Tanzania outlines new oil and gas production terms

Mon Nov 4, 2013 1:19pm EST

* Tanzania outlines payments on signing licences

* Terms also include new royalty structure

* Government under pressure to speed up returns

* Oil and gas firms see region as major new province

By Fumbuka Ng'wanakilala

NAIROBI, Nov 4 (Reuters) - Tanzania has introduced new production sharing agreement (PSA) terms that experts said toughen some of the conditions for energy firms seeking to explore and develop the east African nation's big gas prospects.

The "Model Production Sharing Agreement" document, published on Monday, detailed the bonus to be paid by firms to the state on signing a contract, specified capital gains tax obligations and outlined a new royalty structure that one expert said meant higher fees by contractors in some offshore areas.

East Africa has become one of the world's hottest new oil and gas provinces after a string of discoveries, and which producers hope to exploit to supply energy-hungry Asian markets. In Tanzania, several majors such as BG Group, Ophir Energy, Exxon Mobil and Statoil are at work.

Tanzania estimates it has more than 40 trillion cubic feet of gas and says this could rise five-fold over the next five years, putting it on a level with some Middle East producers.

But like other east African states, it is under pressure from its poor population to maximise returns and deliver benefits fast. It currently produces modest quantities mainly for use in power generation and industry.

"It's a significant toughening of the fiscal terms," Bill Page, energy and resources leader at Deloitte Consulting Tanzania, told Reuters of the new model agreement.

"They have also indicated that they will expect to see more extensive exploration work obligations in the initial periods of the PSA," he said.

The model agreement for 2013, released by the state-run Tanzania Petroleum Development Corporation (TPDC), introduces a minimum signature bonus payment of $2.5 million and a production bonus of at least $5 million payable when production starts.

The agreement also sets a royalty rate of 12.5 percent of total oil or gas production for onshore or shallow operations and a 7.5 percent royalty rate for offshore production.

An oil and gas expert on Tanzania said previous special terms for deep water gas set a royalty rate of 5 percent.

On the new royalty terms and how they should be paid, the expert said: "This reduces the amount available to the contractor. So that is going to have a significant impact."

The new terms replace the previous model 2008 PSA and have been introduced after Tanzania launched its fourth licence bidding round for eight oil and gas blocks. The government said it would take a stake of up to 75 percent in those blocks.

"Any assignment or transfer under this Article shall be subject to the relevant tax law, including capital gain tax," the document said.

Although all firms working in Tanzanzia are affected by such a tax at a rate of 20 percent, experts said this was the first time it was specifically referred to in a PSA.

The tax would have an impact when an energy firm farms out a portion of any licence to another company, common in an industry where one firm may operate a block while others take stakes. Mozambique, a nearby emerging gas power, imposes such a tax.

The new terms leave open how much oil or gas would be diverted to domestic use. Like other east African nations, there has been a debate about how much of the nation's hydrocarbon reserves should be used locally and how much can be exported.

"TPDC and the contractor shall have the obligation to satisfy the domestic market in Tanzania from their proportional share of production," the model PSA said.

It added that the volume "TPDC and the contractor may be required to supply to meet domestic market obligation shall be determined by the parties by mutual agreement."

The government said firms would also have to comply with rules being drawn up on the amount of local content used and investors would have to pay a training fee of $500,000 per year to develop local technical skills in the industry.

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