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Energy investment in emerging economies: Transforming Southeast Asia’s power sector

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Experts discuss risks, policies and investment opportunities for renewables in Southeast Asia during an IEA roundtable at Singapore International Energy Week (Photograph: IEA)

Authors: Michael Waldron and Lucila Arboleya*

The new IEA Southeast Asia Energy Outlook 2019 (SEAO) provides a comprehensive overview of energy prospects in an increasingly influential region for global energy trends. Alongside the scenario projections and analysis, the report contains three “deep dives” – on the future of cooling, on regional electricity trade and renewables integration, and on investment – that reflect priorities for cooperation agreed between Southeast Asia energy ministers and the IEA.

Bolstering investment in more efficient and cleaner energy technologies in Southeast Asia’s power sector is a particularly urgent challenge. Policy makers in many countries of the region are stepping up their efforts to support deployment of renewables across the region, but investment has lagged well behind the levels reached in China and India. Electricity demand in Southeast Asia is rising rapidly, and many parts of the power sector are showing signs of financial strain.

Whichever pathway the region follows, it will need a sizeable increase in investment flows and a reallocation of capital, particularly under a sustainable  pathway (in the Sustainable Development Scenario) where renewables spending more than quadruples. 

What can be done to put the region on a more sustainable pathway, from both a financial and environmental perspective? This was the question that we addressed in the new IEA report  and also at a major IEA Roundtable featuring the insights of financial, legal, industry and policy experts from across Asia, which was held in Singapore on 1 November as part of the Singapore International Energy Week.

Bridging investment gaps with more private finance

To date, public actors – including state-owned enterprises and public financial institutions – have provided the bulk of funding for the power sector, particularly in thermal generation. By contrast, wind and solar PV projects have relied much more on private finance, spurred by specific policy incentives.

In addition, funding for over three-quarters of generation investment has come from within the region. This landscape reflects prevailing decision-making frameworks, which have largely revolved around state-owned utilities and the distortionary impact of energy subsidies, but also the ability and willingness of private players to navigate perceived country, regulatory and market risks that have inhibited much higher levels of investment in the power sector across Southeast Asia. 

However, public sources alone cannot cover the sizeable investment needs ahead. Sustained and balanced access to international and regional sources of private finance, complemented by public sources, would better help Southeast Asia fund its energy goals. More robust private financing conditions would help governments to use public capital more effectively, especially in countries with limited fiscal capacity.

Realising this requires reforms and greater policy focus on tackling the risks facing investments, especially in renewables, flexibility assets and efficiency. With the dramatically improved economics of renewables in many parts of the world, the region now has a compelling opportunity to transform its power sector.

While recognizing that market conditions and underlying risks differ starkly by country, the SEAO points to efforts needed across four priority areas:

  • enhancing the financial sustainability of the region’s utilities;
  • improving procurement frameworks and contracting mechanisms, especially for renewables;
  • creating a supportive financial system that brings in a range of financing sources and
  • promoting integrated approaches that take the demand-side into account.

Priority 1: Enhancing the financial sustainability of the region’s utilities

The region’s utilities, mostly state-owned, function as the primary counterparty to private generators and are the main investors in electricity networks (which as highlighted in the SEAO, are also crucial for supporting regional trade and integration). Their financial sustainability depends on their ability to recover costs, which is influenced by customer connections, operational performance and regulatory frameworks. Cost-recovery varies across Southeast Asian markets, with particular challenges related to setting retail tariffs in a way that balances system needs and affordability for consumers.

For example, despite improved borrowing conditions for Vietnam Electricity (EVN), financial performance is tenuous and tied to government decisions on electricity prices, which remain low by international standards. By contrast, in Malaysia, a combination of improved operations, better financing and regulations for cost-pass-through supports a relatively high level of per capita investment for grids. 

Underperformance can put pressure on government budgets, as in the case of Indonesia. Following several years of improvement, increased financial pressure on PLN, due to rising power purchase and fuel costs in the face of frozen retail tariffs, prompted a year-on-year boost in government subsidies in 2018 (equivalent to over 3% of total state spending). Looking ahead, PLN’s subsidy burden could be sizeably reduced through more cost reflective electricity tariffs. Moreover, changes to retail prices could be tempered through better utilisation of existing generation, more focus on efficiency measures to help slow Indonesia’s demand growth and less dramatic expansion of capacity with contractually onerous terms.

Priority 2: Improving procurement frameworks and contracting mechanisms, especially for renewables

Investment frameworks for power generation have evolved considerably, but further reform could help improve private financing prospects. While independent power producer (IPP) investments are playing an increased role, these have come mostly through administrative mechanisms, such as direct negotiation with utilities, which are often not transparent in terms of price formulation. Price incentives (e.g. feed-in tariffs) under licensing schemes have driven most investment in renewables, but their design is not always effective; in some cases (e.g. Indonesia) tariffs have been set too low to attract investment at current project costs.

Competitive auctions, which can provide price discovery and clear risk allocation through contracts, have helped drive down renewable purchase prices around the world. Most Southeast Asian countries have been slow to adopt them, but implementing such transparent mechanisms for orderly market entry, with a commitment to sustain their use over time, would go a long way to reassure investors.

The case of Viet Nam illustrates challenges and opportunities in terms of policy design and bankability. Attractive feed-in tariffs spurred a boom in solar PV deployment in the first half of 2019, financed mostly by regional players. Yet, perceived risks and financing costs are relatively high and international banks remain reluctant to lend to renewables projects. This stems from risks associated with the standard power purchase agreement offered to IPPs, including areas related to dispatch and payments, as well as concerns over the adequacy of local grids to accommodate a rapid increase in variable generation. Clearer regulations, better policy design, and measures to address system integration and contractual concerns could help to improve the affordability of investments. With financing terms equivalent to those found in more mature markets, generation costs for solar PV and onshore wind could be around one-third lower.

Priority 3: Creating a supportive financial system that brings in a range of financing sources

As changing financing conditions make investing in some legacy parts of the power system more difficult, more effort is needed to cultivate a supportive financing environment for newer technologies while ensuring security of supply. To illustrate, final investment decisions for coal power in the region have fallen to their lowest level in over a decade in 2019 (reflecting a mixture of increased financial scrutiny by banks and overcapacity concerns). There has been a reduction in the number of financiers involved in transactions in the past three years, while IPP projects that have gone ahead continue to rely on a high share of international public finance. 

At the same time, mobilising capital in newer areas requires improving the cost and availability of finance. The average loan duration in Southeast Asia is just over six years, far less than the lifetimes of energy and infrastructure assets. The cost of capital for an indicative IPP varies widely – with estimates in Singapore, Thailand and Malaysia at 3-5% (nominal, after-tax), while those for Philippines, Viet Nam and Indonesia are much higher (7-10%). Investors cite limited availability of early stage project development equity and long-term construction debt for renewables and storage, though some dedicated funds, such as the Southeast Asia Clean Energy Facility, are emerging to fill the gap.

Priority 4: Promoting integrated approaches to investment that address the demand side

Integrated approaches to investment, which take into account the demand side, could help to address rising consumption needs more cost-effectively. This is particularly true in fast-growing areas, such as demand for cooling, which is a major driver of supply requirements during peak hours but where more efficient air conditioner units, including those manufactured locally, are available at affordable prices. Efficiency investments can face barriers due to the small transaction sizes (from the perspective of banks), high upfront capital requirements (from the perspective of consumers), challenges in evaluating creditworthiness, and lack of clear labelling to support purchase choices. Low and subsidised retail power tariffs can also distort the investment case. 

Addressing information barriers, enhancing financing models and reducing subsidies would better support investment. Energy service companies are addressing the scale and upfront financing challenge of investment. They are well established in markets with long-term energy savings targets and supporting regulations, such as in Malaysia, Thailand and Singapore. Targeted use of public funds, insurance and capacity building can help reduce performance-related risks, as in Indonesia’s Energy Efficiency Project Finance Program. Progress in aggregating and securitising projects, through green bonds for example, could also help attract lower cost finance from a bigger pool of investors. Despite picking up in 2018, with over 40% targeting low-carbon buildings, Southeast Asia accounts for only 1% of global green bonds issuance to date.

Higher investments would yield multiple benefits

Overall, achieving Southeast Asia’s energy goals will call upon stronger policy ambitions across a range of energy sources and significant new capital commitments in the years ahead. As international experiences have demonstrated, where governments provide frameworks that allow for the efficient allocation and management of investment risks, the private sector responds and the cost of capital is reduced. 

These efforts would also yield multiple benefits – in the Sustainable Development Scenario, average annual capital spending across the entire energy sector of more than $140 billion over 2019-40 (higher than the $110 billion under the State Policies Scenario), is offset by the nearly $200 billion that Southeast Asian economies would save annually on fossil fuel imports by 2040. Such financial savings would come in addition to improved local air quality and universal energy access, as well as a reduced contribution to global climate change.

There is now an opportunity for investors and companies in Southeast Asian countries to engage with governments in order to encourage financial decisions and policy making that are better aligned with sustainability goals. This includes not just traditional utilities, developers and banks, but also the crucial perspectives of development finance institutions and the institutional investors, whose participation will be critical to funding the region’s energy goals.

As the world’s “All-fuels and All-technologies” energy authority, the IEA will continue to assist ASEAN Member States to tackle their energy policy challenges, including through good data and analysis, training and capacity building and enhanced engagement.

*Lucila Arboleya, Energy Economics and Financial Analyst.

IEA

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Russia and the EU’s messy energy divorce places both sides in a race against time

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The debate over Russian gas is heating up across Europe. For instance, Nord Stream’s turbine maintenance procedures would have been a routine issue before, but now it has turned into a major political problem. And then there’s the situation regarding pumping gas through the parts of the Ukrainian pipeline system that are not currently controlled by Kiev.

We will let the experts deal with the legal side of things, but as things stand, we can assume this is not the most important aspect. Europe (not just the EU, but the whole geographical region) is facing a massive force majeure situation, which normally serves as a legitimate basis for suspending any contractual obligations. The fact that the players concerned haven’t stated it officially is a political game, in which each team is trying not to lose too much (yes, some games don’t have a winner at all). Another objective is to postpone a decisive energy battle, which is not inevitable, but very likely.

For over 50 years, energy partnership has served as a strategic foundation for relations between Moscow and Brussels. This partnership has been extremely beneficial for both sides.

The EU received cheap gas, which helped it compete in the global markets even before the end of the Cold War, but especially afterwards. Meanwhile, Moscow gained a steady income and strategic partnership in engineering.

After the USSR’s collapse, the cooperation grew stronger, since bilateral limitations in the areas of politics and security became lax. Even though these restrictions didn’t disappear altogether, mutual dependence and benefits boosted cooperation, which seemed to guarantee peace and stability.

The situation began to change long before 2022. Transit countries trying to capitalize on Soviet pipelines was a major complication. New elements were at play now, something that wasn’t part of the original setup. The political logic behind the EU project with its expansion eastward and the new balance of the whole system amplified the transit factor, which began to influence decisions made by Western European leaders.

On the other hand, the bloc itself started to diversify energy sources, trying to minimize the role of fossil fuels. This inevitably shook the foundation. Since late 1960s, long-term contracts had been the basis for energy cooperation. This allowed the sides to plan ahead. But from the beginning of the 21st century, this planning timeframe started to shrink, which resulted in some anxious behavior.

The events unfolding in 2022 have been indicative of one thing – that political ambitions and impulses have finally trumped economic expediency, and when that happened, mutual dependence became no longer an extenuating factor in an otherwise quite naturally competitive relationship between major stakeholders on the international market, but an aggravating one. Hence the current battle of wills that puts the involved parties’ resolve and resilience to the test.

There is now less incentive for flexibility. Russia and Gazprom right now are simply following the protocol: If maintenance is scheduled, maintenance is scheduled, and so on.

Under normal circumstances, there would be no problem getting the procedure on track, agreeing on the details with the client, or finding workarounds if necessary. However, in circumstances that are far from normal, everything becomes a problem, on top of the fact that trust in politics and business has a very short shelf life, and is not so easy to win back, if at all.

As of today, it’s impossible to imagine Russia and the EU ever returning to the same relationship in the energy sector they enjoyed before. This dynamic is now being used by Moscow for political leverage in response to the measures of economic punishment undertaken by Brussels in the spring and summer.

In theory, this tit for tat could lead to a certain trade-off that could ease the pressure on both sides, but that would require some strictly pragmatic decision-making, and reason hasn’t exactly been a popular approach so far. The case of Hungary tells us that it actually is possible, but remains an exception to the rule. On the other hand, the European Commission’s call on member states to reduce gas use by 15% was met with protests, since members clearly prefer to make any rationing decisions for themselves independently. As a result, it has been agreed that any cuts will be voluntary and have no mandatory cap. The rest will depend on further developments around many fault lines, including those in Ukraine, the EU itself, and between Russia and the West in general.

The short-term significance of Russian-EU relations in the energy sector is obvious – they will set the tone for the relationship in general for some time.

Nevertheless, they do not seem to have the capacity to remain a priority in the long term. The EU sees its goal as finding a Russian gas-free solution for itself. Russia needs to mirror this behavior and urgently develop infrastructure for alternative consumer markets. These might include some Western European states, too, but only on the bilateral track and under conditions varying from case to case.

From our partner RIAC

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Turkmenistan’s energy relations with China: A significant energy nexus

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Turkmenistan is characterized by one of the most energy-intensive economies with its vast pool of oil and gas fields. Turkmenistan followed a ‘national way of development’ which was based on the Soviet model of development. At the time of its independence in 1991, Turkmenistan was heavily dependent on Russia for selling its gas for a long time despite the long-lasting neutrality strategy.  It was dependent on the soviet pipeline network, which connected the country only to European Russia, through the Central Asia-Center (CAC) pipeline. Russia maintained the monopoly in Turkmenistan’s market through the State-owned company Gazprom and bought Turkmen gas at low prices to cover domestic needs while exporting Russian gas to the European States, obtaining huge revenues from the richer European market. The budget and economy of Turkmenistan became dependent on money coming from Russia due to its gas sales. The energy policy of Turkmenistan has seen a shift towards diversification of its energy resources while coming out of the Russian monopoly over the hydrocarbon resources of Turkmenistan with its pipeline system.

Turkmenistan has become one of the most important Central Asian countries for Chinese investment. China has become Turkmenistan’s primary trade and economic partner as a result of the expansion of energy connections and the timely delivery of Turkmen gas in huge quantities to China. The signing of a General Agreement strengthened Turkmenistan’s commercial connections with China in the post-Niyazov era. The signing of a General Agreement on Gas Cooperation between China and Turkmenistan in 2006 solidified Turkmenistan’s commercial connections with China in the post-Niyazov period. This gas transaction paved the way for China National Petroleum Company (CNPC) to develop reserves in eastern Turkmenistan and laid the groundwork for the Central Asia-China pipeline. China has emerged as a crucial ally in Turkmenistan’s diversification policy, which aims to lessen the country’s reliance on Russia. Turkmenistan was able to break Russia’s monopoly on Turkmen exports when the Central Asia-China Gas Pipeline was completed in 2009.

The 1,833-kilometer pipeline that runs from Turkmenistan’s Gedaim to China’s Xinjiang area’s energy-rich Xinjiang region passes via Uzbekistan and Kazakhstan. The Chinese National Petroleum Company (CNPC) initially committed $4 billion to the construction of the Bagtyarlyk gas field (with estimated reserves of 1,3 trillion cubic metres), which served as the pipeline’s primary source of supply. Gradually China’s investment in Turkmenistan’s massive Galkynysh (Renaissance) gas field development, with an unknown value for the first phase and an undisclosed number for the second. Turkmen gas output has grown as a result of Chinese funding for the extraction of the Bagtyyarlyk and Galkynysh large gas resources, which have been successfully supplied via Central Asia. -Gas Pipeline through China

The construction of the Central Asia-China Gas Pipeline has proven to be a significant step forward in Turkmenistan’s diversification plan. Because of its extensive coverage, the Central Asia-China pipeline might be considered the most successful example of regional cooperation in the energy sector. It will expand out through Uzbekistan and Kazakhstan (both suppliers) before reaching Chinese markets, with Tajikistan and Kyrgyzstan acting as transit nations The construction of the gas export route was finished in 2009 and hailed as the “pipeline of the century” by President Gurbanguly. This pipeline proved to be a milestone in the gas trade for Central Asia to bypass Russia. It was a great respite during the tough times when the country suffered the loss from a gas export restriction after the April 2009 explosion in the Central Asia-Center-4 pipeline carrying gas from Turkmenistan to Russia. It led to a nine-month dispute over gas prices between Ashgabat and Moscow, disrupting of flow between the two countries. Although this pipeline opened up a new export channel, Turkmenistan’s energy security remains fragile owing to the lack of shared borders with China, and the passage of Turkmen gas exports is dependent on the agreement of other Central Asian countries

Map 4.4

source: Petroleum Economist; Kazakhstan Railways, UN Carec; FT research 

Turkmen administrations prefer to gradually expand or limit exports to China due to its small population and limited export revenue requirements. Turkmenistan’s strategic hydrocarbon policy appears to be based on the government’s intention to curb the activities of foreign corporations’ engagement upstream (except Chinese state-owned firms). The lack of managerial experience and skilled labour in China, as well as field development and a lack of information, make it difficult to assess the evolution of the country’s gas market, which is rapidly expanding and moving away from fixed and regulated prices toward market mechanisms, as per government policy.

China’s decision to obtain gas from Turkmenistan was based on its industrial strategy, which included providing Turkmenistan with a large-scale credit programme. It made upstream investments and built pipelines with the help of CNPC, a state-owned business, and state banks. The Chinese government encourages the growth of the gas market. The National Development and Reform Commission (NDRC) has adopted a reform plan that is the first significant step toward shifting away from the conventional regulated cost-plus pricing system and toward an oil-linked netback pricing system, which has been tested since November 2011. The objective, according to the NDRC, is to replace a large number of regulated pricing systems in each province with a single city-gate price, and then to “liberalize well-head prices and allow the market to decide the prices” 

Turkmenistan has made a significant contribution to the development of the Lapis Lazuli international transit corridor, which aims to reconnect Afghanistan with world trade by connecting it to the INSTC and BTK lines that run through Turkmenistan, Azerbaijan, Georgia, and Turkey. The Lapis Lazuli International Transit Corridor links Georgia, Turkey, Afghanistan, Turkmenistan, Azerbaijan, and Turkmenistan both by land and rail. It connects to the BTK railway, which travels from China to the Caucasus and then to the EU. Since the beginning of 2018, the corridor has been in use and has been a key factor in Afghanistan’s new economic boom.

Chinese State Councilor and Foreign Minister Wang Yi held a meeting with Turkmen Deputy Prime Minister and Foreign Minister Rashid Meredov on the sidelines of the third “China+Central Asia” (C+C5) Foreign Ministers’ Meeting in Kazakhstan in June 2022 and both sides agreed to intensify energy cooperation Both the countries decided to speed up coordination between the Turkmenistan development strategy and China’s Belt and Road initiative to strengthen global governance, revive the Great Silk Road, and further their cooperation in cyber and biosecurity.

Challenges to the energy partnership with China

Exports to China have increased at a fast pace: in the first half of 2019, China’s imports from Turkmenistan (nearly solely gas) totaled $4.4 billion. While Turkmenistan is China’s largest gas supplier, taking up more than 40% of the country’s totalgas imports, Beijing’s alliances are significantly more broad than Ashgabat’s. Turkmenistan has been using a large portion of its income to repay Chinese loans used to fund its energy infrastructure and is stuck in the debt trap. Turkmenistan owes China billions of dollars in loans for the construction of gas pipes to transport gas from Turkmen fields to China

While Turkmenistan is witnessing a deepening of its energy relations with China with a major boost in its export market, there also emerges a concern about its dependence on China as a gas export market.China has implemented a multi-vector energy policy that includes a well-diversified portfolio of regional gas suppliers, giving it a strong bargaining position when it comes to gas price and volume negotiation. Turkmenistan has become more exposed to Chinese price pressures as a result of China’s 2014 agreement with Russia, which has had a significant influence on the country’s economy. China’s insistence on paying substantially below European prices for Turkmen goods, with the possibility of even lower prices in the future, has Turkmen officials anxious about the country’s rising reliance on China. Ashgabat has become reliant on gas shipments to China, putting Turkmenistan in a weak bargaining position as seen in 2017 when Turkmenistan halted gas supply to Iran over a price dispute. 

The trade pattern between the two countries shows an imbalance in the export and import of hydrocarbon resources. For example, Turkmenistan exports mainly raw materials in the form of hydrocarbons to China, and China on the other hand supplies finished goods, which has negatively affected the local businesses of Turkmenistan. Increasing engagements with China have resulted in the dependent structure of Turkmenistan on China where China is not only interested in achieving energy security but also in politically asserting itself in the region. Having a huge external debt to China, Turkmenistan is not in a position to cut its ties with China but can surely work on reducing its dependence by working on an export diversification strategy. The untapped export market of South Asia in the east and the highly profitable market of Europeans up the opportunity for Turkmenistan to diversify its export routes. The TAPI (Turkmenistan-Afghanistan-Pakistan-India) project offers a potentially lucrative option in the South Asian market as part of Turkmenistan’s diversification strategy. The Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline offers a promising alternative for Turkmenistan to diversify gas exports. It offers the opportunity to reduce the risk of overreliance on a single player. Turkey and Iran also offers the huge the potential to be significant players in Turkmenistan’s diversification strategy.

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Mozambique Risks Economic Stability if it Purchases Russian Oil

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Mozambique risks destabilizing its economy and further loosing western development finance if it goes ahead to purchase sanctioned oil from Russia. With the return of western development finance institutions such International Monetary Fund, World Bank and the USAID, and currently showing tremendous support for sustainable development projects and programmes, Mozambique would have to stay focus and stay clear from the complexities and contradictions of the Russia-Ukraine crisis.

Mozambique needs to seriously concentrate on and pursue its plans of exporting of liquefied natural gas (LNG), extracted from the Coral South field, off the coast of Palma district, in the northern province of Cabo Delgado, possibly starting this October. It marks an economic turning point and opens a new chapter for its revenue sources.

According our research, Mozambique will become the first country in East Africa to export LNG. It will be produced on a floating platform, belonging to a consortium led by the Italian energy company, Eni. The platform, built in a Korean shipyard, arrived in Mozambican waters in January, and is now anchored in Area Four of the Rovuma Basin, some 40 kilometres from the mainland. 

This is the first deep-water platform in the world to operate at a water depth of about two thousand meters. The Coral South project is expected to produce 3.4 million tons of LNG per year over its estimated 25-year lifespan. A second project is planned for Area One of the Rovuma Basin, where the operator is the French company TotalEnergies. The planned LNG plants for this project, are onshore, in the Afungi Peninsula of Palma district. The jihadists seized Palma town in March 2021, and TotalEnergies withdrew all of its staff from the district. Subsequently the Mozambican defence and security forces and their Rwandan allies drove the terrorists out of both Palma and the neighbouring district of Mocimboa da Praia.

Current global economic situation is changing, competition and rivalry for markets also at its height. During the past months, Russia has cut its export of gas as a reciprocal action against European Union members and has redirected its search for new clients in the Asian region. It has already offered discounted prices to China and India, and now looking beyond to Africa.

United States Special Envoy to the United Nations, Thomas-Greenfield, has made one point clear in her speeches with African leaders that “African nations are free to buy grain from Russia but could face consequences if they trade in U.S.-sanctioned commodities such as oil from Russia.”

“Countries can buy Russian agricultural products, including fertilizer and wheat,” Linda Thomas-Greenfield said. But she added that “if a country decides to engage with Russia, where there are sanctions, then they are breaking those sanctions. We caution countries not to break those sanctions because then … they stand the chance of having actions taken against them.”

Russian Ambassador to Mozambique, Alexander Surikov, after a meeting with the Confederation of Economic Associations of Mozambique (CTA), had proposed that the Mozambican authorities could buy Russian oil in roubles, after Moscow presented the option to Maputo. Ambassador Surikov further expressed Russian companies’ continuing interest in investing in Mozambique. Likewise, the possibility was raised of Russia opening a bank in Mozambique focused on supporting bilateral trade and investment.

Russia previously had a VTB bank in Maputo, later involved in opaque deals. It was a financial scandal involving three fraudulent security-linked companies, and two banks – Credit Suisse and VTB of Russia, relating to an illicit loan guarantees issued by the government under former President Armando Guebuza. Until today, it is popularly referred to as “Hidden Debts” scandal involving US$2.7 billion (€2.3 million), the financial scandal that happened in 2013. 

In the aftermath, financial institutions exited and projects abandoned and this southern African country has struggled to rebound economically. Now these institutions are returning with new financial assistance programmes that would promote sustainable and inclusive growth and long-term macroeconomic stability.

In the context of the current cereal crisis, one other issue that the ambassador raised was how Mozambican companies could have direct access to Russian wheat suppliers. In this regard, it was not clear how Russian wheat would enter the market and how it would be paid for because Mozambique uses principally the US dollar in its foreign transactions, and Russia cannot conduct transactions using the US currency due to the sanctions imposed following the invasion of Ukraine.

“The rouble and the metical are worthy currencies that do not need the benevolence of some other countries that control the international system,” the Russian diplomat explained, adding that Moscow wanted to strengthen cooperation with Maputo.

Nonetheless, Minister of Mineral Resources and Energy of Mozambique, Carlos Zacarias, admittedly the possibility of buying Russian oil in roubles. “I am sure that we will study and verify the feasibility of this offer from Russia. If it is viable, for sure Russian oil will be acquired in roubles,” Carlos Zacarias said.

Mozambique’s receptivity to the Russian proposal stems from the fact that the world is experiencing a peculiar moment, characterized by great volatility in oil prices on the international market as a result of the Russia-Ukraine war.

Mozambique was among the countries that abstained on two resolutions that were voted on by the General Assembly of the United Nations, one condemning Russia for the humanitarian crisis in Ukraine as a consequence of the war and the other suspending Moscow from the Human Rights Council.

The Mozambican Liberation Front (Frelimo, the ruling party) was an ally of Moscow during the time of the former USSR, and received military support during the struggle against Portuguese colonialism and economic aid after independence in 1975.

Mozambique and Russia has admirable political relations. Mozambique has to focus on trade and economic development with external partners. According to data provided by CTA, the annual volume of economic transactions between Mozambique and Russia is estimated to be, at least, US$100 million (€98.5 million at current exchange rates).

Experts point to the fact that there is tremendous opportunity window for Mozambique. With partners including ExxonMobil Corp., China National Petroleum Corp. and Mozambican state-owned Empresa Nacional de Hidrocarbonetos, Mozambique has to move towards its own energy development.

Mozambique has considerable gas resources, the right decision is to move toward both an onshore concept and an offshore concept. It has to determine influential external investment partners ready to invest funds and, in practical terms, committed to support sustainble development in the country.

The Mozambique LNG offshore project, valued at around US$20 billion, aims to extract about 13.12 million tonnes of recoverable gas over 25 years and generate profits of US$60.8 billion, half of which will go to the Mozambican state.

The process to achieve this task has started and would generate 14,000 possible jobs in phases – first creating 5,000 jobs for Mozambicans in the construction phase and 1,200 in the operational phase, with a plan to train 2,500 technicians and so forth. These projects also have a great capacity to create indirect jobs, with foreign labour decreasing throughout the project and Mozambican labour increasing. Most of these jobs are expected to be provided by contractors and subcontractors.

Several corporate projects came to a halt due to armed insurgency in 2017 in Cabo Delgado province. The entry of foreign troops to support Mozambican forces mid-2021 has improved the security situation. Since July 2021, an offensive by government troops was fixed, with the support of Rwandan and later by the Standby Joint Force consisting forces from members of the Southern African Development Community (SADC).

Cabo Delgado province, located in northern Mozambique, is rich in natural gas. Although the gas from the three projects approved so far has a destination, Mozambique has proven reserves of over 180 trillion cubic feet, according to data from the Ministry of Mineral Resources and Energy. With an approximate population of 30 million, Mozambique is endowed with natural resources. It is a member of the Southern Africa Development Community (SADC) and the African Union. 

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