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Planning for the Gas and Oil Industry for Rapid Socio-economic Development in Tanzania

Oil- & Gas Conference 2013 – Tanzania

The Mwalimu Nyerere International Convention Centre, Dar-es-Salaam

October 23rd – 24th, 2013

Chairperson,

Honourable Ministers,

Permanent Secretaries,

Vice Chancellor, University of Dar-Es-Salaam

Excellencies Ambassadors and Members of the Diplomatic Corps,

Distinguished Participants

1. INTRODUCTION

Chairperson & Distinguished Participants,

First and foremost, I must say I am humbled by those who decided to give me the honour to deliver a keynote address at the Second Oil and Gas Conference 2013, on the subject “Planning for Oil and Gas Industry for Rapid Socio-economic Development”. I know too well that there are many Tanzanians who have the stature and wealth of experience to play this role. I therefore take this privilege with profound gratitude. However, I must hasten to add that, the thinking on planning for the gas industry in Tanzania is a brain child of many people, both Tanzanian (in Government and outside Government) and foreign friends/ experts, as well as international literature on the subject. I therefore cannot claim full credit for what I am about to say. However, I take full responsibility for any errors.

Ladies & Gentlemen,

In terms of the structure of this address, my point of departure is to assert, before this august conference, that this is the defining moment in the economic history of Tanzania in the march forward toward prosperity. It is crystal clear in my mind that Tanzania today has a unique window of opportunity to realise the national aspirations laid out in the Vision 2025 (TDV 2025). I shall then move to the core of my address which is to provide an expose’ of the ongoing thinking on the part of the Government of Tanzania (GoT) in planning for the up-coming gas boom in order to accelerate socio-economic development of Tanzania. Specifically, I will be reiterating the vision for the oil and gas industry as articulated by His Excellency Dr. Jakaya Mrisho Kikwete, President of the United Republic of Tanzania; the challenges ahead; and what it will take to realise that vision. I will also hastily indicate where we are now in planning for the orderly development of the gas industry. Finally, I will end my address with a few points of emphasis.

2. DAWN OF A UNIQUE WINDOW OF OPPORTUNITY

Distinguished Participants,

Recent discoveries of a significantly large endowment of natural gas in Tanzania, offer the country a window of opportunity of its kind to build up the country’s industrial capability, accelerate socio-economic transformation and realize the national aspiration to become a middle income country by 2025 (Tanzania Development Vision 2025). The revenues from these resources can be used to break the most binding constraints to growth identified in the Five Year Development Plan 2011/12 – 2015/16, especially power and transport infrastructure gaps (port, railway, road, marine, air) as well as irrigation and skilled human capital deficit. Indeed Tanzania does have a tremendous gas wealth at its disposal with 2.3 trillion cubic feet of proven gas reserves (Index mundi, 2013) and an estimated total of 42.7 trillion cubic feet of on- and offshore reserves (Ministry of Energy & Minerals, 2013; Reuters, 2013). A recent study by Oxford Policy Management (OPM, 2013) estimated that Government revenues through taxes and returns to the planned national gas company, will yield an impressive revenue potential of US$1-2 billion a year, equivalent to 2-3% of GDP.

Ladies & Gentlemen,

However, much as hydrocarbons and mineral wealth is intrinsically a blessing, it can easily become a curse. There are examples of such resources being managed well (efficiently, fairly and openly) and thereby contributing to remarkable improvements in wellbeing, as in Botswana. But there are also examples of where these resources have fuelled wars, as in Sierra Leone or the Democratic Republic of Congo (DRC), or led to widespread corruption and poverty as in Nigeria. Extracting non-renewable sources is, by definition, not a sustainable source of growth over the long-run, and it creates few jobs.

Chairperson,

The source of either the mineral curse or blessing is three fold: (i) Natural resources extraction generate what economists refer to as “rents” (revenues in excess of the cost of extraction). In that regard, everything depends on who gets the rents and how they are used. The rents can be stolen (and frequently stowed away in banks or real estate abroad), lavishly consumed or invested. Therefore, a country can get more (or less) of the rents depending on its stock of expertise for mineral prospecting and contract negotiation; administrative and institutional capacity to manage public finances well and transform the rents into physical and financial assets as well as skilled human capital; extent to which local entrepreneurs participate in upstream and downstream activities; and the quality of governance, including the extent of transparency to reduce corruption. (ii) World market prices of natural resources are volatile and difficult to tell in advance what will happen in the future. Consequently, natural resource rents are equally unpredictable and thereby make economic planning, macroeconomic and budget management difficult, with mega swings in government spending. Rents can lead to boom and burst cycles in the economy linked to drastic rise and fall of commodity prices. The cycles can also be associated with an overvalued exchange rate that makes diversification and the associated job creation difficult, or wasteful public investment. Furthermore, the cycles can also be linked to unsustainable consumption that ends when the resources are depleted. Thus, the quality of economic management also has a bearing on the final outcome; and (iii) The non-renewable nature of natural resources raises issues of intergenerational equity, that is whether to spend a bigger share of the natural resource wealth by the current generation at the expense of future generations, or saving a proportion of the natural gas revenues for future generations and how those savings ought to be invested, including the options of establishing a sovereign wealth fund or investing those revenues in infrastructure development, education and health. Therefore, how the intergenerational issue is resolved also matters

.

Distinguished Participants,

Given its tremendous potential, the oil and gas sector stands to contribute to rapid socioeconomic development of Tanzania through: (a) revenues for the government’s development budget. However, the outcome critically depends on the quality of the investment programme; (b) domestication of the supply chain, which means provision by Tanzanian entrepreneurs of services involved, from the stage of mining the gas to delivery to local consumers and export; (c) power generation and development of gas-related industry (LNG, LPG, NGL, petro-chemical industry – fertilizers, plastics, pharmaceuticals, ethanol, methanol, allied services, etc); (d) technology transfer; and (e) build-up of domestic expertise in geo-sciences (geology; geophysics; drilling, production & reservoir engineering, geo-chemists, natural gas technologists, pipeline engineers, chemical and process engineers, gas metering), economists, as well as experts in managing production sharing agreements (PSAs), taxation, accounting & auditing, lawyers for contract negotiation & administration, and data management.

Distinguished Participants,

Considering limited financial, technological and human capital, Tanzania has little choice but to invite foreign companies to exploit the resources on its behalf and earn revenues through negotiated profit sharing agreements. Nevertheless, Tanzania will have to work on a sound and robust institutional framework for managing this wealth prudently. This may include creating an independently operating, yet state-owned oil and gas company similar to PETRONAS of Malaysia that will legally have to be involved in all oil and gas operations in Tanzania as a partner of foreign companies. As the shareholder the government would then be entitled to dividends and tax payments.

Chairperson, Ladies and Gentlemen,

In the world of business, some people can see major emerging trends (i.e. general directions in which situations are developing or changing), perhaps even predict them, but may lack the motivation or resources to act on them. Many business people may have the resources and intent to act, but are often in the unfortunate position of simply following the trends rather than surfing them. In the end both miss the trends!! Borrowing from Chinese wisdom: The person who catches the trend is strong, or perhaps their strength will master a trend; executing with force is a must to catch a trend. There is also an ancient Chinese saying that classifies how people react to, and the benefit they derive from, opportunities. The saying goes as follows:“If you are not aware, you will have no reaction; Late awareness, delayed reaction; Early awareness, advance reaction: If you know first you act first” (Yuann James and Inch Jason, 2008).

Ladies & Gentlemen

Following the same analogy, the discovery of significant reserves of natural gas reserves in Tanzania is one of the major emerging trends. As such, the time for Tanzania to know the trends, catch them, and act with strength is now. The trends that will shape Tanzania’s future, in the run up to 2025 and beyond, are potentially very large and laden with opportunities. The magnitude of benefits the country stands to gain will critically depend on how fast Tanzanians marshal their ingenuity to recognize and operate in the industries that natural gas promotes.

3. NATIONAL ASPIRATIONS UNDER THE TDV 2025

Distinguished Participants,

The Tanzania Development Vision 2025, officially launched at the end of 1999, laid out the country’s socio-economic aspirations to be realized in a span of 25 years (2000 – 2025). The thrust of the vision was to ensure that Tanzania becomes a middle income country (MIC) by 2025, characterized by a competitive, dynamic and semi-industrialized economy, whose citizens are well educated and enjoying high quality livelihood, peace, national unity, good governance and a per capita GDP of US$ 3,000.

Mr. Chairman, Ladies & Gentlemen,

In 2011 the Planning Commission did some analysis in order to gauge what it would take for Tanzania to become a middle-income country as envisaged under the TDV 2025. The study generated the GNI per capita that would have to be achieved by the year 2025 in order to reach the lower MIC threshold of US$1,026. It turned out that for the threshold to be realized, an average GNI growth rate of 8% in the next fifteen years will have to be sustained. Apart from sustaining growth rates above 8%, the country will also have to transform from a mainly agricultural economy to a semi-industrialized one. This transformation is expected to happen first by increasing productivity in agriculture, fuelling agro-processing and a sharp increase in the growth of the manufacturing sector. Second, improvements in the value addition chain will be required to trigger growth in the industrial sector. The structural transformation implies that there will have to be a drastic shift in sectoral growth paths. Specifically, agriculture growth will have to increase from 4% average realized for the period 2000-2010 to 6% through to 2025. Similarly, the growth of manufacturing will have to increase from 8% average for 2000-2010 and reach 13% all through to 2025.

Ladies & Gentlemen,

The structural shifts and higher growth rates required of Tanzania to graduate to middle-income country status are obviously a tall order, considering that the country is off-target on a number of vision targets, with only twelve (12) years to reach the end of the TDV 2025 period. Regaining lost ground will need, among others, aggressive industrialization drive, taking full advantage of Tanzania’s niches and emerging opportunities, notably the recently discovered natural gas reserves.

4. PLANNING FOR THE UP-COMING GAS BOOM

Ladies & Gentlemen,

His Excellency President Kikwete has already articulated the vision for the natural gas sub-sector as being “to utilize the windfall revenues from the natural gas reserves to diversify the Tanzania economy and create capacity for sustainable growth”. Furthermore, it is envisaged that this vision will be realized by ensuring that Tanzania gets maximum share of the revenue flows from the exploitation of natural gas & oil.

Dear Participants,

In the light of this vision, key aspects that are on the national planning drawing board for the development of the natural gas sub-sector in Tanzania, include the following:

(a) For the Pre-production stage:

(i) Building the country’s capacity for prospecting, writing and negotiation of contracts: This is absolutely critical to enable Tanzania to establish or confirm independently the volume of natural gas reserves that the country has and track and regulate production as well as well as revenue flows. Such information is needed not only for prudent contractual negotiation with foreign investors to ensure fair deals but also for proper planning of oil and gas extraction. As such, it will require building up a pool of experts with specialized technical skills and outstanding knowledge in taxation of petroleum products; writing good contracts /negotiation of production sharing agreements and joint ventures; selecting, appraising and monitoring projects; environmental impact assessment (EIA), as well as pricing of oil and gas (geologists, accountants/ auditors, economists, environment experts etc.);

(ii) Setting up rules for utilization, institutions for managing investment of proceeds, design of an appropriate tax structure that balances the interest of Tanzania and investors, as well as creating a critical mass of informed citizens to enforce accountability and transparency: The rules may include, among others, whether the whole amount should be invested, saved or appropriated between savings and investment; what projects or area of investment and where the investments should be made; and whether the returns from the savings should be invested or added to the savings.

(iii) Instituting a clear strategy to domesticate the supply chain: Focus is on building national ability of Tanzanian entrepreneurs to provide all services involved, from the mining stage to delivery to local consumers and export, to the extent possible;

(b) For Upstream Activities:

(iv) Use of natural gas: This entails weighing the alternative uses of the natural gas and striking a balance between domestic needs (for power generation, development of petro-chemical industries, etc) and for export; At this stage it is also important to think about what proportion of proceeds should be spent on domestic investment and what should be put away in a foreign fund, as well as where to invest domestically in line with national priorities under the TDV 2025 and Five Year Development Plan;

Dear participants,

(c) For Downstream Activities:

(v) Prudent utilization of windfall revenue from natural gas: How to avoid the negative macroeconomic consequences of exploiting natural gas (Dutch disease – by which key sectors such as agriculture and manufacturing will be destroyed if the shilling appreciates due to large inflows of proceeds from natural gas exports and thereby causes losses to exporters of agricultural and manufactured goods);

(vi) Investing in project design, evaluation and implementation capacity to ensure highest returns to selected projects to be financed; and

(vii) Putting aside proceeds in well managed and secured sovereign wealth funds, as well as investing in productive capacity: The objective is to ensuring that future generations benefit from exploitation of this non-renewable resource.

Chairperson, Ladies & Gentlemen

Status on Planning for the Orderly Development of the Oil and Gas Industry

A number of activities have been implemented so far in line with the planning approach described above. They include: Background studies to map-out the terrain; workshops carried out to learn international experience and best practices; Preparation of the roadmap for the development of the natural gas sector; Preparation of the natural gas policy; Capacity building centred around training of young Tanzanians in gas-related skills both within Tanzania and abroad. Work to develop the natural gas master plan is still underway.

6. CONCLUDING REMARKS

Distinguished participants,

To avoid the resource blessing becoming a resource curse, macro-fiscal rules are indispensible. The size of the expected external revenue inflow is tremendous with estimations for gold, gas and nickel suggesting annual revenues of approximately US$3.5 billion or 15% of 2011 GDP in peak years of production for around 20 to 30 years (IMF, 2012); almost equivalent to one third of the national budget for 2013/14. However, Tanzania will have to consider the frequently observed high degree of volatility of resource prices and hence volatility of resource revenues. Those funds can thus be crucial to enable Tanzania graduate to middle income country status or cause substantial havoc while completely obstructing sustainable long-run development.

Ladies & Gentlemen,

As a consequence three key approaches must underlie the planning for the utilization of the revenues from the gas industry for rapid, but sustainable socioeconomic development. Firstly, the influx of those new foreign earnings into the Tanzanian economy needs to be tightly controlled and in sync with the economy’s and the government’s absorptive capacities (IMF, 2012). Simply “throwing money at the system with good intentions” is likely going to cause the Dutch Disease. At the same time spending higher revenues without sufficient absorptive capacities by economic agents will lead to highly inefficient expenditure and hence a waste of those means for development with devastating long-term effects;

Secondly, it is well-established that governments in developing countries play an essential role in investment in key sectors such as infrastructure. Those investments however extend over longer time horizons and frequently require on-going investment through government funds as the project progresses. In resource-rich developing countries a substantial share of government funds can originate in resource exploitation. This however exposes such countries to risks resulting from high volatility of resource prices. This in turn can render budgets and investment very pro-cyclical and thwarts continuous development. As a consequence, countries like Tanzania will need to utilize resource revenues while insulating crucial government investment expenditure from the aforementioned price volatility and also create stabilization buffers;

Thirdly, Tanzania must plan for intergenerational equity as to avoid spending the entire wealth on temporary higher consumption for the current generations in the short-run at the expense of future generations. At the same time, current investment in countries with high levels of poverty, yield higher returns than future investment assuming economic development trends remain the same (IMF, 2012). Consequently key policy questions surrounding saving a proportion of the oil revenues for future generations and how those savings ought to be invested, e.g. a sovereign wealth fund, will arise.

Chairperson, Ladies & Gentlemen,

Allow me to end my address by reiterating that Tanzania has now a unique window of opportunity to transform into a middle-income country within the next 15 to 20 years. Fortunately, most of its natural gas wealth is yet to be commercially developed which according to existing estimations is likely to take at least another decade (IMF& WB, 2013). Tanzania has thus sufficient time to devise a coherent gas development strategy, including a macro-fiscal regime that should maximize the benefits of its resource wealth while minimizing the potential adverse effects.

Tanzania cannot afford to act like the third servant described in the famous biblical narrative of the parable of talents (St. Matthew Chapter 25: 14 – 30). For the benefit of non-Christians, this is a story about a man who is preparing to leave on a journey and entrusts his possessions to his servants. He distributes his wealth among three servants, apportioned to them on the basis of their abilities. To the first he entrusted five talents, to the second two talents and to the third, one talent. The first two servants quickly set to work with their master’s money. The third servant did not invest his master’s money at all; he dug a hole in the ground and buried his master’s money.

When the master returned, the first two eagerly met their master, apparently delighted in the opportunity to multiply their master’s money. Both were commended as good and faithful servants. Both were rewarded with increased responsibilities in their master’s service. Both were invited to share in their master’s joy. The third servant came to his master with only the talent the master had originally entrusted to him. He did not increase his master’s money at all. This servant offered a feeble excuse for his conduct, telling his master that he was a harsh and cruel man, a man who was demanding, and who expected gain where he had not laboured. He contended that this was why he was afraid to take a risk with any kind of investment. And so he only hid the money, and now he returned it, without any gain. The master rebuked this servant for being evil and lazy. He took his talent from him, gave it to the one who earned ten, and cast this fellow into outer darkness, where there was weeping and gnashing of teeth.

The story line of the parable of talents calls upon we Tanzanians to grab the opportunity emerging out of the recent discovery of large natural gas reserves and act with force to transform this God given resource, into a blessing for all Tanzanians, both current and future generations. It also calls upon Tanzanians to do more than simply conserve God given endowments – rather, they are to help us flourish and grow to greater heights.

!! THANK YOU FOR YOUR KIND ATTENTION!!

Philip Mpango (Ph.D.)

Executive Secretary – President’s Office Planning Commission

October 23rd, 2013

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