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Tanzania’s troubles over gas revenue: Sharing the spoils

A LEAKED contract between Norway’s Statoil and the Tanzania Petroleum Development Corporation (TPDC) is raising questions about whether Tanzania will gain the full benefits of its sizeable gas deposits, the first of which was discovered deep in the Indian Ocean in 2010. Estimates put the country’s reserves at a little over 50 trillion cubic feet of gas, a figure the government thinks may double as additional exploration wells are drilled, making them potentially a considerable potential source of revenue.

Arguments over how such revenue should be shared between the country and oil firms have already spilled over into public debate. Last week Tanzania’s revenue authority said it would review and renegotiate mining and gas agreements. A few days later it quickly withdrew that proposal amid concerns that it might hamper investment and exploration.

The bulk of the Tanzanian gas industry is still in its exploration phase, and final investment decisions on production are unlikely to be made until 2015 or 2016. But according to an IMF report released in April, once infrastructure is in place and production is under way, annual revenue collections could range between $3 billion and $6 billion.

However, these projections come with a great deal of uncertainty, and not just because of fluctuating gas prices. The Production Sharing Agreements (PSA) that TPDC is making with big international firms like British Gas, Petrobras and Shell are all confidential. To calculate potential profits, the IMF used the government’s model PSAs, which provide general guidelines for these contracts, including degrees of profit sharing.

In May part of one of these contracts was leaked online. This was a contract with Statoil, an oil-and-gas company that is majority-owned by the Norwegian government, and ExxonMobil, which has a minority 35% share in the licence. A 2012 addendum to an existing agreement between Statoil and the TPDC, the contract differed significantly from the model agreements that had previously been made public. The leaked deal suggests that Tanzania would get 30-50% of the “profit gas” (after costs are covered and royalties paid) rather than the 50-75% specified in the model agreements. The money is intended to be paid into a sovereign-wealth fund, which has yet to be set up.

Based on the 21 trillion cubic feet of gas that is thought to exist in the exploration block covered by the agreement, opposition critics have calculated that the difference in terms could lead to $12 billion less revenue for the government over the expected 15 year life of the project. The TPDC disputes this, saying that Tanzania will collect 61% of profits once corporate taxes are included, plus 5% royalties. The difference between the addendum and the model agreement, they say, is due to Tanzania’s lack of experience in costly deep-sea exploration and the absence of infrastructure, pricing mechanisms and an existing market for Tanzania’s natural gas.

Statoil won’t discuss specific details of its contract, but has said that the deal considers the totality of taxes and rents, along with the specific challenges and risks of the project. According to Statoil’s projections, Tanzania’s total share of the profits could be 65-85%. The Natural Resource Governance Institute (NRGI), an independent, non-profit organisation, says that the terms of the deal seem in line with international standards. Although government profit projections seem reasonable, NRGI analysts say that the accuracy of their report is hindered by a lack of information, specifically not having access to the original contract.

The NRGI echoed the IMF and others in calling for increased transparency and public disclosure of the terms of all PSAs. Tanzania has committed to publishing all newly signed extractive contracts, but agreements already exist for most of the country’s natural gas blocks, and this new commitment isn’t retroactive. So far, only one other contract has been made public. In April, Swala Oil and Gas, a relatively small Tanzanian-owned company, had to make the terms of its agreement for onshore extraction open to the public in order to list on the Dar es Salaam Stock Exchange. The terms of its agreement matched the model PSA almost exactly.

Source: www.economist.com

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