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Sasol deal 'rips off' Mozambique

Feb 19 2017 06:02
Justin Brown

Johannesburg - Sasol has been criticised for entering into a lopsided contract with the ­Mozambique government for its first $1.2 billion (R15 billion) gas investment so that the country didn’t get a fair share of the benefits from its natural resources.

Don Hubert, a Canadian from Ottawa and named on the Alternative Mining Indaba programme as a Mozambique oil and gas expert, said: “There is a really significant gap between what gas is worth and what the government received.”

For the first 10 years of the project, the Mozambican state where the project is situated got $130 million in tax revenue, he added. This compared with his estimate that the gas piped from Mozambique was worth $700 million a year.

Sasol spokesperson Alex Anderson said that, ­between 2004 and 2014, more than $600 million “was delivered to the government of ­Mozambique”.

“These values include corporate taxes, royalties and corporate social investments, as well as profit share and dividends paid to state-owned entities,” he added.

The Alternative Mining Indaba was held in Woodstock in Cape Town this month and was largely supported by nongovernmental ­organisations.

“There is the first big extractive project to fail in Mozambique. Government and citizens don’t get a fair share. The Mozambique government negotiated a bad contract,” Hubert commented.

Anderson said that at the time of the talks between Sasol and the Mozambique government in 2000: “Mozambique needed to increase foreign direct investment, diversify its economy and stimulate economic growth.

“Mozambique will derive revenues in the form of gas royalties and taxes amounting to about $498 million...

“In addition, Mozambique will receive returns on its equity participation in the project’s ­upstream component, the gas field development and the central processing facility, and the pipeline over the project’s 25-year period.”

Hubert said that the price that Sasol was paying for the gas in Mozambique had no reference to the price that Sasol sold the gas for in South Africa.

“Gas prices are not based on global references like oil prices, but are based on regional market dynamics which take into account alternative energy costs of users,” Anderson said.

Hubert said the dispensation that Sasol had in Mozambique was “contractual mispricing” and “abusive”. The gas sale agreement meant Mozambique was incapable of getting its fair share of the gas revenue.

“Perceptions of political risk were high at the time that the financial investment decision was made, as Mozambique had just emerged from a civil war. To obtain financing, the investors needed protection from both market and perceived ­political risks. The project was therefore structured to compensate for the significant investment and risk taken during the initial years after which the benefits would exponentially increase for the Mozambican government,” Anderson said.

Sasol has reported that the initial investment grew to $2 billion. In January 2016, Sasol entered into a new deal with the Mozambique government that will see a further $1.4 billion invested.

Hubert didn’t comment on Sasol’s gas investments in Mozambique beyond the initial $1.2 billion. He said that the infrastructure spinoff from that investment was that just 620 households gained access to gas in Inhambane.

Without commenting on the initial investment, Anderson said that part of the 2011 expansion resulted in gas being allocated to the Mozambican power utility Electricidade de Mozambique and Sasol to develop the Central Termica de Ressano Garcia 175 megawatt power plant, which is ­supplying 2 million Mozambicans with power.

Hubert explained that the project required ­Sasol to spend $800 000 on social responsibility projects but in many years that level of spending was never done. Anderson said that, to date, Sasol had spent about $21 million on social ­responsibility projects.

Hubert said that, in contrast to Mozambique, Botswana was an example of a country that had used its resource wealth to benefit its citizens, and that the Mozambique government should renegotiate the bad deal. “It is worth fighting for a project’s fair revenue.” He said that government capacity was weak and politicians were there for personal enrichment.

Pamela Mondliwa, a University of Johannesburg Centre for Competition, Regulation and Economic Development researcher, said South African state support had placed Sasol in a “very strong position” such that the benefits of the gas failed to be passed on to the downstream sector to allow for ­development and industrialisation.

The research that Mondliwa presented at the Alternative Mining Indaba was sponsored by ­Oxfam.

Sasol dominates the supply of gas in South Africa with 94% market share, she said, adding that “Sasol is in a largely uncontested position and is only constrained by regulation”.

“The regulatory framework around infrastructure and market access is conducive to and enables the participation of new entrants,” Anderson said.

As a result of Sasol’s dominance, South Africa pays a high price for Mozambique gas supplied by Sasol, Mondliwa said. Sasol charges a margin of between 190% and 335%, excluding the cost of transmission, on the gas it sells locally, she added.

Anderson said that the gas pricing framework was regulated by the National Energy Regulator of South Africa.

Mondliwa said that, prior to 2014, Sasol priced its gas in South Africa to attract customers to switch to gas but, after 2014, Sasol significantly hiked it gas prices to its large customers.

“The regulatory framework under which the piped-gas industry operates in South Africa changed on March 26 2014. As a result, Sasol Gas introduced a new pricing mechanism as required. The effect of this is that prices for 90% of Sasol gas customers decreased and prices for the ­remaining 10% ­increased,” Anderson said.

The benefits for the South African state included tax revenue, the development of technology and the promotion of bilateral trade with Mozambique, Mondliwa said.

However, neither the ownership nor the structure of the local fuel sector had greatly changed, and the project had not created many jobs in South Africa, she added. A key lesson was that the ­Mozambique government must not underestimate its bargaining power.

Mondliwa said: “Firms lobby all the time – ­regulations are changed to favour firms. We need not to be blind to this, and find ways to make ­politicians more accountable.”

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