THE ROLE OF GAS IN BUILDING A SUSTAINABLE FUTURE FOR TANZANIA S POWER SECTOR ABOUT: Tanzania Spotlight. Richard Metcalf

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1 THE ROLE OF GAS IN BUILDING A SUSTAINABLE FUTURE FOR TANZANIA S POWER SECTOR Richard Metcalf Partner Norton Rose Fulbright In Tanzania the future of its power sector is inextricably linked to the successful exploitation of its offshore gas reserves. The development of hydropower projects has been slowed by concern over the recent droughts; other forms of renewable energy generation will not achieve the scale of increase in electricity generation required by the country. Although the Government has reiterated its support for coal projects coalfired generation attracts ever stricter environmental controls. In this article we look at the unique opportunity now presented to Tanzania to harness its offshore resources to secure a step change in the provision of electricity to its citizens throughout the Republic. ABOUT: Richard Metcalf is a partner in the Norton Rose Fulbright energy team based in London. Richard focuses in particular on power generation and transmission and oil and gas exploration and development. He has worked in Africa for 20 years and is renowned for the work he does on behalf of African Governments and national energy companies as they negotiate for private investment and his current clients include Governments/ national utilities in Zimbabwe, Zambia and Botswana. His interest in Tanzania is reflected not only in his work for the Government and TANESCO but in the fact he has climbed to Uhuru Point on Mount Kilimanjaro, the highest point in Africa. he publication of Tanzania s first Natural Gas Policy in November 2013 was long awaited, a critical signal of the Government s strategic thinking about the role that gas can play in Tanzania s energy future. In the past three years Tanzania s profile has been transformed from that of a least developed country to one of the hottest for the global energy industry due to the discovery of offshore gas potential of 46 trillion cubic feet. Tanzania has joined the US, Australia, and Mozambique in the global LNG race. The steps that the Government of Tanzania takes in walking the tightrope towards realisation of this potential is being watched closely by stakeholders ranging from international oil majors and their shareholders to individual Tanzanian citizens, particularly those in Tanzania s underdeveloped southern regions closest to the gas fields. In terms of content, it is significant that the Natural Gas Policy was heavily amended from the draft version released in October 2012 to reflect developments subsequently encountered by the Government - particularly strong criticism from international oil companies and civil unrest in the Mtwara region and to appease stakeholders. Despite these amendments uncertainty remains. The Natural Gas Policy refers to an extensive list of legislation, further policies (such as a National Gas Utilisation Master Plan and upstream / petroleum policy) but none of this detail has yet appeared. 35

2 INSTITUTIONS From the information provided in the Policy, it is possible to map out a basic structure for the governance of the gas sector as follows: Tanzania Kwanza Tanzania first has been a constant message in the Government s gas announcements to date, as the Government recognises that electoral support is as key While enhancing the position of local stakeholders, the Government has relinquished its role in respect of gas infrastructure in order to induce greater investment. Whereas the 2012 Draft stated that the main gas infrastructure would initially be owned by the Government through the national oil company, the Natural Gas Policy refers to the Government now participating strategically in developing and operating such infrastructure through state-owned entities and public private partnerships (PPP) to develop and operate the infrastructure. This represents a concession to concerns raised by respondents on the 2012 Draft. as international support in the successful development of a natural gas industry by the ruling CCM party and seeks to ensure a sense of ownership for Tanzanian citizens. Given recent instances of civil unrest in Tanzania, this is also key for investors due to the effect of political risks such as riots, terrorism and sabotage on the feasibility and bankability of potential projects. This message is reflected in several aspects of the Natural Gas Policy, notably the domestic supply obligation. Precedence is to be given to supplying the domestic market over the export market. Given the energy situation in Tanzania, there is clear rationale for such prioritisation. Nonetheless, it will be a source of concern for investors until such time as details emerge of how this prioritisation will work. The Natural Gas Policy makes reference to problems that the Government has experienced in the past in relation to the implementation of PPPs and states that, in order to avoid such problems in future, a proper mechanism for risk sharing in natural gas PPP investments must be put in place. A statutory framework for PPPs was introduced in 2010 and followed with detailed regulations in 2011, but few (if any) projects have been implemented under the regime. Missing links Unlike the 2012 Draft, which applied to all streams and included provisions on exploration and development, the Natural Gas Policy specifies explicitly that its scope is 36

3 limited to the midstream and downstream segments. But although this might suggest that the Policy is more focused on a downstream activity such as the use of gas for power generation, this is not the case. The Policy indicated that more detail would be provided in other, imminent documents but at the time of writing these documents have still not emerged. Specifically: National Gas Utilisation Master Plan this was referred to in the Policy but no date has been given for when it will be published; Natural Gas Act as long ago as November 2013 the Government indicated that the new law was in the final stage of preparation but nothing has emerged. decided to remove this monopoly and encourage private sector participation. The main elements of the strategy consisted of: unbundling of NEPA s vertically integrated structure into 18 separate companies (6 generation, 1 transmission and 11 distribution business units; sale to the private sector of the 18 business units or in the case of the hydropower facilities, long-term concession as an additional option; allowing the private independent power producers to enter the power market; and establishment of an arms-length trading mechanism among these entities. From the perspective of those more interested in the use of gas for power generation, the biggest missing link is the absence of any policy which explicitly addresses the challenges of implementing a national gas transmission infrastructure necessary to provide gas to IPP investors and other bulk users of gas. Investors wait in anticipation as the Natural Gas Policy does contemplate the formation of a Gas Aggregator which is intended to develop and manage the requisite downstream infrastructure (from the pipeline network to processing facilities). The Gas Aggregator is envisioned to have exclusive rights to purchase, collect, transport and sell natural gas produced The Bureau of Public Enterprises (BPE) was entrusted with the reform process. While significant progress was made on most of the core elements of the strategy, it was noted that there was neither a clear and decisive approach to securing investors to provide the gas transmission infrastructure necessary to attract IPP investors into the power market, nor a focused effort to attract IPP investors. A project the G2P or gas to power project - was launched to remedy this deficiency. The project s objective was to undertake the preparatory work needed (i) to attract credible private sector investors Tanzania has joined the US, Australia, and Mozambique in the global LNG race in Tanzania. A useful point of comparison here is Nigeria and the challenges it faced a few years back when it found itself in a similar situation. It is instructive to look at the equivalent situation which first existed in Nigeria and how the Government there started the process which led to the vibrant Nigerian power sector of 2014 attracting substantial private sector investment. Some ten years ago the Federal Government of Nigeria (FGN), with the support of the World Bank, was pursuing a strategy of shifting the provision of electricity service in the country from the state-owned and run entity to the private sector. The FGN, through state-owned National Electric Power Authority (NEPA) had a monopoly over the generation, transmission and distribution of electric power in Nigeria. Due to its poor performance in accommodating the growing demand for electricity in Nigeria, the FGN to participate in the gas transmission infrastructure critical for IPPs to invest in power generation and also to provide access to gas throughout the major population centres of the country; (ii) to study and provide feasibility and basic design of pipeline infrastructure across the country that would permit independent power producers to site their facilities in or near the load centres of these areas to facilitate the reduction of power transmission losses while ensuring good voltage profiles; (iii) to identify and/or confirm the location and size of power station requirements for the next 20 years; (iv) to study, provide feasibility and design of more high voltage transmission lines to strengthen the existing lines in all parts of the country to ensure optimum power transmission, eliminate all bottlenecks and possible voltage collapses for anticipated generation and load demand; (v) to evaluate new technologies to mitigate under- and over-voltages at 37

4 certain fragile load centres; (vi) to examine and provide the design of new distribution lines and transformers to augment existing facilities especially for those feeding major load centres in the light of anticipated sitting of new power stations; and (vii) to provide access to gas to facilitate the emergence of gas-based/-using industries more broadly in the country. THE PROJECT WAS SCOPED TO COVER: Gas and Power Market Demand and Supply: An integrated study of the power supply requirements and forecasts (at least 20 years) to guide the likely locations of new power stations and the construction cost of new distribution and high voltage transmission lines; Gas Pipeline Engineering Study: this was to determine various routing options with related economic and engineering feasibility; Basic Engineering Designs: Preparation of basic engineering designs, implementation plans and preparation of tender documents in accordance with World Bank guidelines for large civil works contracts, with consideration to be given to breaking the tenders into manageable packages to assure early project completion; Pipeline Security Framework and Strategic Plan: development of a security plan to protect the operations of the existing and proposed network of pipelines. The security plan was also to include evaluation of options for adequate gas storage facilities at strategic locations along the pipeline route to ensure stability of gas supply in case of any disruption in the main gas pipeline supply; Integrated Impact Assessment: conduct of a baseline Environmental Impact Assessment (EIA) along the proposed pipeline routes; various tariff levels to assure economic rates of return ranging from 15% - 30%. As is always the case with such large, long-term projects this one evolved and changed shape. The challenges prompted the FGN to develop and implement the Nigerian Gas Master Plan (NGMP). Through the NGMP the FGN developed a deliberate interventionist policy aimed at leveraging the multiplier effect of natural gas in boosting the domestic economy. Given the rapid pace of growth of the Nigerian power sector, the short term focus of the NGMP was to address barriers that had hitherto stunted the growth of the domestic supply. These included: Gas Pricing Reform: hitherto, gas prices for the domestic market failed to reflect its true cost and were unsustainable for supply growth. The FGN introduced a new pricing arrangement for the domestic market, which provided for a more cost reflective tariff and stronger incentives for investment in the domestic sector. Contractual Frameworks: hitherto, gas was supplied to the power sector through Nigeria Gas Company (NGC) and there was no direct contractual relationship between the consumer and the gas supplier. NGC also served as the transporter, hence it offered a bundled service to the consumer. However, this service was not backed by a robust contractual framework, as gas was supplied on a best endeavour basis, as NGC had no control on supply. This arrangement was not bankable. A key element of the reform was the revision of the contractual framework to ensure bankability. The new arrangement involved the execution of a Gas Supply Agreement (GSAA) between Given the rapid pace of growth of the Nigerian power sector, the short term focus of the NGMP was to address barriers that had hitherto stunted the growth of the domestic supply Project Cost Estimate: prepare of a cost estimate (capital and operating) for the gas pipeline infrastructure from the gas inlet point(s), including the storage facility requirements from the supply points to the IPP locations; Economic and Financial Analysis: the determination of the gas supplier and the purchaser, accompanied by a Gas Transmission Agreement (GTA) with NGC. In order to streamline the operations of the sector a gas transmission network code was developed and issued. The network code complements the GTA and is aimed at managing 38

5 access and transmission through the gas pipeline network. The new arrangement is more bankable as the supplier is better placed to assure supply whilst NGC is best suited to assuring transmission. In order to support the efficient One of the goals of the GECSP is to support reform efforts aimed at improving Tanzania s business enabling environment and enhance private sector development. It specifically targets interventions geared towards improving the performance The GACN was setup to facilitate gas purchase and supply agreements, between the IOCs and successor generation companies and navigate the complicated logistics of gas delivery. The GACN acts as an intermediary between buyers and sellers of gas. execution of agreements, template agreements were developed and these allow for speedy customization for each transaction. Domestic Supply Obligations (DSO): another major interventionist aspect of the reform was the introduction of a regulatory framework through the DSO. This mandates all suppliers to set aside a certain amount of gas development for the domestic market in order to address the acute shortage of gas for the power sector. The DSO has played a major role in the increasing growth in domestic supply. Establishment of the Gas Aggregation Company of Nigeria (GACN): The GACN was setup to facilitate gas purchase and supply agreements, between the IOCs and successor generation companies and navigate the complicated logistics of gas delivery. The GACN acts as an intermediary between buyers and sellers of gas. Hitherto, potential consumers experienced difficulty in accessing gas. GACN now acts as that contact, thus facilitating rapid access to gas under the DSO scheme. It is self-evident that the particular challenges which face Tanzania will be different (whether in nature or scope) from those with which Nigeria has grappled as it has integrated gas into its energy mix. But equally it must be acknowledged that there is advantage in being able to look at the paths which other countries have followed as they have worked to optimise the use of gas. Furthermore, investors should be encouraged by the World Bank s and African Development Bank s (AfDB) support of reforms in Tanzania s energy sector, particularly by way of AfDB s recent assistance through the Governance and Economic Competitiveness Support Programme (GECSP). of the energy sector which is critical to attaining accessible, reliable and affordable power in Tanzania. The GECSP specifically aims to improve the power sector by financing much needed technical assistance (through loans and grants) in order to help the Government implement the following: adoption of an energy sector reform roadmap (by June 2014); studies to inform the new structure of TANESCO and TPDC (the current form of the proposed National Oil Company) and the energy sector reform roadmap (by June 2014); and performance / management audit of TANESCO (covering financial management, procurement systems and governance aspects - by June 2014). It is evident that that the next six months should, in theory, mark a turning point in the country s energy sector through (a) the country s affirmation of the proposed LNG project and (b) what it is hoped will be a robust legislative and institutional framework to ensure the bankability of downstream projects in order to dramatically expand capacity. What will be of further interest will be the extent to which AfDB and the World Bank are prepared to replicate their financial support of the Nigerian power sector; i.e. will partial risk guarantees be offered in order to encourage private investors to increase generation capacity? The reform of the energy sector along with the long-awaited National Gas Utilisation Master Plan and Natural Gas Act can hopefully ensure that Tanzania kwanza becomes a reality, incentivising investment through the creation of clear institutional roles, efficient contractual arrangements and secure and adequate gas infrastructure. 39