Tanzanian Oil & Gas Sector: Risks Beyond 2014

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1 Tanzanian Oil & Gas Sector: Risks Beyond 2014 The Tanzanian government hopes the oil and gas sector will spur foreign direct investment and strengthen economic growth. The World Bank estimates total investments in the sector could be as high as USD 4-5 billion a year, generating annual government revenues of USD 3-6 billion. Foreign operators have had considerable success in gas exploration since 2010 and interest has continued with Tanzania receiving bids from companies for new blocks offshore and at Lake Tanganyika as part the Fourth Licensing Round that closed in May Despite significant investment opportunities, regulatory ambiguity and the potential for increased political interference present compliance, reputational and business continuity risks. Interest in the Fourth Licensing Round was below expectations and several key pieces of legislation governing the sector are at risk of being significantly delayed after the opposition announced in June it would not participate in talks on a new constitution. This briefing outlines the core regulatory, political and security risks most likely to impact foreign companies in Tanzania in the next 24 months. Regulatory The government has announced a series of reforms to oil and gas regulations, but a lack of clarity and the potential for delays in implementing policies present significant uncertainty for operators. The Model Production Sharing Agreement (MPSA) and National Gas Policy Act (NGPA), both introduced in late 2013, have given an indication of the direction of government policy and the future role of the state in the management of natural resources. However, the government has provided little detail on domestic supply and local content obligations, fiscal terms - including the nature of production sharing agreements - and the future role of the state-owned Tanzania Petroleum Development Company (TPDC). Political The impact of regulatory changes will be amplified by increased state participation in the oil and gas sector. Populist political rhetoric calling for higher taxation and state management of Tanzania s natural resources will increase with political campaigning ahead of elections in Increased investment in oil and gas as well as popular accusations that the government has mismanaged the mining sector have led to calls for tighter royalty schemes and other redistributive policies. A constitutional referendum in late 2014 is now considered unlikely after the opposition CHADEMA party announced it would not engage in parliamentary discussions on the issue. This threatens to not only delay the constitution itself but also the implementation of other key oil and gas legislation such as the Natural Gas Act, planned to be presented to parliament in November. Security Land disputes and local community relations present the primary onshore security considerations for oil and gas operators. The mining sector - which has a more established history in Tanzania than oil and gas - provides critical lessons. Multiple mining facilities have been affected by protests, attacks on facilities and crime. Ambiguous land ownership laws and a history of poor public relations by the state in managing land disputes strengthen the scope for tensions over future onshore developments. Violent protests against gas pipeline developments in Mtwara in 2013 are indicative of the threat. Piracy targeting offshore operators, rising Islamist violence and worsening inter-religious tensions present broader security considerations for in-country operators.

2 Regulatory Risk The NGPA and MPSA introduced in 2013 have created uncertainty over the direction of regulations governing Tanzania s oil and gas sector and changing compliance obligations for companies. The two, combined with changes in the political landscape, indicate a growing role of the state in resource management and less favourable fiscal terms for operators. Policies due at the end of 2014 will offer important guidance for operators. The NGPA focuses on downstream and midstream operations, but provides little explanation of licensing terms and taxation for upstream operators. The Petroleum Exploration Policy due later this year is expected to determine broad terms for upstream operations but the bill will be susceptible to delays and unlikely to be implemented before Q1 of 2015 at the earliest. Other key policies subject to delays include the Natural Gas Act, the Gas Utilization Master Plan and the Natural Gas Revenue Management Act. The NGPA makes reference to the creation of a new national oil and gas company and regulator, but gives little detail as to how these new entities will interact with the sector. The new oil and gas company is expected to have an ownership role in new oil and gas infrastructure projects and be instrumental in the longer-term issuance of exploration and production licenses. Its political independence and administrative effectiveness will have significant impact on the speed of procedures and licensing. The TPDC is expected to increase exploration and production activities. Reducing the TPDC s role as a regulatory body in the sector will end a conflict of interest between production activities and regulatory impartiality. However, the company is expected to participate in a growing share of licenses through joint ventures with foreign companies and could have mandatory minimum stakes in all future operations, subject to political decisions. The MPSA recommended that TPDC can negotiate a stake of no less than 25 percent in any license award. The Tanzanian government has cooperated closely with Algeria and praised its management of the sector, which requires state-owned Sonatrach to own a majority share in any venture. The Algerian model has acted as a deterrent to some operators in the past decade. Gas exports will become a contentious topic should the government reduce domestic subsidies and politicians call for growing local supply. Despite electricity shortfalls in Tanzania being closely linked to infrastructure weakness and the failings of state utility TANESCO, rising demand and growing politicisation of the sector could see domestic supply obligations increase. Local content requirements will increase. Foreign companies will increasingly be required to invest in the training of local nationals and knowledge transfer schemes. Existing government-corporate employment training schemes will take several years to have an effect on the size of the skilled workforce available locally. A premature introduction of local content policies amid huge skills deficiencies among the population could impact productivity or inflate wages for the low number of trained Tanzanian nationals, thus increasing staffing costs. Local content provisions regarding suppliers and partner organisations will also alter procurement and compliance obligations. Fiscal terms could worsen. The MPSA reduced the profitability of deepwater projects through higher royalties, taxes and reduced profit sharing for companies. In October 2013, President Jakaya Kikwete said the government could take between 65 to 75 percent of any future license awarded. The absence of an economic stabilisation clause in the MPSA also leaves companies exposed to future changes in taxation, potentially overriding individual contractual agreements. The prospect of future mandatory listing of shares on the Dar es Salaam Stock Exchange (DSE) could increase legal and administrative costs and has already affected some mining companies. On 9 June, the Tanzanian unit of Swala Energy Ltd launched an initial public offering (IPO) for ten percent of its shares on the Enterprise Growth Market on the DSE.

3 Political Horizon National elections and the planned constitutional referendum should be monitored over the next 24 months. Both will affect regulatory changes and the scope for civil unrest in Tanzania: Political rhetoric over resource nationalism will increase during political campaigning. Although the governing CCM party is expected to maintain its parliamentary majority and the presidency, opposition attacks on the government s management of natural resources could see a rise in populist campaigning targeting foreign investors. There is no clear succession plan in place for President Jakaya Kikwete and he is obliged under the constitution to step down when his second term ends in Competition within the CCM could spur political infighting. Irrespective of the succession plan, there will be a moderate increase in civil unrest ahead of the election amid increased political campaigning and potential government restrictions on opposition rallies. Tanzanian security forces have poor crowd control experience and have been accused of using excessive force against opposition supporters in the past. Delays to the constitutional referendum will slow down changes to natural resource management in Tanzania. Most drafts of the constitution have proposed increased autonomy for Zanzibar, including the ability to issue exploration permits. The delays will affect the delineation of sea boundaries between the mainland and Zanzibar, slowing the commencement of operations for Shell, who signed a Memorandum of Understanding with regional authorities in President Jakaya Kikwete

4 Security Forecast Land ownership disputes will increase with growing onshore oil and gas developments The 1995 National Land Policy Act includes a number of ambiguities that make the process for securing land complicated and often contentious. The issuance of permits for resource extraction is unclear, and central authorities often issue licenses without an awareness of how land is being used locally. The government s failure to provide reliable information or improve land ownership rights have affected multiple foreign operators, most acutely in the mining sector. Mining companies such as AngloGold Ashanti and African Barrick Gold (ABG) have regularly had their operations at the Geita Gold Mine and North Mara Gold Mine disrupted by local communities that claim to have been displaced or failed to benefit from natural resource extraction. ABG s UK High Court case over allegations of human rights abuses during protests at the North Mara mine illustrates the importance of vetting and training of security providers, as well as the risk of exposure to legal proceedings following local unrest. In addition to land disputes, civil unrest over the distribution of resources and local employment practices could inspire protests. This has already been witnessed across East Africa in relation to oil and gas developments, at times resulting in fatalities or disrupting operations. Protests against pipeline developments between the Mtwara region and Dar es Salaam in 2013 persisted for several months and involved periodic violent clashes with security forces. Mtwara port has been earmarked as a key logistical hub for oil and gas operations to aid the sector s growth in Tanzania. The high number of demonstrations targeting mining interests is illustrative of some of the threats likely to impact future onshore oil and gas operations. Islamist and inter-religious violence threaten staff security but are unlikely to specifically target oil and gas facilities Exposure to political and inter-religious violence is heavily dependent on the location of operations. Zanzibar has previously seen several targeted attacks against foreign nationals, as well as tensions between its Christian and Muslim communities. Western tourists have been indiscriminately attacked, presenting a threat to staff operating or on vacation on the popular island. However, the mainland has also been exposed to violence. The detention of 11 alleged al-shabaab sympathisers planning to attack Chinese construction workers building a pipeline in Mtwara in October 2013 highlights vulnerabilities of oil and gas interests. Arusha has witnessed several bombings linked to growing religious violence and on 30 May police announced the arrest of 16 alleged militants from the Somali-based group. Although not a primary area of operations for al-shabaab and other Islamist groups in East Africa, their regional capabilities, combined with rising religious tensions and disillusionment among certain sectors of the population could contribute to an increased threat from domestic and regional militancy in the year ahead.

5 Threats from piracy will remain but will not return to 2011 levels while international forces are deployed in the region Past pirate attacks against oil and gas supply vessels underscore the risk to offshore operators. In addition to the threat from Somali-based pirates who attempt to hijack vessels for ransom, operators also face security risks from robbers who target ships at or near ports. A changing security and political environment in Somalia, the use of armed guards on commercial vessels, improved prosecution of pirates and the deployment of multi-national naval vessels has dramatically reduced the threat presented by pirates. However, continued attacks and regular sightings of suspected piracy groups in waters further north demonstrate the enduring threat posed by these groups. Although Tanzania s counterpiracy capabilities remain weak and reliant on external assistance, close coordination with local military, which has provided on-board security personnel for oil and gas vessels, will remain important for offshore operators. PGI Risk Portal The PGI Risk Portal provides subscribers access to country risk assessments, analysing geo-political, security and regulatory risk. It provides daily global incident monitoring and analysis as well as access to unique report building and modelling tools. For further information and to register for a free 14-day trial please visit: Contact: riskanalysis@pgitl.com