Could East African Gas Impact U.S. Liquified Natural Gas Exports?

The hottest U.S. energy policy topic coming into 2013 is whether the administration should permit exports of liquefied natural gas (LNG). With the early December release of a Department of Energy-sponsored study examining the domestic economic impact of LNG exports, the debate has intensified and the stage is set for a decision sometime in 2013.

While opponents focus on the potential for rising domestic natural gas prices and the attendant negative impact on industry and consumers, proponents counter that market forces will constrain the volume of economically feasible exports and thus serve as a built-in safety valve limiting domestic price increases.

One of those market forces is growing global LNG supplies. As the Energy Security Initiative at the Brookings Institution noted in its May 2012 assessment: “A well-supplied global gas market will give U.S. exporters fewer opportunities for exports.”

One oft-cited source of new LNG supply is East Africa, especially offshore Mozambique and Tanzania. Wood Mackenzie indicates that four of the five largest oil and gas discoveries in 2012 were made off Mozambique alone, with ENI and Anadarko now having identified 85 tcf of recoverable gas in that country. These resources are sufficient to have prompted the companies to announce plans in late December to jointly develop an LNG export facility in northern Mozambique to be operational in 2018 with an eventual capacity of 50 million tonnes per year (2,435 bcf), making it the largest LNG facility outside of Qatar.

Natural gas represents a major potential benefit for low income and energy poor East African countries. It can provide much-needed revenues for pressing needs in health, education, and infrastructure, as well as help meet demand in various sectors of the economy and expand energy access. For example, the consultant ICF indicates that the government of Mozambique could “collect tens of billions of dollars for gas development” by 2035: to put that in context, the World Bank estimates total GDP in 2011 at $12.8 billion.

Nonetheless, this excitement must be tempered with some sobering realities. There is little to no supporting infrastructure and unpredictable economic and market conditions will have an impact on the viability of proposed LNG projects. But much more important is that a broad array of institutional, regulatory, human capacity, and governance “pre-conditions” must be in place to ensure that the natural gas wealth benefits the local population.

Mozambique is illustrative of these challenges. In the most recent Global Competitiveness Report from the World Economic Forum, Mozambique ranks 138th out of 144 countries. Among the most problematic factors affecting the country’s competitiveness are corruption, insufficient infrastructure, inefficient government bureaucracy, access to financing, and an inadequately educated workforce.

The World Bank’s annual global ranking on the ease of doing business ranks Mozambique 139th out of 183 nations, scoring particularly low in access to electricity, enforcement of contracts, and the ease of registering property. Corruption is also a daunting problem: Transparency International’s Corruption Perceptions Index ranks Mozambique 123rd out of 176 countries.

The Mozambican government seems highly aware of the potential benefits of the natural gas bonanza, of avoiding the “resource curse,” and of addressing institutional and governance challenges. The Minister of Mineral Resources recently stated “We want more than just LNG. We have huge resources and we want to see how we can use the gas in the local, regional, and international market.” The government also has made progress on some key issues: the Extractive Industries Transparency Initiative has certified Mozambique as compliant with its “companies publish what they pay and governments publish what they receive” standards and it is in the process of updating the Petroleum Law and finalizing a Natural Gas Master Plan. Furthermore Anadarko has worked with the government to commit to providing funds for health, educational and other development needs for the local population in Mozambique.

East Africa may well emerge as a global force in the LNG market, impacting the competitiveness of U.S. LNG exports. But there is much work to be done if Mozambique and neighboring nations are to build and sustain world class institutions, laws, infrastructure, and governance mechanisms to support large-scale LNG exports, as well as to ensure that newfound natural gas wealth benefits domestic development and poverty alleviation. Let’s see if progress on these issues keeps pace with gas production and development of associated projects.