What if the anticipated Natural Gas boom doesn't materialise?

Friday June 17 2022
Gas pic

A gas facility in Dar es Salaam. PHOTO|FILE

By Charles Makakala

Lying below the Indian Ocean, 80 kilometres off the coast of Lindi and Mtwara regions in southern Tanzania, 2,500 metres below sea level, and up to 2,500 metres below seabed, are natural gas reserves worth billions of dollars.

The official estimate is around 57 trillion cubic feet (tcf), which is a lot of gas. It is valued at $55 billion – enough for every Tanzanian to collect $10,000 at the time of discovery. And that is how Tanzanians heard it then – that they were going to get a lot of dough. But no one has received a dime since, a phenomenon the Swahili aptly call damu ya kunguni.

A number of factors have contributed to the delay.

Firstly, construction of deep-sea wells costs a lot of money. The conservative estimate here is around $30 billion. Many things need to be right for investors to put that together.

Secondly, the Magufuli factor. When John Pombe Magufuli came to power, negotiations were proceeding towards the signing of what is called a Host Government Agreement (HGA), which precedes the Final Investment Decision (FDI). For a number of reasons, the streets are abuzz with theories – Magufuli delayed the project.

Thirdly, the increase in investment risk. Between 2015 and 2017, Tanzania introduced five acts of Parliament that effectively called for the review of already-agreed terms. Those were the Petroleum Act (2015), Finance Act (2016), ‘Amendments Act’ (2017), ‘Sovereignty Act’ (2017), and ‘Contract Review Act’ (2017). This reinforced policy risks, sending negotiators back to the drawing board.

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While that was happening, market dynamics changed. The East African region doesn’t have enough LNG market to make deep-sea gas extraction feasible. So, the project is premised on exports, mainly to destinations such as India and China. The desirable LNG price ought to be about $14 per mmBtu (a gas unit equivalent to oil barrels), but anything above $11 may be considerable for investments. That said, while the average price of LNG in Asia for the decade ending 2017 was healthy, by 2018 prices had fallen to below $9, which was bad news for LNG investment in Tanzania. That threatened to turn Tanzania’s LNG dream into a nightmare.

However, in a dramatic change of fortune, as the global economy was recovering from Covid, demand for gas surged, sending prices to a peak of $35 per mmBtu (October 2021) from a low of $2 (May 2020). Moreover, thanks to Vladimir Putin’s invasion of Ukraine, the price of gas has lurched forward once again to a high of $65 (March 2022) before stabilising at around $30. As volatile as the prices have been, it appears that the gods have handed Tanzanians another green LNG pass for the foreseeable future.

But it is important for cool heads to prevail. As Tanzanians have seen in the past, hyping the prospective LNG economic boom can have disastrous consequences. That is what happened in Mtwara in 2013.

The LNG discoveries were followed by celebrations with the slogan “Mtwara Kuchele”, meaning “ a new dawn for Mtwara”. The people caught the “Mtwara Kuchele” fever and, before long, the cost of living was skyrocketing. People started coming from all over the place to buy properties in Mtwara, and a plot of land that previously cost $20,000 was sold for $1 million!

In the midst of the “Mtwara Kuchele” hullaballoo, the government launched a 542km-long and 36-inch gas pipeline project from Mnazi Bay in Mtwara to fire power plants in Kinyerezi, Dar es Salaam. This was not a new discovery. Gas was discovered at Mnazi Bay in 1982. The gas volume was quite modest – only 0.7 tcf. But with “Mtwara Kuchele”, people interpreted the government’s decision as marginalisation despite the fact that all the nearby regions combined couldn’t consume the power capacity envisioned for Kinyerezi.

Then all hell broke loose.

Riots erupted in 2013 with people shouting “no to gas pipelines”. Properties owned by ruling party politicians were set alight. Roads were blocked. And when police intervened, a pregnant woman died and dozens were wounded.

The government must not repeat the mistakes of past politicians. There are reports of the “Mtwara Kuchele” effect starting to materialise in Lindi. People risk losing their properties without witnessing any significant improvement in their lives.

Moreover, it is important to communicate that the boom is conditional. For example, at $15 per mmBtu, average revenues over the lifetime of the project will probably be about 2.5 percent of Tanzania’s GDP, around $3 to 4 billion a year. If prices remain as high as they are today, the boom might be felt, if they go below that, not so much.

Furthermore, evidence suggests that even if the employment numbers mentioned are realised, that is, 7000 during execution and 1,000 during operations, they will hardly make a dent in unemployment issues in Tanzania. Besides, unless something remarkable is done today, many of those jobs will go abroad.

Finally, despite so much talk about local content, evidence also suggests that the impact will not be transformative because of structural issues in our economy. Yes, the participation boxes will be ticked, but everything of value will go abroad. Just like the mineral boom, the LNG boom may as well end up in mass disillusionment.

Tanzania doesn’t want to recreate the Angolan nonsense here. Hyping this mega-project could have serious unintended consequences. The focus, instead, must be in creating an appropriate policy environment to support the desired economic transformation.

Disclaimer: The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of The Citizen.