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A push by the Tanzanian government to reinvigorate a stalled LNG
export project led by Equinor and Shell must overcome longstanding
uncertainties around commercial terms and global market dynamics.
For LNG and the hydrocarbon sector more broadly, Tanzania will
likely have to make improvements to fiscal terms and contract
sanctity if proposed developments are to be revived and new
exploration encouraged.
Incoming president renews pursuit of LNG
Tanzania's new head of state, Samia Hassan, in April called on the
energy ministry and international oil company (IOC) operators
Equinor and Shell to expedite a stalled plan to monetise 35 Tcf of
gas discoveries via a USD20-billion onshore liquefaction plant.
Hassan also called on the ministry to find new investors if a
development agreement can't be reached with Equinor and Shell.
Dash for gas hampered by commercial, fiscal and
contractual hurdles
Tanzania's deepwater gas resources - discovered between 2010 and
2018 - remain untapped despite their huge economic potential.
Equinor and Shell had originally envisaged the start-up of the
proposed two-train, 10 million tons per annum (MMtpa) onshore
Tanzania LNG plant this year, but start-up now looks unlikely until
after 2030 at the earliest - if at all.
A final investment decision (FID) on the plant is contingent on
the signing of a Host Government Agreement (HGA) between the state
and the IOCs, which would establish the investment framework
including commercial terms. High and fluctuating costs and a
shifting global gas market make the economics of the project
tenuous, and they were further undermined by toughened tax and
contractual terms introduced by Tanzania's 2015 Petroleum Act, 2016
Finance Act and, in particular, three 2017 natural resources laws
championed by previous president John Magufuli. Those laws enabled
the authorities to renegotiate production sharing agreements (PSAs)
signed by previous governments in which terms are deemed
"unconscionable". In any renegotiation, the government would likely
seek to increase tax take and state participation, as it has
successfully done in the mining sector.
Battle lines drawn, but compromises
needed
Although Hassan's desire to reinvigorate the LNG project seems
positive - at least relative to Magufuli's approach - the
government will need to examine the barriers created by its own
policies. Equinor has repeatedly stated that contract sanctity and
stability are "necessary elements for the success of LNG
development". Equinor and Shell both agree that HGA talks should
resume this year and be concluded quickly, pointing to a shrinking
window of opportunity to monetise the gas resources due to climate
concerns.
Despite agreement between government and IOCs on the need to
expedite and conclude HGA talks, reaching the necessary compromises
may be challenging. Fiscal terms relating to upstream and midstream
elements and local content obligations are probably still the main
sticking points between the parties. Should compromises not be
reached on key issues based on the current two-train onshore
concept, Equinor and Shell could seek to redesign the project, or
walk away if the economics remain uncompetitive.
Meanwhile, Hassan's stated intent to find other, more willing
investors if talks aren't fruitful is probably unrealistic. Should
HGA talks fail to progress, in theory the government could reach an
agreement with the IOCs under which they relinquish the blocks, but
there are few technically competent replacements that could
monetise the deepwater gas for both export and domestic use. Other
majors are either focused on LNG investments elsewhere and/or are
reducing future spending commitments. International national oil
companies (NOCs) such as Petronas could perhaps step in for an FLNG
solution, but fundamentally the government's options to monetise
the gas are very limited.
Window for LNG may be shut, but eased policy can still
boost hydrocarbon sector
Years of wrangling and inertia over Tanzania LNG shows that the
government and IOCs are still struggling to overcome internal
hurdles. Yet the project may already be compromised by the
exogenous forces of global LNG market supply and demand combined
with energy transition considerations. Even if HGA terms are
agreed, Tanzania LNG may struggle to attract buyers and financing
amid an anticipated market oversupply until the end of the 2020s,
which is unlikely to ease sufficiently even if neighbouring
Mozambique's LNG programme is delayed.
That said, Hassan's apparent desire to accelerate LNG
development may be a positive indicator for broader exploration and
production activity in the country. Much will depend on Hassan's
ability to tighten her grip on sector decision-making and follow
through on stated aims. Her decisions on whether to renegotiate
PSAs following the sector-wide contract reviews, and her approach
to Tanzania's currently uncompetitive fiscal terms in light of
planned new licensing will be particularly important. Tangible
improvements are needed on fiscal terms and contract sanctity if
proposed developments and new exploration are to be revived at
scale.