$1bn loss: Who’s fooling Tanzanians? - CORRECTED

In an earlier version of this article we INCORRECTLY identified Ben Taylor as “the leaker” of the StatOil contract. We sincerely regret the error, and apologize for any unintended consequences it may have had – Editors.

Dar es Salaam. As the alleged leaked contract between the government and Norwegian company StatOil continues to circulate online, the biggest question that begs an urgent and sober answer from the government, investors and those who leaked the document is: Who is fooling Tanzanians?

In an early analysis of the StatOil deal, Dar blogger Ben Taylor (@mtega) argues if the contract is fully implemented, the government could lose between $400 million (Sh672 billion) and a whopping $1 billion (Sh1.68 trillion) yearly.

Outspoken Kigoma North MP Zitto Kabwe supports Mr Taylor’s analysis, insisting that the current contract will deny the nation a staggering Sh1.68 trillion.

This amount is equivalent to 10 per cent of the 2014/15 budget, or what the country needs to provide all major cities and towns with clean water.

Although The Citizen could not independently verify the $1 billion loss claim, silence on the part of the government and investors is worrying, particularly among ordinary Tanzanians, whose hopes were heightened following the discovery of natural gas reserves currently valued at $600 billion.

According to leaked details, the contract ignored the proposed profit sharing agreement, which would have benefited the nation (see graphic on Page 1).

Those who oppose the agreement say the proposed profit-sharing model suggested the sharing of profit between the government and investors at ratios of 50:50, 55:45, 60:40, 65:35, 70:30, 75:25 and finally 80:20, when production reaches its peak.

To interpret these figures, it simply means that the government’s share of net profit in natural gas would grow annually by five per cent until it reaches a stage where the State takes 80 per cent of the net revenues, leaving investors with 20 per cent.

The net profit is shared after the deduction of investment costs plus all applicable taxes as stipulated in the fiscal regime agreed during the signing of the contract.

But the leaked contract seen by The Citizen is opposite of what was suggested earlier.

It states that the sharing of profit between the government and investors would be as follows: 30:70, 35:65, 37.5:62.5, 40:60, 45:55 and, finally at the peak of production, 50:50.

From these figures, it means the government’s net profit share would start at 30 per cent, gaining a steady 5 per cent annually up to the peak period when the two parties would share profits equally.

However, those who leaked the document do not say exactly who suggested the model that was ignored.

TPDC denies claims

Tanzania Petroleum Development Corporation (TPDC) has strongly refuted the claims that the country would incur a loss of $1 billion annually if the pact is fully implemented as agreed.

Outgoing TPDC managing director Yona Killagane issued a press statement last Friday explaining that the 2007 contract signed with StatOil was aboveboard, and that it adequately catered for 'national interests' in the exploitation of oil and gas.

He noted that in the agreement signed under the 2004 Model Production Sharing Agreement (MPSA), the government would rake in 61 per cent of the total profit accruing from oil while the Norwegian firm would get 39 per cent.

The TPDC chief said the government’s earnings would include 30 per cent in share of the profit plus all applicable taxes due, including 30 per cent corporate tax and five per cent royalty.

TPDC would additionally earn 10 per cent in participating interest while Statoil will also pay 0.3 per cent in service levy.

According to Mr Killagane, the profit sharing agreement took into account the fact that the drilling of oil in the deep sea by Statoil would be at the company’s expense.

Mr Killagane said in 2012 TPDC signed an additional agreement on gas (Gas Addendum) to take interest of any gas deposits discovered in the process of drilling for oil.

“In this agreement the parties agreed that if gas was discovered instead of oil, they would hold talks on how to exploit the resource, including costing it and the development of necessary infrastructure to transport and sell the product locally or in the international market,” he said.

More holes than a sieve

In his analysis last weekend Mr Taylor wrote: “There are worries that the Tanzanian government lacks either the capacity or the will to negotiate deals with investors that protect the interests of the Tanzanian public…When a Production Sharing Agreement (PSA) between the state-owned Tanzania Petroleum Development Corporation (TPDC) and the Norwegian firm Statoil was leaked a couple of weeks ago, it revealed contract terms that are significantly less favourable to the government than had been expected.”

Exactly how much this contract will cost the government, writes Mr Taylor, would depend on how much gas the company produces, but it could easily be in the hundreds of millions of dollars per year.

If production reaches 500 million cubic feet per day, the government could be losing as much $400 million per year under this deal, compared to the model PSA.

If production reaches 1,000 million cubic feet per day – which is very possible – the loss rises to over $900m per year. And that’s just from one deal.

Mr Taylor further writes: “Another indication of the scale involved here is that since the Norwegian government is StatOil’s majority shareholder, the extra revenue to the Norwegian government from this deal could be worth more than double the total of all Norwegian aid to Tanzania since independence.”

Norway has given Tanzania a total of $2.5 billion in aid during the past five decades.

Although TPDC has denied the claims, some analysts insist that the questions raised need to be answered thoroughly and soberly with facts.

“The most important thing is that TPDC should go beyond the statement it released last week by explaining in simple terms what is within the agreed contract as well as the addendum…Majority of Tanzanians still don’t know much about the gas economy and therefore they deserve more than just a press release,” a senior analyst with PricewaterhouseCoopers, who declined to be named because he is an interested party, told The Citizen.

According to the analyst, the government as well as TPDC should be proactive in communicating with the public in all affairs relating to the natural gas to avoid what transpired during the introduction of large-scale mining.

A few years ago, when the Buzwagi Mining Development Agreement contract was leaked, it was followed by a series of denials, lies and partisan politics, leading to the suspension of Mr Kabwe from Parliament.

Yesterday, Mr Kabwe, who is also the Kigoma North MP, described the TPDC explanation as “an empty statement” that skirted around the real issues.

“In the contract signed, StatOil are allowed to recover up to 70 per cent, then the rest 30 per cent, which is net profit is shared at the ratio of 50:50. After all the deductions, TPDC should take 80 per cent and leaves the rest 20 per cent to investors.

“That’s what was supposed to be considered, but unfortunately, they (TPDC) have taken the wrong PSA model,” Mr Kabwe told The Citizen by telephone.