Taming Tanzania

July 21, 2014

Tanzania is home to several recent gas discoveries. Yet the country's most recent licensing round doesn't reflect that story. Sarah Parker Musarra discusses why. 

With players like Statoil, ExxonMobil, BG Group and Ophir celebrating success in the waters off Tanzania, all eyes were on the country’s fourth deepwater licensing round. The affair was delayed multiple times to allow for further seismic; to allow for relinquished areas in existing deepwater blocks to be included; and finally, to allow finalization of the country’s natural gas policy.

With a new date, 25 October 2013, picked to coincide with state-run Tanzania Petroleum Development Corp.’s (TPDC) release of the updated model production sharing agreement (PSA), Tanzania offered seven offshore blocks, located in 2000-3000m of water, plus one inland lake permit in the Eastern African Rift System, i.e. North Lake Tanganyika.

A small parade of the world’s gas-hun- gry countries flocked to Dar es Salaam, Tanzania’s largest city, for the licensing round, marking China, Russia and the UAE’s first forays into Tanzania. Of those offered, the southern blocks, located closest to the resource-rich blocks 1 and 2, received the most attention. China National Offshore Oil Corp. will compete against existing Tanzania Block 2 partners ExxonMobil and Statoil for Block 4/3A. Russia entered the picture through its state-owned company Gazprom, the sole bidder on Block 4/3B. Mubadala Petroleum, of the UAE, bid on Block 4/2A, while UAE-based RAKGAS applied for inland North Lake Tanganyika Block.

Statoil, operator of Block 2, has been present in Tanzania since 2007 and calls the country a "key project." Photo from Paul Joynson-Hicks/AP/Statoil

The round closed on 15 May, with the bids due 2 June. Four blocks out of eight received little attention. BG Group and Ophir, two of the major Tanzanian play- ers, did not participate in any bids this time. The lukewarm response generated by the bid round has sparked a hotbed of conversation.

A new gas country

Tanzania is widely regarded as the new kid on the natural gas-producing block, compared to long-established producers like the US, Russia, and Qatar.

BG Group entered Tanzania in 2010, and by July 2013 hit nine successful gas discoveries. In June, the count expanded even further with an estimated 1Tcf find in Block 1, which BG Group operates with a 60% interest on behalf of compatriot Ophir. Statoil operates the license on Block 2 on behalf of TPDC with a 65% interest. ExxonMobil Exploration and Production Tanzania Ltd. holds the remaining 35%.

“Tanzania is very new in negotiating for the commercialization of gas. No one can learn these topics quickly,” said Etienne Kolly, IHS regional research man- ager – East Africa. “You cannot compare with more mature countries like Angola.” Kolly explained that Tanzania’s increase of reserves were “flat” until 2009, when the country claimed reserves of around 1Tcf. In 2011, he said the volume grew

to 5Tcf in 2011, culminating in the 31.6Tcf the country is estimated to have today. IHS placed deepwater recoverable reserves at an estimated 29.7Tcf.

Regulations

According to the TPDC, it incorporated in 1969, when the country had one lone concession holder – Italy’s Agip (now a subsidiary of Eni).

“The Italian company, then a national oil company, walked away. It did not see the economic potential,” said Willy Olsen, INTSOK senior advisor and former advisor to the CEO of Statoil. “Today’s major players are less likely to walk away, but they will need terms that are globally competitive to make the final investment decisions.”

While the Tanzanian government tried to push legislation through at the speed of exploration, the model PSA might have hindered the licensing round rather than bolstered it.

“It significantly degraded its attractive- ness through its new terms,” Kolly said, calling the model PSA “too aggressive.”

Kolly said that the government made exploration and production financially appealing in 2004, and now, with this model PSA 2013, fiscally tightened up the terms in an attempt to capitalize on per- ceived boom money. Harriet Okwi, IHS senior analyst and consultant – Africa oil and gas points to a lack of exploration history, limited available data for Blocks 5A and 5B, and the fact that Blocks 4A and 4B were areas relinquished by BG and Ophir as contributing factors to this “muted” response.

“I believe the terms that came with the licensing round largely contributed to the limited investor interest. The 2013 MPSA reduced the contractor share of profit, raised the royalty rate and lowered the cost recovery ceiling. The MPSA also introduced signature and production bonuses, stricter exploration, and local content requirements and capital gains taxes on transactions.”

Offshore royalty rates were raised 2% from the 2008 model PSA to 7.5%. There is a minimum signature bonus payment of US$2.5 million and a production bonus of at least $5 million, payable when production commences. In regards to taxation, any assignment or transfer under the PSA is subject to the relevant taxation law. Tanzania also developed a natural gas policy, and is developing a natural gas bill.

“The natural gas bill will also likely reflect Tanzania’s desire to derive more revenue and benefit from its gas resource. This can be done through increased state participation in gas projects, higher taxation rates and more stringent local content policies,” Okwi said.

Drillship Discoverer Americas offshore Tanzania. Photo from Paul Joynson-HIcks/AP/Statoil.

There is another consideration beyond whether the new model PSA is too stringent, Olsen says. Gas takes much longer to monetize than oil, and companies are cutting costs across the board. And, in general, the deeper the water, the deeper the impact on a budget.

“I do not believe the PSA itself frightens off potential firms, but the terms may have become too ambitious, [for example] to the limited response to the last bidding round. Gas is a long term play,” Olsen said. “The economics of gas are different from oil and it may keep companies away. It can take years to realize value.

“Tanzania is unlikely to see LNG from the deepwater before 2020-2022. It could be even later...The world has been full of ‘stranded gas.’ Let’s hope East Africa can get its gas to the markets.”

In addition, these factors could inhibit smaller players from participating. Tanzania still requires significant invest- ment in infrastructure, and this is only beginning to be addressed. Statoil and BG Group announced plans in March 2013 to construct a US$10 billion, two-train LNG plant. In its YE 2013 results statement, released March 2014, Ophir said its most recent discoveries, which totaled 15.7Tcf, “will underpin a minimum two 5mtpa LNG train development ... and provides encouragement for a potential third LNG train.”

June’s activity alone might make a case for the third train. On 5 June, BG Group’s Taachui-1 STI1 well in Block 1 discovered 1Tcf mean recoverable resources. On 18 June, Statoil struck gas in its Piri 1 wildcat well in Block 2, discovering an additional 2-3Tcf. Statoil now has six discoveries to date ranging up to 20Tcf. IHS estimates Block 2’s recoverable reserves at 13.6Tcf.

A spokesperson for Statoil said that the potential LNG development would be onshore, and that all companies in blocks 1 through 4 – meaning Statoil, ExxonMobil, BG Group, Ophir Energy, and Pavilion Energy – submitted a joint proposal to the Tanzanian government.

“The five international oil companies have been working closely with TPDC and the Ministry of Energy and Minerals on various steps and processes that are needed before the site is announced,” Statoil’s spokesperson said.

The government, with its eyes set on exports, is striving to work with operators and place infra- structure as quickly as possible – a tough proposition when the country has its own energy needs to worry about. The 180MMcf/d produced by Tanzania’s two existing fields, Mnazi Bay and Songo Songo, go to the country’s own domestic needs, which Kolly calls a “huge deficiency in power generation and power access.” The World Bank states that only 15% of the local population has access to electricity.

Like most countries with newly-dis- covered resources, Tanzania is rushing to get its regulations and infrastructure up to speed with the pace of new discoveries. Kolly acknowledged that Tanzania was years away from exporting but remained optimistic.

“Activity is really booming and they (the government) are working hard,” he said. “They want to do well, not reproducing errors done in the past by more mature countries like Nigeria – especially, they want to maximize returns for local people and push for local content,” he said.