East Africa: Tanzania introduces new model Production Sharing Agreement and Mozambique prepares to enact new Petroleum Law

by King & Spalding
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Tanzania and Mozambique are in the process of developing new legislation and regulations for their emerging oil and gas sectors. The potential of these countries as new suppliers in the global natural gas market is attracting significant interest from a wide range of oil and gas companies.

The Government of Tanzania issued a long awaited new model Production Sharing Agreement to coincide with the launch of a 4th licensing round for seven deep offshore blocks and a block in Lake Tanganyika. The new Production Sharing Agreement (PSA 2013) has more onerous fiscal terms for investors than its predecessor, the 2008 model Production Sharing Agreement (PSA 2008).

In neighbouring Mozambique, the passage of a new Petroleum Law and launch of the country's 5th licensing round for areas south of the Rovuma basin and Mozambique's Ultra Deep Marine Water, is imminent.

East Africa: An Emerging Gas Power

East Africa is emerging as one of the world's largest new gas areas as a result of a number of large discoveries which producers hope to monetize largely through LNG sales to Asia. Despite material gas discoveries in this region, East Africa remains a frontier basin and legislation and policy are evolving to address the opportunities brought by large-scale gas exploration and production activities.

Tanzania estimates that it has more than 40 trillion cubic feet (TCF) of gas, which it said could rise five-fold over the next five years, putting it on par with some Middle East producers. Since 2010, large gas discoveries offshore Tanzania have created the potential for Tanzania to becomes a major gas exporter. To date the BG Group (in partnership with Ophir Energy) and Statoil (in partnership with ExxonMobil) have made discoveries with combined resources now put at up to 35 trillion cubic feet. These companies have established a framework for a joint LNG export project in the southern region of Lindi, Tanzania.

Mozambique's national oil company, Empresa Nacional de Hidrocarbonetos (ENH), has indicated that offshore Mozambique may hold up to 250 TCF of gas. Since 2010, Anadarko and Eni have made a series of large gas discoveries in, respectively, Area 1 and Area 4 of the Rovuma Basin. The Area 1 and Area 4 owners are in negotiations to develop a coordinated multi-train LNG export facility in Mozambique. Mozambique is widely considered to have higher resource potential than Tanzania.

Tanzania: A comparison of the 2008 and 2013 PSAs

PSA 2013 will apply to blocks secured in Tanzania's 4th Licensing Round, launched in October 2013 with bids due in May 2014. PSA 2013 aims to offer incentives for deepwater exploration whilst increasing revenue from oil and gas activities in Tanzania by tightening the fiscal terms present in PSA 2008. PSA 2013 will also strengthen the influence of Tanzania Petroleum Development Corporation (TPDC). The Government of Tanzania also recently released its midstream- and downstream-focused Natural Gas Policy. It is expected to pass a new and broader hydrocarbons law by the end of 2014 which will replace the framework under the Petroleum (Exploration and Production Act) 1980.

The following table compares the key fiscal and other commercial terms of the PSA 2008 and the PSA 2013.

Provision

PSA 2008

PSA 2013

Signature Bonus

None

Min US$ 2.5 million

Production Bonus

None

Min US$ 5 million

State (TPDC) Participation

Min 25%
E&A costs carried without repayment

Min 25%
E&A costs carried without repayment

Royalty

Onshore/Shelf :
12.5% (to be paid in kind by TPDC).
Deepwater:
5%

Onshore/Shelf :
12.5%
Deepwater:
7.5%

Contractor Share of Profits

Onshore/shelf:
Oil: 10-30%
Gas: 15-40%
Deepwater:
Oil: 30-50%
Gas: 20-50%

Onshore/Shelf :
Oil: 10-30%
Gas: 20-40%
Deepwater:
Oil: 15-35%
Gas: 15-40%

Cost Recovery Limit

Onshore/Shelf:
50% of production net of royalty
Deepwater:
70% of production net of royalty

Onshore/Shelf:
50% of production net of royalty
Deepwater:
50% of production net of royalty

Additional Profits

Onshore/Shelf:
25%-30%
Deepwater:
None

Onshore/Shelf:
25%-30%
Deepwater:
25%-30%

Training Expenditure

Min US$150,000 p.a

Min US$500,000 p.a

Taxation

Contractor is subject to general taxation laws of Tanzania on income from petroleum production, as well as Additional Profits Tax, and no exemption from transfer taxes on assignment

Contractor is subject to general taxation laws of Tanzania on income from petroleum production, as well as Additional Profits Tax, and no exemption from transfer taxes on assignment
A new levy applies to capital gains on a transfer of interest: 1% against first $100million in transfer value; 1.5% for next $100million and 2% thereafter

Import/Export duties

No import or export duty or tax on equipment and materials for petroleum operations

No import or export duty or tax on equipment and materials for petroleum operations

Local Content Requirement

No specific minimum local content requirement

Contractor must comply with Government’s Local Content Policy requiring greater use of domestic goods, services and materials

Stabilisation

No economic stabilization

No economic stabilization

Arbitration

ICC Rules in Dar es Salaam

ICC Rules in Dar es Salaam

Assignment

Assignment to third parties requires consent of Government not to be unreasonably withheld

Assignment to third parties requires consent of Government not to be unreasonably withheld.

Mozambique: Status of the New Petroleum Law

The main legislation for the hydrocarbons sector in Mozambique is the Petroleum Law of 21 February 2001 (Law No. 3/2001) (Petroleum Law 2001). It is supplemented by (i) Regulation of Petroleum Operations of 20 August 2004 (Decree No. 24/2004); (ii) Taxation of Petroleum Operations of 27 June 2007 (Law No. 12/2007); and (iii) the Fiscal Incentives Law of 27 June 2007 (Law No. 13/2007).

In 2012, Mozambique published a revised draft of a petroleum law intended to replace the Petroleum Law 2001. This new law was approved by the government in April 2013 and was submitted to the Council of Ministers for ratification. Instituto Nacional de Petroleo (INP) had, until recently, indicated that the new petroleum law would be passed by year-end 2013. Recent indications are that the new petroleum law will now receive parliamentary approval in early 2014. The new petroleum law will come into effect 30 days after its publication in the Government Gazette: the "Boletim da Republica." It appears that the delay in enacting the new petroleum law will result in a further delay to the proposed 5th Licensing Round for 12 new exploration blocks onshore and offshore Mozambique.

No official copy of the new petroleum law approved by the government has been published. It is not expected that any new petroleum law will introduce significantly different fiscal terms, which are primarily set out in separate fiscal-specific legislation and applicable exploration and production concession contracts. It is expected that this new petroleum law will recognize that gas, rather than oil, is the main hydrocarbon resource of Mozambique, and will provide for a clearer framework for the development of infrastructure to reflect the likelihood of Mozambique hosting major export infrastructure projects. It is also expected that a new petroleum law will address: (i) more onerous environmental obligations; (ii) increased local content obligations; and (iii) financial disclosure obligations.

 Nina Howell
 London
 +44 20 7551 7543
 nhowell@kslaw.com

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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