Following recent gas finds, Tanzania has joined a new group of energy players in the African market. These finds raise expectations but also set a challenge to manage the resources successfully and in the country's long term interest.

East Africa's energy market has transformed over the course of the last year following significant gas finds off the coasts of Tanzania and Mozambique, the discovery of oil in Kenya and the continued exploitation of Uganda's petroleum reserves.

In Tanzania, discoveries by the likes of BG Group and Statoil are expected to lead to two-train liquefied natural gas plant development, promising billions of dollars worth of investment and raising hopes of the area's export potential. The proximity of east Africa's second biggest economy to Asia makes it well positioned to reap the benefits of surging fuel import demand in Japan, China and India, enticing investors to fund export projects.

These finds have raised expectations that energy resources will have a transformative effect on Tanzania's economy but an effective legal framework will need to be put in place to manage this growth. Tanzania's legal and regulatory system will need to adapt to the rapidly expanding market in order to ensure that the country's long term interests are protected.

Existing Framework

The Petroleum (Exploration and Production) Act 1980 (Act) governs the exploration and production of petroleum and vests title to all petroleum and natural gas deposits within Tanzania and its territorial waters in the Government of Tanzania.

Under the Government, the Tanzania Petroleum Development Company (TPDC) is the body responsible for exploration, promotion and development of oil and gas resources. The role of the TPDC is, among other things, to explore for and produce petroleum, and to hold exploration and production rights. The Government regulates Tanzania's downstream industry through the Energy and Water Utilities Regulatory Authority (EWURA) and the activities of both TPDC and EWURA are coordinated by the Ministry of Energy and Minerals.

TPDC is granted licenses under the Act and engages with investors through Tanzania's tripartite Model Production Sharing Agreement (MPSA) which is entered into between the Government, TPDC and the investing oil company.

Key features of the MPSA include the following:

  • Standard term provisions allow for an exploration period of up to 11 years (divided into renewal periods of 4, 4 and 3 years) with development and production allowed for up to 25 years with the possibility of a 20 year extension
  • Standard relinquishment provision of 50% of the contract area upon each renewal of the licence
  • An option for TPDC to participate in development via a contribution to contract expenses
  • The oil company shall be subject to Tanzanian taxes on income derived from petroleum operations
  • Petroleum produced from the contract area is valued at an average fair international market price
  • All equipment and material etc. imported for use in petroleum operations can be imported free of all duties and import taxes and can be re-exported free of any export duty or tax
  • Free foreign exchange dealings
  • Subject to the requirements to meet domestic crude oil demand (on a pro-rata basis with all other producers in Tanzania), the oil company can freely dispose of its share of petroleum and export it free of all export duties and taxes
  • Good faith negotiations on the discovery of gas in order to reach an agreement on its development, production and sale
  • Oil company expected to undertake a training programme, employ qualified Tanzanian citizens and give preference to Tanzanian goods and services if available.
  • Recourse to international arbitration

The current legal framework presents no legal restrictions on the terms of gas sales agreements, other than the tariffs imposed by EWURA.

Reform and New Regulations

Specific legislation to regulate Tanzania's gas industry is close to coming into force and calls have been made for the Government to stop signing gas exploration contracts until a formal bill and gas policy had been issued. A fresh licensing round (the first since 2005) comprising of eight offshore exploration blocks was due to be launched by TPDC this month but was recently cancelled "until after the Government has been presented with the "Natural Gas Policy" in the October Parliamentary session".

This Natural Gas Policy (Gas Policy) is expected to be presented for Parliamentary approval together with the modified Gas Supply Bill 2009 (Gas Bill) which was drafted before the Gas Policy and consequently the two documents will need to be harmonized. The Government of Tanzania has engaged the support of consultants from Trinidad and Tobago (another of BG's big LNG success stories) to develop the regulations which are in reality not likely to be in force until next year.

Once in force, the Gas Policy and the Gas Bill will provide for the regulation of transportation, liquefaction, re-gasification, storage, distribution, supply, import, export and trade in natural gas. The Gas Bill as initially drafted states that EWURA will, in consultation with the Tanzania Bureau of Standards, the Occupational Safety and Health Authority and the National Environmental Management Council, develop and carry out a programme of gradual adoption and adaptation of prevailing international standards applicable in the petroleum industry. The suggestion is that new sector-specific regulations will be introduced/ imposed/applied, which may create new requirements in the fields of public health, safety and the environment. The Gas Policy is also expected to cover budget treatment of tax revenues.

In other African countries coming to terms with oil and gas discoveries, government has moved to put new structures in place (such as Ghana's Petroleum Revenue Management Bill) in an effort to ensure that proceeds of their nascent petroleum industries are managed appropriately and invested wisely. Ghana is separately in the process of creating two investment funds at its Central Bank which will be fed by oil revenues. Norway has a much admired model of petroleum revenue management and investment and Tanzania will need to develop its own structures in this image to ensure long term success.

Elsewhere in East Africa, Mozambique is in the process of enacting a new petroleum law that will review its old 2002 Code, Uganda's government has established a Petroleum Exploration and Production Department with authority over the sector and changes to Kenya's regulatory landscape are expected to be delayed until after next year's presidential and parliamentary elections.

Tanzania will also need to manage relations with its investors carefully. As stakes are raised, one recent example of tension can be seen from the Government's demand of US$20.1 million from Toronto-listed Orca Exploration's local unit, Pan African Energy Tanzania (PAT). A review of the natural gas supplier's contract has also been ordered following a parliamentary investigation which found that PAT had denied TPDC its rightful share of gas revenues. PAT, which signed a production sharing agreement with TPDC in 2001, supplies gas to 38 industrial customers and for power generation for the national grid by Songas and state-run Tanzania Electric Supply Company (TANESCO). Negotiations between PAT and the Government are ongoing.

Disputes with government are common to the development of resources in many countries (and Tanzania will also have to manage tensions with semi-autonomous Zanzibar over revenues) but a combination of political sensitivity and clear and robust regulations will allow Tanzania to navigate itself towards a bright future.

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