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Tanzania's LNG dreams may be scuppered by mistrust

IOCs have reengaged in Rovuma Basin discussions—but the East African country will find it hard to get LNG back on track

Tanzania's declaration of a timetable towards first production from offshore reserves in the Rovuma Basin underlines the government's willingness to engage with international oil companies (IOCs). But getting the proposed LNG export plant towards final investment decision (FID) still faces significant obstacles.

Energy minister Medard Kalemani told parliament on 28 May that the government plans to wrap up discussions in September, culminating in heads of agreement (HoA) as a precursor to construction starting in 2022 and running until 2028. Kalemani suggested the onshore plant, which it proposed to build at Lindi in southern Tanzania, would have a 10m t/y capacity.

Estimated reserves in those blocks are around 16 trn f3 of recoverable gas. Equinor, as operator, and partner ExxonMobil hold the license for Block 2, where reserves are estimated at more than 20 trn f 3 of gas in place. Shell operates nearby Blocks 1 and 4 in partnership with Ophir Energy.

Tanzania's overall recoverable gas reserves, mainly in its section of the Rovuma Basin, are estimated at 57 trn f3.Tthat's plenty for an export project but there are hurdles still to be surmounted.

The government invited Equinor to resume talks earlier this year, after previous discussions foundered.

If a HoA was to be signed, it would indicate Equinor and its partners at least remain attached to the project. However, it would be by no means a definitive step towards its realisation. HoAs may show commitment on both sides, but have little legal standing. An FID to give the go-ahead to the project isn't expected until 2022, even by the government's estimate. 

Motivated Magafuli

The main beneficiary of an HoA may be Magafuli. He faces a general election in 2020 and will want to demonstrate that the national economic transformation promised by a $30bn LNG project-for a country with average annual GDP per capita of little more than $1,000-remains a possibility.

Tanzanians need only look across the southern border to Mozambique, where three LNG projects exploiting its share of Rovuma Basin reserves are either under way or expected to get the green light soon. 

It seems unlikely that Magafuli's government is suddenly going to become a soft touch in talks with the IOCs, given the president's track record of combative dealings with foreign investors and lenders.

In 2017, he threatened to slap an estimated $190bn of back taxes on gold mining firm Acacia, claiming it had under-reported export earnings over 17 years. Efforts to settle that dispute, which have drawn in Acacia's Canadian-registered parent Barrick Gold, rumble on. The presidency also introduced more onerous local content requirements for the extractive industries sector, with little consultation with mining companies.

In June 2019, Magafuli said Tanzania was suspending the development of a huge Chinese-backed $10bn port development at Bagamoyo, which had been initiated by his predecessor. He called the terms on offer "exploitative and awkward".

Tanzania has also had a fitful relationship with the World Bank due to disagreements over economic and social development issues-which has resulted in it withholding financial support for various projects in recent years.

The government is likely to drive a hard bargain on maximising its share of revenues and gas from the Rovuma Basin project and getting early gas flow to the domestic market. But perhaps of even greater concern to the IOCs are doubts over the ability of the Tanzania Petroleum Development Corporation (TPDC) to function as a reliable development partner, given its recent track record.

The state-owned agency is trying to reach a host government agreement (HGA) for the building of a £3.5bn, 1,445km pipeline from landlocked Uganda's oil reserves to the Tanzanian port of Tanga-but it has hit delays. The project has become bogged down in red tape and issues relating to tariffs, government obligations and environmental standards, as well as a dispute over whether the pipeline holding company should be domiciled in the UK, rather than in East Africa.

"If the FID timeframe for the pipeline can't be met, it could raise questions over Tanzania Petroleum Development Corporation as a reliable and credible partner to deliver complex infrastructure projects in Tanzania's LNG sector," says Ed Hobey-Hamsher, an Africa analyst at consultancy Verisk Maplecroft.

"Will it be able to meet its fiscal contributions?" he questions, noting that under existing legislation TPDC would be able to a stake of take up to 25% of any development.

Gas hub race

The allocation of gas from the project to the domestic market could be another sticking point. Magafuli is a proponent of resource nationalism and wants to maximise the amount of offshore gas going to the country's power sector and industrial base, as homegrown demand expands.

The president is also keen to convert Tanzania into a regional gas hub. On a trip to Kenya in July, Magafuli and his Kenyan counterpart Uhuru Kenyatta discussed the possibility of sending Tanzanian gas to Kenya.

Equinor says its production and sharing agreement allows for 10pc of gas to go to the domestic market. But the amount, cost and timing of any gas supply to Tanzania remains unclear. Even if the project progressed according to the government's schedule, no gas would be produced for almost another decade and the first commercial quantities to the domestic market would take even longer.

By then, Mozambique, which also wants to be a regional gas hub, may be in a position to supply swathes of east and southern Africa with the first domestic supply from its Rovuma Basin reserves potentially flowing in the second half of 2020s, if agreements can be struck with its IOC partners.

With start-up from any plant at Lindi set to be at least five years later than Mozambique LNG, that could mean Tanzania's domestic and regional supply aspirations may have to wait well over a decade before being fully realised.

Hobey-Hamsher says the ease-or otherwise-with which Mozambique can raise equity for its share of LNG projects should give an indication of investor appetite for similar projects in Tanzania. But, he adds, the caution among foreign investors engendered by Tanzania's tough attitude towards the mining sector may have scuppered the country's chances of capitalising on its Rovuma Basin reserves as swiftly as it would like.

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