16 April 2017

Tanzania: CAG Points Out Pitfalls in Tanzania Oil and Gas Plan

Photo: The Citizen
Oil and gas exploration (file photo).

Dodoma — Tanzania may not fully benefit from its substantial oil and gas discoveries due to myriad loopholes in the management of the resource, the National Audit Office has warned.

In the latest audit report, the Controller and Auditor General, Prof Mussa Assad, punched holes in the oil and gas industry, noting that mismanagement and oversight could significantly limit the country's benefits from the new discoveries.

Tanzania recently became a new regional hotspot in hydrocarbon exploration after the discovery of 55.08 trillion cubic feet of natural gas both onshore and deep sea in the Indian Ocean.

Exploration activities are ongoing with BG Group, acquired by Royal Dutch Shell, along with Statoil, Exxon Mobil and Ophir Energy in talks to build the onshore liquefied natural gas (LNG) export terminal in Lindi. The planned LNG plant will be built in partnership with state-run Tanzania Petroleum Development Corp (TPDC).

However, in his latest report, the CAG revealed glaring loopholes in the supervision of the natural gas and oil. He singled out possible missed opportunities in job creation for locals and revenue collection.

Prof Assad is also critical of the weaknesses in environmental management, which he says the government is not closely monitoring.

His audit covered seven areas in the country's nascent oil and gas industry where opportunities abound for the government to take advantage of.

Taxman's preparedness

An audit into the Tanzania Revenue Authority (TRA)'s capacity to assess and collect revenue from the industry revealed the weakness of having to rely on a single source of information in verifying tax returns.

According to audit findings, the taxpayer is the sole source information used by the tax authorities to assess liability for tax. In planning for information gathering, tax auditors do not include information from third parties, such as government institutions.

More so, the CAG report reveals that information from the International Taxation Unit in TRA is not included in the process. The Unit was established to support tax audits, including providing information related to cross border transactions and transfer pricing auditing.

In addition, the report reveals that there is no independent quality review conducted on tax audits carried on oil and gas sector due to lack of capacity.

According to the document, the revenue collected by the taxman from the oil and gas sector was below the TRA's average of Sh208 billion.

The audit on TRA capacity to assess and collect taxes found that TRA has no procedure that requires tax auditors to test the reliability and validity of sources of information.

"The formulation of tax audit team does not have a proper mix of set skills, such as experts in the field of oil and gas to assist the effective design of audit test, which is then linked to relevant sources of information," the report states.

Natural gas contracts

Prof Assad said Tanzania has no regulation for awarding contracts and licences for exploration and development of oil and gas.

He said the procedures used by TPDC in awarding contracts and licences are not clearly stated in the main Petroleum (Exploration and Production) Act of 1980.

The audit also found that there are no guidelines for planning, conducting and reporting on results of monitoring and evaluation on the area of awarding contracts and licenses for natural gas.

Also, officials who were trained to do that lacked specific procurement guidelines and as a result, TPDC's goal of procuring oil companies while attaining value for money could not be achieved.

The report indicates that even the procurement tender in the 4th licensing round in 2013/14 was implemented without being included in the Annual Procurement Plan, contrary to Procurement Regulations of 2013, which require the procuring entity to draw-up plans for those requirements for which sufficient funds have been included in the approved budget in the current financial year.

At the same time, there were no formal risk management initiatives taken by TPDC in processing and awarding contracts and licenses to international oil companies. There exists a risk to procuring incapable contractors in oil and gas sector due to inadequate procedures.

Participation of locals

The CAG says there is no policy, regulations or guidelines that ensure participation of locals in the oil and gas industry as required in the production sharing agreements.

For instance, oil companies spent $2 billion between 2011 and 2014, but only nine per cent of the procurement contracts were given to Tanzanian firms.

The report also indicates that there is a gap between the skills offered by institutions of higher learning and the skills needed by the oil and natural gas sector. Only a few locals stand to benefit from the available opportunities.

Environmental risk

From 2010 to 2015, it was reported that the National Environment Management Council carried out only three out of 71 inspections on registered projects (which is equivalent to 4 per cent).

This situation was attributed to inadequate capacity in terms of oil and gas expertise as well as insufficient tools and equipment.

It was also contributed by lack of risk-based inspection plans and inadequate human resource. As a result, there was poor enforcement; henceforth petroleum exploration companies could pollute the environment.

Geological data

TPDC is said to lack a complete system for managing geophysical and geological data. The Ministry of Energy and Minerals is also understaffed, rendering its monitoring and evaluation function ineffective.

"The interviews held with ministry staff indicated that there was no centralised server system to back up the available information in case of emergency," noted the CAG report.

The report also warned of a risk of distorting interpretation of the data due to inadequate expertise for processing and analysing the data.

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