TANZANIA OIL AND GAS EXPLORATION: OIL UNLIKELY, GAS NEEDS

UNCLAS SECTION 01 OF 02 DAR ES SALAAM 000368

SENSITIVE
SIPDIS

DEPARTMENT FOR AF/E JLIDDLE, INR FEHRENREICH, AF/EPS
COMMERCE FOR BERKUL
TREASURY FOR RKLEIN

E.O. 12958: N/A
TAGS: EPET ENRG ECON PGOV PINR TZ
SUBJECT: TANZANIA OIL AND GAS EXPLORATION: OIL UNLIKELY, GAS NEEDS
INVESTMENT AND GOVERNMENT ACTION

REF: A: Dar Es Salaam 221, B: 2008 Dar es Salaam 444


1. (U) Summary. Natural gas in Tanzania could be exported or at
least support significant domestic generation in the short to
medium-term, but not without GOT action and investment in energy
infrastructure. Significant oil discoveries are unlikely but
possible given offshore geological formations. An unresolved
political debate over revenue-sharing between Zanzibar and mainland
Tanzania continues to hinder offshore exploration. Given the
current energy investment climate and GOT unwillingness to
facilitate further investments, exploration will continue to be an
intermittent process. End Summary.


2. (U) The search for oil and gas in Tanzania has progressed
inconsistently over the past 50 years. According to the website of
the Tanzania Petroleum Development Corporation (TPDC),almost all
multinational petroleum companies have been represented "at one time
or another." Much of the work has been geological, geochemical,
gravity, airborne magnetometer, and seismic surveys conducted by
companies granted exploration concessions or by the GOT through
assistance from donor governments. So far, investors have only
drilled twenty-five wildcat exploration wells and eight development
wells at Songo Songo and Mnazi Bay. While major players such as
Shell and Petrobras have concessions, much of the industry is
currently comprised of minor independents struggling to generate the
capital to keep their exploration plans moving ahead.

Gas exports are viable, but constrained by GOT inaction
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3. (U) When talking with industry experts, the real focus of
exploration in Tanzania is natural gas. With two discoveries at
Songo Songo and Mnazi Bay already online, it seems likely,
especially near the major river basins, that more discoveries are
only a matter of time. Halfani Halfani, the Director of
Exploration, Production, and Technical Services at TPDC, detailed
ongoing exploration activities indicating that gas was the likely
output of all current exploration. He was confident that Tanzania
would soon produce enough gas to export in addition to supplying the
domestic market. Potential markets for Tanzanian gas include Kenya,
Japan and South Korea. According to Halfani, Maurel and Prom, a
French exploration company, has already entered into discussions
regarding the export of Tanzanian gas from a promising deposit near
Mafia Island into the Korean market.


4. (U) In 2008, Tanzania produced around 20.4 billion cubic feet of
natural gas. The first significant discovery in Tanzania was Songo
Songo, south of Dar es Salaam, in 1974. Managed by a consortium of
investors known as Songas, Songo Songo produced 20 billion cubic
feet (bcf) in 2008, up from 4 bcf in 2004. The Songo Songo gas is
piped to Dar es Salaam, where over half is used for domestic power
production (up to 115 megawatts),a third is sold to local industry
and private consumers, and close to 10 percent goes to the local
cement factory that helped fund the pipeline from Songo Songo to Dar
es Salaam. Tanseco, the public power company, has asked Songas to
double the gas output from Songo Songo in order to increase power
generation; however, without doubling the processing units at Songo
Songo and increasing the size of the pipeline this request is not
feasible. (See ref A on Tanzania's power generation problems.)


5. (SBU) Mnazi Bay, situated on the southern-most point of the
Tanzanian coast, is currently an underutilized discovery. In 2008,
it produced close to 300 million cubic feet, all of which was used
for domestic power generation for the southern coastal region.
Artumas Group Inc., the concessionaire, predicts that the find at
Mnazi Bay will yield at least 250 bcf - and possibly up to 4
trillion cubic feet - over its lifetime. According to Salvator
Ntomola, the Country Manager, Artumas had planned for the past three
years to build a 300 megawatt power plant that would feed power
directly into the national grid. The sticking point has been lengthy
discussions with the GOT, led by Tanseco, over pricing structures
and ownership of the necessary, but very expensive, transmission
lines. Given the long delays, Artumas's board recently decided not
to release any further funding until the Tanzanian office submits a
GOT-approved plan of action. Ntomola wants this project to happen,
but without the GOT on board it appears unlikely. Ntomola's new
focus is on exporting the gas to Kenya through the port at Mombasa,
either using ships capable of holding compressed gas or by extending
the existing Songo Songo-Dar pipeline to Mnazi Bay and Mombasa.
This proposal, which would require increasing the size of the

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existing pipeline, would need GOT action that to date has been
limited at best.

Petroleum unlikely, but highly political
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6. (SBU) Possible petroleum discoveries, especially offshore near
Zanzibar, are the big rumors in the industry. Some local
representatives for the smaller oil companies, such as Paddy Hoon of
Heritage Oil, talk up the possibility of significant finds.
Comparing Tanzania's offshore capacity to that of Nigeria, Hoon has
tried to convince all who will listen that the big strike is only
one investment away. However, TPDC's Halfani believes there is no
oil to be found near the islands. Even if oil is found, he is
deeply pessimistic that production would occur in the medium term.



7. (U) Despite the lack of progress on oil exploration, and the real
possibility that exploration will not expose viable fields, the
potential for oil is at the center of a political debate between
Zanzibar and the mainland. Most Zanzibaris see themselves as an
independent nation in free association with the mainland, forming
the Union of Tanzania (ref B). The issue of gaining exclusive
control over any lucrative resources is a hot button for all
Zanzibari politicians. During the April 2009 session of Zanzibar's
unicameral "House of Representatives," delegates from both parties
unanimously adopted a resolution tabled by ruling CCM-Zanzibar
stating that the laws establishing TPDC and oil exploration
activities in the country were not ratified by Zanzibar's
Parliament, so under the articles of the Union, TPDC's activities
were not recognized in Zanzibar. The resolution reiterated the view
that the 1968 agreement on revenue-sharing between Zanzibar and the
Union government did not apply to energy and asserted that
Zanzibar's share from the mainland was too low. It recommended that
Zanzibar form its own TPDC equivalent and that any exploration in
Economic Excusive Zones (EEZ) should be carried out jointly. Any
coordination would be handled through the national Vice President's
Committee for Union issues, but the resolution stressed that energy,
oil and gas as they existed in Zanzibar and its waters were not
Union matters.


8. (SBU) President Kikwete intervened on April 29, accurately
dismissing the debate as hypothetical. Indeed, David Reading, a UK
consultant hired to advise both sides on how to share resources,
pointed out in a press interview during the Zanzibar parliamentary
debate that there were "slim chances" that oil or gas was
commercially available in either Unguja or Pemba, the main islands
of Zanzibar. He said the area was costly to explore and that most
international companies given access to the area had opted out. In
our opinion, the main effect of the dispute is to discourage
investors from pursuing exploration activities, thereby reducing the
possibility that oil revenues will exist to be divided.

MUSHINGI