Mozambique - Issues and options in the energy sector

Report No. 6128-MOZ Mozambique: Issues and Options in the Energy Sector January 1987 ~. . .. .. 2. : .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~..~~~~~~~~~~~~~~~~~~~~~~~ .: . . . ., i t . . . . . . . . .~~~~~~~~~~~~~~~~~~~~~~14  JOIMT UNW/WOULD RAW ENICRY SSCTOR ASS3SSNENT PROGRHM REPORTS AJREADY ISSUED Country Date Number Indonesia November 1981 3543-IND Mauritius December 1981 3510-MAS Kenya May 1982 3800-KE Sri Lanka May 1982 3792-CE Zimbabwe June 1982 3765-ZIM Haiti June 1982 3672-HA Papua New Guinea June 1982 3882-PNG Burundi June 1982 3778-BU Rwanda June 1982 3779-RW Malawi August 1982 3903-MAL Bangladesh October 1982 3873-BD Zambia January 1983 4110-ZA Turkey March I983 3877-TU Bolivia April 1983 4213-BO Fiji June 1983 4462-FIJ Solomon Islands June 1983 4404-SOL Senegal July 1983 4182-SE Sudan July 1983 4511-SU Uganda July 1983 4453-UG Nigeria August 1983 4440-UNI Nepal August 1983 4474-NEP Gambia November 1983 4743-GM Peru January 1984 4677-PE Costa Rica January 1984 4655-CR Lesotho January 1984 4676-ISO Seychelles January 1984 4693-SEY Morocco March 1984 4157-MOR Portugal April 1984 4824-Po Niger May 1984 4642-NIR Ethiopia July 1984 4741-ET Cape Verde August 1984 5073-CV Guinea Bissau August 1984 5083-GUB Botswana September 1984 4998-BT St. Vincent and the Grenadines September 1984 5103-STV St. Lucia September 1984 5111-SLU Paraguay October 1984 5145-PA Tanzania November 1984 4969-TA Yemen Arab Republic December 1984 4892-YAR Liberia December 1984 5279-LBR Islamic Republic of Mauritania April 1985 5224-MAU Jaiiaica April 1985 5466-JM Ivory Coast April 1985 5250-IVC Benin June 1985 5222-BEN Togo June 1985 5221-TO Vanuatu June 1985 5577-VA Tonga June 1985 5498-TON Western Samoa June 1985 5497-WSO Burma June 1985 5416-BA Thailand September 1985 5793-TH Sao Tome & Principe October 1985 5803-STP Ecuador December 1985 5865-EC Somalia December 1985 5796-SO Burkina January 1986 5730-BUR Zaire May 1986 5837-ZR Syria May 1986 5822-SYR Ghana November 1986 6234-GH Guinea November 1986 6137-GUI Madagascar January 1987 5700-MAG  FM O"ICIAL USE OILY REPORT 10. 6128-MUo MlOZAMBIQUE ISSUES AiD OPTIONS IN THE ENECY SCTOR JANUARY 197 This report is based on the findings of an energy assssmnt mission which visited Mozambique in April/lNy 1985. The mission consisted of Messrs. J. Besant-Jones, Mi-uion Leader; M. Del muono, Deputy Mission Leader; A. Alberti, Manpower and Training; H. Chaves* Power Engineer; D.C. Krishnamurthy, Refinery Engineer; J. Rochet, Geologist; I. Rodriguea, Researcher; and A. Bellasoug (Consultant) Gas Expert; Sroukhorst (Consultant) Coal Mining Expert; and Mrs. S. Carbonnier, (Consultant) Forestry Expert. Messrs. Sesant-Jones and Del Buono were the principal authors of this report, which benefited also from contributions by Ms. D. Williamon (Economist), Messrs. C. Warren (Coal Economist), K. Rornby (Consultant), E. Roumeni (Consultant) end R. Williams (Consultant). The draft report was discussed several times with the Mozambican authorities, most notably in July and November, 1986.  Mosambique is relatively well endowed with energy resourc e and its long run economic prospects are good once peaceful conditions are restored to the country. However, the poor conditions of energy supply systems could constrain economic recovery. Gover t s policy of rehabilitation of ezisting sector assets and institutions should be the recommended priority. Planning for meting future energy demand, manpower develeimsnt and improving operational capability are also priorities. Past policy and the incrasing over-valuation of the m_ical have kept the prices of comercial energy well below the economic cost of meeting demand. This policy has been dvitrimetal to the viability of sector enterprises and has resulted in inadequate incentives for energy conservation, The present relationship betwee prices of energy products are inequitab'e, with traditional fuels used by poorer households being much more costly than the commercial fuels used - when available - by the relatively better off households. This report recommends that prices for imported fuels should be raised and maintaine at least at the import parity levels, if possible within an economic reform encompassing wages, prices and exchange rates. Priority invescaets that are recommetIed in this Report amount to about US$175 million in 1985 price terms for the next five years. This total excludes the large export-oriented projects (Cahora Bassa IIt aluminium, coal) currently being studied because, based on information available to the mission,, their feasibility has not been adequately established, especially in terms of locating firm attractive markets, economic returns, and the high financial risks for loambique. rhis total also excludes iLnvestments in domestic gas utilisation since tnese have yet to be firmly defined and evaluated.  ARDRIYATU SAND ACUUS CAPC Central African Power Corporation Carboamoc National Coal Companry of Mozambique CDO Coal Development Office CIDA Canadian International Development Agency c.i.f. cost, insurance and freight CNG Compressed Natural Gas CUSP National Wage and Price Commission DDR German Democrate Republic DBH Diameter at Breast Height DIMEL Distribution de Materiais Electricais DWT Dead eipght Tonnes EDM Electricidade de Mozambique EDP Electricidade de Portugal 8LECTROMOC Empresa de Electricidade Electronica mm Empresa Nacional de Ridrocarbouetos EVIEL Empresa Nacional de Installacoes Blectricas ERR Economic Rate of Return BROOM Electricity Supply Commission (Republic of South Africa) PAO Food and Agriculture Organization f.o.b. free on board f.o.r. free on rail FuELIaG Prente de Liberta,a8 de Mogambique (Official Government party) CDR German Democratic Republic GMI Government of Mozambique BCB Hidroelectrica de Cahora Bassa IBID International Bank for Reconstruction and Development LNG Liquified Natural Gas MADEMO Madeiras de Mogambique (National Wood Marketing Enterprise) mai mean annual increment RUE Ministry of Mineral Resources MONAP Mozambican Nordic Agriculture Program NCI National Geological Institute NDM National Directorate of Mines PETROKOC EMpresa acional de Petr6leos de Kozambique PIP Prospective Indicative Plan r.o.m. run-of-mine BBA Republic of South Africa SADCC Southern Africa Development Coordination Conference SHER Sociedade Hidroelectrica do Rev%A spp. species UDP Unidade de Direccab de Florestas (National Forest Directorate) USAID United States Agency for International Development  WIN W bbl barrel B/D barrel per day BCP billion cubic feet BTU British Thermal Unit DC direct current cJ Gigajoule GCh Gigawatt hour ha hectare kcal kilocalorie km kilometer kWh kilowatthoor kV kilovolt kA kilovoltampere mtpy million tonmes per year HJ emgajoule UT meticl (pl. meticais) million cubic feet per day .NP ahmillion cubic feet Ha Megawatthour thousand cubic feet 'V cubic meter IWA Negavoltempere MW megawatt X Rand TCP trillion cubic feet TOG tonnes of oil equivalent t tonne t/d tonnes per day t/y tonnes per year U8 United States dollar  43 Meticais a US$1 I J4etical - US$0.023 (mid 1985 rates) ENEMY CONVERS ION FACTOR 4I llon tKcal Physical Unit Fuets per unit per TOE Liquid Fuels (tonne) Crude 011 10.2 .00O LPG 10.8 0.94 Kerosene 10.3 0.99 Jet fuel 10.4 0.96 sao lne 10.5 0.97 S.i1 10.2 1.00 Industrial Diesel Ol 10.1 1.01 Fuel oIl 9.8 1.04 Natural GOs O ) 252 0.04 Electricity 0Ih) 86 x o12 4.0 cool Itoene) 5.6 1.82 Fueluood (tone) 3.5 2.91 Charcoal (tono.) 7.0 1,46 mo Ito" I toe a 10,2 mi lIon kcal u 40.5 ml I I Ion OBM 427 U J I keal 3.968 STU I keal I 4.19 x 104 @ 1 Ywh a 60,000 kcal a 0.248 TOE at 34S of filency In thermal (ol) genration 1 bbl of crude oll (averge) a 0.159 cubic atets; 42 US Gallons; 35 Im_eial Gotllns  TAM, OF c .ToTV ?sge EXECUTIVE sUMARY......................................... i It SCTOR R..................... ...... 1 Macro-economic Trendse.................* ........o...*o 1 Energy 2sources............. .., 2 Overview of Energy in the Economy..................... 2 Energy Supply and Consumptio 4n......................... 4 Woodfuels and Household Energy.0 ...................... S Petroleum and Cas..................................... 5 Electric Power ........................e.o .*eeee 7 7 The Inotutional Framework for the Energy Sector....... 8 Policies and Investments in the Last Ten Years ........ 9 Energy Planning Issues...................................... 10 Operational Efficiency and Institutional Strengtheninge .................................................11 Future Large Energy Projects .................... 11 Large Energy-Intensive Industrial Projects............ 12 Energy .............................. ................. 14 Energy Conservation, Fuel Substitution and Rural Enela............. 18 Energy Development Strategies and Policies............ 18 Rec ded Prioritie s 20.....................**.. 20 Recommended Technical Assistance Priorities for the Energy Sector ....................... ..... 21 II. WOODFUELS AND HOUSEHOLD ENERGY .......... .*e .... 23 Voodfuel Supply and Demand............................ 23 Woodfuel Situation in Urban Areaa..................... 23 Voodfuel Situation in Rural Ares..................... 25 Voodfuel Resources .................................... 25 Puelwood Nantstsons......., .......................... 27 Priorities for Increasing Puelwood Supply .............*- 30 Institutional Issues for Woo6fuels and Household Eergy.................................... 32 34 Urban Household Energy Consumption.........e ....* .. 34 Comparative Costs of Household Energy................. 36 Household Energy Supply Options ....................... 38 Priorities for Household Eergy....................... 39 Priorities for Development ............................ 41 Summary of the Mission's Recommendations for the Voodfuels and Household Energy.. 42  III. PETROLEUM AND CAS*......................................... 44 Crude Oil and Petroleum ProductSfe,..................... 44 Petroleum Products Supply end Demandt... ............., 44 The Matola Refinery.................... ............... 46 Product Pricing....................................... 48 Product Supply, Storage and Distribution .............. 49 Petroleum Supply, Procurement and Planning............ 51 PERIROMOC's Manpower................................... 52 Corporate Accounting................ .... .......... 52 Indicative Investment Program.....,.................. 52 Petroleum ard Gas Exploration and Development ........... 53 Geological Framework.................................. 53 Past Exploration Activity............................. 53 Petroleum Promotion Strategy.......................... 54 Current and Proposed Exploration Work................. 54 Manpower and Organizational Needs..................... 55 Gas Demand and Utilization .........5.........* ..... 57 Use of Pande Field Gas ................................ 57 Ammonia Project .............................. 58 Domestic Use of Natural Gas........................... 61 Use of Busi Field Gas................................. 62 Export Market Potential for Natural Gas.............. 63 Priority Investment Program. ...... .... ..... ....*...... 63 Summary of the Mission's Recommendations for the Petroleum Supply Sector ........................*. 64 Swumary of the Mission's Recommendations for Petroleum and Gas Exploration and Development ........ 65 IV. ELECTRIC .....................*....................... 67 Organization of the Power Sector...................... 67 Physical Facilities ........*. 68 71 Historic Demand and Supply....................... 72 Present Supply/Demand Situation....................... 73 -RED's Taif ...........................75 EDM's Financial Position and Practices................ 78 Power Resources.............. . 80 Cabora Bassa Developments ..... .... . ................... 81 Prospective Demand for Power .......................... 84 Power Exports................................. 85 Power Supply to Southern Mozambique.................. 86 Power Supply to Central-Northern Mozambiquee........... 88 Priority Investments.................................. 88 Sumary of the Mission's Recommendations for the Power Sector.................................. 89 Ve O ............................. 91 Introductionooeoo*oooooooo*to*ooeotoooe* * ........... 91 Cosl Resources........................................ 91 Supply and Demand..................................... 92 ColPrcst.......................... 94  Sector Organi:ation.....................,.. 96 Mbnpower ..... 4 ~~~~~~~97 Domestic Market Prospects......e..................e... 98 Rehabilitation of Existing Moatize Mines ............. 99 Planned Coal Developments.....0. *. ......*.** *. .. , 99 Coal Transport Facilities.eee................e........ 101 Viability of Investments for Coal Exports 102 Past and Projected Investment in the Coal Sectors.....,* 105 Summary of Mission's Recommendations for the Coal Setr105 VI, INSTITUTIONAL I ES .............. . 107 Sector Organization and Institutions............s..... 107 Sector Coordination 108 National Energy Council ....... 109 Department of E ner g y 110 Management .................... 111 Manpower Development....... 112 Technical Assistance ......112 Mul-wti-sectoral Developments*********oeo*o 113 Summary of the Mission's Recommendations on I n s t i t u t i o n s 114 TABLES Table 1 Summary of Priority Investments for the Energy Sector to 1991 x Schedule A Recommended Sub-Sectoral Priority Investments to 19919.......................... xii Schedule B Recommended Sub-Sectoral Priorities for Technical Assistance......94444 4@*494444444@444 Xiv Table 1.1 Evolution of CDP 1973-1983.... 1 Table 1.2 Summary of Energy Balances, 1981 and 1984. 8 4.......... 4 Table 1.3 Sammory of Trends in the Fetroleum Subsector 1978-1985 .................... 6 Table 1.4 Energy Prices in Mid-1985....... ..................... 16 Table 2.1 Estimated Forest Resources in 19 8 2 26 Table 2.2 Household Consumption by Energy Product in Maputo for 1984 35 Table 2.3 End-Use Urban Household Energy Costs for Cooking in Ma-uto for 1985 ..... 37 Table 2.4 Priority Investments for Woodfuels and Household Energy to 1991.... 42 Table 3.1 Internal Consumption of Petroleum Products: 1979-85 .... w ~~~~~~~44 Table 3.2 Total Domestic Petroleum Product Supply: 1979-85 ..... 4 Table 3.3 Economic Retutas of Gas Pipeline/Ammonia Plant at Maputo............ 4 60 Table 3.4 Economic Returns of Gas Pipeline/Ammonia Plant at Inbassoro ..... .... e a 61  Table 3.5 Economic Returns of Buxi Pipeline/Gas Utilisation at Ber ....* ...63 Table 3.6 Priority 'vtavesents for Petroleum and Cas Exploration and Development to 199 1 64 Table 4.1 Main Power Supply Facilities to EDN's System....... 69 Table 4.2 Production, Imports and Exports of Power in Mozambique 1978-1985........ 73 Table 4.3 ESM's Tariffs....... 77 Table 4.4 Comparison of EDM's Tariff with Bulk Supply Tariffs... 77 Table 4.5 Capabilities of the Cahora Bassa Complex.......... 82 Table 4.6 Possible Phased Development of Cahora Bassa - Stage 2............ 83 Table 4.7 Priority Investments ^or Electric Power to 1991....... 89 Table 5.1 Coal Production, Imports and Consumption, 1978-84..... 93 Table 5.2 Coal Production Costs at Moatize - 1979-819........... 94 Table 5.3 Coal Prices in 1985................ <. .......... 95 Table 5.4 Moatize Expansion Projeet Coal Characteristics******* 100 Table 5.5 Moatise Project Investment Costs....... t s............. 102 Table 5.6 Priority Investments for Coal to 1991................. 105 ANNEXES Annex I Mozambique Energy Balance: 19797 99.................... 115 Annex 2 Woodfuel Costs and Prices for Maputo in 1985.,.......o 118 Annex 3 Forest Resources in Mozambique.... 120 Aniex 4 Estimated Requirement for Puelwood Plantations to Supply Maputo Urban Households... 124 Annex 5 Evaluation of Alternative Programs for Fuelwood Plantations in the Region of Maputo................. 128 Aunex 6 Household Energy Consumption in Maputo for 1984 4...... 133 Annex 7 End-Use Urban Household Energy Costs in Maputoo....... 135 Annex 8 Consumption of Energy and Non-Energy Petroleum Producta, l7 98 136 Annex 9 Domestic Products Demand and Supply Balance - 1991 9-........... 137 Annex 10 Consumption of Petroleum Products by Sector: 9918 138 Annex 11 Sumary of Matola Refinery Physical Pacilities........ 139 Annex 12 Matola Refinery Production Balance - 1979-84 .... 140 Annex 13 Comparison of Costs of Meeting Mozambican Demand for Petroleum Products from Operating the Matola Refinery Versus Importing Products in Pre Mid 1985 Vorld Market Conditionstit..............ons... 141 Annex 14 Comparison of Costs of Meeting Mozambican Demand for Petroleum Products from Operating the Matola Refinery Versus Importing Products in Early 1986 World Market Conditions ... 145  Annex 15 Proposed Objectives for the Supply of Petroleum Products to the Marine Terminals Including tke Feasibility of Operating the Natola Refinery.... 148 Annex 16 Structure of Refinery Prices.......................... 1SO Annex 17 Crude Oil and Products Storage Capacities - BY Pr1no........................... S Annex 18 Proposed Objectives for Study into the Internal Storage Internal and Transportation of Petroleum Produeto ..... P ........... ~152 Annex 19 Proposed Objectives for Technical Assistance to PETROMOC for Corporate Accounting...............o... 153 Annex 20 Petroleum and Gas Sector Investments in Mozambique Annex 21 Mozambique Geological Framework and Interpretation for Petroleum and Gas Exploration ...... o.......... 155 Annex 22 Details of Past Exploration Activities for Petroleum...... ..eo.oo...ooe.ooo.@ . ..o....... 157 Annex 23 E HGas Exploration Programs.......................... 159 Annex 24 SUE's Technical Staff in Mid 1986 ........... 4*....... 160 Annex 25 Potential Gas Demand in Mapoto Area ...................0 161 Annex 26 Pande Gas Field Development Costs and Production Life to Supply an Ammonia Plant..................... 162 Annex 27 Comments on Awmonia Project Assumption used by Fluor e.go. g......ee.e.......... ........... 163 Annex 28 Assumptions to Evaluate Ammonia Plant/Pipeline to Naputo.e.**.**.. *..***o.. .. .....*- 165 Annex 29 Summary of Base Case Cost and Benefits Streams for Buzi Pipeline/Utilization in Beira.................. 169 Annex 30 Major Gas Consuming Possibilities...............g..... 171 Annex 31 Existing Power Facilities in Mozambique............... 173 Annex 32 Power Sector Investments in Mozambique 1980-1985...... 178 Annex 33 Maputo Thermal Power Station Recumnended Remedial Vorks.................gge......eeg... 179 Annex 34 Historic Production and Consumption of Power in Mozaimbique. g.gs.......e.g....... g e.g...... .....geg...... 181 Annex 35 Capabilities and Costs of Existing Power Sources for EDM's Main Systems .............................. 183 Annex 36 EDK's Tariff - Assessment Mission's Coments*****e*.......... 184 Annex 37 Possible Scenarios for Evolution of Domestic Demand for Power on EDN's Main Systess......e.............. 185 Annex 38 Export Potential for Mozambican Power................. 186 Annex 39 Projected Availability of Power for Export from Existing Surplus and Low-Cost Sources............... 190 Annex 40 Proposed Small Hydroelectric Projects in Southern Mozambique........g................................ ,193 Annex 41 Minor Coal Occurrences in Mozambique.................. 199 Annex 42 Coal Reserves in the Moatize Region .................. 200 Annex 43 Mozambique Coal Supply and Use: 1978-1984 ........ .* 202 Annex 44 Existing Dev4lopments and Manpower at Moatiiez.e*e**,& 203 Annex 45 Domestic and Export Prices of Coal 205  Anne" 46 Illustrative Economic Cost of Ele^tricity from a 60 NW Thermal Power Plant Burning Moatize Coal...... 206 Annex 47 Coal Related Transport Facilities..................... 208 Annex 48 Noaitixe Projects Illustrative Capital and Operating Costs* *,** 212 Annex 49 Noatise Open Pit Mine: Illustrative Capital and Operating Costs 214 Annex 50 Coal Sector Investments in Mozambique 1980-19959... 216 MAPS IBiD 19471 - Mozambique$ Electric Power Facilities IBRD 19515 - Mozambique: Petroleum, Gas and Coal - Exploration and Supply Facilities, 1985  EXECUTm SUNU&RY Present Situation in the Energy Sector Adverse Factors for the Energy Sector 1. Recent trends in the energy sector of Mozambique reflect the prevailing conditions throughout the economy, particularly disruption to economic activity by armed bands, acute scarcity of foreign exchange and trained manpower, and shortcomings in management and operational capability and in financial performance. The continuous decline in economic activity since 1981, as indicated in estimates of GDP, has been cause and effect of a fall in Mozambican consumption of commercial energy forms (petroleum products, electricity and coal) of about 40X between 1981 and 1984. Government attributes the main cause of this decline to the activities of armed bands. Disruption to Energy Supply 2. Acts of sabotage and attacks on the local populace by armed bands have severely disrupted energy production and supply, especially for electricity transmission since 1981 and for coal transportaticr since 1983. Consequently, the two major facilities for the production of energy in Mozambique, the Cahora Bassa hydroelectric power station and the coal mines at Noatize. are virtually out of operation at present. The direct annual cost to Mozambique of this disruption is about US$20 million in terms of foregone earnings from exported energy and additional costs of imported energy. The activities of armed bands are disrupting supplies of woodfuels to urban areas with grave socio-economic consequences for the urban population. These activities are also preventing the exploration and development of natural gas resources and the implementation of major new developments to exploit Mozambique's considerable energy resources. Woodfuels and Household Energy 3. Shortages of energy supplies to urban households are the most serious problem in the energy sector. These shortages have a greater significance to the national socio-economic fabric than even the con- sequences for economic activity arising from interruptions of commercial energyXsupplies to the productive sectors of the economy. The problem has been manifested by the rising cost of woodfuels as degradation of the natural forests and savanna-land around towns becomes more acute. Evidence of this problem is the ten-fold increase in woodfuel prices in Maputo since the early 1980's, compared to a three-fole increase in general prices. Loss of supplies has also been due to the activities of armed bands. This burden is causing major social and economic hardship for lower and even middle-income urban households. Restoration of peaceful conditions to the country would bring some relief to this  - ii - situation, but a significant impact on household energy suppi.es through the development of indigenous energy resources (woodfuels, electricity, coal and natural gas) would take many years and require large amounts of financial resources and skilled manpower. For the short-term, Government considers the only technically available option to be importation of kerosene and LPG, but there was a shortage of these products during 1985 and 1986 due to scarcity of foreign exchange. Shortage of Foreign Bzchange 4. Shortages of foreign exchange have periodically interrupted the supply of petroleum products since 1983. PETRONC has not been able to purchase petroleum products on the best terms with the small and unpredictable amounts of foreign exchange that are put at its disposal, thus leading to an increase in procurement costs. Government has created a Petroleum Funds, operated by PETROMOC at the Bank of Mozambique, to channel foreign exchange for increasing procurement efficiency and stabilising the supply of petroleum products at least to key consmers. Consumption of petroleum products in 1984 and 1985 was abuout 251 below the level in the period 1970-1982 due to constraints on supply, as noted above, and a fall in demand due to the decline in economic activity. 5. Lack of foreign exchange has contributed to a decline in operational efficiency by causing shortages of spare parts, materials and equipment required for system operation, maintenance and rehabilitation. These constraints are particularly evident in the distribution systems for electricity and petroleum products. The distribution systems of Electricidade de Mocambique (1DM) have been kept in operation largely through substantial donor support for imported goods. The handling and distribution facilities owned by PETRONOC and private sector oil companies need to be rehabilitated urgently. The transport fleets of EDM and PETRONOC are inadequate to sustain efficient operations. In the main urban areas, there are frequent power outages and inefficient distribution of petroleum products, while many areas of the country do not receive any petroleum supplies or electricity from local diesel generators. One of the results is loss of agroindustrial production and interruption of other produtive activities. 6. Lack of foreign exchange threatens to delay rehabilitation work on major coal and petroleum production facilities. Once security conditions allow normal operations at the Noatize coal mines, foreign exchange will be required for rehabilitation of the mines (US$14 million) and the railway link from the mines to the main railway system (US$10 million) to allow a resumption of production at historic maximum levels (S50,000 tpy). Likewise, foreign exchange would be required for the recommissioning of PETROMOC's Matola refinery, if justified. However, the mission's review supports Government's present policy of importing petroleum products for meeting domestic demand instead of operating the Natola Refinery. A comprehensive study into the supply and distribution of petroleum products is required before any commitments are made on the refinery.  - iii Shortage of Trained Manpower 7. The shortage of trained manpower that resulted from the exodus of Portuguese managers and technicians in the mid 1970s has been a major impediment to achieving the Government's objective for its manpower policy of improving the operational performunce of the sector insti- tutions and to support -sustained economic development. Government was faced at Independence with a national illiteracy rate of about 98X, and it has hsd to allocate a substantial proportion of its scarce resources to education. Past and probable future levels of output of trained personnel in Mozembique are low relative to the needs of the economy and the sector. There is also a shortage of teachers and educational materials. In addition, emigration of skilled manpower has been and still is occurring. Consequently, there is a reliance on expatriate workers for the operation of energy sector facilities, who are generally provided under bilateral agreements. Government has attempted to stem the outflow of skilled personnel by issuing a new labor law in December, 1985 that allows enterprises to offer wages and incentives to motivate and retain such personnel. Institutional Weaknesses 8. The sector organizations responsible for production and distri- bution of energy share common institutional and management problems. Nany of the problems stem from the newness of these organisations and the shortages of skilled manpower. Broadly, these problems fall into the following categories: (a) inadequate financial data; (b) absence of operating, financial and accounting systems; (c) lack of manag_emnt information systems; (d) minimal planning and budgeting; (e) absence of internal auditing; (f) little or no technical and management training; (g) inadequate computer facilities; and (h) little coordination with related enterprises. Presently, the management of these organizations is 'supported by some assistance from expatriates. Energy Pricing 9. The Government has a general policy of maintaining price stability and enterprise viability. Electricity prices were not changed between the mid 1960's and January 1986. Petroleum product prices have not been changed since 1979. The economic costs of meeting energy demand are not generally considered in setting energy prices, so that changes in import parity prices or the long run marginal costs of meeting demand are not reflected in corresponding changes in the retail prices for energy products. Consequently, consumers of these products aave become increasingly subsidized. Thus, there is little incentive for improving the efficiency of energy consumption and for economically justified substitution between fuels to reduce costs. 10. The policy of keeping the metical grossly overvalued has facilitated the maintenance of official prices of petroleum products, electricity and coal at artificially low levels. On the other hand,  - iv - prices for woodfuels which are market determined, are substantially increased by supply constraints and by general inflation due to excessive monetary expansion. At present, these official prices are only a fraction of the prices of fuelwood and charcoal, whose prices are market-determined. For example, charcoal is about 500 times more expensive than steam coal and 85 times more expensive than fuel oil on a gross energy basis, while fuelwood is nearly 13 times more expensive than illuminating kerosene. The comparison of the costs of fuels to consumers which takes account of the conversion efficiencies of energy appliances shows even greater differences. For household cooking, charcoal is about 53 times more expensive than kerosene and 15 times more expensive than electricity on a useful energy basis. Likewise, fuelwood is 24 and 14 times more expensive than kerosene and electricity respectively. These exceedingly large price differentials are not justifiable in terms of economic efficiency or social equity. 11. Prices for some of the most important energy products are substantially below their imported cost even at the overvalued official exchange rate. In mid-1985, when world crude oil prices were around US~30/bbl, the retail prices of kerosene and fuel oil were only about 402 and 30X respectively of the imported costs. Even at the much lower world prices for petroleum products during the first half of 1986, kerosene and fuel oil prices in Mozambique remained below their imported costs, being about 50S of these prices. The retail prices for steam coal were only about one sixth of the equivalent world market prices. Enterprise Financial Viability 12. Government's policy an energy pricing has prejudiced the viability of the energy supplying agencies, with detrimental consequences for operating efficiency. EDM was making increasing losses from 1981 onwards, and it may at best only break even in 1986 on a cash accrual basis after the major tariff increase in January 1986. PETRONOC and CARBONOC are also extremely short of financial resources, but their financial position cannot be analysed until they start to produce financial accounts. The failure of prices to cover the actual costs of the enterprises has been accommodated through subsidies from the central budget and credit from the banking system. The Government decreed in 1984 that all enterprises should produce full sets of accounts from PY86, which will require technical assistance to fulfill by the energy agencies. Policy Issues 13. The present assessment of the energy sector in Mozambique has identified aiany policy issues concerning investments, pricing, manpower and institutional development. Covernment's investment strategy is based on two principles which it considers to be complementary, namely to maintain viable productive assets in operation through rehabilitation and  maintenance programs, and to promote sustained economic development through exploitaticn of natural resources. The basic issue concerns the priority between these two principles given the country's financial and economic difficulties in the short to medium term. Investment Policy 14. Government has expended in the last few years substantial amounts of scarce financial and trai}ed manpower resources on the preparation and promotion of a number of very large export-oriented energy and energy-intensive projects. This work forms part of Government's strategy for placing Mozambique in a position from which it could exploit regional and international market opportunities should they occur. The present activities of armed bands in the country limit Government's scope for starting in the near future any of the major developments. The combined investment in these projects (in hydroelectricity, coal, natural gas, asmonia and aluminum) would be more than US $2 billion in constant price terms of the early 1980's, and represent massive comitments relative to the size and ebsorptive capacity of the Mozambican economy. 15. The mission's reviews in this report conclude that the strategy of large-scale development of known energy resources specifically for export by Mozambique has not been shown to be viable for the foreseeable future, with the possible exception of the ammonia project, mainly due to constraints or lacK of competitiveness in export markets. A major change in the circumstances of the project environment would be required to modify this general conclusion, including improved project preparation and a substantial and sustained increase in world commodity prices. The mission supports government's criteria for acceptability before entering into commitments for large investments in export-oriented projects namelys (a) viability at world market prices with secure market prospects; and (b) satisfactory economic benefits to Mozambique from the exploitation of its resources. The mission also recommends that Government's policy of taking steps to reduce the risks to the Mozambican economy be strengthened through the use of foreign capital, marketing, management and technical expertise and long-term commitments to the project by foreign partners. Rehabilitation Policy 16. The mission agrees with Government that the main objective in the short and medium term for the energy sector should be the improvement of operational efficiency and the strengthening of sectoral institutions. Improvements to operational efficiency cover a wide range of activities. Individually, many are relatively small, but together they comprise a major program. The main activities cover manpower training, davelopment of improved management, financial and operational procedures, rehabilitation of facilities, improvements in the efficiency of energy utilization and supply, and fuel substitution. This objective is a vital component of any strategy for economic recovery in Mozambique  - vi - and for enabling the country to benef it from its locational advantage for providing transit services to inland countries. The effort of rehabilitating energy and transport facilities would fully absorb Mosambican institutional capacity and available financial and manpower resources for many years to come. In fact, substantial inputs from abroad will also be required, making technical assistance a vital component of this strategy. Any allocation of resources for large new developmnets should not be at the expense of sector operating performance. Knergy Pricing Policy 17. The essential objectives of energy pricing in Mozambique should be the efficient use of economic resources, the financial viability of sector enterprises and the satisfaction of demand for energy at least cost to the economy. The main issues are the need to: (a) eliminate gross distortion in prices between energy products; (b) take account of economic factors in pricing policy, especially to cover import parity prices and to provide incentives for efficient utiliuation of energy; and (c) make the institutional procedures for price-setting more responsive to changes in economic and financial circumstances, and thus establish a better balance between the objectives of price stability and the objectives listed above. 18. Implementation of a new policy for energy pricing in Mozambique is complicated by the major distortions in the foreign exchange rate of the domestic currency and prices and wages throughout the economy relative to economic costs. Thus, energy pricing policy is bound up with economy-wide pricing issues. Without subbtantial investigation, it is not possible to estimate reliably the import parity prices at a realistic exchange rate. Preparation of least-cost development programs would also be required to set the economic basis for energy pricing through derivation of the long run marginal costs of meeting demand. While these parameters are being researched and until new policies are implemented, there is a strong economic case for raising imuediately the prices of imported energy at least to import parity levels based on the present official exchange rate. This adjustment would substantially improve the financial position of the energy supplying enterprises and would give more appropriate indications of economic costs to energy consumers. In general, the mission recommends that Government should implement a pricing policy of at least full financial cost recovery from energy consumers, thus maintaining import parity levels for initernationally traded energy products. Manpower Policy 19. The challeage to energy sector enterprises posed by the shortages of trained manpower is to develop low-cost and efficient training systems that will meet their requirements and reduce the need for expensive expatriate support. The enterprises must be able 1* stem the emigration of skilled manpower. Recent labor legislation allows  - vii - enterprises to offer wages and incentives to motivate and retain staff with key skills. However, there is still a need to give employers greater scope for recruiting and laying-off labor to improve operational performance. These issues are economy-wide, but they require attention urgently to support the training efforts to bring about sustained improvements in the manpower situation. Institutional Policy 20. The need to redress the institutional weaknesses noted above (pars. 8) requires a stronger adhereuce to policies already laid down. For example, sector enterprises are required to submit financial reports at specified frequencies and standards in their decrees of establishment, yet they have not fulfilled this requirement. The capabilities of the Ministry of Industry and Energy and the Ministry of Mineral Resources need to be strengthened to monitor and coordinate the activities in their sectors and to liaise with other ministries. 21. The role of the prospective National Energy Council will be important for development of the energy sector through its responsibilities for recommending policies, setting priorities and ensuring the adequacy of investment planning for the sector. The mission fully supports the proposal to set up the Council. The mission also considers that the role of the Department of Energy should be critical in the formulation of energy policies through its responsibility for coordination and monitoring in the energy sector and support to the National Energy Council. One important area that requires the policy-based perspective and coordinating role of the National Energy Council is the planning of large, multi-sectoral projects and programs, taking into account explicitly the linkages between the energy sector and the agricultural, industrial, and transport sectors. Strategy and Priorities Develoo_ nt Stretegy 22. The evaluation of issues and options in this Report indicates that the order of priorities for energy development in Mozambique in the short to medium term should be determined through the following strategy: First: to satisfy Mozambique's own energy needs by using primarily domestic sources, if economic, and by rehabilitating and improving existing sector assets. Second: to develop Mosambique's potential to benefit from transit trade Tn energy products for inland countries and trade in electricity, and to cooperate with neighbouring countries in development of solutions to co on energy issues.  - viii - Third: to invest in energy or energy intensive industries for export ;Wl yif a number of important conditions are met, especially economic, financial and market criteria. 23. The mission's recommended strategy for development gives a lower priority to large scale export-oriented projects than to rehabilitation of existing facilities to meet the domestic demand for energy. While security constraints exist, even investments that satisfy all the proposed criteria will not be feasible. While the conditions of insecurity and scarcity of financial and human resource persist, the mission recommends that Government focus resources on rehabilitation and institutional strengthening. The mission's reconmendations on priorities are given at the end of this Summary. Furthermore, before entering into any major commitments, Government should strengthen its coordination for the planning of large-scale developments in energy, industry and transportation. Regional Cooperation 24. Development of Mozambique's potential for transit trade in energy products (petroleum products and coal) conforms to the general strategy for regional cooperation under the auspices of SADCC. Other important areas are trade in electricity, natural gas utilization, cooperation in developing regional solutions to common issues such as fuelwood plantations, improving efficiencies of cooking stoves and charcoal manufacture, and development of coal as a household fuel. The mission supports these efforts. On the other hand, concerning Government's policy towards energy trade with the Republic of South Africa (RSA), the right balance is required between taking advantage of the availability of low-cost energy (coal, electricity) from RSA and maintaining the capability to supply key energy consumers in the Maputo region in the event of prolonged disruption to transportation and transmission links between the coast and inland areas. Recommended Sector Priorities 25. Sumuaries of the mission's recommendations concerning policies and strategies and for technical assistance are given for each of the main energy subsectors at the end of the chapters in this Report. Taken together, general themes emerge from these recommendations and constitute the following recommended priorities for the Government in the energy sector. (a) remedy shortages of energy products and secure stable supply conditions; (b) improve the reliability of energy supply facilities through rehabilitation; (c) carry out institutional strengthening and manpower development of the energy suppliers (EDM, PITROMOC, and CARBONOC) end also  - is - ENH* the Ministry of Industry and Energy and the Ministry of Natural Resources; (d) remove distortions to energy pricing, at least by increases in official prices to import parity levels at the prevailing offi- cial exchange rate; account should be taken of the rela- tionship between eaergy prices and other prices in the economy, and to the structure of economic costs of meeting energy demand; (e) strengthen the capacity for planning in energy sector agencies to meet domestic demand for energy and to evaluate large energy projects; (f) address the urban household energy crisis to arrest the des- truction of natural forests around cities (especially Maputo, Beira and Nampula) and to ameliorate socio-economic hardship through a combination of measures to manage demand and increase supply of energy; and (g) continue promotional efforts to stimulate the interest of foreign oil companies in petroleum exploration. Generally, these priorities reflect Governrii's own priorities, and the mission considers that Government could proceed with the implementation of most of these recommendations. Some of the measures required to improve the reliability of energy supply may not be feasible whilst the activities of the armed bands persist. Recommended Technical Assistance Priorities 26. The following priorities for technical assistance emerge from this assessment of the energy sector: (a) to strengthen the management, financial and operating perform-n'ce of the main sector agencies; (b) to develop manpower resources at all levels of skills; (c) to improve the planning capability of the main supply agencies and assist in the preparation of sub-sector development programs; (d) to improve sector-wide planning and coordination through development of the capability of the Department of Energy; (e) to assist with specific important studies covering the structure of energy prices, household energy demand, mapping and forest inventories, petroleum procurement, natural gas utilization, electricity tariffs, rehabilitation requirements for existing operating facilities (petrolem, electricity and coal), energy conservation, fuel substitution and the use of energy in rural communities.  Recommended Priority Investments 27. In line witb the recommended sector priorities, this report suggests a core program of investments of about US$175 million in constant 1985 price terms in the energy sector for the five years to 1991. The program is detailed in Scb,dule A at tba end of this summary, and it is summarized in the table below. The program is considered to be the minimum required to aupport the priorities under the recommended development strategy, namely rehabilitation of assets and institutional development. The recommended technical assistance to support this program of investments is detailed in Schedule 3 at the end of this summary, and the costs of this assistance are included in the core program. The components relating to the woodfuelu and household energy, petroleum supply and distribution, electricity and for institutional development could proceed even under the present conditions of insecurity in the countryside. Table 1: SUIUIRY OF THE PRIORITY INWESTMENTS FOR THE ENEMY SECTOR TO 1991 (1110 million) a Subsector lnstitutional DOvelopment ond Studies 3.0 Woodfuels and Household Energy 10.8 Petroleum Supply and Distribution 7.0 Petroleum and Gas Exploration and Oevelopment 56.0 Electricity 70.5 Coal 27.0 Total 174.3 a/ In 1985 constant price terms. Source: NIsslon estImates. 28. The mission has not presented any recommendations for an investment program for beyond 1991 due to great uncertainties in forecasting the demand for energy in Mozambique. The recommended core program does not include investments which do not have a firm econo,dc justification it present but which future circumstances may justify, such as recommisuioning and modifying the petroleum refinery and some hydroelectric projects under study. In particular, additional investments of up to US$50 million could be considered for the development of natural gas supplies from onshore fields and the conversion to gas utilization of industrial and transport facilities* if  - xi - shown to be economically justified. Large energy-intensive projects, such as the proposed _aoia plant, are not included since they would be classified as induttial sector development. Large energy resource developments, such as for coal, are not included due to the present unfavorable international market prospects and the lack of economic justification based on inforation available to the mission, and to the great uncertainty concerning the availability of funds and the security situation. In addition to surmounting the difficulties enumerated above, interested foreign investors would have to satisfy themselves of the financial and technical feasibility of these projects under the stringent criteria of the private sector.  xii - Schedule A: RECCOMENDED ENER6Y SUE-SECTORAL PRIORITY INNESTIMENTS TO 1991 (USS million) 8/ Voodfuels and Househrld EneMr2 Preparation of woodfu*ls program 0.5 Progra of Natural Forest Management for fuelwood supply 2.0 Program of fuelwood plantations 5.0 Managemont Assistance for plantatlons 2.5 Household Energy Survey 0.2 Plirt Coat projects and cooking stove trials O.1 Cooking Stove Program 0. Total for Sub-Sector 10.8 Petroleum SUDPIY and Distribution Rehabilitation of Storage and Distribution FaciIlties 4.0 Technical assistance for institutlonal strengthening 3.0 Petroleum and Gas Exploration and Development Promotion and preparation 1.5 Driling/f lolJ development 3.0 Gas Exploration Pande Field 10.0 Temane Flold and others 14.0 Gas Fleld Development Pands Field 13.0 ans f&oects PipelIne Pande-Inhassoro 10.0 09 Pilolt ProJect 1.0 Assistance and Training to ENH Management and Administration 1.0 Technical staff for gas proJects 2.5 Total for Sub-Sector 63.0 Electricity Completion of ongoing projects 10.0 Uprating of teputo area substations 2.5 RehabilIltation of Power Stations 1S.0 Extension of Southern 110 kV network 5.0 Rehabilitation of distribution systems 10.0 Connections to new power consumers 4.0 Support facilities for EOM 5.0 Coinunicatton system for EON 1.0 Technical assistance for Institutional strengthening 8.0 New and rehabilitated Isolated diesel power plants 3.0 Nini-"ydro stations -fi0 Total for Sub-Sector 70.  - Aii - coal Ncotize mine rehai itetatlo and s"ll open pit studies 1.0 Nine rehSabIltation requirsemnts 13.0 Compltilon of pilot open pit sine 1.0 Surface Infrastructure and training center (Ioatlze) 2.0 Railway rehbilIltation f0. Sub-totals 27.0 Institutional DeveloPoent Tchnical Assistance at the Sertor Level 3.0 Total for the Energy Sector 174.3 a/ In 1985 constant price terms. Source: mission estimates.  z-iv - Schedule Bs RBCHMQSNDED SUB-SECTOftL PRIORITIES FOR TECHNICAL ASSISTANCE */ Stgrengtben Management Financial and Overatins Performance Assist PETROMC to develop a corporate accounting and management infcrumtion syitem. Carry out annual audits of IMETRONOC's aviation refuelling facilities. Define INK's needs in areas of managemnt, planning and administration as well as its internal organisation, and prepare necessary terms of reference for consulting firms to bid for this service. Assist EDM to undertake a power tariff study. Assist RDO to design and implement new systems for management iniormation and stock control. Assist the Department of Energy to formulate its work program and execute priority act;b'ities. Develop Mlaenpwr ftesoureas Assist PSTRO WO to determine manpower training needs and prepare proposals for a training center. Assist EDM to prepate a manpower development program. Improve Flanni Capability and Develop Least-Cost Program Assist Covernment to define, evaluate and compare options for increasing fuelvoc4 supply. Assist the National Forestry Directorate to plan woodfuels programs. Assist the National Dirctorate for Geography and Mapping to carry out serial surveys. Assist PSTnOMWo to study th least-cost method of eeting Kos abican demand for petroleum products, either through operation of the Katola Refinery with or without a secondary conversion unit, or importation of products. Assist PETROMOC to stgrvey mo assess the potential transit business for petroleum products to blotnd countries. Assist BIP with 4veloping options for gSa utilization in Kozambique, covering tranwpo erion and markets, establishment of a pilot project and evaluation of alternative development programs.  - xv Assist 5DM to establish a program for overhauling the standards for distribution systems. Assist EDM to evaluate the scope for extending electricity supply to urban households. Assist EDM to evaluate the least-cost method of meeting demand for power in 1DM's Southern Region. Evaluate the power potentially available from conjunctive use of the Kariba and Cabora Bassa complexes. Assist CARBONOC to carry out a pre-feasibility study of the rehabilitation needs of the Moatise coal mines. Assist the Natural Geological Institute to carry out basic geological investigation and exploratory drilling for coal in Southern Noxambique. Assist the Ministry of Industry and Energy to review the options available to Mosambique in international markets for the exploitation of the country's energy resources. Assist the Ministry of Industry and Energy in studying various approaches to setting the prices of energy products under the prevailing distortions in prices, wages and foreign exchange rate. Assist the Ministry of Industry and Energy in identifying and implementing economically justified measures for energy conservation, fuel substitution and the use of energy in rural communities. a/ The estimated costs for the recommended technical assistance are included in the core investment program given in Schedule A. Outline terms of reference for some of the technical assistance activities are given in Annexes to this report, and the objectives of some of the activities are sumuarised in the main text of the report.  I. 8SCTOR OVRVIYD Macro-economic Trends 1.1 Mozambique is a large country of about 800,000 km2 with extensive mineral resources and agricultural potential. The population of about 14 million is increasing at about 2.62 annually. Mozambique's CDP is estimated to have declined at an annuAl rate of about 2X in real terms between 1973 and 1983, equivalent to about 52 per capita. As shown in Table 1.1, a major decline in 1973-76 was followed by some recovery in 1976-80, and again by a major decline in 1980-83. The rate of decline reportedly has accelerated since 1983. Table 1.1: EVOLUTION OF GOP 1973-1983 Averan4 Annua I Chang. GOP Shares 1973-83 1973-76 1976-80 1980-83 1963 'O) CS) (5) (5i) (5) GOP -1.9 2.5 -6.3 -6.3 100 Agriculture -1.5 1.1 -9.5 -9.5 43 Industry -3.4 3.2 -7.8 -7.8 14 Other -1.6 4.7 -0.7 -0.7 38 GOP per Capita In 1984: US$150. Source: World Bank; Mozambigue, An Introductory Economic Survey, Washington, June 6, 1985. 1.2 In 1985, the economy was on the verge of collapse with little prospect of recovery until the disruptions to economic activity caused by armed bands are curtailed. Food production has declined, and the countryside is no longer able to supply the cities. Evidence of serious malnutrition is reported. The country's merchandise exports have collap- sed and there has been a drastic reduction in service earnings and workers' remittances, which has led to an acute shortage of foreign ex- change relative to import needs for spare parts, raw materials, petroleum products, capital and consumer goods. Industrial plants operate at only a small fraction of capacity, and consumer goods are in short supply in the cities and are practically unavailable in rural areas. In addition, rural-urban transport is severely disrupted by lack of fuel and operable vehicles and the activities of armed bands. Given the dearth of goods for sale at government-administered prices, the local currency, the metical, has declined greatly in value. A eignificant proportion of internal trade is conducted at prices many times higher than official ones and by barter.  -2- 1.3 Pac%ors beyond Government's control have been instrumentat in the decline of the economy. The main factors are the vacuum in skilled and semi-skilled manpower left by the mass exodus of Portuguese residents in the mid 1970, various natural calamities, spreading of disruption by armed bands since the early 19809 and the fall in revenues from transit trade and worker's remittances from the Republic of South Africa (RSA). However, the economic decline has also resulted from shortcomings in Aovernment's economic and financial policies and institutional weaknesses, especially the severe shortage of trained manpower. Energy Resources 1.4 Mozambique has substantial energy resources which, have been identified fro exploration work undertaken largely since Independence to assist Government in the identification of investment opportunities. Hydroelectric potential is estimated at about 11,000 MW, of which only about 2,200 NW have been developed. Coal deposits abound although proven reserves are only about 5 million tonnes and probable reserves are estimated at 82 million tonnes, but estimates of possible reserves exceed 3 billion tonnes. On-shore gas has been discovered, and estimates of discovered reserves vary between 0.4 TCF and 1.4 TCP. Many other areas are considered to be prospective for gas. Petroleum has not ben discovered but several international oil companies have been exploring, mainly in off-shore areas. Existing forests are still substantial (19 million ha) even though they have been depleted during the last two decades. The country's locational advantage for offering transit services to inland countries also provides substantial potential for development. Good examples of the potential for transit tradt in the sector are the exports of coal and importation of petroleum products. Overview of Energy in the Economy 1.5 Developments in the energy sector have been both cause and con- sequence of the depressed macro-economic situation. The sector agencies suffer from institutional weaknesses and shortages of trained anpower that are endemic throughout the economy. Shortages of petroleum products have contributed to a decline in production in many sectors, while the depressed state of the economy has reduced the demand for energy. The collapse of exports and consequent dearth of foreign exchange are responsible for the shortage of petroleum products, but there is excess supply capacity of electricity at the national level when all supply facilities are in operation. The use of commercial sources of energy by households has been receding because of supply constraints, and increasing reliance is being placed on traditional fuels. The lack of foreign exchange has reduced the supply of kerosene, and supplies during 1985 and 1986 have been negligible. The activities of armed bands in the countryside have constrained supplies of fuelwood, charcoal and even electricity, or made supply less ru'iable and more costly. Consequently, there are inadequate supplies of woodfuels to meet the urban demand.  -3- 1.6 In an average year of the early 1980s, the gross energy avail- able to Mozambique from all energy forms was About 3 million tofnes of oil equivalent (T08) or roughly 250 kgoe per capita (of which about 80X was from woodfuels). This compares with about 560 kgoe for Malawi, 470 kgo. for Tonmania, 760 kgoe for Zimbabwe, 350 kgoe for Uganda, and 270 kgoe for Ethiopia. Mozambique's per capita energy consumption was thus at the lower end of the average for Eastern Africa, although a greater share of total supply came from comercial sources. I1 Of the 20S provided from commercial sources, 7O1 to 752 was from petroleum, 1S to 202 was from primary electricity, and 51 to 101 was from coal. 1.7 In the early 1980s, the distribution of commercial energy consumption on an oil equivalent basis in Nozambique was approximately 271 in industry, 271 in transportation, 311 in households and public institutions, and 151 in agriculture and other sectors. Consumption of commercial and traditional forms of energy together in households and public institutions averaged about 901 of national consumption. In overall terms, Nozambique required about 1.4 toe of energy per thousand US$ of CDP, while for commercial energy only the intensity of consumption was about 280 kgoe per thousand US$ of GDP. Compared to some neighboring countries, 2/ Mozambique requires more commercial energy (most of which is importeds) relative to economic output, which possibly reflects a combination of differences in structure of demand and lower efficiency in energy utilization. 1.8 Energy used to play a much larger role in the country's foreign trade than it. does presently. Power exports from the Cahora Bassa hydroelectric complex were reduced in 1981 and halted in 1984 due to sabotage to transmission lines at a cost to Mozambique in foregone foreign exchange earnings of about US$8.4 million annually. National coal production is a fraction of its level in the late 19709 due to the severance of transport links from the coal mines, and the country is losing about US$4 million annually in revenues from coal exports. 3/ 1/ Commercial ene gy sources here mean electricity, petroleum, gas, and coal, even though sizeable quantities of "traditional' fuels (mainly firewood and charcoal) are traded in markets for cash. Zimbabwe consumes a higher share of commercial energy, essentially because of the importance of mining and heavy industries. 2/ Comparable numbers for Tanzania are: - all energy sourcest 1.6 TOE per US$1,000 of GDP - commercial energy : 126 kgoe per n n " and for Ethiopia: - all energy sources: 1.8 TOE per US$1,000 of GDP - commercial energy s 116 kgoe per n n 3/ In 1985 total merchandise exports by Mozambique were about US$70 million.  -.4- Imports of crude oil have been replaced by imports of refined produActs, and the total volume and value of imported petroleum has declined substantially from 1981 onwards. With the closure of the petroleum refinery in Maputo, excess refined products ceased to be exported during 1984. 4/ Energy Supply and Consumption 1.9 The energy balances for 1981, the last nearly "normal" year, and for 1984, illustrating the more recent situation, are summarized in Table 1.2 from the detailed balances given in Annex 1. Table 1.2: SUOWARY OF ENEtGY BALANCES, 1981 AND 1984 (thousand TOE) Primary Energy Energy Products Sub- of whIch ElectrI- Petroleum Total all Total coal a/ crude oil Coarcoal city P.'ducts Energy 190?' Gross Supply b/ 4,158 262 461 20 181 4,359 Net Supply cl 2,714 220 20 274 567 3,575 Exports/Bunkers 127 127 225 186 538 Net Domestic 2,587 93 20 49 381 3,037 Consumption 1984 Gross Supply b/ 3,078 52 86 24 257 3,359 Net Supply c/ 2,810 14 14 49 306 3,179 ExportsABunkers 9 9 0 41 50 Net Domestic 2,801 5 14 49 265 3,129 Consumptlon a/ For coal, Gross Supply, Net Supply end Net Domestic Consumption Include Imports. b/ Gross Supply Is the sum of domestic production, Imports and net stock changes. cl Net Supply Is Gross Supply less quantity transformed Into other energy products, and plus the quantity of primary energy transformed into this product net of transformation losses. Source: Annex 1. 1.10 The key developments illustrated in Table 1.2 are the reduc- tions in imports of petroleum products/crude oil due mainly to a shortage of foreign exchange, and to exports of hydroelectricity and coal due to acts of sabotage to transmission and transportation facilities. Overall 4/ There are indications (see Chapter 3) that the policy of importing refined products has been more economical than importing crude oil and reexporting surplus refined products, at least since 1984.  -5- net 4omestic consumption of energy increased marginally assuming that per capita fuelwood consumption remained roughly constant as the population increased. As a result, it is estimated that traditional fuels accounted for about 80Z of net domestic energy consumption in 1981 and 90% in 1984, a significant increase attributable mainly to the decline in consumption of commercial fuels. Woodfuels and Household Energy 1.11 Woodfuels are the main source of energy for households (the category with the largest consumption of energy), and nearly all woodfuels- originate from natural forests and savanna-land around towns and villages. These resources are badly degraded and cannot sustain present levels of urban consumption in the long term. Deforestation around the main urban areas will continue due to demand for woodfuels. The prices of woodfuels in urban markets are extremely high relative to official prices for other commodities and wages, causing major economic and social hardship. Further deterioration in the urban energy situation during the next few years is unavoidable, and the major issue facing Government is the need to implement measures to reverse this trend as soon as possible. 1.12 On the national scale, consumption of fuelwood and small diameter poles in 1980 was estimated to be roughly equivalent to the natural growth of the total standing volume of wood in the country. How- ever, the balance between supply and demand varied greatly over the country, with most of the population living in areas of woodfuels scarcity. Government embarked on a program of fuelwood plantations in the late 19709, investing about US$31.5 million. The results from the program have been poor due to unforeseen natural factors, inadequate planning, preparation and management, and disruption by armed bands. Petroleum and Gas 1.13 In an average year in the early 19809, petroleum supplied about 751 of the commercial energy used in Mozambique. Consumption of petro- leum energy products fell by about 21Z over the period 1978 to 1985, from 384,373 tons in 1979 to 303,820 tons in 1985. The structure of supply however, changed markedly. Up to 1980, Mozambique refined sizeable quantities of imported crude oil (600,000-700,000 tpy), exported more than 200,000 tpy of products (mostly gasoline and heavy fuels), and imported gas oil because of a mismatch between refinery yield composition and the pattern of demand for products. 5/ In the most recent years, in contrast, crude oil imports were drastically cut (to 250,000 tons in 1983, 86,000 t in 1984), while product imports rose substantially, from 5/ The historical pattern of demand, skewed towards gasoil and away from gasoline, has also been partly the result of a policy of keeping gasoil prices much lower than gasoline prices.  -6- an average of about 100,000 tpy in the period 1978-1980, about 200,000 tpy in the period 1982-84 and about 300,000 tons in 1983. Notwithstanding this increase, there have been acute shortages of kerosene, LPG and gasoline in 1985 and 1986. 1.14 In financial terms, the annual deficit on the trade of petroleum and products fell from an average of US$150 million in the period 1980-82 to about US$70 million in 1983 with a further fall in 1984. The net cost of petroleum consumption (deficit) averaged about 212 of total imports and 45Z of total exports in the period 1980-83. Trends in the petroleum subsector are summarized in Table 1.3. Table 1.3: SUIIRY OF T1EN16 IN T1E PETRMOUM SUBSECTOR 1978-1965 1978 1980 1963 1964 1985 Coudroil Imports (txlCOO) 638 707 151 86 - Petroleum Products lpowts (txlOOO) 96.5 190.4 239.8 311.8 Yomestic Consumption (txwIOo) 339 435 370 265 311.8 Exports and Sunkews (txlOOO) 362 315 90 41 - Not Petroleum Imports (millon USS) 130 156 70 66 311.8 '_g: Exports GFS a/ na 334 204 154 n.a. Imporfts NFS na 760 636 56 n.ea. Petroleum Trade Deficit es