by Roger Nellist

Statoil’s new discovery boosts Tanzania’s gas reserves
On 19 June Statoil announced its sixth gas discovery offshore Tanzania in Block 2, which it operates with ExxonMobil on behalf of the Tanzania Petroleum Development Corporation (TPDC). Lying under 2,360 metres of water, this new gas find (named Piri-1) adds 2-3 trillion cubic feet (tcf) of gas to the known volumes in-place in Block 2, which now total 20 tcf. In July, reporting second quarter corporate results, Statoil’s Norwegian HQ said that Piri-1 is the world’s largest gas discovery during 2014 to date. Statoil-ExxonMobil will be drilling several additional wells in their Block this year and next.

During the Second Tanzania Oil and Gas Suppliers Conference in June, TPDC confirmed that the country’s natural gas deposits are now estimated at 50 tcf. A total of 17 companies are operating 25 licences on behalf of TPDC under Production Sharing Agreements (PSAs).

Gas pipeline nearing completion
In July, marking the 50th anniversary of the establishment of China-Tanzania diplomatic relations, TPDC announced that construction of the 542 kilometre onshore and offshore gas pipeline from Mtwara via Songo Songo to Kinyerezi (Dar), as well as the associated facilities (two gas processing plants, 16 safety stations, staff housing, flood control, water wells), is more than 90% complete. The 36-inch diameter pipeline comprises 47,000 welded pipe sections.

The construction work is being undertaken by three Chinese companies and is financed by a US$ 1.25 billion loan to Tanzania from China’s EXIM Bank (carrying 33 year maturity and 2% interest rate). It is the EXIM Bank’s largest single contract in Africa. TPDC owns the pipeline, which should be completed by December; live testing is scheduled for January 2015 and commercial commissioning for June 2015.

This huge investment is expected to be “transformational” for Tanzania – delivering a more reliable electricity supply, relieving current power shortages and saving about US$ 800 million annually on oil imports. It will also lay a solid foundation for Tanzania’s energy sector restructuring and industrialisation, boosting GOT tax revenue and promoting wider social development. During the construction phase about 2,000 local jobs have been created. Once the gas reaches Dar, it is anticipated that in addition to large-scale power generation more than 30,000 houses, hotels, factories and other businesses in the city will be connected and supplied directly with gas, as well as 8,000 cars converted to run on CNG (compressed natural gas) under a project costing US$ 76 million over three years. In a pilot phase, 70 houses and 53 cars are already being supplied in the Mikocheni area.

Big challenges for LNG exports
In March British companies Ophir and British Gas (BG), along with the other gas discoverers Statoil and ExxonMobil, signed a Memorandum of Understanding (MOU) with the Tanzanian government to construct an LNG plant in southern Tanzania. The plant will be fed by gas from the companies’ discoveries in Blocks 1, 2, 3, and 4 and is estimated to cost between US$ 30 and 40 billion.

Out of a possible 30 sites identified for the onshore LNG plant, the companies have opted for Likongo–Mchinga in Lindi. However, this location is likely to upset Mtwara region, where the long gas pipeline to Dar originates and where the government had promised earlier that the plant would be built to enhance the region’s development. Also, the plant and an associated industrial park requires a large area of land (a 6,800-acre site is suggested) over which there may be title disputes. Although the companies could still use Mtwara as the supply base, it is feared that these two problems could delay the project significantly. The MOU gives the government responsibility for securing the land and clarifies on compensation to affected local communities.

Independently, in an interview to Reuters in June, Royal Dutch Shell’s Director of Projects and Technology, Matthias Bichsel, cautioned that only a fraction of the world’s anticipated natural gas export projects will materialise – because of high and rising development costs, low profit margins and new producers flooding world markets with gas. Against this background some analysts believe that the Tanzanian and Mozambique LNG projects will struggle to find the necessary financing and that costly production delays are likely. Bichsel described the Tanzanian and Mozambique LNG development schedules as “somewhat ambitious since all infrastructure there has to be built from scratch”.

Two ongoing controversies
Petroleum and mining operations are often controversial, and those in Tanzania are no exception. Whilst the Statoil-ExxonMobil offshore drilling has been highly successful (with a 100% drilling success rate), there has been recent criticism by parliamentarians and commentators about some of the terms in the gas PSA that these companies concluded with the government and TPDC in February 2012. In June a copy of their signed contract was leaked and circulated in social media. The criticism – first aired in Parliament by Opposition MP Zitto Kabwe – focuses on the companies’ obligation to supply gas to the domestic market as well as on the (perceived low) share of the profit gas that will accrue to TPDC and government. It is suggested that if gas production becomes as large as some sources indicate, government revenues will be hundreds of millions of dollars lower annually than what might have been expected. In a press release TPDC denied these claims.

These concerns are bolstering calls for a much larger local Tanzanian engagement and content in the country’s incipient gas industry, as well as greater transparency in the extractive sectors – particularly for the government to make public the PSAs it signs with each foreign oil and mining company. Whilst many governments – like Tanzania – do not publish their extractives contracts, the Swala PSA terms were made public as part of its recent share offering (see below). Addressing these concerns, in April, the Ministry of Energy and Minerals published a Draft Local Content Policy document, for public consultation.

Other petroleum sector news
Tanzania’s 4th Deep Offshore Licensing Round closed in May. Bids were received from the China National Offshore Oil Corporation; Russian Gazprom; two UAE companies (including one for Lake Tanganyika North); and Statoil & ExxonMobil. The bids are being evaluated and successful bidders will be invited to negotiate with the government and TPDC on the basis of Tanzania’s 2013 Model PSA, which contains stronger terms including higher royalty rates, and signature and production bonuses. The British High Commissioner to Tanzania, Dianna Melrose, cautioned that this tougher PSA may make Tanzania uncompetitive in the oil and gas exploration business and scare away potential investors.

In June Australian explorer Swala Energy Ltd launched its first shares offer to Tanzanians, selling 9.6 million Ordinary Shares in its Tanzanian subsidiary in order to fund further exploration work in its Pangani and Kilosa-Kilombero license area and to enhance Tanzanians’ participation in the growing petroleum business. Priced at Tsh 500 each, and expecting to raise Tsh 4.8 billion, this was the first such offering in the oil and gas business in East Africa.

Troubles at African Barrick Gold
Meanwhile, serious allegations continue to be made against African Barrick Gold (ABG) for its alleged use of excessive force in handling the large numbers of local village intruders who enter its North Mara gold mine (Tanzania’s largest), reportedly to steal gold-bearing rocks and other property. Tanzanian police and security staff contracted by ABG are accused of shooting dead 16 trespassers and injuring another 11 over the last six years. ABG is the British subsidiary of Canadian Barrick Gold, the world’s largest gold company, and is now facing a case in the UK High Court brought by 10 villagers. ABG vigorously refutes these claims. In July, after calls for the British government to intervene, three UK All-Party Parliamentary Groups (on Human Rights, Extractives and Tanzania) held a joint meeting to debate the issues. A number of responses were suggested, and the APPGs plan to hold a separate meeting with ABG.

Gold continues to be a major export. In the year ending March 2014 total gold exports from all Tanzanian mines amounted to US$1,750 million, constituting 37% of the value of the country’s total exports.

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