by Ben Taylor
Equinor, Shell and Exxon agree major LNG project with Tanzanian authorities
The Government of Tanzania has agreed a deal with three companies – Equinor, Shell and Exxon Mobil – for the development of a liquefied natural gas (LNG) export terminal. The agreement is a milestone for the long-delayed project to unlock Tanzania’s vast but remote offshore gas resources, which the companies involved have said is expected to cost tens of billions of dollars. Experts put the likely cost at around US $42billon (£34bn).
The deal includes the main elements of a host government agreement to provide a regulatory framework and a production-sharing agreement and is subject to legal reviews and quality assurance before an expected signing in the coming weeks, Norway’s Equinor said.
“It paves the way for the series of milestones that need to follow to realise this fantastic LNG opportunity for the country and the world,” Equinor’s Tanzania country manager Unni Fjaer said in a statement.
“We are happy it is a big step towards the implementation of the project, although we have a lot to do,” said Tanzania’s chief negotiator Charles Sangweni. “If everything goes well as planned, I am confident that the final investment decision will be reached in 2025,” he told Reuters.
Equinor and Shell are joint operators of the development while Exxon, Pavilion Energy, Medco Energi and Tanzania’s national oil company TPDC are partners. Shell operates Tanzania’s Block 1 and Block 4, which hold 16 trillion cubic feet in estimated recoverable gas. Norwegian oil and gas producer Equinor operates Block 2, in which ExxonMobil holds a stake and which is estimated to hold more than 20 trillion cubic feet of gas.
Project-specific law in preparation
A few days after the deal was signed, Energy Minister, January Makamba, told Parliament that the government is preparing a project-specific law on the proposed Liquefied Natural Gas (LNG). A project-specific law gives investors preferential legal protections, boosting their confidence to invest.
“Madam Speaker, this law will be brought to the parliament for the first reading anytime from now,” Mr Makamba said, who called the finalisation of talks with the energy companies on the project “a historic milestone.”
Mr Makamba said that on top of the special project law, the government also plans to establish a special office for the highly anticipated project that authorities expect to unlock Tanzania’s vast offshore gas resources.
Dastan Kweka, a prominent analyst and commentator on oil and gas issues, said that the development was expected considering Tanzania’s recent relations with investors. “During the previous administration, Tanzania enacted several laws described as unfriendly to investors. There are also risks emanating from the change of administrations because every administration comes with its philosophy and priorities,” Mr Kweka noted.
In 2017, Tanzania passed laws allowing it to force mining and energy companies to renegotiate their contracts, which observers predicted would complicate its gas exploration plans.
“Project-specific laws help investors avoid these risks,” added Mr Kweka. “It gives them more certainty and protection. They most likely demanded the legislation as part of the conditions to invest in the project.”
Whether or not Tanzania will benefit from it will depend on how authorities handle it, he said, urging caution while developing the legislation.
“It is a law that if we had options as a nation, we would not accept,” he explained. “But because we have no option, whether Tanzania benefits or not will depend on how our government negotiates the terms with the investors.”
However, an expert working with one of the companies involved told The Chanzo online newspaper that there is no cause for concern.
“No one would invest US$43 billion without protective measures that the Parliament supports,” said the expert, who preferred to remain anonymous. “Project law is a mechanism that protects the investment.”
IMF: the project’s potential is transformative
Earlier in the year, the International Monetary Fund (IMF) published a paper on the macroeconomic implications of the project, concluding that “the project has the potential to transform the Tanzanian economy,” but that this will require “proper institutional and policy frameworks for the effective management of gas revenues”.
“In addition to the direct impacts of the LNG investment and gas production on economic activity,” said the paper, “the revenue generated from LNG exports could enable the Tanzanian government to invest on highly needed human capital and infrastructure, thereby raising the potential of the economy and lifting millions of Tanzanians out of poverty.”
“International experience shows that a balanced saving and investment approach that scales up public investment gradually, taking into account absorptive capacity, efficiency of public investment, volatility of revenues, and exhaustibility of gas reserves would serve Tanzania better than either saving or aggressively scaling up public investments.”
“While preparations towards project implementation progress, the Tanzanian authorities should start developing a policy framework for effective management of gas revenues. The first step would be having a comprehensive understanding of the macroeconomic implications of the project. … Meanwhile, improving the efficiency and effectiveness of public investments can help Tanzania prepare for a productive utilisation of upcoming gas revenues.”
LNG and the climate crisis
Despite being a fossil fuel, LNG is frequently cited as being compatible with the Paris Agreement. This is because some adoption of LNG (the ideal percentage is not agreed) would allegedly facilitate the Paris Agreement goal to limit global warming to 1.5°C above preindustrial levels. LNG would help countries reduce their emissions, as LNG emits less carbon than coal and oil, and could help bridge the period while advances and investments are made in the world of renewable energy. As a result, it is sometimes called a “transition fuel” or “bridge fuel.”
Further, Tanzania’s moral right to profit economically from her fossil fuel reserves is strong. The country’s contributions to global carbon dioxide emissions have always been tiny, and the argument is compelling that those who caused the problem should bear the cost of solving it. Furthermore, the benefits of LNG extraction for countries at lower levels of development, such as Tanzania, could include – as the IMF indicates – massive poverty reduction.
Nevertheless, LNG remains controversial, for various reasons. First, LNG emits large quantities of methane, a potent greenhouse gas, making it less preferrable from an emissions reduction perspective than originally thought. Second, LNG investment diverts finance not only from dirtier fossil fuels, but also from renewable energy. And third, new investments in LNG risk the entrenchment of further fossil fuel-based infrastructure, with stranded assets that will be rendered obsolete as decarbonisation proceeds worldwide, particularly as LNG facilities are extremely difficult to repurpose for cleaner fuels like hydrogen.
Alejandra Padín-Dujon, an analyst at Colombia University in New York, said the project was an “ecologically and politically risky bet”, given declining demand for LNG in Europe and global decarbonisation efforts.
“In a world that is rapidly moving toward decarbonisation,” she wrote on a blog for the London School of Economics (LSE), “investing in LNG may never pay off: by the time new facilities are up and running, global markets may not only have turned away from LNG (limiting demand and leading to stranded assets), but may actively penalise countries that rely on it.” (Reuters, The Chanzo, The Citizen, IMF, LSE)
Solar-power plants under construction on mainland and Zanzibar
Mainland Tanzania and Zanzibar have each initiated groundbreaking solar-power plants. The projects respectively represent the first grid-linked solar power generation project on the mainland and a major step towards reducing dependence on under-sea power cables for Zanzibar.
On the mainland, Tanzania has awarded China’s Sinohydro Corporation as the construction contractor for the country’s first-ever solar photovoltaic power station to feed into the national electricity grid.
The Tanzania Electricity Supply Company (TANESCO) signed the contract for the plant’s first phase of 50 MW capacity, in the presence of the Minister of Energy, January Makamba.
The project is part of a TSh 275 billion (£89m) 150 MW solar power initiative in Kishapu district, Shinyanga region. The power station will connect to the national grid through a 220 kV transmission line from Singida to Shinyanga.
TANESCO picked JV Artelia from France and Energiovida from Tanzania as consulting contractors. The estimated cost for the first phase is TSh 109 billion, the works are expected to start in mid-2023 and be completed within 12 months.
Mr. Makamba acknowledged at the signing ceremony that this marks the first introduction of solar electricity into the national grid of Tanzania. He commended the French Development Agency (AFD), which has provided a loan for the project’s implementation.
Tanzania is developing a new Renewable Energy Policy to further enhance investments in renewable energy, which will capitalise on the substantial financial resources, capital markets, and advancements in new technologies dedicated to renewable energy globally, Makamba said. He also announced ongoing efforts to identify areas with renewable energy resources and prioritise native investments in wind and solar projects. The Tanzanian government, Mr. Makamba said, will provide support in this regard and establish guidelines for project implementation.
Meanwhile, the government of semi-autonomous Zanzibar has signed an agreement with Mauritius-based Generation Capital Ltd and Tanzania’s Taifa Energy to build its first large-scale solar power plant, as it seeks to become energy independent. The plant will cost $140 million (£113m).
The Power Purchase Agreement (PPA) between the state-owned Zanzibar Electricity Corporation (Zeco) and the two companies to develop the 180MW plant will be implemented in phases, according to Zanzibar’s Ministry of Energy and Minerals.
“The project will be built in phases and will commence with the expedited construction of a 30 MW solar PV power plant at Bambi, Central District in South Unguja Region, that will be completed in 2024,” Joseph Kilangi, the Permanent Secretary at the Ministry of Energy and Minerals, said in a statement.
Zanzibar currently gets electricity through a 100 MW under-sea cable from mainland Tanzania, but now wants to generate its own energy as it pursues the development of its tourism sector. The province is betting on clean energy to help achieve that ambition.
In March this year, the government of Zanzibar committed to supply approximately 200 acres of land for the Zanzibar Clean and Renewable Energy Park Project, for instance. The project, to be developed by Astra Energy Inc, will generate 50MW of clean and renewable energy, largely driven by solar.