Tanzania expects to become A major natural gas producer

01Jul 2016
Muharram Macatta
The Guardian
Tanzania expects to become A major natural gas producer

Tanzania has great potential in natural gas reserves and if liquefied or commercialised the sum of taxes and other fiscal revenue from the natural gas will, at its peak, reach roughly one third of total fiscal revenue.

Developments in the natural gas sector will transform the landscape of the domestic economy. FILE PHOTO.

Recent developments in the natural resource sector have triggered a fresh round of much needed infrastructure investment. Results show that while a conservative approach, which simply awaits liquefied natural gas (LNG) revenues, would miss significant current growth opportunities, an aggressive approach would likely meet absorptive capacity constraints and imply a much bigger (and, in an adverse scenario, unsustainable) build-up of public debt.

A gradual scaling up approach represents indeed a desirable path, as it allows anticipating some, though not all, of the LNG revenue and, even in an adverse scenario, keeping public debt at sustainable levels.

Structural reforms affecting selection, governance and execution of public investment projects would significantly enhance the extent to which public capital is accumulated and impact non-resource growth and, ultimately, debt sustainability.

However, Tanzania is expected to become one of the major natural gas producers and liquefied natural gas (LNG) exporters in Sub-Saharan Africa. Oil companies have discovered tremendous natural gas reserves in Mtwara and other neighboring regions along the coast.

According to the business plans, liquefaction and transportation facilities are to be built, and by the next four years or so, the government of Tanzania would be exporting tens of millions tonnes of LNG to the rest of the world, in turn bringing in billions of dollars of revenue back to the country each year.

As is shown in this analysis, developments in the natural gas sector will transform the landscape of the domestic economy. According to the results of the fiscal analysis of resource industries, if the LNG projects materialise as planned, LNG will become Tanzania’s single largest exporting sector and contribute up to around one third of foreign exchange earnings.

The natural gas discoveries created the possibility for Tanzania to become a major natural gas exporter. The offshore nature and geographic location of the gas reserves will make it economically feasible to liquefy and transport natural gas to South and East Asia, where the demand for natural gas has been growing fast. The size of confirmed reserves can support large-scale LNG production over a long time horizon.

Technically, the natural gas reserve can support a much larger scale of LNG production in the Mtwara basin.

However, the realisation of LNG production will depend on a lot of factors, such as world prices movements, finding investors and customers, securing financing, and construction capacity constraints. Because of these uncertainties, we take the four-train LNG production scenario as the baseline for our analysis.

Just imagine how this viable project will in future benefit the peoples of Tanzania. The government’s share is projected to be small in the first few years, when gas production volume is small and the bulk of the revenue is used to cover costs.

Revenue is expected to surge in probably the year 2021 when all basic four LNG trains may become operational, and would gradually increase afterwards. The composition of revenue also changes over the project horizon.

At first the main source of revenue is subcontractor withholding tax. Corporate income tax and payoff from public enterprise participation will pick up a few years after the projects start. Revenue from production sharing will be small at the beginning, but the share of profit gas will increase gradually along with the Parameters
Eventually, profit gas will become the main source of revenue, accounting for more than half of total LNG-related fiscal revenue.

Tanzania has generally had relatively high public investment levels throughout its post-colonial era history. Public capital expenditure exceeded 10 percent of GDP in 16 out of the past 54 years of independence. The high level of investment has been supported by foreign grant and debt financing, and increasingly by domestic financing in recent years.

Public investment went largely into infrastructure: roads, ports and electricity, water and sanitation, schools, and hospitals.

The need for infrastructure investment was significant: existing infrastructure was either destroyed or poorly maintained, if at all, during the heavy rains or by heavy modern means of transportation.

However, it is costly to build and maintain infrastructure in a sparsely populated country (population of about 46 million excluding the wildlife with a landscape size of Uganda and Kenya put together).

About half a century after the end of the colonial era, infrastructure gaps remain one of the major constraints to growth and development

Recent developments in the natural resources sector have triggered further infrastructure investment. Towns and cities are expanding near the coal mines in Mbeya, Ruvuma, Rukwa, Lindi and Mtwara regions.

Railways and ports need to be expanded or modernised to ship coal and other extra heavy consignments to and from the landlocked and overseas countries.

Dar es Salaam the commercial capital of Tanzania is becoming increasingly densely populated and requires upgrades in roads, electricity, and other urban infrastructure. The government is trying to address these needs by expanding public investments.

An aggressive investment scaling-up that anticipates all future LNG revenue may probably partly expose Tanzania to the downside risks, leading to unsustainable debt path under the adverse scenario of negative shocks to LNG production and prices. Let us hope for the best.

MUHARRAM MACATTA is a retired civil servant, a graduate in liberal arts, majoring in economics and political science. He served as a director of internal and international trade, import and export section, with the then ministry of commerce and industries, which later became to be the ministry of commerce and cooperative; and served as principal marketing officer assigned to several marketing boards.
He established state motors corporation and also founder regional offices; and first director of the Saba Saba International trade Fairs.