Energy export and production can be a source of political leverage for producers (America, Australia, Qatar) and a vulnerability for non-producing countries (the Baltic states) and developing energy producers (Nigeria, Equatorial Guinea). New energy entrants like Tanzania stand to benefit if resources are properly managed and invested. The recent discovery of over 46 trillion cubic feet (TCF) of offshore natural gas in Tanzania places the East African country as a significant competitor in the global Liquified Natural Gas (LNG) market. [1] Their proximity to the Asian LNG market heightens the expectation of this resource for power generation, regional supply, and intercontinental export. However, the political, legal, and security environment, along with the collapse in oil prices (to which most liquified gas exports are linked) and increased demand for cheaper and cleaner energy sources caused by COVID-19 all present challenges to Tanzania.

This paper will examine the political, legal, and security factors that may affect the viability of the new energy power, Tanzania, as a global competitor in the LNG market. Using secondary data, I observe an increasing level of repression in Tanzania, compounded with a failure to manage the expectations of job creation and social security. Therefore, LNG exploration could result in civil unrest and protests in Tanzania. Tanzania must therefore work twice as hard to attract and retain investors that will develop hard (roads, pipelines, railway) and soft infrastructure (capacity building, skilled labour, training) and establish legal frameworks that enable the people to have a stake in the resource.

By Ugo Igariwey Iduma

INTRODUCTION

The first offshore discovery of natural gas in Tanzania was made in 2010, which fuelled expectations of development and talks of its opportunities for the East African region and the continent overall. [2] Previous literature has focused on how the significant share of natural gas production can be used for power generation, transportation, and fertilizer production. [3] [4]. Recent studies, however, have failed to look at the structural, political, legal, and security factors that may affect new energy powers. Ernst and Young (2012) attempt to give an overall risk assessment of Tanzania. Yet, there is a need for an updated evaluation of the situation in Tanzania given the increasing rates of urbanization and the effects of the COVID-19 outbreak, which has forced millions of people to adapt to working from home, and therefore, increasing domestic energy consumption. [5] This paper runs a SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) of Tanzania and LNG exploration. A SWOT analysis will enable us to answer the question ‘Can Tanzania be the Next Global LNG Exporter?'

STRENGTHS AND OPPORTUNITIES

The high costs of generating electricity are causing Africans to demand further access to LNG because it is a relatively cheap, clean, and abundant source of energy. The large discoveries of LNG off the shore of Tanzania is expected to meet the rapidly growing worldwide energy demand, while also serving as an effective energy solution in East Africa. [6] Their proximity to India and South Asia instills optimism that if LNG plants are completed and production commences, Tanzania could be a significant LNG exporter. Being a significant exporter could lead to poverty reduction, job creation, and social security, creating the possibility of Tanzania climbing up the development ladder to middle-income status. [7]

THREATS

The increase of American unconventional gas production in 2006 coupled with the expansion of the Panama Canal in 2016, has caused the LNG market to become oversaturated and extremely competitive, [8] making it difficult for Tanzania to penetrate the market. In addition to their newness to the market, Tanzania must play catch-up to create relationships with foreign investors and secure buyers. Domestically, Tanzania struggles to secure financial investment to establish hard and soft infrastructures. COVID-19 has also made it increasingly challenging to keep existing investors, as the pandemic has caused foreign investors to retreat inwards to their home countries, causing a delay in plans to start LNG production. [9]

Infrastructure issues are compounded with the fiscal and regulatory uncertainties relating to taxation, domestic supply obligations, and local content requirements. [10] The 2013, Production Sharing Agreement Model (PSAM) local content policy requires firms to use domestically-manufactured and supplied goods and services is yet to be adopted effectively. Until the local content policies address the needs of the local communities, exploration and production (E&P), companies cannot begin production and expect a return on investment. [11] The stern local content requirements became a politically sensitive issue for Tanzania as violent protests broke out in 2013 over the construction of the Mtwara pipeline. Unless expectations are better managed, an LNG project could trigger similar unrest.

Additionally, the fall in oil prices in March 2020 also poses a risk to the commercialisation of LNG for Tanzania. LNG contracts remain heavily indexed to oil. With the development of export terminals at a high cost, lowering oil prices leaves the Tanzania LNG project at an estimated breakeven price of USD10.10 per million British thermal units (mmBtu) (excluding shipping). [12] In comparison to the United States (USD5.56 per mmBtu) and Australia (USD 3 per mmBtu) breakeven prices, Tanzania has to export its LNG at a higher price to make profits. [13] From these breakeven prices and oil prices dependency, Tanzania is put in an even more critical position in developing their LNG project.

WEAKNESS

Furthermore, the operational and legal constraints have forced Tanzania to prioritise domestic and regional markets over international counterparts. [14] Tanzania's domestic demand for natural gas is large, but the percentage of the population that can afford LNG energy is small. The problem becomes, can local people pay for electricity or will the government subsidise it? Government subsidies would not be sustainable economically if anchor industries (BG Group {Shell}, Equinor, Ophir Energy, Statoil and ExxonMobil) do not pay off the excesses allowing the government to subsidise the consumer. The commitment to payoff excesses is proven to be a loss for leading International Oil Companies in Tanzania, who are not short of alternative LNG projects to plough investment and expertise into as their focus is on sales and securing supply contracts. Shell and ExxonMobil, for instance, are both in the running to develop new Qatari trains and also have major North American projects lined up. Furthermore, Equinor lacks the capacity to pay off Tanzania LNG project without the support of other large players. [15] Their connectivity to other markets in the region also remains limited. LNG demand from neighbouring Burundi, Kenya, Congo, Malawi, Zambia, Zimbabwe are low ( see table 1). [16] There are also limited opportunities for gas pipeline exports from Tanzania to neighbouring countries, for instance, Harare, Zimbabwe is 2,170.6 KM away from Tanzania (Mtwara) and Lusaka, Zambia is 1,982.0 KM from Mkuranga, Tanzania locations with drilling wells. Therefore, these high distances restrict options for export and investment without further infrastructure development.

Table 1: Natural Gas demand in East African countries

Source: [17]

From the table we see that power demand and generation are low in neighbouring countries such as Burundi, Kenya, Malawi, Rwanda, Zimbabwe, with power consumption of less than 1bn KWh. Despite power consumption being less than 1bn KWh in 2019, demand for LNG specifically from Kenya is increasing at the rate of 3.6% annually representing an opportunity for Tanzania to become a regional exporter, but the potential is limited without substantial aid in the construction of gas pipelines in the destination market. [18]

Furthermore, the 1990s gold rush gave Tanzania a peripheral reputation of being exploited by foreign gold mining companies. As a result, much of Tanzania’s gold revenues accrued to gold corporations, while the needs of local people were neglected. In the eyes of ordinary Tanzanians, gas exploration is no different. Tanzania’s one-party system has cracked down on the media, civil society, and statistics, and the growing authoritarianism is breeding more organised opposition and lower confidence in government. This could result in protests or civil unrest particularly if the country does not peacefully reform to a multi-party system,, thus posing a risk to future investors and delaying LNG development. [19]

Under the current president John Magufuli, Tanzania has gone through a “mining revolution” that has left the President clashing with foreign mining corporations. In 2017 Magufuli accused foreign mining companies of theft and exploitation, fast-tracking three bills through parliament that included provisions of reviewing and annulling mining contracts that were under “unconscionable terms”. [20] Acacia Mining, the largest stakeholder in the Tanzanian gold sector – announced in 2017 that it was considering the full closure of its operations in the country so as to “protect our cash pile”. [21] Shock waves were sent not only through the gold, but also the gas sector, as the host government’s agreement to the construction of a gas terminal was still under negotiation at that time. These acts of political sniping have created delays in LNG production.

In conclusion, Tanzania’s threats and weakness include a lack of infrastructure, oversaturation of the global market, non-existent local content policies that include local communities, and increasing levels of authoritarianism. According to my analysis, these outweigh the strengths and opportunities of a large commercial resource deposit and proximity to lucrative Asian markets. Therefore, I deduce that Tanzania will not be a significant LNG exporter in its current situation. To overcome its weaknesses, Tanzania should design a "unitization initiative" with other East African LNG explorers (such as Kenya and Uganda) to pool their resources and market together to cut LNG production costs, gain access to hard and soft infrastructures, and greater competitiveness, while curbing construction time. As Tanzania’s gas sector focuses on regional and domestic LNG exports, it becomes important to pool the resources of other East African countries to construct their individual gas pipelines and terminals for Tanzanian LNG.

SOURCES

[1] British Petroleum (2016) BP Statistical Review of World Energy.

[2] Ledesma, D., (2013) East Africa gas–the potential for export. Oxford Institute for Energy Studies.

[3] Foell, W., Pachauri, S., Spreng, D. and Zerriffi, H., (2011) 'Household cooking fuels and technologies in developing economies. Energy policy', 39(12), pp.7487-7496.

[4] Schlag, N. and Zuzarte, F. (2008) Market Barriers to Clean Cooking Fuels in Sub-Saharan Africa: A Review of Literature. Sweden.

[5] Denton F. (2020) Will COVID-19 leave fuel-rich African countries gasping for breath? International institute for environment and development. (online) Available from:https://www.iied.org/will-covid-19-leave-fuel-rich-african-countries-gasping-for-breath\

[6] International Energy Agency (2014) Medium-term Gas Market Report 2014: Market Analysis and Forecasts to 2019. International Energy Agency.

[7] US Energy Information Administration (2016) International Energy Outlook. Energy Information Administration (EIA), 2016.

[8] Leather, D.T., Bahadori, A., Nwaoha, C. and Wood, D.A., (2013) 'A review of Australia's natural gas resources and their exploitation. Journal of Natural Gas Science and Engineering, 10, pp.68-88.

[9] Demierre, J., Bazilian, M., Carbajal, J., Sherpa, S. and Modi, V., (2015) 'Potential for regional use of East Africa's natural gas'. Applied energy, 143, pp.414-436.

[10] Boersma, T., Ebinger, C.K. and Greenley, H.L. (2015) An assessment of US natural gas exports. The Brookings Institution, Washington, DC.

[11] Sisa J. (2014) Local policies set back East Africa oil and gas projects. (online) Available from:https://globalriskinsights.com/2014/11/local-policies-may-set-back-e-africa-oil-gas-projects/

[12] Business monitoring institute (BMI) (2016) Tanzania oil and gas report: Includes 10-year forecast to 2025. Q4. BMI.

[13] Russell, C. (2020) Column: Asian LNG prices take bigger coronavirus hit than Brent crude. Reuter. (Online) Availiable from: https://uk.reuters.com/article/uk-column-russell-lng-asia/column-asian-lng-prices-take-bigger-coronavirus-hit-than-brent-crude-idUKKCN2290YC#:~:text=Most%20Australian%20LNG%20projects%20are,to%20need%20slightly%20higher%20prices

[14] The United Republic of Tanzania (2013) The Natural Gas Policy of Tanzania., Dar es Salaam: October 2013, 14. Available from: http://www.tanzania.go.tz/egov_uploads/documents/Natural_Gas_Policy_-_Approved_sw.pdf.

[15] Petroleum Economist (2020) LNG spot trading continues to surge. (Online) available from: https://www.petroleum-economist.com/articles/midstream-downstream/lng/2020/lng-spot-trading-continues-to-surge

[16] Ledesma, p. 22

[17] Ibid, p.27

[18] International Energy Agency (2019) Kenya Energy Outlook: Analysis from Africa Energy Outlook 2019. International Energy Agency.

[19] Polus, A. and Tycholiz, W., (2019) 'David versus Goliath: Tanzania's Efforts to Stand Up to Foreign Gas Corporations'. Africa Spectrum, 54(1), pp.61-72

[20] The Parliament of Tanzania (2017) The Permanent Sovereignty Act, Part III. Printed by the Government Printer, Dar Es Salaam, 7 July 2017.

[21] Hume N (2017) Acacia warns of mine closure unless Tanzania lifts export ban. (online) Available from: https://www.ft.com/content/fe0a33b6-6e06-11e7-bfeb-33fe0c5b7eaa