‘Bulldozer’ Magufuli digs for LNG riches

With its colourful military parade and booming stadium concert, Tanzania’s lavish Independence Day is usually a chance for the political elite to kick back and bask in the reflected glow of the country’s founding fathers. 

Under John Magufuli, the reform-minded president elected by a landslide in October, those days are over. Having assumed the CCM ruling party nomination on a ticket of eliminating graft, Magufuli has wasted little time in throwing the annual bash on a bonfire of unnecessary spending. Now foreign investors are waiting to see whether the president – known as ‘The Bulldozer’ – can bring his no-nonsense, decisive approach to unlocking the vast potential of Tanzania’s liquefied natural gas (LNG) reserves.

The industry’s potential to transform Tanzania from an underpowered rural economy to a gas giant has been well reported. Estimates suggest that Tanzania has some 55 trillion cubic feet of offshore gas reserves – yet the government has been slow in exploiting it. Strong interest from some of the world’s largest oil and gas companies has been met by a sluggish legislative process and uncertainty around a land grant for a crucial export terminal which could cost up to $30bn. Having impressed with his previous spells in public administration and promised early progress on LNG development, Magufuli’s promises on reform are being closely scrutinised by analysts.

“Magufuli is known as a technocrat and someone with a lot of experience in public infrastructure. His campaign advisor has come out and said that the land issue could be resolved within a matter of weeks – that does sound optimistic but it shows the priorities of the new administration,” says Robert Besseling, principal advisor in Africa country risk at IHS.

The export facility lies at the heart of foreign companies’ hopes for Tanzania. The plant has been proposed by a consortium of BG Group, Statoil, ExxonMobil and Ophir Energy, with the intention of exporting by the early 2020s. Yet the final decision continues to be withheld pending the government’s action on the land question.

The importance of providing certainty on that project and shoring up wider foreign interest cannot be overstated. According to a report from the International Energy Agency, the low market price of oil and LNG means that the capital costs of new plants “simply cannot be met” by investors. As a result, oil and gas majors are slashing spending and scrapping or mothballing uncompetitive projects. With the IEA predicting that key investment decisions affecting the early part of the next decade will be made over the next 24 months, there is little time to waste.

If Tanzania is unable to provide investors with a strong set of incentives now, the country is likely to fall behind cost-competitive international rivals including new fields in Australia and the US.

“It’s not the best time to be investing. If the government were seen to be turning people off the idea nowadays, you might see the majors reconsidering their plans. It’s important that they keep this interest at a time of flagging enthusiasm,” says John Ashbourne, Africa economist at Capital Economics. 

That urgency was distinctly lacking in the final years of Jakaya Kikwete’s administration. With the CCM distracted by a closely fought nomination process for its new leader and the run-in to this year’s presidential elections, progress on LNG development was stunted. Nevertheless, Kikwete was able to sign three important pieces of legislation governing transparency and transactions in the sector. Analysts hope that Magufuli’s administration can build on this by drafting legislation covering local procurement, employment and tax.

That process will be anything but easy. One of the thorniest areas for the government will be ensuring an equitable distribution of revenues across the country, particularly in the spoils allocated to Zanzibar. The Indian Ocean archipelago and self-governing territory is laying a claim to reserves discovered off its coastline, and is hoping that a constitutional review will delineate its sea border with Tanzania and confirm its autonomy on oil and gas matters.

“That’s something where there’s a bit of a question mark and people will want that sorted out. But that’s not exactly pressing and will happen over a long time horizon. If it takes a while longer and is a transparent process, that’s not too worrying,” says Ashbourne.

Competition

Of more pressing concern will be the intense competition with another Indian Ocean rival: neighbouring Mozambique. Similarly endowed with natural gas reserves – its Rovuma Basin is estimates to hold over 160tr cubic feet – Maputo is aiming for the same East Asian markets that Tanzania regards as its future consumers. Majors interested in Mozambique’s extensive reserves, including Anadarko and Eni, are expected to announce their final investment decisions next year. A mooted plan to open a joint terminal appears to have been abandoned as the rival nations compete openly. 

Alexander Njombe, a Tanzania-based director at KPMG speaking in a personal capacity, says that Tanzania faces a tough fight against its neighbour.

“In terms of the LNG project, Mozambique is a bit further ahead. They’ve already identified land. It’s easy for them to progress, and in terms of the framework I think they are seen to be a bit more attractive by the investors,” he says.  

Winning that fight will depend on offering attractive fiscal terms to investors, something that may prove controversial given the minimal amount of local employment generated by natural gas projects. Due to the highly technical nature of extracting gas from offshore sites, the industry will look to draft a cadre of well-trained expatriates into senior roles.

“It isn’t going to employ many people at all. So the effect it has on people’s daily lives will be almost entirely dependent on how the government negotiates the royalty regime and how much tax they get. It’s a little bit abstract for the average person,” says Ashbourne.

He argues that setting up a strategic reserve to save LNG profits for the difficult times will be essential. For Njombe, tempering public expectations will be one of Magufuli’s most difficult challenges.

“The public want to see gas revenues starting to flow now, but if you talk to IOCs, the offshore is not going to come in probably for the next 10 years.”

David Thomas