Current Affairs East Africa

Gas will be the cherry on Tanzania’s economic cake

Gas will be the cherry on Tanzania’s economic cake
  • PublishedApril 17, 2023

It would be easy to get carried away by Tanzania’s LNG potential but progress on the project has ground to a halt previously, so the government would do well not to rely on the income it would generate just yet. 

The presence of huge offshore gas reserves on both sides of the Tanzanian-Mozambican maritime border has been known for at least a decade. Local demand in the region is limited, so LNG was the obvious option, as it allows the gas to be shipped by tanker around the world. However, a combination of a violent Islamist insurgency on the Mozambican side of the border and uncertainty over global demand saw projects in both countries suspended, bar a smaller floating LNG scheme off Mozambique. 

However, global consumption has greatly increased over the past year, mainly because of the Russian invasion of Ukraine. Russia has long been the world’s biggest gas supplier but Moscow restricted piped gas supplies to most of its European customers in response to the sanctions that European governments imposed on Russia over the invasion. 

The strategy has driven up LNG prices across the world, as European customers have competed with their Asian counterparts for available supplies. At the same time, European leaders are determined to end their reliance on Russian gas in the long term through a combination of increased LNG imports and speeding up the development of renewable energy projects. 

This has reawakened interest in building new LNG production lines, or trains as they are known in the industry, in Africa in general and Tanzania in particular. 

A consortium of Shell (60%), Pavilion Energy (20%) and Medco Energy (20%) control blocks 1 and 4 off Tanzania, with 16trn cu ft of gas discovered to date. Equinor (65%) and ExxonMobil’s (35%) block 2 contains an estimated 20trn cu ft. 

Gas will be piped 100km from offshore fields on all three blocks to a liquefaction plant that will be built outside the Port of Lindi in the far south. The combined volume discovered to date is only about a third of that identified in Mozambique but once the final investment decision has been taken, there will be more incentive to increase exploration efforts in the region.

Estimated investment of $30-40bn will make the LNG plant by far the biggest project in the country and will have a huge impact around Lindi. It will take up to five years to build the liquefaction plant, with first shipments due sometime after 2029, with sufficient reserves in place to sustain production for at least 30 years. 

However, there could be a stumbling block in that finance is usually dependent upon securing long-term supply contracts – while European importers tend to rely more heavily on spot markets than most other parts of the world. That will not be a problem, however, if the bulk of the gas is shipped to Asian customers. LNG’s role in the energy transition is controversial. The industry produces huge greenhouse gas emissions, including both carbon and methane, but just 50% of the emissions of coal-fired plants, while avoiding almost all of the particulate matter that coal produces.

The state-owned Tanzania Petroleum Development Corporation could take a 12% stake in the project, which would require $4bn in investment from the government but it should be relatively straightforward to raise this sum given the guaranteed returns and the fact that repayments could be made using LNG revenues themselves.

Beyond gas

While LNG will boost GDP, unlike tourism it will not directly create a great deal of employment. The tourism sector has recovered strongly after a huge downturn during the pandemic and as travel restrictions have been eased. 

According to the Bank of Tanzania, the country generated $2.56bn in tourism earnings in 2022, just above the $2.53bn it earned from the sector in 2019 before the pandemic. However, the number of visitors was still 72,000 lower than in 2019 at 1.527m. Nevertheless the 2022 figures represent a big recovery on the $1bn revenue and 616,000 tourists recorded in 2020.

Kennedy Edward, CEO of the Hotel Association of Tanzania, said: “After the pandemic was declared, we asked customers not to cancel but instead postpone to the next year all the bookings that did not mature in 2020. Thus, a number of the bookings were fulfilled in 2021 and many were pushed further to 2022, which is why we saw a significant surge of arrival numbers and revenue.” 

The government has pledged to continue investing in power, water and transport infrastructure in the near future. The most high-profile project and the one that seems to highlight the country’s growing confidence is the new standard gauge railway (SGR) being built from Dar es Salaam to north-western Tanzania and on to Burundi and Rwanda, with possible extensions into Uganda and Democratic Republic of Congo. 

The railway and associated spur lines will extend to 2,561km and provide much quicker passenger and freight transport than the existing colonial-era Central Line to Kigoma on the shores of Lake Tanganyika and the existing road network. It will boost trade across the country and provide the Great Lakes region with a direct route to the Port of Dar es Salaam.

The project was launched several years after Kenya planned its own SGR from the Port of Mombasa to Nairobi and on to Kampala and beyond. Yet while the section as far as the Kenyan capital has been built, financing to extend the line into Uganda has proven difficult to secure, so Kampala either has to find an alternative or switch its attention to building a link to the Tanzanian project instead. 

Different contractors are working on different parts of the Tanzanian SGR, including Turkey’s Yapi Merkezi and Mota-Engil of Portugal. Contracts covering 2,102 km and $10bn in investment have now been awarded. Most recently, China Civil Engineering Construction and China Railway Construction signed a $2.2bn contract to build the 506km leg from Tabora in central-west Tanzania to Kigoma, while the governments of Burundi and Tanzania have signed a bilateral deal to build the 367km stretch from Uvinza in Tanzania to Gitega in Burundi.

President Hassan said: “The aim of these infrastructure projects is to make Tanzania a business and transportation hub… Upon completion of the SGR, Tanzania will be in a better position to utilise its strategic geographical positioning to facilitate cross-border trade… We have to borrow for this important infrastructure and other sustainable development projects because we don’t have enough local resources.” 

At the same time, Tanzania International Container Terminal Services (TICTS) is to boost the annual handling capacity of its container terminal at Dar es Salaam by 200,000 TEU, or standard sized containers, to 700,000 TEU. TICTS, which is owned by Hutchison Ports, is investing $500m to completely refurbish all four berths.

Continued increases in GDP, trade volumes and population mean that Tanzania will require much more port capacity over the coming decades, so Hassan hopes to get the stalled Bagamoyo project back on track. In 2015, China Merchant Port Holdings had signed a contract to build a new port and associated free zone at the site 75km north of Dar es Salaam, but little progress was made, partly because Magufuli complained that the deal was too favourable to the Chinese company. 

However, the state-owned Tanzania Ports Authority has taken over the scheme, with Hassan saying that the government will begin talks with potential investors. The LNG project should also see the Port of Lindi upgraded in the far south, while Tanga in the north is already being modernised to begin shipping oil as early as 2025, when the East African Crude Oil Pipeline from Uganda is due to be completed.

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Written By
Neil Ford

Neil is a journalist, writer, editor and consultant, specialising in international and African affairs.

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