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Tanzania: New hydrocarbon laws fail to end confusion over future of tax & local content requirements

2015-08-20 Protection Group International Ltd Tanzania: New hydrocarbon laws fail to end confusion over future of tax & local content requirements

President Jakaya Kikwete signed into law three key pieces of legislation on 4 August that bring the country a step closer to establishing a new hydrocarbon regime. The laws, which are intended to overhaul Tanzania’s outdated oil and gas legislation, bring notable changes to the regulation of the sector, rates of taxation and local content obligations. These long-stalled policy changes have however failed to clarify a number of fiscal and regulatory ambiguities that are unlikely to be resolved within the next six months.

The new legislation comes after years of uncertainty over the new fiscal and regulatory regime that has led to repeated calls from international oil companies (IOCs) for greater clarity from Tanzania’s oil and gas laws and has limited some investments. Evidence of this was seen in the disappointing May 2014 oil and gas licensing round, when four of seven blocks failed to attract any bids. The new hydrocarbon regime contains three key pieces of legislation: the Petroleum Bill and the Oil and Gas Revenue Management Bill and the Tanzania Extractive Industries (Transparency and Accountability) Bill. The bills were tabled to parliament in early July under a “certificate of urgency” to ensure they were passed before the assembly dissolved on 9 July. The rushing of the legislation through parliament has provoked considerable criticism from opposition groups who claimed not enough time was given to consult stakeholders, including civil society and opposition groups. Nonetheless, with the legislation now approved by parliament and with the backing of Kikwete, the bills are expected to achieve presidential assent in the coming weeks. 

As expected, the new legislation brings with it far more burdensome tax requirements for oil and gas companies. Previously, taxation was negotiated in private between companies and the government, leading to concerns over transparency and that the state was foregoing revenues. Under the 2015 Petroleum Bill, oil companies will pay a 12 percent royalty on onshore and continental production and 7.5 percent for offshore production. For natural gas, the government’s profit share will vary from 60 percent to 85 percent depending on how much is pumped daily. Companies will also pay signature and production bonus payments and an annual licence fee will also be paid, but the details of these have not yet been published. On their own, these taxes are not especially onerous, but are problematic as IOCs will no longer be granted exemptions from other domestic taxes, such as capital gains and withholding taxes. The lack of exemptions mean stabilisation clauses will be vital to ensure contracts are protected from future changes to taxation that could harm the profitability of oil and gas projects. As yet, it is unclear how stabilisation clauses within existing agreements will be applied under the new fiscal regime.

There are also substantial changes planned to the governance of the sector. The Tanzania Petroleum Development Corporation (TPDC) will no longer play the dual role of national oil company and regulator. Instead, the TPDC will be solely a national oil company, while a new body, the Petroleum Upstream Regulatory Authority (PURA), will be established to oversee the upstream sector. The Petroleum Act also provides for the creation of an Energy and Water Utilities Regulatory Authority to oversee the midstream and downstream sectors. The new delineation of responsibilities will likely be welcomed by transparency campaigners, who had claimed the TPDC’s role as both participant and regulator in the sector represented a conflict of interest and granted the central government too much authority. However, the new measures still expand state participation in the sector, granting the TPDC a minimum 25 percent in all petroleum operations. The Petroleum Act also stipulates that the joint venture must receive approval from the cabinet, creating the potential for delays and political interference in licensing. 

Local content requirements are more clearly proscribed under the new legislation, though risk constraining some upstream companies. Although foreign companies may be accessed to provide services and goods in cases where domestic companies are unable to fulfil these functions, this may only be done via a joint venture with a local company. In this case, the local company must hold a 25 percent minimum stake in the joint venture. Opposition groups are also campaigning for a more rigorous implementation of the provisions, including the requirement for companies in the natural gas sector to be listed on the Dar es Salaam Stock Exchange. Similar efforts to make the mining and telecommunications sector list have not been effectively implemented following resistance from industry and it is uncertain whether the same proposals will be successful in the oil and gas sector.

Evidently, considerable regulatory uncertainty remains and the government will need to provide further detail on how it plans to implement the laws, particularly in the areas of local content and stabilisation clauses. New guidelines on how the laws will be applied are unlikely to be released until at least after the election, raising the prospect of continuing uncertainty in the interim. The matter is further complicated by ongoing debate surrounding Tanzania’s new constitution. A referendum was intended to take place in April but was indefinitely postponed until after the October election due to delays in voter registration. The new constitution will determine boundaries between Zanzibar and the mainland, and whether the semi-autonomous Zanzibar government can negotiate its own exploration licenses. The confusion has meant Royal Dutch Shell has delayed its exploration plans around the Zanzibar archipelago, and other companies operating in the area may be at risk if their licenses cross changing maritime boundaries in the future.

The outcome of October’s election will influence the evolution of these regulatory ambiguities, but an absence of debate on policy during campaigning has meant that uncertainty is likely to persist until well after the vote. The specifics of oil and gas legislation have rarely featured in debate and none of the principle candidates have indicated how they would implement the new hydrocarbon regime. MPs from the main opposition coalition Ukawa have made calls for more resource nationalist measures and greater devolution to Zanzibar, but their nomination of former prime minister Edward Lowassa as presidential candidate has confused the opposition’s position on these issues. Lowassa is a recent defector from the ruling CCM, whose supporters in the party were responsible for drafting the government’s proposed constitution that rejected devolution of licensing powers, which was so opposed by the opposition. The ruling CCM, meanwhile, has been more moderate in its approach to oil and gas regulation, but it is unclear how Kikwete’s successor as presidential candidate, John Magufuli, would approach these considerations if he is elected. With an election that that has been largely devoid of policy debate, most companies will continue to delay final investment decisions until at least after the vote. These delays threaten to push back long-delayed natural gas production, which is now unlikely to begin before 2022. 

 

 

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Protection Group International Ltd

Tanzania: New hydrocarbon laws fail to end confusion over future of tax & local content requirements - Protection Group International Ltd
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