Tanzania to lose up to $1b under StatOil PSA: Open these Oil and Gas Contracts

Zitto Kabwe, MP

 

When news of the leaked Production Sharing Agreement (PSA) between Tanzania Petroleum Development Corporation (TPDC) and Norweigean State Company StatOil came out through social networks, the discussion was muted. When a blogger Ben Taylor wrote a brief about it, some of us saw how serious the issue is. According to the article http://africanarguments.org/2014/07/04/leaked-agreement-shows-tanzania-may-not-get-a-good-deal-for-gas-by-ben-taylor/ Tanzania may be losing up to $1 billion each year depending on the levels of production of natural gas. However, very few people may understand. Took a liberty to simplify the leak and comparing it with the Model PSA which shall be used as a benchmark for these contracts.

Q What exactly is the document?

The leaked document isn’t the PSA per se, but an addendum to the original PSA for Block 2 to take account of the fact that the discoveries are of natural gas, not oil.

The original PSA was agreed with Statoil in 2007 (source, Statoil website). This would have been under Minister Karamagi. The original PSA was presumably based on 2004 Model PSA (pdf). The addendum signed with Statoil was based on the Model PSA Addendum for Natural Gas, finalised in 2008 to take account of contract terms for gas.

The addendum was signed in February 2012, when William Ngeleja was minister.

Q So the leaked PSA is the same as the publicly available model?

For the most part yes, but for the most important part, no. The Model PSA Addendum sets out the following profit gas sharing ratios as seen in Table 1.

 

Table 1 Model PSA Addendum for Natural Gas suggested terms.

Tranches of daily total Production rates in each of the Contract Areas (MMscf per Day)		TPDC Share of Profit Gas	Contractor Share of Profit Gas
0	249.999	50	50
250	499.999	55	45
500	749.999	60	40
750	999.999	65	35
1000	1249.999	70	30
1250	1499.999	75	25
1500	Above 1500	80	20

 

The actual agreed profit gas sharing  terms are quite different, as seen in Table 2.

Table 2 Statoil agreed profit gas sharing terms as per leaked document.

Tranches of daily total Production rates in each of the Contract Areas (MMscf per Day)		TPDC Share of Profit Gas	Contractor Share of Profit Gas
0	299.999	30	70
300	599.999	35	65
600	899.999	37.5	62.5
900	119.999	40	60
1200	1499.999	45	55
1500	Above 1500	50	50

 

Clearly, the agreed terms are much better for Statoil and Exxon than the proposed terms.

Q Any other significant terms in the agreement that differ from the model?

Yes. Article 8.1 (i) sets out the Domestic Market Obligation. Ten percent of production is to be reserved for the domestic market. This figure is not included in the model PSA Addendum. The model states that when the proven accessible reserves are determined, then the parties will agree on how much should go into the Gas Commercialisation Project (i.e. the LNG plant) and how much into the domestic market.

The question that arises from this is, by 2012, were the ‘proven reserves’ determined. If so, how much were they?

We know that BG is seeking to have their 10 percent market obligation reduced to zero. At a meeting with stakeholders late last year, they said it was the biggest issue between them and government.

So, are Statoil / Exxon also seeking to have the 10 percent domestic obligation removed?

Was the figure reasonable in the first place?

Q How does this leak affect the conversation about revenues?

Considerably. The IMF released a projection of revenues from LNG (. One key assumption made by that report is that cost recovery is capped at 70 per cent of production and that sharing is on the basis of a six step model with a lowest government share of 35 percent and a highest of 60 percent.

The 70 percent cost recovery limit is founded in the leaked PSA. However, the sharing ratio is quite different. The Model Addendum proposed a seven step model with government share ranging from 50 to 80 percent.

The actual Statoil / Exxon agreement is a six step model with government share ranging from a low 30 percent to just 50 percent at the highest levels.

This makes us ask the question, where did the IMF get the idea of using a six step model in the range of 35 to 60 percent shares for government, when the model was a seven step model ranging from 50 to 80 and the actual Statoil / Exxon agreement was a six step model, ranging from 30 to 50 for government share?

Q Have any other PSAs in Tanzania or the region been released?

In Tanzania, no PSAs have been released. However, Swala Energy in a prospectus they released last year (very big pdf) set out the substantive terms of the two PSAs they hold in Tanzania and the single PSA they hold in Kenya. This type of disclosure is common for small companies seeking to raise capital on stock markets. In fact, the information released in the Swala prospectus goes beyond what is in the leaked Statoil / Exxon addendum and includes the work programme and obligatory payments such as training levy etc.

In Kenya, the CAMAC PSA has been released to the New York Stock Exchange, again to facilitate raising capital. Typically large firms such Statoil or BG are not obliged by capital markets to release individual PSAs, as their overall business isn’t dependent on any single PSA. But small firms such as Swala or CAMAC are often obliged to do so when going to markets.

Q Is it fair that small firms like Swala have to release the terms of their PSAs but big firms like Statoil and BG do not?

Of course not!

Conclusions

For Tanzania to transform our wealth in natural resources to benefit the entire society, TRANSPARENCY must be a key. Let us make a campaign to make all these contracts in Oil and Gas open.