Why there’s nothing much to write home about Tanzania on gas sector

Dar es Salaam. Tanzania’s natural wealth has increased with the discovery of large deposits of deep-water off-shore natural gas. Commercial operations of the discoveries have not started, nevertheless, these discoveries have generated considerable expectations.

But what is the magnitude and timing of the economic impact of the “boom”? How many jobs will be created? What is the potential for local supply chains and government revenue? These are important questions which need to be tied into managing expectations from the much politicised gas discoveries.

Official estimates put the total amount of gas discovered so far at about 57.25 trillion cubic feet (TCF). These are significant volumes, though much smaller than the 180 TCF reserves have also been recently discovered offshore in Mozambique. They are also a very small fraction when compared to countries having the largest proven gas reserves in the world including Russia (1139.6 TCF), Iran (1201.4 TCF) and Qatar (866.2 TCF).

The on-shore or shallow-water fields, such as those at Songo Songo and Mnazi Bay account for only 20 percent of the discoveries, while the offshore deep water fields account for the other 80 percent. The latter will cost much more to bring to production which reflects the scale and engineering involved.

There is a range of potential uses for increased gas supply to Tanzania. Until recently, the country was producing up to 30 per cent of power from diesel generators, with costly imported fuel. Substituting to lower cost gas-fired power generation would be a potentially significant gain and the most immediate and lowest cost source comes from the on-shore and shallow water fields: Songo Songo and Mnazi Bay.

Given the scale of production volumes required to justify the investment, the majority of the deep-water gas will have to go for export where there is the demand for gas at world prices in sufficient volumes. Yet still, there are ‘domestic market obligations’ included in the contracts for deep-water gas.

That means that some minimum percentage of gas, probably between five and 10 per cent of production, could be sold into the domestic market, if required, at an agreed price with the potential use of gas for electricity, industrial production and fertilizer production.

Although there are proven reserves of gas, it will be a long time before there is any production from the large offshore reserves. That wealth in the form of gas is effectively ‘stranded’ until the huge investment required to release it, is both committed and disbursed.

Risk project

The combination of deep water gas production and the development of a Liquefied Natural Gas (LNG) plant makes for a big and complex project, surrounded by a range of risks.

Such a project goes through phases and it begins with the planning phase which involves technical and commercial evaluation. This can last several years, depending on the complexity of the project.

Once a decision to go ahead has been made and the necessary preparation is completed, the construction phase typically lasts for four to five years. Once the project starts operations, it will run for between 20 and 30 years and when it has exhausted the resources, de-commissioning takes place for over two years.

Tanzania is still in the planning phase and the final investment decision is not expected to be reached before 2018 at the earliest.

The largest impact of the deep water gas project is likely to be through government revenues. The project will also contribute to direct, indirect and induced job creation, but the scale will critically depend on whether opportunities for training and employing Tanzanians are being taken, and whether it will be possible to develop a Tanzanian element in the supply chain.

But what are the likely numbers and timing of these impacts?

During the planning phase of these projects, the contractors and their subcontractors will have already created a few hundred jobs.

This is not much, although these jobs will also have had a modest induced impact through multiplier effects as workers spend their incomes. In addition, these companies need locally supplied inputs and services including transport, housing, office space, and other office services.

Direct job creation during construction could potentially be in the thousands of jobs, mainly for the construction of the LNG plant. However, this will depend on the extent to which sufficient up-front training and skills development can be delivered.

During the operating phase, direct job creation will be more limited, numbering only in the hundreds of jobs. There will be scope for more jobs to be created indirectly, if the government and the private sector can work out a suitable approach to developing the industrial capabilities of Tanzanian firms and the skills of individuals as part of the supply chain.

Relying solely on local content within the gas sector to develop a large country like Tanzania is not adequate. This makes thinking about linkages with the non-extractive economy important. Seizing the opportunities to transfer knowledge, business practices and kick start private sector development that leads to wider development beyond the gas sector is typically a better strategy.

During the production phase, the single biggest impact will eventually be from revenue to government through royalties, profit shares, corporate income tax, and dividends from the state-held equity in the project.

However, even if all goes well (best case scenario), production is unlikely to start before 2022. The need to reimburse capital costs means that significant profit-sharing will commence a further five years or more down the line (starting 2027). It is also likely to take ten years of production (until 2032) before both a corporate income tax liability and a dividend for distribution from after-tax corporate profits are realized. Projections show that annual revenue to government at peak (beyond 2035) will be a modest number of single-digits percentages of GDP (about 2%) and a few tens of dollars per person per year.

What the figures have actually shown us is that, although there will be significant gains from the gas projects, it will take some time before these gains are fully realised.

However, the discoveries have already triggered an explosion of unrealistic expectations, which can rapidly become a problem for Government. This has to be countered by presenting the basic facts.

There is a critical need in communicating facts and managing expectations. The default option is that people will think they are now very rich having discovered trillions of cubic feet of gas.

Mr Dennis Rweyemamu is the Head of Research & Policy at UONGOZI Institute. This article was written as a part of the work that is being undertaken under UONGOZI Institute’s Natural Resource Management Programme.