A decision to split the energy and minerals ministry in two may be intended to dispel uncertainty over future liquefied natural gas export plans, but more than that will be needed.

Since a draft agreement with international oil companies designed to kickstart Tanzania’s LNG export industry with some $30bn of investment was drawn up earlier this year, little has happened.

He had previously sacked Sospeter Muhongo, the minister in charge of minerals and energy, and several other senior officials. That move followed an investigation into alleged undeclared exports by mining firms, notably goldminer Acacia Resources.

It was unclear what all this meant for the nascent offshore industry. However, it certainly raised questions for the international oil companies hoping to persuade Tanzania to sanction LNG exports on commercially acceptable terms. The situation contrasts with that in southern neighbour Mozambique, where an LNG export project using floating LNG is under development, based on the substantial gas reserves of the Rovuma Basin, which straddle the maritime border between the two countries.

Clear division

Perhaps in an effort to bring clarity to the situation, the government announced in October that it was splitting the energy and minerals ministry in two and had appointed two new ministers to head them. The energy ministry is headed by Medard Kalemani, the former deputy energy and minerals minister, who has a long track record in that ministry.

The IOCs will be pleased that legislation relating to their activities will now be more distinct from that governing the much-pilloried mining sector—and they will now be hoping that the envisaged LNG project can start to take shape.

Shell, ExxonMobil, Statoil and Ophir Energy are among the companies seeking to push forward the $30bn project based on part of estimated total recoverable gas reserves of around 57 trillion cubic feet—much of these in or near the Rovuma Basin. They would be fed to a proposed onshore LNG facility at Lindi, in the south of the country.

The government has shown little urgency to push LNG export plans forward this year, other than on its own strict terms. It has refused, so far, to countenance the development of a cheaper and potentially less risky floating LNG project for first exports, as Mozambique has done. While talks with the IOCs continue, they remain at a preliminary stage.

Magufuli prefers to see LNG infrastructure onshore where it can bring economic and social benefits to the country in the form of infrastructure and jobs. He also wants to see a share of first gas production from the new project going to the domestic market – a condition that Mozambique dropped in the interests of speed.

Doubts also remain over the extent of benefits that will accrue to the country from LNG exports.

Limited benefits?

The New York-based Natural Resource Governance Institute said in a report on Tanzania’s prospective gas revenues, published in September, that the economics of the LNG project were marginal.

The NRGI said it estimated the minimum long-term LNG price at which companies would be willing to go ahead with the project to be $14/m Btu. It noted that this compared unfavourably with forecasts that long-term LNG prices in East Asia would be around $8/m Btu and with the average real price over the past 15 years of around $11/m Btu.

“Our estimate suggests that under current conditions and expectations the project is not likely to go ahead,” the report’s authors said.

“If the project does go ahead, the government revenues it generates are unlikely to be transformative,'” they added.

Using the 15-year price average as a reference, they estimated that government revenue would average approximately $2.3bn a year in real terms over the period of gas production That’s only around 1.2% of GDP a year – or $20 per person.

That contradicts more optimistic noises from the government, including a claim made by Tanzania’s central bank a year ago, that just starting to build the LNG terminal would add 2 percentage points to the country’s annual economic growth.

Whatever happens, most observers believe a final investment decision would be five years away at best. By then, the IOCs may well have turned their attention elsewhere. source: petroleumeconomist.com