Revealed: New terms for oil, gas investors

Dar es Salaam. Oil and gas royalties will be higher than those on gold. This is aimed at avoiding mistakes that cost Tanzania dearly when awarding gold mining licences.

The government has also introduced new charges for companies seeking to invest in the multibillion shillings sector.

However, the bid to accrue more revenue from the two resources is going to further sideline the participation of local firms in the lucrative business.

Most local companies have already cried foul over the organisation and management of the sector’s investment regime.

Whereas local analysts have positively received the new model production sharing agreement (PSA), their foreign counterparts regard its conditions as tough. According to them, the new charges and rates have been introduced following growing pressure on the government to deliver tangible benefits to the people in the shortest time possible.

Apart from increasing the royalty for deep offshore operations from five to 7.5 per cent, the government has also introduced two bonuses worth $7.5 million (about Sh12 billion) in the 2013 PSA. In the fourth licensing round for eight gas blocks last month, local companies found it expensive to buy bid documents at $750,000 (about Sh1.2 billion).

“Local businesspeople had problems with buying tender documents…What about paying something like Sh4 billion for just winning a bid for a gas block…that would be too expensive for most of them,” noted an expert with one of the companies that have already discovered huge amounts of gas in the country.

Speaking on condition of anonymity, he said the government had guts to introduce the new charges following positive exploration results in the last four years.

He said discoveries made by Statoil and BG Group had elevated the rating of Tanzania and greatly reduced the dimension of risk in the exploration of oil and gas in the country.

One of the bonuses is the signature bonus, which will cost investors $2.5 million and this is a payment made by the winner of any tendered block. Under this arrangement, the government will generate $20 million (about Sh32 billion) when the fourth licensing round is concluded in May next year.

The other is the production bonus that is charged at not less than $5 million and this becomes effective when real operations to produce oil or process gas start. The new model PSA was introduced following the launch of Tanzania’s new licensing round for seven deep sea offshore blocks and the North Lake Tanganyika block on October 25 in Dar es Salaam.

“The two bonuses are new charges introduced by the government in the 2013 PSA as part of its efforts to accrue more revenue from oil and gas,” the spokesman of the Tanzania Petroleum Development Corporation (TPDC), Mr Sebastian Shana, said yesterday.

He told The Citizen on Sunday that the royalty rate of 12.5 per cent for onshore or shallow operations had not been changed.

The 2013 model PSA also notes specifically that any assignment or transfer under the PSA shall be subject to the relevant taxation law.

Although companies operating in the country are subject to the 20 per cent corporation tax, the specific reference in Article 13 of the 2013 PSA means that capital gains tax will apply to energy firms wishing to transfer licence interests.

Had this provision been in the 2008 PSA, the government could have made money this week from Ophir Energy’s $1.3 billion (about Sh2.08 trillion) sale of its 40 per cent stake in three offshore gas blocks in the country. Sectoral sources say the government generated only $300 million from the deal between the UK based company and Pavilion Energy of Singapore.

“The new PSA model isn’t a bad thing for a start. But the absence of mention of how local firms interested in investing in the sector will be involved is puzzling,” said social and political commentator Emmanuel Kisumo of Dar es Salaam.

“Them (local investors) being left out to contend with multinational companies or being involved as ‘third parties’ should foreign investors see it fit, amounts to ostracising them,” he added echoing the concerns of the local private sector, which has recently been vocal on the matter.

While the government maintains that national interests in the lucrative industry will be taken care of by the TPDC involvement, concerns are still rife over local ownership of a stake in the newly discovered wealth. The authorities have been dispelling these fears by saying that under the new licensing regime the state will have a stake of up to 75 per cent in any block.

When officiating at the launch of the fourth round last month, President Jakaya Kikwete said the new production-sharing formula would either be 35 per cent to investors and 65 per cent to the government or 25 per cent to them and 75 per cent to the state.

Instead of empowering individual participation in the oil and gas business, the government says shares of the state in the new investments will be under TPDC on behalf of the Tanzanians. When the utility organisation is later split to form a regulator and commercial firm, the shares in the latter will be offered to the public.

That arrangement does not impress members of the Tanzania Private Sector Foundation, who want to be given special preference in the sector through government support.

“I have no problem with the royalty rates but if our recent history regarding foreign investment is any guide, we’ve displayed a serious lapse in enforcing agreements we made in the past,” noted Mr Kisumo.

A Mzumbe University economics lecturer, Dr Honest Ngowi, said the new regime implies that the country stands to get substantial revenues from the gas and oil.

However, he cautioned that having more revenues was one thing and using them properly was something else.

According to him, it is also important to note that money from oil and gas - as should have been the case for other resources such as gold, is more than just tax revenues. Money from such multiplier effects as employment wages and other forms of local content are more important than taxes, royalties and the like, he added.

“For this to happen, local firms and the potential labour force should prepare themselves to make the most out of the oil and gas bonanza and not necessarily wait for the government to empower them,” he said.