The Net-Zero Circle

Managing oil subsidies in a period of crisis

The world is experiencing an unprecedented global crisis, characterized by a staggering rise in prices and a major turmoil in the oil markets as a result of the Russia-Ukraine-NATO confrontation, which resulted in a significant decline in oil and its derivatives.

It suffices only to refer to the alarming speeches of some world leaders during the past months, the International Monetary Fund’s (IMF) review of its forecasts for global growth, and its warning that many developing countries may face economic crises and real debts.

According to H.E Abdessalam Ould Mohamed Saleh, Minister of Petroleum, Minerals and Energy of Mauritania, “in the midst of this situation, the Mauritanian government’s responsibility, first and foremost, is to protect its territory and people, and prepare it to face the challenges of the near and long future by providing financial and economic margins that enable the state to act and deal with potential risks”.

The Minister stated that “the government has allocated a large subsidy to fuel, close to 68 billion ounces since the beginning of the price hike, including 28 billion for domestic gas and 40 billion for gasoline and gasoil. The total fuel subsidy for 2022 reached between 120 and 140 billion ounces, according to international oil price scenarios”. It should be noted that subsidy spending begins as soon as the oil price exceeds USD $65 to USD $70 per barrel.

It was decided to reduce the subsidy after a comprehensive budget review that showed the difficulty of maintaining the current level of support without causing major disruptions in the country’s social and investment programs. Even after the state has reduced the operating budget and expenditures, the deficit remains very large.

The decision to reduce oil subsidies is considered among the most effective measures in containing the fiscal deficit. It is true that the decision has repercussions on large groups, including the less fortunate. Nevertheless, the government is taking the accompanying measures to mitigate the impact of the decision on the most vulnerable groups.

Salleh also commented that at the same time, “this decision is not without feasibility and justice, as it allows several things, including, first, that everyone will share in bearing part of this burden, and of course those who consume the most will pay the largest part. It is also important to encourage rationalization and that non-essential consumption of fuel and electricity is halted, as it will help consumers save some money, and ease the burden on the state and companies. Mauritania’s energy bill rose from USD $600 million in 2021 to USD $1.2 billion in 2022 (a 100% increase), which constitutes an enormous burden on the balance of payments and the state budget”.

Second, the decision to reduce oil subsidies enables the state to protect its social and investment programs, and allows it to continue supporting employment initiatives, as well as the security and sovereignty of the state.

Third, it’s important to note that the Mauritanian government still clings to two-thirds of the subsidy provided to fuel, as well as subsidizing domestic gas and fixing its price at a time when its prices, as well as the price of electricity, rose dramatically after the crisis.

If international prices remain at their current level, reducing oil subsidies today may avoid a greater reduction and a further rise in prices in the future.

Mauritania’s mineral potential and licensing

As highlighted by Minister Saleh, “Mauritania is characterized by the presence of great mineral capabilities and a rich and diverse mineral record with more than 2,000 mineral indicators. As evidence of its position in the forefront, Mauritania is one of the largest iron exporters in the African continent. In terms of figures, the number of research licenses currently granted in Mauritania is 55, while the number of applications registered for research licenses, under study, is 76”.

As for exploitation licenses, “the number of those granted is 21, while the number of applications for exploitation licenses is 8, which cover altogether an area of 66,000 square kilometres, equivalent to 6.5% of the nation’s total area”. This shows that despite Mauritania’s long mineral history and the multiplicity of exploration and exploitation activities that began before and after the first years of national independence, most areas of our country remain unexplored, presenting enormous opportunities for international companies.

It is important to mention that all licenses that do not meet the conditions are withdrawn or aren’t renewed; the Mauritanian government doesn’t license a new company until transparent, technical and financial standards are met. As the exploitation licenses, some companies have invoked the force majeure conditions related to COVID-19. Pending the return of things to normal, the government will evaluate the issue and make decisions based on this.

In this regard, it was also taken into account that mineral activity in recent years has witnessed a major stagnation at the global level due to the low prices of mineral materials, and the sector has been flexible with these companies. This extends to strategic projects that require significant financial investments.

Gold prospecting and the Mauritanian Minerals Company (MMC)

According to Minister Saleh, “immediately after the citizens moved massively towards traditional gold prospecting, and in the interest of the sector to organize these activities, the Mauritanian Minerals Company (MMC) was established to begin its work of framing, controlling and keeping pace with the activity of traditional and semi-industrial gold”.

The company has played a prominent role in regulating this sector, and this required great work, continuous field effort, and lengthy consultation with all concerned parties. The Ministry has designated corridors and placed them at the disposal of companies dedicated to the practice of traditional gold activities. However, unfortunately, some prospectors sometimes do not respect these designated corridors, and due to the circumstances, some of them turn to areas licensed by international foreign companies to practice exploration within the scope of the licenses granted to them.

The Mauritanian government is very keen to abide by the agreements with companies, and their property rights, because they help the country maintain steady investment, contribute to the state budget, employ local content and simultaneously help them develop new skills.

As an example, a Canadian company that has had an exploitation license since 2017 found prospectors occupying the geographical space specified in its license (15% of which is owned by the Mauritanian state). Consultations are taking place with the prospectors in order for the site to be evacuated voluntarily and at the lowest cost to all parties involved.

Advancing through green hydrogen projects

As highlighted by the Minister, the development of green hydrogen in Mauritania is a strategic direction that constitutes one of the main axes of the national energy strategy. This strategy aims to achieve energy security for the country, provide energy to Mauritanians at reasonable prices, and make energy a key driver in advancing the country’s economic and social growth; it will be implemented in three phases.

First phase (2023 to 2027): start of gas and petroleum projects;
Second phase (2027 to 2030): raising the level of gas and oil production and starting construction of green hydrogen projects;
Third phase (2030 onwards): the production of hydrogen and ammonia will begin on a large scale, and gas production is expected to reach its peak at this stage.

This constitutes long-term strategies and programs that may completely change the Mauritanian economy due to its positive repercussions on providing electricity at the lowest prices possible, and its role in the green industries of steel that will be in demand globally, as well as in the export of green energy to developed countries.

As for the projects, the Memorandums of Understanding (MoUs) the Mauritanian government signed with CWP (USD $40 billion, 30GW, Aman project) and Chariot (USD $3.5 billion, 10GW, Nour project) have already entered important stages, which includes the preparation of project agreements, expected to be completed in May 2023; preparations for both projects will begin to take the financing decision in 2026, and start the construction phase in 2027.

Gaining ground in the Greater Tortue Ahmeyim (GTA) and BirAllah gas fields

The pace of completion of the first phase of the Greater Tortue Ahmeyim (GTA) gas field continues, with works reaching nearly 80% by the end of June 2022, and the first shipment of LNG expected to be exported at the end of 2023.

The annual production of the first phase is also expected to be 2.5 million tons of LNG, and the cost of developing this phase alone is about USD $6 billion.

Furthermore, on October 11 2022, BP and Kosmos Energy have signed a new Exploration & Production Sharing Contract (EPSC) over the BirAllah gas discovery offshore Mauritania; a new agreement was required after the exploration period over Block C8 expired last June 2022.

The new EPSC provides for 30 months of studies and planning before submitting a development plan for the field, where a final investment decision (FID) is now expected in the first half of 2025. 50 trillion cubic feet of gas have been discovered on Block C8 across the BirAllah discovery in 2015 (Marsouin-1 well) and the Orca-1 discovery of 2019. The reserves are bigger than at the GTA field, where BP and Kosmos Energy expect to start producing gas and exporting LNG in 2023, and are already preparing the expansion of their FLNG hub to 5 million tons per annum.

As stated by Minister Saleh, “the BirAllah development plan is expected to further maximize local content and build on the domestic capacities developed during the development phase of GTA. The project includes an increased participation from the State of Mauritania (29%), and will rely on the logistics capacities of the Ndiago Port”.

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