Tanzania: Local Content And Domestic Supply Obligations Under The Tanzania Petroleum Act 2015

This Article is an abridged version of the article by Peter Kasanda and Kumara Mallikaaratchi

Clyde & Co. For the complete version of the article, please visit www.mondaq.com

Our energy briefing late last year highlighted the Petroleum Act 2015 (PA 2015), which relates to upstream, midstream and downstream petroleum activities. This briefing provides a more detailed account of the changes made specifically in relation to local content policies (LCP) and domestic supply obligations (DSO) in Tanzania.

PA 2015

This briefing will analyse the new LCP and DSO provisions in Tanzania by drawing a comparison against similar policies in other African jurisdictions. We feel that a comparison with other African jurisdictions is beneficial for several reasons. The primary benefit is because the Tanzanian LCP and DSO obligations are not as detailed as other jurisdictions. Rather than conclude that the Tanzanian legislation will remain as it is, we predict that this is just the beginning of the LCP and DSO story in Tanzania. Government may decide to enact a Local Contact Act for example, which goes across sectors. The local content policy certainly hinted at this. Or alternatively, regulations may be enacted in support of PA 2015 which will impact LCP and DSO.

Whichever route is eventually chosen, there will no doubt be further clarification and certainly further obligations for the private sector to adhere to in Tanzania. A comparison with other African jurisdictions which are further down the road in this area is of assistance in predicting the type of future obligations which may come into force once a Local Content Act or regulations are completed.

Local Content Policies

Section 219 of PA 2015 states that licence holders, contractors and sub-contractors should give preference to goods which are produced or available in Tanzania and seek services from Tanzanian companies or citizens. Where such services or goods cannot be locally sourced, they must be sourced from a company in a joint venture with a local company. Section 219 (3) states that the local company must own at least 25% of the joint venture. A local company is defined at section 219 (9) as one which is either (i) 100% owned by Tanzanian citizens or (ii) a company which is in a joint venture with a Tanzanian citizen or citizens "whose participating share is not less that fifteen percent". This is a surprisingly low threshold. Generally, we would expect that a joint venture would be required to be at least 51% owned by local citizens for the company to be considered indigenous.

Section 219 (4) contains the requirement for licence holders, contractors and subcontractors to report to the Petroleum Upstream Regulatory Authority (PURA) with a local content procurement plan in relation to financial, legal, accounts and health matters. Section 219 (5) – (8) requires licence holders, contractors and subcontractors to notify PURA in relation to various standards, including adherence to local content plans at the end of each calendar year. 

Sections 220 – 221 require a licence holder and contractor to submit to PURA a detailed programme for recruitment and training of Tanzanians, as well as a specific report in relation to training and technology transfer. Surprisingly, there are currently no minimum quotas that licence holders and contractors need to meet. It is possible that this policy may change in time, given the quotas used in other jurisdictions. It is also important to note that these provisions are currently very vague. There is no guidance on the practical implementation of the provisions, such as to whom at PURA one would need to submit reports. This would presumably be contained in regulations.

Section 222 deals with corporate social responsibility (CSR). A licence holder and contractor are to prepare a CSR report annually, in relation to environment, social, economic and cultural activities. It has been left to local authorities to approve such reports and to provide guidelines in relation to CSR and oversee the implementation of such plans. This is an area which will be subjective and dependent on the guidelines produced by the relevant local government authorities. There is currently a great risk associated with the ability of a licence holder or contractor to comply with such discretionary guidelines. Do the local authorities have sufficient capacity and experience to deliver guidelines? Will there be delays?

Section 223 introduces the integrity pledge; licence holders and contractors must note that a great deal of risk is associated with compliance with the integrity pledge. The integrity pledge requires licence holders and contractors to, among other things, conduct regulated activities with "utmost integrity", "desist to engage in any arrangement that undermines or is any manner prejudicial to the country's financial and monetary systems" and "disengage in any arrangement that is inconsistent with the country's economic objectives, policies and strategies". These provisions have been drafted incredibly widely. Further, any person who fails to comply with the integrity pledge will be deemed to have breached the conditions of their licence and can have their licence withdrawn or cancelled. This places licence holders and contractors at significant risk of potentially being unable to continue business, for noncompliance with a subjective and discretionary provision. 

Domestic Supply Obligations

Section 97 of PA 2015 states that a licence holder and  contractor shall have the obligation to satisfy the domestic market in Tanzania from their proportional share of production. Section 97 (2) states that the volume of crude oil or natural gas to be sold will not exceed the "share of profit oil or gas of a licence holder and contractor". It is not completely clear what this drafting means. Who is to determine the proportional shares of production? Exactly how will the profit of a licence holder or contractor be determined in relation to DSO? The current drafting of these provisions will leave companies unaware of their proportional DSO contributions, which will have a significant impact on the ability of the companies to make annual financial predictions.

Section 98 states that the domestic gas price shall be determined based on the "strategic nature of the project to be undertaken by the Government". This is again highly subjective and will not give licence holders and contractors any certainty as to how much they may be able to sell domestic gas for. Section 98 (2) states that the volume of crude oil or natural gas which a licence holder or contractor is required to supply to meet the domestic market obligation will be "determined by the parties in mutual agreement and on pro rata basis with other producers in Mainland Tanzania".

Section 99 states that the fair market price of Tanzania's crude oil shall be determined in the manner "prescribed in the regulations", but it is unclear which regulations this refers to, presumably, yet unpublished future regulations. It is clear, in particular given the discussion of the Nigerian laws below, that this is an area which will need further regulation and guidance to clarify these provisions.

Section 253 (1) covers the supply of domestic gas and petroleum products where there is a shortfall. The minister responsible for petroleum affairs may direct a licensee to make supplies or deliveries to cover such a shortfall. Section 253 (2) states that the minister may require a licence holder or contractor to supply all or part of the petroleum produced to the Government of Tanzania in the case of war or emergency.

Section 254 states that in the case of natural disaster or other extraordinary crisis; the minister may direct the licensee to place gas commodities at the disposal of the state. This broad-brush drafting does not detail specifically what will happen in such situations, but merely states that the minister can require licence holders and contractors to contribute.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Source: www.mondaq.com

THE NIGERIAN CONTENT DEVELOPMENT FUND (NCDF) AND THE TREASURY SINGLE ACCOUNT THROUGH THE EYES OF THE CONSTITUTION

On the 7^th of August, 2015 the Federal Government via circular HCSF/428/S.1/120 directed all MDAs, to pay all receipts due to the Federal Government or any of her agencies into the Treasury Single Account (TSA) maintained in the Central Bank of Nigeria. The MDAs affected include all MDAs funded through the Federal Government Budget, MDAs partially funded through the Federal Government Budget and which generate additional revenues, MDAs not funded through the Federal Budget but which are expected to pay operating surplus /25% of Gross Earnings to the Consolidated Revenue Fund (CRF), MDAs that are funded from the Federation Account, Agencies funded through special accounts (levies), profit oriented public corporations/business enterprises, revenue generated under Public Private Partnership, and MDAs with revolving funds and project accounts.

The directive is to take effect from the date of the circular, which is 7^th August, 2015 and non-compliance will attract serious sanctions. In compliance with this directive, all government Ministries, Departments and Agencies (MDAs) have complied or have taken steps to comply and have moved their revenues to the Central Bank of Nigeria, unless those that were granted exceptions. The Nigerian Content Development and Monitoring Board (NCDMB) is not one of those granted exceptions and as such is expected to pay all its revenue into the TSA. The government further directed that the Nigerian Content Development Fund (NCDF), which technically is an industry fund held in trust for the industry by the NCDMB, be paid into the TSA. The question agitating the mind of industry stakeholders is whether the NCDF is government’s revenue that should be paid into the Treasury Single Account.

The NCDF is established pursuant to section 104 of the Nigerian Oil and Gas Industry Content Development Act, 2010 (NOGIC Act). For ease of reference, the section provides as follows:

104(1): A Fund to be known as the Nigerian Content Development Fund (the “Fund”) is established for purposes of funding the implementation of Nigeria content development in the Nigeria oil and gas industry.

104(2): The sum of one per cent of every contract awarded to any operator, contractor, subcontractor, alliance partner or any other entity involved in any project, operation, activity or transaction in the upstream sector of the Nigeria oil and gas industry shall be deducted at source and paid into the Fund.

104(3): The Fund shall be managed by the Nigerian Content Development Board and employed for projects, programmes, and activities directed at increasing Nigerian content in the oil and gas industry.

To answer the question subject matter of this piece, it is important to find out what are the revenues required to be paid into the TSA by the Constitution.

The relevant sections pursuant to which the circular was issued are sections 80 and 162 of the 1999 Constitution of the Federal Republic of Nigeria (As Amended). Also, the sections are quoted for ease of reference.

Section 80(1): All revenues or other moneys raised or received by the Federation (not being revenues or other moneys payable under this Constitution or any Act of the National Assembly into any other public fund of the Federation established for a specific purpose) shall be paid into and form one Consolidated Revenue Fund of the Federation”.

Section 162(1): The Federation shall maintain a special account to be called “the Federation Account” into which shall be paid all revenues collected by the Government of the Federation, except the proceeds from the personal income tax of the personnel of the armed forces of the Federation, the Nigeria Police Force, the Ministry or department of government charged with responsibility for Foreign Affairs and the residents of the Federal Capital Territory, Abuja.

Section 162(10) defines “revenue” for purposes of that section to include any receipt, however described, arising from the operation of any law; any return, however described, arising from or in respect of any property held by the Government of the Federation; and any return by way of interest on loans and dividends in respect of shares or interest held by the Government of the Federation in any company or statutory body.

Does the NCDF qualify as “revenue” by the government or a “public fund” and as such payable into the TSA? To answer these questions we have to make recourse to the NOGIC Act. Section 104(1) of the NOGIC Act expressly shows that the funds payable into the NCDF are not collected by the government. It is a fund independent of the government. It is a pool of fund put together by the industry players for the sole purpose of developing local content in the Nigerian oil and gas industry. Section 162(10) of the Constitution which defines “revenue” as meaning any receipt, however described, arising from the operation of any law must refer to any receipt by the government. Is the government receiving the NCDF? The answer is an emphatic No! The monies in the NCDF are of the industry, by the industry and for the industry, only to be managed by the NCDMB. It is an industry fund, not a government fund.

Importantly also, all monies in the Federation Account and the Consolidated Revenue Fund is not spent at will, but can only be spent by the federal government for purposes stated in the Constitution. To this end, section 162(3) of the Constitution mandates that the monies in the Federation Account be shared between the three tiers of government. With respect to the Consolidated Revenue Fund, section 80(2) of the Constitution forbids the withdrawal of any money therefrom except to meet an expenditure charged on the fund by the Constitution, or where it is approved for budgetary purposes. It follows that once the NCDF is put into the TSA, withdrawal therefrom for the purposes for which it was established by the Act becomes unconstitutional, as the said withdrawal is not pursuant to the Constitution, is not to fund the budget and is not to share among the three tiers of government. In other words, withdrawing the funds to fund the implementation of Nigerian content in the oil and gas industry (the purpose for which the fund was established) becomes unconstitutional. It must be noted that the NCDF cannot be used for any other purpose other than funding the implementation of Nigerian content in the Nigerian oil and gas industry as provided by section 104(1) of the NOGIC Act. Once it goes into the TSA, it must be used only as stipulated in sections 80 and 162 of the 1999 Constitution.

It is thus clear that it is unconstitutional to pay the NCDF into the TSA as the NCDF is not revenues received or collected by the government of the Federation or the Federation. It is an industry fund meant for the industry but managed by the NCDMB. The money does not go into NCDMB’s account, it goes into the NCDF which is a separate account maintained in the custodian banks.

Other issues like access to the NCDF and the willingness of industry players to contribute to the fund also arise from the directive of the federal government that the NCDF be paid into the TSA. While those issues are genuine and justified, this piece focuses on the constitutionality of the directive with respect to the NCDF. 

Harrison Declan is an energy lawyer, and author of the book “Local Content in Africa’s Petroleum States: Law and Policy”.