Alarmed by the recent cartel by fuel dealers and a monopoly in gas business, the government has finally decided to construct the $1.01 billion gas pipeline from Mtwara to Dar es Salaam, causing panic in the boardrooms of Pan African Energy and Songas companies.
The lucrative deal that involves the construction of processing plants at a cost of $300 million at Mnazi Bay, will be financed by a loan from the Chinese government, The Guardian on Sunday has learnt.
Completion of the project is expected to lower the gas delivery price by up to 200 percent as it would enable more suppliers including Ndovu Resources to compete with Songas, which is currently dominating the market.
The proposed gas pipeline has the capacity to supply gas that is enough to produce up to 2,000 megawatts of electricity including the 300 megawatts plant at Manzi Bay, according to details gathered by The Guardian on Sunday.
The move would reduce the cost of producing thermo electricity from the current $0.34 cents to $0.12 cents per megawatts according to cost analysts from power generating companies.
However as two cabinet ministers, Finance Minister Mustafa Mkullo and Energy and Minerals minister William Ngeleja prepare to sign the loan agreement in Beijing next week, Songas and Pan African Energy have been struggling with lobbying in Dar es Salaam to block the project.
Currently the key players in the gas business are Songas, a subsidiary company of UK’s Globeleq (exploration and infrastructure development) and Pan African Energy, a subsidiary firm of a British Virgin Island based company, Orca Exploration, which operated all Songas-owned gas infrastructure on agreed business terms.
In partnership with the government, it controls business on the gas distribution network to industries, commercial institutions and for domestic use.
The duo have dominated the lucrative gas business in the country, enjoying monopoly for years, since the existing pipeline became operational in July 2004.
The pipeline, built by a Sh440 billion ($265 million) loan obtained by the government from the World Bank, was in substance loaned to Songas under specific terms.
With the government deciding to ditch the duo after it was irked by the dilly-dallying by Songas and Pan African Energy, the two key players are lobbying to regain the lucrative deal but their efforts have hit a snag after the government decided to go ahead with its Chinese financing option.
The proposed gas pipeline would constitute a 24-30-inches pipe compared to the 12-16-inch existing one, with intent to increase the quantity of gas transported, which eventually would contribute to easing the power crisis, costly to the national economy.
According to the details gathered by The Guardian on Sunday, project implementation would be effected under the Chinese assistance in terms of financing and technical aspects after the government agreed in principle with the Chinese authorities to acquire a substantial amount of money on a soft loan basis.
Contacted for clarification this week, minister Ngeleja said, “This is a must project for the future of this country…we have secured financing from the Chinese and the agreement will be signed next week.”
“Some people have been misleading the public by saying the Chinese own this project, but the truth is that it’s government owned…The Chinese are financiers and the project will boost gas supply as well as reducing or ending the power supply problem in the country,” the minister told The Guardian on Sunday this week.
Defending the government decision, the Minister added, “Neither do we intend to operate nor control gas business...what we are doing as building the modern and capable infrastructure to enable both players including Songas to transport more gas to Dar es Salaam .”
“So far we are forced to depend on expensive fuel based electricity because the existing infrastructure can’t allow the pumping of more gas as required by independent power producers” Said the Minister.
The Guardian on Sunday has established that a team of Tanzanian government officials involving key technical financial and legal experts flew to China last Wednesday to finalise the project document, before the deal is sealed next week.
Mr Mkulo flew to Beijing last Monday while Mr Ngeleja was expected to join the joint ministerial delegation mid next week.
‘This visit follows the one by Chinese teams in the country in two phases towards the end of July and twice last month, the first of which involved engineers for the processing plant.
The second team of experts was made of pipeline engineers and the third comprised of experts on material procurement and market surveys, Energy ministry sources indicated.
The Guardian on Sunday has further been informed that the project which would be implemented by Chinese National Petroleum Corporation (CNPC) through its subsidiary, the China Petroleum and Technology Development Company (CPTDC), in partnership with the Tanzania Petroleum Development Corporation (TPDC) would cost $1.058 billion (Sh1.6 trillion) to be acquired as a loan and repaid in 10 years at a reasonable rate of less than 5 percent interest liability per annum.
The source unveiled further that the project would be implemented under arrangement known as Engineering design, Procurement and Construction (EPC) where all key components of the project are handled by a single company. The project’s operational date is set for December 2012.
Pan African Energy and Songas have been irked by the government’s move to construct the billion dollar project, which is bigger than theirs, seeing it as a threat to their lucrative business as it would enable competitors to invest in gas the business.
Previously potential investors in gas business failed to invest because they couldn’t use the existing pipeline dominated and controlled by Songas.
Now with the Sh1.6 trillion pipeline to be built from Mnazi Bay, Mtwara to Dar es Salaam, also expected to be connected to the Songosongo fields at Somanga Fungu, the sector is set to attract more investors.
The Guardian on Sunday understands that top officials from the two companies (Songas and Pan African Energy) have been consistently working against the government’s project, illustrating how far their business worries have risen.
It is reported that mid last week a top executive from the gas companies met President Jakaya Kikwete at the State House in Dar es Salaam to express their displeasure with the government’s new gas pipeline project but the President referred them to the minister.
Minister Ngeleja confirmed to this paper this week about the meeting with officials from Songas and Pan African Energy, where he told them that there was no way the government would halt its project.
‘It is a fact. I met them and said expressly no one can stop us (government) from implementing the project under the Chinese technical and financial assistance, whose initial cost is $778 million. We queried them (Songas) over their source of finance, they said they could borrow from world financial institutions such as the World Bank, an answer which was not possible for the government to rely on,’ the minister intoned.
The Guardian on Sunday is aware that whereas Songas and Pan African Energy could transport a maximum of 172 million cubic feet of gas a day by expanding its processing plant at Songosongo, the project under the Chinese technical and financial assistance could process and transmit 420 million cubic feet of gas every day.
According to an engineer at TPDC, 420 million cubic feet could generate more than 2,000 megawatts of power, but since a small portion of the said amount of gas was projected for increased industrial and domestic use.
About 1,700 megawatts of power are projected to be generated through different power projects including private firms and the Tanzania Electric Supply Company (TANESCO).
National power requirements during high demand hours stand at 833 megawatts as per statistics provided by Tanesco in March 2011.
Currently the power produced from gas stands at 328 megawatts, from the 102 million cubic feet transported a day under Songas infrastructure. This remains a major reason for several power generating plants to use costly diesel, Heavy Fuel Oil (HFO) and Jet A1 oil.
Natural gas is by far cheaper compared to imported fuel, whose prices keep fluctuating.
Reliable sources close to Pan African Energy and Songas told this paper that although the companies were different entities, they operated cooperatively in virtually all aspects on gas business and remain dependent on one another.
‘Songas owns the gas infrastructure including the processing plant and the pipeline but all infrastructures are operated by Pan African on behalf of Songas.
This implies that any adverse effect on either of the company’s operations would definitely extend to the other as they are inter-dependent, thus they view their business as affected by the major Chinese-TPDC pipeline project,’ the sources noted.
The well placed sources added: ‘Take a case of Pan Africa Energy which under the existing agreement with TPDC enjoys a monopoly of gas business by selling it to production industries, commercial and other government institutions at a rate $8 per Giga Joule (GJ). Thus it is worried if potential competitors push down prices by increasing the supply,’ noting further that there is a foreseeable possibility of prices to go down to $3 for the same unit.
About 35 major industries in Dar es Salaam including the cement factory, Portland (Twiga Cement), food processing industries belonged to S.S Bakhresa group and Murza Mills are among those which frequently use gas powered machinery.
And the companies’ efforts which seem to be going nowhere emerged three months after Songas obtained government approval to expand its gas processing plant at Songosongo.
The expansion proposal, which was approved last May was twice rejected by the Energy and Water Utilities Regulatory Authority (EWURA) in 2008 and 2009 as the regulator was convinced that the project costs were not realistic and could have negative effects on the power produced and eventually sold to Tanesco.
While the Songas proposal indicated that the project would cost about $68 million Ewura argued the total genuine cost would not exceed $45 million.
Pan African Energy’s country general manager Andrew Brown said during an interview that he could not comment on the expansion project as the equipment belonged to Songas. He said that in the gas business there was plenty of misrepresentation, but he did not clarify.
‘Our key objective is to ensure the production of natural gas goes high as much as possible so as to enhance increased power generation. We expect the amount of gas produced and transported to increase up to 200 million cubic feet a day by the end of 2012,’ the manager projected.
Songas managing director Christopher Ford said: ‘We are not worried at all. We are concentrating on our expansion project, of which we have already floated the tender and now we are arranging the financial aspect under EPC (Engineering design, Procurement and Construction),’ adding in a timely manner that ‘we have strong government support.’
‘The government project will be additional, resulting in increased gas production and not a threat to our project and business,’ he emphasised.
Quizzed over alleged Songas’ request to be commissioned the work to construct the new gas pipeline, Ford said: ‘At no point have we ever requested for that construction work. We entirely focus on our project, but what we have repeatedly told the government is that we are ready to develop gas infrastructure for tapping gas resources wherever they are found.’
The new development comes at a time when the Parliamentary select sub-committee for Energy and Minerals last week begun to probe the dealings of Pan African Energy, which among other shortfalls has denied TPDC a chunk of money amounting to $28 million, according to Parliamentary committee chairman January Makamba (Bumbuli-CCM).
The said money, which was supposed to be paid to TPDC resulted from profit/production sharing agreement between TPDC and Pan African Energy, penned in November 2004 in regard to the distribution of gases for manufacturing industries and domestic use and thus was accumulated for five years between 2004 and 2009.
The investors are further accused of deceitful practices by dubiously including all expenses accrued from the project at downstream level, in Dar es Salaam, and deducting the money at profit sharing with TPDC.
The sub-committee, formed of legislators Charles Mwijage (Muleba North-CCM), Diana Kilolo (Special Seats-CCM), Selemani Zedi (Bukene-CCM), David Silinde (Mbozi West-Chadema) Yusuph Nassir (Korogwe Urban-CCM) and Christopher ole Sendeka (Simanjiro-CCM) is tasked with scrutinising documents of Pan African dealings to establish due diligence.
On August 13 minister Ngeleja announced in Parliament that the government had decided to inject a 1.3 trillion shillings package to arrest the power crisis up to December 2012.
However, about 523 billion shillings was budgeted for the same purpose for the period between August and December 2011.
The country has suffered continuous load shedding for nine consecutive months since late last year.