When Africa’s second-largest gas reserve was discovered in Mozambique in 2010, the ruling party Frelimo saw a miraculous route out of poverty.
Foreign investors arrived. French energy giant Total initiated a $20bn offshore gas project aimed at producing 13.1 million tonnes of gas a year from 2024. The company said it also wanted to create “meaningful social and economic benefits for the province of Cabo Delgado” with 3,000 construction jobs – but gains for ordinary people are difficult to find.
“Locals lost land they were using for food production, no longer had access to fishing grounds or were simply dissatisfied at the long-term failure of any profits to trickle down,” says Laurie van der Burg, an analyst from Oil Change International, a research and advocacy organisation. “Only a select group of elites appeared to be profiting from the new gas development. This led to a feeling of discontent, and contributed to many young people joining militant groups.”
Mozambique is now a country in crisis. Cabo Delgado, where the largest gas field lies, has been gripped by a militant insurgency since 2017. Recent weeks have seen reports of beheadings and alleged atrocities involving child soldiers, as well as a raid on the coastal town of Palma that destroyed civic buildings and saw dozens of people killed. The government in the Christian-majority country blames al-Shabaab-linked terrorists with ties to Islamic State, but Amnesty International also sees links to the oil industry.
“Al-Shabaab is primarily a home-grown armed group fighting over local issues, an insurgency sparked by the long-term underinvestment in the Muslim-majority province by the central government,” says the human rights charity. “While Islamist ideologies have been growing in Cabo Delgado for decades, the movement did not gain traction until the arrival of resource extraction industries that provide little subsequent benefit for local communities.”
President Nyusi has insisted the most recent Palma attack “was not greater” than previous incidents, but Total has now withdrawn all staff and mothballed its site. The company has only spent a fraction of the planned $20bn investment, and could well walk away for good. Total declined to comment when approached by Energy Monitor.
Meanwhile, in part to help pay for new gas developments, Mozambique’s debt skyrocketed from 54% of GDP in 2013 to 113% in 2019, says the International Monetary Fund.
At risk from the energy transition
Until recently, such was the world’s thirst for oil and gas, companies were happy to extract from even the most volatile and war-torn regions of the world. Now, in the face of the Covid-19-induced global recession and the prospect of reduced oil and gas demand in an accelerated clean energy transition, companies like Total may be more willing to withdraw from difficult projects.
For the world to reach net-zero emissions by 2050 and maintain a good chance of limiting average global temperature rise to 1.5°C, total CO2 emissions would need to fall by around 45% from 2010 levels by 2030, says the International Energy Agency (IEA). To achieve this milestone, natural gas consumption must fall by around 10% from 2019 levels by 2030, in addition to substantial falls in coal and oil consumption.
Climate think-tank the Carbon Tracker Initiative (CTI) has modelled the fate of Mozambique and other emerging petrostates under the IEA’s Sustainable Development Scenario (SDS), which theorises a 50% chance of limiting the global temperature rise to 1.65°C. The SDS is less ambitious than the agency’s net-zero 2050 scenario, but it could still crush countries’ development dreams.
Out of six countries analysed under the SDS, Mozambique would see the smallest drop in actual fossil fuel revenue compared with projected revenue from 2021-40, although this is before any non-climate considerations are brought into the equation. The other countries featured would see less than half of their predicted revenues materialise, with Mauritania and Uganda not seeing any money at all.
“Countries taking on lots of debt to bet on future oil revenues are extremely vulnerable,” says Valérie Marcel, who leads the New Producers Group, aimed at helping new oil and gas producers manage their resources “effectively” and prepare for a clean energy future, at British think tank Chatham House. “The fossil fuel sector tends to be hyped-up, and governments start to make decisions around the idea of a bonanza,” she says. “But that bonanza doesn’t happen, and they are left with debt.”
After oil and gas is discovered, it takes on average seven years before there is any return on investment, says Marcel. “Seven years is a long time, especially when there is a lot of market uncertainty. Oil companies are beginning to curb exploration as they attempt to diversify their assets.”
In 2020, oil majors including Total, BP, Shell and Equinor all indicated their desire to move away from fossil fuels, announcing plans to become net-zero emissions companies by 2050. BP is aiming to cut oil and gas production by 40% by 2030, while Shell has pledged to focus its upstream extraction business on nine core locations worldwide.
The Covid-induced economic recession – which in 2020 saw oil demand collapse by 8.5% – has further shaken investment in the sector. In Africa, where all but one of CTI’s emerging petrostates is situated, spending on oil and gas in 2020–21 was $60bn, compared with an anticipated $90bn, according to the African Chamber of Commerce.
Rich versus emerging producers
Emerging petrostates are typically poor, unindustrialised former colonies of European powers. They have low Human Development Index (HDI) scores, and have often endured civil war or autocratic regimes. From an economic development point of view, the odds are usually stacked against them.
“Many of the new producer nations are carbon sinks, with big forests that absorb more carbon than the country emits,” says Marcel. “It is a bit rich for countries that have massive oil industries, like the US and the UK, to tell new producers what to do.”
Jonathan Gaventa, a senior associate at climate think tank E3G, agrees it would be difficult for heavily polluting rich nations to tell others how they are supposed to develop. “Countries like Mozambique have done very little to cause the climate crisis,” he says. “From a climate equity lens, there are no grounds for saying Mozambique can’t develop its gas resources. The problems around oil and gas developments are economic, not moral.”
Canada, Norway, the US and the UK have all extracted massively from their oil and gas reserves and continue to do so.
The sheer scale of their operations is mind-boggling. They collectively had lifetime recoverable reserves of 564 billion barrels of oil equivalent (boe), while the six featured emerging petrostates have recoverable reserves of 30.7 billion boe. Overall oil and gas revenues are much less significant for developed nations given the size of their economies.
Of the emerging petrostates cited by CTI, Ghana is the only country that has so far extracted any significant share of its reserves. World Bank data shows rents from fossil fuel extraction in 2018 accounted for 5% of the country’s GDP, based on oil output of 186 barrels a day. By contrast, rents from an average of 1,705 barrels extracted a day contributed to 1% of the UK economy in the same year.
All countries need to decarbonise as rapidly as possible, says Marcel. However, there are questions about the fairness of developed nations continuing to exploit their reserves, when they have already consumed a hugely disproportionate share of the world’s carbon budget.
Case study: Guyana
Marcel believes there is a feasible path for emerging petrostates to benefit from oil and gas incomes, while keeping their contribution to climate change low. It involves countries producing oil and gas primarily for export, and investing revenues in renewables, carbon-negative technologies and nature-based solutions such as forests. It would also involve wealthier countries curtailing production to allow emerging nations a chunk of the diminishing market.
Marcel cites the example of how Guyana is planning to develop its oil reserves. Total annual oil revenues in the country could approach $30bn within ten years, predicted Norwegian energy consultancy Rystad Energy at the start of 2020. That assumption was made before the Covid-19 pandemic and fails to take into account any accelerated energy transition scenario, but it nonetheless provides a sense of the extent to which the South American country of 800,000 people could be transformed.
Rather than using the oil to flood the domestic energy sector, the country has an ambitious renewables strategy. Under its ‘Vision 2040’ development plan, Guyana aims to transition from producing 18% of its energy from renewables in 2019, to nearly 100% in 2040.
The plan predicts the country is “about to be catapulted onto the global stage as the newest producer of oil and gas”, but insists the country’s development strategy will be based on “a good quality of life for all citizens based on sound education and social protection, low-carbon and resilient development”.
Billions are already being invested in fossil fuel extraction in the six emerging petrostates cited by CTI. Marcel believes the pathway chosen by Guyana – which saw its first shipments of crude oil leave the country in 2020 – offers a practical route forward.
“Oil revenues will completely dominate Guyana’s economy,” says Marcel. “Originally there were plans to bring the oil ashore, build a refinery and power the economy with cheap gasoline, but thankfully they have decided to avoid this route that so many established producers in the Middle East have gone down.”
The country has been criticised more recently for paring back its ambitions by planning to develop more gas-powered electricity. However, the original theory behind its development pathway could ultimately still offer a greener model for other emerging petrostates.
Not all experts believe it would be a good idea to lower production rates in rich countries to allow emerging petrostates to develop fossil fuel assets. “Rich countries often have stronger regulatory mechanisms around production and managing supply, including pipelines, for instance,” says Bob Ward from the Grantham Research Institute on Climate Change and the Environment in the UK.
Wealthy nations also tend to have more stringent regulations around fugitive emissions and gas flaring, and the electrification of rigs. Extraction from the newest oil platforms off the coast of Norway produces 25 times fewer carbon emissions than the global average, claims Equinor.
“If you allow fossil fuel industries to become embedded in new producing countries, it will make the transition to a low-carbon economy more difficult,” says Ward. “Transitioning away from fossil fuels takes a long time. It is in everybody’s interests to encourage countries to start now.”
Gaventa agrees there are significant risks around extracting oil and gas in developing nations, but says he would “strongly agree” with any push to curb production in rich countries. Denmark, France and Costa Rica have all declared they will phase out new oil exploration – a move the UK, Norway, Canada and the US have yet to follow.
“The issue of fossil fuel production has been somewhat missing from international climate diplomacy for a long time, and that needs to change,” says Gaventa.
Renewables investment growing
Developing a renewables-based domestic economy along the model of Guyana was until recently deemed unfeasible for developing countries. Uncertainty around long-term financing, as well as the prospect of low financial returns compared with a commodity like crude oil, has historically made renewables an unattractive prospect for international investors.
However, the plummeting price of solar and wind power, coupled with the volatility of fossil fuel prices and uncertainty about longer-term returns, is making renewables investment increasingly attractive.
“We see a big opportunity in wind and solar, which is cost competitive across 80% of the planet,” said Lucy Heintz, a partner at investment firm Actis, in a recent webinar organised by Chatham House.
“In comparisons between different classes of infrastructure, even through the Covid crisis, renewable energy has performed well […] precisely because it doesn’t typically have a lot of commodity risk, because you are fixing along a long-term price that is not subject to volatility,” said Heintz.
A fine balance
Nonetheless, emerging petrostates generally remain enamoured by the prospect of using oil and gas to try to ape the development pathways of the UAE, Qatar or Kuwait.
“One common lesson from the experience of most new producers is that they generally only benefit from oil and gas if they take it slowly: building up local supply chains, workforce skills and the public institutions to manage contracts with foreign companies,” says Greg Muttitt, from the International Institute for Sustainable Development. “When countries try to move too fast, revenues, jobs and supply contracts flow out to multinational companies rather than the country itself. The hopes for socio-economic development tend to be frustrated.”
The problem for emerging petrostates is that, given the pressing nature of the climate crisis, there are not spare decades to develop assets slowly. The UN Emissions Gap report highlights how carbon emissions must drop by 7.6% every year this decade to keep the average temperature rise below 1.5°C. The emissions fall caused by Covid-19 lockdowns in 2020 was in line with this figure, but emissions are rebounding as the global economy recovers.
“Rich countries have abrogated responsibility to support countries in their transition to low-carbon economies, and that is where our focus should be,” argues Ward. “It is ridiculous that rich countries continue to finance fossil fuel infrastructure in developing countries, instead of investing more strongly in the development of low-carbon industries.
“The choice we are offering these countries is develop with fossil fuels or don’t develop at all – and that is an unreasonable choice given where the world is heading.”