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Funding and Policy Challenges Facing Africa’s Petroleum Industry

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Editor’s Note: Modern Diplomacy, along with Global Leaders especially OPEC members, mourns Mohammad Sanusi Barkindo, OPEC Secretary General, whose unexpected death occurred early this month. Modern Diplomacy is hereby reproducing one of his last speeches in which he examined, among others, a few of the significant policy issues affecting investment in the sector.

“At the end of this month, I will hand over the baton as Secretary General to my brother and friend Haitham Al-Ghais of the State of Kuwait. He is a seasoned veteran of the oil industry and an astute diplomat who has dedicated himself to OPEC for many years,” said Barkindo.

Barkindo, 63, a veteran of the oil industry, was due to step down at the end of this month after six years in the top job at the Organization of the Petroleum Exporting Countries (OPEC).

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Today, I would like to talk about some of the funding challenges facing our industry here in Africa and globally, as well as examine a few of the policy issues affecting investment in the sector. Before I do so, I would like to draw your kind attention to a couple of important milestones in Nigeria’s recent history. One year ago this month, the Petroleum Industry Bill was adopted by both houses of the 9th National Assembly and signed into law by President Muhammadu Buhari. This was a ground-breaking achievement, culminating many long years of hard work. I am confident that the implementation of the law will help unlock the full potential of our petroleum industry, strengthen its ability to attract long-term investment, as well as support a dynamic and diverse economy.

If our NOCs are to continue to innovate and flourish, it is of utmost importance that they have predictable and unfettered access to investment capital. Regular Investment at adequate levels is the lifeblood of our industry. It is essential if we are to develop new technologies, strengthen our human capacity and remain leaders in innovation so that we can do our part to meet the world’s growing need for energy, shrink our overall environmental footprint, and expand access to underserved communities.

Yet our industry is now facing huge challenges along multiple fronts, and these threaten our investment potential now and in the longer term. To put it bluntly, the oil and gas industry is under siege!

For starters, the evolving geopolitical developments in Eastern Europe, the ongoing war in Ukraine, the ongoing COVID-19 pandemic and inflationary pressures across the globe have come together in a perfect storm that is causing significant volatility and uncertainty in the commodity markets and, more importantly, in the world of energy.

Against this backdrop, a number of industrialized countries and multilateral institutions continue to pursue stringent policies aimed at accelerating the energy transition and fundamentally altering the energy mix.

Putting these issues aside for a moment, we must not forget that our industry is still reeling from the enormous investment losses of recent years.

In a very short timespan, the industry has been hit by two major cycles – the severe market downturn in 2015 and 2016, and the even more far-reaching impact of the COVID-19 pandemic.

In 2020, the first year of the pandemic and one of the darkest periods in the history of oil, upstream oil capital expenditure fell by around 30%. This exceeded the colossal 26% annual declines experienced during the severe industry downturn in 2015 and 2016.

Looking further down the road, OPEC’s most recent World Oil Outlook gives us some perspective on what is to come. It shows the global oil sector will need cumulative investments of $11.8 trillion in the upstream, midstream and downstream through to 2045 to meet expectations for significant growth in energy demand.

With regard to demand, there is only one direction, and that is up. In fact, OPEC projects that total primary energy demand will expand by a robust 28% in the period to 2045. Oil is expected to retain the largest share of the energy mix, accounting for just over a 28% share in 2045, followed by gas at around 24%. In other words, oil and gas together will continue to supply more than half of the world’s energy needs for many decades. These hydrocarbons are especially vital to the energy mix in regions like Africa, which will see massive population shifts and economic growth in the coming years. These developments increase the urgency of eradicating energy poverty.

The impacts of the two major market cycles are manifesting themselves in real time. Years of underinvestment in the oil sector help explain the current market tightness and razor-thin spare capacity margins.

In OPEC’s 62-year history, spare capacity has never been as low as it is today, and this takes into account periods of war, natural disaster and other market shocks. If this trend continues, it could haunt us in the future.

We could, however, unlock resources and strengthen capacity if the oil produced by the Islamic Republic of Iran and Venezuela were allowed to return to the market. As we know, their oil industries have been held hostage by geopolitics, while Libya has faced internal challenges that have at times sharply curbed its exports. Unfortunately, the disruptions affecting these three OPEC Member Countries not only contribute to the current market tightness, they directly affect the welfare and development of these great nations.

Here, it is also important to remember that it takes time to return to normal operations and restore production capacity. This is especially the case in countries that have had to endure restrictions on investment and exports, and following severe market shocks like we saw in 2020. As we all know, you cannot turn a tap and solve the world’s oil needs overnight; it takes time, technology, logistics and capital.

Reading the daily news feed, the upstream has become a favourite scapegoat for the current market conditions. However, this discounts the current capacity challenges that also plague the downstream, especially with regard to transportation fuels. Refinery closures in recent years – coupled with a number of untimely accidents at important regional refineries – have curtailed supplies and helped fuel the energy market volatility of recent months.

OPEC’s 2022 Annual Statistical Bulletin helps shed light on the situation. Worldwide refinery capacity fell by more than 330,000 barrels per calendar day year-on-year in 2020 and remained below pre-pandemic levels last year despite the robust global economic rebound. The Middle East, China, as well as Africa and India, have recorded refining capacity additions. However, refinery capacity in the OECD declined for the third consecutive year in 2021. Comparing the pre-pandemic year of 2019 to 2021, OECD refining capacity fell by a significant 1.5 million barrels per calendar day, or 3.3%. Given the global refining squeeze at the moment, the construction of the Dangote refinery in Lagos, with its capacity of around 650,000 barrels per day, is a huge step in the direction of addressing not only  Nigeria’s longer-term demand – but significantly improving the capacity outlook of the global down-stream sector.

The urgent need to ensure predictable investment is one reason OPEC joined hands with a number of key non-OPEC oil-producing countries in the Declaration of Cooperation back in December of 2016. With our combined expertise and experience to guide us, the participating countries were able to move quickly and decisively to address the widening market crisis at the onset of COVID-19. Rarely in the history of our industry have we witnessed such far-reaching efforts to restore sustainable stability to the global oil market, which in turn has been vital to the global economic recovery.

Let me stress here that many African producing countries, both OPEC and non-OPEC Members, have been instrumental in supporting the framework Declaration of Cooperation from the start. These efforts have not gone unnoticed by policymakers, energy analysts and some of the leading stakeholders in the international oil industry. We remain optimistic these market-stabilization efforts will extend beyond the Declaration of Cooperation’s current production adjustment schedule, which is due to expire at the end of August, particularly taking into consideration the persistent volatility and enormous uncertainties in the market. Last week’s important OPEC and non-OPEC Ministerial Meeting, which by the way was the 30th held since the beginning of the DoC, demonstrated once again the commitment of our participating countries to remain resolutely focused on oil market stability and supporting the global economy.

OPEC is a unique Organization and has always dedicated itself to cooperation and teamwork regardless of the geopolitical landscape. We have drawn on this experience to support the growth and stability of the global oil market by continually expanding data exchanges, technical capacity and high-level cooperation with many leading oil-consuming countries, producers and institutions. Our first High-level Meeting of the OPEC-Africa Energy Dialogue took place last year, marking a major milestone in our collaboration with like-minded organizations across this great continent.

These efforts to build strong sustainable relationships are proving their worth. Over the longer term, we believe these Dialogues will facilitate the sharing of experiences, lessons learnt and best practices to support efforts for an inclusive and sustainable way forward.

Regrettably, we are seeing global energy cooperation becoming more fragmented. New regional alignments are threatening to reverse years of progress towards creating a more stable and interconnected energy system. We cannot afford to allow multilateral energy cooperation and global energy security become collateral damage of geopolitics.

As many of you know, I have been involved in the global climate negotiations since their inception three decades ago, representing Nigeria in the early years and more recently OPEC. The past negotiating sessions were never easy. However, there was always space around the table for multiple viewpoints to be heard and consensual outcomes to be found.

Unfortunately, the policy narrative in the run-up to and during COP26 last year in Glasgow, UK was heavily distorted against hydrocarbons and divorced from the reality of the world’s energy needs. Developing countries were urged to turn their backs on their own hydrocarbon assets, even though their right to sovereignty over the use of these natural resources is carved in the Paris Agreement’s principle of equity in the context of sustainable development.

Efforts to unwisely encourage divestment in the hydrocarbon industries are unfortunately becoming more pronounced. Last month, UN Secretary-General António Guterres suggested in remarks at a White House-sponsored event that our industry is ignoring its responsibility to address the climate change challenge and is undermining global climate policies.

Such misleading pronouncements are terribly unfair to many of us in this industry who have dedicated ourselves to working towards inclusive, just and sustainable solutions to the climate challenge. In fact, key stakeholders in the industry are participating in the intergovernmental arrangements and initiatives to develop, deploy and promote cutting-edge technologies to reduce emissions from the production and consumption of energy.

Furthermore, I would respectfully point out that the G7 countries only a few weeks ago called on energy-exporting countries to increase oil production and acknowledged the critical role of OPEC in this regard.

Then at last week’s G7 Summit in Germany, the leaders took a step in the right direction by recognizing the need for continued investment in fossil fuels to help meet the world’s energy needs. It is imperative that they translate these words into policy actions that affirm the importance of a broad portfolio of energy options, including oil and gas, and support an investment climate that makes this possible.

Inopportune remarks and efforts to discourage oil exploration and development are bound to sow the seeds of a more pronounced energy crisis and undermine global energy security. Moreover, they jeopardize efforts to achieve universal, reliable and affordable energy access for people across the globe, including those in developing countries.

Both the market and consumers deserve clear and consistent policies which recognize that oil is indispensable to global economic development and the world’s energy mix. Our industry cannot afford to sleepwalk into another crisis. It is of utmost importance that we seize opportunities to encourage world leaders to return to the roots and principles of the Paris Agreement. This means focusing on inclusive, Party-driven negotiations and decision-making based on the science and data, not emotions and rhetoric.

COP27, which will take place in Egypt later this year, offers a prime opportunity for developing nations, including those producing oil and gas, to make our voices heard. This is a chance to return to a balanced and holistic process to address critical issues such as adaptation, mitigation and the means of implementation, especially climate finance and technology.

Furthermore, COP27 provides a platform to reaffirm the importance of multilateralism and mutual respect among nations. These principles are pillars of OPEC’s own success dating back to its founding in 1960 in Baghdad, Iraq.

We also need more cooperation and financial firepower when it comes to tackling energy poverty. Globally, more than 750 million people lack reliable electricity. A further 2.6 billion do not have safe and clean fuels and technologies for cooking and heating. In Sub-Saharan Africa, OPEC data show that an estimated 47% of people have no electricity and approximately 85% lack access to clean cooking and heating fuels. Considering the enormous energy resources available on this continent, this is simply hard to accept.

At OPEC, we are committed to expand energy access and help achieve the UN Sustainable Development Goals. Many of our Member Countries are already taking a lead in developing and deploying innovative technologies that can help ensure a stable and sustainable energy supply for all. We are proud that our sister Organization, the OPEC Fund for International Development, has helped finance energy projects across the global south since it was set up by OPEC Member Countries, including Nigeria in 1976.

Each step we take to improve energy access is a step in the right direction, but we need all forms of energy to reach our destination. As Nelson Mandela once said, “You can start changing our world for the better daily, no matter how small the action.”

When I first became Nigeria’s delegate to OPEC in 1986, little did I know that I would end up as its Secretary General 30 years later. I will forever be grateful to President Muhammadu Buhari for sending me to OPEC to serve as its 28th Secretary General. It has been gratifying to enjoy his full support, advice and guidance throughout my tenure, during which time I drank from his fountain of wisdom and reservoir of knowledge of OPEC. Muhammadu Buhari is the only current President in the world to have served as Minister of Petroleum and Head of delegation to the Organization.

Serving as Secretary General of OPEC for two terms has been the honour of a lifetime. Over the past six years, we have witnessed both challenging and historic moments, which have underscored time and again the importance of cooperation and teamwork. It has also been a source of pride to see African oil-producing countries becoming more prominent on the global energy stage, not only in OPEC, but through organizations like the Gas Exporting Countries Forum and International Energy Forum with whom we share many members in common.

Together with my very able colleagues at the Secretariat in Vienna, our Member Countries and those in the Declaration of Cooperation framework, we have turned a historic page and wrote several glorious chapters of our industry in the last six years.

At the end of this month, I will hand over the baton as Secretary General to my brother and friend Haitham Al-Ghais of the State of Kuwait. He is a seasoned veteran of the oil industry and an astute diplomat who has dedicated himself to OPEC for many years.

As we move on to a new chapter, we can take comfort in knowing that OPEC and its Member Countries will continue to devote themselves to the core principles of the Organization’s statute: supporting a stable and secure energy future for the benefit of producers, consumers and the global economy. The best is yet to come for OPEC, for Nigeria, and for this great industry.

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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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