Africa > East Africa > Tanzania > Discovering potential in Tanzanian natural gas

Tanzania: Discovering potential in Tanzanian natural gas

2014/12/22

There is little doubt that Tanzania possesses tremendous energy potential. Recent offshore gas discoveries estimated to run into the hundreds of trillions of cubic feet have led a lot of experts to project that Tanzania could be a middle gain country by 2025.

However, the rapid pace of discovery has not been met by similar speed in policy making in the government. As the October 2015 election approaches, tensions are emerging over the discrepancy between promises of next resource wealth and the lack of visible evolution within Tanzania to unlock this wealth.

Oil and gas exploration in Tanzania is not new. Onshore gas is by presently produced at Songo Songo Island and Mnazi Bay. However, there is no comprehensive legislative framework in place to regulate the sector and establish a balance between the interests of Tanzania and of international investors.

The current Petroleum Act dates back to 1980, and therefore does not contain the level of detail which developers and lenders require to support investing in new finds. Debate within Tanzania over the management and regulation of the country’s gas – and the funds it will generate – is intensifying, and has been subject of considerable controversy. This culminated in November with the arrest of officials at the national oil company, Tanzania Petroleum Development Corporation (TPDC), next the compnay refused to disclose the terms of production sharing agreements to Parliament.

To date, the government has issued a series of fragmented draft and published policies. These do not provide the reassurance that they form part of a coherent energy policy. Notable part these is the National Natural Gas Policy issued in October 2013. This policy proposes that the domestic market will be required to benefit from the natural gas finds, for example by way of gas-to-power projects, before gas exports can be considered.

Prioritising domestic consumption of natural resources is a tactic that is familiar to international investors in extractive industries. This policy has subsequently been taken a step further with a Natural Gas Bill which was issued by in mid-2014. This bill focuses on mid and downstream elements of the energy price chain. The Draft Upstream Policy, meanwhile, recognises that current upstream legislation under the Petroleum Act 1980 is inadequate. It as well acknowledges that the country’s mid and downstream ambitions can only be realised through gas produced by upstream investors.

In light of civil disturbances in gas rich provinces such as Mtwara in the southeast, the government seems to have responded to pressure to promote opportunities for Tanzanian individuals and businesses by releasing a draft local content policy. In addition, the Natural Gas Bill makes only brief reference to the establishment of a sovereign wealth fund which would benefit from “all natural gas revenues”. However, a additional detailed proposition is expected (following Kenya’s recent example) outlining how the government intends to provide benefit for its citizens and invest in infrastructure using gas revenues.

However, it is as well be significant that the government does not overlook the reasonable concerns of investors. In 2013, it published a further model Product Sharing Agreement (PSA) allowing for better returns for the government. This new model was intended to apply to blocks auctioned as part of the fourth offshore gas licensing round in October 2013. Only three of the seven offshore blocks auctioned received bids. The stricter terms imposed on licensees, coupled with the lack of an adequate regulatory framework, were undoubtedly factors in the underwhelming interest.

As world economic conditions lead oil companies to reduce exploration budgets, 2015 is likely to see additional focus on the development of existing discoveries. Industry analysts estimate that sufficient reserves have by presently been discovered to make a $20-30bn Liquified Natural Gas (LNG) terminal viable. The onus is presently on the government to provide an adequate legislative framework to enable a final investment decision.

It was anticipated that the Natural Gas Bill would be put to parliament in November 2014. However, debate over constitutional reform has monopolised the parliament's time. That is not to say that such debate is detrimental to the sector. One controversy in the constitutional debate is the level of autonomy Zanzibar should be given to sign exploration deals - most recently with Royal Dutch Shell - and the delineation of sea boundaries. A final determination on such matters will be greeted positively by investors seeking assurance that their licences will be granted by an entity with the authority to do so.

In a recent speech to an audience of energy sector stakeholders, Tanzania’s minister of energy and minerals Sospeter Muhongo emphasized that developing the country’s competitive chance in sustainable indigenous resources is key to its aspirations of reaching middle gain status by 2025. Natural gas production is key to this vision. Natural gas is viewed alongside geothermal as the cheapest and most reliable potential source for domestic electricity production, superseding hydropower due to recent unpredictable rainy seasons.

However, this prospective avenue for domestic development remains potential. Although the Government is adamant that its priority is domestic request, a lack of infrastructure is impeding the domestic economy from taking full chance of the gas reserves. Furthermore, Tanzania’s power sector cannot develop until the deficit burdened national utility, TANESCO, is restructured.

Tanzania has been the beneficiary of various donor programmes over recent years. The new forms of support - provided by the US agencies inclunding the Millennium Challenge Corporation and Power Africa, the African Development Bank, and the World Bank - may yield results which could attract foreign investors. If Tanzania can offer a bankable independent power project package to prospective developers, this would provide much needed power sector investment and enable the sale of gas for power.

The gas discoveries in Tanzania have the potential to accelerate development and drive the country’s transformation into a significant world LNG industry participant. However, if the government continues to delay the creation of a coherent regulatory framework for the energy sector, the hopes articulated by the minister will be disappointed.

Richard Metcalf is a London projects partner at law firm Norton Rose Fulbright specialising in African oil and gas exploration, development, and power generation. Laura Kiwelu is an energy project finance senior associate based in Dar es Salaam, Tanzania. Shah Jahan Khandokar is a London based energy project finance associate focusing on sub-Saharan Africa.

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