Experts Warned It Was Too Risky: The $6B Gas Pipeline China Hopes To Build In Mozambique

Experts Warned It Was Too Risky: The $6B Gas Pipeline China Hopes To Build In Mozambique

China’s planned $6 billion US investment in the Rovuma-Gauteng pipeline — its largest investment ever in Mozambique — will support Mozambican industrialization, strengthen Chinese presence in the region, and secure export markets at a time when China’s domestic markets are shrinking, MacauHub reported.

The 2,600 kilometer (1615-mile) African Renaissance Pipeline, if built, will transport gas from Mozambique to South Africa, and China’s participation brings technical capacity and financial weight to a project that experts previously warned was too risky or expensive to fund, according to InterfaxEnergy.

The Chinese government-owned Petroleum Pipeline Bureau said in March it plans to do a pipeline feasibility study. If the pipeline is approved, 70 percent of funding will be provided by Chinese financial institutions. China National Petroleum Corp. is a shareholder in the Area 4 block of the Rovuma basin.

Mozambique has an estimated 100 trillion cubic feet of proven natural gas reserves, making it the third-largest holder in Africa after Nigeria and Algeria, according to BizCommunity.

In early March South Africa’s SacOil Holdings announced an agreement with Mozambique’s national oil and gas company, Mozambican private-sector consortium Profin Consulting, and the China Petroleum Pipeline Bureau to build the $6 billion natural-gas pipeline from the Rovuma Basin in northern Mozambique to Gauteng, with branches going to other neighboring Southern African Development Community countries.

At least five countries stand to gain from the pipeline, said Aubrey Hruby with the Atlantic Council Africa Centre.

“It is a gain for China because the Chinese contractors get the business, it is a gain for South Africa and Mozambique because they secure the gas they need and it is a win for Zimbabwe and Zambia, because they also need energy,” Hruby said.

Funding for the project will come primarily from China, with the China Petroleum Pipeline responsible for 70 percent of debt financing from Chinese financial institutions. Financing details have yet to be finalized, but pipeline completion has been tentatively set for as early as 2020.

Much of China Petroleum Pipeline’s business in recent years has been driven by China’s need to secure new energy supplies, InterfaxEnergy reported.

“Investment opportunities are diminishing in China so it is natural for the country’s big firms to go global. We should expect to see them involved in projects around the world that do not necessarily relate back to the Chinese economy,” said David Dollar, a senior fellow with the Brookings Institution’s Foreign Policy and Global Economy and Development programs.

Drowning in gas

Low oil prices and global oversupply of liquefied natural gas mean both of Mozambique’s liquefied natural gas projects are struggling to make final investment decisions, according to InterfaxEnergy:

Although Rovuma volumes are unlikely to hit the global market before the early 2020s, China National Petroleum Corp’s 20 percent stake in Eni’s Offshore Area 4 could prove handy for securing supplies in 10-to-15 years, when China’s gas demand is expected to be at least double the current level.

In the meantime, China National Petroleum Corp will be looking for quick returns on the asset, particularly because it needs to prove to the Chinese government that it did not overpay or buy a dud. The $4.2 billion deal, which closed in 2013, is one of China National Petroleum Corp’s most expensive international acquisitions.

As the outlook for global LNG demand looks uncertain, exports from Mozambique to regional markets could become increasingly attractive, but the African Renaissance Pipeline will still need to find a large anchor customer for its gas.

Seeing as South Africa’s state utility Eskom has thrown its weight behind the rival Gasnosu pipeline project, “it is not entirely clear who in southern Africa this could be,” said  Charlotte King, an analyst on the Economist Intelligence Unit’s Middle East and Africa team.

Even if Eskom switched loyalties and started up negotiations with the African Renaissance Pipeline, it is uncertain if the beleaguered company has the balance sheet to support a project of this size. On top of that, even with access to cheap Chinese financing it is not certain pipeline imports from Mozambique will be competitive against LNG.

According to local media reports, the African Renaissance Pipeline does not intend to use domestic market obligation gas, so it will not be guaranteed cheap supply.

Even if strategically important, China is not now prepared to subsidize a development that does not promise returns.

“With the Chinese economy slowing down, we expect Chinese financiers to be increasingly selective over the projects that they back – if it is not economically viable, the project will not progress,” King said.

Other Chinese projects in Mozambique

The first major sporting facility built in post-independence Mozambique, the Zimpeto Stadium was funded by China. The three-kilometer Catembe bridge in Maputo, due to be inaugurated in 2017, will be one of the largest of its kind in Africa.

Construction of the new port of Beira began in September. Built by China Harbour Engineering Co., the port is seen as key to revitalizing the country’s fishing industry and will serve the entire production chain including refrigeration and export of processed products.

The Maputo Circular Road is being built by the China Road and Bridge Corporation, also responsible for the Catembe Bridge project. The Export-Import Bank (Exim) of China helped fund new terminals of Maputo international airport, completed in 2012.

Exported Chinese labor is not always welcome abroad, InterfaxEnergy reported. In Mozambique – where employment, skills and local industry are government priorities – there is a concern that as major Chinese companies move in, local workers and companies will lose out.

The problem has been “overblown in the public psyche,” Hruby said. “Maybe five years ago this was an issue, but most governments have got much more savvy in their negotiations with the Chinese and mandate how many local workers should be used. When I’ve worked with Chinese companies on these types of infrastructure projects a lot of time they will try to source as much locally as possible because it’s cheaper.”