AFRICA ENERGY FRONTIERS
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A major gas discovery in 2012 thrust Tanzania into the international spotlight, and subsequent gas discoveries have kept it there. With gas reserves estimated at 57 trillion cubic feet as of 2016, Tanzania has grand ambitions to develop the upstream, midstream and downstream sectors, including plans for a LNG facility, domestic gas processing, gas pipelines and gas-to-power plants. However, Tanzania is also in competition with neighboring Mozambique to attract the necessary investment.
The Petroleum Act of 2015; The Oil and Gas Revenues Management Act of 2015
Ministry of Energy and Minerals Prof. Dr. Sospeter Muhongo, Minister of Energy and Minerals
NATIONAL OIL COMPANY
Tanzania Petroleum Development Corporation Prof. Sufian H. Bukurura, Chairman of TPDC
R E G U L AT O R
The Petroleum Upstream Regulatory Authority (PURA)
Massive offshore gas discoveries waiting to be developed, one of two East Africa markets that will be major contributors to global LNG supply.
AFRICA ENERGY FRONTIERS
OVERVIEW AND BACKGROUND
Initial exploration work in Tanzania kicked off in the 1950s, when BP and Shell began exploring along the coast, but they had little initial success. The Tanzania Petroleum Development Corporation, the national oil company, was established by the government in 1969, shortly before the first the first significant gas discovery was made by Agip (now a subsidiary of ENI) in 1974 at the Songo Songo gas field. Tanzania also established The Petroleum (Exploration and Production) Act of l980 to regulate the emerging sector.
Development and commercialization of Songo Songo took decades, with operatorship of the field changing to Orca Exploration Group and first gas achieved in 2004. This was Tanzania's first natural gas development and the project, now fully operational, includes three shallow water wellhead platforms, a subsea pipeline, a gas processing plant and a cross-country pipeline to operate the Songas Ubungo power plant, a gas-to-power plant that represents about 45 percent of Tanzania's power capacity. Estimated recoverable reserves are at 879 bcf.
A second gas discovery by Agip came in 1982 at Mnazi Bay. The Mnazi reserves are estimated at 1 trillion cubic feet. Again, however, development of the field took decades, with operatorship ultimately changing to Maurel et Prom and first gas delivered via a new transnational pipeline in August 2015.
In 2012, exploration efforts hit pay dirt: BG Group (now owned by Shell) and Ophir Energy made several mega gas discoveries offshore, followed in the coming years by additional discoveries by Statoil and ExxonMobil, upping total estimated reserves to 57 tcf in what is now considered one of the most prolific conventional gas plays in the world.
While Tanzania is best known for these mega gas finds, it also has oil potential, as Tanzania is part of the East African Rift System. Interest in this area has increased substantially in recent years after a 2006 oil discovery in the rift system was made in Uganda. In 2016, Tanzania and the Democratic Republic of Congo signed a memorandum of understanding to jointly explore and develop hydrocarbons in Lake Tanganyika, which sits on the border of Tanzania, DRC, Burundi and Zambia. In 2011, Tanzania awarded exploration rights for the northern side of Lake Tanganyika to a subsidiary of Total, but it has yet to make any commercial discoveries.
Tanzania has plans to spend $47.9 billion in the next several years on projects to develop its natural gas capabilities, including a liquefied natural gas plant, an industrial zone, a new port, pipelines and railway lines. Despite its promising gas finds, however, Tanzania is expected to face hurdles in monetizing the finds, as the dramatic drop in oil and gas prices has hindered development and the country is burdened by a debt of about $19 billion, accounting for about 34 percent of gross domestic product.
AFRICA ENERGY FRONTIERS
THE ADOPTION OF THE PETROLEUM ACT OF 2015 AND THE OIL AND GAS REVENUES MANAGEMENT ACT OF 2015 HAS CHANGED THE LEGAL STRUCTURE FOR OIL AND GAS OPERATORS. THE ACTS DO NOT MAKE THE REGULATORY FRAMEWORK MORE CERTAIN, THOUGH TANZANIA STILL PRESENTS A RELATIVELY STABLE INVESTMENT ENVIRONMENT.
Tanzania's petroleum regulatory system is based on two 2015 acts, legislating for petroleum operations and fiscal conditions. A model PSA from 2013 is the most recent basis for new production sharing contracts.
The 2015 Act guarantees the government's participation in oil and gas through the production sharing contract, both in terms of royalties and through the Tanzania Petroleum Development Corporation's share of production. The act offers two types of licenses - an exploration license and a development license.
Under the exploration license, the licensee is granted rights to explore an area under a contract period of four years, with extensions of four years in the first extension and three years for a second. However, if the contract is extended, there is a requirement to relinquish a portion of the license area, typically 50 percent of the total.
The development license provides rights to both continue exploration activities and also develop any discoveries, including operating a production area and selling or disposing of recovered hydrocarbons. The license can be granted for up to 25 years, and can be extended for an additional 15 years with approval.
Licensing in Tanzania is typically conducted through open bidding rounds, with the most recent licensing round taking place in 20132014. However, the government can enter into direct agreements with companies, such as in 2006 when Blocks 3 and 4 were awarded to Ophir Energy.
The Petroleum Act of 2015 stipulates local content requirements, including requiring contractors to give preference to Tanzanian
goods and services when available in the country. When these goods and services are not available in Tanzania, they must be provided by a company that has entered into a joint venture with a local company, and the Tanzanian company must have a minimum interest in the joint venture of 25 percent.
Contractors must create a local content plan, to be approved by the government, which outlines the training and recruitment of Tanzanians. This plan needs to be submitted every 12 months. Companies must also provide a fiveyear plan outlining the planned use of indigenous companies in the fields of insurance, finance, accounts, health and legal. Annual corporate social responsibility actions must be approved by government authorities.
AFRICA ENERGY FRONTIERS
ENERGY SECTOR ORGANIZATION
State regulation and actors
The Petroleum Act of 2015 replaces the Petroleum Exploration and Production Act of 1980 and the Petroleum Act of 2008, and also reshaped the administrative structure of the country's oil and gas industry. Among other things, the 2015 regulation created a new upstream regulator, the Petroleum Upstream Regulatory Authority (PURA); expanded the role of the Energy and Water Utilities Regulatory Authority, which regulates the midstream and downstream sectors of the petroleum industry; and officially designated TPDC the national oil company.
PURA is responsible for developing a new model production sharing agreement, subject to approval by the Cabinet, replacing the model PSA issued by the government in 2013. The agency is also tasked with advising the government on oil and gas contracts. The Energy and Water Regulatory Authority is responsible for managing midstream and downstream activities, including the processing, transport, storage and distribution of petroleum products and regulating rates and charges; and establishing standards for services and renewing and cancelling licenses. The Ministry of Energy and Minerals develops policy; and awards, implements and revokes oil and gas licenses.
While many small explorers are playing a role in Tanzania, the mega gas discoveries have been made by major international players --Shell, ExxonMobil, Ophir Energy and Statoil. Development licenses are held by PanAfrican Energy, Maurel et Prom and Ndovu Resources. Exploration licenses are held by Heritage Rukwa, Motherland Industries, Swala Oil and Gas, Afren, Antrim Resources, Dodsal, Petrodel, Maurel et Prom, Ndovu Resources, Jacka Resources, Petrobras, Shell, Statoil and Hydrotanz.
The first gas discovery was made in 1974, but first gas was not realized until 2004. Since the first discovery made by Agip, players in the Tanzanian oil and gas industry have come and gone, with the most recent change underway currently, as Shell takes over BG Group's holdings, including gas finds made recently in Blocks 1, 3 and 4.
Recent exploration and development efforts have been hindered by sustained low oil and gas prices. Notably, Tanzania's plans to build a $30-billion LNG plant at Lindi have stalled, with a final investment decision not expected for another five years, despite government hopes to monetize recent gas finds quickly. Stakeholders of the project, including Statoil, Shell, ExxonMobil and Ophir Energy, say the hold-up is due in large part to negotiations with the government over a stable framework and clarity over ownership requirements.
Tanzania also has plans to explore for oil in Lake Tanganyika, and has made a deal with the Democratic Republic of the Congo, which also has ownership of the lake, to conduct joint exploration activities. Tanganyika, part of the East African Rift System, is expected to hold promising oil reserves, especially after Uganda announced a major oil find in Lake Albert in 2006. Tanzanian gas production is estimated at 35.3 bcf.
Midstream and Downstream
Tanzania's midstream sector is just recently being developed, but is gaining momentum.
A gas processing facility at Songo Songo and a 25-km pipeline connecting the island to the mainland came online in 2004. An additional 207 km of pipeline connects mainland cities of Ubungo and Dar es Salaam. The facilities are owned by Songas, a local joint venture. The plant was just expanded in 2016 to process gas from Ndovu Resources, a subsidiary of Aminex, including an additional subsea pipeline.
A $1.23-billion, 512-km pipeline and gas processing plant was completed in 2015 and connected natural gas fields in Mnazi Bay to Dar es Salaam. Construction of the pipeline took two years and the project was funded through a concessional loan from the Export-Import Bank of China. The project is part of the government's plan to add 2,000 MW of gas-fired power capacity by 2018. The Madimba Processing Centre, with a capacity of 210 mcf/d, is operated by the state-run Gas Supply Company, a subsidiary of TPDC.
Tanzania will be host to an oil export pipeline from Uganda through Tanzania to the port of Tamga, so that land-locked Uganda will be able to export its oil from Lake Albert. Construction on the 1443-km pipeline is expected to start in 2017. Once completed, it is slated to carry up to 200,000 barrels of crude oil per day and cost $4 billion. Tanzania was picked over Kenya for the pipeline route, due to cheaper development costs and better security.
Tanzania has no refining capability. Gas supplies have thus far been primarily used for power generation, though a portion of the gas from Songo Songo is fed into a local cement plant in Dar es Salaam. But the country has big downstream dreams. Among them, the government hopes to construct a $4.82-million petrochemicals complex known as the Mtwara Petrochemical Special Economic Zone, a $2.89 billion LNG plant in Mtwara and a $30 billion LNG facility at Lindi.
AFRICA ENERGY FRONTIERS
ENERGY SECTOR ORGANIZATION
Tanzania's political structure is a presidential republic, formed by the 1964 union of Tanganyika and Zanzibar and with a legal system based on English common law, the 1977 constitution and the 1985 Zanzibar constitution. Zanzibar is a semi-autonomous state. The political system consists of a president, elected every five years, a national assembly of 295 members and Zanzibar's House of Representatives, which rules on internal issues.
Leadership and vision
Officials in Tanzania have worked diligently in the last decade to attract investors, attempting to wipe away traces of the nation's socialist economy and creating incentives for investors to come to the table. After the election of John Magufuli as the new president of Tanzania in November 2015, however, investors are becoming concerned that the country's business-friendly policies are becoming less friendly.
Magufuli, the son of a farmer and nicknamed the "Bulldozer", won the presidency with 58 percent of the vote after promising to fight corruption, create jobs, spur industrialization, end power shortages and exploit the country's natural gas reserves. His administration has raised taxes, created tougher regulations, increased local content requirements and is pushing for more investment amid an already economically depressed environment.
A new petroleum law passed in July 2015 has been negatively received. A survey by PwC showed the "regulatory environment remains uncertain" despite the new law, and investors see the financial requirements as uncompetitive. The Petroleum Act of 2015 stipulates a 12.5
percent royalty for oil and gas production in onshore or shelf regions and a 7.5 percent royalty payment for offshore fields. It also mandates the state's share of natural gas profit from 60 to 80 percent, pegged on daily output. The law allows for increased involvement by the central government and increased local content requirements, which investors fear they will be unable to meet because of an "insufficiently skilled labor market." Additionally, the administration has passed new tax regulations. The strict new tax regime launched in 2016 has seen several companies threaten to withdraw from the country.
There are concerns over how the administration is handling the power sector. US-based Symbion Power, a power generation and transmission company, is threatening to sue the government over a plan to terminate its power supply contract. The move comes after the state electricity company TANESCO failed to pay over $35 million owed for supplied power from a gas-fired plant built by Symbion. Handling of the case, many experts say, could scare away additional investors even as the administration is courting investors for a $12.3 billion borrowing program. Magufuli fired the chief executive of TANESCO in January 2017 and immediately vetoed the company's decision to raise electricity prices, even after the IMF advised that the higher prices could improve the financial situation of the highly-indebted national power company.
Still, the president is no doubt business-driven and he has shown great interest in building relationships with the East African Community. Magufuli is said to have been key in convincing Uganda to run its planned oil pipeline through Tanzania, as opposed to Kenya, as originally planned. He has actively campaigned against corruption and tax evasion, and is pushing to spend $47.9 billion in the next five years on infrastructure projects.
AFRICA ENERGY FRONTIERS
TAX AND FISCAL REGIME
No production sharing contract has been signed or model PSA contract released since the passing of the Petroleum Act of 2015, creating ambiguity for investors. PURA is responsible for developing a new model PSA, which is subject to approval by the cabinet.
The 2013 model PSA, still in force, is considered to be more onerous on international ompanies compared to other regimes in the region, and works to secure greater benefits for the state than previous contracts. The PSA lists several payments, including annual charges, signature and production bonuses, taxes and royalty payments, import duties and additional profits tax. Companies enter into a PSA with the government through TPDC. The Ministry also maintains the right to audit the bank accounts of the contractor.
The Petroleum Act of 2015 lays out the government's participation in the PSA, specifically through royalties at a rate of 12.5 percent for onshore production and 7.5 percent for offshore production, in a scheme that is based on the gross production before cost oil or cost gas recovery.
Additionally, TPDC is guaranteed a portion of production, which varies based on the type of project, such as crude oil, gas, onshore or offshore. The contractor's share diminishes as production levels increase. For profit oil the contractor's share of product ranges between 30 percent and 50 percent. For profit gas the contractor's share ranges between 15 percent and 40 percent. The contract provides recovery of expenses for cost oil and gas of up to 50 percent of production in a calendar year.
The income tax rate is 30 percent for resident corporations and permanent establishments of a non-resident corporation. In the 2013 model PSA, additional charges include annual fees, signature and production bonuses, taxes and royalty payments, import duties and additional profits tax. As PSAs remain confidential, and a new PSA reflecting the changes of the Petroleum Act of 2015 has not been released, the value of these additional charges is not yet known.
Fifteen percent of Tanzania's population has access to electricity, and only 2 percent of rural populations have access. This compares to a regional average for East Africa of 23 percent, and 55 percent for neighboring Kenya. The government has ambitious plans to increase installed power capacity from about 1,500 MW to 10,000 MW in the next decade. In a $46.2 billion plan, the government aims to invest in power generation, transmission and substations in a Power System Master Plan from 2016 to 2040.
Much of Tanzania's power is provided by hydro and gas, with 561 MW coming from hydro, 527 MW coming from gas and 495 MW from liquid fuel. The country has great potential for gas-to-power, and is also flush with additional energy sources of gas, hydro, coal, geothermal, solar and wind. The state-owned electricity company TANESCO imports power from neighboring countries, with 10 MW coming Uganda, 5 MW coming from Zambia and 1 MW coming from Kenya.
The sector is heavily indebted and is currently facing international arbitration over a failure to pay $35 million for power supplied by Symbion Power. Additionally, the government has terminated its contract with Symbion Power. Both moves are seen as negative signs for private investors.
TANESCO is seeking a $200 million loan from the World Bank to help clear debts held by the loss-making utility. Debts increased to $363 million as of January 2017, from $250 million at the end of 2015. President John Magufuli fired the chief executive of TANESCO in January 2017 and vetoed a prior decision to raise electricity prices.
Tanzania's first IPP unit was installed in 2004 by Songas, and is powered by gas from the Songo Songo field. Several hydropower plants are owned by the private sector, including Mwenga, installed in 2012, and Mapembasi and EA Power, which are expected to be installed by 2019. TANESCO owns seven hydro power plants, four gas-fired plants, one residual fuel oil plant and one diesel oil plant. The power system master plan emphasizes use
of Tanzania's abundant gas resources to meet power needs. To that end, the government is constructing Kinyerezi II, which will add 240 MW capacity and is expected to be completed in 2018. The plant, funded by the Tanzanian government, the Development Bank of Southern Africa, the Japan Bank for International Cooperation and SMBC Trust Bank and the Japan International Cooperation Agency, costs $432 million. Kinyerezi I has an installed capacity of 150 MW.
TANESCO owns and operates the country's transmission network and the Energy and Water Utilities Regulatory Authority (EWURA) regulates the electricity sector.
AFRICA ENERGY FRONTIERS
Blocks 1, 3 and 4
Ophir Energy was awarded a 100 percent stake in Block 1 in 2005 and in Blocks 3 and 4 in 2006. However, in 2010 Ophir finalized a deal with BG Group (now Shell) for BG to acquire 60 percent of Ophir's interests in each of the PSAs by contributing 85 percent towards the cost of an extended work program and drilling. BG Group assumed operatorship and mega-gas finds followed. Sixteen wells have been drilled, with 11 successful exploration wells and five appraisal wells. In 2014
Ophir sold an additional 20 percent interest to Pavilion Energy. Production flow tests have been completed on the Jodari, Mzia, Pweza and Taachui discoveries. Drilling continued in 2016, with wells Kitatange-1 in Block 1 and Bunju-1 in Block 4 drilled in Q4. Though both wells showed good reservoir quality, no hydrocarbons were found. With that, Shell fulfilled its exploration commitments. The assets are now in the pre-FEED phase for the Tanzania LNG project. The Mafia Deep Basin is estimated to have 17 tcf of gross contingent resources, and enough gas to support a three-train LNG development.
Statoil signed a PSA for Tanzania's Block 2 in 2007 and owns a 65 percent working interest, with ExxonMobil owning a 35 percent interest. Statoil has made eight discoveries since 2012, with total in-place volumes of approximately 22 tcf for Block 2. The block includes some of the largest gas discoveries in recent years, including the Piri and Giligiliani discoveries in 2014, and the Mdalasini in 2015. Plans to develop the gas is also centered around development of LNG facilities.
No doubt the largest and most anticipated upcoming project is a planned $30-billion LNG plant in the southern town of Lindi, which will use gas from Blocks 1, 2, 3 and 4. The partners of the four blocks signed an agreement in 2014 to cooperate on a combined onshore LNG plant. They also signed an MoU with the government that defines the site, the process for acquiring land and how resettlement will be managed. The project is in the pre-FEED stage, and is expected to take several years to develop. Officials have said a final investment decision is at least five years away, as the parties negotiate fiscal terms, regulatory frameworks and commercial terms.
AFRICA ENERGY FRONTIERS
Tanzania is a frontier market with infrastructural limitations and regulatory complexities. However, the proven abundance of gas clearly demonstrates the country's potential, and key infrastructure projects, including gas processing plants and pipelines, have been completed in recent years. Tanzania is striving to attract the necessary investment to complete its LNG project and boost power generation.
Yet to discover oil, but 23 deep test wells drilled
Estimated natural gas reserves of 57 tcf
1,500 MW of power capacity
First gas was discovered in 1974
MNAZI BAY GAS
Maurel et Prom operates the Mnazi Bay field with partners Wentworth Resources and NOC TPDC.
The field was discovered in 1982 by Agip and began production in 2015. Development license signed in 2006.
A gas sales agreement is in place to supply 130 mcf/d to the Mtwara-Dar Es Salaam pipeline.
National power company Tanesco has a $24 mn debt to M&P for gas delivered from August 2016 to May 2017.
SONGO SONGO GAS
Discovered by Agip in 1974, Songo Songo entered commercial production in 2004, delivering first gas via pipeline.
Located on and around Songo Songo island, 15 km from mainland.
Gas processing and pipeline owned by Songas, a JV of CDC Globaleq, Tanesco, TPDC and TDFL. Gas from the field produces 45% of Tanzania's power.
Gas reserves (recoverable) estimated at 879 billion cubic feet.
Dar es Salaam
All upstream block partners will be involved - Statoil, ExxonMobil, Shell, Ophir, and the government.
Tanzania LNG will cost an estimated $30 billion to develop.
Block 4 Block 3
Block 1 Lindi
The project is in the pre-FEED stage and will likely not reach FID for five years.
Initial capacity would be 10 million tonnes per annum with two LNG trains.
The onshore development will be at Lindi and will use gas from blocks 1, 2, 3 and 4.