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Tanzania's New Petroleum Regime - Are Investors Ready for Development and Production?

2016-11-29 10:06:55

By Paul Kibuuka

Tanzania’s new petroleum legislation has been long awaited by international oil and gas investors who have been looking for a clear and comprehensive legal, institutional and regulatory framework to facilitate investment in the development and production of the country’s huge gas reserves. Do the new laws provide that framework?

Updated on 4th August 2015, when President Jakaya Kikwete assented to the legislation 

THE Petroleum Act 2015, the Tanzania Extractive Industry (Transparency and Accountability) Act 2015, and the Oil and Gas Revenues Management Act 2015 are conceivably the most controversial in recent years, given the sweeping reforms these pieces of legislation seek to bring to the Tanzanian petroleum industry, which is projected to be the single largest contributor to the national economy.

Passed under certificate of urgency before the end of the 20th session of the National Assembly last July, these Acts have just been assented to by President Jakaya Mrisho Kikwete on 4th August 2015. The Acts update and consolidate existing enactments for the petroleum industry.

The introduction and passing of the Acts can be traced to the emergency of competing petroleum investment opportunities in other sub-Saharan African countries, most notably Kenya, Uganda, Egypt, Algeria, Ghana, Nigeria, Angola, and Mozambique; and, according to press reports, the fear of losing investors to these countries.

At the outset, it should be pointed out that building accountability and trust by increasing openness and transparency in administering and managing the petroleum industry cannot be overstated. As such, the Tanzania Extractive Industry (Transparency and Accountability) Act 2015 will be largely viewed as positive by all stakeholders.

It appears, however, that the effectiveness of the Tanzania Extractive Industry (Transparency and Accountability) Act 2015 is watered down by the provision which requires the publication of all concessions, contracts and licenses relating to the extractive industries, including oil and gas. Non-compliance by is a criminal offence, which attracts a stiffer pecuniary fine of Tshs.150 million (approximately, US$75,000) for companies.

This provision is expected to become a bone of contention between the GoT and international oil and gas investors, since it’s not clear if all the signed Production Sharing Agreements (PSAs) will need to be published, considering the confidentiality clauses contained in the PSAs and MDAs. It will be interesting to see how the provision will be actually applied.

For purposes of restructuring the country’s petroleum institutional framework, the new legislation establishes and, in some instances, re-establishes the following authorities, institutions, and funds:

  • Oil and Gas Bureau – This is an independent department, under the Office of the President, mandated to advise the Cabinet on strategic and commercial aspects of the country’s oil and gas economy.
  • Petroleum industry regulators – A new regulatory authority, the Petroleum Upstream Regulatory Authority (PURA), will oversee the upstream petroleum sub-sector and perform audits of the cost recovery on the exploration, development, production and sale of oil and gas in order to determine government profit share and royalties (rents). Already well-known by industry stakeholders, the Energy, Water and Utilities Regulatory Authority (EWURA) is re-established but with a new role: regulatory oversight over the midstream and downstream petroleum sub-sector.
  • Tanzania Extractive Industry (Transparency and Accountability) Committee– This is an autonomous body responsible for promoting and enhancing transparency and accountability and ensuring that the benefits of the extractive industries are verified, duly accounted for, and prudently utilised for the advantage of Tanzanians.
  • The National Oil Company (NOC) – The Tanzania Petroleum Development Corporation (TPDC) is designated as the NOC and will exclusively manage the GoT’s commercial interests and involvement in petroleum projects. TPDC will participate in petroleum reconnaissance, aggregate natural gas, own and operate major gas infrastructure either directly or via subsidiaries, and collect and account for non-tax oil and gas revenues, surface rentals and block fees.
  • Two funds are proposed for the industry – The Oil and Gas Fund, established under the Oil and Gas Revenues Management Act 2015, will be responsible for maintaining fiscal and macroeconomic stability, enhancing social and economic development, and safeguarding resources for future generations. A Decommissioning Fund is also established under the Petroleum Act 2015, and international oil and gas investors will need to factor payments to this fund into their costs.  

Besides restructuring the institutional framework, the new legislation seeks to re-organize the regulatory framework for the petroleum industry. Accordingly, PURA, responsible for regulating the upstream petroleum sub-sector, will oversee the processing, granting, renewal, suspension and cancellation of exploration, development and production licenses for the NOC (TPDC); implement local content programs; facilitate the resolution of complaints and disputes; and deal with other issues relating to the management of petroleum areas, private sector-entity partnerships with TPDC, and reservation of blocks for TPDC.

In that regard, a registry of petroleum agreements, licenses, permit authorisations and any change in interest of an existing petroleum agreement, license or permit will be established and maintained by PURA. International oil and gas investors should be aware that any purported transfer or assignment of an interest which is not authorized by the Minister of Energy and Minerals is in vain. Additionally, investors should note that, as the NOC, TPDC will be given the first right of refusal to acquire a participating interest intended to be transferred or assigned to a non-affiliate.

A domestic gas supply obligation is imposed on license holders to satisfy the domestic market in Tanzania from their proportional share of production, but how this will actually operate remains imprecise. This obligation, which is directed towards improving Tanzania’s perennially poor power system and assisting local industrialisation, will be considered by most Tanzanians as deserving of praise.

For the midstream and downstream petroleum sub-sector, EWURA will have similar regulatory oversight roles like PURA: issuing, renewing, suspending, and cancelling construction approvals and operational licenses; collecting fees and levies in accordance with the EWURA Act; approving applications for tariffs and prices; promoting the use of local goods and services; and ensuring the maximum participation of Tanzanians in every part of the petroleum value chain.

Using the National Petroleum and Gas Information System (NPGIS), a strategic planning tool, EWURA is, under the Petroleum Act 2015, mandated to let the public know, periodically, about the status of the industry. A key part of the NPGIS will be the Central Registry of Petroleum Operations (CRPO).

TPDC will designate one of its subsidiaries to exclusively purchase, collect and sell natural gas from producers. The subsidiary, called the aggregator, will be licensed by EWURA. This implies that international oil and gas investors may not have the need to set up separate legal entities for marketing and distribution purposes. Moreover, these investors must give serious consideration to how they will interact with the aggregator.

As mentioned previously, TPDC has exclusive rights over petroleum in the upstream sub-sector, but it does not have such rights in the midstream and downstream sub-sector. So, international oil and gas investors can find processing, transportation and storage; liquefaction, shipping and re-gasification; and distribution opportunities in the midstream and downstream sub-sector, without concluding partnership arrangements with TPDC.

Tariffs for transportation and distribution of gas are set by EWURA, however, concerns about the viability of petroleum operations in Tanzania means that international oil and gas investors will be expecting EWURA to consult them in setting tariffs.

In discharging their regulatory responsibilities, PURA and EWURA are to act in accordance with the Tanzania Development Vision 2025, the Energy Policy 2003, the Natural Gas Policy 2013 and a yet-to-be finalized Local Content Policy. Locally produced goods and services are required to be given first consideration by a license holder, and where such goods and services are unavailable, the same are to be provided by a foreign company which has a joint venture arrangement with a Tanzanian company. The objective here, it is understood, is to help improve the competitiveness of Tanzanians in the global marketplace by giving them access to advanced technology and management experience when they work in consortia with foreign companies.

It is obvious that petroleum projects require access to land. Under the Petroleum Act 2015, TPDC is considered as the only entity which will have land rights and facilities in the upstream sub-sector. The President is empowered to grant a right of occupancy over land to a license holder, assumed to be TPDC; however, where the corporate vehicle is a joint venture between TPDC and a foreign entity as the majority shareholder, there may be issues with respect to foreign ownership of land, which is prohibited under the land laws of Tanzania. In such a scenario, in order to obtain rights over land for upstream petroleum activities, a key question is whether the joint venture with TPDC would have to be registered under the Tanzania Investment Centre (TIC)?

From a fiscal perspective, the main objective of international oil and gas companies and the GoT investing in or permitting operations in the petroleum industry is to derive revenue. That’s why changes and developments in the Tanzanian tax regime are important. Very briefly, the Petroleum Act 2015 makes provision for payment of annual licence fees and bonuses to TPDC (upon on signing of the relevant agreement and on commencement of production) as well as all other relevant taxes, including capital gains tax in respect of a corporate reorganization and withholding tax on interest payments of loans.

The Petroleum Act 2015 also places international oil and gas investors with licences in almost the same tax position as any other commercial entity in Tanzania; and a key assumption from this is that, going forward, it will be more difficult to implement stabilisation clauses incorporated in PSAs. As noted above, the management of revenues derived from oil and gas exploration, development and production activities is to be governed by the Oil and Gas Revenues Management Act 2015, which establishes Tanzania’s first ever Oil and Gas Fund.

In relation to dispute resolution within the upstream petroleum sub-sector, PURA is empowered to determine disputes between a license holder and a third party save for the GoT. PURA, on due proof of facts, may, in its discretion, make rulings and decrees. PURA can also decide to refuse to resolve a dispute, in which case the courts of judicature would be the right forum. In the midstream and downstream sub-sector, it’s EWURA that determines disputes, but ambiguity exists around the amount of compensation payable by a licensee, who has been granted a wayleave (i.e. the applicable legal instrument by which a pipeline is laid), in the event of a dispute with a land owner given the lack of sufficient details in the new legislation.

Appeals from PURA and EWURA lie to the Fair Competition Commission (FCC) within 30 and 14 days, respectively, of the decision. But can it be assumed that the foregoing new positions will not undermine the legal validity and effectiveness of the applicable law and dispute resolution clauses in pertinent agreements that the GoT has signed with international oil and gas investors?

Undoubtedly, the Tanzanian petroleum industry, which had inadequate legal and regulatory frameworks and oversight mechanisms, has been in need of a full-scale overhaul. International oil and gas investors have long awaited the legislative reform that facilitates investment in the development and production of the country’s huge gas reserves. But, the legitimate needs, interests, and concerns of different stakeholders, including local investors, must be properly handled. It would be a colossal gamble for the GoT to ignore this.

The GoT is serious in its efforts, and unwavering in its determination, to boost the taxes and royalties it collects, and its stand is that a flourishing petroleum and extractive industry is vital for securing economic growth. All the same, operations of international oil and gas investors in Tanzania must remain bankable and safe so these investors do not eventually end up investing in other competing sub-Saharan African countries.

Local and international investors will welcome the setting forth of a clear commercial role for TPDC, while PURA and EWURA deal with regulatory responsibilities. This distinction will ensure that TPDC has a strategic focus and stave off potential conflicts of interest that may arise if it is in charge of regulating and monitoring its own activities.

Nevertheless, there’s a lot of vagueness as to, for instance, what constitutes “fair and reasonable” compensation payable by a license holder who causes harm, damage or interference with the rights of an occupier of land while undertaking oil and gas exploration or development activities; or the requirement to publish all extractive industry-related agreements, which contain confidentiality clauses. In light of this, it would be helpful for the GoT to help address these concerns.

Paul Kibuuka is the Managing Partner of Isidora & Company Advocates. Email: paul.kibuuka@isidoralaw.co.tz Twitter: @isidoralaw

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