What next for Tanzania’s LNG after Equinor cuts its annual balance sheet value?

What you need to know:

The Norwegian oil and gas firm has been present in Tanzania since 2007 when the company signed a Production Sharing Agreement (PSA) with the Tanzania Petroleum Development Corporation (TPDC).

Dar es Salaam. Norwegian oil and gas company Equinor has decided to reduce the annual balance sheet value of its Tanzania Liquefied Natural Gas (LNG) project which is, at this time, not competitive within their global portfolio, according to the firm.

 The move was revealed on Friday, where Equinor further stated that the project has an anticipated breakeven price well above the portfolio average for the company.

The government, however, has stated that it was not aware of the decision reached by Equinor because the information was yet to be officially communicated to them.

Equinor ASA’s International Upstream press spokesperson Erik Haaland told The Citizen that while progress has been made in recent years on the commercial framework for TLNG, overall project economics had not yet improved sufficiently to justify keeping it on the balance sheet.

 “We have today announced an impairment of the value of our Tanzanian project,” he said. According to him, before they can progress the project any further, they need to get a commercial, fiscal, and legal framework in place that demonstrates a viable business case. We will continue to engage with the government with the aim to resume negotiations that have been on hold since 2019. If we succeed to make it economically viable, we will reverse the impairment,” he said.

Contacted on the matter, Tanzania Petroleum Development Corporation (TPDC) man- aging director James Mataragio said he was not aware of the decision.

 “They [Equinor] are our partners, I’m yet to receive official communication on the matter and, therefore, cannot comment anything at the moment,” Dr Mataragio said.

However, economic analyst Donath Olomi of CEO Institute of Management and Entrepreneurship Development (IMED) had this to say regarding the matter: “Equinor have decided to reduce the annual balance sheet value of the blocks due to a number of factors including global prices of gas dropping.”

 He said the other factor could be that the country’s environment for investing has changed including change in the Production Sharing Agreements (PSAs).

“The laws have changed and so has invest- ment. On a wider scale, it could be difficult to get profit going by the current global trend where prices have dropped due to Covid-19,” Dr Olomi added. For his part, Revenue Watch Institute, senior regional associate (Africa) Silas Olang said Equinor was looking at the price trend in the next 10 to 30 years which was indicating a nosedive.

“With the current trend in prices they feel that cost of production is high and may there- fore not get profit in the endeavour,” he said.

The Equinor decision comes at a time when the Host Government Agreement (HGA) negotiations between the government and International Oil and Gas Companies (IOCs) on the LNG have stalled since 2019. In April 2020, the government said it had completed review of contracts for the extractive sector including Production Sharing Agreements (PSAs), for oil and gas companies and Mineral Development Agreements (MDA’s), for the mineral sector that started way back in 2018.

The Attorney General (AG) Adelardus Kilangi told The Citizen that the review process of the contracts was completed in January, 2020, and the results handed over to Prime Minister Kassim Majaliwa for further decision.

“We started the process in 2018 after a committee that was appointed by Parliament Speaker Job Ndugai called for the contracts to be reviewed to ensure they enable both parties including the government on behalf of the public and multinational companies to benefit,” he explained.

 The government and project developers were initially expected to have concluded the negotiations in September 2019, a key decision that could pave the way to the final investment decision to be made.

Meanwhile, according to reports, Equinor has decided to write down the book value of its Tanzania LNG project (TLNG) on the company’s balance sheet by $982 million.

According to the Capital Markets Update in February last year, Equinor’s oil and gas projects with expected start-up by 2026 have an average breakeven below $35/bbl based on today’s estimates. Similar for non-sanctioned oil and gas projects with expected start-up within this decade, the average breakeven is below $40/ bbl.

The Norwegian oil and gas firm has been present in Tanzania since 2007 when the company signed a Production Sharing Agreement (PSA) with the Tanzania Petroleum Development Corporation (TPDC).

Equinor is the operator with a 65 per cent participating interest, along with ExxonMobil’s working interest of 35 per cent, TPDC has the right to participate with a 10 per cent interest