East Africa

Tanzania publishes new rules for oil and gas companies

By  | 

Tanzania has launched a new Production Sharing Agreement (PSA) framework with tougher fiscal and operational terms, following epic natural gas discoveries by the likes of Statoil, Ophir Energy and BG Group.

The new model published on November 4, which replaces a 2008 PSA, introduces a minimum signature bonus payment of $2.5m and a production bonus of at least $5m, payable when production starts. It also sets a royalty rate of 12.5 percent of oil or gas production for onshore or shallow operations, and 7.5 percent for tougher offshore production. While signature bonuses are unlikely to be a big problem for the kinds of deep-pocketed companies looking to tap Tanzania’s reserves – which are now estimated at above above 40 trillion cubic feet – the new offshore royalties are a notable increase from 5 percent previously.

Cost recovery – the amount companies can recover per year before profit splitting with the state – has been reduced to 50 percent from 70 percent previously. Unlike the previous rules, the obligation to pay capital gains tax is now detailed. While this will increase the costs of farming out, it could reduce the likelihood of the kinds of investor disputes which have stalled oil and gas activity in neighbouring countries – especially Uganda, where a lack of clarity over capital gains tax led to several arbitrations between companies and the state.

Overall, the new terms present a tougher deal for companies. “The increase in royalties for offshore blocks and the inclusion of signature and production bonuses have resulted in significantly less favourable fiscal terms for oil and gas companies,” says Sarah Collier, Africa analyst at Maplecroft, the risk analytics company.

“We were expecting a toughening of the fiscal terms. Given exploration success, the government is looking to capitalise on that,” says Bill Page, partner at Deloitte Tanzania. “However it is quite a high risk strategy for them to pursue at this moment. Firstly, this is deepwater so it is a very challenging environment, very expensive.”

Offshore wells have been costing in the range of $60-$100m, and can cost around $1m a day. Secondly, gas markets in Africa are limited so commercialisation depends on export, yet east Africa has no liquefied natural gas export facilities yet. “Everything will have to be developed from scratch” says Mr Page. “My gut feeling is that they may have gone a little bit too far.”

A local content provision is highlighted by some analysts as problematic. The new rules are somewhat vague. They oblige companies to maximise their utilisation of goods, services and materials from Tanzania, giving priority to locals “in all aspects of petroleum operations”, and require an annual spending plan of $500,000 earmarked for developing the skillsets of Tanzanians. In effect, companies are being asked to sign up to the country’s local content rules, but there is currently no local content strategy at the national level, says Paul Jones, senior associate at Clyde & Co LLP.

The new terms do not affect existing licenses, but apply to the current licensing round launched on October 25 in Dar es Salaam. The round – Tanzania’s fourth, which runs until May 2014 – is offering seven deep sea offshore blocks next to proven reserves (in depths of 2,000 to 3,000m) and the Lake Tanganyika North Offshore Block, which is at 1,500m and runs along the western arm of the East African Rift System, a proven play for commercial liquid hydrocarbons. Asian companies are showing particular interest, with the likes of India ONGC and Thailand’s PTT said to be sniffing around.

Source: This is Africa

You must be logged in to post a comment Login

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.