Tanzania Natural Gas strategy

By Al-amani Mutarubukwa,Businessweek
The government has started working on strategies to prepare Tanzania’s economy to accommodate huge investments in the natural gas sector in anticipation of major commercial discoveries in the next five years.

The imminent commercial discoveries, whose quantity is yet to be determined, will result into “multi-billion dollar foreign direct investments,” which would add significant revenue flows to the government coffers, as well as take a big part of the country’s export volumes, the facts that will, in pure technical terms, make Tanzania a “gas economy” said the minister of Finance and Economic Affairs Mustafa Mkulo in a letter he sent to the International Monetary Fund (IMF) last month.

Tanzania is expected to receive an FDI of around $7 billion from just one company, Ophir Energy and its partners British Gas. Other multinational companies like Petrobras and Statoil are in drilling programmes in 2012.

The country has proven natural gas deposits of about 7 trillion cubic feet. It is estimated that Tanzania will confirm around 60 trillion cubic feet of natural gas from the current 7 trillion cf.

About 3.5 trillion cubic feet of the reserves have already been commercialized with natural gas wells being drilled in Songo Songo and Mnazi Bay gas fields. Tanzania’s gas reserves border those of Mozambique in the Ruvuma basin where commercial natural gas reserves of about $800 billion have been discovered by Eni SpA and Anadarko Petroleum Corp. The reserves are 36 times more valuable than Mozambique’s economy.

“Discussions on how to position the country to best take advantage of the huge natural gas potential have been initiated,” Mr Mkulo added in his letter to managing director of IMF Christine Lagarde.

To prepare the economy for major gas investments the government is drafting a natural gas master plan as well as a gas and petroleum revenue management bill. The bill will cover the budget treatment of gas revenue.

Also the tax regime will be reviewed to ensure adequate cover for the gas sector. This will go hand in hand with development of staff expertise in the Tanzania Revenue Authority (TRA) on tax issues associated with the development and exploitation of gas.

Mr Mkulo further said in the letter that the ministry of Finance, the Planning Commission and TRA will prepare a report by the end of this year identifying what steps will need to be taken to prepare Tanzania’s macroeconomic management for the new gas economy. The institutions will also identify the nature of any corresponding technical assistance needs.

The government is also considering “possible launch of a future generations fund to save a portion of the resource wealth,” added Mr Mkulo.

The government is planning to carry a big project of constructing a gas pipeline from Mnazi Bay in Mtwara to Dar es Salaam to carry fuel for electricity generation purposes. The project would be funded by Exim Bank of China to the tune of $1.058 billion. It is expected to be operational by the end of 2012.

The project includes construction of gas processing plants at Mnazi Bay and at Songosongo, and the pipeline would be technically able to transport a maximum of 700 million standard cubic feet per day, which can generate up to 3,500 megawatts of power.

According to Mr Mkulo, the planned financing package involves a combination of a concessional loan (75 per cent of the total), a commercial loan (20 per cent), and a contribution by the government (5 per cent). “Given the scale of the project, the government will ensure that it has a high rate of economic return, and will share with the IMF the technical and economic evaluation of the project,” he said.

Exploration status
Preliminary exploration reports have also indicated the presence of oil in Mozambique. Similar results are expected in Tanzania soon.

Activities are increasing whereby this year about 23 wells will be drilled off Tanzania, Mozambique and Kenya almost double the number in 2011, according to research from Morgan Stanley.

The reports for huge gas deposits have drawn the interest of the world’s largest oil and gas exploration companies such as BP, Petrobras, Statoil, Exxon Mobil and Shell.
Experts say Tanzania will be a focus of drilling this year.

Shell teamed up with Petrobras last October to explore Tanzania’s coast. BP had been in talks on East Africa projects with Ophir.

Ophir and its partner BG Group Plc have so far found about 4 trillion cubic feet of gas in Tanzania.

Ophir, which is buying Dominion Petroleum Ltd, will be joined by Mubadala Oil & Gas of Abu Dhabi to explore Block 7 in Tanzania. The company plans to import LNG to meet the Persian Gulf nation’s growing demand for gas.
Statoil ASA, Norway’s largest oil company plans to drill a well this year at an exploration block in Tanzania in partnership with Exxon Mobil.

Analysts say the amount of investment in gas exploration and infrastructure will run into billions of dollars. Petrobas and Ophir Energy Plc alone are spending close to $2 million (Sh3.1 billion) per day in Tanzania.
Incentives

Tanzanian government last June abolished the Value Added Tax on petroleum products imported to be used as fuel by gas and oil exploration companies. Mozambique and Tanzania may eventually rival Qatar and Australia as the world’s biggest suppliers of liquefied natural gas (LNG).

The East African deposits found so far are large enough to justify construction of at least eight LNG production trains, according to estimates by the companies.

Today Qatar has 14 trains operating, while Australia has at least six trains producing and about $250 billion in projects under construction or planned. w Experts say, the gas industry development will be a catalyst to the predominantly agriculture economy by stimulating other sectors such as supply services and thus rendering a variety of employment to the youth.

However, they urge the government to be keen on the sector from the early begging to avoid future remorse over blunder contracts like those previously seen in the mining sector.

“It is high time we open up new areas for revenue sources. However, we would like to see the government taking charge as a large player just like South Africa and Norway, whose economies are thriving smoothly on their natural resources,” Dr Razack Lokina, a lecturer at University of Dar es Salaam said.

The Energy and Minerals Parliamentary Committee Chairman, January Makamba warned that even as the government was ambitious to transform the nation into a gas-driven economy, it was important to put legal framework and institutional capacity first in place.

“We need to develop technical schools and faculties in universities specifically to develop enough skilled personnel for the industry such as gas economists, petroleum engineers, auditors and so forth,” Mr Makamba said.

Mr Zitto Kabwe, the shadow minister for Finance and Economic Affairs said reforms should be done as early as practical to enable the country prepare well for the exploitation of the resource wealth from hydrocarbons.

“Tanzania must from the beginning institutionalise governance issues in the oil and gas by ensuring transparency in contracts as well as total commitment to Extractive Industry Transparency Initiative (EITI),” said Mr Kabwe who is also the MP for Kigoma north (Chadema).

He added that the EITI bill must be brought to Parliament to ensure transparency and accountability.
Gas exploration is governed by the Petroleum (Exploration and Production) Act 1980.

“I personally think this law needs to be updated. In fact, it doesn’t even mention gas – it talks generally about “hydrocarbons” but the substance of the law dwells on oil. As a result, gas sector in Tanzania is regulated by individual contracts – something that is not ideal,” Mr Makamba said.

According to Mr Makamba, who is also the MP for Bumbuli (CCM), the planned Gas Master Plan should be linked to the Power System Master Plan so as if gas is going to be key to power issues, gas planners have an idea about what power planners are thinking.

Currently, Tanzania use gas in industries and in power generation using the existing Songas pipeline, which is under pressure to meet increased gas demand.

The country also imports liquefied natural gas (LNG)/cooking gas for the retail market.