Ministers join intense lobbying to evict Ewura, allow Songas to increase its tariffs A section of gas pipes at Songosongo gas plant in Mtwara. Songas wants to be allowed to sell gas to private customers. Photo/LEONARD MAGOMBA By CORRESPONDENT THE EAST AFRICAN Posted Saturday, April 11 2009 at 00:51 Internal lobbying by powerful figures is currently underway to allow Songas to increase its gas tariffs to finance drilling of more wells in Kilwa. The company also wants to be allowed to sell gas to private customers; currently it is only licensed to sell gas to Tanesco for conversion into electricity. In August 2008 Songas submitted its calculations to EWURA for the tariff increase designed to expand gas production in Tanzania. The proposal was rejected due to the fact that the contract sums in connection with engineering, procurement and construction (EPC) and equipment supply (ES) contracts, the two major components of the total budgeted project capital costs and the terms and conditions of the loan, had not been firmed up by Songas Ltd. Ewura said in addition any contract entered into by Songas for goods or services related to natural gas processing and transportation facilities, under which Songass obligations in any one calendar year exceed $5 million, should be procured competitively, unless justifications acceptable to Ewura were made on such contracts. Songas shall provide Ewura with a copy for information, and amendments thereof; and on a monthly basis, provide EWURA with an implementation progress report. On April 12, 2007) Ewura had approved a memorandum for natural gas and processing tariff payable by power-sector gas consumers for the next 15 years, which was published as Government Notice No.70 of May 23, 2008. According to Songas, the project capital costs had since increased from $29.8 million on December 18, 2006 to approximately $60 million by May 2007. Songas produces 70 million cubic feet of natural gas daily and the expansion aims at doubling the capacity, which is said to running short. The financing would be borne by Globelec East Africa Capital, through Globelec Tanzania Ltd. Senior government officials including ministers are now lobbying to revoke powers under Section 7 (4) granted to Ewura to determine the Songas application. The Ewura Act of 2001 grants the Authority powers to establish standards for the terms and conditions of supply of goods and services and to regulate rates and charges. Investigations by The EastAfrican have established that the officials and ministers have stepped up a campaign to have the Attorney General nullify the jurisdiction that Ewura has been granted over the processing of natural gas when that process is conducted as a field operation under development license, even though the firm is selling gas to the government. The Ewura Consumer Consultative Council has meanwhile warned that the governments persistent interference in the regulation of the energy sector, specifically gas, could result in the loss of million of dollars paid to the gas firm in the form of excessively high tariffs if its request is granted. The chairman of the Energy and Water Utilities Regulatory Authority Consumer Consultative Council (Ewura CCC), Prof Jamidu Katima, told this newspaper in Dar es Salaam last week that the interference in the regulatory process emanates from the Ministry of Energy and Minerals. The best example is the way the procedure to change the tariff for natural gas had been interfered with by the government, he said. According to Prof Katima, when the government interferes or intervenes in such processes, it denies the regulator the freedom to make informed decisions based on the documents and information supplied. Several confidential reports obtained by The EastAfrican have established that Minister for Water and Irrigation Prof Mark Mwandosya has been instructed to intervene in the issue, an eventuality that is likely to cause an uproar in next weeks session of the national assembly, which begins sitting on April 20. Last week, another gas-to-power company, Artumas, which was contracted to generate and provide electricity in the southern regions of the country, asked for a $7 million financial bailout from the government claiming that the project was in a temporary financial distress. Songas had applied to Ewura for a Multi-year Tariff Adjustment Mechanism I in respect of the development of the Songo Songo Gas Processing Expansion Project. The project involves the installation of the third and fourth train at Songo Songo, doubling the capacity of the gas processing plant from the original 70 million standard cubic feet per day (MMscfd) to 140 MMscfd. The Director General of Ewura, Haruna Masebu, told The EastAfrican that the decision to issue Order No.09-004 was arrived at after considering all scenarios. Songas said that there were significant differences between Songass application and the Ewura Memorandum and Order. Prof Masebu said that while Ewura had refused to make the changes in the way Songas wants it to, the latter has the first right of refusal to undertake the project and can also appeal against the decision to the Fair Competition Tribunal. On its part, Songas argues that its investment if it implemented the expansion project under the order, would be exposed to risks that are considerably more significant than those envisaged under the application and which Songas considers normal for similar projects. Songas managing director Christopher Ford said the project economics, as a result of a reduced rate of return and disallowance of genuine project costs, are significantly below that anticipated in Songass application and what Songas continues to believe is an appropriate rate of return for such a project. Songas believes that the interpretation set out in the memorandum is mistaken in a number of key areas, leading to critical mistakes in the order, he said. Instead of going to the Fair Competition Tribunal, Songas decided to seek assistance from the central government by writing to the Minister for Energy and Minerals to intervene even though the regulator falls under the jurisdiction of the Minister for Water and Irrigation. And in order to push the regulator into accepting the wishes of the investor, government officials are now saying that due to the importance of the project to the national economy and in this case the electricity subsector, Ewura must accept the changes as proposed by Songas. Another twist to the Songas case is the fact that Hunton and Williams, consultants for the Ministry of Energy and Minerals, were also advisers to Globeleq Uganda. Being consultants for the ministry means Hunton and Williams were privy to all undertakings involving Globeleq Tanzania, which is expected to be the main financier in the expansion project. Globeleq has indicated that at 15 per cent weighted average cost of capital and based on its view of the availability and likelihood of debt financing, it is willing to provide 100 per cent of the funding for the project, said Mr Ford. It would however be prepared to provide 40 percent of the funding as equity capital, at the equity rate of return, previously sanctioned by Ewura, of 20.4 percent. According to Songas and Globeleq, the expansion project can still be implemented if these matters are resolved and Ewura approves amendments to the Order, which would rebalance the risks and rewards available under it.