LOCAL PARTICIPATION IN THE OIL & GAS INDUSTRY IN TANZANIA BY DR. REGINALD A. MENGI, CHAIRMAN
TANZANIA PRIVATE SECTOR FOUNDATION
24TH OCTOBER, 2013 DAR ES SALAM
1.0 INTRODUCTION
We all agree on the necessity for local participation in the emerging oil and gas industry in Tanzania. The critical question we need to ask ourselves is what will pave the way for such participation? In the view of Tanzania Private Sector Foundation, it must be a deliberately designed policy that ensures guaranteed levels of local participation in the industry.
If there is much that has been said recently about local participation in the Oil and Gas industry it is because of TPSF's fear that history may repeat itself; in that, a century after gold and diamond reserves were discovered in Tanzania, to this date, the majority of Tanzanians are only playing a marginal role – as artisan miners; low and mid-level employees or suppliers of minor goods and services to international mining companies. Accordingly, concrete steps by the Government and Private Sector are necessary to demonstrate that this phenomenon shall never repeat itself.
TPSF is not in doubt that the Government recognizes the necessity for the empowerment of Tanzanians. This is clearly contained in the policy the Government articulated in its National Economic Empowerment Act of 2004 that: "Natural resources, trade, agriculture industry and other economic opportunities must generate wealth, boost the small and medium enterprise sector, in order to bring about a sustainable affirmative action and facilitate genuine and positive economic empowerment to the population of Tanzanians". It further states that: "Economic empowerment is a central means for bringing about economic growth and social.
justice among our people that is necessary for the promotion of peace, tranquility and social stability that has characterized our society". Unfortunately, the National Economic Empowerment Act was not implemented in a manner that would have empowered Tanzanians in the mining sector. In consequence, Tanzania should not now shy away from this golden opportunity which will wipe our years of agony caused by the mining sector in this country. We have been blessed with a second chance and let us fully utilize it to create sustainable local participation that will benefit future generations.
2.0 ECONOMIC EMPOWERMENT OF TANZANIANS IN OIL AND GAS INDUSTRY
The overall empowerment of Tanzanians to participate in the oil and gas industry is therefore crucial and in line with the National Economic Empowerment Policy, 2004 and the National Economic Empowerment Act, 2004. The objective is to ensure that we adopt inclusiveness approach to enable Tanzanians and Tanzanian firms to partner with foreign firms at all levels of the value chain – upstream, midstream and downstream.
Tanzania Private Sector Foundation therefore advocates for the enforcement of the National Economic Empowerment Act 2004 which calls for affirmative action to enable Tanzanians to participate effectively and productively in the oil and gas sector rather than remaining spectators. TPSF notes that the Government has developed a natural gas policy which focuses on regulating the mid and downstream activities but it has no link to the National Economic Empowerment Policy.
This is a serious weakness that should be addressed quickly by all of us. It is important to note that the country has no policy to regulate UPSTREAM development in the gas industry, in particular, the allocation of blocks, which would take into account the provisions of the National Economic Empowerment Policy, 2004.
3.0 THE EXPERIENCE OF OTHER COUNTRIES
Many countries, including Mozambique, Uganda, Angola, Libya, Algeria, Ghana and Saudi Arabia are now seeking to create more in value through local content. The most successful countries that have achieved a national content level of 40%-80% include Brazil, Malaysia, the United Kingdom, and Norway. Many others which are struggling to reach 25%-30% include Nigeria, Angola, Trinidad and Tobago, Saudi Arabia, and Libya.
3.1 THE CASE OF NIGERIA
In 2010 the Nigerian National Assembly enacted a law titled "Nigeria Oil and Gas Content Development Act" whose main objective is to ensure Nigerians participate effectively in the oil and gas industry. Section 3 (1) of the Act states that Nigerian Independent operators shall be given first consideration in the award of oil blocks, oil field licenses, oil lifting licenses and in all projects for which contract is to be awarded in the oil and gas industry subject to fulfillment of such conditions as may be determined by the Minister.
As a result of the affirmative action, to-date Nigeria has allocated 52% of the 173 awarded blocks to Nigerians and 48% have been given to foreign companies. Nigeria has discovered a total 388 oil blocks. As a result of this move Nigeria has created wealth owned by Nigerians which can be confirmed by the recently published list of 30 billionaires of which the top three are all in the oil and gas business but the list has 14 billionaires investing in oil and gas industry.
3.2 THE CASE OF BRAZIL
Brazil has a law which: aims to grow the local labour market, technology, and its competitiveness; requires oil and gas
companies to contract with Brazilian suppliers; and has a minimum local content requirement for exploration projects of 55%. Ultimately, the local content policy framework in Brazil, due to the Government's strategic push and leadership, has seen policies converted into actionable and measurable impact and the local supplier force has grown extensively over the last three years.
3.3 THE CASE OF ANGOLA
In its effort to ensure local participation by Angolan suppliers in the oil and gas supply chain, Angola has identified a number of products and services which Angolan suppliers have competence in and this group has been categorized as opportunities for Angolan suppliers ONLY.
Because foreign companies have many advantages over local companies, what Angola has done is to stipulate that when a local company can meet the time, quality and quantity requirements but is higher on price, they will be given preference if they are 10% within the required price. 10% may be too low but at least Angola has been specific in its stipulation.
4.0 PARTICIPATION OF TANZANIAN LOCAL FIRMS – A PROPOSED CONTRACTUAL STRATEGY FRAMEWORK
To maximize Tanzanian Content in the development of gas projects, a list of broad contract categories have been identified. Local content must aim at increasing local participation and develop local capacity towards international competitiveness. Thus, local content development on the back of contracts has been identified as the best model to drive capacity building and local participation. This gives an overview of a strategic case and proposed contractual framework which will guarantee that local suppliers in Tanzania participate in this new market.
Invitations to Tender need to create an environment promoting local participation. The following activities that will potentially take part in Tanzania need to be considered for local participation:
o For survey service-based contracts (Environmental Impact Assessment, Geotechnical/Geophysical Surveys and Metocean Data).
o The Government should identify individual areas of expertise that are required as part of FEED and assess in which of these Tanzanian firms have competence (i.e. risers, flow lines, PLEMs, umbilicals, manifolds and foundations, subsea control system and Xmas trees). All FEED work carried out shall include the use of all available materials, facilities and installation equipment locally available in Tanzania. This will be a crucial evaluation criterion in all FEED contract packages.
o When it comes to Detailed Engineering Design work, the international contractor should go into a joint venture/partnership with competent and capable Tanzanian engineering companies with a capacity to deliver on small elements (work packages) that can be locally executed. These must however be domiciled in the country. These alliances must show clear evidence that they support technical growth and improve their capacity to compete for the contracts.
o Other areas of focus that the Tanzanian Government must mandate 1st tier construction contractors to sub-contract to Tanzanian firms must include roads, mechanical and electrical works, painting, insulation, machine operation and building services.
o The Government must require suppliers of subsea hardware to carry out their Systems Integration Tests in Tanzania.
o Fabrication has been identified in several countries as a major area of focus in Local Content Development. The Government should ensure that piles, decks, anchors, buoys, jackets, pipe racks, bridges, flare booms and storage tanks will be fabricated locally as far as possible. It is said to take at least 5 years to develop a fabrication yard and competence from scratch. With the production date set for 7 to 10 year timeline, this calls for fabrication development initiatives to start YESTERDAY. We are already running behind.
o Like Norway, Tanzania should require for Research & Development Centers be established in Tanzania. This will ensure that technology transfer takes place.
The emphasis therefore is towards knowledge transfer so that in future these firms can compete independently and even act as mentors to other Tanzanian companies that lack technical capacities to be globally competitive.
Tanzania signs PSA with the operators but it is not the operators who do most of the work. A big chunk of the work is being done by what is being referred to as Tier 1 Suppliers. How then does the Government ensure that these Tier 1 Suppliers do create an environment that accommodates local participation? It is a common practice in countries where is a local content policy that it is the operators who have the responsibility to ensure that Tier 1 Suppliers do create this environment. Operators are made accountable for their Tier 1 Suppliers.
5.0 ISSUE OF CAPITAL AND EXPERTISE
Tanzanians fully recognize that exploration and extraction of minerals be them gold, oil or gas requires "rare skills" and vast amount of capital. This creates considerable reliance on foreign investors. On the other hand, Tanzanians have their vast mineral resources, which the foreign investors do not have and at this time Tanzania offers an attractive climate for their investment. Thus, Tanzanians (not only through their Government but also through their Private Sector) would be bringing their mineral resources (gold, oil, gas etc.) to the table and, likewise, the foreign investors bring their "rare skills" and vast amount of capital (which is what they have) to the table in agreed proportions. This is what partnership is all about! So, this notion of Tanzanians being weak and lacking capital is imaginary and should be discarded. The minerals are a huge part of the capital.
The issue is how the Tanzania Private Sector can be facilitated to access the mineral resources of their country. Partnership between Tanzanians and foreign investors can and should be facilitated by the Government through its declared policy of empowerment and affirmative action (National Economic Empowerment Act no. 16 of 2004) and our oil and gas sector presents historic opportunities. The most important factor is for Tanzanians to have the capacity to effectively negotiate with foreign partners to ensure balanced partnership agreements.
6.0 THE ISSUE OF TPDC SHARES FOR TANZANIANS
There was an announcement at the Oil and Gas conference by the Honourable Minister of Energy and Minerals that Tanzanians shall participate through the purchase of TPDC shares when such shares shall be offered to the public. The major shortcoming of this arrangement is that it will have denied Tanzanians opportunities to develop the capacity that will enable them to participate in all aspects of the developments of the sector and internalize such capacity in the domestic private sector for present and future generations.
7.0 WHOM TO EMPOWER
A question raised most – both within and outside the Government – is how the Government will choose who, among Tanzanians, it shall empower. There may well be some merit in this question. Yet, this question arises more when it comes to allocation of upstream oil and gas operations to Tanzanians. Less pronounced, however, is that in addition to Public Procurement Policy (which includes some preferential arrangement to local suppliers), the Government has already stated its commitment to ensure that the "midstream and downstream" gas development shall be dominated by Tanzanian Private Sector.
In consequence, there is no reason why the criteria applicable to choose the Tanzanians for empowerment in "midstream and upstream" oil and gas operations, should also not apply to choosing them for allocation of oil and gas blocks. It may be fair to add that Tanzanians aspiring especially for oil and gas blocks should have entities based on an inclusive (rather than an individual) shareholding structure with demonstrated capacity for partnership with foreign investors. It is important to emphasize two things: countries benefit more in terms of technology and transfer of skills if foreign investment involves joint ventures with local companies and secondly, foreign investors are more attracted to a country where local investors have a reasonable stake in their economy.
8.0 CONCLUSION
What makes gas a curse is the policies not the product itself. Taking loans on future earnings is one of the traps. Tanzania should not fall into this trap of being offered huge loans that it can use its future earnings from this industry as collateral. We want the earnings of this industry to be used to develop and build Tanzania into becoming a Middle Income Country and most importantly benefit the future generation.
TPSF is known for its particular interest in seeing local participation in exploration activities and owning blocks. It is through the local content policy that this can be achieved. An example of how it can be done is through local companies forming Joint Ventures with a Tier 1 Supplier. This will automatically reduce the risk factors and give local participants a stake in this crucial resource.
There are no two countries or situations which are exactly alike; but if history and experience is of any guide, one thing is abundantly clear: countries that have succeeded in creating prosperity for their people through their mineral resources (Botswana, Norway, Malaysia to mention a few) are those that not only ensured maximum local content in the process, but also empowered their people to effectively participate in the upstream, midstream and downstream of the resource development.
Additionally, these countries observed a high level of transparency in the development and management of their mineral resources and accountability to their people of their actions pertaining to their mineral sector. The choices for Tanzania are clear! Tanzania should emulate the winners to ensure prosperity for its people.
THANK YOU FOR YOUR ATTENTION
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