October 17, 2013

African Oil and Gas: A glittering future for Tanzania?

By Margaret Curzon and Clare Montgomery.

In a few days, Tanzania’s fourth deepwater licensing round is expected to launch in Dar es Salaam, attracting companies keen to invest in the exploration and production of liquefied natural gas (LNG). Since ExxonMobil and Statoil discovered large natural gasfields off the coast of Tanzania in March 2012, and as a result of the discovery of even bigger fields off Mozambique, the East African region has been the topic of renewed international interest. Among the companies already operating offshore blocks in Tanzania are ExxonMobil, PetroBras, Ophir, BG Group, Shell and Statoil. This article will briefly consider some of the challenges which the successful bidding companies may face.

The fourth deepwater licensing round launches on 25 October 2013, following the Second Tanzania Oil & Gas Conference, which takes place on 23 & 24 October. Seven offshore (at depths of 2-3,000 metres) and one onshore block (covering the northern part of Lake Tanganyika) will be available for bidding. Technical review meetings are planned and data rooms should open in London, Houston and Dar es Salaam. The process is set to conclude on 15 May 2014, when bids will be opened and bidding companies’ financial and technical capabilities will be taken into account.

Press statements have tipped Tanzania to have the potential to be a leading exporter of LNG by 2025. However, the development of Tanzania into a prominent LNG exporter may prove challenging. In a country lacking specialised infrastructure, it is estimated that an investment of at least $40bn and potentially as much as $60bn will be necessary to turn the resource into shiploads of LNG ready for export. This process will also take several years, and whilst demand currently outstrips supply of LNG, the situation may subsequently change given the US shale gas boom and predictions of competition from Australia and, of course, Mozambique. The US Energy Information Administration have advised that Tanzania and Mozambique “should focus on securing long-term LNG contracts” or “sell stakes in their LNG projects to Asian investors that are big LNG buyers“. By securing demand in this manner, companies developing the resource would improve their position vis-à-vis those financing the construction of the LNG plants through loans.

Any bidder must consider the potential market for LNG. Tanzania’s LNG could be exported to the Asian market, likewise to Pakistan, Chile and Spain, however shipping costs and port facilities need to be taken into account. The World Bank have estimated that Tanzania is losing $1.8bn a year due to inefficiencies and corruption in the port of Dar es Salaam – it has been reported that it can take a container vessel 10 days to find a berth and another 10 to unload. Notably the China Merchants Group has approached the Tanzanian government with plans for a new, much larger port to the North of Dar es Salaam.

As regards the legal framework for the upstream industry, this is currently governed by the Petroleum (Exploration & Production) Act 1980, which applies both to mainland Tanzania and to the island state of Zanzibar, and vests title to all petroleum resources in the United Republic. The act sets out the procedure for the granting of licences for exploration and development. These rights are obtained by entering into a PSA (Production Sharing Agreement) with the Ministry of Energy and Minerals (MEM) and the Tanzania Petroleum Development Corporation (TPDC). The TPDC applies for and holds the necessary licences, and the gas company is contracted to undertake the exploration and production activities.

The draft Natural Gas Policy (which although it has no binding legal effect, is expected to form a basis for the new Natural Gas Act, which will have such effect) includes statements regarding the reassignment of the regulatory function of the TPDC, leaving the TPDC as a commercial market player. This is preferable for accountability purposes and is in line with good market practice. The policy also gives priority to the domestic market and requires companies involved in the natural gas value chain to enlist on the Dar es Salaam stock exchange. An updated Model PSA (MPSA 2013) will be used in future, and it is believed that it may be a prerequisite that insurance is procured locally, although whether this would apply to existing blocks is unclear.

These reforms, together with the more prominent reforms to the laws governing the mid and downstream gas sector, are much anticipated and have been affected by delays. Potential investors want to see clear policies and a predictable regulatory environment. With the reforms to the legal and regulatory framework, the need for infrastructure, elections scheduled for 2015 and Zanzibar agitating for independence, bidders in the fourth licensing round have a lot to consider. Nevertheless, the potential offshore Tanzania is clearly an exciting prospect and one which it is hoped will provide a welcome boost to this agrarian economy.

Clyde & Co has an associate office in Dar es Salaam providing a full range of legal services. The increased investment in the region due to the gas industry will increase the number of transactions taking place within and concerning Tanzania. We are uniquely placed to advise clients on the legal and commercial aspects of doing business in Africa. Contact details are available on our website (www.clydeco.com)

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