29 July 2014

Tanzania: Analysts, MP Raise Questions Over Leaked Tanzania Gas Contract

Dar es Salaam/Washington — A leaked contract showing ExxonMobil and Norway's Statoil will pay Tanzania no more than 50 percent of the profits from a natural gas field in the Indian Ocean has stirred a furore in the east African country.

Politicians and citizens had expected their country would get up to 85 percent of the profits from the offshore gas field that has been under exploration since 2000. Now the headlines in The Citizen, Dar es Salaam's biggest daily newspaper, declare: "$1 billion loss: Who's Fooling Tanzanians?"

The controversy has exposed how secret government deals can stir fear and suspicion, especially over a natural resource that the International Monetary Fund estimates could bring $5-6 billion a year into Tanzania's coffers by 2029 - equivalent to half its budget and more than enough money to free the country from dependency on foreign aid.

Tanzania has been promised riches before, and the new row has echoes of previous deals that have left a sour taste.

Two decades ago gold mining was to lift the country into the ranks of middle-income nations. While Tanzania is the third largest exporter of gold, problems of political oversight of contracts and mispricing have led to disappointment over the amount of mining revenue that flows into government coffers.

This feeds into fresh concerns that major international oil companies may be taking advantage of the relative lack of experience of the government agency, the Tanzania Petroleum Development Corporation (TPDC), in negotiating highly complex exploration and production deals and suspicions that government officials are taking kick-backs.

The leaked Statoil/ExxonMobil contract started to attract attention when blogger Ben Taylor, who is a consultant with the Tanzania governance think tank Twaweza, scrutinised it earlier this month. He estimated possible losses of $900 million a year compared with a model contract.

The contract states that Tanzania will get a 30 percent share of gas profits after production and developments costs, rising to 50 percent as more gas is produced from the offshore field known as Block 2.

BEHIND CLOSED DOORS

But the model production sharing agreement (PSA) posted on TPDC's website as an example of the type of contracts the government would agree lists 60 percent of gas profits flowing to Tanzania on a sliding scale up to 85 percent.

An initial review of the contract by oil industry experts indicated that the contract terms, struck in February 2012, does not on the face of it throw up red flags. Offshore projects can be risky and require a high level of upfront costs, so contracts will vary according to the specific conditions.

But Zitto Kabwe, an outspoken member of Tanzania's parliament who heads its committee on public accounts, asked why the leaked contract, negotiated behind closed doors, differs so greatly from the example cited by TPDC.

"Why have a model PSA if terms can vary that much? If the contract remains as it is with Statoil, Tanzania will get just 15 percent of its wealth in natural gas" after production and development costs are deducted, he said by email.

"We will campaign for transparency of contracts and renegotiations of better terms," he told Thomson Reuters Foundation.

Statoil said it could not comment on the details of the contract, in accordance with the terms of the agreement.

"However, the contract does consider the totality of taxes, direct government take, local conditions, risks, market access, technical challenges and cost levels," the company said in an emailed response.

OPEN BOOKS

Civil society groups are pressing for open contracts in the extractives industry as a means of heightening government accountability over natural resource wealth and to promote more public discussion over how revenues are invested.

Tanzania has taken a number of steps to be more accountable. It is part of a global initiative to reconcile government accounts on extractives with corporate royalty payments, and it is setting up a sovereign wealth fund to use natural resource revenues for long-term investments. But it does not make public individual contracts.

Isabel Munilla, a senior policy officer on extractive industries at Oxfam America, said such lack of transparency can undermine confidence in government.

"It creates a row for no reason. If you negotiate these with some oversight from the public, you increase trust and get better contracts," she said.

TPDC said that once corporate taxes are added, Tanzania actually will get 61 percent of the profits plus 5 percent royalties. Its director general, Yona Killagane, in a statement issued last week disputed estimates circulating on social media.

"We would like to inform the public that such information is incorrect, misleading and has not been thoroughly researched and analysed, and was disseminated by people with no broad understanding of gas exploration activities," he said.

But the numbers crunched by activists are still raising questions.

Taylor estimated that if production reaches 500 million cubic feet per day, the government could be losing as much as $400 million per year under the Statoil/ExxonMobil deal compared with the model contract and more than twice that if production reaches 1,000 million cubic feet per day.

"And that's just one deal," he said in a blog post earlier this month.

Editing by Ros Russell; rosalind.russell@thomsonreuters.com

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