Tanzania oil and gas report

From: Yona Maro

Tanzania

Rex Attorneys

Introduction
Tanzania’s upstream oil and gas sector
is currently enjoying a boom
experienced elsewhere in East Africa
following major discoveries of natural
gas by Statoil, Ophir Energy and BG
Group. These discoveries mean that in
2012 Tanzania’s total estimated natural
gas reserves quadrupled from 10 trillion
to 40 trillion cubic feet. Offshore gas
fields at Songo Songo and Mnazi Bay are
currently in the process of being
developed by Pan African Energy and
Maurel and Prom in conjunction with
the Tanzania Petroleum Development
Corporation (TPDC). However, despite
50 years of exploration activity,
Tanzania still has no proven oil reserves
and remains dependent on imported
petroleum products.
Key legislation and regulatory structure

The key legislation regulating the Tanzanian
upstream oil and gas sector is the Petroleum
(Exploration and Production) Act 1980 (the
Petroleum Act 1980), which vests title to all
petroleum within Tanzania and its
territorial waters to the United Republic
of Tanzania.
The large discoveries of natural gas have
prompted the Tanzanian government to
develop a Natural Gas Policy and Natural
Gas Utilization Master Plan. In late 2012,
drafts of both documents were in
circulation for comments from stakeholders.
These will supplement Tanzania’s existing
2003 national energy policy. A Natural Gas
Act is also due to be enacted during the
course of 2013. In relation to oil and gas, the
2003 Energy Policy states that petroleum
operations should be undertaken in
accordance with high standards for
environment, safety, health and product
quality; that environmental impact
assessments and environmental
management plans should be made; and
that regional and international co-operation
in exploration, development of
infrastructure, trade, database and capacity
building should be promoted.
Under the Petroleum Act 1980, the oil and
gas industry in Tanzania is regulated by the
Ministry for Energy and Minerals (MEM),
which sets industry-specific policies,
strategies and laws. The MEM co-ordinates
the TPDC, which regulates upstream
activities, and the Energy and Water
Utilities Regulatory Authority (EWURA),
which regulates downstream activities.

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The TPDC was established in 1969 by the
Tanzanian government under the Tanzania
Petroleum Corporation (Establishment)
Order (GN No. 140 of 1969). It is the
TPDC through which the MEM implements
its petroleum exploration and
development policies.
The role of the TPDC is set out in the
Tanzania Petroleum Corporation
(Establishment) Order as being:
to promote and monitor exploration for

oil and gas;
to develop and produce oil and gas;

to conduct research relating to and

develop the oil and gas industry
in Tanzania;
to manage the exploration for oil and gas;

to advise the government on petroleum

production data;
to undertake the management of

strategic fuel reserves; and
to undertake trading in

petroleum products.
The TPDC is also a signatory to all
production sharing agreements (PSAs)
entered into in Tanzania. The TPDC
monitors the implementation of PSAs and
advises the Tanzanian government on
various compliance issues.

Licensing regime

Rights to explore for and produce petroleum
in Tanzania are obtained by entering into a
PSA with the Tanzanian government and
the TPDC. Under the agreement, the
Tanzanian government grants petroleum
exploration and development licences to the
TPDC, which in turn engages the oil
company to carry out petroleum exploration
and production operations on its behalf.
Standard terms for the PSA, which are
negotiable, are set out in Tanzania’s
2008 Model PSA (MPSA) and the Petroleum
Act 1980. Applications for licences and for
entry into PSAs are done both through
licensing rounds and by application.
The initial period of an exploration licence
is four years, which can be extended twice
for a four and three year period. An
exploration licence normally consists of
60 blocks, although the Petroleum Act 1980
allows for the licence to comprise up to
200 blocks in special circumstances.
Moreover, more than one exploration licence
can be granted under each PSA in respect of
different areas.
If there is a commercial discovery, the TPDC,
as the registered holder of the exploration
licence, applies for a development licence on
the contractor’s behalf. The application for a
development licence must be made (subject
to certain permitted extensions) within two
years of the date that the relevant blocks are
declared to be a ‘location’, that is, an area (as
prescribed by the Petroleum Act 1980)
within which a discovery has been made. A
development licence is granted for 25 years,
with the possibility of an extension for a
further 20 years. A development licence
confers on the holder the exclusive rights to
carry on exploration and development
operations in the development area and to
sell or otherwise dispose of the
petroleum recovered.
Applications for exploration and
development licences must contain, among
other things, details of the applicant’s
technical and financial capability and its
proposal for the employment and training of
citizens of Tanzania.
Only an entity incorporated in Tanzania can
hold an interest in a petroleum licence.
In September 2012, the Energy Minister
announced a review of all the then current
PSAs to ensure that they are in the country’s
best interests. Additionally, the TPDC
delayed a licensing round for nine deep-sea
oil and gas blocks, originally set for
September 2012, until a parliamentary vote

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on the new gas policy takes place. These
measures have created some uncertainty as
to the future direction of Tanzania’s
licensing regime.

National oil company/state participation

Under the MPSA, the TPDC may elect at any
time by notice in writing to the contractor
to acquire up to a 25 per cent participating
interest in any development area by
contributing its share of contract expenses,
excluding exploration and appraisal
expenses. If the TPDC fails to pay its share of
contract expenses, the contractor shall bear
the TPDC’s share of expenses by way of a
loan, bearing interest at LIBOR plus 2 per
cent and reimbursable on a preferential
basis from the TPDC’s share of profit oil or
gas. The TPDC’s profit oil and/or gas share is
increased by the rate of the participating
interest and the contractor’s share is
reduced accordingly.

Fiscal regime

The fiscal terms applicable to upstream
petroleum activities in Tanzania are
governed primarily by terms of the
Petroleum Act 1980, the Income Tax Act,
No. 11 of 2004 (the Income Tax Act) and any
PSA entered into as set out below.
Royalty

– under Section 81 of the
Petroleum Act, a registered holder of a
development licence must pay a royalty to
the government in respect of the
petroleum obtained from the
development area. Under Article 14(c) of
the MPSA, the TPDC agrees to discharge
this obligation to pay a royalty by
delivering to the government 12.5 per
cent of total crude oil or gas production
before any cost recovery.
Cost recovery

– under the MPSA, the
contractor is entitled to recover contract
expenses out of up to 50 per cent of the
volumes of crude oil or natural gas (after
deduction of the royalty) produced and
saved from the contract area in any
calendar year. Any unrecovered contract
expenses are carried forward. Operating
expenses are recovered first, then
exploration expenses and finally
development expenses. Contract expenses
incurred in any one licence area within a
contract area may be recovered from
production from a development area
within the same contract area to the
extent incurred before first production
from that development area.
Profit oil

– the remainder of the crude oil
and natural gas produced is shared
between the contractor and the TPDC on
a sliding scale that depends on daily
production rates for the prior calendar
quarter. Under the MPSA, for crude oil
the contractor’s take ranges from 30 per
cent when production is from
0–12,499bpd to 10 per cent when
production is above 100,000bpd. Crude oil
is valued based on the average price for
sales of the relevant type of crude from
the development area in the prior
quarter. The valuation of natural gas for
production sharing purposes is to be
agreed between contractor and the
government so as to give the contractor ‘a
fair return on its investment’.
Taxation

– the contractor is subject to
income tax under the Income Tax Act at
the standard corporate income tax rate of
30 per cent. Deductions are not permitted
in respect of expenditure of a capital
nature that secures benefits lasting
longer than 12 months or is incurred in
respect of natural resources prospecting,
exploration or development. The Act
provides for a 20 per cent depreciation
rate for assets used in natural resources
activities. Under the MPSA, the contractor
is also required to pay an Additional
Profits Tax calculated on positive
cumulative net cash flow on a
development area basis.

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Customs duties

– under the MPSA, all
machinery, equipment, vehicles,
materials, supplies, consumable items
and moveable property imported for use
in petroleum activities can be imported
and exported free of all duties and taxes.
Subject to requirements to meet
Tanzanian crude oil demand, the
contractor can freely dispose of its share
of petroleum and export it free of export
duties and taxes.
Other

– the contractor must pay the
TPDC an annual charge in respect of any
exploration licence ranging from
$4–16/sq km (indexed to dollar
inflation rates) depending on the period
of exploration. The annual charge for a
development licence is $2,000/sq km and
each year of the exploration licence the
oil company must spend a minimum of
$150,000 on the training of Tanzanian
personnel.
Repatriation of profits

– the payment of
dividends is subject to a withholding tax
of 10 per cent save that payment of a
dividend by a company to a local
company shareholder with at least a
25 per cent ownership interest is only
subject to a 5 per cent withholding.

Local content requirements

Under the Petroleum Act 1980, applications
for exploration or development licences
must be accompanied by proposals with
respect to the training and employment of
Tanzanian citizens. Under the MPSA, the
contractor must implement such proposals
within six months of the grant of a
development licence. The contractor must
also ensure that the transfer of management
and operation functions to Tanzanian
nationals occurs within five years of the
start of commercial operations. Additionally,
under the MPSA the contractor is
required to:
give preference to the purchase of

Tanzanian goods, services and materials;
make maximum use of Tanzanian

service companies;
establish appropriate tender

procedures to give effect to local
content requirements;
maximise the level of usage of local goods

and services, businesses, financing and
employment of Tanzanian nationals;
ensure that sub-contracts are scoped to

match the capability of local
enterprises and manage risk to allow
their participation;
give equal treatment to local enterprises

by ensuring access to all tender
invitations and by including high
weighting on local value added in tender
evaluation criteria; and
employ Tanzanian citizens having

appropriate qualifications to the
maximum extent possible. In this
connection, the oil company must
propose and carry out an effective
training and employment programme for
Tanzanian employees in each phase and
level of operations.

Domestic supply obligation

Under the MPSA, if domestic demand
exceeds the TPDC’s total entitlement to
profit oil or gas, the contractor may be
required to sell its share of profit oil or gas
in Tanzania on a pro rata basis with other
producers in Tanzania (except the TPDC).
The Petroleum Act 1980 also states that a
development licence must include conditions
with respect to the duty of the registered
holder of a development licence to supply
petrol to meet the local needs of Tanzania.

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Transfer of interests

Consents
Under the Petroleum Act 1980, a legal or
equitable interest in or affecting an
exploration or development licence can only
be transferred or assigned, directly or
indirectly, by instrument in writing, and is
subject to MEM’s approval. This applies both
on a transfer of an interest and on direct or
indirect change of control of the party with
an interest in the licence. There are no
reasonableness requirements regarding
approval except that MEM shall give its
approval for the transfer of an exploration
licence when the transferee is a person
controlling, controlled by or under common
control with the transferor and is not
disqualified from holding such licence.
Under the MPSA, a contractor is permitted
to assign or transfer its rights, privileges,
duties or obligations under the MPSA to an
affiliate company provided that the
Tanzanian government and the TPDC are
notified in writing in advance and that the
assignment will not adversely affect the
performance of obligations under the MPSA.
The written consent of the Tanzanian
government is required if the contractor
wishes to make such an assignment or
transfer to a non-affiliated person, firm or
corporation (in whole or in part). This
consent must not be unreasonably withheld
or delayed. Moreover, as a condition of the
assignment, the oil company must provide
an unconditional undertaking from the
assignee to assume all the obligations of the
oil company under the MPSA.
Taxation
Under the Income Tax Act 2004, any gain on
the disposal of an interest in a petroleum
licence will be chargeable income for the
purposes of calculating the disposing party’s
liability to income tax.

Stabilisation/equilibrium and
dispute resolution

The MPSA provides for disputes to be settled
by arbitration in accordance with the
International Chamber of Commerce Rules
of Conciliation and Arbitration. The
arbitration is to be held in Dar es Salaam
and the applicable law is that of the United
Republic of Tanzania. There are no
stabilisation or equilibrium provisions in
the MPSA

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