Legislating for the Nascent Oil and Gas Sector in the EAC: Tanzania
Friday, 13 July 2012
With a number of new off-shore gas finds, Tanzania stands to receive sizeable investments in its gas sector. However, a long-running stand off between the mainland and the semi-autonomous island of Zanzibar over revenue sharing creates uncertainty.

Harmonising Policy and Bill
Tanzania is on the verge of the transformation into a gas economy with proven gas reserves of 28trn cubic feet (tcf) and expectations that this could go as high as 60tcf. The country has been producing small quantities of gas for domestic consumption from the SongoSongo Island, but with the new offshore finds, Tanzania may receive massive FDI inflows potentially larger than the USD22bnGDP . Earlier this year, British Gas International announced a massive investment plan in excess of USD10bnin the second half of the decade. This calls for new legislation beyond the outdated 1980 Petroleum (Exploration and Production) Act.

Progress has been sluggish. Since 2009, the government has been working on the Gas Bill,expected to be brought to Parliament by December 2012. The resultant Act is expected toprovide for the regulation of transportation, liquefaction, re-gasification, storage, distribution, supply, import, export and trade in natural gas. Deputy Minister for Energy and Minerals George Simbachawene recently told parliament that since the draft Gas Bill was prepared before formulation of a gas policy, the ministry would review the draft to ensure harmonization with the new policy on natural gas also currently under review.

Additionally, the government, with the help of a lead consultant from Trinidad and Tobago, is in the final stages of completing a draft strategic plan and use of natural gas.“A Natural Gas Master Plan will be finished by June 2012. In a macroeconomic and budget management context, considerable work will be needed, including design and adoption of a gas/petroleum revenue management bill covering the budget treatment of gas revenues,” wrote Minister of Finance Mustafa Mkuloin a Letter of Intent to the IMF dated December 2011.

Zanzibari Stumbling Block
It is widely accepted that part of the revenues from extractive industries will have to benefit the host community and the administrative region where the exploitation occurs, and this is expected to be part of the new legislation. But of greater concern might be the semi-autonomous Zanzibar’s assertion that revenues generated from resources within their boundaries are not up for division with mainland Tanzania. According to Reuters, the ‘state-owned Tanzania Petroleum Development Corp (TPDC) fears that making a politically unpopular decision could stoke separatist sentiments in Zanzibar.’

This is by no means a recent issueas this excerpt fromTanzania mainland and Zanzibar islandsocio-economic and environment study published in 2008 shows: ‘Most Zanzibari officials preferred to have the largest share of the revenues for several reasons; they believe large reserves of fossils for petroleum are located within their boundaries, Zanzibar do not get share of other minerals, or gas extracted from mainland while few others preferred equal sharing of the revenues. The favorable distribution if put into percentages is 60% to Zanzibar and 40% to the mainland. Tanzanian mainland officials preferred equal sharing and others were preferred the matter should be handled by TPDC and Zanzibar counterpart to advise on the matter.’(http://www.tzonline.org/pdf/aupecdissemination.pdf)

Leaked cables give more insight: ‘Despite the lack of progress on oil exploration, and the real possibility that exploration will not expose viable fields, the potential for oil is at the center of a political debate between Zanzibar and the mainland. Most Zanzibaris see themselves as an independent nation in free association with the mainland, forming the Union of Tanzania. The issue of gaining exclusive control over any lucrative resources is a hot button for all Zanzibari politicians. During the April 2009 session of Zanzibar's unicameral House of Representatives, delegates from both parties unanimously adopted a resolution tabled by ruling CCM-Zanzibar stating that the laws establishing TPDC and oil exploration activities in the country were not ratified by Zanzibar's Parliament, so under the articles of the Union, TPDC's activities were not recognized in Zanzibar. The resolution reiterated the view that the 1968 agreement on revenue-sharing between Zanzibar and the Union government did not apply to energy and asserted that Zanzibar's share from the mainland was too low. It recommended that Zanzibar form its own TPDC equivalent and that any exploration in Economic Excusive Zones (EEZ) should be carried out jointly. Any coordination would be handled through the national Vice President's Committee for Union issues, but the resolution stressed that energy, oil and gas as they existed in Zanzibar and its waters were not Union matters. Apparently Shell is unable to explore blocks awarded to it in 2002 because of the standoff.’

Investors like a stable, clearly defined legal and regulatory framework, even thoughTanzania may have a little room to enact these laws. According to Deloitte Uganda partner Bill Page , production may take some time: ‘Even if the most optimistic expectations are fulfilled, it might be at least 10 years before Tanzania becomes a major gas producer/exporter. So the ordinary Tanzanian will have to be more patient than his/her Ugandan neighbour.’

This will give the country a bit more leeway to resolve the contentious issues with Zanzibar. The power sharing agreement on Zanzibar has created some stability in the perennially conflicted relations between the mainland and the semi-autonomous island since 2010, but the recent demonstrations by Uamsho, an Islamist group with a separatist agenda, show the persistent fault lines. The dispute over offshore oil revenue allocation risks exacerbating this.

But corporates interested in Tanzania’s natural resources are keen to see some progress in this matter: Shell has reportedly been trying to bring parties from Zanzibar and mainland Tanzania to nudge this discussion forward – the company won the rights in 2002, but has been unable to explore or sell the interests due to the uncertainty surrounding revenue sharing between the mainland and Zanzibar. Canadian Antrim are in a similar situation with their agreements signed as far back as 1997.

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