Price factor could delay LNG project in Tanzania

Tuesday October 15 2019

 

By Kelvin Matandiko and Mnaku Mbani @TheCitizenTZ

Dar es Salaam. Fresh uncertainty has surfaced with regard to foreign investment in the envisaged liquefied natural gas (LNG) plant project in Lindi Region.

However, reliable sources within the government maintain that plans for the project’s implementation are on course.

Construction of the plant was expected to start in 2022, according to the ministry of Energy.

A September briefing by the Natural Resources Governance Institute (NRGI) said the government should not rush into a deal that would not benefit Tanzania.

According to the briefing, an economic model of the project suggests a long-term LNG price of $11 per metric million British thermal unit (mmBtu) is needed for investors to earn the returns they usually require from LNG projects.

Current forecasts by the IMF and World Bank are $7-8 per mmBtu.

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The briefing by analysts Thomas Scurfield and David Manley of NRGI said the chances of investment will shrink further if - during the ongoing negotiations of the project’s regulatory terms - the government increases taxes, and requires companies to share a greater portion of the gas with Tanzania’s home market.

“Government officials could wait and hope that conditions improve, but this would delay the point at which the country would start generating benefits from the project,” said the briefing.

“If officials want to accelerate development - and without harming long-term gains for the country - they could adopt a more progressive tax regime, avoid raising the share of gas to be sold in the home market, and establish a legal framework that both company managers and future generations of Tanzanians will trust.”

The briefing also said that the new laws passed in 2017 provide for contracts to be frequently renegotiated, prohibit international arbitration to resolve disputes.

However, the briefing noted that the forecasts are not always correct, and companies might find more efficient ways to develop the gas, so we do not rule out investment altogether.

Responding to the briefing, Tanzania Petroleum Development Corporation (TPDC) director general James Mataragio told The Citizen that companies have their own price range - and that the project would not be affected adversely if there were a drop.

“Gas prices are always changing, and the construction of an LNG plant does not consider the changing of prices,” he said.

Equinor Press spokesperson Erik Haaland told The Citizen that an LNG development is a large project that requires huge upfront investments.

“We don’t want to speculate on the outcome of pending discussions,” he said in an email response.

Mr Haaland said to ensure that all parties benefit from such a project, stable and predictable framework conditions for the more than 30-year lifetime of the plant is essential.

“We trust that the government of Tanzania has a long-term view on this major industrial investment.”

Mr Haaland said that, through the Host Government Agreement negotiations with the Tanzania government, Equinor assumed that key terms for the project would be agreed.

He noted that the Block 2 operator, Equinor and its partner ExxonMobil, have been in dialogue with the Government Negotiation team (GNT) with the purpose of creating a common understanding for developing the Tanzania LNG project.

Negotiation of regulatory terms for the project centres on the existing production sharing agreements (PSAs) for the offshore exploration blocks and a planned host government agreement (HGA) for the LNG plant.