Sunday, September 21, 2014

Investors accuse govt of keeping contracts secret

The country manager of Statoil Tanzania, Mr

The country manager of Statoil Tanzania, Mr Øystein Michelsen.PHOTO|FILE 

QUESTION: First, can you briefly outline the purpose and mission of the Statoil high level market expedition that was recently conducted to Tanzania?

ANSWER: The Statoil leaders’ visit to our operations in Tanzania was finalised on September 5. The delegation comprised members of the Statoil board of directors, together with President and CEO Helge Lund, as well as members of the corporate executive committee and other senior executives in a total of 17 members.

The purpose of this high level visit was to provide the board with a better understanding of Tanzania and Statoil’s activities; view progress in the country’s development and meet with Tanzania Petroleum Development Corporation (TPDC) and the government officials.

What good news, if any, did the delegation have for Tanzanians?

As of today the Block 2 partners with Statoil as operator have spent over $1.5 billion (about Sh2.4 trillion) on exploration and appraisal activities, including having drilled nine wells. Block 2 activities alone have resulted in the employment of 600 Tanzanians, directly and indirectly through suppliers.

The good news for Tanzanians is that the country’s LNG project is a top priority project for Statoil to progress. However, there are challenges ahead that we need to solve together with TPDC, our other partners and the government to make this a commercially viable project.

Statoil believes in building local capacity in countries of operation, which is important for developing a sustainable and robust business and ensuring long term benefits to Tanzania. In this context, during the Statoil board visit, Statoil launched the Heroes of Tomorrow Business Competition, which aims at promoting entrepreneurship among the youth in Mtwara Region.

The competition invites all youth, from 18 to 25 years of age, to share their business ideas which are to be transformed into business plans. The contest goes together with the establishment of the Heroes of Tomorrow computer laboratory located at Stella Maris University College in Mtwara, where new computers connected to the internet will be used by students in Mtwara to develop their business ideas and business proposals. The computer will in future continue to be owned by Stella Maris University College and used for academic purposes.

We gather that the group had a board meeting here and one of the issues discussed was the LNG project. What was the final decision and where will the LNG plant finally be constructed?

The board of Statoil held the normal board meeting to discuss a number of issues related to Statoil ASA but in culminating to the visit, Statoil Tanzania was also a key focus area in discussing about the development of the offshore gas discoveries into a commercially viable and robust LNG project that can be sanctioned.

It is important to mention here that in Tanzania, as we are guided by the government, there will only be one LNG built for the development of resources that have been discovered offshore Tanzania. Hence in this endeavour Statoil and partner in Block 2, ExxonMobil, shall be working jointly with partners in Block 1, 3 and 4 (BG, Ophir Energy and Pavilion Energy) to establish the joint LNG facility.

We have welcomed the guidance from the government to work on the joint LNG facility because we see that by working together we can avoid costly duplication by processing the significant gas resources that we have each discovered offshore in a common processing facility. A single, focussed project team involving all partners will give the project the best chance of success.

The partners in Block 2 and Block 1, 3 and 4 have submitted a recommendation on the LNG site to the government of Tanzania following an extensive site selection process conducted last year. The work related to the site is currently in progress and we are unable to comment further, until at a later date when the appropriate procedures have been finalised with the government of Tanzania.

When Statoil decides to develop the gas reserves and an LNG plant in Tanzania, it is projected that an investment of $20 – 30 billion will be needed. Can you elaborate on this?

Statoil has so far had successful drilling operations in Tanzania where we have already drilled 10 wells in Block 2 and are currently working on our 11th well. These wells include both exploration and appraisal wells. In Block 2, Statoil and partner ExxonMobil have an estimated gas in volumes of 20 trillion cubic feet (tcf). The investment made in Tanzania in Block 2 to date is thus around $1.5 billion. Every day, Statoil and partners invest an additional $2 million (about Sh3.2 billion).

This project will be the foundation for the Tanzanian gas industry and will provide significant long term benefits to Tanzania in the form of income, employment, local content, domestic gas, contribution to GDP and favourable trade balance.

The foundation for monetizing the gas discoveries is an LNG export project. The government, TPDC and the International Oil and Gas Companies (IOCs) have a shared goal to succeed with developing the Tanzania gas resource.

A good partnership has been established. Extensive work needs to be done to clarify if a development is possible, but no final investment decision is yet to be taken.

LNG projects are characterized by large capital investments over many years before any income can be realized.

For the investors to undertake such commitments, stable fiscal and commercial terms are important. A capital intensive strategic project like this will require a tailor-made commercial solution and stability of terms and framework conditions. This is common practice for LNG projects in many countries.

Before any decision can be made on detailed planning, such arrangements need to be in place for the LNG project.

The total investment for this capital intensive project is too early to estimate at this time. Similar projects of this kind, however, have investments in the range of $20 -30 billion (about Sh32 trillion and Sh48 trillion respectively). Statoil contribution to the overall budget for LNG plant will be about one third.

What major issues came up when members of the Statoil met with President Kikwete in Dodoma on September 3?

For Statoil as a major investor and long term partner of Tanzania, it is important to meet with the government to ensure continued alignment on our investment and business priorities. Statoil continues to be committed to Tanzania as one of the most important ventures outside of Norway and our commitment is to ensure that development of the resources discovered in Tanzania will benefit both Tanzania and investors.

Is it true that the meeting with the President dwelt a lot on the issue of policy consistency; and could this have led to the withdrawal of the Tanzania Revenue Authority (TRA) advertisement/announcement in the previous week of plans to review mining and gas contracts, which apparently had rattled investors, including Statoil?

It is not in Statoil’s interest to divulge the content of discussions of such business meetings. Statoil honours all contracts that we enter in countries where we operate; for these are legally binding agreements and they should be honoured by all parties involved.

Honouring contracts and stability of terms is a pre-requisite for sanctioning large capital intensive long term projects like an LNG development.

That brings us to the question of the leaked 2012 addendum of the 2007 PSA with the government; we have established that Statoil has never shed light on the matter nor is it even ready to discuss the issue. It is very important that your firm gives clarification on the PSA, which if left unanswered, will remain controversial, if not suspicious.

Statoil signed the Production Sharing Agreement for Block 2 in 2007 and consequently the Gas Addendum in 2012.

We are now working hard to develop the offshore gas discoveries into a commercially viable and robust gas development for domestic use and LNG export.

Our assessment is that the terms in the Block 2 PSA and the Gas Addendum are balanced and comparable to commercial terms in other places with similar risks.

The contract considers the totality of taxes, direct government take, local conditions, risks, market access, technical challenges and cost levels. If sanctioned, an LNG development will also provide significant benefits to Tanzania over the lifetime of the project in the form of employment, local content, domestic gas, contribution to GDP and favourable trade balance.

Statoil respects the position of any government in the countries where we operate with regards to whether the contracts are made publicly available or not. In a number of countries where we operate the contracts are publicly available and Statoil does comply with that position.

In Tanzania, the contracts are confidential and for that matter, Statoil also complies with that position.

For over 10 years, Statoil has voluntarily disclosed payments to governments and other economic contributions to communities in its country-by-country reporting in the Annual Sustainability Report. As member of the Extractive Industries Transparency Initiative (EITI), Statoil encourage all oil producing countries to implement the EITI standard. Tanzania is known to being one of the member countries.

In 2012, Transparency ranked Statoil as the most transparent company among the world 105 largest publicly traded companies. We will continue to promote transparency, but we will also respect contract terms and the obligations we have towards our partners.

At the reception held in honour of the delegation at the Norwegian Embassy in Dar es Salaam, you among other things advised the government on the need to better manage peoples’ expectations of the potential gas bonanza; can you be more specific?

Yes, I spoke about managing people’s expectations by communicating facts about the industry.

And the key facts about the gas discovered in Block 2 deep waters are as follows:

Block 2 is located about 100km from the shore. The gas discovered in Block 2 is in ultra-deep waters with depths of 2300m – 2500m. The gas discovered in Block 2 is very dry. It does not contain any condensate which in the gas market is less profitable compared to gas that contains condensate.

The seabed topography or layout is not flat. It has canyons and valleys which would be very challenging in laying out the pipelines that are needed to bring the gas to the shore onto the LNG plant.

Oil and gas industry is not labour intensive but it is very capital intensive. It is important to understand that there will be employment chances, but these will be limited in the long term.

The gas has been discovered, but this does not mean that it can or will be produced. Long time, much effort and large investments are needed, before a viable project is established, and development of facilities can start. The partners in Block 2 are currently looking at ways to develop that gas offshore Tanzania. This is not an easy task and it will take some time before all the work is finalised, implemented and for first gas to be produced. Our current estimate is that first gas from offshore Tanzania can be produced in 2022 at the earliest.

So what does that mean?

It is very important for Tanzanians to understand the facts in order to plan and embrace the opportunities as they come, but also not to hold onto false hopes and expectations that would never be met.

It is important for the public to know what they should expect from investors, and what they should expect from the Government of Tanzania.

The LNG project can be a catalyst to increasing wealth in Tanzania, but this project cannot meet the large expectations alone.

What then should Tanzanians expect from Statoil in the remaining part of the year?

Additional prospecting has been mapped and will be tested throughout 2014 and 2015. We expect to drill additional exploration and appraisal wells.

Depending on the results of these wells, it will be decided if exploration should continue, and the results from the exploration and appraisal work will help to determine the profitability of the future LNG project. Important work is ahead of us to establish the necessary framework conditions supporting a commercially viable project.

In essence, gas and oil business is very risky; and is important that investors should have stable and predictable fiscal and regulatory framework in order to make long-term investment. What is Statoil’s take of the situation in Tanzania?

This project will be the foundation for the Tanzanian gas industry and will provide significant long term benefits to Tanzania in the form of income, employment, local content, domestic gas, contribution to GDP and favourable trade balance.

LNG projects are characterized by large capital investments over many years before any income can be realized. For the investors to undertake such commitments, stable fiscal and commercial terms are important. A capital intensive strategic project like this will requires a tailor-made commercial solution and stability of terms and framework conditions. This is common practice for LNG projects in many countries.

Before any decision can be made on detailed planning, such arrangements need to be in place for the LNG project.

We need to jointly develop terms and framework conditions that are sustainable and balanced to ensure (1) long term benefits for Tanzania, (2) long term stability and certainty of terms and framework conditions, and (3) a commercially viable and financeable project. This is very important work ahead of us.

As investors Statoil honours all the agreements we have entered with the government of Tanzania and will honour the obligation to deliver gas for the domestic market in line with our Production Sharing Agreement (PSA).

advertisement