Our energy briefing late last year highlighted the Petroleum Act 2015 (PA 2015), which relates to upstream, midstream and downstream petroleum activities. This briefing provides a more detailed account of the changes made specifically in relation to local content (LCP) and domestic supply obligations (DSO) in Tanzania.

PA 2015

This briefing will analyse the new LCP and DSO provisions in Tanzania by drawing a comparison against similar policies in other African jurisdictions. We feel that a comparison with other African jurisdictions is beneficial for several reasons. The primary benefit is because the Tanzanian LCP and DSO obligations are not as detailed as other jurisdictions. Rather than conclude that the Tanzanian legislation will remain as it is, we predict that this is just the beginning of the LCP and DSO story in Tanzania. Government may decide to enact a Local Contact Act for example, which goes across sectors. The local content policy certainly hinted at this. Or alternatively, regulations may be enacted in support of PA 2015 which will impact LCP and DSO.

Whichever route is eventually chosen, there will no doubt be further clarification and certainly further obligations for the private sector to adhere to in Tanzania. A comparison with other African jurisdictions which are further down the road in this area is of assistance in predicting the type of future obligations which may come into force once a Local Content Act or regulations are completed.

Local Content Policies

Section 219 of PA 2015 states that licence holders, contractors and sub-contractors should give preference to goods which are produced or available in Tanzania and seek services from Tanzanian companies or citizens. Where such services or goods cannot be locally sourced, they must be sourced from a company in a joint venture with a local company. Section 219 (3) states that the local company must own at least 25% of the joint venture. A local company is defined at section 219 (9) as one which is either (i) 100% owned by Tanzanian citizens or (ii) a company which is in a joint venture with a Tanzanian citizen or citizens “whose participating share is not less that fifteen percent”. This is a surprisingly low threshold. Generally, we would expect that a joint venture would be required to be at least 51% owned by local citizens for the company to be considered indigenous.

Section 219 (4) contains the requirement for licence holders, contractors and subcontractors to report to the Petroleum Upstream Regulatory Authority (PURA) with a local content procurement plan in relation to financial, legal, accounts and health matters. Section 219 (5) – (8) requires licence holders, contractors and subcontractors to notify PURA in relation to various standards, including adherence to local content plans at the end of each calendar year. 

Sections 220 – 221 require a licence holder and contractor to submit to PURA a detailed programme for recruitment and training of Tanzanians, as well as a specific report in relation to training and technology transfer. Surprisingly, there are currently no minimum quotas that licence holders and contractors need to meet. It is possible that this policy may change in time, given the quotas used in other jurisdictions. It is also important to note that these provisions are currently very vague. There is no guidance on the practical implementation of the provisions, such as to whom at PURA one would need to submit reports. This would presumably be contained in regulations.

Section 222 deals with corporate social responsibility (CSR). A licence holder and contractor are to prepare a CSR report annually, in relation to environment, social, economic and cultural activities. It has been left to local authorities to approve such reports and to provide guidelines in relation to CSR and oversee the implementation of such plans. This is an area which will be subjective and dependant on the guidelines produced by the relevant local government authorities. There is currently a great risk associated with the ability of a licence holder or contractor to comply with such discretionary guidelines. Do the local authorities have sufficient capacity and experience to deliver guidelines? Will there be delays?

Section 223 introduces the integrity pledge; licence holders and contractors must note that a great deal of risk is associated with compliance with the integrity pledge. The integrity pledge requires licence holders and contractors to, among other things, conduct regulated activities with “utmost integrity”, “desist to engage in any arrangement that undermines or is any manner prejudicial to the country’s financial and monetary systems” and “disengage in any arrangement that is inconsistent with the country’s economic objectives, policies and strategies”. These provisions have been drafted incredibly widely. Further, any person who fails to comply with the integrity pledge will be deemed to have breached the conditions of their licence and can have their licence withdrawn or cancelled. This places licence holders and contractors at significant risk of potentially being unable to continue business, for noncompliance with a subjective and discretionary provision. 

Local Content: Analysis and Comparison with Ghana

In Ghana, the Petroleum Commission Act 2011 established a Petroleum Commission, whose objective is to regulate and manage the utilisation of petroleum resources in Ghana and to co-ordinate the policies in relation to them. The main functions of the Petroleum Commission include promoting efficient petroleum activities for the overall benefit and welfare of Ghanaian citizens as well as the responsibility to “promote local content and local participation in petroleum activities” and to “strengthen national development”. The practical implementation of LCP in Ghana would be promoted were introduced through the Petroleum (Local Content and Local Participation) Regulations 2013.

Petroleum (Local Content and Local Participation) Regulations 2013

The purpose of the Regulations are fairly detailed as to how LCP should be promoted; specifically referring to the maximisation of value-addition and job creation through the use of local expertise, goods and services, businesses and financing in the petroleum industry value chain. This is to be achieved through developing education, expertise and the transfer of skills, technology and know-how.

To accomplish this, there is a minimum local content requirement. This states that a contractor, subcontractor, licensee, the Ghana National Petroleum Corporation or other allied entity (Operators) carrying out petroleum activities shall “ensure that local content is a component of the petroleum activities” in which they are engaged.

When granting a petroleum agreement or licence, an indigenous Ghanaian company (IGC) is to be given first preference. An IGC is defined as a company that (i) is at least 51% owned by a citizen of Ghana, (ii) has Ghanaian citizens holding at least eighty percent of executive and senior management positions and (iii) is one hundred percent indigenous in terms of other employees. The 51% requirement is a much higher threshold than the 15% ownership requirement that is currently in PA 2015. Further, to be qualified for a petroleum licence or to enter into a petroleum agreement, foreign companies must also be 5% owned by an IGC and a foreign company that intends to provide goods or services to an Operator must incorporate a joint venture company with an IGC, which holds at least 10% in the JV. This can be contrasted with the 25% threshold under PA 2015.

The Local Content Committee (LCC) is used to oversee the implementation of the Regulations, ensuring that there is measurable and continuous growth in local content. Any Operator, prior to engaging in any petroleum activities, must prepare and submit a local content plan for approval by the Petroleum Commission and the LCC. The local content plan shall include detailed provisions to ensure that first consideration is given to services and goods from IGCs, qualified Ghanaians are given first consideration with respect to employment and adequate provisions to trainGhanaians are included. The provisions are much more detailed than those set out in PA 2015, as in Ghana, a local content plan should have the following specific sub-plans: Employment and Training, Research and Development, Technology Transfer, Legal Services and Financial Services.

As explained above, PA 2015 does not currently stipulate minimum local content quotas. We might expect that this will be amended to reflect something similar to the position in Ghana, where Operators are bound to meet minimum local content levels, as illustrated below:

Click here to view table.

Operators are to implement a competitive bidding process for the acquisition of goods and services, which gives preference to IGCs. This provision is highly preferential of IGCs. Where a qualified IGC does not exceed the lowest bid by more than ten percent; the contract must be awarded to the IGC. We would expect that LCP in Tanzania will be developed further to stipulate similar specific requirements.

Domestic Supply Obligations

Section 97 of PA 2015 states that a licence holder and contractor shall have the obligation to satisfy the domestic market in Tanzania from their proportional share of production. Section 97 (2) states that the volume of crude oil or natural gas to be sold will not exceed the “share of profit oil or gas of a licence holder and contractor”. It is not completely clear what this drafting means. Who is to determine the proportional shares of production? Exactly how will the profit of a licence holder or contractor be determined in relation to DSO? The current drafting of these provisions will leave companies unaware of their proportional DSO contributions, which will have a significant impact on the ability of the companies to make annual financial predictions.

Section 98 states that the domestic gas price shall be determined based on the “strategic nature of the project to be undertaken by the Government”. This is again highly subjective and will not give licence holders and contractors any certainty as to how much they may be able to sell domestic gas for. Section 98 (2) states that the volume of crude oil or natural gas which a licence holder or contractor is required to supply to meet the domestic market obligation will be “determined by the parties in mutual agreement and on pro rata basis with other producers in Mainland Tanzania”.

Section 99 states that the fair market price of Tanzania’s crude oil shall be determined in the manner “prescribed in the regulations”, but it is unclear which regulations this refers to, presumably, yet unpublished future regulations. It is clear, in particular given the discussion of the Nigerianlaws below, that this is an area which will need further regulation and guidance to clarify these provisions.

Section 253 (1) covers the supply of domestic gas and petroleum products where there is a shortfall. The minister responsible for petroleum affairs may direct a licensee to make supplies or deliveries to cover such a shortfall. Section 253 (2) states that the minister may require a licence holder or contractor to supply all or part of the petroleum produced to the Government of Tanzania in the case of war or emergency.

Section 254 states that in the case of natural disaster or other extraordinary crisis; the minister may direct the licensee to place gas commodities at the disposal of the state. This broad-brush drafting does not detail specifically what will happen in such situations, but merely states that the minister can require licence holders and contractors to contribute.

Domestic Supply Obligations: Analysis and Comparison with Nigeria

The Nigerian domestic gas sector has a much more detailed and thorough regime. To deal with Nigeria’s developing gas sector, the National Gas Master Plan was created and led to the National Domestic Gas Supply and Pricing Policy in relation to the domestic supply of gas. The Policy highlights the strategic benefits to the economy that may be attained by the domestic untilisation and value addition to natural gas. This provides that all gas asset holders will be required to dedicate a specific proportion of their gas reserves and production for supply to the domestic market, which is referred to as the Domestic Reserves and Production Obligation. The obligation will be broken down annually for the initial period of 5 years. The Department of Gas will announce the annual proportional contribution for each gas asset holder, the total of which will equal the planned domestic requirement for that period. Periodical reviews take place to take into account changes in demographics and supply and demand.

The Strategic Aggregator has the role of managing the domestic supply and demand economy. The Strategic Aggregator will aggregate gas from gas asset holders for resale to the strategic projects. The Strategic Aggregator requires each oil and gas producer to supply a specific volume of gas towards the Domestic Gas Demand Requirement. The mechanism for allocation is equitable between the various operators and therefore allows for predictability for each company as to their annual commitment. The price paid for domestic supply, the Aggregate Domestic Gas Price, is determined by the forecast aggregate domestic price based on the projected total of domestic demand.

It is much clearer in Nigerian legislation what the domestic requirements are. Each gas asset holder knows their contribution at the start of the year, which is stated to them clearly. Companies know the price that will be paid for oil and gas supplied domestically at the start of the year and can therefore consider this in their annual accounts. The regime is much more detailed, which lowers the risk associated with domestic supply for the producers. Current domestic supply obligations in Tanzania are drafted very broadly and some would argue lack certainty. This poses a risk for licence holders and contractors. As with LCP, Tanzania may provide further detail for DSO in regulations.

We include at the Schedule, an at a glance comparison of Tanzania, Ghana and Nigeria in respect of LCP and DSO.

Schedule

Local Content Policies

Click here to view table.

Domestic supply obligations

Click here to view table.