US embassy cable - 05MAPUTO726

UNCLAS SECTION 01 OF 04 MAPUTO 000726 
 
SIPDIS 
SENSITIVE 
AF/S - HTREGER 
E.O. 12958: N/A 
TAGS: EMIN, ENRG, EPET, ETRD, EINV, MZ, Education 
SUBJECT: MOZAMBIQUE - PETROLEUM EXPLORATION RIGHTS INTEREST 
TWO U.S. COMPANIES; ENERGY/MINING OVERVIEW 
 
Sensitive But Unclassified. Confidential Business 
Information. Not for placement on the Internet. 
 
1. (SBU) Summary: The GRM will open a bidding round in July 
for deepwater exploration rights off the coast of the 
northern province of Cabo Delgado. Two American companies, 
Anadarko and Vanco, have indicated to the Embassy and the GRM 
that they believe the region may have oil, and plan to enter 
bids. They are the first U.S. companies to show serious 
interest in oil exploration in Mozambique in nearly a decade. 
Mozambique has negotiated contracts in recent years with 
various international firms for exploration and production of 
natural gas, titanium sands, and coal. Several of these 
projects are now starting to produce, while others remain 
delayed due to lack of available power sources and/or 
investment. American investment in these sectors is minimal. 
End Summary. 
 
Oil 
---- 
2. (U) On May 29 Minister of Natural Resources (MNR) 
Esperanca Bias announced that four offshore lots in the 
Rovuma Basin region of Cabo Delgado province will be opened 
up for competitive bidding by companies wishing to explore 
for oil and gas. The GRM will announce terms of the bidding 
process in July; according to ministry sources, companies 
will have six months in which to submit bids. The Rovuma 
river demarcates the Mozambique-Tanzania border; the Rovuma 
Basin exploration area in question lies south of that border. 
Two of the lots for bid (#1 and #4) are located offshore 
just north of the city of Mocimboa de Praia, and two (#3 and 
#6), are located further south, off the provincial capital, 
Pemba. The MNR announcement was made shortly before the 
inauguration of the Ninth African Oil & Gas Trade & Finance 
Conference, held in Maputo from May 31 through June 3. Many 
international companies interested in the bid lots were 
present at the conference. 
 
3. (SBU) Two American companies, Vanco Energy Company and 
Anadarko International Energy Company, attended and indicated 
that they plan to submit bids on lots #1 and #4. Vanco was 
particularly aggressive at the conference, hosting a 
reception at which company founder and president Gene Van 
Dyke made his interest publicly known. During the conference 
Mr. Van Dyke met with Minister Bias to get a better sense of 
how the process would work, and also met with Embassy 
officials. Vanco is the largest holder of deepwater 
exploration acreage in Africa, with holdings in five 
countries. Notably, it has partnered with ExxonMobil to 
explore the Majunga Salt Basin off the northwest shore of 
Madagascar, directly across the Madagascar Channel from the 
Rovuma Basin of Mozambique. In recent years Vanco has 
started drilling in its Morocco and Gabon properties. 
 
4. (SBU) Anadarko took a more low-key approach to lobbying 
during the conference, but company interest was just as high. 
Anadarko representatives plan to return to Mozambique in 
July once the bidding terms are released. Anadarko is 
already a major producer in Africa, engaged in onshore 
production in Algeria and offshore drilling in Tunisia and 
Gabon. Anadarko is a larger company than Vanco, producing 
considerably more gas and oil both in North America and 
overseas - a fact that was not lost on MNR officials in 
recent conversations with emboff. Vanco and Anadarko will 
not be the only bidders on these lots. Woodside (Australia), 
Tullo (Ireland), ENI (Italy), Stirling Energy (UK), Petrobras 
(Brazil), Statoil (Norway), and Shell/South Africa are also 
considered likely bidders, among others. Some of these 
companies may pull out, however. In November 2004 Tanzania 
held a bidding round for exploration in geologically similar 
deepwater terrain and received many inquiries of interest, 
although only three bids. 
 
5. (SBU) The bidding process announced by GRM will be the 
first of its kind in the oil sector; in the past, the GRM has 
always negotiated oil exploration rights directly with a 
pre-selected company rather than via an open bidding process. 
For example, in 2004 the GRM decided to negotiate a contract 
to explore lots #2 and #5 in the Rovuma Basin region directly 
with Statoil of Norway; contract negotiations are still in 
process. Since bidding for oil exploration contracts is a 
new process in Mozambique and the terms are yet to be 
announced, it is difficult to determine what the GRM,s 
ultimate criteria will be. In conversations with the 
Embassy, Vanco representatives said that they believed that 
the most important factors would be the perceived strength of 
the bidder,s understanding of the region,s geology, the 
speed at which seismic studies would be carried out, and 
financial capability. Recent emboff conversations with MNR 
officials also suggest that the Mozambicans are interested in 
each bidder,s history of undertaking actual production 
activities; they are suspicious of companies that may see the 
lots primarily for their speculative value. The key figure 
in the GRM during this process will be Arsenio Mabote, 
Chairman of the National Institute for Petroleum (part of the 
MNR). In recent years Mabote negotiated the terms of the 
GRM,s natural gas exploration and production agreement with 
Sasol of South Africa, and also, as then National Director of 
Coal and Hydrocarbons, handled the 2004 open bid process for 
the Moatize coal mine. 
 
6. (SBU) The big question underlying the entire bid process 
is a simple one: does the Rovuma Basin have commercially 
viable oil reserves? Many companies believe that it does, 
based on basic geologic information available from the GRM 
and data available from Lonropet, a British firm that carried 
out exploration in parts of the Rovuma Basin in the late 
1990s but never did any drilling. (Note: No wells have ever 
been drilled offshore in the Mozambican part of the Rovuma 
basin. End Note.) The overlapping layers of Jurassic rocks 
in the basin are considered very similar to the geology of 
river basins in other parts of Africa (Nigeria, Ghana, 
Gabon), where commercially viable deposits have been found. 
Also, many minor oil and gas seeps have been identified in 
the Mozambican and Tanzanian parts of the Rovuma Basin. 
Despite these encouraging signs, however, many industry 
observers at the conference remarked that reserves of gas but 
very little oil have been discovered by recent exploration in 
southeast Africa. Some pointed to the apparent difficulties 
experienced by the Malaysian company Petronas, which was 
granted exploration rights in 2002 to a broad offshore swath 
of the Zambezi Basin of Central Mozambique. Petronas so far 
has carried out extensive seismic studies, valued at up to 
$30 million over the past three years, but has not found 
indications of enough oil or natural gas to attract 
investment for further drilling. The company is in danger of 
defaulting on its agreement with the GRM, which required 
drilling to commence within three years. GRM officials and 
Vanco representatives state, however, that the geology of the 
Zambezi Basin is different and less compelling than that of 
the Rovuma Basin. 
 
Natural Gas 
----------- 
7. (U) Natural gas is by far the most advanced of all 
Mozambique's natural resource sectors. Sasol Petroleum 
International is now the biggest natural resources producer 
in Mozambique. In March 2004 Sasol made its first sales of 
natural gas from the Pande and Temane oil fields in southern 
Mozambique, of which it holds a 70 percent share. This 
followed the November 2003 completion of a central processing 
facility in Inhambane province and a gas pipeline to South 
Africa finished three months later. (Note: The GRM is in the 
midst of negotiations to secure a 30 percent ownership in the 
Sasol central processing facility. It also holds the rights 
to purchase a 25 percent ownership in the Sasol pipeline at 
specific outtake points, and plans to take steps toward 
purchase when appropriate investors are identified. End 
note.) Sasol Petroleum International announced at the Maputo 
conference last week that it is now producing approximately 
90 MGJ/year from the Pande and Temane fields, and expects to 
be at 120 MGJ/year in 2008. Pande and Temane are world-class 
gas fields with 4.81 GHP combined in proven reserves. 
Mozambique has two other smaller proven natural gas fields at 
Inhassoro and Buzi; neither is in production. The GRM has 
also granted a concession for gas exploration in the 
Inhaminga block of Central Mozambique to the Norwegian firm 
DNO, with the U.S. firm Wilrusco owning a 20% share. DNO is 
carrying out nearly all the operational work in the area, 
though no drilling has yet been done. 
 
Coal 
---- 
8. (U) Mozambique is scheduled to return to the ranks of 
significant coal producers by 2007. In November 2004 the 
Brazilian giant Companhia Vale do Rio Doce (CVRD) won in a 
competitive bidding process the rights to begin production at 
the long-stagnant Moatize coal mine in Tete province. (Note: 
CVRD owns 95% of the Moatize concession, with the 
Connecticut-based American Metals and Coal International 
owning the other 5%. End Note.) CVRD is currently 
undertaking its feasibility study, to be released to the GRM 
early next year, in which it will determine not only where to 
mine, but also whether to build a 1500 megawatt coal-fired 
power station. CVRD plans to export the majority of coal 
mined at Moatize, but at least 30% of the coal will be 
retained within Mozambique. The American firm Fluor hopes to 
partner with CVRD. 
 
Power Needs 
----------- 
9. (SBU) Visiting U.S. Department of Energy officer Carolyn 
Gay and emboff spoke at length with GRM's Minister of Energy 
Salvador Namburete May 31 about opportunities and challenges 
in Mozambique's power sector. According to Namburete, the 
GRM foresees a power shortage in Mozambique and in Southern 
Africa in general. It believes it will be necessary to boost 
power production quickly for greater industrial output, to 
facilitate further mining and exploration, and to increase 
rural electrification. For example, the GRM would like to 
expand the massive Mozal aluminum smelter near Maputo, but an 
extra 550 megawatts would be needed to do so. Mozambique 
does not have the energy internally for this and fears the 
costs of importing energy. Also, it will take at least an 
additional 150 megawatts to commence production of the 
Corridor Sands project, scheduled to start in two years (see 
para 14 below). Namburete added that during the negotiation 
with CVRD for the Moatize coal concession, the government was 
less concerned with obtaining of a high percentage of 
royalties than it was with securing additional power sources. 
? 
10. (U) The construction of a coal-fired plant in Tete is one 
way to solve these and many other energy needs. But, 
according to Namburete, the GRM is particularly focused on 
increasing its hydroelectric power reserves. Mozambique is 
seeking investors to build a second massive dam inside 
Mozambique on the Zambezi river, approximately 100 kilometers 
downstream from Cahora Bassa dam; Minister Namburete 
suggested one with a hydroelectric generation capacity of 
1300 megawatts. Also, the GRM wants to add a second power 
station at Cahora Bassa, on the north side of the dam. The 
Ministry of Energy has identified several other rivers for 
smaller dams producing less than 150 megawatts. 
 
Cahora Bassa Dam 
---------------- 
11. (U) To construct a second power station on the north side 
of Cahora Bassa, Mozambique would need to reach a settlement 
with Portugal. This is because the Cahora Bassa 
Hydroelectric Company, which manages dam operations, is 82% 
Portuguese-owned and 18% Mozambican-owned. Renegotiation of 
the entire Cahora Bassa complex (including the use of the 
waters of the reservoir behind the dam) is at the top of the 
Ministry of Energy's goals for the next few years - and 
renegotiation may not be an impossible goal. Energy produced 
at the dam is sold primarily to ESKOM in South Africa, and 
then sold back to Mozambique at a higher price. In early 
2004 the price of electricity sold to ESKOM was revised 
upward, although it still was only a fraction of the 
international and regional price. Mozambique and Portugal 
will be meeting on June 14 in Lisbon to discuss a possible 
resolution to the Cahora Bassa Dam issue. The biggest 
obstacle to reaching agreement, now as always, is servicing 
the Cahora Bassa Hydroelectric Company's huge debt to the 
Portuguese treasury. 
 
Heavy Sands 
----------- 
12. (SBU) Mining of several "heavy sands" deposits is 
scheduled to come on-line in the next couple years. Two 
projects stand out: Moma Sands, located in the northern 
province of Nampula and Corridor Sands, in the southern 
province of Gaza. In August 2004 Kenmare Resources of 
Ireland contracted an Australian firm to commence 
construction of a processing facility for the Moma Sands 
project. Construction is now about half finished, according 
to company sources, and Kenmare hopes to begin production in 
early 2006. The American firm Fluor made a large but 
unsuccessful bid for constructing the Moma facility. Kenmare 
expects to produce 615,000 tons of ilmenite minerals per 
year, including 40,000 tons of premium ilmenite, 20,000 tons 
of premium zircon, and 15,000 tons of rutile. Kenmare 
projects huge profits in Mozambique following completion of 
its factory, since it foresees total production costs at 
approximately $23 million per year and annual revenues in the 
$85-$90 million range. 
 
13. (SBU) The Corridor Sands heavy sands project in Gaza 
province is less advanced. The Australian firm WMC Resources, 
Ltd. purchased full rights to the project area in January 
2005. They had planned to designate a project management 
contractor by the end of 2005 and to begin construction of 
processing facilities in 2006. (Fluor is bidding on this 
contract, too.) WMC targeted production levels of 
approximately 400,000 tons per year by 2008, also focusing 
primarily on ilmenite, zircon, and rutile. The project had 
been delayed due to concerns over lack of available power. 
On June 3 the mining giant BHP Billiton purchased 55% of WMC 
Resources, effectively taking over the company. It is 
unclear what this move will mean for the Corridor Sands 
project. 
La Lime