Mozambique is harvesting the gains of having clear legal and fiscal frameworks that drive transparency and attract foreign investors as Nigeria’s Petroleum Industry Bill’s journey to becoming a law remains uncertain several years after it was first initiated.
Energy multinationals including Total, Mitsui, ONGC, PTTEP, Eni and ExxonMobil have already invested more than $20 billion in the country. Last August, 68 new US companies signed engineering, procurement and construction contracts to supply equipment and services to the landmark Mozambique liquefied natural gas (LNG) gas-processing facility, with individual contracts reaching $1.8 billion.
Saipem and Subsea 7 inked a major contract for subsea work on the offshore Mamba Area 4 project, which is on track to feed gas from the field into the Rovuma liquefaction trains, with a final investment decision expected later this year.
The influx of capital into Mozambique is supported by the country’s relatively attractive contractual terms, characterised by a public bidding process, limited government involvement and preference granted to local entities. Hydrocarbon activity in Mozambique is governed by the Petroleum Act, which serves to promote competitiveness and transparency within the sector, while protecting national interests and driving state participation through Empresa Nacional de Hidrocarbonetos (ENH).
“Mozambique defied global investment flows by reporting a rise in deal activity in 2020. Now, the country seeks to engage local service providers to supply goods and services to gas megaprojects to drive in-country value generation and retention,” Grace Goodrich, field editor at Africa Oil & Power said.
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While overall transactions dropped by eight percent in sub-Saharan Africa in 2020, in Mozambique, the number of transactions rose, with 12 deals reported compared to only four deals in 2019, according to a Baker McKenzie analysis.
Despite on-going market uncertainty due to COVID-19, for Mozambique, this comes as little surprise: in recent years, the country has emerged as a regional hub for energy investment and development on the continent, as foreign investors spearhead gas megaprojects and local service providers seek to access large-scale contracts.
In 2021, deal activity in Mozambique and on the continent is expected to increase, as the sector continues to recover from COVID-19 and foreign direct investment begins to flow.
However, Nigeria requires clear legal and fiscal frameworks to reap the benefits of these investment inflows. For close to two decades, the Petroleum Industry Bill (PIB) has been in the works. It was first introduced in the National Assembly in 2000. This makes it the bill with the longest timeline at the National Assembly.
Five years ago, the Nigeria Extractive Industries Transparency Initiative said Nigeria has recorded losses to the tune of $200 billion for failing to pass an enabling law for the petroleum industry. This loss has naturally continued to increase for as long as the delay in the passing of the PIB remains.
Nevertheless, Goodrich said looking ahead, the key to unlocking the full scope of Mozambique’s energy development lies within strengthening its engagement with local service providers, in turn driving down costs associated with the procurement of goods and services for international oil companies, while ensuring local value generation for Mozambican firms.
The southern African energy hub has a system where concession contracts are established for appraisal, exploration and production activities; construction and operation of pipelines; and construction and operation of infrastructure. Appraisal contracts are non-renewable and carry a maximum period of two-years, providing for drilling of up to 100 meters below the surface or seabed. Meanwhile, exploration and production contracts grant exclusive exploration rights for eight years.
Mozambique adheres to a system of public tender, with only certain exclusions made for direct negotiation. Bid applications are submitted to the National Petroleum Institution (NPI) and addressed to the Ministry of Mineral Resources and Energy, which is tasked with approving appraisal contracts.
Meanwhile, the Mozambican Government is responsible for granting the award of exploration and production contracts. While any Mozambican or foreign entity with sufficient technical expertise and financial capacity is allowed to operate an asset, Mozambican entities are given preference when it comes to the allocation of exploration or production blocks.
The principle of public tender also applies to the provision of goods and services in the petroleum sector, with public bidding specifically required for goods and services worth MZN 40 million (approximately $500,000), under the Petroleum Operations Regulation. The NPI directly oversees the award of service contracts, whose evaluation is contingent on price, service quality, delivery time and other key variables.
For Mozambican companies, service contracts represent a valuable opportunity to tap into gas megaprojects on a more manageable scale, and current regulations seek to account for this.
