OiI and Gas Industry Regulation in Tanzania - Petroleum Legislation

[Kibanga Ampiga Mkoloni]

[h=2]Introduction[/h] The hydrocarbon industry is regulated by the Ministry for Energy and Minerals. Upstream petroleum activities are governed by the provisions of the Petroleum (Exploration and Production) Act 1980 while downstream petroleum activities are governed by the National Investment (Promotion and Protection) Act, 1990, and qualify for the incentives and guarantees provided for in the Act.
The purpose of the National Investment (Promotion and Protection) Act is to establish rules for governing investment in Tanzanian enterprises, particularly foreign capital.
The National Energy policy objectives are:

• Exploitation and utilisation of the country's abundant indigenous resources such as hydroelectricity, coal and natural gas.
• Reduction of dependency on imported petroleum products.
• Stemming of woodfuel depletion and use of woodfuel in a sustainable and ecologically sound manner.
• Development of indigenous manpower capacity in the development of the energy sector.

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[h=2]The Petroleum (Exploration and Production) Act 1980[/h]
Petroleum exploration and development in Tanzania is governed by the Petroleum (Exploration and Production) Act 1980. This Act vests title to petroleum deposits within Tanzania in the State and is designed to create a favorable legal environment for exploration by oil companies.
The Act expressly permits the Government to enter into a petroleum agreement under which an oil company may be granted exclusive rights to explore for and produce petroleum. Under the Production Sharing Agreement (PSA) arrangements currently in place in Tanzania, TPDC is granted the licences under the Act with the Government and TPDC entering into PSA's with the oil companies. The terms of the PSA's form the basis of the licences and are negotiable. The legislative framework offers considerable flexibility to the Government in negotiating acceptable terms with oil companies.
An exploration licence normally consists of 60 blocks (each block being a 5 minute x 5 minute graticular unit) but the Act does provide flexibility for more than one licence to be granted and, in certain cases, for a licence to comprise more than 60 blocks. The Act also provides for exploration, appraisal, development and production periods. Full details are given in the next section.
In the event of a commercial discovery, the holder of an exploration licence has a right to a development licence, subject to the development plan ensuring the most efficient and beneficial use of the petroleum resources.

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[h=2]Model Production Sharing Agreement (PSA)[/h]
Tanzania's Model PSA serves as the basic document for negotiations between foreign oil companies and the Government and TPDC. It sets out in detail the terms under which exploration and production can take place. Although the terms - which are internationally competitive - mirror closely those incorporated in earlier PSA's concluded in Tanzania, the Government's flexible approach allows for the negotiation of the important issues (such as Area, Work Program and Economic terms etc.) within the framework of production sharing arrangements.
The Government's objective is to negotiate terms with the oil industry which are fair and balanced, bearing in mind the usual risks associated with exploration and the State's legitimate desire for revenues as owner of a depleting, non-renewable, natural resource. The Government seeks to encourage the development of small and marginal discoveries; obtain a higher share of profits from the more attractive fields, and satisfy national objectives such as the transfer of petroleum skills and the acquisition of more data.
The following is a brief summary of some of the terms in Tanzania's Model PSA likely to be of interest to foreign oil companies:-
Parties to the Contract:

The parties to the Contract shall be the Government of the United Republic of Tanzania, the Tanzania Petroleum Development Corporation, and the oil company.
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Type of Agreement:

Production sharing - in which the foreign oil company undertakes the exploration, development and production activities.
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Contract Area:

Each PSA can cover more than one exploration Licence.
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Term of Agreement:

• Exploration - up to 11 years divided into an initial and two renewal periods of 4,4 and 3 years respectively.
• Appraisal - normally 2 years but more if necessary.
• Development and Production - 25 years with the possibility of an extension for a further twenty years.

Relinquishment:

50% of the retained Contract Area upon each renewal of the Exploration Licence. However, in special circumstances a different rate can be negotiable.
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Work Program:

The minimum work (and expenditure) obligations for each Exploration Licence period - detailing seismic coverage, the number of wells to be drilled, and any other exploration activities - are negotiable. Any financial obligations in excess of the minimum expenditure in any exploration phase may be carried forward to the subsequent phase and offset against the minimum financial commitment for such phase. The economic basement is one of the allowable criteria for the purpose of determining well total depth.
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Bonus Payments:

There are no signature or production bonuses or any other "front-end" charges.
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Annual Licence Charge:

The following charges are indexed to US$ inflation rates:
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• Initial Exploration Period : 4US$/sq.km
• First Extension Period : 8US$/sq.km
• Second Extension Period : 16US$/sq.km

Royalty:

Paid by TPDC as a licence holder through the minimum share of Profit Oil being equivalent at all times to 12½ of total crude oil production from the Contract area.
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Cost Recovery:

There is no ring-fencing of blocks for the purposes of exploration costs. Costs incurred in one block can be recovered from another block. However, the recovery cannot be 100% of the production due to TPDC's obligation to pay royalty from its share of Profit Oil. All costs incurred are recoverable out of a proportion of annual production exclusively available for this purpose ("Cost Oil"). The recovery is based on cumulative annual production in the Contract Area as follows:
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Production tranche (million barrels)	Recovery (%)
< 25	60
25-50	50
>50	40

Production Sharing:

The remaining volume after cost recovery shall be divided between TPDC and the oil company in the following progressive proportions which are negotiable:
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Crude Oil (Quarterly Average in bopd)	TPDC Share (%)	Oil Company Share (%)
0-12,500	50	50
12,501-25,000	55	45
25,001-50,000	60	40
50,001-100,000	65	35
> 100,000	70	30

Participation (Joint Operations):

There is an option for TPDC to participate whereby it will contribute to Contract Expenses. The progressive proportions which are negotiable are:
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Crude Oil (Quarterly Average in bopd)	Maximum Specified Proportion (%)
0-12,500	5
12,501-25,000	7.5
25,001-50,000	10
50,001-75,000	12.5
75,001-100,000	15
100,001-125,000	17.5
>125,000	20

Additional Profits Tax:

Varies with the real rate of return earned by the company on the net cash flow from the Development Area. The threshold for the first and second accumulated net cash position being 20% and 30% respectively.
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Development Areas:

There may be more than one Development Area in the Contract Area. The Model PSA provides for TPDC to exercise its participation option, and for APT to be levied, on a Development Area basis. However, it is possible to negotiate an alternative basis as part of the overall economic package.
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Other Taxation:

Apart from taxes of a minor nature of general applicability, the oil company is exempted from all other taxes. However, the Model PSA provides an option for TPDC to pay Income Tax on behalf of the oil company if a foreign oil company desires such an arrangement, or for the oil company to be exempted from Income Tax.
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Valuation:

Petroleum produced from the Contract Area is valued at an average fair international market price which, in the case of arms length sales, is the average realised price.
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Import Duty Exemption:

All equipment and material etc. imported for use in petroleum operations can be import free of all duties and import taxes and can be re-exported free of any export duty or tax. Expatriates enjoy similar privileges in respect of their personal effects.
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Foreign Exchange Concessions:

Free foreign exchange dealings.
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Right to Export:

Subject to the requirements to help meet domestic crude oil demand (on a pro-rata basis with all other producers in Tanzania), the oil company can freely dispose of its share of petroleum and export it free of all export duties and taxes.
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Natural Gas:

In line with Tanzania's earlier agreements, the Model PSA envisages good faith negotiations upon the discovery of gas in order to reach an agreement on its development, production and sale. In appropriate circumstances the Minister will extend the appraisal period.
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Accounting:

Detailed accounting provisions are incorporated based upon those for joint venture arrangements commonly used in the industry.
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Training and Resources:

The Oil Company is expected to undertake a training program, employ qualified Tanzanian citizens and give preference to Tanzanian goods and services if available.
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Arbitration:

Recourse to international arbitration is provided for in the Model PSA.
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Assignment:

The oil company may freely assign its rights and obligations to an affiliate providing the performance of the oil company's obligations will not be adversely affected. Assignment to third parties requires the prior consent of government, not to be unreasonably withheld. (Several such assignments have in fact occurred in recent years).
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Performance Guarantee:

Unless there are unusual circumstances, a performance guarantee etc. is not normally required.

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