Uncertainty and incentives in MozambiqueMay 26, 2020
Chivambo Mamadhusen, CEO of Grupo Videre, about the impact of the emerging Covid-19 crisis on Mozambique’s energy industry and the need for clarity on government support for the private sector. Grupo Videre is focused on energy across the value chain (power, mining and oil and gas) and provides services to the oil and gas industry through strategic partnerships.
How has Covid-19 affected your business?
If we look back two months, our office was full of people and we were completing proposals and negotiating with EPC contractors for both Area 1 and Area 4. Things were going very well – the industry was flying. There were some handicaps, like the security issue, but the government was in the final stages of setting up a security solution reached between itself and investors.
So, what has happened since then? Terrorist attacks have intensified by around 300%. Attacks have been happening on a monthly basis, and there has been a shift from small weapons to big ones, from small groups of five to 10 people to groups of 50 people, from inland operations to island operations and from cars to barges.
Africa started to receive official confirmations on the pandemic a bit late. In Mozambique, it started a month and a half ago and we have had around 100 people infected. The first confirmation arrived from the Total camp in Afungi, which meant that Total had to take the official leadership in confirming and working with Mozambique’s National Institute of Health. They had to make sure to close the camp, quarantine everyone and follow all the procedures.
This forced IOCs to send all their people back to Maputo and then back to their countries. In terms of partnerships, everything has stopped. Total has kept only the main companies that are working on preliminary works onsite.
Regarding Exxon, they are dealing with the third problem of the market, apart from terrorism and Covid-19, which is the oil price. This forced Exxon to cut spending for 2020 by USD 30 billion. This had a direct effect, which was the moving of the FID on their Rovuma LNG project to 2021. Fluor, which is the procurement leader of the consortium that won the EPC contract for this project, also stopped its activities, and as a result our partnerships with companies that were bidding or pricing with Fluor also stopped.
All in all, at least 90% of activities on these projects have stopped.
Does the continuity of the Coral South FLNG project provide opportunities for local companies?
The vessel is being built by a consortium led by Samsung in South Korea at their yard, and as such, there has been no direct impact of that construction here. There is, however, some impact on offshore and drilling activities, in which both Saipem and TechnipFMC are involved. We have some strategic partnerships in place for this project and we have not heard of any cancellations. These are supposed to happen later this year or early next year.
Can we expect more governmental support for ENH to continue operations?
The issue of ENH is the equity responsibility for the Area 4 project. In recent years, they have been trying to find a solution in order to get funded for the equity without having to use the government collateral guarantee. So, they looked at different types of solutions.
We recently saw that the Ministry of Finance is requesting parliamentary approval for an extra collateral guarantee for ENH. We as the private sector understand that this is a strategic issue, if not the most strategic issue, when it comes to Mozambique’s economy, so we are fine with that. What we requested is to understand the cost of this extra collateral state guarantee, and how that would affect ENH’s cost for borrowing equity for this project.
What tools and opportunities are there for local companies to navigate through the crisis?
We are already moving into the second month of the state of emergency. Of course, oil and gas and mining are considered essential and can continue operations, but you no longer have a market for the product. If you look at the essential products for the private sector in Mozambique, most of them are imported. The government is trying its best to avoid having to pay the higher price of these products while they become more expensive globally.
We are in discussions with the CTA [the Confederation of Business Associations in Mozambique] on the incentive package for the private sector. The state budget is being cut and the government is in negotiations with the IMF and World Bank for an incentive package to deal with Covid-19. As of today, we have no details on where that USD 700 million or so is going to go. We have seen that the cost of borrowing money has grown a bit, even though the Central Bank is injecting USD 500 million into the commercial banks to support this phase. However, this amount will mostly go to companies that are involved with the manufacturing and import of first-need and essential products. So as of now, we as the private sector still don’t know what incentives will come from the government to keep us going.
Have you seen a supportive approach towards the private sector from commercial banks?
Not really. Commercial banks are also waiting to understand what kind of package the government will provide. The government is currently focusing on approving the state budget and on finalising deals with the IMF and World Bank and after that they can discuss with their strategic partners providing a package to the private sector. We just heard that the main tourism area in Mozambique closed 30 lodges and hotels, which will leave 1,500 people unemployed. These are the developments we are going to see until we know the details of the incentive package.
What qualities of Mozambique will make it stronger after the crisis compared to its peers?
The government has to be very serious in pushing forward and making reforms. Post Covid-19, I think we will believe more in a market-driven industry. The market is global and we cannot control commodity prices. One of our biggest export products is coal, and the producer, Vale, is cutting operations here. That means less USD for the country. And for aluminium, which is our top export product, prices are going down.
The only solution for us is to pursue reforms, especially regarding tax benefits and logistics costs, which will make our products more competitive. In terms of oil and gas, Sasol now has financial problems due to its US investment. We have to make sure they continue to export gas and Mozambique continues to benefit.
Activity at Area 1 is ongoing; there are 2,000 people working there now. We believe if the terrorism issue in that area is handled well by the government, the project will move forward.
What are the opportunities now for Grupo Videre?
Right now, the only big opportunity is the gold price, which is on the rise and is expected to reach historical highs by the end of this year. The problem rests in the logistics, as gold is a commodity to be transported on commercial planes, which have all stopped. Now, the only commodities that can be transported on cargo flights are the essential ones, so we are competing with them. The solution we found is private planes, which is a bit expensive but still profitable.
We are also looking at using cash to invest in infrastructure that will make our products more competitive. We hope that the pace of the pandemic stays the same here, and we don’t get to the point of a complete lockdown. Considering the low number of recorded cases, when taking the pandemic into consideration in our business, we see it as something which is just about to start.