SOLID PROSPECTS

Tanzania 2015 | ENERGY | VIP INTERVIEW

TBY talks to Patrick Rutabanzibwa, Country Chairman of PanAfrican Energy, on being a pioneer in the natural gas sector and its potential for the future.

As the first company in Tanzania to produce natural gas, how would you describe PanAfrican Energy's pioneering role in this sector?

PanAfrican Energy is a subsidiary of Orca Exploration Group, which is listed on the Toronto Stock Exchange. At the beginning of the 1990s, the company began discussions with the Tanzania government about developing the Songo Songo gas field. At that time the government had not yet decided what to do with the gas, after having made a serious effort for 10 years to develop the gas for a fertilizer project without success. Following the first of several bouts of power rationing in the national grid system in 1992 due to drought and over-dependence on hydro-based power, the government decided to use the gas for power generation. Development proposals were solicited from several companies in 1993, and the PanAfrican Energy and TransCanada Pipelines were selected for negotiations. Formal negotiations commenced in 1994 and continued until October 2001 when the Songo Songo Project agreements were signed. It was a profound learning experience for PanAfrican Energy, the government, TPDC, TANESCO, and probably all of the other eight parties to the 18 agreements that were needed to define the project legally, physicaly, and commercially. The parties included the World Bank and other development finance institutions. The scope of the project included gas exploration, development, production, transportation by pipeline and marketing to industries, and power generation, as well as payment guarantee mechanisms. Even today the commercial arrangements of the Songo Songo gas-to-electricity project represent a complex but practical way to balance risks and rewards for the parties. In putting the arrangements together Tanzania had never undertaken a project like this before, and on several occasions the negotiations nearly failed. PanAfrican's role as the gas development pioneer in collaboration with Songas, and as TPDC's partner in gas production sharing, has essentially been to enable Tanzania to become East and Central Africa's first commercial natural gas producer and to demonstrate that it is capable of attracting, negotiating, and hosting projects as complex as Songo Songo. This has no doubt contributed to attracting the larger foreign investment that has since led to the discovery of the much bigger offshore gas resources. After a decade of production TPDC and the government have together earned over 80% of the net gas sales revenue. The issues that make a small investor comfortable with the national environment are generally the same issues that make the big ones comfortable. After 10 years of operations, PanAfrican Energy is still around, and this speaks to our positive outlook.

How will PanAfrican Energy work to expand the production capacity of its assets in Songo Songo?

There are some geological structures near the main Songo Songo reservoir that have yet to be drilled that may yield additional volumes of gas beyond the current estimate of about a trillion cubic feet. At the moment, PanAfrican Energy is negotiating with the government the terms on which it will double gas production capacity from 100 million to 200 million cubic feet per day in order to provide enough gas for the National Natural Gas Infrastructure Project (NNGIP), which is dedicated to delivering gas mainly for power generation.

“Tanzania has and will continue to have many opportunities for energy sector investors."

How would you describe the current environment for foreign energy companies trying to operate in Tanzania?

If you consider the basics, Tanzania is in a relatively unexplored and underdeveloped region. It has considerable petroleum potential, as is evident from the gas that has already been discovered, and it has one of the fastest growing economies in Africa. At the same time, the strategic location of Tanzania is a huge bonus, and with adequate infrastructure it could become an economic gateway to Southern and Central Africa. That being said, we are of course in a tough neighborhood, as the past 50 years of the region's history have shown. But Tanzania stands out as being stable, which is of course a very positive attribute. The overall environment is therefore attractive in terms of the investment opportunities that exist, but it is challenging when it comes to dealing with the complicated processes for negotiating with the government and other local partners, obtaining the necessary permits and approvals, and dealing with the commercial and taxation issues and stakeholder relations once projects are up and running. A particularly challenging aspect of the investment environment recently has been TANESCO's inability to meet its payment obligations to private energy suppliers. This issue will hopefully be addressed by the government through the extensive restructuring and commercialization of the power sector that it has just launched. Another challenge is that even though the basic terms of petroleum exploration and development agreements are clear, the policy environment is still being defined. This makes the future value of oil and gas development investments difficult to project and thus enhances perceptions of risk. For example, the new Gas Act is expected to prescribe a gas industry structure that was not envisaged under the existing production sharing agreements.

How confident are you that the Gas Act, currently in its draft stage, will address most of the sector's major framework concerns?

It is difficult to describe how a shoe fits without wearing it first. Issues will definitely arise during the anticipated discussions about the Gas Act in which stakeholders will seek to further or safeguard their interests. Although the stakeholders have an overriding common interest, they nevertheless will have competing sub-interests. No doubt we will see stakeholders attempting to have the Gas Act crafted so that their interests and concerns are addressed. It will be difficult to completely satisfy any stakeholder or group. The key will be to strike a balance that everyone can live with, the overriding consideration being to facilitate the optimal, efficient development of the gas industry within the boundaries set by natural gas policy. Once we start implementing the Act, issues that the stakeholders had not foreseen will probably emerge, and that may require amendments to legislation or new regulations to iron those issues out.

How would you characterize PanAfrican Energy's role in the NNGIP?

The company's involvement will be simply as a supplier of some of the gas that will be needed in order to bring the new NNGIP pipeline into operation. PanAfrican Energy is expected to provide up to 100 million cubic feet per day to the NNGIP. However, production will have to be doubled to 200 million cubic feet per day. As I mentioned earlier, we are currently in negotiations with the Ministry of Energy and Minerals and TPDC about the gas price and other terms that will enable PanAfrican Energy to secure financing from the International Finance Corporation (IFC) to double gas production. We are talking about an initial investment of about $150 million in order to drill new wells, service some of existing ones, and install additional infrastructure.

What is PanAfrican Energy's long-term future in the country?

Tanzania has and will continue to have many opportunities for energy sector investors. As long as those opportunities are assessed to make business sense, PanAfrican Energy will consider pursuing them. The company took nearly a decade of hard work to earn the government's final approval to invest in Tanzania, and it has now been here for a decade producing gas reliably, with no major problems or incidents, for generating most of the power in the national grid and for the largest industries in Dar es Salaam. We would obviously want to continue that way indefinitely.

© The Business Year - July 2014