News and Views
Repositioning Tanzania for the gas economy
Tanzania has been exploring for oil and gas for the past 60 years since 1952. The first natural gas discovery was made in 1974 at Songo Songo Island and at Mnazi Bay in 1982.
The Songo Songo natural gas was commercialised in 2004 and that of Mnazi Bay in 2006. In 2010 exploration activities in the deep sea encountered commercial reserves for natural gas. To date Tanzania stands at 32 trillion cubic feet of natural gas.
Since 2004 when natural gas started to be produced commercially, Tanzania has enjoyed several benefits including, significant savings of foreign currency from importation of heavy fuel oil (HFO) both for power generation and industries.
Exploration for oil and gas is quite risky and requires huge capital in order to collect geo-scientific data and later carry out drilling of wells to confirm the resource. The drilling goes to depths at least 1,500 metres and some extent up to 5,000 metres below the surface.
In order to attract requisite investors, we have adopted a Production Sharing Agreement model that provides for foreign direct investments from multinational companies to risk their monies hoping to recover their investment and share profits with the State should discovery be made.
Otherwise the State has no obligation to compensate for the losses made.
Once natural gas is discovered and confirmed to be of commercial value, the following tasks have to be performed (i) development of facilities including flow lines, (ii) processing plants for gas purification; (iii) pipelines for gas transportation and distribution. This stage is equally capital intensive, particularly, when it is a deep sea discovery.
From gas discovery to first gas production requires about 5 to 10 years of continuous investment to develop the gas field and associated infrastructure. The investment varies with the amount to be recovered and the market to be served.
For the overseas market, you will definitely require investment in liquefied natural gas (LNG) facilities on top of the usual gas processing plant. For local or regional market, gas pipeline and associated equipment are required. For Tanzania, we need careful evaluation to balance between serving the domestic and foreign markets.
Natural gas discoveries in the deep sea of Tanzania are a result of serious determination by the Government and the national oil company, Tanzania Petroleum Development Corporation (TPDC) and foreign private companies who provide capital, technology and skills.
One has to bear in mind that, unlike oil whose market is ready and robust worldwide, there is need to establish and confirm the natural gas market before making investment decisions. Mature and strong natural gas markets are not found locally or regionally, but in Europe, Asia and America.
At the same time, we wish to use our natural gas for domestic market to transform our economy to make Tanzania a medium income country. As I said, this requires a careful analysis to determine the proportions for the two markets vis-à-vis recovering the investment costs.
In reality, considering only the current size of the domestic market, investment in upstream and downstream altogether neither justify economics nor support mobilization of financing for the development of the discoveries.
In order to optimize benefits from natural gas, both export and local markets are to be considered strategically. LNG investment for that matter has to be done to support the export market. At the same time, the local market has to be developed aggressively so as to benefit from natural gas along the value chain.
Intensive energy industries such as petrochemicals, cement factories, iron smelters, ammonia plants, methanol and other derivatives of natural gas need to be established to strengthen the local market beyond the power generation and domestic consumption.
It is true that through revenues generated from the export the country will be able to develop other sectors including transport, heath and education. Maximization of the benefits will be attained through the optimization of the value chain which consists of upstream, midstream and downstream activities.
You may all be aware that Tanzania started using natural gas in 2004 which was mainly for power generation and in manufacturing industries. However, this situation will definitely change when manufacturing of fertilizers, petrochemicals and LNG production using natural gas from the deep sea. These industries will attract significant improve Tanzania’s balance of payments.
Repositioning Tanzania for the Gas Economy, the Government has identified several key challenges which need to be addressed before production of natural gas from the deep sea commences.
The challenges include legal and institutional set up, human resources, local content, revenue management, natural gas infrastructure, transparency and accountability, environment, health and safety issues.
It is worth noting that, natural gas industry by itself cannot be able to transform the economy of Tanzania, unless complemented by other economic sectors.
Therefore, in order for Tanzania to unleash its growth potential a dedicated policy particularly for natural gas is a requisite. It is through this policy that institutions, legal and regulatory matters, roles of stakeholder and plans to develop the natural gas industry in Tanzania will be defined.
The natural gas policy supported by its respective instruments such as the Gas Act and Gas Master Plan will be able a mitigate the challenges.
In order to unleash its potential growth as a pole of East Africa’s growth, natural gas industry has to be linked with other sectors of the economy.
Let me conclude that, our guiding principle for Tanzania to unleash its potential is through every player in the gas industry to recognize that, natural gas resource belongs to the people of Tanzania, and must be managed in a way that benefits the entire Tanzanian society.
• George Simbachawene is the Deputy Minister for Energy and Minerals. This article has been extracted from his speech he delivered to a round table dialogue organized by Agenda Participation 2000 for local media editors