11 Strategic Insights for Navigating Tanzania’s Gas Contract Negotiations

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It has been years since the discussion of gas processing in Tanzania began. On several occasions, the negotiations have been suspended due to international energy companies’ negative wishes for the country’s interests. It is good that the government has maintained a strong position to protect its interests.

Every now and then, international energy companies have been changing tactics and bringing in new conditions as long as their profit-making goals are achieved. These methods have been widely used in many countries.

Fortunately, Tanzania is negotiating while several countries have learned from the negative consequences of not considering how best to protect the country’s interests.

Other countries also had to legislate to contain negative provisions in gas contracts. Such countries include Algeria, Angola, Uganda, Ghana, Trinidad and Tobago, Azerbaijan, Kazakhstan and Peru. Others are Russia, Malaysia, Brazil, India, Guyana and Mozambique.

By and large, Indonesia is forced to take a hard line in making oil and gas contracts (PSAs).

The following countries are already very strong in negotiating oil and gas deals – Qatar, Iran and Saudi Arabia. So, there are plenty of examples of how to combat the tactics used by international energy companies to negotiate contracts.

READ RELATED: The Untold Story: Inside Tanzania’s LNG Contract Talks.

I would like to discuss some of the methods that the government should use to limit them. Russia’s Central Bank had to issue a note of items to be considered as a precaution. Indonesia has a law specifically regulating these kinds of deals. Algeria, as well.

International energy companies have been demanding and using the following methods to make huge profits and deprive countries of the resources from enjoying legitimate profit allocations: –

  1. Eliminate the Use of Host State Laws

International energy companies prefer not to be subject to the laws of the country where projects are being developed. They want special laws to be made so that they are not held accountable to any authorities within the country. What they call  “Project Law” purports to be enacted to eliminate the application of state law, for example, immigration laws, taxes, customs, defence and security, land, and so on.

Fortunately, except for Western Australia, most countries have rejected the application of project rules. These laws contradict the country’s “sovereignty” and are degrading, as they declare that the laws of the land are unsound and unfair. This is an insult to a free country.

  1. Oppose State Regulatory Authorities

These companies also claim that regulatory authorities have no power over the project. For example, the authorities regulating the petroleum industry, tax authorities, the authorities regulating foreign exchange, customs authorities, and so on. They demand the freedom to self-regulate.

This allows them to deprive the government of a wide range of important information and control the conduct of the project even when it is obvious that the project can have a significant impact on the country, such as environmental damage, the economy, the health and safety of citizens, and even to deny the indigenous some economic opportunities. There are times when they have even claimed that the security agencies should not control their foreign workers because they lack the quality to do justice.

  1. Requiring Project Areas to have State Status within the State

International energy companies in various countries have been demanding that they be given unlimited ownership of project sites and the ability to do anything in those areas without government control.

For example, they want security issues to be under them, where the authorities cannot enter the areas without their permission, even if there is a report of a breach of the country’s laws. This is aimed at creating a country within a country and degrading the nationhood of the country.

  1. Oppose the Project as not Being a Government Financial Resource 

It has become common for multinational energy companies not to want to pay taxes and royalties or exist with a fair distribution of profits and project revenues. They claim they get permanent tax exemptions and no control of any kind.

  1. Evading the Use of Domestic Financial Institutions

International energy companies like to offer a variety of reasons so that they can keep the money available from sales to be kept abroad. The aim is to deny local banks access to foreign currency and to deny the country the right to speak about foreign exchange reserves.

So, the project in Tanzania is used to build foreign currency reserves for other countries, especially “tax havens”. This is alleged even when a country sets laws to protect the rights of foreign investors, as Tanzania has done.

They often make baseless accusations that governments in developing countries are partisan and should not be trusted.

This is said even though there are large foreign companies with investments within the country that have not been harmed by the accusations made. It is common for multinational energy companies to show great contempt for the government and the country’s systems.

ALSO READ: Tanzania Secures $1B Deals with Australia, US in Critical Minerals Push.

  1. Not Wanting the Money Allocated to Rehabilitate the Environment to be Protected in the Country

It is common for mining, oil and gas companies to be required to raise money for environmental remediation once the project ceases. This is a legal requirement as long as the government ceases to be assured that sufficient funds have been allocated to restructure the environment and that the company in question cannot escape without carrying out the obligation.

International energy companies have insisted that the money allocated should not be stored locally.

There are several goals to emphasize that. One is to allow them to escape without performing the task. There are countries where these companies have used unjust leaders to carry out this evil goal. Second, it deprives the government of the opportunity to put that money into safe investment to develop a special environmental remediation fund.

Since the money is deposited in foreign currency and stored for 30 to 50 years, it provides an excellent opportunity to grow the country’s foreign exchange reserves. Third, the companies want the government to release the money for their investments abroad. Clearly, these funds should be in the hands of the government and used when the project ceases without the possibility of the companies escaping.

  1. Willingness to Change the Oil and Gas Extraction Profit-sharing System

It has been a tradition since the 1950s that joint venture contracts in oil and gas extraction, i.e., Production Sharing Agreements, are based on a key basis involving royalty payments, the project’s cost, i.e., oil cost, and profit-sharing oil, i.e., oil profit.

Recently, these companies have begun to change the distribution system by requiring that distributions be made after sales as well as for negative criteria such as the use of “internal rate of return“, “netback value“, and other criteria that transfer profits to them and leave the government in problems. This is a criterion that many countries have rejected, such as Algeria.

  1. Seeking to Transfer Commercial Impact to Government

In oil and gas projects, the commercial impact must be carried out by the person doing the business.

One of the biggest influences is the price fluctuations of oil and gas. If oil distribution is done properly, everyone selling in the market must bear the consequences.

The government should not be burdened with these effects in any way. Companies burden the government by proposing to deprive it of allocations by changing the system of rationing to require that there be no allocation of oil instead of sales revenue being used as a criterion after the cost of the cost.

Sometimes, they demand that the government should not get a share when the price drops in the market, including not collecting taxes. This corrupt system is also not transparent and invites confrontation between the government and foreign partners.

  1. Demand that the Government Pay Royalties to Foreign Partners Through a Tax System

Taxes should not be part of the project’s costs. They are the rewards of being allowed to harvest natural resources such as oil, gas, minerals, and others. They are paid to the government as a percentage of the value of the harvested natural resources.

After that, the allocation of oil or gas to pay for the cost, “cost gas,” and the gas of the profit dividend, “profit gas,” follows.

These companies want royalties to be identified as one of the project’s operating costs to reduce the government’s revenue from tax collection. In a system where royalties are not taxed and are not collected on a tax basis, as in Tanzania, the claim is baseless.

The system is internationally recognized and accepted except where royalties are part of the tax system. However, the partners may not want royalties used to calculate the taxes they should pay because they do not pay them.

ALSO READ: Zanzibar’s Energy Future: Oil as a Catalyst for Development.

  1. Limiting Government Participation Until it Invests Money in the Project

Oil and gas projects rely heavily on implementation funds obtained from the world’s largest buyers. The government enables this by licensing a mining joint venture issued to the National Oil or Gas Company, the “National Oil Company“, or the acronym NOC.

So, the project’s property owner is NOC on the government’s behalf. Multinational energy companies often do not want to realize that the the government and NOC’s stakes are also present in allowing its assets to access investment funds. They claim that the government must invest cash in the project. Because the government does not have the investment funds that are made so much by the project designers

In order for the government to fail there is a discussion of it owning shares that will be paid for as the resource is harvested and itself to get the “profit oil/gas” dividend.

These companies seek to impose stringent and aggressive conditions to limit the government’s participation in the project even though the majority shareholder is usually NOC and the government together.

  1. Demand that All Gas be Sold Abroad

International energy companies have a tendency to demand that all available oil or gas be sold abroad without considering domestic consumption needs. This often leads to conflicts between the property owner and the government, which also has its own oil and gas spending plans to grow the economy.

The government can receive oil and gas dividends and decide how to use them. It is common for these agreements to set sufficient standards to meet gas demand within countries and in the region, such as East Africa.

These are just some of the lessons learned from countries that have had similar agreements. Through the negotiating team, the government needs to ensure the country does not lose its interests by letting international energy companies infiltrate the negative terms in the negotiated deals.

Suppose conditions are necessary to be agreed upon. In that case, there should be a strong consensus of caution, i.e., “safeguards” to prevent the conditions from being used inappropriately and to bring about an impact.

Since these deals have occurred in many parts of the world, our country should not rediscover the wheel. It is better to be strong and not allow threats to be used to enter into impactful contracts rather than discuss the benefits and impact of each proposed contract in detail.

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Rutashubanyuma Nestory
Rutashubanyuma Nestory
3 months ago

Where is accountability and transparency to make domestic governments strong?

Domestic governments also personalize public goods by refusing to be accountable to the Parliament. Only a handful of citizens are aware of what is going on behind the scene but the people’s representatives are kept in the dark.

For the government to be tough we need transparency and accountability when such international agreements are made.

So long as domestic governments disown their own people from their natural resources such governments cannot claim to be strong in such dealmaking.

Adam Mlowo
Adam Mlowo
3 months ago

Tanzania we negotiate at the period we have positive experience and negative one from other countries facing or faced some challenges this can play as an advantage to us.

We suppose to consider what is important to us and benefit of our coming generations

Energy security are one of important security issue in economics aspects and well-being of any national and has multiple inter linked benefit once you don’t negotiate well in this area you are going to put yourself as a country in negative trends politically, economical and in peace and stability

We have witnessed how colonial rule as affected us and how we evolved from that,we suppose to fight forceful with neo-colonialism and imperialism through those sinful agreements and contracts
I can say as an African we are well prepared to win now than ever due to experience and reality of wrongfully acts

Hope those representing us will consider best things for our economy and country as whole

Rutashubanyuma Nestory
Rutashubanyuma Nestory
3 months ago
Reply to  Adam Mlowo

Negotiating with our former colonial tormentors not heading in the right direction.

The major problem with our national energy strategy is to deal with Anglo American institutions that nurse extending colonial exploitation of our natural resources. They need energy to solve their own problems why entertain them unless official graft is an incentive to deal with them.

The question no policymaker worthy his name will ever answer why opening door to them in the first place?

For energy to solve our problems is to work with countries that do not need energy like Russia but dealing with ExxonMobil or Shell show we have really learnt nothing from the colonial injustices.

We empower them then we complain later the question ought to be why? Look at Mozambique and ask yourself why she has not faced even a single problem you have highlighted?

Are they not smarter than us?

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