Mozambique is entering a crucial period in its history. Although its LNG projects could add $100bn to the economy over 25 years, the industry itself is under threat from the very people its revenues could benefit. Neil Ford examines the disturbing situation in an effort to find a basis for solutions.
Mozambique is entering a crucial period in its history. The insurgency in Cabo Delgado seems to be intensifying, with reports of young men sailing to the province from elsewhere in the world to join the militant group Ahlus Sunnah wal Jammah (ASWJ), which is also gaining regional members.
Among their other targets are the huge LNG resources under construction. At the same time, the country’s role in heroin transit is growing in the face of its limited ability to tackle the trade, and perhaps also some official collusion.
The common thread running through all this is the weak economy and poor prospects for the country’s youth. Ironically, although the government estimates that LNG projects could add $100bn to the economy over 25 years, the industry itself is under threat from the very people its revenues could benefit.
Overview: A nation in deep crisis
Overall, it is difficult to escape the feeling that Mozambique would benefit from a more competitive political arena. Ruling parties often stay in power for decades after independence or civil wars but the country needs an injection of new opposition ideas to provide Frelimo with real competition.
Traditionally one of the world’s poorest countries, a violent and constraining Portuguese colonial period was followed by bloody independence and civil wars, leaving Mozambique underdeveloped and divided.
However, generally stable if unspectacular governance and the prospect of rapidly growing coal and liquefied natural gas (LNG) industries offered the prospect of improved living standards. Yet diverse but linked problems now threaten to undermine the expected period of growth before it even begins.
The Cabo Delgado insurgency emerged, seemingly out of nowhere, in 2017. It gained international attention because of the brutality involved, with dozens of people beheaded in single attacks.
At least 2,780 people have been killed to date, while many more have fled their homes, and overall, 670,000 were internally displaced across Cabo Delgado, Niassa and Nampula provinces at the end of 2020.
The Armed Conflict Location and Event Data Project recorded 570 violent incidents last year, the highest number on record. Islamic State is certainly keen to claim credit for the attacks but there is some debate over the level of its involvement.
We discuss the details and causes of the insurgency in the accompanying article What lies behind Mozambique’s deadly insurgency? but it is also worth pointing out that both the level of underdevelopment and the insurgency themselves are also the result of weak national cohesion.
Transport links between the more developed far south and the rest of the country are very limited, with existing transport routes running east-west, reinforcing the pre-colonial pattern that was entrenched under Portuguese rule.
Too little effort has been put into correcting this since the civil war ended in 1992. Plans for a north-south railway and also a better north-south highway have been drawn up but not yet implemented. The railway seems unlikely to proceed for a long time to come, as recent rail projects have all either focused on promoting trade with neighbouring states or supporting the coal industry.
As always, underdevelopment and poor economic prospects seem to have created fertile ground for the insurgents to grow, while the contrast between local poverty and plans for two of the biggest new LNG projects anywhere in the world have exacerbated tensions. There is certainly a clear connection between the attacks and LNG development.
LNG contractors working on the project have been targeted since Ahlus Sunnah wal Jamaah (ASWJ) first emerged, while insurgents were even reported to have overrun Mozambican army positions near Afungi in Cabo Delgado province, although the army said that the LNG plant there was safe. Total, which is leading one of the two land-based LNG consortia whose operations are based at Afungi, has announced that it is suspending work on its project over security concerns. The LNG ventures represent by far the biggest investments ever made in Mozambique, so any threat to them is of huge importance to economic development.
Yields on Mozambican debt have risen as a result of the recent attacks and Total’s decision, while economic forecasts have been reduced. Credit ratings agency S&P now forecasts that GDP will increase by 2.5% this year, after a 1.25% contraction in 2020. This means that growth is currently failing to keep pace with population growth, although S&P predicts average growth of 5.5% a year from 2022 onwards, which would put Mozambique back on track towards steady if unspectacular growth.
Crime and scandal
At the same time, Mozambique has developed a role in heroin smuggling (see below) because of its open sea access to Pakistan, through which much of the world’s heroin is transported on its way from Afghanistan to Europe. It also has a long, poorly guarded coastline and a border with South Africa, from where heroin is moved on to Europe.
Yet above all else, it is Mozambique’s lack of resources to counter the problem that has seen it caught up in the trade. There have been some reports along the lines that narcotics fund Islamist insurgents in Mozambique but this statement may be untrue on two counts. Firstly, it appears that heroin smuggling routes are diverted away from areas that the ASWJ controls; and secondly, there is some debate over whether the insurgents should be described as Islamists. We analyse the trade on page 19.
There have been increasing reports of state corruption over the past few years. One of the most high-profile cases concerned financial transactions between 2013 and 2016, when three state-owned companies secured $2.05bn in secret loans to finance the purchase of tuna fishing boats, a radar surveillance network and patrol boats in deals that were massively overvalued.
Government officials appeared to block investigations into the case, while Maputo later defaulted on repaying the loans. Deals were subsequently struck with creditors, who will receive payment out of LNG revenue, but the government’s financial credibility has been badly shaken.
The discovery of vast reserves of natural gas in the Rovuma Basin in the far north of Mozambique has the potential to revolutionise the national economy, yet the overwhelming scale of the LNG projects in relation to the size of the national economy can also have a negative effect. The creation of such a valuable industry in what is still a very underdeveloped economy brings its own risks, in the form of what is often known as the ‘resource curse’.
Huge revenues from a single source can make governments over-reliant on the commodity in question, distracting them from wider, more distributed economic growth that creates more employment and links with local businesses and the wider economy.
It also tends to lead to dependency that makes states vulnerable to fluctuating commodity prices. In addition, over-reliance on a single commodity all too often creates opportunities for corruption. As in Nigeria, a culture can grow up that sees tapping oil and gas wealth as the only source of prosperity.
Climate change poses yet another problem. Global warming is widely expected to result in more frequent extreme weather events in Mozambique, as warmer water in the south-western Indian Ocean increases the frequency and intensity of cyclones.
The agriculture sector and rural areas in particular have been badly affected by the succession of cyclones that have hit the area in recent years. Cyclones Idai and Kenneth devastated much of central Mozambique in 2019, killing more than 1,000 people and destroying crops and infrastructure over a wide area.
Close to 100,000 people are still waiting to be resettled now. Most recently, in January, Cyclone Eloise saw 18,000 Mozambicans internally displaced, with 142,000 hectares of crops flooded and schools and medical centres damaged.
The government secured a $118m interest-free loan from the IMF to help rebuild after the 2019 cyclones, plus another $309m emergency assistance loan. Public debt has been rising steadily over the past decade, partly because of loans taken out in secret by companies linked to the state, so sovereign debt now stands at about 110% of GDP.
The Covid-19 crisis and associated economic recession has only sped up the pace of the economic deterioration.
Mozambique as a transit route for drug smuggling
Mozambique’s role in global heroin flows is often overlooked but the country has been a hub for heroin distribution on its way from Afghanistan to Europe for a quarter of a century.
Indeed, its role appears to be getting bigger because of greater Kenyan and Tanzanian success in cracking down on the trade. The motorised dhows that transport it across the Indian Ocean are therefore looking to Mozambique’s long poorly monitored coastline as the ideal area to land their contraband.
Heroin is transported across the mountains from Afghanistan to Pakistan, where it is loaded on to dhows to be transported to Mozambique, where it is taken across the border to South Africa for onward distribution to Europe.
It appears that smaller value consignments of crystal meth and methamphetamine are transported along the same route, while cannabis and morphine have also been discovered. Most of the methamphetamine is likely to be consumed within South Africa itself, as local consumption is high. Finally, some heroin appears to enter the country hidden in containers carrying licit cargo and carried on container vessels.
Some sources suggest that port employees have been instructed not to use the scanners that have been bought by container terminals in recent years on particular containers. The dhow deliveries can be huge, often of about a ton, so the consignment has to be broken up somewhere within Mozambique for onward distribution.
It would probably be too risky to take such a huge volume across the border into South Africa for it to be divided up there. Estimates vary but it is generally reckoned that 10-40 tonnes a year could pass through Mozambique, giving it a huge role in the global narcotics business.
Joseph Hanlon, a prominent writer and commentator on Mozambique, believes that heroin vies with coal as Mozambique’s biggest export, with the trade valued at $600-800m a year.
Hanlon estimates that about $100m is spent within the country in the form of bribes to officials, although he says that the trade has become decentralised through the use of encrypted mobile phone apps, such as WhatsApp, which allow couriers and fishing boat owners to operate freelance for different smugglers. This makes it more difficult for the authorities to intercept them.
Tackling the trade
However, Mozambique’s role as an entry point to South Africa provides two opportunities to tackle the trade: at the coast as it enters Mozambique; and also along the Mozambique-South African border, although it is difficult to prevent all movement across it, including in the low Lebombo hills that separate the two countries.
Nevertheless, seizures have been made on the main road between Nampula and South Africa and other deliveries have been intercepted. For instance, a motorised dhow carrying heroin was apprehended in the Arabian Sea by a British warship, HMS Montrose, in March, while Mozambican police found 365kg of heroin and methamphetamine in a truck on a beach.
The furthest south a seizure has been made to date was at Quelimane, where 440kg of heroin, 180kg of cannabis and 5.5kg of morphine was discovered in a police raid in March.
There have also been a smaller number of seizures of heroin on the coast of South Africa’s KwaZulu-Natal province, apparently having been moved by sea from Mozambique rather than directly from Pakistan.
For instance, in September, South African police discovered 342kg of heroin hidden in a secret compartment in a truck in Richards Bay. They were presumably operating on a tip-off, as it was difficult for them to break into the compartment, even with the necessary tools.
The obvious point at which to detect consignments is along the coast, but heroin is usually transferred from the dhows to Mozambican fishing boats about 40km offshore, to be taken to coastal drop zones.
The willingness of fishermen to participate may be assisted by anger at the role of both licit and illicit giant foreign fishing ships operating in Mozambican waters.
Overall, the country’s very long land and sea borders would make it difficult to police heroin smuggling even with a better funded police force, coastguard and navy, but greater resources would certainly make a difference.
Link with the insurgents?
Some sources have suggested that the heroin trade is connected to ASWJ in Cabo Delgado province and the US government certainly links the illicit trade to terrorism in Mozambique.
However, Alastair Nelson, senior analyst at the Global Initiative Network, told the Organised Crime and Corruption Reporting Project that the insurgents were probably not involved in the drugs trade. “In reality after a recent field trip it’s safe to say that they have not gotten involved in any of these criminal economies and we found no evidence that they are involved in the drugs economy, nor rubies, nor timber,” he said.
Indeed, it appears that the insurgency has seen the drug routes bypass Cabo Delgado to avoid the chaos and switch instead to Nampula and Zambezia provinces.
However, the Africa Organised Crime Index reports that significant criminal activity takes place in areas where the insurgents are based, so there could be some links between them and the criminal gangs, even if just in the form of bribes.
Even if the business is not directly controlled by militants in Cabo Delgado, both the militants and drug smugglers are exploiting the same unstable, loosely regulated environment.
Both the drugs trade and the insurgency could be tackled by a larger presence offshore on the part of the Mozambican navy or its allies. The militants use speedboats and have sunk a Mozambican patrol boat, so a far bigger offshore security presence could also be needed to deter attacks on offshore gas industry installations, as has happened offshore the coast of Nigeria.
Mozambique is ranked 14th in the Africa Organised Crime Index, so while it is not among the worst countries in Africa, the situation is serious.
There are particular problems with heroin, ivory, rhino horn and illegal fishing and logging. There is also an uncertain level of ruby smuggling, as about 80% of the global ruby supply comes from Mozambique. Consignments of illegally felled timber have been detected at the nation’s ports, almost all of it bound for China.
All illegal trades have some impact on wider society but the Index rates heroin, ivory and rhino horn flows as the most serious. It reported: “Mozambique’s criminal networks, state-embedded actors and foreign actors all record high scores. Their involvement in all sectors of Mozambique’s illicit economy is viewed as widespread and growing.”
At the same time, Mozambique’s ability to deal with such problems is poor, partly because of the involvement of state officials but also because of limited financial, technical and human resources.
There have been few prosecutions at any level and there have been reports that officials of the ruling party, Frelimo, were previously heavily involved, but that their role is becoming more limited as networks are decentralised.
The Index suggests that at least four foreign organised crime groups are active in the country but that most day-to-day operations are run by Mozambicans. “These Mozambican ‘oligarchs’ appear to control wealthy organised criminal networks that have secured political protection and operate in parallel to the state with relative impunity,” it reports.
The economy: Coal and gas potential under threat
Mozambique had lacked the raw material exports of other Southern African countries but coal and liquefied natural gas (LNG) both have the potential to generate much-needed revenue.
The revenue from both sectors could finance wider economic diversification but both are currently at risk. At present, the country’s main exports are aluminium, coal, electricity exports to the rest of Southern Africa, timber and agricultural products, such as sugar and cashew nuts, but a lack of infrastructure and trade with the rest of the region continue to hamper wider economic growth.
The presence of huge reserves of coal in Tete province in the far northwest had long been recognised but the lack of transport infrastructure needed to move the coal to foreign markets had deterred development. However, new railways have been built or rehabilitated between Tete and the Indian Ocean ports of Beira and Nacala, as international mining companies have poured billions of dollars into rail, port and mine projects in an effort to finally exploit the country’s vast coal resources.
Yet nature, international markets and environmental concerns have not been kind to Mozambique’s coal. The increasing incidence of extreme weather events resulted in massive damage to the railways from flooding, halting deliveries while repairs were carried out.
At the same time, international coal prices have been weaker than anticipated and reserves smaller than expected, prompting some investors, including Rio Tinto, to pull out of the country.
Finally, global concern over the coal industry’s contribution to global warming has held back consumption and dissuaded financial institutions from backing coal projects.
While other companies had sold their assets in the coal sector, Brazil’s Vale had continued investing. However, its partner Mitsui has now pulled out and Vale has decided to halt all thermal coal mining as it seeks to reduce its contribution to global carbon emissions.
It is now looking for a buyer for its coking coal operations in the country, so Mozambique’s long-awaited coal boom may never materialise and a planned rail and port project at Macuse seems unlikely to proceed.
However, a distinction should be drawn between the two main types of coal. Thermal coal is used for power generation and its consumption is avoidable because there are plenty of other power production technologies, including increasingly cheap solar and wind power.
Coking coal, on the other hand, is used in steel production and there is currently no other alternative, so its use is less controversial, although other options with lower emissions are expected to become viable towards the end of this decade.
Continued mining of Mozambique’s coking coal is therefore likely to be easier to justify and finance. While it has shut down Moatize’s thermal coal production, Vale has set production targets on the project at an annualised rate of 15m tonnes/year of coking coal for this year and 18m tonnes/year for 2022. It remains to be seen if Moatize’s thermal coal will ever now be significantly mined.
On a more positive note, as far as the coal industry is concerned, demand for Southern African coal is increasing in China as the recent diplomatic spat between Beijing and Canberra has seen demand for Australian coal in China virtually collapse.
In addition, Indian mining firms Jindal and ICVL are still active in the country and could be interested in taking over the Vale mine in Moatize, which is the biggest operating mine in the country.
The promise of LNG
The environmental debate over the use of another energy commodity, liquefied natural gas (LNG), is more nuanced. LNG yields about half of the emissions of coal per unit of energy produced but a lot more than solar, wind, geothermal or any other form of renewable energy.
Given international pledges to cut emissions by 80%, it is difficult to justify its use but if LNG is burned instead of coal, then some argue that it can play an important role as a bridging fuel between oil and coal, and renewables.
The local market for gas in Mozambique is limited, so the most obvious method of monetising the reserves is through LNG production. This involves cooling the gas to about -160oC to reduce its volume to 1/600th of its original size. This allows it to be loaded on to tankers for distribution around the world.
Three LNG projects are underway or planned: two onshore at a common site at Afungi in Cabo Delgado and a third, much smaller project, which is being developed offshore as a floating LNG (FLNG) project.
The FLNG Coral Sul scheme is being developed by Italian firm Eni, with a production capacity of 3.4m tonnes/year at a cost of $10bn. Eni holds a 50% stake in the venture, with the remaining equity owned by China National Petroleum Company (CNPC) (20%) and Mozambique’s own state-owned Empresa Nacional de Hidrocarbonetos (ENH), Kogas and Galp Energia (10%) each. A big advantage of floating projects is that they are generally protected from any onshore conflict. The Coral Sul FLNG vessel is now due to be moved into place in December, several months ahead of schedule, with first production now due next year, making it the first of the three ventures to come on stream. The vessel is being built by a South Korean shipyard.
The other two projects are both being developed onshore: Mozambique LNG, which is being developed by a consortium led by Total, and Rovuma LNG, where Eni and ExxonMobil are taking the lead.
Both projects will dwarf the country’s biggest private sector project to date, the Mozal aluminium smelter, which opened in 1998. The government of Mozambique opted for the sensible approach of asking the two consortia to develop their projects on a common site, allowing some infrastructure to be shared, meaning that only one set of environmental assessments and permits had to be pursued.
Gas for both is being piped onshore from gas fields in the Rovuma Basin.
Mozambique LNG aims to build two LNG trains – as production lines are known in the industry – each with a production capacity of 6.44m tonnes/year, using gas from the Atum and Golfinho fields, with total project costs put at $25bn.
However, Total and its partners ONGC Videsh, ENH, Bharat PetroResources, PTT Exploration & Production of Thailand and Oil India have suspended work on the project.
The ExxonMobil-led consortium has not yet taken the final investment decision on its Rovuma project. The decision has been delayed by the Covid-19 pandemic but it remains to be seen whether the investors need a big improvement in the security situation before committing themselves.
At the very least, it can be expected that the LNG sector will require government forces to secure the Afungi site, Palma and the immediate vicinity. Rovuma LNG would have two trains, each with 7.6m tonnes/year production capacity, which would make them the biggest LNG trains in the world outside Qatar. South Africa’s Standard Bank calculates total project costs at $30bn.
The government expects to earn about $100bn over 25 years from the three LNG projects, while further trains would generate even more income.
Before the most recent attacks, analysts had suggested that the number of trains could be doubled within the next decade. An average of $4bn a year would have a big impact on annual GDP, which currently stands at just $15bn, while double the number of trains could help lift the country out of the ranks of the world’s 10 poorest countries. The government estimates that the three projects will generate 70,000 formal jobs over 20 years from 2022.