Tanzania's Natural Gas Policy

by King & Spalding

The publication of Tanzania's first Natural Gas Policy (NGP) is seen as a significant moment in Tanzania's ascendance in the global energy industry. The ascendance has been propelled by major gas field discoveries in the last three years by Statoil, Exxon Mobil, Ophir Energy, and BG Group. The scale of the discoveries are indeed significant; recent estimates are that Tanzania has an offshore gas potential of 42.7 trillion cubic feet of natural gas.

The NGP, which was initially released in draft form and developed in consultation during the past 18 months, is likely to form the basis of a future Natural Gas Act. The NGP is limited in scope and applies to the midstream and downstream sectors, which includes gas processing, liquefaction, transportation, storage, and distribution. The government of Tanzania has indicated that a separate policy will be drafted to manage upstream activities such as exploration, development, and production stages of oil and gas operations.

The scale of the opportunity provided by discoveries in Tanzania has been widely acknowledged by the government, stakeholders and commentators alike. The hope is that the NGP will enable effective management of domestic interests and balance those interests with those of other stakeholders. Achieving a successful outcome requires domestic needs to be prioritized whilst creating transparent and accountable regulatory features that provide an attractive investment environment.

Domestic Opportunities and Demands

The NGP encourages a competitive and efficient domestic market for natural gas with precedence given to supplying the domestic market over the export market. The NGP proposes that gas be exported only "where the domestic market has been satisfied."

To further the creation of a successful domestic market the NGP contemplates the creation of a "Gas Aggregator" to develop and manage downstream gas business, including the pipeline network, all gas processing facilities and central gas gathering stations and with exclusive rights to purchase, collect transport and sell natural gas produced onshore.

The NGP seeks to provide wide-ranging benefits to Tanzania by introducing more favorable production sharing agreement provisions that relate to local content issues. In particular, the contribution of international oil companies (IOCs), investors, and contractors to the continued development of Tanzania is increased by more prominent roles for IOCs in creating opportunities for the supply of goods and employment to Tanzanians, capacity building, and transfer of skills and technology.

Under the NGP, Tanzanian development is also encouraged by mandatory corporate social responsibility obligations on investors that require the undertaking of community development programs. The NGP also leaves open the possibility that under the future Natural Gas Act a listing on the Dar es Salaam Stock Exchange will be required. In addition, creation of a Natural Gas Revenue Fund for the development and growth of the natural gas industry and for national strategic projects will help ensure that local communities benefit from revenue emanating from the natural gas activities in their respective localities (a particularly sensitive issue in view of recent protests in the Mtwara Region).

Creating an Attractive Environment for Investors

The NGP and the involvement of various stakeholders in its construction acknowledges the perceived importance to the government of encouraging and maintaining investment into the country. This is partly motivated by Tanzania's current failings in attracting investment. Tanzania currently falls behind its neighbors Rwanda, Uganda, and Kenya in attracting foreign investment and lies 60th of 62 states in the World Economic Forum's Development Report.

The NGP raises the specific need for clear legislation to address governance of the natural gas industry for the benefit of all, including investors. The government plans to establish an appropriate legal and regulatory framework to govern processing, transportation, liquefaction, distribution, supply, and trading of natural gas.

As part of its aim to create an attractive environment to secure adequate investment, the government has reduced its own role in respect of gas infrastructure. Whereas the draft NGP proposed that the main gas infrastructure would initially be owned by the government through the national oil company, the NGP refers to government participation being "strategic" (implying less involvement) in developing and operating such infrastructure through state-owned entities and public private partnerships. This reduction in government control represents a concession to concerns raised by IOCs on the draft NGP.

The establishment of an appropriate pricing mechanism based on key principles, including "cost reflectivity, prudently incurred costs, reliability and quality of service, fair return on invested capital, and capacity allocation to the most valued use" is a key part of creating an attractive environment for investors. The NGP includes statements and mechanisms to ensure that the pricing structures provide incentives for promoting investment while sustaining supply and demand for natural gas and ensuring that prices to strategic industries and households are both affordable and predictable.

Domestic opportunities and demands must be balanced with the objective of creating an attractive environment for investors. The measure of Tanzania's ability to harness its reserves will depend on the rate and extent of domestic development and the ability to ensure that project feasibility or bankability is not adversely affected.

 Anthony Long
 +44 20 7551 7571

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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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