Tanzania’s natural gas sector: The elusive economic game-changer

19Feb 2020
Correspondent
The Guardian
Tanzania’s natural gas sector: The elusive economic game-changer

​​​​​​​IN 2010 Tanzania discovered about 47 trillion cubic feet(tcf) of proven offshore natural gas deposits. With this newly discovered resource many Tanzanians most of whom live in poverty, hoped that their lives would be transformed and their economic burden would be eased.

At national scale, the gas deposits could indeed accelerate industrialization, supply power and raise the quality of lives of majority of Tanzanians through government revenue generated by export of Liquefied Natural Gas (LNG).

It is against this backdrop that when President Jakaya Kikwete addressed Mtwara residents in early 2012, he spoke of rapid development of Mtwara town and the region in general, likening its economic development to that of Dubai in the UAE and the public took it for granted.

However, behind the high expectations and optimism of rapid economic turnaround that would improve the wellbeing of Tanzanians hovered challenges of significant magnitude that have, ten years down the road, shattered almost all the dreams of realizing economic bounty.

Eight years after the offshore discoveries, the sector had yet to make a significant mark in the country’s economy. “The leading contributors to Tanzania’s economy in 2018 were construction (23%), followed by trade and repair (11.1%) agriculture (10.7%), manufacturing (7.3%), mining (5.2%), and others(23.1%),” reads part of a report by Tanzania Invest.

The Financial Times(Tanzania) of July 2018 also indicates that the natural gas sector  was yet to make a breakthrough as a major contributor to the country’s economy citing construction (22.7%), transport and storage (15.6%), agriculture (10.5%), and information and communication(9.86%) as having made significant contributions to the country’s economy.

One of the challenges that accounts for the failure to develop offshore gas deposits is the uncertainty that shrouds the extractive industry and in particular the gas sector, in terms of global market prices, which in turn makes it difficult for the government to make agreements with companies that would see the country getting substantial benefits. Such good deals should, on the other hand, also attract investors.

At the time the gas deposits were discovered, the price of LNG in Tanzania’s likely export market - Japan, China and other countries Asia and the Far East - was high. However, the price has since fallen and the future is gloomy. In 2015, for example, the International Monetary Fund (IMF) forecast that gas prices would be USD16 per one million British Thermal Units (mmBtu) come 2020. By end of that year the forecast changed to USD 7 and prices today fluctuate between USD 7 and USD 8. The recent global price collapse together with forecasts of prolonged low prices have made the government and gas companies rethink development of the gas sector, thereby stalling construction of the LNG plant in Lindi and dashing hopes of the country realizing rapid economic development.

On a different front, the gas companies and the government have been negotiating the host government agreement (HGA) which would script ground rules for management of the LNG plant. These negotiations were scheduled for conclusion in 2018 but have been grinding on and are now likely to be concluded in 2022. The protracted negotiations between government and gas companies have delayed construction of the LNG plant.

Again in 2017, government enacted various legislations including the Natural Wealth and Resources Contracts (Review and Renegotiation of Unconscionable Terms) Act 2017. This allows the government to renegotiate existing extractives agreements if they seem to contain “unconscionable terms”. However, the basis for identifying and defining a term as “unconscionable” are vague, allowing the government to renegotiate the PSAs as it deems fit. Implementation of this law coupled with on-going negotiations for HGA and low global gas prices have put construction of the Tanzania LNG in jeopardy.

“Export of natural gas would have a big impact on the economy but construction of the proposed LNG plant in Lindi has seen slow progress for various reasons,” says Mr. Modestus Lumato, TPDC’s Development and Production Manager.  “Currently natural gas is trading at between 7 and 8 mmBtu in the global market. This is not good enough for business. We acknowledge the significant role of LNG accelerating the country’s economic growth because it is a commodity that we can export and earn big revenue but under the circumstances we have to be patient and protect the country’s interests,” explains Mr. Lumato.

A consortium of six companies; Equinor of Norway, Royal Dutch Shell, Exxon Mobil, Ophir Energy, Pavillion Energy and TPDC, has shown interest to construct the LNG plant in Lindi and is engaged in negotiation with the government. While the initial cost of the plant was estimated to be USD 30bn, this is likely to have gone up. “The initial estimate was done after the discovery of offshore gas deposits. We are talking about ten years after the first estimates, which means the cost could now be more than USD40bn. We cannot implement this project from local funding, we must work with oil companies,” he says.

Besides low prices that don’t attract investors, construction of the LNG plant has stalled due to the government’s decision to review Production Sharing Agreements (PSA) entered into with gas companies. This is in line with the Natural Wealth and Resources Contracts (Review and Renegotiation of Unconscionable Terms) Act 2017 which allows the government to look into PSAs that did not protect the interests of the country and subsequently make appropriate changes. “Such review is done carefully and thus takes time. We have to wait and once this is completed, implementation of the LNG project will proceed, other issues notwithstanding,” explains Mr. Lumato

In 2017, the Natural Resource Governance Institute (NRGI) had cast doubt on oil companies investing in the LNG plant construction project in Tanzania due to its economics much as it acknowledged that construction of the LNG plant is the basis for development of Tanzania’s offshore gas. “For investors to earn a return comparable to that seen in other LNG projects, we estimate that a long-term LNG price of USD 14 per one million British Thermal Units(mmBtu) would be required over the life of the project. With long-term forecasts for LNG prices in East Asia at USD 8, it appears unlikely that companies will decide to invest in the current environment,” reads part of a Briefing paper “Negotiating Tanzania’s Gas Future: What Matters for Investment and Government Revenues?” published by the Institute.

However, while Tanzania’s LNG project is progressing at a snail’s pace, Mozambiquewith more than 200tcflast year concluded FID with Total and Exxon Mobil who secured bank loans to start construction of two separate LNG plants in the country. This is being done while global prices are low and uncertainty still shrouds the global natural gas market.

The Board Chairman of Haki Rasilimali Dr. Donald Kasongi concedes that the performance of the natural gas sector has been below expectations since the resource was discovered extracted. “For Tanzania, the expectation that offshore discoveries now estimated to be 57 trillion cubic feet would turnaround the country’s economy has been unmet. Apart from the bad business environment arising from low prices and investment there has been change in the policy and legal landscape that has sent jitters among potential investors,” he says.

The declaration by government last year that it will shift its focus from natural gas to hydropower development and the review of PSAs it embarked on dulled the urgency to construct the LNG plant which would bolster the country’s economy through export of natural gas. 

“With the slump in global natural gas prices and the resulting uncertainty in the market the risks for investment were heavy and obvious. Oil and gas companies are prepared to invest but not where the risks of making losses are conspicuous. But it would appear that Tanzania was not ready to build a good business climate that would attract big investors as evidenced by protracted negotiations on some issues like HGA and subsequent FID as well as the review of PSAs. This is different from what is happening in Mozambique where after discoveries of proven quantities in 2010, HGA was completed in 2014 and now FID has been made,” explains Dr. Kasongi who is based in Mwanza City.

According to “A snapshot of Tanzania natural gas” published by Norton Rose Fulbright in 2014 the Final Investment Decision for construction of the LNG plant was set to be agreed upon between the government of Tanzania and the consortium of companies by 2016. Subsequently the LNG plant should have become operational this year (2020) but the HGA has not been reached and as such construction of the LNG plant has not started.

The publication also highlights that private sector involvement in natural gas sector has been slow and uncertain. “The private sector was not strong enough, not well-prepared to participate in the natural gas economy. Only after huge proven quantities were discovered did the government begin to build local foundations that would prop up the sector. These include policy and legal frameworks as well as creating private sector space in the gas economy,” reads part of the publication.

Recent policy and legal changes have also sent uncomfortable signs to investors making them wary of pouring in money when the future is uncertain. The review of PSA, for example, did not go down well with investors with some of them closing business and making huge investments in Mozambique’s natural gas sector instead. Investors were not assured of long-term stability of the country’s policies.

Current reports indicate that the PSAs review was completed by early January 2020and companies should receive drafts or final text by end of the moth. However, it may not be easy to find out the proposed changes made by the review since government and companies do not disclose PSAs.

The frustrations of unmet economic expectations from the natural gas sector have run far and wide. “It would appear that all plans and strategies to develop gas deposits in order to lift Tanzanians out of poverty have been abandoned. The economic boom that promised and signaled rapid development of Mtwara town and the region at large has suddenly disappeared. For example,the price of land that had shot up has also plunged, and construction has come to a halt. Some buildings have no tenants,” says Baltazar Komba, a social worker and Executive Director of FAWOPA, an NGO based in Mtwara town.

According to Mr. Komba, construction of the LNG plant would have economic spill-over effect in agriculture, construction, transport and the hospitality industry.

He argues that the little progress made in the natural gas sector could perhaps be linked to changes being made in the policy and legal frameworks including the review of PSA that was introduced in 2017.

Given current circumstances, companies are unlikely to invest in Tanzania’s LNG project and this leaves the government with few options to make progress in developing the offshore gas deposits and get into the natural gas export business. One is to wait for global gas prices to bounce back following which the LNG project could then become profitable enough to attract investors. Yet this option could lead not only to delay in realizing the project’s benefits but also see the overall costs of conduction rising up tremendously.

Maybe government should also strive to improve the business climate by scaling up the pace of government decision making process. Huge natural gas deposits were discovered both in Mozambique and Tanzania at about the same time but by 2014, the former had already concluded the HGA for its two proposed LNG plants and by end of 2019 the companies had already made the FID.

Government must make careful and transparent decisions and improve the overall business environment in order to realise the potential of the natural gas sector in turning around the country’s economy.

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