Given costly mistakes made with Statoil/ExxonMobil…Tanzanian politician warns nations to make oil and gas contracts public

Sep 17, 2017 Features / Columnists, News, What Guyana needs to know about ExxonMobil, https://www.kaieteurnewsonline...as-contracts-public/

There is a stark similarity between the Government of Guyana and that of Tanzania. Both Governments are against the release of oil contracts.

In the case of Tanzania, it has been reported worldwide that the government had no intention of releasing its Production Sharing Agreement (PSA) which was signed with Statoil of Norway in partnership with USA oil giant, ExxonMobil. It was even speculated that there were even highly controversial amendments to the Agreement.

But when the PSA was finally leaked and it made its way into the Public Accounts Committee (PAC) of the Tanzanian Parliament, the damage was already done. In fact, the PAC found gaping holes in the contract as well as numerous instances for abuse which saw the nation losing out on billions of dollars in revenue.

Given the grave mistakes made by the African nation, the former head of the Tanzanian PAC, Zitto Kabwe, has issued a warning to all nations to ensure that their oil and gas contracts be made public.

Kabwe said, “I am stating the obvious; contracts must be made public. Today we are able to analyze key elements of the Statoil/ExxonMobil contract against the model contract because we have seen the addendum. What of those we have not seen?”

Kabwe said that his nation paid a terrible price for cloaking contracts in secrecy.

The politician said that some of the major problems identified in the contract were in relation to equipment leasing from related party, transfer pricing and capitalization (thin capitalization). He said that guarding against these issues is crucial so that Governments and the citizenry can be able to determine the actual costs to be recovered by the oil company.

Furthermore, Kabwe stressed that the leak of the natural gas terms agreed with Statoil/ExxonMobil presented a unique opportunity to examine how much more the nation could have benefitted from its considerable natural gas resources.

As it relates to fiscal challenges, Kabwe said that the nation suffered big time in the determination of Cost Oil/Gas. (Cost Oil simply speaks to the portion of revenue an oil operator is entitled to as compensation for incurred production costs. This is usually outlined in PSAs.) Kabwe noted that the determination of Cost Oil is one of the biggest challenges in developing countries.

In Tanzania, he said that there was “no ring fencing” of blocks and worse yet, there was no provision to guard against this in the PSA.

The politician said, “This means that costs incurred in one block can be recovered from another block. This is one of the challenges as it is easier for private companies to mount on costs and even declare losses from profitable blocks.”

Kabwe in his special report on this matter said that fiscal challenges face most of the developing world as well as resource-rich countries like Tanzania. He said that there are more challenges with equal weight to fiscal ones, including how to maximize backward and forward linkages in the economy.

The anti-corruption advocate said, “Studies conducted for the last 50 years have concluded that Foreign Direct Investment (FDI) flows into the primary sector (mining including petroleum) have a very small multiplier effect to the rest of the economy unless timely and decisive efforts are done through policy interventions to correct the situation.”

Kabwe continued, “Tanzania is currently experiencing this problem in the mining sector as no strategies were laid down to take at least an advantage on the backward linkages (inputs to the sector from local sources). In oil and gas, these backward linkages involve all elements of the supply chain ranging from drilling rigs to office paper clips.”

The politician stated the question of how Tanzania is going to be prepared on the petroleum front to ensure the economy benefits from investments in the oil and gas sector, is the most important issue which remains unaddressed by the nation’s policymakers as well as other stakeholders in the sector.

Kabwe said, “While trying to maximize revenue to meet its demand for development challenges, Tanzania must review its petroleum sector and enact legislations that will ensure more investments, stronger linkages and sustainable development through fiscal decentralization on the central government – local government relations…”

Moreover, the anti-corruption advocate added that the government of his country must start a process to establish a sovereign development fund for mining and oil and gas sectors in order to ensure a proper use of revenue accrued from the resources rent.

He said, “We need not to wait for another foreign investment backlash for us to take proactive measures in oil and gas sector development.”

One can only wonder if the Government of Guyana will pay attention to the lessons of Tanzania or go forth recklessly with blinders on.

(See full report by Kabwe here: http://www.thecitizen.co.tz/bl.../-/ZITTO-PSA-OIL.pdf)

Anticorruption advocate and former PAC Chairman of Tanzania, Zitto Kabwe

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In Tanzania, he said that there was “no ring fencing” of blocks and worse yet, there was no provision to guard against this in the PSA.

The politician said, “This means that costs incurred in one block can be recovered from another block. This is one of the challenges as it is easier for private companies to mount on costs and even declare losses from profitable blocks.”

Kabwe in his special report on this matter said that fiscal challenges face most of the developing world as well as resource-rich countries like Tanzania. He said that there are more challenges with equal weight to fiscal ones, including how to maximize backward and forward linkages in the economy.