Tanzania changes the terms of its oil and gas contracts

Dodoma, Tanzania – Tanzania has changed the terms for companies signing agreements for exploration and production contracts for crude oil and natural gas.

The new model production sharing agreement (PSA) has tougher terms and conditions entailing payment of higher fees by companies as the country has discovered massive quantities of natural gas in offshore exploration areas.

The 2013 model issued by the Tanzania Petroleum Development Corporation (TPDC) outlines capital gains tax obligations and a new royalty structure. It requires firms to make a one off payment (signature bonus) of $2.5 million on signing of the agreement and pay at least $5 million when production starts.

Companies will pay the government a royalty rate of 12.5 per cent of total oil and gas production for onshore or shallow water operations and 7.5 per cent for deep water offshore. The previous deep water gas rate was five per cent.

“Onshore areas include shelf up to water depths of 500 metres and offshore areas include water depths beyond 500 metres,” said TPDC’s managing director Yona Killagane.

He said exploration rights and other privileges will not be transferred directly or indirectly without a written consent from the Minister of Energy and all transactions shall be subject to capital gain tax when allowed.

Negotiations between a company licensed in Tanzania with a non-affiliated entity will be subject to transfer or assignment fee payable to the government at rates corresponding to the value of the consideration.

For every dollar of the first $100 million, the fee will be one per cent. For every dollar of the next $100 million, the rate will be 1.5 per cent and for every dollar thereafter the fee will be two per cent.

The Minister for Energy reserves the right to employ the services of an independent consultant mutually agreed on, to carry out an independent valuation of the transaction.

Final determination of valuation shall remain with the minister and will be subject to the applicable rates. The company will be required to show the minister the third party has technical competence and financial capacity.

TPDC said a company shall apply for consent at least 90 days before the proposed effective date of the transfer and the application has to be submitted with a valuation and all material terms of the transfer.

Resolving disputes

The new PSA requires TPDC with each company to periodically meet to discuss  conduct of operations envisaged under the signed agreement  and efforts made to settle any arising problems amicably.

“If any dispute or difference should arise in relation to or in connection with or arising out of any of the terms and conditions of this agreement, the same shall be resolved by negotiations between the parties,” said the new PSA.

If an agreement is not reached, either party will have the right of dispute or difference to be settled in accordance with the International Chamber of Commerce Rules of Conciliation and Arbitration.

Prior to an arbitration, the parties may resort to the opinion of a mutually agreed on expert. The expert will be required under the provisions of the PSA to notify both parties of his or her opinion within 30 days.

“The place of arbitration shall be Dar es Salaam. The language used shall be English, the applicable law shall be that of United Republic of Tanzania and the provisions of this agreement shall be interpreted in accordance with that law,” says the new model document.

It is expected that during the arbitration process, the contractual obligations of a company licensed to operate in the country and TPDC will not be suspended.