Natural gas is a game changer in Tanzania, both economically and politically. The latest reports suggest that there may be as much as 51 trillion cubic feet available, not huge by global standards, but enough to have raised expectations sky high – see cartoon. The public and policy makers are excited, and it’s already having significant effects on both local and national politics.
“One Minister stated in the Parliament that “with the natural gas reserves Tanzania has, poverty will be history”. How I wish it was that simple! A plus and minus equation. Unfortunately the reality is opposite. There are chains of evidence that resources, due to many factors engraved within a ‘lesser’ leader, may lead to curse.”
Much of this excitement relates to the potential increase in revenue for the Tanzanian government. It is impossible to know how much money the government will get from natural gas – there are still far too many unknown factors to produce precise estimates. But the IMF has had a go, based on two different sets of assumptions – see charts below. And around the same time, part of the Production Sharing Agreement (PSA) for one of the major players – Statoil (with ExxonMobile) – was leaked online.
I will come to the leaked document in a moment, as it is very significant. But first, those charts from the IMF, for which a brief explanation is needed: “Upstream revenues” refers to revenue that comes directly from the extraction of gas resources, like royalties, corporate income tax, and the government’s share of gas produced, while “downstream revenues” are those that relate to the transportation and processing of the gas.
The first chart is based on low estimates: 10 million metric tons of production per year, and using a total of 12 trillion cubic feet (tcf) of gas resources, and construction of a “two-train” facility:
In this projection, the government has to invest initially, between 2018 and 2020, after which it starts to generate revenues. Government revenue then reaches a peak of around $3bn each year between 2025 and 2038.
The second projection assumes higher levels of production: 20 million metric tons per year produced and 24 tcf gas reserves used. Here the projected government revenue each year is higher – reaching around $5-6bn per year between 2029-2043:
There’s a lot of uncertainty here – the actual quantity of gas available is not known, tax and royalty rates are not known, the type of processing facilities to be built is not known, the future market price of gas is not know, etc., etc., etc. Nevertheless, as the IMF report states:
“If a large-scale gas project goes ahead, the potential fiscal revenue would be substantial, and would facilitate government spending on priority investment. … In the event that major revenues are obtained and put to fruitful use, they could have a transformational impact on the economy.” (my emphasis)
In other words, there could be a lot of money available to the government to spend on schools, hospitals, water and roads, etc. The IMF numbers dwarf the amount of aid Tanzania receives each year, for example.
Beyond the finances, however, the IMF analysis is very light indeed on politics. There are a a few passing references to “expectations” and “fair shares”, but nothing on the political tensions and risks associated with such a major new revenue stream, particularly one that’s not accompanied by the accountability pressures that come with taxes paid by citizens or aid provided by donors. Will contracts be negotiated to maximise the benefit to Tanzania? Will the revenues be well managed, well spent, on the kind of infrastructure and services that turn a temporary boom into a permanent benefit for the country? Or will corruption and mismanagement mean this opportunity gets wasted?
Which brings me to that leaked document, part of Statoil’s Production Sharing Agreement (PSA), signed in 2012. Among other things, it revealed that the details of the agreement were quite different from Tanzania’s model PSA, which is supposed to indicate the terms of the PSAs. The reality is substantially more favourable to the company than the model, particularly with regard to “profit gas” – see blue lines in the chart below.
Profit gas is the value of gas produced after the company has recovered its costs, and is shared between the company and the state-owned Tanzania Petroleum Development Corporation (TPDC) at a rate that varies according to how much gas is produced, specified in the PSA. It is also the biggest single component of government revenue in the IMF’s analysis, so it matters.
In contrast, the terms of the PSAs of Swala Energy (pdf, see Ch12.1), a relatively small Tanzanian-owned company that recently released details of their PSAs, match the 2008 model PSA – red lines in the chart.
And indeed the terms of the leaked Statoil PSA are also different to the assumptions that the IMF used in its analysis (dotted line in the chart, details are speculative). With contracts like this one, there will be a lot less money for the government than the IMF’s analysis and charts suggest.
The Parliamentary Committee for Economic Affairs, Industry and Trade raised this point last week (pdf, Swahili), suggesting that the leaked contract shows Tanzania will get as little as 10% of the value of the gas produced, well below the 65-70% the government had promised. That is probably overstating the lost revenue, but the broader point – that government has lost out here – is correct. Depending on the amount of gas produced, the difference in terms between the leaked Statoil PSA and the Model PSA could easily be worth several hundred million dollars a year in lost government revenue.
The IMF makes one final point that’s relevant here:
“Transparency is critical, not the least for the public to gain confidence that any agreements are fair. A good starting point would be to disclose the terms of signed PSAs. Companies are likely to welcome this, at least as long as disclosure is applied across all companies on a level playing field. More generally, the government needs to step up to the challenge of providing credible information that is accessible to the ordinary citizen.”
There are two arguments for transparency. First, at present, smaller companies are effectively forced to release details of their PSAs when trying to raise capital, while larger companies can keep their terms secret. The playing field is effectively tilted in favour of the big global players, and against Tanzanian firms like Swala. Publishing all PSAs would correct this imbalance.
Second, when negotiating PSAs the government’s goals should surely be to get the best deal possible for Tanzania. The leaked Statoil contract’s terms are less favourable to government than expected, and by extension, less favourable to Tanzanian citizens. What better evidence could you want that making these agreements public is an essential part of protecting the public interest?