Angola and Mozambique: the smart money is on clean energy

clean-energy

Discussion panel consisting of:

Miranda Managing Partner, Diogo Xavier da Cunha;

PLMJ Partner and Head of the Angola Desk, Bruno Xavier de Pina;

PLMJ Partner and Head of the Mozambique desk, Miguel Spinola; and

Scan Managing Partner, Francisco Avillez.

Q: What were the major trends in the energy market in Angola and Mozambique in the last year?

Avillez: The consolidation (or acquisitions) of big investments with big corporations.

Xavier da Cunha: All of the oil dependent countries globally, including Angola, are clearly experiencing a difficult time, with the price of crude oil dropping from around US$100 a barrel to US$40 in the last 18 months. Gas prices are also lower than a few years ago. This may have delayed investment decisions in respect of gas-related projects for Mozambique, but they continue to attract a lot of international interest.

In view of these circumstances, both governments are working very hard to diversify their economies and overcome these new challenges. We can clearly see our clients in the energy sector adapting their business models to this new paradigm and making strategic decisions in order to guarantee long-term sustainability. We are seeing these trends in the market first hand and are particularly witnessing a growth in restructuring legal work for the firm, notably in Angola.

Xavier de Pina: Like all oil producing subSaharan African countries, Angola is currently going through rough times mainly owing to the fall in the oil price. Energy players are cutting costs and, at the same time, there is not enough foreign currency to pay international suppliers. This caused a drastic shortage in US dollars and consequently a significant devaluation of the kwanza.

The shortage of foreign currency is causing a number of different difficulties for investors, ranging from the importation of goods and services in many sectors (for example, food and construction) to the payment of expatriate workers’ salaries. The unfavorable economic situation has created major problems for companies operating in Angola and has led to the need to optimism and “cut the fat”.

The trend last year, which we anticipate will also mark the end of 2016 and the first half of 2017, will be cost-cutting by Angolan players, both private and public. It should also be noted that petroleum legislation is undergoing a substantial reform with the segregation of powers between the national concessionaire and the petroleum supervising body. From a private perspective, companies are focusing on M&A operations to maximise efficiency and reduce operating costs.

Spinola: As has been generally reported over recent years, Mozambique made one of the world’s biggest gas finds in the Rovuma Basin and immediately started negotiations with Italian operator ENI, and US firm Anadarko. The aim of this is for Mozambique to emerge as a new giant in natural gas market and to spark investments with the potential to transform one of the world’s poorest countries into a major African economic player.

The discoveries in the Rovuma Basin, combined with plans to construct one of the largest LNG plants after Qatar in 2015, unquestionably represented the most significant movement in the energy sector in Mozambique and one which has definitely created real prospects for major investments both in the energy sector and many other sectors.

However, because of disputes over the terms, concerns about falling energy prices and the long delay in the offshore gas project development, especially at the end of 2015, it has been reported that some economic players were left with the impression that Mozambique has not secured the energy industry investment that it had expected. The conclusion of natural gas exploration was not followed by project development, final investment decisions have been delayed and this has led to the slimming down or exit of many energy companies that had set up business in Mozambique hoping to benefit from liquefied natural gas deals. With the coal sector also struggling with low prices and export logistics difficulties, foreign direct investment sank to pre-2012 levels.

Furthermore, depressed international commodity prices caused a decrease in the value of exports in 2015, with natural gas and coal registering the biggest drops. As a result, after almost a decade of average annual economic growth above 7%, Mozambique saw a slowdown to 6.3% in 2015 as the country faced defining economic and political challenges.

Despite the fragile political stability in Mozambique and the lack of dialogue between the government and the Renamo opposition party, the public authorities have recognized the need to ensure sustainable and transparent management of the business environment and have promised to focus on giving priority to the development of the energy natural resources projects.

As a consequence, Mozambique’s energy outlook remained clearly positive in 2015. A breakthrough in the negotiations between the government and gas and coal operators meant that a decision was finally made to start liquefied natural gas projects by the end of 2016, and to boost coal exports. It is expected this situation will unlock investments in major projects and infrastructure that will drive growth in the energy sector over the coming years.

Q: How are clean energy projects developing compared to the more traditional oil projects?

Avillez: Unfortunately, in Mozambique no one is looking to develop much regarding clean energy projects. We hope that with coal prices as low as they are, someone will look to those clean energy projects, for example wind power and/or wave energy.

Da Cunha: Angola and Mozambique are looking to invest in proven renewable technologies. We have seen that the most forward-thinking energy companies are also looking to embrace this pioneering African thinking. With over 25 years’ experience in various projects across the continent, Miranda’s own history is closely aligned to the growth and evolution of Africa’s energy markets. Recently, we have seen an increasing demand for assistance in connection with renewable energy projects, both from sponsors and international lenders. These projects pose some challenges and require both legal expertise and a strong understanding of local African values, culture and practices.

Spinola: In order to increase the development of renewable energy technologies in the country, the Ministry of Energy launched a feed-in tariff in 2014 to provide price premiums to small-scale projects from 10kW to 10 megawatts (MW) for biomass, small hydro, solar and wind. A regulatory framework is in the process of being implemented. There are also plans to develop a wind farm close to Inhambane, 500-kilometres north of Maputo. Mozambique is also one of the few countries in sub-Saharan Africa to have a solar supply chain facility. The module assembly plant near Maputo aims to produce components for the domestic market.

In summary, Mozambique offers unique business development opportunities for all those project developers, consultants and financiers involved in the clean energy sector and looking for further outlets in the sub-Saharan region. However, the country is still attempting to create an operational strategy to develop these infrastructures in an effective, competitive and attractive way and these are challenges that must be overcome before Mozambique can yield dividends from investing in clean energy projects.

Q: How are investors dealing with the complex regulation in both jurisdictions?

Avillez: Some of the investors come from common law jurisdiction and they are not familiar with the system in Mozambique. To resolve this, they have adapted and seek the advice of local consultants.

Da Cunha: Angola and Mozambique are trying to create mechanisms to attract more foreign investment, including from a regulatory standpoint. Changing framework laws is a good starting point, but it is not enough. Transforming the culture and practice of public administration and encouraging it to develop a more friendly attitude towards foreign investors is also important. However, such a change in attitude will take much longer than the enactment of laws. Therefore, successful investments will continue to require legal advice from those experienced in local culture and practice.

Spinola: Over the past two years, Mozambique’s economic framework has undergone significant changes in basic business regulations, such as employment and oil and gas legislation, the tax rules for both the mining and oil and gas sectors, public procurement, the tax code, public financial management, foreign exchange, public-private partnerships, commerce and intellectual property rights. Institutions have also been set up to implement policy objectives. This reflected the will of the government to conduct an open economic policy without distinctions based on the origins of investors, and to provide all investors with equal rights and obligations.

Among others, the Investment Law offers protection guarantees and includes provisions on the resolution of disputes. Although neither national nor foreign investors are obliged to comply with the Investment Law, only investors that comply with the law’s provisions will have access to ‘investment licences’ from the CPI. In turn, while this licence is not mandatory for business operations, the provisions of the Investment Law apply only to those investors that have one, so it is clearly highly recommended. Therefore, the recent reforms have positively reoriented the trajectory of economic growth and development in Mozambique. Nonetheless, policy implementation is

often weak, as several arms of the government remain committed to a regulated economy or lack the necessary technical capacity. Accordingly, there can be a gap between promulgation of policy and its comprehension and enforcement – by individuals and corporate citizens, as well as by government staff overseeing policy implementation. While investing in Mozambique, investors face innumerable requirements for permits, approvals and clearances, all of which take a significant amount of time and effort to obtain.

The government is aware of the problems and, in recent years, has launched a donor-funded effort to streamline procedures. For instance, public comments on proposed new laws and regulations are usually limited and input may come from a few private sector associations, such as the Confederation of Business Associations. Mozambique is considering passing a new law that would make public consultation on future legislation mandatory and this endorses the argument that the government is aware of the need to create a more attractive environment for doing business in Mozambique.

Investment in renewable energy:

By 2030 it is expected that about half of Africa’s projected 1.5-billion population will live in cities and by 2050 the number living in cities will hit 1.2-billion. To put this into context, Johannesburg (South Africa) was the only African city with more than one million inhabitants in 1960; now there are 35.

Population growth aside, Africa’s vast natural resources make it a compelling investment destination. For example, about 60% of the world’s available arable land is in Africa. Beyond minerals, oil and gas the continent has natural advantages for investments in renewable energy, particularly wind and solar.

According to data compiled by Clean Energy Pipeline, US$29.9-billion has been invested in renewable energy projects in Africa in the past five years.

Few transactions have come close to the size of those deals in the past two years, with the slowdown in China coupled with the slump in oil prices having a knock-on effect on both the value and volume of deals taking place in the African energy and power space since 2013. Indeed, the number of deals fell from 85 to 55 between 2013 and 2015 while the value of those deals fell 76% from US$21.6-billion to US$5.2-billion. Over the same timeframe the average price of a barrel of Brent crude oil more than halved, going from US$108.56 to US$52.53, with the figure hovering around the US$30-40 mark in the Q1 2016.

This poses a dilemma for oil-producing African states, which rely heavily on oil exports for their national income. Angola and Nigeria, for example, which are among the world’s top oil exporters, derive more than 90% of their export revenues from oil sales.

Source: The Lawyer

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