To Get the LNG Project Right, Avoid Mistakes Made in Mining

The prospective LNG project is a low-hanging fruit compared to the new constitution agenda if President Samia is looking for initiatives that will cement her legacy.
Dastan Kweka24 April 20215 min

About three weeks ago, President Samia Suluhu Hassan delivered a wide-ranging speech and clarified her government’s position concerning a long-standing plan to construct a Liquefied Natural Gas (LNG) plant in Lindi, a coastal town in southwestern Tanzania. The policy guidance she offered to the Ministry of Energy and the Tanzania Petroleum Development Corporation (TPDC) was clear – avoid unnecessary delays, work with industry actors that are willing and committed, and offer realistic terms. Just like any other senior political leader, the new President must be working to identify public initiatives that will cement her legacy, and the prospective LNG project is a low-hanging fruit if compared with, for instance, the new constitution agenda.

There are many reasons why the LNG objective has not been realised, and lack of political will isn’t one of them. The outbreak of violent protests in Mtwara in late 2012 and early 2013 complicated land acquisition and heightened political risk. The power transfer in 2015 and the initiation of a broad and lengthy extractives sector reform in 2017 made the policy environment unstable. The TPDC Executive Director James Mataragio was suspended in August 2016 and reinstated in July 2019. As such, the government agency in charge of the project was without its most important leader – in terms of seniority, knowledge, and experience – for about three years. It is, therefore, not surprising that the Controller and Auditor General (CAG) reports for 2019/2020 carry a daunting indictment of TPDC’s performance between 2017 and 2020. The report points to very poor implementation of the agency’s work plan.

Global energy dynamics and variation in risk appetite levels within the community of Oil and Gas Companies interested in Tanzania’s LNG constitute a set of other factors that have contributed to the delay.  However, domestic factors appear to have been the most potent –, and there is some blame to apportion. Mtwara protests could have been avoided, especially if the government had undertaken enough consultations in the period leading up to constructing a pipeline. The tone of the 2017 extractives sector reform effort was unnecessarily hostile, even though it taught us that the industry, once hunkered down, is likely to find a solution, no matter how insurmountable the challenge might appear.

Mistakes in the mining sector

President Samia’s remarks on LNG have been celebrated by a section of stakeholders and interpreted as a call for, and the need for, speed. While it is true that there is an imperative for speed, the framing underpinning the speed argument – that there is a global competition in which Tanzania is about to lose a once in a lifetime opportunity, and that the country needs to offer ‘competitive’ and ‘stable’ terms – is quite familiar, and accounts, to a large extent, for the fundamental mistakes that the country made in the mining sector in the 1990s and early 2000s.

As the country sought to embrace political and economic liberalisation at the turn of the century, with the intention of improving the inflow of Foreign Direct Investments (FDI), its socialist past became a strategic liability. A strong narrative developed – spearheaded by a coterie of influential International Financial Institutions and their clients – that the local legal framework in place was weak and that the country’s socialist past meant that investors would face a higher risk exposure. While this assessment was correct, its proponents used it as a basis for demanding and justifying overly generous terms, supposedly as compensation for accepting a disproportionate amount of risk. This sort of framing of the country’s position that, to a large extent, resulted in contracts with inequitable fiscal terms and an inability to correct them due to inimical stability clauses.

The tense extractive sector reform effort that began in 2017 constituted an attempt to, primarily, correct unfair deals struck in the 1990s and 2000s. In doing so, mistakes were made, including the adoption of a provision that momentarily blocked access to international arbitration. Nevertheless, the whole experience reinforced the need for the government to improve its capacity to generate, store and analyse quality historical data, undertake comprehensive risk assessments, and carry out effective cost audits. The recent CAG report has revealed that there is still a great deal of reliance on industry data and laxity in verification. The Ministry of Energy and that of Minerals must coordinate closely in this area and encourage well-defined cooperation between the Mining Commission and the Petroleum Upstream Regulatory Authority (PURA). Besides, the lingering controversy over the equity of remuneration of the Mining Commission staff needs a quick resolution to avoid unnecessary distraction.

The LNG faces significant land conflict risks. Over-ambition on the government’s side led to the announcement in 2015 that nearly nineteen thousand hectares had been earmarked for the project and that land transactions in the designated plot in the Lindi region were no longer permitted, even though the land needed for immediate use was about two thousand hectares. Local communities in the area have had to endure years of uncertainty, as compensation within the two thousand hectares area has taken more than six years to materialise. The fate of the rest – those occupying the area meant for an industrial park – remains unknown. There is evidence, including my own research, that land-based effects played a crucial role in fueling the 2012/2013 violent protests in Mtwara. Project proponents need to look beyond land acquisition risks and pay attention to potential land-based effects and their implications on the project’s risk profile.

Since TPDC has the mandate to coordinate negotiations with potential LNG investors, it must engage them from a position of strength and reject clever attempts to force it into a position of weakness. The President’s directive about the need to take the project forward and in a manner that avoids unnecessary delays should not be interpreted as a ticket for making unrealistic concessions, just for the sake of demonstrating progress. Twiga Minerals Corporation (TMC) is a clear testament to what the country can achieve if it is willing to trade speed for efficiency.

Dastan Kweka is a freelance analyst based in Dar es Salaam, Tanzania. He can be reached through his e-mail address kwekad@gmail.com, or you can follow him on Twitter at @KwekaKweka. These are the writer’s own opinions, and they do not necessarily reflect the viewpoint of The Chanzo Initiative. If you’re interested in publishing in this space, contact our editor at editor@thechanzo.com.

 

Dastan Kweka

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