Hydrocarbon Resources in Tanzania: Realities of the Boom and Managing Expectations

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By Dennis Rweyemamu

Tanzania’s natural wealth has increased with the discovery of large deposits of deep-water off-shore natural gas. These discoveries have generated considerable expectations, even though commercial operations have not started. But what is the magnitude and timing of the economic impact of the “boom”? How many jobs will be created? What is the potential for local supply chains and government revenue? These are important questions which need to be tied into managing expectations from the much politicized gas discoveries.

Official estimates put the total amount of gas discovered so far at about 57.25 trillion cubic feet (TCF).  These are significant volumes, though much smaller than the 180 TCF reserves also recently discovered offshore Mozambique. They are also a very small fraction when compared to countries having the largest proven gas reserves in the world including Russia (1139.6 TCF), Iran (1201.4 TCF) and Qatar (866.2 TCF). The on-shore or shallow-water fields, such as those at Songo Songo and Mnazi Bay account for only 20 percent of the discoveries, while the offshore deep water fields account for the other 80 percent. The latter will cost much more to bring to production which reflects the scale and engineering involved.

There is a range of potential uses for increased gas supply to Tanzania. Until recently, the country was producing up to 30 per cent of power from diesel generators, with imported fuel. Substituting to lower cost gas-fired power generation would be a potentially significant gain, and the most immediate and lowest cost source comes from the on-shore and shallow water fields: Songo Songo and Mnazi Bay. Given the scale of production volumes required to justify the investment, the majority of the deep-water gas will have to go for export where there is the demand for gas at world prices in sufficient volumes. Yet still, there are ‘domestic market obligations’ included in the contracts for deep-water gas. That means that some minimum percentage of gas, probably between 5 and 10 per cent of production, could be sold into the domestic market, if required, at an agreed price with the potential use of gas for electricity, industrial production and fertilizer production.

Although there are proven reserves of gas, it will be a long time before there is any production from the large offshore reserves. That wealth in the form of gas is effectively ‘stranded’ until the huge investment required to release it, is both committed and disbursed. The combination of deepwater gas production and the development of a Liquefied Natural Gas (LNG) plant makes for a big and complex project, surrounded by a range of risks. Such a project goes through phases, and it begins with the planning phase which involves technical and commercial evaluation. This can last several years, depending on the complexity of the project. Once a decision to go ahead has been made, and the necessary preparation is completed, the construction phase typically lasts for 4 to 5 years. Once the project starts operations, it will run for 20-30 years, and when it has finished, de-commissioning takes place over 2-3 years. Tanzania is still in the planning phase and the final investment decision is not expected to be reached before 2018 at the earliest.

The largest impact of the deepwater gas project is likely to be through government revenues. The project will also contribute to direct, indirect and induced job creation, but the scale will critically depend on whether opportunities for training and employing Tanzanians are being taken, and whether it will be possible to develop a Tanzanian element in the supply chain. But what are the likely numbers and timing of these impacts?

During the planning phase of these projects, the contractors and their subcontractors will have already created a few hundred jobs. This is not much, although these jobs will also have had a modest induced impact through multiplier effects as workers spend their incomes. In addition, these companies need locally supplied inputs and services including transport, housing, office space, and other office services.

Direct job creation during construction could potentially be in the thousands of jobs, mainly for the construction of the LNG plant. However, this will depend on the extent to which sufficient up-front training and skills development can be delivered. During the operating phase, direct job creation will be more limited, numbering only in the hundreds of jobs. There will be scope for more jobs to be created indirectly, if the government and the private sector can work out a suitable approach to developing the industrial capabilities of Tanzanian firms and the skills of individuals as part of the supply chain. Relying solely on local content within the gas sector to develop a large country like Tanzania is not adequate. This makes thinking about linkages with the non-extractive economy important. Seizing the opportunities to transfer knowledge, business practices and kick start private sector development that leads to wider development beyond the gas sector is typically a better strategy.

During the production phase, the single biggest impact will eventually be from revenue to government through royalties, profit shares, corporate income tax, and dividends from the state-held equity in the project. However, even if all goes well (best case scenario), production is unlikely to start before 2022. The need to reimburse capital costs means that significant profit-sharing will commence a further five years or more down the line (starting 2027).  It is also likely to take ten years of production (untill 2032) before both a corporate income tax liability and a dividend for distribution from after-tax corporate profits are realized. Projections show that annual revenue to government at peak (beyond 2035) will be a modest number of single-digits percentages of GDP (about 2%) and a few tens of dollars per person per year.

What the figures have actually shown us is that, although there will be significant gains from the gas projects, it will take some time before these gains are fully realized. However, the discoveries have already triggered an explosion of unrealistic expectations, which can rapidly become a problem for Government. This has to be countered by presenting the basic facts. There is a critical need in communicating facts and managing expectations. The default option is that people will think they are now very rich having discovered trillions of cubic feet of gas.

This article was written as a part of the work that is being undertaken under UONGOZI Institute’s Natural Resource Management Programme. More information on the Programme is available on UONGOZI Institute’s website: www.uongozi.or.tz. To comment on the article, visit www.uongoziblog.wordpress.com.

Mr. Dennis Rweyemamu is the Head of Research & Policy at UONGOZI Institute.

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Maximizing domestic participation in extractives

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The 2nd Vice-President of the Revolutionary Government of Zanzibar Hon. Amb. Seif Ali Iddi (seated middle) in a group photo with participants of the regional roundtable on ‘Extractives for Human Development: Maximizing Domestic Participation along the Value Chain,’ organized by UONGOZI Institute in collaboration with the Ministry of Land, Water, Energy and Environment of Zanzibar.

The 2nd Vice-President of Zanzibar Hon. Amb. Seif Ali Iddi launched a two-day regional roundtable on ‘Extractives for Human Development: Maximizing Domestic Participation along the Value Chain,” organized by UONGOZI Institute in collaboration with the Ministry of Land, Water, Energy and Environment of Zanzibar.

The round-table which took place on 27th and 28th October at the Park Hyatt Hotel in Zanzibar had the primary goal of reflecting on how to optimize benefits from domestic participation in the extractives sector in Africa. It also aimed at providing a platform where stakeholders in the sector discussed how the continent can increase the participation of locals in the value chain.

The round-table gathered stakeholders from the African region and a few experts in the area of local content from other parts of the world. Participants also included senior representatives from the public and private sector, academia and civil society from Tanzania, Kenya, Uganda, South Africa, Sierra Leone, UK and Ghana.

Opening the round-table Amb. Idd said, “As you know the extractive sector adds value to human lives but also in many ways it causes problems both politically, economically, socially and environmentally. Many countries particularly from the developing world the natural resources are more of a curse than blessing.  This has been in many ways due to having policies, laws, regulations, and strategies that do not maximize domestic participation along the value chain. As a result, many people tend to feel left out.”

However, the 2nd Vice-President also noted that there is no easy solution to the challenge of enhancing domestic participation in the value chain.

“I believe knowledge sharing through dialogue with government representatives, industry associations, supplier organizations, civil society organizations, development partners, and other relevant institutions is critical to success,” he stated.

2nd Vice-President Iddi also said that it is important to understand the trade-offs and pitfalls that the development of local content policies may entail; indicating that their success largely depends on engagement and collaboration among stakeholders, and involves cross-sectoral, national, regional, and local considerations; and that it requires industry-wide collaboration and multi-stakeholders involvement.

Adding, “I therefore trust that this forum will make a major contribution to broadening the understanding of these issues and bring together the stakeholders who must be part of this collaborative effort.”

UONGOZI Institute commemorates Mwalimu Nyerere’s Legacy

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Former President Alhaj Ally Hassan Mwinyi delivers his remarks during the 17th commemoration of Mwalimu Julius Kambarage Nyerer round-table organized by UONGOZI Institute in collaboration with the Chinese Embassy in Tanzania and the Tanzania – China Friendship Promotion Association.

On October 13th 2016, UONGOZI Institute in collaboration with the Embassy of the People’s Republic of China in Tanzania and the Tanzania – China Friendship Promotion Association organized a forum titled, “Mwalimu Nyerere’s Legacy: Lessons for the Current and Future Generation of Leaders,” in commemoration of Mwalimu Julius Kambarage Nyerere since his demise 17 years ago.

The main objective of the forum was to reflect on Mwalimu’s life as a leader who has had significant public impact and who distinguished himself in one or more forms of service, and to draw valuable lessons for the current and future generation of leaders.

To grace the event was former President of the 2nd phase administration H.E Alhaj Ally Hassan Mwinyi. The keynote address was also delivered by Prof. Issa Shivji, one of the great public intellectuals of postcolonial Africa and Director of “Kavazi la Mwalimu Nyerere”, the Nyerere Resource Centre in Dar es Salaam.

Speaking at the event former President Alhaj Ally Hassan Mwinyi said, “I must admit that when I was asked to come and officiate this event I had many reasons to come. I had to come because I saw it not only as an opportunity to talk about our Father of the Nation but also a platform to talk about a person who was more than a leader to me, he was like my brother, he was my friend. I had known him for such a long time and I have learnt many things from him.”

Former President Mwinyi continued, “Indeed, he was a man of character and vision. The peace, tranquility and sense of national pride that prevail in Tanzania today are only a part of his enduring legacy. He proved to be one of the greatest leaders who enjoyed respect not only in Africa, but throughout the world.”

In front of a crowd of 200 people consisting of former senior public servants, members of the academia, private sector, students and youth the former President Mwinyi also described the symposium as the best opportunity to discuss where the country had gone wrong and the best to do to get back to the route that Nyerere had planned.

“I believe that the time is ripe for us to have this discussion about the heritage which our founding fathers have left us. This heritage if applied wisely can help us solve a lot of problems present and future,” he said.

He added, “It is therefore a good idea to use this forum to look back and draw the lessons from Mwalimu Nyerere’s legacy, to see which philosophies and lessons we can still apply today, and what lessons need to be customized to fit our current environment,” added the former President.

Meanwhile, Prof. Shivji said, “Tanzania’s founding President the Late Mwalimu Julius Nyerere was among the first generation of independent African leaders. He lived and died fighting the good fight to uphold the ideals of human rights and dignity, and to foster an egalitarian society across all Africa. He walked the walk and talked the talk with utmost selflessness and humility.”

To complement the keynote address, the forum also featured a moderated panel discussion with distinguished panelists participating in the discussion. The panelists included; Dr. Benson Bana, Senior Lecturer from the University of Dar es Salaan; Prof. Penina Mlama, Executive Director of the Kigoda cha Mwalimu Nyerere; Hon. Zitto Kabwe (MP), Leader of ACT Wazalendo; Mr. Walter Bgoya, Managing Director of Mkuki na Nyota Publishers; and Prof. Zhao Baisheng from the University of Peking, China.