Oil and Gas Fiscal Regime in Tanzania

i

Petroleum Taxation:

A Critical Analysis of Oil and Gas Fiscal Regime in Tanzania

September 2014

By Raphael Bahati Tweve Mgaya

Dissertation Supervisor: Mr William Craig

Submitted in partial completion of the degree of MSc Oil and Gas Law Degree

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ABSTRACT Petroleum resources exploitation is both capital-intensive and technically challenging.

Developing countries do not have the necessary capital and technology to invest in

exploration and development of hydrocarbon resources. On the other hand, petroleum

resources are non-renewable and therefore their exploitation raises issues of taxation

and intergenerational equitable sharing of revenues.

Over the period of time, various petroleum fiscal regimes have evolved to ensure that

the host governments attract foreign capital and at the same time get reasonable

revenues from the resource extraction. The main fiscal regimes which have been

developed include concession, production sharing agreement and service agreements.

The aim of this research was to investigate how the petroleum fiscal regime in

Tanzania balances the interest of the Government and that of the investors. The study

was carried out in Dar es Salaam region in Tanzania. Secondary data were collected

by review of literature while primary data were collected through interview,

distribution of questionnaires and focused-group discussions.

The research shows that though some elements of the Tanzania petroleum fiscal

regime are progressive, generally the fiscal regime itself is thought to be the toughest

in the region. This is so, particularly as a result of the coming into force of the Model

Production Sharing Agreement of 2013. The case is made that the results of the 4th

Bidding Round which was closed on 15 May 2014 is a testament.

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ACKNOWLEDGEMENTS

The author wishes to express thanks to all those who have assisted and advised during

this research, with particular mention of: Mr. William Craig, for his thoughtful

guidance as a dissertation supervisor; the staff of the University of Robert Gordon and

the University of Dar es Salaam for their tireless support particularly in regard to

library services; my employer, the Tanzania Development Corporation for affording

me ample time and financial resources for this work. Appreciation are also due to the

my colleagues Goodluck Shirima, Kelvin Gadi, Burton Mwaka and Pascal Lyimo

through whose support in one way or the other has helped me to accomplish this

research. Any shortcomings in this research are entirely my own.

iv

TABLE OF CONTENTS ABSTRACT ............................................................................................................................. ii

ACKNOWLEDGEMENTS ........................................................................................................ iii

ABBREVIATIONS .................................................................................................................. vii

LIST OF STATUTES .............................................................................................................. viii

LIST OF TABLES ..................................................................................................................... ix

LIST OF FIGURES .................................................................................................................... x

CHAPTER ONE: INTRODUCTION ........................................................................................... 1

1.1 Background 1

1.2 Overview of Tanzania 1

1.2.1 History .................................................................................................................. 1

1.2.2 Economy ............................................................................................................... 2

1.2.3 Petroleum Exploration History .............................................................................. 3

1.3 Statement of the Problem 7

1.4 Research Questions 9

1.4.1 Main Question ...................................................................................................... 9

1.4.1 Specific Questions ................................................................................................. 9

1.5 Objectives of the Research 9

1.5.1 Main Objective ..................................................................................................... 9

1.5.2 Specific Objectives ................................................................................................ 9

1.6 Significance of the Study 10

1.7 Scope of the Study 10

1.8 Limitations to the Study 10

1.8.1 Limited Resources ............................................................................................... 11

1.8.2 Access to Confidential Information..................................................................... 11

1.8.3 Lack of Cooperation from Respondents............................................................... 11

1.8.4 Delimitation of the Research ............................................................................... 11

v

1.9 Methodology 12

1.9.1 Population .......................................................................................................... 12

1.9.2 Sample Size and Sampling Technique .................................................................. 12

1.9.3 Types of Data and Collection Methods ................................................................ 12

1.9.4 Data Processing and Analysis Methods ............................................................... 13

CHAPTER TWO: CRITICAL ANALYSIS OF PETROLEUM FISCAL REGIMES......................... 14

2.1 The Rationale for Special Petroleum Tax Regime 14

2.2Types of Fiscal Regimes 14

2.2.1 Concessionary Systems ....................................................................................... 16

2.2.2 Contractual Systems ........................................................................................... 18

2.3 Fiscal Components of Contractual Systems 22

2.3.1 Royalty ............................................................................................................... 22

2.3.2 Cost Recovery Limit............................................................................................. 25

2.3.3 Profit Oil Split ...................................................................................................... 26

2.3.4 Government Participation ................................................................................... 27

2.3.5 Other Fiscal Instruments ..................................................................................... 29

CHAPTER THREE: CRITICAL ANALYSIS OF PETROLEUM FISCAL REGIME IN TANZANIA........... 32

3.1 The Overview of the Oil and Gas Fiscal Regime of Tanzania 32

3.1.1 Elements of PSA Regime in Tanzania ................................................................... 33

3.2 The Perceptions of the Industry on the Oil and Gas Fiscal Framework 43

3.2.1 Analysis of Survey Methods ................................................................................ 43

3.2.2 Factors Influencing the Development of Oil and Gas Fiscal Regime ..................... 45

3.2.3 Production Sharing System ................................................................................. 48

CHAPTER FOUR: ASSESSMENT OF THE SUSTAINABILITY OF THE PETROLEUM FISCAL REGIME IN TANZANIA ....................................................................................................................... 50

4.1 Objectives of the Government and the Investors 50

4.2 Measures Sustainability 53

4.2.1 Efficiency ............................................................................................................ 53

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4.2.2 Neutrality ........................................................................................................... 53

4.2.3 Equity ................................................................................................................. 54

4.2.4 Risk Sharing ........................................................................................................ 55

4.2.5 Stability............................................................................................................... 56

4.2.6 Clarity and simplicity ........................................................................................... 57

4.3 Perceptions on the Sustainability of the Current Fiscal Regime .............................. 58

CHAPTER FIVE: RECOMMENDATIONS .................................................................................. 62

5.1 Recommendations 62

5.1.1 Royalty ............................................................................................................... 62

5.1. 2 Cost Recovery Limit ............................................................................................ 63

5.1. 3 Additional Profit Tax .......................................................................................... 63

5.1. 4 Income Tax ........................................................................................................ 63

5.1. 5 Government Participation .................................................................................. 63

5.1. 6 Ring Fencing ....................................................................................................... 64

5.1. 7 Transfer Pricing Rules ......................................................................................... 64

5.1. 8 Bonuses ............................................................................................................. 64

5.2 Conclusion 64

Appendix I: Copy Right Declaration Form ............................................................................ 68

Appendix II: Electronic Document Submission Form ............................................................ 69

Appendix III: Dissertation Supervision Record ...................................................................... 70

BIBLIOGRAPHY .................................................................................................................... 71

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ABBREVIATIONS

AMT Alternative Minimum Tax

APT Additional Profit Tax

CIT Corporate Income Tax

DSE Dar es Salaam Stock Exchange

EWURA Energy and Water Utilities Regulatory Authority

FANCP First Accumulated Net Cash Position

GDP Gross Domestic Product

GNI Gross National Income

IOCs International Oil Companies

ITA Income Tax Act

MEM Ministry of Energy and Minerals

MPSA Model Production Sharing Agreement

PE Permanent Establishment

PSA Production Sharing Agreement

SANCP Second Accumulated Net Cash Position

SPSS Social Package for Social Sciences

TPDC Tanzania Petroleum Development Corporation

TRA Tanzania Revenue Authority

VAT Value Added Tax

viii

LIST OF STATUTES Financial laws (Miscellaneous Amendment) Act, 1997 Income Tax Act, 2004

Mining (Mineral Oil) Ordinance) 1958 Petroleum (Exploration and Production) Act, 1980

ix

LIST OF TABLES Table 2.1 Key Features between Concessionary System and Contractual

System.............................................................................................. 19

Table 2.2 The Differences between Concessionary Systems and Production

Sharing Contracts................................................................................21

Table 3.1 Profit Oil Share for Onshore and Shelf areas (No Joint Operations)...35

Table 3.2 Profit Oil Share for Deepwater and Lake Tanganyika North (No Joint

Operations) .........................................................................................36

Table 3.3 Profit Gas Share for Onshore and Shelf areas (No Joint Operations)..36

Table 3.4 Profit Gas Share for Deepwater and Lake Tanganyika North (No Joint

Operations)...........................................................................................37

Table 3.5 The Percentage of Respondents who filled Questionnaire.................44

Table 3.6 Methods of Data Collection in Percentage..........................................44

Table 3.7 Influence of Industry and Market Conditions......................................46

Table 3.8 Influence of Geological Potential of the Area/Company....................46

Table 3.9 Influence of Economic Conditions and Price of Crude.......................47

Table 4.1 Responses regarding the Degree of Fairness of Fiscal Regime..........52

Table 4.2 Responses regarding the Efficiency of Fiscal Regimes......................60

Table 4.3 Responses regarding the Neutrality of Fiscal Regime........................60

Table 4.4 Responses regarding the Degree of Certainty of Fiscal Regime........61

Table 4.5 Responses regarding the Competitiveness of Fiscal Regime..............61

x

LIST OF FIGURES Figure 1.1 The Map of Tanzania........................................................................2

Figure 2.1 Classifications of Petroleum Fiscal Regimes...................................16

Figure 2.2 Incremental Sliding Scale Royalty...................................................24

Figure 2.3 Slab Sliding Scale Royalty..............................................................25

Figure 3.1 The Percentage of Respondents who filled Questionnaire.................................44

Figure 3.2 Methods of Data Collection in Percentage......................................45

Figure 3.3 Influence of Industry and Market Conditions.................................46

Figure 3.4 Influence of Geological Potential of the Area/Company................47

Figure 3.5 Influence of Economic Conditions and Price of Crude...................47

Figure 4.1 Responses regarding the Degree of Fairness of Fiscal Regime......52

Figure 4.2 Responses regarding the Efficiency of Fiscal Regimes..................60

Figure 4.3 Responses regarding the Neutrality of Fiscal Regime....................60

Figure 4.4 Responses regarding the Degree of Certainty of Fiscal Regime....61

Figure 4.5 Responses regarding the Competitiveness of Fiscal Regime..........61

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CHAPTER ONE: INTRODUCTION

1.1 Background The oil and gas exploration in Tanzania started in early 1950s1. The exploration

activities have continued in the country since then with the first commercial natural

gas discovery being made at Songo Songo Island in 1973. The second natural gas

discovery was made at Mnazi bay in 1982.2 More gas discoveries were made from

2010 to 2012 especially in the deepwater in the Indian Ocean and up to now a total of

50.5trillion cubic feet of natural gas have been discovered in Tanzania.3 Commercial

gas production in Tanzania started in 2004 at Songo Songo Island and in 2006 at

Mnazi bay gas fields. Despite, the long history of oil and gas exploration in Tanzania

no research has ever been carried out in the field of oil and gas fiscal regime.

Therefore, this study has a special significance in that it is a pioneer study.

This Chapter basically introduces the subject of the study. It is divided into eight main

sections namely: background to the study, statement of the problem and objectives of

the study and research questions. The other sections are the scope of the study, the

rationale or significance of the study; limitations to the study and methodology. At

this juncture, the detailed discussion for the abovementioned is in order.

1.2 Overview of Tanzania

1.2.1 History Tanzania is a United Republic which came into existence on 26th April 1964 as a

result of the Union between the Republic of Tanganyika and the People Republic of

Zanzibar. The Republic of Tanganyika got its independence from Britain on 9th

December 1961 and Zanzibar became independent following a revolution which

overthrew the Oman Sultanate on 12th January 1964.4 Tanzania covers an area of

1 See at< http://www.tpdc-tz.com/exploration_history.htm >accessed 7 September 2014.

2 Ibid.

3 This is in accordance to the recent report of the Tanzania Petroleum Development Corporation.

4 Anthony Clayton, ‘The Zanzibar Revolution and its Aftermath’ (1983) 53(4), Africa: Journal of International African Institute, 98-100.

2

945,087 square kilometers.5 It is located at south of Equator with geographical

coordinates 6 00 S and 35 00 E in the Eastern Africa bordering Indian Ocean between

Kenya and Mozambique.6 The estimated population of Tanzania in 2013 was about

49.25million people.7

Figure 1.1: The Map of the Tanzania

Source: Google Maps (2014)

1.2.2 Economy In 2013 the Gross Domestic Product (GDP) for Tanzania was USD 33.23 billion. The

GDP grew by 7.0%.8 Agriculture is the main source of GDP which contributes almost

half of the total GDP and employs almost 80% of the workforce in the country.

Mineral sector represents the largest source of economic growth and contributes about

5 See <https://data.un.org/CountryProfile.aspx?crName=United%20Republic%20of%20Tanzania> accessed 5 September 2014.

6 See at< https://www.cia.gov/library/publications/the-world-factbook/geos/tz.html > accessed 2 September 2014.

7 See at < http://www.worldbank.org/en/country/tanzania> accessed 7 September 2014.

8 Ibid.

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3% of the GPD.9 According to the National Bureau of Statistics of Tanzania the

Annual Headline Inflation Rate for the month of July, 2014 increased slightly to 6.5%

from 6.4% in June, 2014.10 The Gross National Income (GNI) per Capital is USD

1,702.12.11

1.2.3 Petroleum Exploration History The oil and gas industry in Tanzania is still emerging12, however following the huge

natural gas discoveries since 2010, there have been rapid developments in the

industry. Currently, it is estimated that the discovered natural gas in place in Tanzania

is 50.5 trillion cubic feet (TCF)13. This has necessitated the existing oil and gas

exploration companies together with the Government of Tanzania to embark on the

construction of a Liquefied Natural Gas (LNG) Project to commercialize the huge gas

discoveries.14

On the other hand, the significant natural gas discoveries have raised concerns among

industry participants with respect to robustness and effectiveness of the oil and gas

legal and regulatory framework vis a vis the rapid developments in the industry. In

response to these concerns, the Government has started to carry out legal and

regulatory reforms which are necessary to cope with the new and rapid development

in the oil and gas industry. In this regard, the Government has promulgated for the

first time the Natural Gas Policy 2013 with the principal objective of providing

guidance for the sustainable development and utilization of the natural gas resource in

9 See at < http://www.tanzaniainvest.com/economy > accessed 6 September 2014.

10 See ‘Tanzania Inflation Increases to 6.5% in July 2014’ <http://www.tanzaniainvest.com/economy/news/1218-tanzania-inflation-increases-to-65-in-july-2014-> accessed 2 August 2014.

11 United Nations Development Programme, Human Development Reports, < http://hdr.undp.org/en/countries/profiles/TZA > accessed 15 September 2014.

12 Ombeni Sefue, ‘Toward a Gas Economy in Tanzania’ < http://naturalresourcecharter.org/sites/default/files/Ombeni%20Sefue_0.pdf > accessed 7 August 2014.

13 See ‘I will be the last to lead an impoverished Tanzania – JK’ The Guardian, 7th August 2014. 14 Brian Cassidy and Steven Fox, ‘East Africa: from niche play to key LNG Suppliers?’ (April 2014), Vol.81, Issue 3, Petroleum Economist.

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the country.15 The Government has also prepared a Gas Utilization Master Plan16 with

major use of natural being focused on power generation.17

At the time of writing this report, the Government is developing an Upstream

Petroleum Policy of 2014 whose major objective is to set out legal and regulatory

framework for exploration, production and utilization of the country’s petroleum

resources in an effective and efficient manner.18 Besides, the Government is also

developing the Local Content Policy 2014 in order to promote participation of

Tanzanians into the oil and gas industry, transfer of technology and ensure the oil and

gas industry development benefits other sectors of the economy in the country.19 The

Gas Act Bill has also been drafted and is ready for tabling to the Parliament before

the end of the year 2014 for deliberations and enactment. The amendments of the

upstream petroleum legislation, the Petroleum (Exploration and Production) Act of

1980 (hereinafter called the PEPA) are also in the final stages and interestingly the

author is a member to one of the Government Committee which is tasked with

preparing the amendment proposals.

In October 25, 2013 the Government of the United Republic of Tanzania launched its

4th Licensing round whereby the Model Production Sharing Agreement (MPSA) 2013

15 The United Republic of Tanzania, The National Natural Gas Policy, 2013 < http://www.tanzania.go.tz/egov_uploads/documents/Natural_Gas_Policy_-_Approved_sw.pdf > accessed 7 August 2014.

16 Christopher B. Strong (ed.) (2013), ‘The Oil and Gas Law Review’ Law Business Research Limited p.244.

17 The United Republic of Tanzania, ‘Power System Master Plan 2012 Update’ < http://www.google.co.tz/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=1&ved=0CBsQFjAA&url=http%3A%2F%2Fwww.tanesco.co.tz%2Findex.php%3Foption%3Dcom_docman%26task%3Ddoc_download%26gid%3D68%26Itemid%3D172&ei=Q4bjU_Z2qaHRBb3sgRA&usg=AFQjCNEg6xTNJJ2b8KSGVWD_itOiUX-Faw&bvm=bv.72676100,d.d2k > accessed 7 August 2014

18 The United Republic of Tanzania, The National Petroleum Policy of Tanzania (Draft 2, April 2014) < http://www.tpdc-tz.com/National%20Petroleum%20Policy.pdf > accessed 7 August 2014.

19 The United republic of Tanzania, Local Content Policy of Tanzania for Oil and Gas Industry 2014 (Draft I)’ < http://www.mem.go.tz/wp-content/uploads/2014/05/07.05.2014local-content-policy-of-tanzania-for-oil-gas-industry.pdf > accessed 21 June 2014.

5

became effective. The terms of MPSA 2013 are considered as tough by the industry20

in comparison with the preceding MPSAs namely MPSA 2004 and MPSA 3008.

However, the Government views that the new MPSA 2013 terms are fair and

equitable because in the Government views they reflect the changed geological

potential of the country. Under the MPSA 2013 the Government aims at maximizing

its revenue and at the same time ensuring that the industry remains competitiveness in

region.21

The current MPSA 2013 is the sixth version22 in Tanzania since the commencement

of the oil and gas exploration in the country in early 1950s.23 BP and Shell started

petroleum exploration in Tanzania (then Tanganyika territory) in 1952 under the

concession agreement with the government based on the Mining (Mineral Oil)

Ordinance, CAP. 39924. BP and Shell held exploration acreage along the Coastal

Basin including the islands of Zanzibar, Pemba and Mafia.25 The licensees carried out

geological and geophysical surveys which however did not lead to any commercial

20 Tanzania outlines new oil and gas production terms, Reuters, Monday 4 November 2013 < http://www.reuters.com/article/2013/11/04/tanzania-energy-idUSL5N0IP37820131104 > accessed 6 August 2014.

21 The East African region, covering Uganda, Kenya, Tanzania and Mozambique in this case is a hotspot for hydrocarbon exploration particularly following significant oil discoveries in Uganda and Kenya and natural gas discoveries in Mozambique and Tanzania / these countries.

22 The previous version of Model Production Agreements (MPSAs) were the 1989, 1995, 2000, 2004 and 2008. The discussion on these Model PSAs is outside the scope of this study.

23Tanzania Petroleum Development Corporation, ‘Exploration History’ < http://www.tpdc-tz.com/exploration_history.htm > accessed 15 August 2014.

24 This Act was repealed by the Petroleum (Exploration and Production) Act, 1980.

25Yona S. M. Killagane, ‘Tanzania’s Model Production Sharing Agreement’

<http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=10&ved=0CGwQFjAJ&url=http%3A%2F%2Fwww.energy.eac.int%2Feapc2005%2Fpdfs%2Fconfrence%2520proceedings%2FCountry%2520Presentations%2FTanzania%2FModel%2520Production%2520Sharing%2520Agreement%2520%2520Mr.%2520Yona%2520Killagane.pdf&ei=vZ0QVJWPH4iXaoT9gegG&usg=AFQjCNEu5ivHTpba-xR40UzzZ_-GKgfWqg&sig2=Y9yHaKjRuQqDa2toL9Dy0Q&bvm=bv.74649129,d.d2s> accessed 2 August 2014.

6

discoveries and as a result the concession was relinquished in 1964.26 AGIP

negotiated a service agreement with the Tanzania Government for the whole area

relinquished by BP/Shell. The service agreement was amended in 1970 to

accommodate TPDC through the first Production Sharing Agreement.27 In 1973,

AGIP SpA made the first natural gas discoveries in Songo Songo Island.28 The

enactment of the PEPA and increase in the oil prices prompted the increased

exploration activity in the country especially in 1980 to 1991 resulting gas discovery

at Mnazi bay.29

The first offshore licensing round was launched in September 2000 whereby six

deepwater blocks were put up for bids. Three companies submitted their bids and after

successful negotiations, block 6 was awarded to Brazil’s Petrobas and a

corresponding PSA was signed with the Government and TPDC in April 2001.30 The

second bid was launched in June 2001 in which eleven blocks were on offer.31

Following the second bidding round, TPDC received two bids and after successfully

negotiations four PSAs for blocks 9, 10, 11 and 12 were all executed with Shell

International in September 2002.32 The third bidding round which was launched in

2004 was more successful that the previous rounds. Between 2005 and 2007, block 5

was awarded to Petrobras, block 2 to Staoil and blocks 1, 3 and 4 were awarded to

Ophir Energy. Besides, block 8 and block 7 were awarded in 2011 and 2007 to

26 David Ledesma, ‘East Africa Gas-Potential for Export’ (March, 2013), The Oxford Institute for Energy Studies p. 12.

27 Yona S.M. Killagane (n 25) 4.

28 Tanzania Petroleum Development Corporation, ‘Exploration History’ < http://www.tpdc-tz.com/tpdc/directorate/exploration/Exploration_History.php > accessed 16 August 2014.

29 David Ledesma (n 26) p. 12.

30 GEO ExPro, ‘New Offshore Licensing Round for Tanzania’ < http://www.geoexpro.com/articles/2012/10/new-offshore-licensing-round-for-tanzania > accessed 15 August 2014.

31 Ibid.


7

Petrobras and Dominion Petroleum respectively.33 The 4th Offshore Licensing

Round34 was launched on 23rd October 2013 and TPDC received four bids from the

following companies: China National Offshore Oil Corporation (CNOOC) (Block

4/3A); ExxonMobil and Statoil consortium (Block 4/3A); Gazprom (Block 4/3B); and

Mubadala (Block 4/2A); and RAKGas LLC (Lake Tanganyika).35

It is generally argued that there had been a success in the subsequent rounds since the

first offshore round in 2000. Until 2013, Tanzania in particular and the East African

region generally became a hydrocarbon hotspot. Therefore it was expected that the 4th

Licensing Round would attract a lot of interests form IOCs. However, the results

have been disappointing. At the time of writing this Report, the Government

Negotiation Team is meeting with CNOOC and RAGas LLC for the negotiation of

the PSAs in respect of the Blocks for which bids were submitted. Gazprom withdrew

from the bid before the opening a ExxonMobil and Statoil consortium and Mubadala

bids were according to a senior TPDC officer, way below the bidding thresholds and

so they were both disqualified. It is questionable if the current petroleum fiscal regime

is sustainable and thus balances the interests of the Government and the interests of

the investors.

1.3 Statement of the Problem Following huge natural gas discoveries in the country particularly commencing in

2010, the Government of the United Republic of Tanzania has taken various steps to

address the oil and gas legal framework which is thought to be not comprehensive

enough. The Government has also adopted measures to ensure the management and

administration of the discovered natural gas resources for the benefit of the entire 33 GEO ExPro (n 30) p.12.

34 Seven (7) Deep Sea Offshore Blocks and the Lake Tanganyika North Offshore Block have been offered under this bid. These blocks are seven deepsea blocks (Blocks 4/2A, 4/3A, 4/3B, 4/4A, 4/4B, 4/5A, 4/5B) with an average size of 3000 sq. km and with a water depth of between 2000m to 3000m, and the North Lake Tanganyika block. See at < http://www.tz-licensing-round.com > accessed 15 August 2014.

35 Leigh Elston, ‘Five groups bid in Tanzania’s fourth licensing round’ Natural Gas Daily 15 May 2014 < http://interfaxenergy.com/gasdaily/article/8177/five-groups-bid-in-tanzanias-fourth-licensing-round > accessed 22 September 2014.

8

Tanzanian society. These measures include the promulgation of the Natural Gas

Policy 2013, the adoption of the Gas utilization Master Plan and the MPSA 2013.

The terms of the current MPSA 2013 applicable in Tanzania petroleum industry

which can in force on 23rd October 2013 are considered as relatively tough from the

investor’s point of view as compared to previous MPSAs such as MPSA 1995, MPSA

2004, and MPSA 2008. There have been a total of four bids since the launching of the

first licensing round for deepwater in 2000. In contrast with the previous bids, the 4th

Bidding Round has been launched in Tanzania against the backdrop that the country

has been a hotspot for hydrocarbon exploration and productions. This has been largely

due to the huge discoveries of hydrocarbons in the country and in the neighbouring

countries. Therefore, it would be expected that the response of the oil and gas

exploration and production would be significantly higher in the 4th Bidding round

than in the previous bids. However, the reality seems to be quite different and this

study will explain why that is the case.

The efficiency of the new oil and gas fiscal regime is yet to be tested. It remains to be

seen how this fiscal regime will balance, as it should, the interests of the government

and those of the investors. Inefficient tax has distortionary effect to the economy, i.e.

it disincetivizes the development of marginal fields and exploration of new deposits; it

leads to premature abandonment of the fields; changes the depletion rate; and may

encourage oil companies to resort to tax avoidance.36 A good fiscal regime needs to

be simple to understand and to administer otherwise it may induce manipulation.37

The aim of this study was to find out how the current oil and gas fiscal regime

balances the achievement of the government above objectives and interests and the

interests of the investors.

36 Alexander G. Kemp, ‘Economic Consideration in the taxation of petroleum exploitation’ from Kameel I.F. Khan (ed.), Petroleum Resources and development: economic, legal and policy issues for developing countries (Belhaven Press, 1987) 121.

37 A. Ogunlade, ‘How Can Government Best Achieve its Objectives for Petroleum Development: Taxation and Regulation or State Participation?’ (2010) 8(4) OGEL < www.ogel.org > accessed 23 June 2014.

9

1.4 Research Questions

1.4.1 Main Question This main question for this study was to seek an answer for the following main

question:

How the current oil and gas fiscal regime balances the government objectives and

interests and the interests of the investors in the petroleum industry?

1.4.1 Specific Questions The specific research questions of this study were as stated here below:

i) What are the features of the oil and gas fiscal regime?

ii) What are the objectives of the government and the investors in the

petroleum industry?

iii) How does the current oil and gas fiscal regime help the government to

achieve its objectives and promote the interests of the investors in the

petroleum industry?

iv) What are the perceptions of the industry in respect to the current oil and

gas fiscal regime?

1.5 Objectives of the Research

1.5.1 Main Objective The main objective of the research was to find out how the current oil and gas fiscal

regime balances the government objectives and interests in the petroleum industry and

the interests of the investors.

1.5.2 Specific Objectives The research has the following specific objectives:

i) To identify features and discuss the oil and gas fiscal regime in Tanzania.

ii) To identify and discuss the objectives of the government and the investors

in the petroleum industry.

10

iii) To find out how does the current oil and gas fiscal regime helps the

government to achieve its objectives and promote the interests of the

investors in the petroleum industry.

iv) To carry out a survey of and discuss the perceptions of the industry in

respect to the current oil and gas fiscal regime.

1.6 Significance of the Study In this study, an assessment is made on how the current oil and gas fiscal regime

balances the government objectives and interests and the interest of the investors in

the petroleum industry. Besides, the study also describes the features of the current oil

and gas fiscal regime in Tanzania and discusses the perceptions of the industry in

respect with the existing fiscal regimes with the focus on the MPSA 2013. It is hoped

that this study will be useful for both individuals and organizations in the following

ways:

i) It will help policy makers and industry regulators to appreciate weakness

existing in the oil and gas fiscal regime;

ii) It will help future researchers to identify gaps which requires future

research;

iii) Due to very low level of local studies in the subject, it will be used as an

essential empirical reference for future researchers; and

iv) It will enable the researcher to fulfil the requirement for the degree of MSc

Oil and Gas law of the University of Robert Gordon.

1.7 Scope of the Study This study was undertaken in Tanzania. The data for the research were collected in

Dar es Salaam city from the oil and gas industry regulators, tax authorities, national

oil companies and other oil and gas companies. Due to resources limitations, data

were collected from a targeted sample of 132 participants.

1.8 Limitations to the Study Every research is subject to limitations specific to its setting. In course of this study,

the researcher encountered a number of constraints which affected the outcome of the

11

study. These constraints are stated and discussed in the subsequent paragraphs.

Nevertheless, it is the researcher’s belief that such limitations did not affect the

validity and reliability of the findings of the study.

1.8.1 Limited Resources The researcher had little fund necessary for carrying out the study, such as meeting

the costs to reach many respondents physically or through telephone interview. Other

resources constraints were the shortage of time for research. This study had to be

accomplished within the period of not more than four months. However, the

researcher countervailed the time constraints by adhering to the time schedule and by

ensuring the full utilization of the short time available.

1.8.2 Access to Confidential Information It is quite common in the oil and gas industry for participants to enter into

confidentiality agreements to protect commercially sensitive information. In order to

countervail this situation, a researcher had to get official authorizations to be able to

access the data for the research from various entities such as the Tanzania Revenue

Authority (TRA), the Ministry of Energy and Minerals (MEM), TPDC, non-

government organizations and oil and gas companies. For those respondents who

were hesitant to give their opinions on the information which were in the public

domain, the researcher explained to them that such information was not protected by

confidentiality agreements. This enabled the researcher to win the confidence of the

respondents and thus get the access to such information.

1.8.3 Lack of Cooperation from Respondents The researcher encountered difficulties in getting people to agree to participate in the

study. Some turned down the interview on the ground that there were not

knowledgeable enough in the subject. Others received the questionnaire but never

turned up with a filled questionnaire. Other respondents said that since they were not

public relations officers so they would not respond.

1.8.4 Delimitation of the Research This research was restricted to individuals who are working in the oil and gas industry

mainly officers working for the Government and Government agencies, local and

international oil and gas exploration companies. The study also involved employees

12

of oil and gas companies operating in Tanzania upstream sector. The group of people

was targeted because the researcher believes that they have the necessary information

sought for the research. The Dar es Salaam region was chosen as a focus of research

since it is the centre from which all oil and gas exploration and production companies

operate. Besides, Dar es Salaam is also a location where the researcher works and

lives and thus it was thought to be a logistically convenient location for data

collection and report writing.

1.9 Methodology

1.9.1 Population The population of the study comprised of all individuals working in oil and gas

industry based in Dar es Salaam region in Tanzania. In particular, these included

employees of the Ministry of Energy and Minerals (MEM), TPDC, TRA, Energy and

Water Utilities Regulatory Authority (EWURA) and oil and gas exploration

companies.

1.9.2 Sample Size and Sampling Technique The questionnaires were distributed to targeted individuals, telephone interviews were

also carried out and focused group discussions were also held. In case of the focused

group discussion, the group ranged between 4 to 8 participants with the researcher as

a moderator of the discussion. There were a total of 48 respondents who responded to

the by filling a questionnaire. Purposive sampling (i.e. non-probability sampling) was

employed in the collection of data for the study. Individuals with special knowledge

in the subject were targeted for interview. This sampling technique was chosen since

the researcher believed that it was the most appropriate to obtain data which required

specialized knowledge of the industry.

1.9.3 Types of Data and Collection Methods The primary data were collected through interview, focus group discussions and

questionnaires. The data which was collected was firsthand data that no one has

access to it before. This was mainly because the data were given by individuals who

had firsthand experience. Secondary data were collected by the review of various

documents and publications that were reviewed by the researcher. These documents

included books, reports, magazines, journals and empirical reports. These documents

13

were accessed from TPDC, MEM, TRA, EWURA and from the University of Robert

Gordon and the University of Dar es Salaam libraries. Other documents included

reports which were availed to the researcher from oil and gas companies operating in

Tanzania upstream petroleum sector. The researcher also accessed some information

by use of the internet.

1.9.4 Data Processing and Analysis Methods After the collection of raw data, the researcher had to check for errors and

inconsistencies of collected data. This was done by processing data. Initially data

entry was performed and followed by editing and coding. The analysis of quantitative

data was performed by using the Microsoft Statistical Package for Social Sciences

(SPSS). Figures such as pie-chart and bar charts were used to present the findings.

14

CHAPTER TWO: CRITICAL ANALYSIS OF PETROLEUM FISCAL REGIMES

2.1 The Rationale for Special Petroleum Tax Regime The taxation of oil and gas resources is given special treatment in petroleum

producing countries due to a number of reasons. Oil and gas resources are exhaustible

resources i.e. their prices are volatile and their production is unpredictable.38 This

poses challenges in many ways. While exhaustibility raises challenges in terms of

sustainability and intergenerational equity in the allocation of resources, the

uncertainty and volatility of petroleum revenues makes it difficult for fiscal policy

making and macroeconomic management.

The oil and gas industry is inherently risky. The main risks are geological,

commercial and political risks. These risks are particularly complicated for the reason

that the oil and gas projects involves high capital costs, long project life cycles,

volatile prices and unpredictable reserves. Besides, due to non-renewability of

petroleum resources, most governments target at taxing as much economic rent as

possible. Due to the complex nature of the petroleum investment it is pertinent that

any government must ensure that a proper tax regime that balances the interest of the

state and that of the investor is put in place. It is argued that such tax must target an

economic rent39 and must comprise of the features of good fiscal regime discussed in

the following paragraphs.

2.2Types of Fiscal Regimes Petroleum operations are subject to various tax instruments both those that are

specific to the petroleum industry and those that are applicable to all other industries. 38 Steven Barnett and Rolando Osowski, ‘Operational Aspects of Fiscal Policy in Oil-Producing Countries’(International Monetary Fund, 2002) p.13-15 <http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CDQQFjAC&url=http%3A%2F%2Fwww.mafhoum.com%2Fpress4%2F120E11.pdf&ei=pBkRVNT7IJTUarHGgZgP&usg=AFQjCNGXp2wfXDnS2UPc1lBUy_M_pgddaQ&sig2=oERYaszRWQRA1CfPO4Zmrw&bvm=bv.74894050,d.d2s > accessed 10 September 2014.

39 Peter Mullins, ‘International tax issues for resource sector’ in Philip Daniel and aothers(eds.),The Taxation of Petroleum Minerals (Routledge 2010) p.378.

15

There are other non-tax instruments to which the oil and gas regime is also subject.

The non-tax instruments include bonuses, production sharing and surface rentals.40

Governments need to design tax regimes to achieve particular objectives which

include maximizing the value of revenues from the resource being produced; job

creation; transfer of technology; development of local infrastructure and capacity; and

ensure energy security. The government needs also to design fiscal regime in such a

way as does attract investors and particularly foreign investors in the case petroleum

industry.

Foreign investments in petroleum industry increase petroleum resources development

and reserves; increase access to modern technology; improve management skills and

profit orientation; increase financial resources for development; establish long term

relationships with international oil companies and global oil and gas markets.41 In

order to achieve these objectives, governments need to design fiscal regime which

among others ensures that: tax revenues are predictable and stable; high extraction of

economic rent during the period of high profit; tax instruments do not introduce

distortions to the economy; ensure high revenues in the early period of the life cycle

to increase the net present value of revenues; tax is neutral and thus eliminate negative

impacts on resource allocations.

Different countries in the world have adopted various oil and gas fiscal regimes

depending on many factors including historical backgrounds, prevailing geological

potentials and government objectives, among others. Some jurisdictions have more

than one oil and gas fiscal regimes and others have fiscal regimes which are ‘hybrid’

i.e. comprise of elements of more than one fiscal regime. The main oil and gas fiscal

regimes that exist in the world are concessionary systems and contractual systems

40 Silvana Tordo, ‘Fiscal Systems for Hydrocarbons: Design Issues’ (World Bank Working Paper no.123, 2007) <http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCEQFjAA&url=http%3A%2F%2Fsiteresources.worldbank.org%2FINTOGMC%2FResources%2Ffiscal_systems_for_hydrocarbons.pdf&ei=NH__U4D0MPGR0QWpzICgAg&usg=AFQjCNFP4d02s8z8bbH3Tj3mn7WxJAr0QA&sig2=IFdwkUpx2g7Ro_Dc9pEDeg&bvm=bv.74035653,d.ZGU > accessed 12 July 2014.

41 William T. Onorato and J. Jay Park, ‘World Petroleum Legislation: Frameworks that Foster Oil and Gas Development’ (2001) 39 (1) Alberta Law Review, p. 70.

16

(See Figure 2.1 below). The discussion of each of these petroleum arrangements

follows in the paragraphs below.

Figure 2.1 Classifications of Petroleum Fiscal Regimes

Source: Adapted from Johnson (1994).

2.2.1 Concessionary Systems The concessionary system is the earliest mode of petroleum arrangement which

originated in the very early years of petroleum industry in around 1850.42 In early

days concessions were granted by the host government to the owner of the land

surface rights for the purposes of exploring and producing petroleum from the

concession. In return for the right to exploit concession the holder of the land surface

right was obliged to pay royalty.43 The concession system was a common feature of

the continental civil law systems of Europe, Latin and South America, and the Middle

East where the title to petroleum resources was vested in the state.44 42 Carole Nakhle , Petroleum Taxation Sharing the oil wealth: a study of petroleum taxation yesterday, today and tomorrow (Routlege, 2008) 32.

43 Nwosu E. Ikenna, ‘International Petroleum Law: Has it Emerged as a distinct Legal Discipline?’ (1996) 8, African Journal of International Comparative Law, 434.

44 Ibid.

Petroleum Fiscal Regimes

Contractual

Production Sharing Agreements

Service Contracts

Pure Service Hybrid Service Risk Service

Concessionary

17

Early concessions were characterized by long term periods and lower host

government control of management of resources and conduct of operations by the oil

company.45 The well known concession which was granted on 28th May 1901 by the

Persian government to William Knox D’Arcy to carry out petroleum exploration and

production throughout Persia was valid for the period of sixty years. 46 In return

D’Arcy was obliged to pay bonuses to the government and 16 percent of the

company’s annual profit.47Besides, early concessions gave oil companies wider

freedom to explore and exploit petroleum and host countries did not exercise any

control over the management of resource and conduct of operations by the oil

companies operating within their jurisdictions. Concession contracts were popular

petroleum arrangements between host states and oil companies up until 1950s. In

Tanzania, concession was the first phase of exploration history whereby in 1952-1964

BP and Shell were awarded concessions along the coast of Tanzania (then

Tanganyika) including the islands of Unguja, Pemba and Mafia.48

Around 1960s tension began to build between host countries and oil companies over

the sharing of revenues and control of resources under the concession arrangement.

The conflict between host countries and oil companies was further amplified by the

external factors such as the passing of various United Nations resolution in respect of

ownership of natural resources49; the rise of crude prices in early 1970s; the formation

45 A. Al Faruque, ‘Utility of Flexible Mechanisms and Progressive Tax System Stability in Fiscal Regime of Petroleum Contract: An Appraisal’ (2004) 2 (3) OGEL < www.ogel.org > accessed 28 July 2014.

46 Daniel Yergin, ‘The Prize: The Epic Quest for Oil, Money & Power (Free Press, 2008).

47 Nwosu E. Ikenna (n 43) 434.

48 Emma Msaky, ‘A Presentation to the delegation from Tanzania Private Sector Foundation (TPSF), <http://www.google.co.tz/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CCQQFjAB&url=http%3A%2F%2Fwww.tpdctz.com%2FOIL%2520and%2520GAS%2520EXPLORATION.pdf&ei=bCwCVNH2J6bgyQPx64CICw&usg=AFQjCNFk4kY0_JYxyj5o8f-zusYeqz5ZMw&bvm=bv.74115972,d.d2k> accessed 30 August 2014.

49 Some of these resolutions includes the Permanent Sovereignty over Natural Resources General Assembly resolution 1803 (XVII) passed in New York on 14 December 1962, see at < http://legal.un.org/avl/ha/ga_1803/ga_1803.html > accessed 11 September 2014.

18

of the Organization of Petroleum Exporting Countries (OPEC) in 196050; the expansion of

petroleum industry further to downstream; the emergence of independent oil

companies between 1957 and 1960 and state oil companies which offered more

attractive terms to host countries than the majors.51

Concession system is also referred to as royalty/tax arrangement. Under concession

the oil company acquires title to petroleum produced at the wellhead and the oil

company has to pay royalty and tax only to the host government. The contractor also

owns assets and the government or its agents do not monitor operations and

expenditure unless the oil company defaults payment of taxes.52 The oil company has

the right to own the produced petroleum except that it may be required to supply local

markets.53 Unlike the old concessions, modern concessions consists of short-term

period, the state has a greater control over resource and project management. Modern

concessions also comprise of various taxes including bonuses, royalty, income tax and

additional profit tax.54 It is argued that concessions are less-self enforcing since their

fiscal arrangement are incorporated into legislations instead of the contract itself, thus

they are susceptible to legislative changes.55

2.2.2 Contractual Systems The source of contractual systems is based on the French legal philosophy since the

Napoleonic era which vested ownership of mineral resources in the host government

on behalf of the populace.56 Under the contractual systems, an oil company is engaged

to explore, develop and produce petroleum at its own risks; the state owns the

resources and ownership is transferred to the oil company at the delivery point; and

50 The Organization of Petroleum Exporting Countries, ‘Brief History’ <http://www.opec.org/opec_web/en/about_us/24.htm > accessed 12 June 2014.

51 Ibid 435.

52 Emma Msaky (n 48) 3.

53 Carole Nakhle (n 42) 32.

54 A. Al Faruque (n 45) 14.

55 Ibid.

56 Daniel Johnson, Petroleum Fiscal Systems and Production Sharing Contracts (PennWell Books 1994) p.22.

19

ownership of assets reverts to the host government immediately and thus the host

government is responsible for abandonment unless otherwise expressly agreed.57

Contractual systems are divided into production sharing agreements and risk service

agreements. The key distinctive features between concessionary and contractual

systems are summarized in the Table 2. 1below.

Table 2.1: Key Distinctive Features between Concessionary System

and Contractual System

Concessionary Systems Contractual Systems

In its most basic form, a concessionary system has three components: royalty; deductions (such as operating costs, depreciation, depletion and amortization, intangible drilling costs); and tax.

Under a production sharing contract (PSC) the contractor receives a share of production for services performed. In its most basic form, a PSC has four components: royalty, cost recovery, profit oil, and tax.

The royalty is normally a percentage of the proceeds of the sale of hydrocarbon. It can be determined on a sliding scale, the terms of which may be negotiable or biddable, and paid in cash or in kind. The royalty represents a cost of doing business and is thus tax-deductible.

Similar to concessionary systems. In addition, normally royalties are not cost recoverable.

The definition of fiscal costs is described in the legislation of the country or in the particular concession agreement. Royalties and operating expenditures are normally expensed in the year in which they occur, and depreciation is calculated according to applicable legislation. Some countries allow the deduction of investment credits, interest on financing, and bonuses.

Fiscal costs are defined and rules for amortization and depreciation are established in the legislation of the country or in the particular PSC. After payment of royalties, the contractor is allowed to recover costs in accordance with contractual provisions (a cost recovery limit may apply). The remainder of the production is split between the host government and the oil company at a stipulated (often negotiated) rate.

The taxable income under a concessionary agreement may be taxed at the country’s basic corporate tax rate. Special investment incentive programs and special resource taxes may also apply. Tax losses are normally carried forward until full recovery.

Corporate taxes may apply or may be paid by the host government or its NOC on behalf of the contractor. Income tax is calculated on taxable income (revenue net of royalties, allowable costs, and government share of profit oil). Tax losses are normally carried forward until full recovery. In most countries, when cost recovery limits exist, the company’s share of profit oil in any given accounting period is not the taxable base

Source: Adapted from Silvana Tordo (2007)

57 A. Karembu Njeru, ‘Kenya Oil and Gas Fiscal Regime: An Economic Analysis on Attainment of Government Objectives’ (2009) 7(3) OGEL p.3 < www.ogel.org > accessed 2 August 2014.

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2.2.2.1 Production Sharing Agreements

Like farm-out agreements, PSAs originated from agricultural arrangements based on

the sharecropping arrangements whereby the owner of land grants a farmer the right

to grow crops and in return the farmer shares the produce with the land owner in the

pre-agreed ratio.58 The Production Sharing Agreement (PSA)59 was developed

initially in Indonesia in 1966 as a result of host governments’ battle for control of

petroleum resources and the desire to extract higher values from the production. This

was due to weaknesses that were identified under the concessionary system which

predated the PSA system. Under PSA system, the investor, usually referred to as the

contractor assumes all the risks before the production starts and recoups costs and

profits out of the production.60In petroleum industry, PSA is a crucial tool which

enables the cooperation between the host government, the national oil company and

the investor. It provides stable risks sharing contractual arrangement between all the

parties involved.61 It is argued that PSA provides “a flexible tool to adjust the fiscal

package to suit a particular project without changing the overarching fiscal

framework”.62 The ability to be flexible has been the defining criteria for the success

of the PSA system in meet the requirements of both the investor and the

government.63It is further argued that the PSA is the most attractive amongst all the

petroleum contracts today in that it balances the interests of the host country and the

investors to the greatest degree possible. This is so because PSA ensures the state

58 Stephen Harwood, ‘Production Sharing Contracts: Analysis of Comparative Practice in certain African Jurisdictions’ (UNCTAD 11th Africa Oil and Gas Trade & Finance Conference, Nairobi, 23-25 May, 2007) p.3. <http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CE4QFjAB&url=http%3A%2F%2Fwww.unctadxi.org%2FSections%2FDITC%2FFinance_Energy%2Fdocs%2F11thAfrican%2F11thAfrican_Marc%2520Hammerson.pdf&ei=rWoRVNGzCc7haPjIgPAO&usg=AFQjCNFWs9h8AsnZvdEtevp7OpSb8EEJcg&sig2=vrvfqmELMG35wBnFioBX3Q&bvm=bv.74894050,d.ZGU >

59 In some jurisdiction PSA is synonymously known as production sharing contract (PSC).

60 T. Baunsgaard ‘A Primer on Mineral Taxation’ (2004) 2(3) OGEL pp.12 < www.ogel.org > accessed 12 July 2014.

61 Ibid.

62 T. Baunsgaard (n 60) 13.

63 Thomas W. Walde, ‘Renegotiating Acquired rights in the oil and gas industries: Industry and political cycles meet the rule of law’ (2008) 1 (1) Journal of World Energy Law & Business, p.65.

21

maintains general management of petroleum operations while the investor being in

control of the day to day operations.64

Although the PSA is negotiated and agreed between parties, in practice the

government usually develops a template or Model PSA which serves as a basis for

PSA negotiations. In case of award of exploration block by bids, Model PSA is

usually included in the bidding package with some of its terms being biddable and

others not biddable. In the case of Tanzania, under the Model PSA 2013, biddable

terms includes, work programmes, profit sharing, state participation, bonuses and cost

recovery.65 The differences between the concessionary system and production sharing

agreement were brilliantly pointed out by Johnson (see Table 2.2 below).

Table 2.2: The Differences between the Concessionary Systems and Production

Sharing Contracts Concessionary System Production Sharing Contract

Ownership of nation’s mineral resources

Held by sovereign state Held by sovereign state

Title transfer point At the wellhead At the export point66

Company entitlement Gross production less royalty Cost oil/gas + profit oil/gas

Entitlement percentage Typically 90% Typically 50-60%

Ownership of Facilities Held by company Held by state

Management control Typically less government

control

More direct control and

participation

Government participation (carried working interest)

Less likely More likely

Ring Fencing Less likely More likely

Adapted from Johnson (1994)

2.2.2.2 Risk Service Contracts

The risk service contract is a contractual arrangement whereby the government owns

the resource and the investor assumes all the risks for exploration, development and 64 Nwosu E. Ikenna (n 43) 443.

65 Usually a threshold or a limit is set below/above which a particular parameter cannot be allowed exceed.

66 Also is known as Delivery Point.

22

production costs. In case the venture is successful, the investor is allowed to recoup its

costs from the petroleum revenues.67 Besides, the investor also in return gets paid a

fixed or a variable fee in cash or in kind.68 The risk service contracts are divided into

pure service contracts and risk service contracts. Under the pure service contract the

investor is paid a fixed fee and all production belongs to the state but under the risk

service contract the investor is paid a fee which is linked to the profit.69

In recent years more countries are adopting service contracts as opposed to production

sharing agreements or concessions in their petroleum development projects.70 This

shift in interest towards service contracts is attributed to two main reasons namely, the

heightened sovereignty concerns and the need by the host countries of capital and

know-how for the development of the petroleum industry. In relation to other forms of

petroleum arrangements, service contracts are quite recent and their application in the

petroleum industry came in late 1980s and early 1990s.71

2.3 Fiscal Components of Contractual Systems Fiscal components of contractual systems are elements which constitute fiscal regime

in contractual systems. These elements include royalty, cost recovery limit, profit oil

split and state or government participation. The discussion on these elements follows

in the following paragraphs.

2.3.1 Royalty Royalty is the most common levy imposed by governments in petroleum resource

extraction. Royalty can either be specific i.e. based on volume or ad valorem i.e. 67 Daniel Johnson (n 56) 87-88.

68 Oscar E. Arrieta, ‘New Petroleum Law of Peru’ (1996) 14(1), Journal of Energy and Natural Resources Law, p. 424.

69 Silvana Tordo (n 40) 8.

70 Abbas Ghandi and C. Y. Cynthia Lin, ‘Oil and Gas Service Contracts around the World: A Review’ p.1 <http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CDEQFjAC&url=http%3A%2F%2Fwww.des.ucdavis.edu%2Ffaculty%2FLin%2Fservice_contracts_review_paper.pdf&ei=i_ERVM_BN8vH7Ab7o4GoCQ&usg=AFQjCNHuLy_EqmOwCN9BAs-RV6uzY_OIww&sig2=XNc6Bhq2IKrgZ6Ss9Xel3g > accessed 11 September 2014.

71 Ibid 2.

23

based on the value of the petroleum produced. Royalty is said to be a monetary

compensation to the state for the use of state’s property for economic purposes. In

countries like Brazil, royalties are paid on monthly basis relative to each field starting

with the one in which the production commences.72 Royalty is commonly charged as

a percentage of gross revenues from the sale of petroleum resources and it may be

paid either in cash or in kind, i.e. as oil or gas at the existing prices.73 Thus, royalty

can be expressed mathematically as follows:

Royalty = Royalty rate (%) x production (bbl) x oil price ($/bbl)

In terms of administration, specific royalty is said to be easy to administer since the

government is only required to monitor the physical quantity of output. The other

advantage of specific royalty is that from the government perspective, revenues are

not dependent on the price of crude or gas. The shortcoming of specific royalty is that

the government’s revenue does not increase if the real price of the product rises and

the revenues does not keep pace with inflation. In contrast to specific royalty, ad

valorem royalty are preferred since they are sensitive to inflation and to fluctuations

of oil or gas prices.

The governments prefer levying royalty since it ensures early revenues flow to the

state after the commencement of production and that the amount of revenues is easily

predictable.74 However, from the investor’s point of view royalty is a regressive tax

since it is not targeted on profit and it is not sensitive to field sizes, costs and reduces

significantly the net present value (NPV). For these reasons, royalty may have

distortionary effects, including pre-mature abandonment of fields.75

72 Eduardo Pereira (eds.), Brazilian Upstream Oil and Gas: A Practical Guide to the Law and Regulation (Global Business Publishing Ltd, 2012) p.69.

73 Frank Jahn and others, Hydrocarbons Exploration and Production (2nd edition, Elsevier, 2008).


75 Greg Gordon and others, Oil and Gas Law: Current Practice and Emerging Trends (2nd edition, Dundee University Press, 2011), p. 138.

24

In order to overcome the regressivity of royalty, other jurisdictions have adopted

sliding scale royalties such as Norway, Denmark, the Netherlands, Ireland and

Alberta.76 The sliding scale mechanism ensures that the amount of royalty rises as the

amount of production increases. The sliding scale royalties can either be on slab basis

or incremental basis. In the incremental model, the increased level of royalty is only

payable on the incremental production above the defined threshold (Figure 2.2). It is

argued that in the incremental model the chances of the schedule distorting depletion

rates is greatly reduced but is not entirely removed.77

Figure 2.2 Incremental sliding scale royalty

In the slab model, the higher level of royalty is payable on the entire production, not

just on the incremental production (Figure 2.3). According to Kemp78 when designing

the steps under the slab form of sliding scale, great care must be exercised to avoid

extremely high marginal rates.

76 Alexander G. Kemp Evolving Economic Issues in Maturing UKCS’ in Greg Gordon and others (eds.), Oil and Gas Law: Current Practice and Emerging Trends (2nd edition, Dundee University Press 2011) 128

77 Ibid.

78 Ibid

Royalty (%) Production t/d

25

Figure 2.3 “Slab” sliding scale royalty

2.3.2 Cost Recovery Limit Under contractual systems an investor undertakes exploration, development and

production of petroleum resources at own risks. In case of successful exploration, the

investor recoups all exploration costs, development costs, operating costs and general

and administration costs from the petroleum revenues. In each year the amount of

costs to be recovered in a particular year is specified as a percentage of the annual

production.79 This limit is known as cost recovery limit and the amount of oil or gas

specified for cost recovery purposes is called cost oil or cost gas. Cost recovery

provisions are a common feature in the petroleum fiscal regimes around the world

today.80 The cost recovery limit is normally pre-negotiated and any unrecovered costs

are usually carried forward either indefinitely or for a specific period of time. The

typical limits of costs recovery is 30 to 50 percent of the gross revenue. In some

79 Lindsay Hogan and Brenton Goldsworthy, ‘International mineral taxation: experience and issues’ in Daniel Philip and others (eds.), The Taxation of Petroleum and Minerals: Principles, Problems and Practice, (Routledge, 2010), p.99.

80 Alex Kemp (n 75) 24.


26

jurisdiction, cost recovery can be 100%81 or can vary depending on the location of the

discovery.82

Financing charges are generally not recoverable. In some cases costs which remain

unrecovered at the end of the year of accrual can be carried forward with uplift. The

cost recovery limit is favoured by host governments as it ensures that a state starts to

get part of the revenue from the production right at the commencement of project life

as a profit share.83

2.3.3 Profit Oil Split The amount of oil or gas remaining after the deductions of cost recovery is profit oil

or profit gas. In the case of PSA arrangement, profit oil or profit gas is shared

between the host country and the investor at pre-negotiated ratio and “the investor is

not entitled to its share of production until the oil or gas reaches the export point or an

agreed delivery point.” In general, the contractor is permitted to export its share of

profit oil/gas subject (in some cases) to the meeting of domestic supply

requirements.84

The mechanism of profit oil/gas sharing between the host government and the

investor has changed over the years since the introduction of the first PSA in

Indonesia in 1966. 85 In the early days, production was distributed on a flat basis and

81 Such jurisdictions include Indonesia, Bahrain and Angola. Full cost recovery normally is subject to time limit.

82 In the case of Tanzania, under the MPSA 2004 the cost recovery limit onshore/shelf areas is 50% and in deepwater is 70% of the total production from the Contract Area. The cost recovery limit was changed to 50% of the gross production net of royalty.

83 Lindsay Hogan and Brenton Goldsworthy (n 95) 100.

84 An agreed amount of the contractor’s share must be sold to the government at a heavily discounted rate.

85 M.R. de Oliveira, ‘The Overhaul of the Brazilian Oil and Gas Regime: Does the Adoption of a Production Sharing Agreement bring any Advantage over the current Modern Concession Systems?’ (2010) 8 (4) OGEL, p.60 < www.ogel.org > accessed 2 September 2014. For more on the historical development of PSAs See also Kirsten Bindemann, ‘Production-Sharing Agreements: An Economic Analysis’ ( Oxford Institute for Energy Studies, 1999) <http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CCkQFjAB&url=http%3A%2F%2Fwww.oxfordenergy.org%2Fwpcms%2Fwp-

27

mutually on contract by contract basis irrespective of the features of the discovery.

For instance, in the first Indonesian PSA the sharing was 65% by 35% in favour of the

government. This was later changed to 85% by 15% in favour of the government in

case of oil in 1976 but remained the same for natural gas. In later years, progressive

sliding scale sharing mechanisms based on daily production rate were incorporated.

For example progressive profit oil increased from 50% by 50% for low production

levels to 85% by 15% for higher levels of production.

In Angola, a progressive scale based on cumulative production from a given field was

introduced in 1979. Thus, the division of profit oil was related to the characteristic of

the field in terms of its location that is onshore, shallow, offshore or deep offshore. In

1983, countries like Liberia, Libya, Equatorial Guinea, Tunisia, India and Azerbaijan

introduced new sharing mechanism based on the rate of return. Generally, the

production sharing between the host country and the Contractor is the function of the

geological potential of the area.86 High costs for exploration and production and less

prospectivity of the block means higher risk to the Contractor/investor in which case

the Contractor will demand favourable terms.

2.3.4 Government Participation State participation is very common practice in the petroleum industry particularly in

the PSA arrangement. State participation allows the government to acquire shares in

the project where there is a commercial discovery. In practice, the level of state

participation is negotiable but it is a function of the geological potential of the area,

the amount of costs involved and the level of maturity of the industry. The state

participation in the petroleum industry emerged mainly due to the following factors:

the decolonization of the Middle Eastern and African countries from the home state of

the international oil companies (IOCs); the formation of OPEC to equalize the

bargaining powers of member states; the promulgation of the UN General Assembly content%2Fuploads%2F2010%2F11%2FWPM25- ProductionSharingAgreementsAnEconomicAnalysis-KBindemann- 1999.pdf&ei=SRMUVIjaL8_caKbtgNAI&usg=AFQjCNFtF9EK9IuN1YF5fNFLjX40NAloCA&sig2=frmmYUxaIxhJKuMcYnU-AQ&bvm=bv.75097201,d.d2s > accessed 12 September 2014.

86 Ibid 61.

28

Resolution on Permanent Sovereignty of states over natural resources; and the

mounting pressure on the need for states to get fair share of returns from petroleum

development and retain control over the resources.87 The rationale for state

participation includes assertion of sovereignty, policy control, technology transfer,

local employment opportunity and higher share of revenue.88

There are several forms of state participation namely, paid up equity on commercial

terms; paid up equity on concessional terms; carried interests with repayment; tax

swapped for equity; free equity; equity in exchange for non-cash contribution such as

state providing infrastructure or project assets; and production sharing consisting of

back-in rights for a state at commerciality.89 It is argued that, when the financial

obligations are taken into account, such as cash calls that the state has to contribute

during development phase, state participation may be a costly option. There are other

disadvantages of state participation which includes the rise of conflict of roles as a

result of the government playing both commercial role as equity holder and regulatory

role. Thus, in this regard Baunsgaard concludes that “the government will be better

off by solely taxing and regulating a project rather than being directly involved as an

equity participant”.90

Furthermore, Ogunlade points out that the state has predominant financial obligations

to its citizens which would be negatively impacted in case the state were to engage in

high capital, high risk ventures like petroleum.91 The state participation has the effect

of reducing the bankable reserves for the investor as such it can potentially affect the

investor’s decision to invest in petroleum. Thus, it is advisable that in order to avoid

87 A. Ogunlade (n 27) 18.

88 H. Abdo, ‘The Story of the UK Oil and Gas Taxation Policy: History and Trends’ (November 2010) 8 (4) OGEL p. 5 < www.ogel.org > accessed 12 July 2014. For more discussion on the rationale for state participation see , Adebola Ogunlade, ‘How Can Government Best Achieve its Objectives for Petroleum Development:Taxation and Regulation or State Participation?’(November 2010) 8 (4) OGEL, p.5 < www.ogel.org > accessed 1 September 2014. 89 A. Ogunlade (n 27) 21.

90 Baunsgaard (n 60) 14.


29

burdening the state with huge financial commitment in petroleum projects there must

be a minimum level of state participation.92

2.3.5 Other Fiscal Instruments Bonuses: Bonuses are upfront monies paid by oil companies to the government for

signing a PSA; or on discovery of petroleum; or on start of commercial production.93

Bonuses are common and essential element of the petroleum fiscal regimes.94 There

are three types of bonuses namely signature bonuses, discovery bonuses and

production bonuses.95 In principle, bonuses are not recoverable contract expenses but

they are deductible for tax purposes.

Domestic Market Obligation (DMO): DMO is an obligation to Contractor to supply

oil or gas produced in the domestic market, usually at prices much less than the

market price.96 The amount of petroleum for DMO is fixed percent of the production

and it is usually mutually agreed by parties. Most countries have adopted DMO

provisions in their petroleum contracts to ensure the security of energy supply.97 This

arises from the realization that energy sufficiency is the bedrock for economic

9292 Ibid 23.

93 Carole Nakhle, ‘Petroleum Taxation: A Critical Evaluation with Special Application to the UK Continental Shelf’ < http://epubs.surrey.ac.uk/2790/ > accessed 3 September 2014. 94 George Ndi, ’The Contractual and Legal Framework for Petroleum Exploration and Production in Cameroon’ (1992) 10, Journal of Energy and Natural Resources Law, p.275.

95 Signature bonuses are paid during the signing of the PSA, the discovery bonuses are paid on commercial discovery of petroleum and production bonuses are paid when production of petroleum reaches certain predetermined levels.

96 B.C. Land, ‘The Similarities and Differences between Mining and Petroleum Investment: A Comparison of Investment Characteristics, Company Decisions and Host Government Regulation’ (2007) 5(2) OGEL p. 239 < www.ogel.org > accessed 2 September 2014. 97 Theresa O. Okenabirhie, ‘The Domestic Market Supply Obligation: Is this the final Solution to Power Failure in Nigeria? How Can the Government Make the Obligation work?’ (University of Dundee, 2009) <http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCEQFjAA&url=http%3A%2F%2Fwww.dundee.ac.uk%2Fcepmlp%2Fgateway%2Ffiles.php%3Ffile%3Dcepmlp_car13_65_266090310.pdf&ei=jxoUVJHhMIfQ7Abk7ID4DQ&usg=AFQjCNEQQuJX5PUogQZZXV4xXjpePjWytQ&sig2=MA6DWgER0Glt6McBeZrYvw&bvm=bv.75097201,d.d2s > accessed 13 September 2014.

30

prosperity, global stability, geopolitical influence and national security.98 It is argued

that DMO petroleum supplied below the market prices to domestic market can have

substantial impact on the project cash flow.99

Income tax: Income tax usually applies to all sectors of the economy. In some

jurisdiction, profit oil or profit gas can be subject to the income tax.100Income tax can

be income tax on employees or corporation income tax. For example, Iran has a

Corporate Income Tax (CIT) on profit101 and Azerbaijan has income tax on

employees.102 Unlike royalties and bonuses, CIT is a progressive tax since it is

targeted at economic rent and thus it is back-loaded. It is therefore argued that CIT

enables fluctuations in oil prices, revenues volatility and cost overruns to be taken into

account and consequently assures the IOCs.103

Rental fees: Rental fees are annual charges paid by the IOC to the government on the

basis of acreage as a licence fees. Usually, exploration licence fees and development

licence fees have different charges, with the latter usually significantly higher than the

former. Rental fees are pre-production payments.104 For example in Ghana, Chile and

Indonesia rental charges are part of the fiscal regimes, albeit they are generally not

substantial.105 98 Daniel Yergin, The Quest: Energy, Security, and the Remaking of the Modern World (Penguin Group, 2011). Also see Duncan Clarke, The Battle for Barrels: Peak Oil Myths & World Oil Futures (Profile Books, 2007); and Duncan Clarke, Empires of Oil: Corporate Oil in Barbarian Worlds ( Profile Books, 2007).

99 Ibid.


101 H. Farnejad, ‘How Competitive is the Iranian Buy-Back Contracts in Comparison to Contractual Production Sharing Fiscal Systems?’ (2009) 7 (1) OGEL p.5 < www.ogel.org > accessed 3 September 2014. 102 N. Mustafayev, ‘The Framework for Foreign Investments in Upstream Petroleum Industry of Azerbaijan’ (2013) 11(5) OGEL < www.ogel.org > accessed 20 August 2014..

103 H. Farnejad (n 101) 5.


105 M. Kene Omalu and T.W. Walde, ‘Key Issues of Mining Law: A Brief Comparative Survey as a Background Study for Reform of Mining Law, (2003) 1 (1) OGEL, p.16 < www.ogel.org > accessed 1 September 2014.

31

Ring fencing: This is a limitation of taxable entity to the effect that a company cannot

be allowed to set off losses from one project with the revenues from another project.

Ring fencing is “introduced to protect the present tax revenues which could otherwise

be postponed through continuous deductions.”106 In effect ring fencing widens the tax

base by delineating on the deductions for tax purposes across different activities or

projects being carried out by a single tax payer.107 The other positive effect of ring

fencing is that it lowers barriers to new entry in the industry in respect of the

companies which have no income from which to deduct initial costs. However, it is

argued that ring fencing can have distortionary effects in the economy, for instance oil

companies resorting to transfer pricing and ‘gold plating’.108


107 Carole Nakhle, ‘Petroleum Fiscal regimes: evolution and challenges’ in Philip Daniel and others (eds.),The Taxation of Petroleum Minerals (Routledge 2010) p.97.

108 Robin Boadway and Michael Keen, ‘Theoretical Perspectives and resource tax design’ in Philip Daniel and others (eds.),The Taxation of Petroleum Minerals (Routledge, 2010) p.43.

32

CHAPTER THREE: CRITICAL ANALYSIS OF PETROLEUM FISCAL REGIME IN TANZANIA

The main objective of this study was to find out how the current oil and gas fiscal

regime balances the government objectives and interests of the investors in the

petroleum industry. The study also had specific objectives namely: identifying

features and discussing the oil and gas fiscal regime; identifying and discussing the

objectives of the government and the investors in the petroleum industry; finding out

how the current oil and gas fiscal regime helps the government to achieve its

objectives and promoting the interests of the investors in the petroleum industry;

carrying out a survey of and discussing the perceptions of the industry in respect to

the current oil and gas fiscal regime.

The identification of features of the oil and gas framework was mainly done through

the review of literature. The examination and discussion of how the oil and gas fiscal

regime helps to achieve the interests of the government and promote the interest of the

investor was done by both literature survey and through interviews, focused group

discussions and questionnaire. Surveys on the perception of the industry regarding the

oil and gas fiscal regime were mainly done by interviews, focused group discussions

and questionnaire.

The first part of this Chapter identifies and critically discusses features of the

petroleum fiscal regime in Tanzania. The second part presents the findings and

discusses the perceptions of the industry in respect to the current oil and gas fiscal

regime.

3.1 The Overview of the Oil and Gas Fiscal Regime of Tanzania Tanzania has a PSA system which was established in 1969 with the signing of the

first PSA between the Government of the United Republic of Tanzania, TPDC and the

AGIP SpA following the establishment of TPDC as a national oil company.109 Since 109 See Tanzania Petroleum Development Corporation, ‘Exploration History’ < http://www.tpdc-tz.com/exploration_history.htm > accessed 3 September 2014.

33

the first PSA, Tanzania has had a PSA system and abandoned the Concessionary

System and a short-lived service contract arrangement.110 However, the PEPA does

not specify the nature of petroleum contract that has to be used in the country.111 This

means, legally Tanzania can adopt other fiscal regimes, namely concessionary or

service contracts without the need to amend or repeal the PEPA.

3.1.1 Elements of PSA Regime in Tanzania

3.1.1.1 Royalty

In Tanzania, the requirement for the payment of royalty is established by PEPA which

requires that holder of development licence should pay royalty in cash or in kind in

respect of petroleum produced in the development area.112 According to PEPA the

Minister for Energy and Minerals (hereinafter the Minister) may instruct that royalty

be remitted wholly or partly as he may consider it necessary for the interest of

production of petroleum to do so. Besides, the Minister has powers to defer payment

of royalty due from the licence holder for a period he may determine and with

conditions that he may prescribe as he considers necessary.113 So far, the Minister has

never exercised his discretion to defer royalty. However, it is important to underscore

that the Minister’s powers in respect of royalty is crucial as it introduces element of

flexibility and sliding scale in the fiscal regime which ensures economic efficiency by

eliminating distortions.

With effect from 25th October 2013 all PSAs entered or to be entered in Tanzania,

royalty is to be paid by TPDC on behalf of itself and the Contractor.114 There is a

110 The Concessionary system was practiced in Tanzania since 1950s and was abandoned after the introduction of the PSA system.

111 Petroleum (Exploration and Production) Act, 1980, Section 14.

112 Petroleum (Exploration and Production) Act, 1980, Section 81 (1) and (2).

113 Petroleum (Exploration and Production) Act, 1980, Section 83(1) and (2).

114Tanzania Petroleum Development Corporation, Model Production Sharing Agreement, 2013, Article 16 ( c) <www.tpdc-tz.com > accessed 21 August 2014.

34

sliding scale royalty whereby it is 12.5% for onshore/shelf areas and 7.5% for

offshore of the total crude oil and or natural gas prior to cost recovery.115

3.1.1.2 Cost Recovery

Recoverable and non-recoverable costs related to the PSA are usually itemized under

Annex D-Accounting Procedure of a particular PSA116. In Tanzania, costs incurred by

the Contractor in respect of exploration, development, production and operations are

recoverable from cost oil and or cost gas.117 The cost oil and cost gas for any Calendar

Year is limited to 50% of total production net of royalty both for onshore and offshore

production.118 Costs which are not recoverable119 under the PSA include, annual

charges; costs incurred before the Effective Date of the PSA;120 marketing and

transportation costs beyond the Delivery Point; costs of bank guarantee and related

costs; costs of arbitration and the sole expert determination in respect of any dispute

under the PSA; penalties and fines; costs as a result of wilful misconduct/negligence

of a Contractor; donations and contributions; bonuses; ‘excessive costs’121; R & D

costs122; and interests and financial charges. Costs which are not recovered from cost

115 For the purposes of royalty, onshore areas includes shelf up to water depths of 500metres and offshore water depth above 500metres.

116 Accounting procedure acts as a tool which enables the Government and TPDC to monitor the costs, expenditures, production and receipts.

117Tanzania Petroleum Development Corporation, Model Production Sharing Agreement, Article 12 (a) <www.tpdc-tz.com > accessed 21 August 2014.

118 Good fiscal regime would differentiate limits of cost recovery in onshore production from the offshore production. The cost recovery limit for offshore production would be higher than on the onshore production to reflect the relatively higher costs and higher risks associated with the former.

119 Tanzania Petroleum Development Corporation, Model Production Sharing Agreement t, 2013, Annex D, Clause 3.2 < www.tpdc-tz.com >accessed 6 September 2014.

120 Effective Date means the date on which, a particular PSA is signed by the Parties and the Exploration Licence is simultaneously granted by the Minister. 121 TPDC can disallow costs which can be shown to be excessive by reference to the Best International Petroleum Industry Practice.

122 The exception is where the costs have been in relation to a research carried out in collaboration with TPDC and related to the supporting of petroleum operations in Tanzania.

35

oil or cost gas in the first year are carried for recovery in the following years until

fully recovered or until termination of the PSA.123

3.1.1.3 Profit Sharing

Under the Tanzanian PSA system, the produced hydrocarbon is subject to both

royalty deductions and cost oil/ costs deductions. The remaining petroleum is known

as profit oil or profit gas and it is shared between TPDC and the Contractor on pre-

determined percentages.124 Profit shares are commercial elements of the fiscal regime

which are usually negotiable. In practice, the government sets threshold parameters in

its offer document for oil companies to bid. During bidding process, oil companies

invariably propose higher or lower values than the threshold parameters set out by the

government depending on their risk appetite. The profit sharing under the PSA regime

in Tanzania is based on sliding scale i.e. differs with the tranches of daily production.

The sharing differs depending on whether the area is located onshore or offshore (See

Table 3.1 and Table 3.2) or whether it is oil or gas being produced (See Table 3.3 and

Table 3.4).125

Table 3.1 Profit Oil Share for Onshore and Shelf areas (No Joint

Operations) Tranches of daily total Production (BOPD) rates in the Contract Area for onshore and shelf areas TPDC Share of Profit Oil ABC Share Contractor of Profit Oil

TPDC Share of Profit Oil

Contractor Share

of Profit Oil

0- 12,499 70% 30%

12,500- 24,999 75% 25%

25,000- 49,999 80% 20%

50,000- 99,999 85% 15%

100,000- and above 90% 10%

Source: Adapted from the Tanzania Petroleum Development Corporation (2013)

123 Tanzania Petroleum Development Corporation, Model Production Sharing Agreement, 2013, Article 12 (b) < www.tpdc-tz.com > accessed 6 September 2014.

124 Tanzania Petroleum Development Corporation, Model Production Sharing Agreement, 2013, Article 12 (g) < www.tpdc-tz.com > accessed 6 September 2014.

125 It is clearly stated whether the tranches of profit share are on incremental basis or slab basis. However, from the government perspective it would prefer tranches to be based on slab basis since it ensures higher revenues.

36

Table 3.2 Profit Oil Share for Deepwater and Lake Tanganyika North (No Joint Operations)

Tranches of daily total Production(BOPD) rates in the Contract Area for deep waters and Lake Tanganyika North


Contractor Share

of Profit Oil

0- 49,999

65% 35%

50,000- 99,999

70% 30%

100,000- 149,999

75% 25%

150,000- 199,999

80% 20%

200,000- and above 85% 15%


Table 3.3 Profit Gas Share for onshore and shelf areas (No Joint

Operations)

Tranches of daily total Production (MMSCFD) rates in the Contract Area for onshore and shelf areas

TPDC Share of Profit Gas

Contractor Share

of Profit Gas

0 - 19.99

60% 50%

20 - 39.99

65% 35%

40 - 59.99

70% 30%

60 - 79.99 75% 25%

80 and above 80% 20%


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Table 3.4 Profit Gas Share for deep waters and Lake Tanganyika North (No Joint Operations)



Contractor

Share of

Profit Gas

0 - 149.999

60% 40%

150 299.999

65% 35%

300 449.999

70% 30%

450 599.999

75% 25%

600 749.999

80% 20%

750 and above 85% 15% 85% 15%


3.1.1.4 State Participation

Under the Tanzania PSA system, the Government has the right to participate in the

petroleum development projects by at least 25%.126The Government participates

through TPDC. Where TPDC elects to participate it has to pay its share of contract

expenses in relation to its participation. In case TPDC fails to pay its shares of

contract expenses the Contractor is obliged to advance a loan to TPDC up to 100% to

meet its unpaid share of contract expenses. The Contractor is entitled to recover the

loan so advanced from TPDC’s share of Cost Oil and or Cost Gas at the interest of

LIBOR plus 1%.127 Where TPDC participates in development operations, the TPDC

share of Profit Oil or Profit Gas indicated in Figure 4.1 to Figure 4.4 relative to each

tranche of daily production shall be increased by the number of percentage points

obtained by multiplying TPDC’s working interest of not less than 25% by the share of

126 Tanzania Petroleum Development Corporation, Model Production Sharing Agreement, 2013, Article 10 (iii) < www.tpdc-tz.com > accessed 7 September 2014.

127 This is in accordance with the terms of the MPSA 2013. These terms have to be negotiated and mutually agreed by parties and therefore in reality they may be different.

38

the Contractor’s Profit Oil or Profit Gas and the Contractor share shall be reduced

accordingly.128

3.1.1.5 Additional Profit Tax

The PSA system in Tanzania comprises of the requirement for the Contractor to pay

Additional Profit Tax (APT) though there is no legal basis for APT. In principle, APT

is similar to the Resource Rent Tax (RRT) since it applies where the rates of return

exceeds certain defined thresholds, with a 25% applicable to the Fist Accumulated

Net Cash Position (FANCP) and 35% to the second tranche, Second Accumulated Net

Cash Position (SANCP).129 Thus APT is a progressive tax since it is targeted at profit

above a specified rate of return. Unlike royalty and bonuses, APT has no distortionary

consequences to the economy. For this reason, APT is attractive to investors since it is

back-loaded and it does not interfere with economic decision making unlike royalty

and bonuses which are front-ended.

3.1.1.6 Income tax

The survey of various literatures has revealed that, in Tanzania there is no special

income tax which apply in petroleum industry. The Income Tax Act, 2014 (ITA)

applies to all companies operating in Tanzania, including the PSA Contractors130. In

other jurisdictions, host states (such as Nigeria) have enacted special legislation for

petroleum taxation. Thus ITA is targeted on the profit of the company overall on the

basis of conventional accounting standards and not targeted on petroleum projects. In

Tanzania, a resident company is subject to income tax on its worldwide income at a

rate of 30% and non-resident company with permanent establishment (PE) is also

128 Tanzania Petroleum Development Corporation, Model Production Sharing Agreement, 2013, Article 102(i) ---< www.tpdc-tz.com > accessed 7 September 2014.

129 PwC, Oil and Gas Tax Guide for Africa 2013, p. 17 <http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CCgQFjAB&url=http%3A%2F%2Fwww.pwc.com%2Fen_TZ%2Ftz%2Fpdf%2Fpwc-oil-and-gas-tax-guide-for-africa-2013.pdf&ei=gqIUVPSQL8_gaMuugOAL&usg=AFQjCNEEIX1NoMNhuaEy3HmNExNeLCy8lA&sig2=c7Vp2B4bJ-oAA54rUqvtug&bvm=bv.75097201,d.d2s .> accessed 13 September 2014.

130 Tanzania Petroleum Development Corporation, Model Production Sharing Agreement, 2013, Article 16 < www.tpdc-tz.com > accessed 12 August 2014.

39

taxed at the rate of 30%. A non-resident is taxed for its Tanzanian sourced income

only at the rate of 30%.131 A new company whose 30% equity share have been issued

to the public and listed in the Dar es Salaam Stock Exchange (DSE) is taxed at a

reduced rate of 25%.132

3.1.1.7 Value Added Tax

The Value Added Tax (VAT) is a consumption tax charged on taxable goods and

services whenever value is added at each stage of production and at the final stage of

sale.133VAT is administered under the Value Added Tax Act of 1997. It is a

requirement that any person with a turnover of TShs. 40 million and above making

taxable supplies of goods and services must register for VAT.134 The current rate is

18% of taxable goods and services, including importation of taxable goods. Exports

are zero rated, i.e. not subject to VAT and producers of zero-rated commodity do

not have to pay VAT and if they have paid VAT on their inputs they are entitled to

claim refund.135 Companies engaged in oil and gas exploration and prospecting are

VAT-exempted.136 The exemption of VAT to oil and gas companies engaged in

exploration and prospecting of oil and gas was meant to relieve the burden of delay in

VAT refund.

131 Ernst & Young, Global Oil and Gas Tax Guide, p. 510 <http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=8&ved=0CGYQFjAH&url=http%3A%2F%2Fwww.ey.com%2FPublication%2FvwLUAssets%2F2013_global_oil_and_gas_tax_guide%2F%24FILE%2FEY_Oil_and_Gas_2013.pdf&ei=eXMLVNnKOInlavv5gLAO&usg=AFQjCNEmiDseGjJ- wkwVvxCzJ7r9JqumZw&sig2=d9OiOZKIJujz9tw9Iqm_Fw&bvm=bv.74649129,d.d2s > accessed 2 May 2014.

132 Ibid.

133 See at < http://www.tra.go.tz/index.php/value-added-tax-vat> accessed 13 September 2014.

134 Ibid.

135 Economic and Social Research Foundation, Petroleum Exploration Study: A Baseline Survey Report (ESRF, 2009), p.69 <http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCEQFjAA&url=http%3A%2F%2Fwww.policyforum-tz.org%2Ffiles%2FESRFNPAPetroleumSectorBaselineReport.pdf&ei=ZyoVVO-mEILoaJS3gpAN&usg=AFQjCNHx6PMvKbk5tWJZgikiV3J57TrN0Q&sig2=igR2rKE14C2CpmlEhk7Tjw&bvm=bv.75097201,d.d2s > accessed 11 August 2014.

136 Ernst & Young (n 131) 513.

40

Any entity registered for VAT purposes may recover the VAT paid on goods and

services acquired for furtherance of its business as an input tax by offsetting such

input tax from VAT payable on taxable supplies (output tax). The general perception

of the industry is that procedures for exemptions are complex, cumbersome and time-

consuming. One respondent has this to say, “the level of tax was not a problem but the

administration of tax is what was the biggest problem which was driving away

existing businesses and potential investors”.

3.1.1.8 Capital Gains Tax

Capital gains on the disposal of depreciable assets are treated as business income for

the company and are taxed at the rate of 30%. Any person who owns an interest in

land or building shall be treated as realising the asset when the person parts with

ownership of such interest including when the it is sold, exchanged, transferred,

distributed, cancelled, redeemed, destroyed or surrendered and in the case of interest

of an entity when it ceases to exist, immediately before the entity ceases to exist.137 A

person, who derives a gain from the realisation of an interest in land or buildings

situated in the United Republic, is obliged to pay income tax by way of single

instalment.138 In the case of petroleum industry, assignment of licence in a PSA in the

form of farm-in/farm out is subject to capital gain tax.139

Companies listed in the DSE do not have to pay capital gain tax. Gains from the

realization of investment assets are only deductible against capital gains from the

same investment assets and not from ordinary income. Capital losses can be carried

forward to be used against gains in following years.140 A PE is subject to a tax at the

rate of 10% of its repatriated income. The company making losses for three

consecutive years is obliged to pay Alternative Minimum Tax (AMT) at the rate of

137 Tanzania Revenue Authority, ‘Capital Gain from Realisation of Interest in Land or Buildings’ < http://www.tra.go.tz/index.php/capital-gains-tax > accessed 21 June 2014.

138 Income Tax Act, 2004, Section 91 (1).

139 Tanzania Petroleum Development Corporation, Model Production Sharing Agreement, 2013 < www.tpdc-tz.com > accessed 12 August 2014.

140 Ernst & Young ( n 131)511.

41

0.3% on its turnover. Payment of AMT is reckoned from the third year of perpetual

losses.141

3.1.1.9 Import Duties

The Custom Tariff Act, 1976 was amended by the Financial Laws (Miscellaneous

Amendment) Act, 1997. The company which is engaged in petroleum operations after

the first anniversary of the commencement of commercial production, the rate of

import duty on items to be used in carrying out petroleum operations is capped at 5%.

The company which has not commenced commercial production is exempted from

custom duties under the East African Community Custom Management Act, 2004.142

3.1.1.10 Other Taxes

Transfer pricing: There are no transfer pricing rules in Tanzania but the law

generally requires that transactions between related parties must be at arm’s length.143

The Commissioner of Income Tax has the power to make adjustments where in his

opinion a person has failed to comply with transfer pricing requirement.144 The use of

the Organization for Economic Cooperation and Development (OECD) model is

allowed. Under the PSA system, the Contractors are obliged to make sure that

services from affiliates are not higher than most favourable prices charged by affiliate

companies to third parties for comparable services under similar terms and conditions

elsewhere.145TPDC has the right to disallow all costs that in its opinion are

uncompetitive.

141 PKF, Tax Guide 2012/2013, p.1 <http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CDkQFjAD&url=http%3A%2F%2Fpkftz.com%2Fpublications%2FTanzania%2520Tax%2520Guide%25202012.pdf&ei=KiwVVPyENZLnaJq1gfgE&usg=AFQjCNGqeJiUwsgnF9FQGYbg6sgkO28G5g&sig2=-KMNsEpaiDInr4XagJV0XA&bvm=bv.75097201,d.d2s >

142 Tanzania is a member of East Africa Community which became a Custom Union since 1 January 2005.

143 Income Tax Act, Section 33 (1).

144 Income Tax, 2004, section 33(2).

145 Tanzania Petroleum Development Corporation, Model Production Sharing Agreement, Annex D Clause 3.1 ( c) (ii) < www.tpdc-tz.com > accessed 7 September 2014.

42

Thin capitalization: The total amount of interest deduction (for corporations that are

25% or more foreign owned for a year of income) is limited to the sum of interest

with respect to debt that does not exceed debt to equity ratio of 7:3.146

Bonuses: There has never been bonus payment to the state under the petroleum

industry in Tanzania until 2013 when the MPSA 2013 came in force and established

two types of bonuses i.e. signature bonus and production bonus.147 The Contractor has

to pay a signature bonus of not less than two million five hundred thousand United

States Dollars (USD 2,500,000) on signing of the PSA. The production bonuses is

payable on commencement of production at the rate not less than five million United

States Dollars (USD 5,000,000) and for subsequent development license in the

contract area, the production bonuses payable shall be not less than five million

United States Dollars (USD 5,000,000).148 The bonuses paid are not cost recoverable

under the PSA.

Ring fencing: Ring fencing of contract expenses applies with respect to exploration

licence or development licence. This means, a company engaged in oil and gas

exploration and production cannot set off losses from other business activities or oil

and or gas projects from revenues generated from a particular petroleum development

licence in the country. In case the company holds more than one development licence

costs can only be recovered from the petroleum revenues from the Development Area

if those costs were incurred before the commencement of production from such a

Development Area. The relevant provision states that:

“Where a company holds Exploration Licence or more than one Development Licence within a Contract Area (prior to any relinquishments) recoverable Contract Expenses in Licence Areas or Block(s) within the Contract Area (prior to any relinquishments) may only be recoverable from petroleum revenues from such Development

146 Ernst & Young ( n 131) 512.

147 Tanzania Petroleum Development Corporation, Model Production Sharing Agreement, Article 11( c) < www.tpdc-tz.com > accessed 7 September 2014

148 Ibid.

43

Area to the extent that were incurred prior to commencement of Petroleum production from such Development Area”149

It may be underscored that care must be exercised in the enforcement of the

above provision as its strict application may discourage exploration of other

fields within the Contract Area.

Rental fees: Licence holder is obliged to pay annual charges in respect of a

licence at the day of grant of a licence and thereafter on the anniversary of the

grant of a licence until the licence terminates.150 Under the PSA, the annual

charges payment obligations are shifted to the Contractor. The MPSA 2013

raised the annual charges from the previous rates (USD4/sq.km for Initial

Period; USD 8/sq.km for First Extension; and USD 16/sq.km for Second

Extension) under the MPSA 2008 151 to USD 50/sq.km for Initial Period;

USD100/sq.km for the First Extension; and USD 200/sq.km for the Second

Extension).152

3.2 The Perceptions of the Industry on the Oil and Gas Fiscal Framework

3.2.1 Analysis of Survey Methods In order to understand the perception of the industry on the oil and gas fiscal regime,

the researcher distributed eighty (80) questionnaires out of which forty eight

questionnaires were filled. This means the amount of questionnaires that were filled

was sixty percent (60%) of the total questionnaire that were distributed. The Table 3.5

and Figure 3.1 below show the percentage of respondents who filled the questionnaire

and those who did not fill the questionnaires.

149 Tanzania Petroleum Development Corporation, Model Production Sharing Agreement, 2013 Article 12( d) < www.tpdc-tz.com > accessed 7 September 2014


151 Tanzania Petroleum Development Corporation, Model Production Sharing Agreement, 2008 Article 10 < www.tpdc-tz.com > accessed 7 September 2014

152 Tanzania Petroleum Development Corporation, Model Production Sharing Agreement, 2013, Article 11 < www.tpdc-tz.com > accessed 7 September 2014

44

Table 3.5: The Percentage of Respondents who filled questionnaires

Item Total Percentage (%) Total Number of Questionnaires 80 100 Filled Questionnaires 48 60 Unfilled questionnaires 32 40

Figure 3.1: The Percentage of Respondents who filled questionnaires

The focused group discussions were carried out in groups ranging from4 to 8

participants. A total of sixty (60) participants were involved in the group discussions

that were held in various areas within Dar es Salaam city. Telephone interview

conducted with twenty four (24) participants who mostly were senior officers of

government departments and agencies and also officers working for oil and gas

exploration and production companies. The results of the comparison of various

respondents namely, those who filled questionnaires, those who participated in the

focused group discussions and those who were interviewed by phone are presented in

Table 3.6 and Figure 3.2.

Table 3.6 Methods of Data Collection in Percentage

Methods of data Collection Number of Participants Percentage (%)

Questionnaires 48 36.36364 Focused Group Discussion 60 45.45455 Telephone Interview 24 18.18182

45

Figure 3.2 Methods of Data Collection in Percentage

3.2.2 Factors Influencing the Development of Oil and Gas Fiscal Regime Respondents were requested to give their opinions in respect of five factors

influencing the development of oil and gas fiscal regime. A total of forty eight (48)

respondents filled the questionnaires. The five factors influencing the development of

oil and gas fiscal regime for which the opinions of the respondents were sought

include the government objectives; industry and market conditions; geological

potential of the area/country; global economic conditions; and price of crude. The

respondents were supposed to rate qualitatively the influence of these factors.

Among the forty eight (48) respondents who filled the questionnaires, all of them (i.e.

hundred percent (100%)) said that government objectives have very high influence on

the development of oil and gas fiscal regime. Regarding the influence of industry and

market conditions on the development of oil and gas fiscal regime, twelve (12)

respondents said that they have a slight influence, the other twelve (12) said that they

have high influence. The remaining twenty four (24) were of the view that industry

and market conditions have very high influence. The results of respondents’ response

on the influence of industry and market conditions on the development of oil and gas

fiscal regime are tabulated and presented in Table 3.7 and Figure 3.3 respectively here

below.

46

Table 3.7: Influence of Industry and Market Conditions

Rating Number of Respondents Percentage (%) Slightly 12 25 High 12 25 Very High 24 50

Figure 3.3: Influence of Industry and Market Conditions

Geological potential was considered as having a slight influence by twenty seven (27)

respondents; whereas the remaining twenty one (21) said geological potential have

high influence. The results of the respondents’ opinions on the influence of geological

potential are presented in the Table 3.8 and Figure 3.4 below.

Table 3.8: Influence of Geological Potential of the Area/Country

Rating Number of Respondents Percentage (%) Slightly 27 56.25 High 21 43.75

47

Figure 3.4: Influence of Geological Potential of the Area/Country

Global economic conditions and price of crude were considered by thirty six (36)

people as having a slight influence and the remaining twelve (12) people responded

that both had very high influence. The results of the respondents’ response regarding

the influence of the global economic conditions and price of crude are shown in Table

3.9 and Figure 3.5 hereunder.

Table 3.9: Influence of Economic Conditions and Price of Crude Rating Number of Respondents Percentage (%)

Slightly 36 75%

High 12 25%

Figure 3.5: Influence of Economic Conditions and Price of Crude

The respondents were further asked to state any other factors which in their opinion

influence the development of oil and gas fiscal framework. Some of these factors

which were mentioned are political ambitions and local community expectations.

48

Others mentioned news of discoveries, which in the author’s opinion is the same as

the geological potential of the area or country because new discoveries raise the

country’s attractiveness for hydrocarbon exploration and exploitation and this gives

incentive for host government to review its fiscal regime.

3.2.3 Production Sharing System The researcher sought the industry view on the production sharing system in Tanzania

in general and the MPSA 2013 specifically. According to the survey, officials

working for the Government were of the view that in terms of ensuring revenues

flow to the state, the PSA was efficient. One senior officer of TPDC noted that MPSA

2013 “has a flat rate revenue flow mechanism which if managed properly it may

moderately tap much of the revenue”. The oil companies view that MPSA 2013 has

increased state take in comparison with the MPSA 2004. The terms of the MPSA

2013 are considered as toughest in the region. This fact was viewed by one TPDC

official as having the potential to divert investment capital away from the country to

the other countries in a sub-region.

In terms of maximizing the return to investment for the oil companies, opinions

between the Government at least from its employees’ perspectives and those of the

IOCs were completely opposed. The Government’s views is that the terms of MPSA

2013 provide a fair return to the investor and that the investor can maximize as much

as eighty percent (80%) of the capital investment due to vertical integration nature of

the investment. On the other hand the IOCs views that the MPSA 2013 has in fact

reduced the rate of return to the investor.

The Government is of the view that the current oil and gas fiscal regime in general

and MPSA 2013 in particular makes the Tanzanian industry competitive, especially if

looked at from the point of view of the existing tax code. However, there is an equally

contradictory view from the Government’s view whereby other players in the industry

are of the view that the current oil and gas fiscal regime and MPSA 2013 have not

made Tanzania competitive at all, rather they have made it rather difficult for investor

to choose the project portfolios. This view is supported by the IOCs which consider

that the oil and gas fiscal regime and MPSA 2013 in particular has actually made

49

Tanzania lose out in comparison to other countries in the sub-region. It was pointed

out by other respondents that Tanzania oil and gas fiscal regime was bottom of the list

in competitiveness in comparison with other countries in the region, however, the

situation was likely to change as many countries were likely to change their fiscal

regime following rapid discoveries in those countries.

50

CHAPTER FOUR: ASSESSMENT OF THE SUSTAINABILITY OF THE PETROLEUM FISCAL

REGIME IN TANZANIA Petroleum fiscal regimes need to balance the interests of the host Government and the

investors. In this Chapter the objectives of the Government and the investors are

identified and discussed. The Chapter also critically examines the sustainability of the

petroleum fiscal regime in Tanzania.

4.1 Objectives of the Government and the Investors The objectives of the Government of the United Republic of Tanzania (the

Government) in the oil and gas industry are set out in the National Energy Policy

2003153 and the National Natural Gas Policy 2013.154 The National Natural Gas Policy

2013 applies for natural gas for midstream and downstream section of the petroleum

industry.155 The main objective of the Government in the overall petroleum industry

as enshrined in the National Energy Policy of 2003 is to “ensure the availability of

reliable and affordable energy supplies and their use in a rational and sustainable

manner in order to support national development goals.”156 The petroleum industry on

the upstream up until now is regulated by the National Energy Policy of 2003. In

order to ensure the realization of the above objective, the National Energy Policy

2003 therefore aims at ensuring efficient energy production and environmentally

friendly energy consumption.157

The objectives of the Government in respect of the exploration, development and

production of natural gas are to ensure sustainable development and utilization of

natural gas resources and maximization of benefits from the natural gas resources.158 153 See at < https://mem.go.tz/acts-policies/ > accessed 12 September 2014.

154 Ibid.

155 The United Republic of Tanzania (n 13) 7.

156 The United Republic of Tanzania, The National Energy Policy, 2003 < https://mem.go.tz/acts-policies/ > accessed 14 September 2014.

157 Ibid.


51

The Government also aims at ensuring that natural gas resources contribute towards

the diversification of the Tanzanian economy. The Government gives priority to

domestic market supply of natural gas to ensure energy sufficiency. Other

Government objectives includes attracting foreign capital, ensure transfer of

technology, promote local capacity in the industry, develop other sectors of the

economy and ensure compliance with health, safety and environment standards.159

Taxation is crucial to both the host government and the investors. Through tax

governments can fulfil various objectives including raising money for public goods,

distributing resources in the community, regulating the economy.160 By public goods

it entails those goods and services that are not provided by the private market since it

is not efficient for them to do so. Taxation of natural resources such as oil and gas

affects the interests of both the government and the investors. The main interest of

both government and investors in relation to petroleum project is the maximization of

the net present value of the revenues generated from the exploitation of the resources.

It is thus argued that the government has to ensure that it acquires a fair share of the

revenues accruing from resource extraction while at the same time incentivizing the

investors to continue with exploitation of the resource.161

Apart from revenues maximization, the government and investors have other

objectives. The other objectives of the host government in petroleum development is

to distribute wealth among its citizens to ensure social welfare.162 The government

also aims at sharing risks with the investors. The oil and gas industry is characterized

by high risks and from the government perspectives these risks are mainly geological,

technical, price and market risks. Through petroleum development, the government

159 Ibid.

160 Angharad Miller and Lynne Oats, Principles of International Taxation (Tottel Publishing 2006) p.3-4.


162 A. Ogunlade (n 27) 7. See also Arnold C. Harberger, ‘Taxation, Resource Allocation and Welfare’ (University of Chicago 1964) <http://scholar.google.com/scholar?hl=en&q=Taxation+and+resource+distribution&btnG=&as_sdt=1%2C5&as_sdtp= > accessed 23 August 2014.

52

also wants to make sure that there is adequate energy supply in the domestic market

and thus most hydrocarbons laws requires the license holder to meet certain domestic

market supply obligations (DMO).163 The DMO is also provided in the Tanzania

MPSA 2013 under Article 19 (2). This Article requires TPDC and the Contractor to

satisfy the domestic market by using their proportional share of production and the

price for such petroleum shall be based on the strategic nature of the project to be

undertaken by the Government.

Most governments in developing countries prefer to participate in petroleum activities

in the country. Participation enables the government achieve several national

objectives in the petroleum development including the control of management and

involvement in decision making in matters regarding petroleum development.164 State

participation in the industry ensures the achievement of the following objectives: the

transfer of technology and expanding employment opportunities.165 Participation also

bridges the information gap between the host country and the investors and thus

reduces risks on the part of the state and it increases the sense of ownership by

addressing information asymmetry.166

State participation is a long practice in the petroleum industry which increased

rapidly in the 1950s, 1960s and 1970s due to the successes of decolonization167 and

rising claims on resources which were happening in many developing countries

following the 1962 United Nations General Assembly Resolution 1803 on Permanent

Sovereignty over Natural Resources.

163 See for example the Tanzania Petroleum (Exploration and Production) Act, 1980, Section 40 (2) < http://www.tpdc-tz.com/tpdc/ > accessed 22 August 2014.


166 T. Baunsgaard (n 60) 13-14.

167 Bryan Christopher Land, ‘Similarities and Differences between Mining and Petroleum Investment: A Comparison of Industry Characteristics, Company Decisions and Host Government Regulation’ (2007) 5(2) OGEL < www.ogel.org > accessed 20 July 2014.

53

4.2 Measures Sustainability In order for the tax regime to be sustainable it must have the following features

namely efficiency, neutrality, stability, equity, risk-sharing, clarity and simplicity. In

the following paragraphs, the petroleum fiscal regime of Tanzania is critically

examined in light of the abovementioned fiscal elements to assess the extent of

sustainability of the fiscal regime.

4.2.1 Efficiency Efficiency is a measure of how a particular tax influences the allocation of resources

in the economy, as “determined by the tastes and preferences of individuals”.168 An

efficient tax does not restrict or lower the productive capacity of an economy nor does

it engender distortions in resources allocation.169 When the efficiency of tax is

reduced the output is also reduced and consequently this leads to lower standard of

living since investments are not made where the capital productivity is the

highest.170The petroleum fiscal regime of Tanzania includes both royalty and bonuses

which have to be paid by the company engaged in petroleum exploitation. Royalty

and bonuses are front-loaded payments i.e. regressive taxes which have the effect of

reducing the net present value of the project. As such, they may affect the investment

decision in particular projects and development of marginal fields may be abandoned

due to low to net present value of project as a result of these taxes.

4.2.2 Neutrality Neutral tax is the one that leaves the pre-tax ranking of project results the same as the

after tax ranking. This means, a decision by the investor before tax will remain the

same after tax is applied. Fixed charges and fees which are not targeted on profit or

rent such as royalties and bonuses will have negative repercussions on investment

neutrality. The pre-tax and post-tax ranking of the project is likely to vary very

significantly. Looked at from this perspective, it may be argued that the petroleum

fiscal regime in Tanzania is not neutral due presence of royalties and bonuses which




54

are not targeted on profit. Other such taxes albeit on a lower degree include rental

charges or licence fees.

4.2.3 Equity Good fiscal regime must ensure that there is a fair allocation of risk and revenue

between the government and the investor; and among the various taxpayers and

between current and future generation. The Tanzania Natural Gas Policy addresses the

issue of intergenerational equity in the sharing of petroleum revenue between the

current and future generation. Its main objective is to “provide guidance for the

sustainable development and utilization of natural gas resources”.171 It further aims

at “contributing to the improving the quality of life of Tanzania for many decades to

come” while at the same time balancing between domestic market supply of natural

gas and export and between foreign and local investments.172 In order to ensure an

intergenerational equity in the distribution of the natural gas wealth, the National

Natural Gas Policy promulgates the creation of a sovereign fund173 for the purposes of

spreading the benefits of the natural gas wealth to the future generations.174

The oil and gas fiscal regime in Tanzania also provides some allowances and

incentives to investors. The rights to explore and produce oil and gas resources and

assets and expenditures in respect of exploration and development are depreciated at

the rate of 20% on a straight line basis.175 The income tax losses can be carried

forward indefinitely and the thin capitalization rules are such that the total amount of

interest deduction for the company whereby at least 25% of share is held by

171 The United Republic of Tanzania, The National Natural Gas Policy, 2013, pp. 4-5. < www.tanzania.go.tz/egov.../Natural_Gas_Policy_-_Approved_sw.pdf > accessed 23 August 2014.

172 Ibid 5.

173 Ibid 10.

174 The Draft Gas Act Bill which is due for tabling for deliberations in Parliament in October 2014 incorporates a provision on the establishment of Gas Revenue Fund.

175 Ernest & Young, Oil and Gas Tax Guide 2013, p.512. < www.ey.com/...oil_and_gas_tax_guide/.../EY_Oil_and_Gas_2013.pdf > accessed 20 July 2014.

55

foreigners for a year of income is limited to the sum of interest with respect to debt

that does not exceed debt to equity ratio of 7:3.176

4.2.4 Risk Sharing Good oil and gas tax regime has to balance the risks between the state and the

investor. Otherwise, the government will lose its competitiveness for attracting the

investment capital in relation to other petroleum provinces. This entails that, where

the risks are higher than the expected rewards, investors cannot be willing to invest

their capital and thus the government will also lose revenues from such investments.

Thus, it is crucial that the government should share some of the risks such as by

taxing the economic rents and by introducing incentives and tax allowances. It may be

argued that, the Tanzania oil and gas fiscal regime has tried to balance the interests

between the state and the investors. Under the current MPSA 2013, the government

taxes the economic rent in the form of an additional profit tax (APT) which is based

on the net cash flow from the development area.177 There are two rates of APT, i.e

25% of the first accumulated net cash position (FANCP), where FANCP is positive.

The APT rate is 25% of FANCP plus 35% of the second accumulated net cash

position (SANCP) where both FANCP and SANCP are positive. Currently there is no

APT law in Tanzania178 and thus it is arguable whether the Government and TPDC

will be able to enforce the provision of APT under various production sharing

agreements (PSAs) without there being a legal basis. However, the government plans

to introduce a legislation which will tax excess profit in the petroleum industry.179 The

Government also shares risks with the investors by paying the contractor cash calls

for the government participation during development.

176 Ibid.

177 The Tanzania Model Production Sharing Agreement, 2013, Article 17 (a).

178 The provisions on windfall tax in the Income Tax Act 1973 were repealed by the Financial laws (Miscellaneous Amendment) Act, 1997.

179 David Malingha Doya and Paul Richardson, ‘Tanzania rethinks planned super-profit tax on gas’ Business Report < http://www.iol.co.za/business/international/tanzania-rethinks-planned-super-profit-tax-on-gas-projects-1.1675984#.VBEfHtUrMy4 > accessed 11 September 2014.

56

4.2.5 Stability Petroleum projects are characterized by long-term and high initial investment costs.

Frequent changes in tax regimes may seriously impact negatively on the future

development of projects. Unstable tax regime escalates the political risks and reduces

the present value of the project by increasing the risk premium. Thus, stability is

paramount in the petroleum industry since it protects the investment by ensuring that

future changes of policy or legislation of the host country does not affect the existing

agreement.180 From the government revenue’s perspectives tax must be predictable

and reliable to enable the government to understand the timing and amount of

revenues collections.181 In order to guarantee stability in the fiscal regimes investors

have pressed on measures including the incorporation of stability clauses, or in case of

Latin America, special stability agreement.182 It is suggested that in reality, stability

clauses do not provide requisite immunity of investments against host government

actions on the ground of permanent sovereignty on natural resources but also on the

principle that a state cannot restrain by contract restrict its powers to make

legislations. The other justification in this respect is the principle of rebus sic

stantibus which requires that where there be a fundamental change in circumstances,

renegotiations of contractual clauses is justifiable.183

In Tanzania, the stability clause was incorporated into the model PSA of 2004

whereby the relevant provision reads as follows:

180 For further discussion on stability in petroleum agreements see Peter D. Cameron, ‘Stabilization in Investment Contracts and Changes of Rules in Host Countries: Tool for Oil and Gas Investors’ (Final Report, 5 July 2006), < http://www.google.co.tz/url?sa=t&rct=j&q=&esrc=s&source=web&cd=7&ved=0CEwQFjAG&url=http%3A%2F%2Fwww.rmmlf.org%2FIstanbul%2F4-Stabilisation-Paper.pdf&ei=s4z9U5eXDOq60QW5mIGwCw&usg=AFQjCNF7-Rm1AVdungISjkpnaia5q3pEQw > accessed 18 June 2014.


182 Wood Mackenzie & CEPMLP, ‘Contractual and Fiscal Stability: Rhetoric and Reality’ < http://www.google.co.tz/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CDMQFjAC&url=http%3A%2F%2Fwww.dundee.ac.uk%2Fcepmlp%2Fgateway%2Ffiles.php%3Ffile%3DContract-Fiscal-Stability_311561174.pdf&ei=s4z9U5eXDOq60QW5mIGwCw&usg=AFQjCNFVAgB6w-gf99xue2rcpYE0jt75_A&bvm=bv.74035653,d.d2k > accessed 20 June 2014.

183 Hadiza Tijjani Mato, ‘The Role of Stability and Renegotiation in Transnational Petroleum Agreements’ (2012) 5(1) Journal of Politics and Law, p. 33.

57

“If at any time or from time to time there should be a change in legislation

or regulations which materially affects the commercial and fiscal benefits

afforded by the Contractor under this Contract, the Parties will consult

each other and shall agree to such amendments to this Contract as are

necessary to restore as near as practicable such commercial benefits which

existed under the Contract as of the Effective Date.”184

Stability clauses are generally not preferred by all governments since most

governments prefer freedom to renegotiate contracts where circumstances so dictate.

It is argued that the parliament cannot easily cede its legislative powers on the account

of a contractual commitment on the government and or a national oil company.185 In

the author’s own experience, negotiations for inclusion of stability clauses into the

contracts are usually very contested by the host government. It can be deductively

argued that the relatively reduced geological and commercial risks in the country led

to the government of the United Republic of Tanzania to remove the stability clause

in both MPSA 2008 and MPSA 2013.

At present, the Government intends to make sure that most of the fiscal terms and

others of the PSA are incorporated into relevant legislations. Such arrangement will

make it easier for the Government to vary fiscal terms by amending legislation thus

making the fiscal regime less stable.

4.2.6 Clarity and simplicity Good tax must be simple to understand and not costly to administer. For this reasons,

simple and clear tax also means administrative efficiency. Such tax must be targeted

on a definite tax base which makes it easy to collect.186 It is argued that simple tax

reduces the chance of tax manipulation and administrative discretion which can

184 The United Republic of Tanzania, Tanzania Model Production Sharing Agreement 2004, Article 30 (b) < http://www.tpdc-tz.com/tpdc/ > accessed 11 August 2014.

185 Daniel Johnson, Petroleum Fiscal Systems and Production Sharing Contracts, (PennyWells Books 1994).


58

potentially increase the investor’s risk perceptions.187According to the Association of

Chartered Certified Accountants the complex tax increases chances of violating the

rules and simple tax enables both the tax payers and the tax authorities by making

sure that the tax regime functions efficiently.188The view is substantiated by the

World Bank report which shows that “economic growth appears to be more strongly

linked with reduction in the administrative burden on business than with cutting of the

tax rates”.189

The petroleum fiscal regime of Tanzania is comprehensive. The Government is still

developing new policies and legislation in the industry. The existing instruments are

not very comprehensive. Therefore, procedures to be undertaken for a particular

process or issue are not clear. As a result, this has created room for discretion which

hampers the administration of the fiscal regime.

4.3 Perceptions on the Sustainability of the Current Fiscal Regime In order to assess the sustainability of fiscal regime the researcher requested opinions

of the respondents on elements of good tax regime namely fairness, efficiency,

neutrality, certainty and competitiveness. The respondents were also requested to

opine whether or not the terms of the MPSA 2013 were tough to investors or not;

whether or not the fiscal regime was simple and clear to administer; whether there

were enough and competent manpower to administer the upstream petroleum tax

regime; whether or not the fiscal regime was neutral or has a reasonable degree of

certainty.

The respondents were asked to state their view on the degree of fairness of the fiscal

regime i.e whether the tax burden was distributed fairly and did not discriminate 187 C. Watson, ‘Atlantic Petroleum Royalties: Fair deal or raw deal’, The AIMS Oil and Gas Papers, Atlantic Institute of Market Studies’ (Halifax, Nova Scotia 2001) p.17.

188 The Association of Chartered Certified Accountants (November, 2013), ‘Simplicity in Tax System’ <http://www.google.co.tz/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CBwQFjAA&url=http%3A%2F%2Fwww.accaglobal.com%2Fcontent%2Fdam%2Facca%2Fglobal%2FPDF-technical%2Ftax-publications%2Ftech-tp-sitts.pdf&ei=4BL-U4rkC-aI7AaTr4CQDw&usg=AFQjCNG1wMIJEnE5fCq-MJXFzr68vX9b9w&bvm=bv.74035653,d.d2k > accessed 2 July 2014.

189 Ibid 14.

59

between foreigners and locals; or state entities and private entities. Among the

respondents, twelve (12) said that the fiscal regime had no element of fairness at all;

twelve (12) said there was a slight fairness; another twelve (12) respondents said

there was high fairness; and the remaining twelve (12) said that there was very high

degree of fairness in the fiscal regime. The same procedure was repeated to seek

respondents’ views on other elements of the good tax regime namely efficiency,

neutrality, certainty and competitiveness. The results were analyzed and presented in

Tables 4.1 to 4.5 and Figures 4.1 to 4.5 below.

Table 4.1: Responses regarding the Degree of Fairness of Fiscal Regime

Rating Number of Respondents Percentage (%) Not at all 12 25 Slightly 12 25 High 12 25 Very High 12 25

Figure 4.1 Responses regarding the Degree of Fairness of Fiscal Regime

60

Table 4.2: Responses regarding Efficiency of Fiscal Regime

Rating Number of Respondents Percentage (%) Not at all 12 25 Slightly 24 50 High 12 25

Figure 4.2: Responses regarding Efficiency of Fiscal Regime

Table 4.3: Responses regarding Degree of Neutrality of Fiscal Regime

Rating Number of Respondents Percentage (%) Not at all 10 20.8 Slightly 12 25 High 6 12.5 Very High 20 41.7

Figure 4.3: Responses regarding Degree of Neutrality of Fiscal Regime

61

Table 4.4: Responses regarding the degree of certainty of Fiscal Regime

Rating Number of Respondents Percentage (%) Not at all 8 16.7 Slightly 14 29.2 High 10 20.8 Very High 16 33.3

Figure 4.4: Responses regarding the degree of certainty of Fiscal Regime

Table 4.5: Responses regarding the competitiveness of the Fiscal Regime


Figure 4.5 Responses regarding the competitiveness of the Fiscal Regime

62

CHAPTER FIVE: RECOMMENDATIONS

5.1 Recommendations The results of the 4th Licensing Round show that despite the increased geological

prospectivity in the petroleum industry in Tanzania, the industry has become very

unattractive to oil companies due to the tough fiscal terms which were introduced by

the MPSA 2013. Tanzania competes for foreign capital with equally attractive

hydrocarbon provinces in the region particularly Uganda, Kenya and Mozambique. In

order to maintain competitiveness in the industry it is important that the country must

ensure that the fiscal regime balances the interests of the Government and that of the

oil companies. Failure to this means that capital will flow to where fiscal regimes are

more attractive.

Critical examination of the oil and gas fiscal regime in Tanzania has depicted

weaknesses in the regime which need to be addressed if the regime has to continue to

attract oil companies to invest in the country. Therefore, it is recommended that

elements of the fiscal regimes namely royalty, cost recovery, APT, income tax,

government participation, ring fencing, transfer pricing and bonuses must be designed

in such a way as to strike a proper balance between the interests of the Government

and that of the investors.

5.1.1 Royalty Royalty is a regressive tax and if not properly administered it may distort economic

decision making. It is proposed that a sliding scale royalty on incremental basis

should be introduced as opposed to the current flat royalty. The rate of royalty should

be based on a volume of production. This will take into account the varying economic

and geological conditions for various fields and allow the state proportionate revenue

in each project. It will enable the development of marginal fields which would

otherwise be uneconomic.

63

5.1. 2 Cost Recovery Limit Under the current regime, the cost recovery limit is capped at 50% of the gross

production net of royalty. The cost recovery limit is the same regardless of the

location of the development area. It is proposed that there should be introduced a

sliding scale cost recovery limit, that is cost recovery limit which will be sensitive to

location of the development area or to the volume of production. For instance, it

would be appropriate to ensure higher cost limit in deepwater exploitation than in the

onshore exploitation operations.

5.1. 3 Additional Profit Tax The MPSA 2013 has a provision on the APT but there is no legislation for the same.

Oil companies had already aired their concern with respect to the legality and

enforceability of this tax. It is therefore crucial that the Government should take

immediate measures to legislate on the subject. Such legislation should apply

retrospectively to cover those PSAs which had provisions on the APT.

5.1. 4 Income Tax The current Income Tax Act 2004 applies to all companies operating in Tanzania or

having a source of revenue in Tanzania. There is no tax which is targeted at profit oil

or profit gas which is the case in other countries such as Nigeria. As such, a company

operating in Tanzania may not pay income tax for many years after the

commencement of commercial production since it will only pay income tax after a

break-even but not on the basis of its share of profit. It is suggested that the

Government should introduce a special tax which with be targeted on the profit share

of the oil company.

5.1. 5 Government Participation Government participation is aimed at optimizing government revenues in the

petroleum exploitation. In Tanzania the government participation can either be by

paid equity or by carried-interests. In paid equity the Government is obliged to pay

cash calls which for a poor country like Tanzania it may be burdensome

responsibility. It will not be prudent for the Government which is in need of finance

for public spending to spend huge revenues on petroleum projects. It is therefore

64

much better for the Government to insist on the carried-interests in all projects as a

matter of public policy.

5.1. 6 Ring Fencing Ring fencing ensures that losses in one licence/development area are not deducted

from the revenues from other licence/development area. Generally this is important as

it ensures that the Government gets early tax revenues which would otherwise not

accrue. However, strictly ring fence such as it is the case in Indonesia may render the

industry uncompetitive. It is noteworthy that the Government should relax or tighten

requirement of ring fencing on the case by case basis so as to allow development of

fields which would otherwise be non-commercial.

5.1. 7 Transfer Pricing Rules The Government may lose a lot of revenue through the oil companies engaging into

transactions which effectively transfers profit to their related companies residing in

tax-free havens or low tax jurisdictions. The Government must establish

comprehensive transfer pricing rules and build the local capacity to monitor costs, and

oversee transactions in the industry in order to close loopholes for tax avoidance and

tax evasion.

5.1. 8 Bonuses The MPSA 2013 introduced two types of bonuses, signature bonuses and production

bonus. The bonuses are not based on licence area or the volume of production. In

order to avoid early abandonment of marginal fields or creating economic distortions

it is recommended that the Government should introduce sliding scales in bonuses.

This means, bonuses which increase with the increase of production and vice versa or

differ from project to project depending on the geological characteristic of the area.

5.2 Conclusion Like other East African countries, Tanzania is an emerging hydrocarbon province.

Though explorations of oil and gas have been carried out in the country since 1950s,

Tanzania has featured prominently in the hydrocarbon world in less than five years

period mainly due to huge natural gas discoveries which have been made offshore by

oil companies namely BG/Ophir and ExxonMobil/Staoil. The oil and gas fiscal

65

regime in Tanzania has evolved through many stages from Concession in 1950s to

1969, service contract briefly in 1969 to 1970 and the from 1970 PSA was introduced

and it has dominated the industry ever since. The first model PSA came in force in

1989. The Model PSA has evolved into several versions. The current MPSA 2013 is

the sixth version.

Despite all these developments no research, has been done in the oil and gas fiscal

framework in the country. The MPSA 2013 was prepared at a time when the country

has become a hydrocarbon hotspot. The terms of the new fiscal regime are aimed at

ensuring that the country gets higher revenues from production. However, it is not

clear whether despite the raised geological profile of the country the oil and gas fiscal

framework will continue to attract to investors to the country. This research is

pertinent in that it addresses this important question, among others.

Host governments have various interests in the petroleum industry with the main one

being to maximize the net present value of the revenues from petroleum production.

Other government interests include ensuring transfer of technology, promoting the

growth of local industry, creating employment opportunities to citizens and the

protection of the environment. The investor on the other hand is interested in

maximizing the return to investment as well as the ability to market the petroleum

products without hindrance, distributing profit to shareholders and right to transfer

interests in the petroleum projects. The investor also prefers stable oil and gas fiscal

regime and progressive taxes i.e. taxes which targets the economic rent.

The interests of the host government and the investor are in conflict and thus it is

crucial for the host government to try in its formulation of oil and gas fiscal

framework to balance between its own interests and the interests of the investors. This

is very important especially for developing countries like Tanzania which need

foreign investors to come and invest in a relatively new, high capital intensive and

risky industry. In order to achieve these objectives appropriate fiscal systems have

been developed in the industry over time namely concessionary system and

contractual system. These systems comprise of tax instruments (such as income tax,

VAT, import duties, etc) and non-tax instruments (such as royalty, bonuses, surface

66

rentals etc) which are applied differently in different jurisdiction depending on

geological potential of the country, maturity of the industry, government objectives

and existing market conditions.

In carrying out this study, the author used descriptive approach. The population for

the study was all the individuals based in Dar es Salaam with skills and knowledge in

the petroleum industry being employed by various government department and

agencies and also oil and gas exploration and production companies operating in the

country. The sample was drawn from the target population using purposive sampling.

Both primary and secondary data were used. Primary data were collected through

questionnaire; interview; and focused group discussions and secondary data were

collected through documentary reviews. Analysis of data and presentation of findings

was done by using the Microsoft SPSS.

Tanzania adopted the PSA system since the late 1960s. The fiscal elements of the

PSA regime includes royalty, cost recovery, profit sharing, state participation,

additional profit tax, income tax, value-added tax, capital gain tax and import duties.

It is noted that the objectives of the Government and the investors are usually

opposed, thus in order to ensure continued petroleum operations the Government must

strive to ensure that the fiscal regime balances the interests of the Government with

that of the investors.

The assessment of the sustainability of the petroleum fiscal regime was done by

focusing on the elements which make a fiscal regime sustainable namely neutrality,

equity, risk-sharing, stability and clarity or simplicity. Critical examination of the

elements of the fiscal regime shows that the regime is neither neutral nor efficient

mainly due to existence of royalties and bonuses payments. Royalties and bonuses

are said to interfere with economic decision making since they lower the net present

value of the project and thus can potentially lower the profitability of an otherwise

profitable project. The regime is considered equitable as it envisages the creation of

revenue fund with the purposes of allocating the benefit of resources for both current

and future generations. Besides, the regime incentives to investor such as indefinite

loss carry forward, tax exemptions and other capital allowances. The APT is targeted

67

on a predetermined rate of return and is based on the net cash flow from the

development area and this means the regime ensures risk-sharing between the

Government and the investors. Though at the moment the regime is relatively stable,

the move by the Government to include terms of MPSA into legislation will

destabilize the regime. Lack of comprehensive policies and legislations in the

industry, means that most actions are dependent on the discretion of the Government.

This hampers the smooth administration of the fiscal regime.

The perception of the industry, on the fiscal regime was surveyed and critically

analyzed. There is a consensus on the industry opinions that the MPSA 2013 terms

are tougher to the investor than those of the previous MPSAs i.e. MPSA 2004 and

MPSA 2008. It is also generally agreed that the oil and gas fiscal regime of Tanzania

is probably the toughest in the sub-region and that the petroleum industry of Tanzania

is bottom of the list in terms of attractiveness to investors. The low turnout of

investors in the 4th Licensing Round which ended in May 30th 2014 is cited as

evidence in this respect. The same view is shared by the industry’s independent

information organizations like IHS and Wood & McKenzie.

68

Appendix I: Copy Right Declaration Form Name

RAPHAEL BAHATI TWEVE MGAYA

Email/contact tel no.:

[email protected] Mobile: +255 788 523649 (Tanzania)

Course:

MSc Oil and Gas law

Module:

MSc Dissertation

Dissertation Title:

Petroleum Taxation: A Critical Analysis of the Oil and Gas Fiscal Regime in Tanzania

Supervisor/Tutor:

Mr. William J. Craig

Before submitting confirm: a) that the work undertaken for this assignment is entirely my own and that I have

not made use of any unauthorised assistance b) that the sources of all reference material have been properly acknowledged c) that, where necessary, I have obtained permission from the owners of third party

copyrighted material to include this material in my dissertation. I have read and agree to comply with the requirements for submitting the dissertation as an electronic document. I agree/do not agree (please delete as appropriate):

That an electronic copy of the dissertation may be held and made available on restricted access for a period of 3 or more years to students and staff of the University through The Robert Gordon University Virtual Campus.

That during the period that it is accessible on the Virtual Campus the work shall be licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 2.5 Licence to the end-user - http://creativecommons.org/licenses/by-nc-sa/2.5/

Signed: Raphael Bahati Tweve Mgaya Date: Friday, September 26, 2014. Extensions to coursework deadlines must be agreed by the Course Leader, prior to the original deadline and will only be granted upon receipt of evidence of mitigating circumstances. Students must retain a copy of their coursework and the assessed document until the end of the year, as it may be required for Assessment Board purposes.

69

Appendix II: Electronic Document Submission Form Requirements for the submission of postgraduate dissertations as electronic documents. Students are required to submit one electronic copy of the dissertation, preferably on CD-ROM, identical to the hard copy submissions of the same work.

The document should be in MS Word 2003 format and consist of a single complete file comprising individual chapters, sections and appendices.

Use the form below to describe the submitted dissertation:

Date of submission:

Friday, September 26, 2014

Dissertation methodology e.g. case study, survey

Survey

Keywords:

Oil and Gas Fiscal Regimes; Oil and Gas Law; Taxation; Tanzania.

Abstract Petroleum resources exploitation is both capital-intensive and technically challenging. Developing countries do not have the necessary capital and technology to invest in exploration and development of hydrocarbon resources. On the other hand, petroleum resources are non-renewable and therefore their exploitation raises issues of taxation and intergenerational equitable sharing of revenues. Over the period of time, various petroleum fiscal regimes have evolved to ensure that the host governments attract foreign capital and at the same time get reasonable revenues from the resource extraction. The main fiscal regimes which have been developed include concession, production sharing agreement and service agreements. The aim of this research was to investigate how the petroleum fiscal regime in Tanzania balances the interest of the Government and that of the investors. The study was carried out in Dar es Salaam region in Tanzania. Secondary data were collected by review of literature while primary data were collected through interview, distribution of questionnaires and focused-group discussions. The research shows that though some elements of the Tanzania petroleum fiscal regime are progressive, generally the fiscal regime itself is thought to be the toughest in the region. This is so, particularly as a result of the coming into force of the Model Production Sharing Agreement of 2013. The case is made that the results of the 4th Bidding Round which was closed on 15 May 2014 is a testament.

70

Appendix III: Dissertation Supervision Record Name of student: Raphael Bahati Tweve Mgaya Course: MSc Oil and Gas Law Supervisor: Mr. William J. Craig

I confirm the dissertation supervision electronic contacts/meetings as defined below:

Date of contact

Brief summary of progress/actions Student agreement

1 July 2014

The proposal was communicated to the supervisor for his advice. The supervisor made comments thereto

Comments of the supervisor were adopted and incorporated into the proposal

2 July 2014 Discussion on the type of award between LLM and MSc. The student informed that he wished to be awarded an MSc. The supervisor had no objection but advised that award of MSc requires a dissertation to involve collection, processing and analysis of data.

The student followed the supervisor’s advice.

17 July 2014 Submission of an amended research questionnaire. The supervisor had no objection

The student proceeded to collect data using the agreed questionnaire

15 Aug 2014 Submission and discussion of the First Draft Dissertation.

Comments of the supervisor were taken on board.

18 Sept 2004

Submission of final draft was communicated to the Supervisor. The supervisor made valuable comments

The comments of the supervisor were worked upon

Process completed on:

_____________________________________________Supervisor.

71

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PKF, Tax Guide 2012/2013, <http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=4&ved=0CDkQFjAD&url=http%3A%2F%2Fpkftz.com%2Fpublications%2FTanzania%2520Tax%2520Guide%25202012.pdf&ei=KiwVVPyENZLnaJq1gfgE&usg=AFQjCNGqeJiUwsgnF9FQGYbg6sgkO28G5g&sig2=-KMNsEpaiDInr4XagJV0XA&bvm=bv.75097201,d.d2s >.

Tanzania Petroleum Development Corporation, Model Production Sharing Agreement, Annex D Clause 3.1 ( c) (ii) < www.tpdc-tz.com > accessed 7 September 2014.

Tanzania Petroleum Development Corporation, Model Production Sharing Agreement, Article 11( c) < www.tpdc-tz.com > accessed 7 September 2014

Angharad Miller and Lynne Oats, Principles of International Taxation (Tottel Publishing 2006) p.3-4.

< https://mem.go.tz/acts-policies/ > accessed 12 September 2014

Arnold C. Harberger, ‘Taxation, Resource Allocation and Welfare’ (University of Chicago 1964) <http://scholar.google.com/scholar?hl=en&q=Taxation+and+resource+distribution&btnG=&as_sdt=1%2C5&as_sdtp= > accessed 23 August 2014.

The United Republic of Tanzania, The National Natural Gas Policy, 2013, pp. 4-5. < www.tanzania.go.tz/egov.../Natural_Gas_Policy_-_Approved_sw.pdf > accessed 23 August 2014.

David Malingha Doya and Paul Richardson, ‘Tanzania rethinks planned super-profit tax on gas’ Business Report < http://www.iol.co.za/business/international/tanzania-

79

rethinks-planned-super-profit-tax-on-gas-projects-1.1675984#.VBEfHtUrMy4 > accessed 11 September 2014.

Peter D. Cameron, ‘Stabilization in Investment Contracts and Changes of Rules in Host Countries: Tool for Oil and Gas Investors’ (Final Report, 5 July 2006), < http://www.google.co.tz/url?sa=t&rct=j&q=&esrc=s&source=web&cd=7&ved=0CEwQFjAG&url=http%3A%2F%2Fwww.rmmlf.org%2FIstanbul%2F4-Stabilisation-Paper.pdf&ei=s4z9U5eXDOq60QW5mIGwCw&usg=AFQjCNF7-Rm1AVdungISjkpnaia5q3pEQw > accessed 18 June 2014.

Wood Mackenzie & CEPMLP, ‘Contractual and Fiscal Stability: Rhetoric and Reality’ < http://www.google.co.tz/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&ved=0CDMQFjAC&url=http%3A%2F%2Fwww.dundee.ac.uk%2Fcepmlp%2Fgateway%2Ffiles.php%3Ffile%3DContract-Fiscal-Stability_311561174.pdf&ei=s4z9U5eXDOq60QW5mIGwCw&usg=AFQjCNFVAgB6w-gf99xue2rcpYE0jt75_A&bvm=bv.74035653,d.d2k > accessed 20 June 2014.

Hadiza Tijjani Mato, ‘The Role of Stability and Renegotiation in Transnational Petroleum Agreements’ (2012) 5(1) Journal of Politics and Law, p. 33.

The United Republic of Tanzania, Tanzania Model Production Sharing Agreement 2004, Article 30 (b) < http://www.tpdc-tz.com/tpdc/ > accessed 11 August 2014.

The Association of Chartered Certified Accountants (November, 2013), ‘Simplicity in Tax System’ <http://www.google.co.tz/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CBwQFjAA&url=http%3A%2F%2Fwww.accaglobal.com%2Fcontent%2Fdam%2Facca%2Fglobal%2FPDF-technical%2Ftax-publications%2Ftech-tp-sitts.pdf&ei=4BL-U4rkC-aI7AaTr4CQDw&usg=AFQjCNG1wMIJEnE5fCq-MJXFzr68vX9b9w&bvm=bv.74035653,d.d2k > accessed 2 July 2014.

i

Petroleum Taxation:

A Critical Analysis of Oil and Gas Fiscal Regime in Tanzania

September 2014

By Raphael Bahati Tweve Mgaya

Dissertation Supervisor: Mr William Craig

Submitted in partial completion of the degree of MSc Oil and Gas Law Degree

ii

ABSTRACT Petroleum resources exploitation is both capital-intensive and technically challenging.

Developing countries do not have the necessary capital and technology to invest in

exploration and development of hydrocarbon resources. On the other hand, petroleum

resources are non-renewable and therefore their exploitation raises issues of taxation

and intergenerational equitable sharing of revenues.

Over the period of time, various petroleum fiscal regimes have evolved to ensure that

the host governments attract foreign capital and at the same time get reasonable

revenues from the resource extraction. The main fiscal regimes which have been

developed include concession, production sharing agreement and service agreements.

The aim of this research was to investigate how the petroleum fiscal regime in

Tanzania balances the interest of the Government and that of the investors. The study

was carried out in Dar es Salaam region in Tanzania. Secondary data were collected

by review of literature while primary data were collected through interview,

distribution of questionnaires and focused-group discussions.

The research shows that though some elements of the Tanzania petroleum fiscal

regime are progressive, generally the fiscal regime itself is thought to be the toughest

in the region. This is so, particularly as a result of the coming into force of the Model

Production Sharing Agreement of 2013. The case is made that the results of the 4th

Bidding Round which was closed on 15 May 2014 is a testament.

iii

ACKNOWLEDGEMENTS

The author wishes to express thanks to all those who have assisted and advised during

this research, with particular mention of: Mr. William Craig, for his thoughtful

guidance as a dissertation supervisor; the staff of the University of Robert Gordon and

the University of Dar es Salaam for their tireless support particularly in regard to

library services; my employer, the Tanzania Development Corporation for affording

me ample time and financial resources for this work. Appreciation are also due to the

my colleagues Goodluck Shirima, Kelvin Gadi, Burton Mwaka and Pascal Lyimo

through whose support in one way or the other has helped me to accomplish this

research. Any shortcomings in this research are entirely my own.

iv

TABLE OF CONTENTS ABSTRACT ............................................................................................................................. ii

ACKNOWLEDGEMENTS ........................................................................................................ iii

ABBREVIATIONS .................................................................................................................. vii

LIST OF STATUTES .............................................................................................................. viii

LIST OF TABLES ..................................................................................................................... ix

LIST OF FIGURES .................................................................................................................... x

CHAPTER ONE: INTRODUCTION ........................................................................................... 1

1.1 Background 1

1.2 Overview of Tanzania 1

1.2.1 History .................................................................................................................. 1

1.2.2 Economy ............................................................................................................... 2

1.2.3 Petroleum Exploration History .............................................................................. 3

1.3 Statement of the Problem 7

1.4 Research Questions 9

1.4.1 Main Question ...................................................................................................... 9

1.4.1 Specific Questions ................................................................................................. 9

1.5 Objectives of the Research 9

1.5.1 Main Objective ..................................................................................................... 9

1.5.2 Specific Objectives ................................................................................................ 9

1.6 Significance of the Study 10

1.7 Scope of the Study 10

1.8 Limitations to the Study 10

1.8.1 Limited Resources ............................................................................................... 11

1.8.2 Access to Confidential Information..................................................................... 11

1.8.3 Lack of Cooperation from Respondents............................................................... 11

1.8.4 Delimitation of the Research ............................................................................... 11

v

1.9 Methodology 12

1.9.1 Population .......................................................................................................... 12

1.9.2 Sample Size and Sampling Technique .................................................................. 12

1.9.3 Types of Data and Collection Methods ................................................................ 12

1.9.4 Data Processing and Analysis Methods ............................................................... 13

CHAPTER TWO: CRITICAL ANALYSIS OF PETROLEUM FISCAL REGIMES......................... 14

2.1 The Rationale for Special Petroleum Tax Regime 14

2.2Types of Fiscal Regimes 14

2.2.1 Concessionary Systems ....................................................................................... 16

2.2.2 Contractual Systems ........................................................................................... 18

2.3 Fiscal Components of Contractual Systems 22

2.3.1 Royalty ............................................................................................................... 22

2.3.2 Cost Recovery Limit............................................................................................. 25

2.3.3 Profit Oil Split ...................................................................................................... 26

2.3.4 Government Participation ................................................................................... 27

2.3.5 Other Fiscal Instruments ..................................................................................... 29

CHAPTER THREE: CRITICAL ANALYSIS OF PETROLEUM FISCAL REGIME IN TANZANIA........... 32

3.1 The Overview of the Oil and Gas Fiscal Regime of Tanzania 32

3.1.1 Elements of PSA Regime in Tanzania ................................................................... 33

3.2 The Perceptions of the Industry on the Oil and Gas Fiscal Framework 43

3.2.1 Analysis of Survey Methods ................................................................................ 43

3.2.2 Factors Influencing the Development of Oil and Gas Fiscal Regime ..................... 45

3.2.3 Production Sharing System ................................................................................. 48

CHAPTER FOUR: ASSESSMENT OF THE SUSTAINABILITY OF THE PETROLEUM FISCAL REGIME IN TANZANIA ....................................................................................................................... 50

4.1 Objectives of the Government and the Investors 50

4.2 Measures Sustainability 53

4.2.1 Efficiency ............................................................................................................ 53

vi

4.2.2 Neutrality ........................................................................................................... 53

4.2.3 Equity ................................................................................................................. 54

4.2.4 Risk Sharing ........................................................................................................ 55

4.2.5 Stability............................................................................................................... 56

4.2.6 Clarity and simplicity ........................................................................................... 57

4.3 Perceptions on the Sustainability of the Current Fiscal Regime .............................. 58

CHAPTER FIVE: RECOMMENDATIONS .................................................................................. 62

5.1 Recommendations 62

5.1.1 Royalty ............................................................................................................... 62

5.1. 2 Cost Recovery Limit ............................................................................................ 63

5.1. 3 Additional Profit Tax .......................................................................................... 63

5.1. 4 Income Tax ........................................................................................................ 63

5.1. 5 Government Participation .................................................................................. 63

5.1. 6 Ring Fencing ....................................................................................................... 64

5.1. 7 Transfer Pricing Rules ......................................................................................... 64

5.1. 8 Bonuses ............................................................................................................. 64

5.2 Conclusion 64

Appendix I: Copy Right Declaration Form ............................................................................ 68

Appendix II: Electronic Document Submission Form ............................................................ 69

Appendix III: Dissertation Supervision Record ...................................................................... 70

BIBLIOGRAPHY .................................................................................................................... 71

vii

ABBREVIATIONS

AMT Alternative Minimum Tax

APT Additional Profit Tax

CIT Corporate Income Tax

DSE Dar es Salaam Stock Exchange

EWURA Energy and Water Utilities Regulatory Authority

FANCP First Accumulated Net Cash Position

GDP Gross Domestic Product

GNI Gross National Income

IOCs International Oil Companies

ITA Income Tax Act

MEM Ministry of Energy and Minerals

MPSA Model Production Sharing Agreement

PE Permanent Establishment

PSA Production Sharing Agreement

SANCP Second Accumulated Net Cash Position

SPSS Social Package for Social Sciences

TPDC Tanzania Petroleum Development Corporation

TRA Tanzania Revenue Authority

VAT Value Added Tax

viii

LIST OF STATUTES Financial laws (Miscellaneous Amendment) Act, 1997 Income Tax Act, 2004


ix

LIST OF TABLES Table 2.1 Key Features between Concessionary System and Contractual

System.............................................................................................. 19

Table 2.2 The Differences between Concessionary Systems and Production

Sharing Contracts................................................................................21

Table 3.1 Profit Oil Share for Onshore and Shelf areas (No Joint Operations)...35

Table 3.2 Profit Oil Share for Deepwater and Lake Tanganyika North (No Joint

Operations) .........................................................................................36

Table 3.3 Profit Gas Share for Onshore and Shelf areas (No Joint Operations)..36

Table 3.4 Profit Gas Share for Deepwater and Lake Tanganyika North (No Joint

Operations)...........................................................................................37

Table 3.5 The Percentage of Respondents who filled Questionnaire.................44

Table 3.6 Methods of Data Collection in Percentage..........................................44

Table 3.7 Influence of Industry and Market Conditions......................................46

Table 3.8 Influence of Geological Potential of the Area/Company....................46

Table 3.9 Influence of Economic Conditions and Price of Crude.......................47

Table 4.1 Responses regarding the Degree of Fairness of Fiscal Regime..........52

Table 4.2 Responses regarding the Efficiency of Fiscal Regimes......................60

Table 4.3 Responses regarding the Neutrality of Fiscal Regime........................60

Table 4.4 Responses regarding the Degree of Certainty of Fiscal Regime........61

Table 4.5 Responses regarding the Competitiveness of Fiscal Regime..............61

x

LIST OF FIGURES Figure 1.1 The Map of Tanzania........................................................................2

Figure 2.1 Classifications of Petroleum Fiscal Regimes...................................16

Figure 2.2 Incremental Sliding Scale Royalty...................................................24

Figure 2.3 Slab Sliding Scale Royalty..............................................................25

Figure 3.1 The Percentage of Respondents who filled Questionnaire.................................44

Figure 3.2 Methods of Data Collection in Percentage......................................45

Figure 3.3 Influence of Industry and Market Conditions.................................46

Figure 3.4 Influence of Geological Potential of the Area/Company................47

Figure 3.5 Influence of Economic Conditions and Price of Crude...................47

Figure 4.1 Responses regarding the Degree of Fairness of Fiscal Regime......52

Figure 4.2 Responses regarding the Efficiency of Fiscal Regimes..................60

Figure 4.3 Responses regarding the Neutrality of Fiscal Regime....................60

Figure 4.4 Responses regarding the Degree of Certainty of Fiscal Regime....61

Figure 4.5 Responses regarding the Competitiveness of Fiscal Regime..........61

1

CHAPTER ONE: INTRODUCTION

1.1 Background The oil and gas exploration in Tanzania started in early 1950s1. The exploration

activities have continued in the country since then with the first commercial natural

gas discovery being made at Songo Songo Island in 1973. The second natural gas

discovery was made at Mnazi bay in 1982.2 More gas discoveries were made from

2010 to 2012 especially in the deepwater in the Indian Ocean and up to now a total of

50.5trillion cubic feet of natural gas have been discovered in Tanzania.3 Commercial

gas production in Tanzania started in 2004 at Songo Songo Island and in 2006 at

Mnazi bay gas fields. Despite, the long history of oil and gas exploration in Tanzania

no research has ever been carried out in the field of oil and gas fiscal regime.

Therefore, this study has a special significance in that it is a pioneer study.

This Chapter basically introduces the subject of the study. It is divided into eight main

sections namely: background to the study, statement of the problem and objectives of

the study and research questions. The other sections are the scope of the study, the

rationale or significance of the study; limitations to the study and methodology. At

this juncture, the detailed discussion for the abovementioned is in order.

1.2 Overview of Tanzania

1.2.1 History Tanzania is a United Republic which came into existence on 26th April 1964 as a

result of the Union between the Republic of Tanganyika and the People Republic of

Zanzibar. The Republic of Tanganyika got its independence from Britain on 9th

December 1961 and Zanzibar became independent following a revolution which

overthrew the Oman Sultanate on 12th January 1964.4 Tanzania covers an area of

1 See at< http://www.tpdc-tz.com/exploration_history.htm >accessed 7 September 2014.

2 Ibid.

3 This is in accordance to the recent report of the Tanzania Petroleum Development Corporation.

4 Anthony Clayton, ‘The Zanzibar Revolution and its Aftermath’ (1983) 53(4), Africa: Journal of International African Institute, 98-100.

2

945,087 square kilometers.5 It is located at south of Equator with geographical

coordinates 6 00 S and 35 00 E in the Eastern Africa bordering Indian Ocean between

Kenya and Mozambique.6 The estimated population of Tanzania in 2013 was about

49.25million people.7

Figure 1.1: The Map of the Tanzania

Source: Google Maps (2014)

1.2.2 Economy In 2013 the Gross Domestic Product (GDP) for Tanzania was USD 33.23 billion. The

GDP grew by 7.0%.8 Agriculture is the main source of GDP which contributes almost

half of the total GDP and employs almost 80% of the workforce in the country.

Mineral sector represents the largest source of economic growth and contributes about

5 See <https://data.un.org/CountryProfile.aspx?crName=United%20Republic%20of%20Tanzania> accessed 5 September 2014.

6 See at< https://www.cia.gov/library/publications/the-world-factbook/geos/tz.html > accessed 2 September 2014.

7 See at < http://www.worldbank.org/en/country/tanzania> accessed 7 September 2014.

8 Ibid.

3

3% of the GPD.9 According to the National Bureau of Statistics of Tanzania the

Annual Headline Inflation Rate for the month of July, 2014 increased slightly to 6.5%

from 6.4% in June, 2014.10 The Gross National Income (GNI) per Capital is USD

1,702.12.11

1.2.3 Petroleum Exploration History The oil and gas industry in Tanzania is still emerging12, however following the huge

natural gas discoveries since 2010, there have been rapid developments in the

industry. Currently, it is estimated that the discovered natural gas in place in Tanzania

is 50.5 trillion cubic feet (TCF)13. This has necessitated the existing oil and gas

exploration companies together with the Government of Tanzania to embark on the

construction of a Liquefied Natural Gas (LNG) Project to commercialize the huge gas

discoveries.14

On the other hand, the significant natural gas discoveries have raised concerns among

industry participants with respect to robustness and effectiveness of the oil and gas

legal and regulatory framework vis a vis the rapid developments in the industry. In

response to these concerns, the Government has started to carry out legal and

regulatory reforms which are necessary to cope with the new and rapid development

in the oil and gas industry. In this regard, the Government has promulgated for the

first time the Natural Gas Policy 2013 with the principal objective of providing

guidance for the sustainable development and utilization of the natural gas resource in

9 See at < http://www.tanzaniainvest.com/economy > accessed 6 September 2014.

10 See ‘Tanzania Inflation Increases to 6.5% in July 2014’ <http://www.tanzaniainvest.com/economy/news/1218-tanzania-inflation-increases-to-65-in-july-2014-> accessed 2 August 2014.

11 United Nations Development Programme, Human Development Reports, < http://hdr.undp.org/en/countries/profiles/TZA > accessed 15 September 2014.

12 Ombeni Sefue, ‘Toward a Gas Economy in Tanzania’ < http://naturalresourcecharter.org/sites/default/files/Ombeni%20Sefue_0.pdf > accessed 7 August 2014.

13 See ‘I will be the last to lead an impoverished Tanzania – JK’ The Guardian, 7th August 2014. 14 Brian Cassidy and Steven Fox, ‘East Africa: from niche play to key LNG Suppliers?’ (April 2014), Vol.81, Issue 3, Petroleum Economist.

4

the country.15 The Government has also prepared a Gas Utilization Master Plan16 with

major use of natural being focused on power generation.17

At the time of writing this report, the Government is developing an Upstream

Petroleum Policy of 2014 whose major objective is to set out legal and regulatory

framework for exploration, production and utilization of the country’s petroleum

resources in an effective and efficient manner.18 Besides, the Government is also

developing the Local Content Policy 2014 in order to promote participation of

Tanzanians into the oil and gas industry, transfer of technology and ensure the oil and

gas industry development benefits other sectors of the economy in the country.19 The

Gas Act Bill has also been drafted and is ready for tabling to the Parliament before

the end of the year 2014 for deliberations and enactment. The amendments of the

upstream petroleum legislation, the Petroleum (Exploration and Production) Act of

1980 (hereinafter called the PEPA) are also in the final stages and interestingly the

author is a member to one of the Government Committee which is tasked with

preparing the amendment proposals.

In October 25, 2013 the Government of the United Republic of Tanzania launched its

4th Licensing round whereby the Model Production Sharing Agreement (MPSA) 2013

15 The United Republic of Tanzania, The National Natural Gas Policy, 2013 < http://www.tanzania.go.tz/egov_uploads/documents/Natural_Gas_Policy_-_Approved_sw.pdf > accessed 7 August 2014.

16 Christopher B. Strong (ed.) (2013), ‘The Oil and Gas Law Review’ Law Business Research Limited p.244.

17 The United Republic of Tanzania, ‘Power System Master Plan 2012 Update’ < http://www.google.co.tz/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=1&ved=0CBsQFjAA&url=http%3A%2F%2Fwww.tanesco.co.tz%2Findex.php%3Foption%3Dcom_docman%26task%3Ddoc_download%26gid%3D68%26Itemid%3D172&ei=Q4bjU_Z2qaHRBb3sgRA&usg=AFQjCNEg6xTNJJ2b8KSGVWD_itOiUX-Faw&bvm=bv.72676100,d.d2k > accessed 7 August 2014

18 The United Republic of Tanzania, The National Petroleum Policy of Tanzania (Draft 2, April 2014) < http://www.tpdc-tz.com/National%20Petroleum%20Policy.pdf > accessed 7 August 2014.

19 The United republic of Tanzania, Local Content Policy of Tanzania for Oil and Gas Industry 2014 (Draft I)’ < http://www.mem.go.tz/wp-content/uploads/2014/05/07.05.2014local-content-policy-of-tanzania-for-oil-gas-industry.pdf > accessed 21 June 2014.

5

became effective. The terms of MPSA 2013 are considered as tough by the industry20

in comparison with the preceding MPSAs namely MPSA 2004 and MPSA 3008.

However, the Government views that the new MPSA 2013 terms are fair and

equitable because in the Government views they reflect the changed geological

potential of the country. Under the MPSA 2013 the Government aims at maximizing

its revenue and at the same time ensuring that the industry remains competitiveness in

region.21

The current MPSA 2013 is the sixth version22 in Tanzania since the commencement

of the oil and gas exploration in the country in early 1950s.23 BP and Shell started

petroleum exploration in Tanzania (then Tanganyika territory) in 1952 under the

concession agreement with the government based on the Mining (Mineral Oil)

Ordinance, CAP. 39924. BP and Shell held exploration acreage along the Coastal

Basin including the islands of Zanzibar, Pemba and Mafia.25 The licensees carried out

geological and geophysical surveys which however did not lead to any commercial

20 Tanzania outlines new oil and gas production terms, Reuters, Monday 4 November 2013 < http://www.reuters.com/article/2013/11/04/tanzania-energy-idUSL5N0IP37820131104 > accessed 6 August 2014.

21 The East African region, covering Uganda, Kenya, Tanzania and Mozambique in this case is a hotspot for hydrocarbon exploration particularly following significant oil discoveries in Uganda and Kenya and natural gas discoveries in Mozambique and Tanzania / these countries.

22 The previous version of Model Production Agreements (MPSAs) were the 1989, 1995, 2000, 2004 and 2008. The discussion on these Model PSAs is outside the scope of this study.

23Tanzania Petroleum Development Corporation, ‘Exploration History’ < http://www.tpdc-tz.com/exploration_history.htm > accessed 15 August 2014.

24 This Act was repealed by the Petroleum (Exploration and Production) Act, 1980.

25Yona S. M. Killagane, ‘Tanzania’s Model Production Sharing Agreement’

<http://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=10&ved=0CGwQFjAJ&url=http%3A%2F%2Fwww.energy.eac.int%2Feapc2005%2Fpdfs%2Fconfrence%2520proceedings%2FCountry%2520Presentations%2FTanzania%2FModel%2520Production%2520Sharing%2520Agreement%2520%2520Mr.%2520Yona%2520Killagane.pdf&ei=vZ0QVJWPH4iXaoT9gegG&usg=AFQjCNEu5ivHTpba-xR40UzzZ_-GKgfWqg&sig2=Y9yHaKjRuQqDa2toL9Dy0Q&bvm=bv.74649129,d.d2s> accessed 2 August 2014.

6

discoveries and as a result the concession was relinquished in 1964.26 AGIP

negotiated a service agreement with the Tanzania Government for the whole area

relinquished by BP/Shell. The service agreement was amended in 1970 to

accommodate TPDC through the first Production Sharing Agreement.27 In 1973,

AGIP SpA made the first natural gas discoveries in Songo Songo Island.28 The

enactment of the PEPA and increase in the oil prices prompted the increased

exploration activity in the country especially in 1980 to 1991 resulting gas discovery

at Mnazi bay.29

The first offshore licensing round was launched in September 2000 whereby six

deepwater blocks were put up for bids. Three companies submitted their bids and after

successful negotiations, block 6 was awarded to Brazil’s Petrobas and a

corresponding PSA was signed with the Government and TPDC in April 2001.30 The

second bid was launched in June 2001 in which eleven blocks were on offer.31

Following the second bidding round, TPDC received two bids and after successfully

negotiations four PSAs for blocks 9, 10, 11 and 12 were all executed with Shell

International in September 2002.32 The third bidding round which was launched in

2004 was more successful that the previous rounds. Between 2005 and 2007, block 5

was awarded to Petrobras, block 2 to Staoil and blocks 1, 3 and 4 were awarded to

Ophir Energy. Besides, block 8 and block 7 were awarded in 2011 and 2007 to

26 David Ledesma, ‘East Africa Gas-Potential for Export’ (March, 2013), The Oxford Institute for Energy Studies p. 12.

27 Yona S.M. Killagane (n 25) 4.

28 Tanzania Petroleum Development Corporation, ‘Exploration History’ < http://www.tpdc-tz.com/tpdc/directorate/exploration/Exploration_History.php > accessed 16 August 2014.


30 GEO ExPro, ‘New Offshore Licensing Round for Tanzania’ < http://www.geoexpro.com/articles/2012/10/new-offshore-licensing-round-for-tanzania > accessed 15 August 2014.

31 Ibid.
