‘RIPS OFF’

CityPress - - Business - JUSTIN BROWN justin.brown@city­press.co.za

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.”

PHOTO: JUSTIN BROWN

GAS PRIC­ING Sa­sol’s nat­u­ral gas op­er­a­tions in Mozam­bique near Vi­lankulo in In­ham­bane prov­ince

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