Tuesday, 28 February 2017

Hoima –Tanga oil Pipeline: was Tanzania short changed?

A Tullow Rig in Paipai- Kenya

DESPITE political talk to the contrary, it seems, Tanzania could end up with the short end of the stick in this project.  There is no clear, definable and quantifiable benefit for Tanzania, political rhetoric notwithstanding. The Tanzanian President was recently quoted as bragging that Tanzania will have three fuel pipelines including the Mtwara- Dar-es-salaam LNG pipeline, the Tanzania- Zambia white oils Pipeline and  now the Hoima- Tanga pipeline. 
 The cost-benefit analysis of the project does not support President Magufuli’s optimism.  However, Magufuli is ardent at jumping before looking. While the need and justification for the two pipelines is not hard to gauge, it is difficult to understand Tanzania’s stake in the third pipeline.

She has no oil so far and the possibility of finding oil looks dim so far. What is the Oil pipeline for? Will she invest or risk tax payers’ money in that project? Can it be justified in terms of economic gains? How will it contribute to Tanzania’s economic growth and welfare? How significant is that contribution? What are the Opportunity costs? Have they been quantified?

Uganda expects to make US$43 billion over the next 25 years. That is a cool US$1.72 billion a year which could be invested elsewhere in the country.  In fact, reports have it, Uganda is planning to mortgage the oil revenues to China for an SGR. 

Total SA has gained an extra 567 million barrels in Hoima fields. Assuming a fixed US$60 per barrel over the next 25 years, that is an additional US$34.02 billion. If you add the US$34.02 billion that was her share before she bought out Tullow oil, then Total SPA will generate some US$68 billion over the next 25 years other things being the same. And for this Total oil will sink any amount below US$10 billion.
Can Tanzania quantify her benefits in a similar fashion? Having waived VAT, what else is left for her?  Just being a landlord? How much rent will she get since she cannot charge for transport of crude per barrel. If Uganda, which owns the oil will earn only US$1.72 billion a year, how much will Tanzania earn as a Landlord? How significant is that to the economy?

In its previous life, the Hoima- Lamu pipeline was to be run by a SPV, Special Purpose Vehicle, which was to charge for transporting crude per barrel. That would have meant that the two countries were to invest in the pipeline which was expected to cost a pricey US$5 billion. This leads to the next question: was Total spa, “allowed” to build the pipeline or was it “contracted” to build it? Given that Tullow oil has surrendered the huge chunk of its price, "$700 million in deferred consideration which will be used by Tullow to fund the company's share of the costs of the upstream development project and the associated export pipeline project," it seems that the pipeline is purely owned by the private sector.

The structure of ownership of Hoima Oil Project changed in January 2017 when Tulllow oil Plc sold its 21.57 stake in the fields to Total SPA for $900 million. Now Total is the majority shareholder with a 54.87 Per cent stake. China National Offshore Oil Corp CNOC owns 33.3 per cent stake while Tullow, the minority stake holder holds 11.7 per cent.  If this will be the structure in the upstream operations including the pipeline, then Total will dictate terms. It cannot be “contracted” to build that which she owns.

 Reports indicate that the pipeline’s construction will be financed through equity and debt.  This means that the largest shareholder in the pipeline deal is still Total spa with 54.87 say in the matter of contracting the debt because they are expected to bear the greater burden. This is the expected structure in the downstream operations: Total 54.87; CNOOC 33.3; Tullow 10; Uganda 2 per cent; Tanzania? 

In the absence of any visible economic reasons, the view is gaining currency that the shift was a scheme to push Tullow out of Uganda by the French oil Major, Total. This is clear from Tullow’s stand on the shift of the export pipeline from Kenya to Tanzania. In March 2016, Tullow told Bloomberg that the shift to Tanzania “will have enormous opportunity cost.”  To them it was either “one joint pipeline through Kenya, or two separate lines,” Tim O’Hanlon, the London-based company’s vice president for African business told Bloomberg.

The hardline stand was not surprising for Kenya is the bedrock of Tullow oil’s business in east Africa. Her stock of recoverable crude is growing by the day. Some reports indicate that she could end up with 1.6 billion barrels in Kenya, making Kenya a more attractive proposition than Uganda where her share was slightly more than 500 million barrels. Her departure was therefore imminent.
 It is not clear whether Total SA, which was farmed into the Hoima-Oilfields by Tullow oil turned into a corporate raider. But there are fears it did, analysts say.

 After buying a third of the stake in Hoima oilfields, she went on to engineer a feasibility study of questionable competence which bad mouthed the Kenyan route causing Uganda to shift to the Tanzanian route.  That study apparently left the other partners out.  A part from irritating Kenya, Total Spa also gained by buying Tullow oil out, she increased here share of crude oil in Uganda to more than a billion barrels.

The buyout also saved her face for engineering the shift of the pipeline from Kenya to Tanzania which was becoming awkward as she had not found any oil in Tanzania where she has exploratory Licenses. Without oil in Tanzania, say industry analysts, raising the US$3.5 billion meant for the pipeline was tricky given that one of the partners opposed the new route.

This divergence of interests meant the time for divorce had come. That is how the deal to sale Tullows’ stake to Total was mooted and solemnized. Total will buy out Tullow stake for a whopping $900 million which is sweetened by the fact that it was staggered over time. Pay $100 million cash, another $50 million after the deal is approved and $50 million at the start of pumping.  In the meantime use $700 million to finance our stake in developing upstream infrastructure including the pipeline.

Analysts say that Tullow chose to protect its interests in Kenya where she has huge stock of recoverable crude – going to 800 million barrels than going the Tanzania route with its share of 567 million barrels. The Uganda oil stock is shared equally between, Tullow, Total SA and China National Offshore Oil Corp CNOC. The stake would fall further when the Uganda exercise its right to share in the Oil. 

That left the choices stark- she has to stand with Kenya where her interests are larger than Uganda, say analysts.  A week after the announcement of the sale of nearly 22 per cent stake in Uganda, Tullow hit the headlines with a find of another 50 Metre thick layer of recoverable oil at Erut-1 in Kenya raising her stock and prospects of a further increases.

  The apparent win-win situation is corporate myopia which left a bitter taste in some mouths. The diplomatic relations between Kenya and Tanzania were seriously hurt and could take a long time to heal.

 Further, by bad mouthing Kenya, Total SA has permanently locked itself out of the Kenyan Exploration scene. Analysts say, it will take a miracle, for Total to be allowed to explore for oil and gas in Kenya or even buy a stake in exploration companies in Kenya.

Kenya decided to go it alone and build a pipeline from Lokichar basin to Lamu port which will cost US$2.1 billion. The pipeline  will be financed by the joint Venture companies- Tullow, Maersk, and Africa oil and the Kenya government in equal share that 25% a piece.

 The firm is already preparing to pump about 2000bpd on experimental basis from July this year. Also to start about that time is the preliminary designs for the oil pipeline.

Monday, 20 February 2017

President Magufuli is Tanzania's Major risk factor

 It is rare for an elected government to become a stability risk for any country. However, in Tanzania, east Africa, the government, particularly the president is slowly assuming that dubious distinction

This is as a consequences of his disregard for due process and the rule of law in his governance style. It is becoming increasingly difficult to gauge the purpose of some of his actions for they appear to work against the country’s interests. Some actions even contradict the country’s economic and political goals.

For instance, transferring government funds from the private Commercial banks is reasonable if the government wants to spend the money and does not want to be tied down by investment contracts. However, it becomes a hurdle to economic activity if it is just parked at the Central Bank and the government begins to show a budget surplus because it did not spend the money. 

Economic growth is driven by flow of credit and money circulation in an economy.  Credit to the productive sectors is generated by savings in commercial banks that trade in money.  The central Bank does not trade in money and when the government is not spending the money in its account, the money is withdrawn from the economy. This leads to low circulation of money and therefore low demand even for local products. Low demand means low products and contraction of the economy.

The most telling contradiction of this move is it contradicts the government own stated goal of spreading wealth in Tanzania. Wealth is spread through consumption of goods and services. Without these, there cannot be any transfer of wealth.  

The financial sector in Tanzania is weak. This is why they need support from the government in terms of deposits because, some government institutions, such as the retirement benefits schemes have a lot of cash lying idle in bank vaults. 

This is the money that when deposited with commercial banks, generate interest for the depositors and the banks  as the banks also sell -on profit-to those looking for credit.  One of the consequences of the withdrawal of money  is that commercial banks in Tanzania are posting losses due to credit squeeze and bad debts. 

The banks' deposits have declined after the loss of government deposits. The largest private bank, CRDB, for example, posted a loss of Tsh1.9 billion ($1 million) in the third quarter of this year. Twiga Bancorp also registered a loss of Tsh18 billion ($8.26 million) over the past year. These are indigenous banks whose fall could have serious ramifications of the economy.

The Central Bank of Tanzania is itself convinced that danger is looming.  It recently said in a statement, that weakness in the financial sector “poses a systematic risk to the stability of the financial system; the continuation of Twiga operations in its current capital position is detrimental to the interest of its depositors."

To avert risks associated with tight monetary policy, the government must spent taxes on goods and services. But the government is proudly announcing savings made due to certain restrictions. 

Restricting wasteful spending  such as foreign travel is good but the money so saved musty be spent on other sectors that buoy economic activity.

 Ironically, the government is not spending.  In the third quarter last year, which was the first quarter of the current fiscal year, the government ran a budget surplus of over Tshs 300 billion (US$ 150 million). It also saved another $500 million from restricting foreign travel. That is a whole US$700 million lying idle in consolidated account.

Governments collect taxes in order to spend –not to save.  In fact government are famous for running budget deficits- that is they spend more than they collect.  This is because there is more demand for government services than the available resources. Saving nearly 10 per cent of a country’s annual budget suggest that the government does not need the taxes. It should therefore ease the tax burden so that, citizens can have more money to spend and keep the economy going.

Another contradiction is the rejection of electricity tariff increase yet the government seeks to borrow US$200 million to pay off Tanesco’s debt. We have reliably learnt that the government had earlier tried to borrow from the World Bank for the same purpose but the request was rejected. Analysts do not see the current application succeeding. The government’s argument in rejecting the increase is; such an increase would hamber the President Industrialisation drive which is pegged on availability of electricity.
 In November, Dangotte Cement Tanzania closed for 10 days over dispute over availability of energy to fire the plant.  Book publishers are crying foul over the ban to publish school text books while some of the large corporations in the country are reportedly slowing down on investment in Tanzania. Some are even said to be considering decamping from the country altogether.

The far-reaching cost-cutting measures announced by President John Magufuli's administration since coming into office in November last year have become widely blamed for causing a liquidity squeeze in the economy that appears to be getting tighter by the day.

This has in turn had a ripple effect on the private sector - the engine of the country’s economic growth - leading to a decline in revenues and profits for various small, medium and large-scale businesses across several industries and sectors, according to analysts. At least six companies are rethinking their business and investment plans others, some of the biggest foreign firms operating in Tanzania, or their local arms, in sectors including mining, telecoms and shipping.

The president assumed office in October 2015 and embarked on a sacking spree of public servants deemed corrupt or in efficient. This scares civil servants and is likely to reduce Tanzania into a country of sycophants who do what the President says even if it is wrong.

The first to suffer the President’s wrath was the Tanzania Ports Authority whose managers were removed under the pretext of fighting corruption. Within two months the port had lost 42 per cent of its business to other ports in the Indian Ocean sea board. While there many factors driving the scampering from the Port, the major cause was delay caused by fear to work by employees at the port.
 Others who have been sacked in a humiliating fashion include the director of the National Institute for Medical Research (NIMR) Director General Dr Mwele Malecela whose only crime was to report that the dreaded Zika virus had been detected in Morogoro and Geita regions; the CEO of Tanesco for raising power tariffs, among others.

  On the Political scene, the President has effectively silenced the opposition by banning political activity. The malicious nature of this abuse of power is the humiliating arrest of Opposition MPs rights at the gate of Parliament on flimsy criminal cases. One of them has been languishing in Jail for more than four months over a charge of incitement. This charge is boilable in Tanzanian law and a person no less a former Attorney General of Tanzania, who is currently an MP of the ruling party was public quoted for wisdom in arrest MPs.

From the foregoing, it is clear Tanzania is headed in the wrong direction. The President, who is the single major threat to the country’s stability needs to slow down. He must stand back and take stock before the country implodes.