (PIC), which is a major shareholder in SacOil, and Mozambique's state-owned investment firm, the Institute of State Managed Holdings (Instituto de Gestão das Participações do Estado: IGEPE). The JDA partners estimate the cost of the project at USD6 billion.
Substantial improvement to operational environment for industrials likely
South Africa's state power utility Eskom, which produces 95% of South Africa's power, is facing serious financial and electricity supply challenges. Since late 2013, Eskom has re-imposed rolling black-outs, called "load-shedding", for the first time since the power crisis in 2008.
Eskom has favoured targeted demand-side management to reduce the need for load shedding, imposing restrictions on large industrial users and seeking cuts of up to 15% of power usage. End users such as construction companies, retailers, and commodity traders, have faced severe supply-chain disruption caused by the power cuts and rationing (currently power cuts last between two and three hours per day). The economic impact of the power crisis is estimated to cut 20 basis points off global domestic product (GDP) on a monthly basis (according to IHS economists).
Moreover, households and small businesses have been hit with rising electricity costs since 2008. From April 2015 an additional tariff increase of 4.69% per annum will be implemented over and above the 8% annual increase granted in 2013. Further tariff increases by 12% a year are due until 2018 as Eskom still faces a USD20 billion funding shortfall. Long-term preferential pricing agreements effectively shield large industrial power users such as BHP Billiton from such price increases.
There are currently no plans for South Africa to expand its use of natural gas within its future energy mix that is still dominated by coal. The delayed release of the Integrated Resource Plan (IRP) and Gas Utilisation Master Plan (GUMP), now due in early 2015, will give the clearest indication of South Africa's energy policy, and ambitions for natural gas development.
If the project is implemented it would provide a reliable source of natural gas to South Africa's Mossel Bay gas-to-liquids- plant, the Saldanha industrial development zone, and a number of coal or diesel-fired power stations that can be converted into gas (at Mossel Bay and Atlantis) or newly constructed gas-fired powers stations (at Coega and Richard's Bay). This will boost electricity supply to manufacturing, mining, construction, metalworking and chemicals industries in these regions.
Mozambique's industrial development hampered by skills and infrastructure constraints
According to SacOil, the pipeline is also planned to deliver gas to all of Mozambique's provinces and the capital Maputo. Industries that are likely to benefit include fertiliser plants, cement manufacturing, mining (graphite, coal, etc.), small-scale manufacturing, and transport. The incoming government of Filipe Nyusi will prioritise socio-economic development in northern regions on the back of natural gas production. However, serious constraints to economic development such as poor infrastructure and skills deficiencies will weaken any improvement to the operational environment from the pipeline at least in the five-year outlook.
Outlook and implications
The involvement of the PIC and IGEPE indicates a strong desire by both South Africa and Mozambique's governments to complete the pipeline. SacOil would most likely become the operator. An existing 865 kilometre pipeline carrying gas from the Pande and Temane fields to South Africa has been successfully run by Sasol Limited for over ten years, indicating the potential viability of the project.
However, contract allocation for the pipeline construction and engineering phases will face high risk of arbitrary and preferential decision-making. Asian companies will most likely be favoured, given the growing role of Chinese, Japanese, and South Korean firms in Mozambique's construction, power, and gas sectors. The JDA has also stressed that local companies will be favoured in terms of procurement, indicating that politically-aligned holding companies through which local elites seek rents from large natural resources projects are likely to be included in partnerships. This system is already in place in the mining and natural gas sectors, and will raise reputational risks for private investors in the project.
Legal disputes over land rights to build the pipeline are likely to be protracted and legally complex due to different national, provincial, municipal and traditional land rights being practised in Mozambique. Disputes will further delay the pipeline construction and cause frustration among local residents. These types of projects usually involve compensation payments for relocations, which will attract new residents to move to the disputed lands.
Pipeline construction will also face high risk of disruption, sabotage, and vandalism as local communities along the 2,600-km route (mostly within Mozambique) will call for economic benefits from Mozambique's natural resources boom. A gas pipeline in neighbouring Tanzania at Mtwara has been frequently vandalised by frustrated local residents. Railway projects in central Mozambique have triggered violent protests and blockades over relocations, halting construction and coal exports. The presence of Asian workers would also heighten the risk of discriminatory violence, including targeted attacks on managers. Construction in remote poorly policed northern and central regions will also raise risk of theft of materials.
Risk of terrorism is low as the Mozambican armed opposition has ceased a two-year insurgency and the group has rarely sought to attack high profile commercial targets to avoid a stronger government reaction.