Tanzania Oil and Gas - 4th licensing round and 2013 Model Production Sharing Agreement

Commentary

 Term

An exploration licence is issued for an initial four-year exploration period, renewable once for four years and again for a further three years. In the event of a discovery, the Minister may grant a two-year appraisal period, which may be extended for a period not exceeding three years. A development licence may then be granted for a period of 25 years, which may be extended by a further 20 years. As these timescales are governed by the Petroleum Act they remain unchanged.

Bonuses and Annual Charges

The annual license rentals have been significantly increased: 

For the first time the GoT will require the payment of bonuses under the MPSA, namely a:

• Signature bonus: which shall be not less than US$ 2.5 million;
• Production bonus: which shall be not less than US$ 5 million on commencement of production from each development license area in the contract area. The MPSA does not explicitly state that production for these purposes is commercial production.

Whilst this is a new provision for Tanzania, you commonly see these types of bonus provisions in other jurisdictions for example Angola and Nigeria, however what is different in the Tanzania model is that this is a minimum requirement whereas it is more usual to see these bonuses as negotiable.  

TPDC Participation

As per earlier PSAs, TPDC is entitled at any time to take a participating interest of at least 25% in any area which is subject to a development licence. TPDC is obliged to pay its share of contract expenses excluding any exploration costs (which includes the appraisal programme). Where TPDC does not meet its share of costs the Contractor is required to loan the shortfall. The interest rate on the loan is LIBOR plus 1% (as opposed to 2% under the 2008 MPSA) and is to be recovered out of TPDC’s share of cost hydrocarbons (under the 2008 MPSA, it was to be recovered out of the TPDC profit hydrocarbons). There is no such explicit carry obligation in the 2008 MPSA, however, we notice that in practice this was negotiated into many of the Tanzanian PSAs currently in effect.

Royalties

Production Sharing

A significant change in the MPSA is the increase in the TPDC “take” compared to what we have seen previously negotiated in PSAs currently in effect:

Profit Oil

2008 MPSA

These percentages in favour of TPDC were very rarely actually achieved in the PSAs.

2013 MPSA

* up to water depths of 500 metres 

Profit Gas

As per the 2010 Gas Addendum (which amended the 2008 MPSA)

2013 MPSA

Sharing of profit hydrocarbons is based on daily production volumes. Although these appear to be ridged in their application we know from experience that these are heavily negotiated and vary depending on the degree of TPDC participation.

Relinquishment of Contract Area

At the end of the first and second exploration periods, 50% of the contract area is to be relinquished and at the end of the third exploration period all the contract area is relinquished apart from any area designated as a Development Area.

Assignment

There are some significant modifications to the terms relating to transfers in the MPSA:

• Transfers and assignments, directly or indirectly, in whole or in part, to affiliates and 3rd parties require consent (whereas previously this only applied to 3rd party transactions). 
• TPDC is now under the MPSA given a right of first refusal over any PSA interests to be transferred to a non-affiliate.
• There is a requirement to pay stamp duty on the transfers to a non-affiliate (see Tax above).
• In addition, any assignment or transfer shall be subject to relevant tax law, including capital gains.
• When an interest is assigned or transferred, the Contractor retains a secondary obligation in respect of abandonment for assets in place at the date of the assignment and is now required to provide adequate security for those secondary obligations, (this presumably kicks in only if the assignee defaults). We presume that evidence of this security will be required prior to approval of the transfer.
• The MPSA does not explicitly require consent where a change of control is indirect (for example in the case of the takeover of a Contractor Party’s ultimate shareholder). However, note that change of direct or indirect control of a Contractor would usually result in a deemed disposal of assets and liabilities for income tax.

Local Content

Unsurprisingly, these provisions have been extensively expanded, no doubt reflecting the GoT’s long term goal to maximise Tanzanian participation in projects. Amongst the key requirements are:

• Increase of the annual training expenditure from US$150,000 in 2008 to US$ 500,000 in the MPSA. 
• The Contractor is required to comply with the GoT’s (as yet unpublished) local content policy as modified from time to time; 
• Unskilled jobs are to be reserved for Tanzanians; 
• Subcontracts are to be scoped, where possible, from a Tanzanian company; 
• All tenders are to be advertised, evaluated and awarded in Tanzania; 
• Local content is to be given a high weighting in awarding projects; 
• Skills and technology transfer to be promoted in specified areas; and 
• Reporting requirements and cooperation with TPDC to maximise local content.

Domestic Supply Obligation

Under the 2008 MPSA, domestic market requirements were satisfied primarily out of the TPDC share of hydrocarbons and only any excess was to be provided by the Contractor under the MPSA. This is now a joint obligation.

Tax

The Contractor is subject to general taxation laws of Tanzania on income from oil and gas production, as well as additional profits tax, and they have no exemption from transfer taxes on assignment. A new levy in the MPSA applies to capital gains on a transfer of an interest to a 3rd party: 1% against first US$ 100 million in transfer value, 1.5% for the next US$ 100 million and 2% thereafter.

Decommissioning and Insurance

The Contractor is obliged to establish a Decommissioning Fund within two years of commencement of commercial production. The 2013 MPSA is silent on whether allocations to the Fund are cost recoverable.

Insurance must be placed with local insurance companies and reinsured where required. This requirement applies to all subcontractors as well as the Contractor itself. Self-insurance or insurance through affiliates is not permitted.

Termination

Other than the normal rights of termination, a new right of termination has been added where if the majority of the share capital of the Contractor has been transferred to an unrelated third party without consent of TPDC and GoT the PSA can be terminated. This may be being used as a device to compel payment of any tax which the GoT considers due on such a transfer.

Unitisation

This is an entirely new provision which obliges the Contractor to unitise fields which cover more than one PSA area. Additionally where hydrocarbon accumulations are in proximity to each other, though in different PSA areas, joint development may be required by the Minister in the interests of efficiency. This is not an unusual provision and is common practice in a number of other countries.

Anti-Corruption

There is also a new provision reflecting increased focus on the issue of corruption. The Contractor is obliged to establish anti-bribery and anti-corruption policies and measures and to ensure that these are followed by all employees, directors, affiliates and subcontractors.

Stablisation and Change in Law

It is important to note that there is no change in law or stablisation clause to protect the investor from an adverse change in tax or other laws after the signing of the PSA. This follows the precedent set by the 2008 MPSA, however we have noticed in practice that most PSAs currently in effect provide stabilisation mechanism to enable parties to negotiate a change to the PSA to compensate for adverse changes in legislation or regulations.

Law and Disputes

The MPSA is governed by Tanzanian law. If a dispute cannot be settled through negotiations then the dispute shall be resolved through arbitration under the International Chamber of Commerce (ICC) Rules in Dar es Salaam. The place of arbitration used to be London in 2008 MPSA.