Tanzania’s new political will can overcome LNG development roadblock

By David Whitehouse
Posted on Monday, 29 November 2021 09:43

Tanzanian president Samia Suluhu Hassan is seen as more business-friendly than her predecessor. Spencer Platt/Pool via REUTERS

The November resumption of talks between Tanzania’s government and multinational corporates, on plans to develop the country’s $30bn liquefied natural gas (LNG) reserves, has triggered optimism that progress may finally be in sight.

Royal Dutch Shell and Norwegian company Equinor have been planning to build an LNG terminal at Lindi in southern Tanzania since 2014. However, progress was undermined by revised terms introduced by Tanzania’s 2015 Petroleum Act, the 2016 Finance Act and a series of natural resources laws pushed through by the late president, John Magufuli, in 2017. These enabled the authorities to renegotiate previous production sharing agreements.

In March, Magufuli’s unexpected death altered the political context, with Samia Suluhu Hassan coming to power as the country’s first female president. “I think it is likely to work with the political will of the current government,” says Imani Muhingo, head of research and analytics at Orbis Securities in Dar es Salaam. “I will not be surprised if they conclude a deal next year.”

The project has many benefits, from the initial inflow of foreign investment and the employment generated, to solving the country’s energy challenges and garnering export revenue, Muhingo says. The project has the potential to end energy shortages in the country, he says. The Bank of Tanzania projects that the initiation of the project alone will add two percentage points to the country’s economic growth.

The government is now aiming for construction to begin in 2023. Shell and Equinor made a joint statement to The Africa Report on the progress of the talks.

  • “We have been engaging with the government of Tanzania and continue to be pleased about the partnership, cooperation and opportunities associated with the potential project,” says Jared Kuehl, vice president and country chair, Shell Tanzania and Equinor Tanzania’s country manager Unni Merethe Skorstad Fjaer.
  • Equinor operates Tanzania’s Block 2, in which ExxonMobil also has a stake, while Shell operates Blocks 1 and 4. The talks aim at establishing a “competitive and attractive project”, the statement says. “We are pleased with the energy and momentum brought by the government of Tanzania and look forward to having constructive discussions over the coming months.”

Something’s got to give

There is currently a “favourable window of opportunity with mutual benefits for the government and foreign investors”, says Zaynab Mohamed, an analyst at Oxford Economics in Cape Town. “We expect stakeholders to fast-track negotiations and get the ball rolling.”

The first discovery of Tanzanian natural gas was made in the Lindi region in 1974. The fact that it has not been developed since, hints at economic as well as political obstacles. “The economics are difficult” for LNG as a greenfield project in Tanzania, which lacks developed infrastructure, says Roderick Bruce, associate director at IHS Markit in London.

A host government agreement would need to cover fiscal terms, and the questions of domestic market supply and local content. These, Bruce says, are “all potential sticking points. There are still big hurdles to overcome.”

The fact that dialogue has restarted is “very positive” and is an “important signpost,” Bruce says. However, even if an agreement is reached with the government, he says, it’s possible the companies still might not go ahead. The economics may not stack up versus other possible investments, he says, pointing to Equinor’s decision to write down its $982m investment in the project at the start of 2021.

  • At the time, the company said the project’s estimated breakeven price was well above Equinor’s $40 per barrel average portfolio breakeven.
  • “Something still has to change to make the problem economically attractive,” Bruce says.
  • Shell and Equinor, he adds, are likely to be pushing for better tax terms, and could also try to lower costs, for instance through a lower local content requirement.
  • A more radical move, he adds, would be for the companies to design a scaled-down version of the project, which could drop, for example, the planned onshore liquefaction plant.

Hassan has removed Magufuli’s energy minister, Medard Kalemani, and replaced him with January Makamba. Kalemani was seen as a “roadblock” and his relationship with oil companies was “pretty poor,” Bruce says. Makamba, however, has shown himself to be a “vocal Magufuli critic”.

  • Compared with the Magufuli era, it’s now “much less likely” that contracts will be renegotiated in an unfavourable way, Bruce says.
  • Still, the new presidency has not transformed Tanzania, and Hassan does have some “authoritarian tendencies”, he says.

Fossil or transition fuel?

An academic paper led by Obadia Kyetuza Bishoge at Beijing’s University of Science and Technology argues that Tanzania’s LNG can reduce environmental pollution caused by the domestic use of charcoal and wood for fuel. LNG also has the potential to stimulate industries such as fertilisers, chemicals, aluminum and plastics, the paper says.

Nevertheless, there is no consensus, Bruce says, on whether LNG should be seen as a transition fuel, or just another fossil fuel. LNG will have a role to play over the next 20 years, as base load will still have to come from somewhere during the energy transition, he adds. Gas is less polluting than coal, and, Bruce says, it will be “politically hard” for the West to tell poor, developing countries to keep their gas in the ground.

Still, a huge expansion of LNG – planned in Qatar – as well as the planned development in Mozambique could create global oversupply and make it harder for Tanzania to bring gas to market, Bruce says. It’s clear, he argues, that abundant global gas supply and the energy transition mean that East Africa will be left with “stranded gas assets”. Whether Tanzania’s LNG reserves will be developed, he says, is roughly a 50-50 shot at present.

Muhingo is more optimistic. With political will having been established, differences on issues, such as the host government agreement and production sharing, will be easier to settle, he says. “The major obstacle was political will,” he says. “The government now has its eyes on the project.”

Bottom line

Tanzania’s renewed political will to develop LNG needs to be matched by steps to make the project more economically attractive.

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