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Tanzania's offshore gas plans slow amid protests

Tanzania's offshore gas reserves are developing quickly. Plans to use the resource are not. Hopeful LNG exporters will have to be patient

About 20 miles north of Rovuma River, which separates Tanzania and Mozambique on Africa's Indian Ocean coast, sits Mtwara, a town of around 80,000 people who may soon find themselves at the centre of a booming natural gas export business.

Mtwara has seen foreigners try to build a lucrative export industry before - and fail. Its deep-water port, the only one in Tanzania capable of loading a Panamax vessel, is the legacy of the infamous groundnut plan, a post-war British colonial scheme to grow and ship abroad nuts from a region where nuts don't grow very well. The ruse became a butt of empire jokes.

New, gas-based developments underway in Mtwara should have better success, but locals are sceptical. A Chinese-funded gas pipeline linking nearby shallow-water fields to Dar es Salaam, Tanzania's commercial capital, is expected on stream in 2014. The $1.2 billion project, however, which will draw on gas produced by Canada's Wentworth Resources and France's Maurel & Prom, is not popular. Some residents of Mtwara say the gas should stay in the region, one of Tanzania's poorest. Protests in the past year have often turned violent. 

The government sees the development as crucial for Tanzania's economy. Following clashes in May, energy minister Sospeter Muhongo said the project would lift the country's economic growth from 6.9% to 8%. The 210 million cubic feet a day (cf/d) pipeline would allow for a doubling of national power generation capacity to 3,000 MW, helping to improve energy access in a country where power blackouts are frequent and electricity reaches just a fraction of the population. "The pipeline," Muhongo said, "will banish poverty in our country."

The same could be true for liquefied natural gas (LNG). Offshore drilling in the past three years has shown that Tanzania, like its neighbour Mozambique, is sitting on vast reserves of gas - enough to underpin some gasification of the economy's energy sector and support exports to Asia. Mtwara, close to some of the big recent offshore discoveries, is one of the possible locations for the liquefaction plant. Development would transform the local economy - and the country. "Tanzanians have been farming since independence, but remain poor," Muhongo told reporters last month. "We want the gas economy to benefit all Tanzanians."

Prolific upstream

How that will unfold is not yet clear. Tanzania's offshore upstream, in the hands of large foreign investors, has been growing rapidly, with one of the most successful drilling campaigns in the world. But decisions by the government on how to use all this gas are not keeping pace. Bureaucracy is partly to blame, say some analysts, but for Tanzania getting the development right is more important that doing it quickly. Commercial terms are in flux and the issue is becoming increasingly political as elections in 2015 get nearer. The offshore gas finds have made the hopeful LNG operators, led by BG and Statoil, and other investors bullish and eager to join the list of global LNG plants hoping to feed a growing foreign market. Tanzanian politics could yet dampen their enthusiasm.

Tanzania's upstream has come a long way in a short time. Five years ago it was one of the oil and gas industry's also-rans. Two small offshore gasfields, Songo Songo and Mnazi Bay, were on stream supplying the local market. But decades of drilling had brought little other success. Activity petered out in the 1990s, only recovering early this century when soaring energy prices sent deep-water specialists like Statoil and Petrobras into the area searching for oil. Bid-round interest began to pick up. Then came the bonanza year of 2010, as discoveries in the Rovuma Basin offshore northern Mozambique and southern Tanzania proved the potential.

Ophir Energy, the UK firm that had come to dominate the upstream, became hot property. In May 2010, BG Group farmed into Ophir's assets, taking a 60% stake and agreeing to fund 85% of the drilling programme. A discovery, Pweza-1 in Block 4, followed in October. It was Tanzania's first deep-water well. After completing an appraisal programme last month, BG said Pweza, an "excellent reservoir", could be the most prolific field in its Tanzanian portfolio. At the time of the find, Ophir said it would "de-risk" Tanzania's Rovuma play.

Drilling successes since then have shown this to be true (see table 1). Across the BG-operated blocks, a string of discoveries has now firmed up gross reserves of 13 trillion cubic feet (cf), BG said last month, including Jodari, in Block 1, one of BG's 15 biggest finds globally in the past 15 years. In March, Statoil and ExxonMobil, its partner in Block 2 since a farm-in deal in 2010, announced a 4 trillion-6 trillion cf discovery at the Tangawizi-1 well, its third "high-impact" find in the block alongside the nearby Zafarani and Lavani wells. Statoil said gross reserves in Block 2 could be 15 trillion-17 trillion cf.

The numbers are likely to grow steadily in the coming years as more drilling reveals the full potential. All the operators in Tanzania's seven blocks (including Petrobras and Shell, in Blocks 5 and 6, and Ophir and the UAE's Mubadala, in Block 7) have exploration programmes underway. Muhongo said earlier this year that another 17 wells would be drilled between July 2013 and June 2014. A licensing round for more acreage was due to be held at the end of last month. Wood Mackenzie, an energy consultancy, estimates Tanzania's recoverable gas reserves have now already reached 25 trillion cf, but says another "30 trillion-40 trillion cf" is yet to be found. The ministry, more optimistic still, reckons reserves already amount to 43.1 trillion cf and, in August, said the number will hit 200 trillion cf "after the next two years". (BP's statistical annual, a reference for the industry, didn't even list Tanzania's gas reserves in its most recent publication - a measure of how quickly recent drilling has changed things.)

Whatever number Tanzania ends up with, the operators are confident enough with what they've found to have drawn up plans for an LNG plant. Wood Mackenzie said in March that the reserves in Statoil's Block 2 were "right on the threshold" to support an LNG facility on their own. But, in any case, the government has made clear its preference for BG and Statoil to pool their resources into a joint facility (the companies had already been in "gentle discussions" about the idea, says BG).

An official project proposal remains at this stage only under discussion with the government, so details are still to be ironed out. But BG says a 10m tonne a year (t/y) facility in Tanzania is among its future growth plans. Statoil has said the companies must decide whether to build two trains first and add more later, or build a larger complex at once. Last month, the government said a decision about where to put the plant was "imminent". The likeliest spot, aside from Mtwara, is elsewhere in the south of Tanzania, at about the midpoint of Blocks 1 and 2, which are adjacent to one another. BG says land acquisition could begin later this year. Costs could amount to $10bn-16bn, believe analysts, or possibly much more. 

There are few doubts in the industry about the plausibility of this project. As in Mozambique, the flow rates from wells in Tanzania have been large - in Block 1, around 70m (cf/d) - meaning fewer will be needed to produce the gas. This will keep costs lower, making Tanzanian LNG competitive with the raft of other planned projects that could come on stream in the next 10 years.

Unlike in Mozambique, which will probably begin exporting LNG before Tanzania, the developers have long experience of bringing LNG projects to market. Exports would target the Asia, especially India, say analysts. BG earlier this year signed a long-term agreement to ship 1.25m t/y of LNG to Gujarat State Petroleum Corporation starting in 2015. Martin Kelly, lead analyst in Wood Mackenzie's Sub-Saharan division, says some of that gas may come from Tanzania once the project is on stream. Indian investors such as ONGC Videsh, the foreign unit of state company ONGC, were also thought likely to bid in the auction for new acreage in Tanzania in October.

Nor do the operators doubt that future global demand will support exports from Tanzania. BG, in common with some other LNG producers like Chevron, takes a bullish view of the market, reflecting rising scepticism in the industry that the proposed US projects due on stream in the coming years will satisfy the expected rise in consumption stemming from Asia. "We see (global) supply as the constraining factor," BG chief operating officer Martin Houston said in September. That also means that BG - "the motive force in pulling (Tanzania LNG) together", according to Houston - sees no threat from Mozambique's LNG plant, which is likely to come on stream first and target the same consumers. Despite BG's enthusiasm, however, the timing of the Tanzania project is far from certain. BG says pre-front-end engineering and design (Feed) and then Feed work, as well as an environmental assessment, will "take us through to 2015" leading to a final investment decision "at the earliest" in late 2016. Assuming a four-year build time, this would allow for exports "around the end of the decade". BG says this makes for a "more measured pace in Tanzania", especially compared with its Queensland LNG project in Australia, where the company has sped its development through quickly. Kelly believes 2021 is a probable start-up date for two trains, one each from BG/Ophir and Statoil/ExxonMobil.

Sketchy schedule

Yet a host of factors, mainly political, could disrupt even this conservative timetable. Although there is some high-level political support in Tanzania for the LNG projects, there is little urgency; and the infrastructural, fiscal, legal and commercial framework that would underpin the development of the country's energy sector is still deficient, and will take years to catch up.

Indeed, Tanzania hasn't really decided how it wants to use its gas - in particular how much will be burnt onshore, how much exported and what the state's role in it all will be. A draft gas policy emerged last year, setting out, rather vaguely, the principles by which the country wanted to see the sector develop. State-owned Tanzania Petroleum Development Corporation (TPDC) would take a larger role in the sector, especially in the mid- and downstream, while at the same time shedding its role as an upstream regulator. The plan also called for more domestic gas infrastructure to be built, in hopes of stimulating local demand (a meagre 800m cubic metres a year in 2011); public-private partnerships; and so on. Above all, it made the domestic market the priority for the offshore gas, including requirements to base processing facilities onshore. Those kinds of terms were not popular with the foreign investors. 

The policy was to be published by the end of 2012, but it remains in draft form, under discussion in cabinet. A source in Dar es Salaam said that the cabinet had approved the draft on 11 October, although it had yet to make its approval or any revisions public as Petroleum Economist went to press. It is also unclear whether the ministry of energy and mines wishes to table the policy in parliament. Lucy Minde, a lawyer in the Dar es Salaam office of Clyde & Co, a legal firm, says if the draft policy faces parliamentary scrutiny the process could last until May next year. The new Natural Gas Act, to be based on the policy, remains even further off, given the debate it is likely to provoke in parliament - two years at least, says Minde.

And then there is upstream legislation. Tanzania's Petroleum (Exploration and Production) Act of 1980, the foundation legislation for the upstream, is inadequate, failing to provide satisfactory framework for revenue management, say some analysts. But changing it will only begin after passage of the Natural Gas Act becomes law, probably after 2015.

For the foreign investors, the outcome of this long process will be critical, because some changes to their production-sharing agreements (PSAs) may be involved. A domestic-market obligation could also increase the amount of gas the foreign companies have to set aside for local consumption to as much as 16-20% (details of that will come in yet another policy document, named the Utilisation Master Plan). Royalties on production, now set at 12.5%, could also rise.

Getting political

While the policy decisions have stalled, the swift rise of Tanzania's gas has become an increasingly political issue in the country. No wonder. Although Tanzania is one of sub-Saharan Africa's strongest economies, the IMF thinks that advancing the LNG project could ing in foreign direct investment of $20bn-30bn - or about the size of the country' GDP last year. If the exporters secured a sales price of $10 per 1,000 cf, exports earnings "could significantly exceed" $3bn a year (about 10% of current GDP), the fund reckons. By the mid-2020s, after a period of cost recovery by the developers, tax receipts could be "in the range of two-thirds of net gas export revenues". Tanzania's debts would also fall.

But this potential bonanza brings dangers, unless Tanzania ensures both that its currency, the shilling, doesn't appreciate significantly as all the construction begins; and that the wealth is spread fairly, especially to rural parts of the country where poverty is still widespread. Satisfying the latter need is the thrust of some of the draft gas policy and the proposal to set aside gas for the domestic market. The unrest in Mtwara and, more broadly, the need to ensure the gas developments carry local support across the country hang over the debate.

Those kinds of issues could yet face the LNG operators when they decide to build their plant. "Land is a very divisive issue in Tanzania," says Minde. So is local content. Control Risks, a security and advisory firm, says that demand for more technically skilled workers could mean the country being "swamped" by better-educated Kenyans, who can work in the Tanzania thanks to the East African Community, a free-trade bloc. So when the LNG development in Tanzania begins, the companies will need to work hard on the ground to win favour, not least by providing significant employment for locals during construction and operation.

But the rules governing all this are still vague. Deloitte, a firm of accountants, points out that in neither the 2004 nor 2008 model of the PSAs (both are in effect, covering the 28 upstream contracts signed) specifies a target percentage for local content. Investors should probably err on the high side, even when the laws become clear.

There are other lingering political issues that could stall upstream development elsewhere in Tanzania, including a dispute between Zanzibar (and Pemba) and the federal government. Licences awarded by federal government in Dodoma for blocks offshore Tanzania's north have not been recognised by the authorities of the semi-autonomous islands. That already triggered the withdrawal of one investor, Calgary-based Antrim Energy, which had been looking for hydrocarbons - oil seeps suggested promise - since 1997. After selling most of its interest to the UAE's Rakgas, Antrim this year sold off a right to farm back into the project to a mystery buyer (also thought to be Rakgas). Shell, with several federally awarded blocks around Zanzibar, may have a better chance. It signed a memorandum of understanding for exploration with the Zanzibar government in late August, following an initial agreement between the governments. But full progress is unlikely before a new constitution for the whole country is agreed. Another territorial dispute, surrounding Tanzania's and Malawi's claims to Lake Malawi (called Nyasa in Tanzania), will also hold up exploration of its waters, believed to be prospective.

But the main worry for the big operators in Tanzania's Rovuma waters is that the country's politics will prevent swift resolution of the commercial terms for development. "People do underestimate the risks here," says Minde. "There isn't going to be an upheaval. But there will be delays and uncertainty with all this legislation in the pipeline." President Jakaya Kikwete and his government will face elections in 2015, when the president's term also ends. The opposition to his ruling party has been far more hostile to the gas developments, though it probably won't win the election. But pushing through constitutional reform, the new plan for mid- and downstream gas use and revisions to petroleum legislation, including a new natural gas act - all before the election - is a tall order.

That risk has scarcely been reflected in foreign perceptions about the opportunities in Tanzania's upstream. "The way it has been pitched to investors in the context of BG and Ophir," says one oil-industry executive, "is that (the companies are saying): "we know how to do this, we've done it before, we've got a structure to do it". But in the best political climate, projects take a long time. With political problems you can add three or four years."    

While corruption is an issue (Transparency International ranked Tanzania 102nd out of 172 countries in a table of most corrupt countries in 2012), foreign developers may find the biggest problem ends up being simply a lack of political will to speed ahead with project approval. Control Risks says "barely disguised hostility" and "mutual suspicion" still characterise relations between the government and foreign investors. (The government agreed to a telephone interview and later email interview with Petroleum Economist, but had not responded by press time.) The lack of urgency from the government over the LNG plans will only increase as elections near. Some politicians understand that Tanzania may need to fit its exports into the global supply and demand outlook, says one analyst, and recognise that the companies are only investing in order to launch a lucrative export business, on which domestic gasification would hang. But public discussion about the gas, for understandable reasons, mainly focuses on using it to end power shortages and alleviate poverty.

So while the licensing round in late October should bring more investors to the country's upstream, the development schedule will fluctuate for some time. Tanzania needs to find the right balance between the needs of its people and those of international investors. Building the right gas sector will be more important than building one quickly. For investors, it could get frustrating. Success with the drill bit characterised the first phase of their engagement with Tanzania, but patience will have to define the next one. 

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