8/10/2019 Special Report Tanzania Gas Revenues

1/4

SPECIAL REPORT: Whatleaked gas agreement means

An offshore gas and oil rig. PHOTO | file

By David Manley and Thomas Lassourd

Posted Wednesday, August 13 2014 at 1233

!" #$MMA%&

'()erts *rom the "atural %esour+es overnan+e !nstitute say )otentially at sta-e are .illions o* dollars o*

)otential revenues that +ould .oost so+io/e+onomi+ develo)ment in Tanania i* it .e+omes )ossi.le to e(tra+t these

gas resour+es

'%"M'"T A"D #TAT!L: The government has signed PSAs for a total of 12 blocks off the coast of Tanzania since

22

The leak in July 2014 of an important addendum to a production sharing agreement

(PSA) et!een Statoil and the go"ernment of Tan#ania has ignited a deate on

!hether Tan#ania $got a good deal% from granting these e&traction rights for a lockno! e&pected to produce large amounts of commercial natural gas'

The deate demonstrates a pulic appetite for e&planations from the go"ernment

on the countrys management of its nascent oil and gas industry' Potentially at stake

are illions of dollars of potential re"enues that could oost socioeconomic

de"elopment in Tan#ania if it ecomes possile to e&tract these gas resources'

8/10/2019 Special Report Tanzania Gas Revenues

2/4

*ur analysis indicates that it is premature to say !hether the Statoil PSA and

addendum represent a good deal for Tan#ania' +i"en the limited information

a"ailale, the deal does not seem out of line !ith international standards for a

country that had no pro"en o-shore reser"es of natural gas at the time !hen the

original contract !as signed' .ore detailed elements and e&planations from the

national oil company TP/ or the go"ernment could conrm for Tan#anian citi#ensthat this is the case' The fact that Statoil !on its rights through a competiti"e

process should also indicate !hat market information !as a"ailale to the

go"ernment at the time, and should also help the go"ernment to e&plain its

assessment that the deal !as the est possile option at the time'

However, the differences between the 2010 model PSA addendum and the leaked Statoil addendum have

led to legitimate questions about the reliability of model PSAs to assess the legal environment of the

emerging gas sector, and the actual content of signed PSAs !hese questions underscore the need for

contract trans"arency Publication of all contracts would su""ort informed debates within !an#ania on the

management of e$tractive resources, which is necessary to build trust and manage e$"ectations around

what these new resources could mean for the future of the country

What is a model PSA? What is the significance of the addendum?

!he addendum establishes some changes to a "roduction sharing agreement %PSA& that had been signed

between 'orwegian oil com"any Statoil, the !an#ania Petroleum (evelo"ment )or"oration %!P()& and

the government of !an#ania, through the *inistry of +nergy and *inerals %*+*& in 200 !he PSA

concerns a license for Statoil to e$"lore and "roduce in -lock 2, off the coast of !an#ania

!he date of the leaked addendum %which we will refer to as the Statoil addendum& is .ebruary 22, 2012,

following the first discovery of natural gas in substantial quantities by the com"any !he original PSA

%which we call the Statoil PSA& has never been disclosed to the "ublic %and was not "art of the recent

addendum leak& +$$on*obil is also a "arty to this contract, as stated in the Statoil addendum, with a /

"er cent "artici"ating interest in -lock 2, bought from Statoil through an agreement in 2010 !he

government has signed PSAs with com"anies for a total of 12 blocks off the coast of !an#ania since 2002

none of the PSAs are "ublicly available

Since "etroleum contracts frequently s"an 2 years or more, it is not uncommon for the "arties to agree to

adustments as the contract "rogresses, "articularly when the original contract is signed in an environment

of uncertainty, or when une$"ected events change the assum"tions that accom"anied the original deal

%eg, reassessment of reserves, "articularly favorable or unfavorable market conditions& Such

adustments are generally made in order to render "roects viable, while stabili#ation clauses often "rotect

investors against unilateral revision of the initially agreed financial balance

8/10/2019 Special Report Tanzania Gas Revenues

3/4

3hen Statoil started e$"loring in 200, the likelihood that the block would "roduce significant quantities

of natural gas was low !he sea floors off the coast of +ast Africa had not been discovered to hold

significant "etroleum de"osits, and the ho"es the industry did have for the area were focused on oil, not

gas .urther, the combination of a heavy su""ly of liquified natural gas %4'5& on the market and

concerns over weakening Asian demand was "utting downward "ressure on 4'5 "rices

!his meant that there was a high hurdle for an 4'5 "roect off the coast of !an#ania to clear in order to

be commercially viable At the time that the Statoil PSA was signed, there were clearly sufficiently

interesting "ros"ects to warrant e$"loration by the com"any, but the level of geological uncertainty

created significant risks !his "resented !an#ania with a challenge faced by many emerging countries

seen as 6frontier #ones7 by the oil and gas industry 8t first needed to negotiate a contract that created

enough incentives for an oil com"any to invest the huge sums necessary to conduct e$"loration in a risky

environment -ut it also had to ensure that a "roect, if it ever led to e$traction, would deliver a""reciable

benefits to citi#ens

Natural gas prospects

8n the years since the original Statoil PSA was signed, the "ros"ects for natural gas "roduction, both in

!an#ania and globally, have risen significantly *ost im"ortant for !an#ania was the significant 2010

discovery of natural gas off the country9s coast by a consortium led by :"hir energy and -5, as well as a

maor discovery in neighboring *o#ambique !he shutdown of ;a"anese nuclear reactors following the

.ukushima disaster in 2011 "rom"ted significant shifts away from nuclear "ower into gas !his increased

global demand and further enhanced the viability of bringing !an#anian gas to market .inding non %focused on oil e$"loration and "roduction&, 200? %a full model PSA for onshore@shelf

oil and gas areas&, 2010 %a model PSA addendum for offshore natural gas&, and 201/ %a""licable to both

onshore and offshore oil and gas&

!he 2010 model addendum was established after the first discoveries of offshore natural gas, to guide the

adustment of e$isting contracts with res"ect to gas !he s"ecificities of gas mean that new terms often

need to be agreed with investors in order to account for the "roect com"onents necessary to moneti#e

these finds %accounting for cost, structure@terms of gas sales, financing etc&

8/10/2019 Special Report Tanzania Gas Revenues

4/4

*odel PSAs are used as a com"lement to "etroleum laws to set standard terms to guide agreements with

com"anies interested in develo"ing a "roect in a country !hough not the case in the !an#anian model

PSAs, it is common for some fiscal terms to be left blank in the model, to be subect to com"eting bids in

the allocation of "etroleum blocks in a bidding round

As its name suggests, a model contract re"resents a guide or reference "oint, designed to hel" the

government standardi#e its relationshi"s with various com"anies, increase its leverage in negotiation, and

enhance its ability to monitor com"liance 8nternational e$"erience has demonstrated that governments

tend to get the best deals for their citi#ens when negotiations are limited to only a small number of

contract terms 8n most countries though, including !an#ania, the government retains legal discretion

The authors are experts from the Natural Resources Governance Institute

Source=htt"=@@wwwtheciti#encot#@'ews@SP+)8A4