07 November 2013, News Wires – Tanzania is reported to have introduced new production sharing agreement terms that experts said toughen some of the conditions for energy companies seeking to exploit the East African nation’s significant gas potential.
The Model Production Sharing Agreement document, published on Monday, detailed the bonus to be paid by companies 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.
“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 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% of total oil or gas production for onshore or shallow operations and a 7.5% 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%.
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% in those blocks.
“Any assignment or transfer under this Article shall be subject to the relevant tax law, including capital gains tax,” the document said.
Although all firms working in Tanzania are affected by such a tax at a rate of 20%, experts said this was the first time it was specifically referred to in a PSA.
The tax would have an impact when an energy company 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 output 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 stated.
It added 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”.
Major players Statoil, ExxonMobil, BG Group and Ophir Energy are seeking to exploit offshore gas discoveries with combined resources of around 27 trillion cubic feet, with plans for a joint liquefied natural gas development.
However, Statoil chief executive Helge Lund has said the right framework conditions have to be in place before the company can commit to such a multi-billion dollar investment.
Tanzania estimates it has more than 40 trillion cubic feet of gas and says this could rise fivefold over the next five years, putting it on a level with some Middle East producers.
Under the revised contract terms, the Dar Es Salaam government has also said companies 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.