4th Tanzania Offshore Licensing Round and New Model PSA

State-run Tanzania Petroleum Development Corporation (TPDC) has introduced a new model production sharing agreement (PSA) that means oil companies seeking to explore Tanzania’s oil and gas prospects will be subject to tougher fiscal terms that were prescribed in the 2008 model PSA.

The East African nation estimates it has more than 40 trillion cubic feet of gas and several major firms including BG Group and Statoil are already active there. As has been the case with other countries in the region however, increased activity has placed pressure on the Tanzanian government to deliver tangible benefits to its people in the short-term. The new model PSA was introduced following the launch of Tanzania's new licensing round for seven deep sea offshore blocks and the North Lake Tanganyika block.

The 2013 PSA includes a signature bonus of $2.5 million and a production bonus of at least $5 million. Royalty rates have been increased to 12.5 per cent of total oil and gas production for onshore or shallow operations and 7.5 per cent of total deep offshore production.

The 2013 model PSA also notes specifically that any assignment or transfer under the PSA shall be subject to the relevant taxation law. Although companies operating in Tanzania are subject to the 20 per cent corporate tax rate, the specific reference in Article 13 of the 2013 PSA means that capital gains tax will apply to energy firms wishing to transfer licence interests.

A full copy of the 2013 PSA may be found here and a summary of its terms are as follows:

• Parties: Government of the United Republic of Tanzania, TPDC and the relevant oil company.
• Contract Area: Each PSA can cover more than one exploration licence.
• Term: Exploration up to 11 years divided into an initial and two renewal periods of 4, 4 and 3 years respectively. Appraisal normally 2 years but more if necessary. Development and Production - 25 years with the possibility of an extension for a further 20 years.
• Relinquishment: 50% of the retained contract area upon each renewal of the exploration period. However, in special circumstances a different rate can be negotiated.
• Participation: There is an option for TPDC to participate in development where it contributes to post-exploration expenses. The PSA allows TPDC to negotiate a participating /paying interest of 20% (excluding exploration (and appraisal) expenses). TPDC's profit oil share will then be increased by the rate of the participating interest, and the oil company's share will be reduced accordingly.
• Right to Export: The PSA is vague as to how much oil or gas may be diverted to the domestic market saying only that: “TPDC and the contractor shall have the obligation to satisfy the domestic market in Tanzania from their proportional share of production”.
• Natural Gas: The PSA envisages good faith negotiations upon the discovery of gas in order to reach an agreement on its development, production and sale. In appropriate circumstances the Minister will extend the appraisal period.
• Assignment: The oil company may freely assign its rights and obligations to an affiliate. Assignment to third parties requires the prior consent of government, not to be unreasonably withheld. (Several such assignments have in fact occurred in recent years).

The CMS team has extensive experience in the African Oil and Gas market and would be happy to discuss any issues you may be facing in Tanzania or indeed across the entire continent.