TUDARCO-Principles and rules governing Oil & Gas

PRINCIPLES AND RULES GOVERNING OIL & GAS: A Focus on the Local Content in Tanzania

A: Meaning of Local Content and Principles of LCWhat is a Local Content? •The added value brought to the country(URT) in the activities of the oil and gas industry through the participation and development of local Tanzanians and local businesses through national labour, technology, goods, services, capital and research capability [Local Value Addition].•(It is) VALUE ADDITION leading to SUSTAINABLE DEVELOPMENT and culminating also in JOB CREATION, ECONOMIC GROWTH, ENVIRONMENTAL PROTECTION AND LONG TERM GAINS.

“The degree of local ownership, control and financing by citizens of a nation, in a specific venture or entity that promotes and enables the optimal use of in‐country human resource, materials and services”.

LC develops conditions between the EI and the host country local economy through; 1.Vertical linkages: linkages between the EI and companies that are not engaged in oil extraction that include;

Backward Linkage: supplying input to the local economy through transfer of technology, the generation of value-added in domestic supply sectors, the creation of local employment opportunities, and increasing local ownership and controlForward Linkage: processing the sector’s output prior to export through, for example, the establishment of refineries, petrochemical industry, and the production of fertilizers

A: Meaning of Local Content and Principles of LC

2. Horizontal Linkage: linkage between foreign investors and other extractive companies in the same industry, e.g. technology agreements with local or international natural resource firms or joint venture collaborations with local companies.

The Principles pertaining to Local Contents encompass:

1. Competitiveness Principle: the ability of a domestic supplier or contractor to supply goods or services in an international market which could be entirely within the domestic economy, with foreign and local firms competing against each other in open competition.


2. Protectionism Principle: intended or unintended economic policy of restraining trade between countries through methods such as tariffs (taxes) on imported goods, or restrictive import quotas and regulations designed to discourage imports. The setting of Local Content targets would fall within the category of restrictive import quotas. [Infant industry, Market Power i.e Foreign coys are uncompetitive on base price, Social Impact i.e where local content regulations is as a form of compensation for the adverse socio-economic impacts of oil, and gas investment on local communities and vulnerable groups]


3. Comparative Advantage Principle: pervades key decisions and assures contracts are awarded on a competitive basis. This is the key principle of procurement – The Golden Thread E.g. Clause in PSA could reads;

“Give preference to local contractors and locally manufactured materials and equipment so long as their performance, quality and time of delivery are competitive with international performance and prices”


The golden thread ofprocurement is theprinciple of contract awardon an ‘internationallycompetitive’ basis

The Golden Thread: “local companies will not be treateddifferently with regard to quality, price, delivery, HSE compliance”.


B:Why Local Content?1. Monitor the project delivery: Local Content is

also becoming a strategic consideration in project delivery.

2. Facilitate Commercial Or Public Policy Objectives: Local Content regulations, such as reporting requirements, may be fairly caring, whilst others may facilitate commercial or public policy objectives to be substantively modified.

3. Rising Expectations: Due to new competitive landscape of diminishing supply and increasing demand for energy resources, companies in the oil and gas industry face rising expectations to do more than simply mitigate negative impacts, serve as sources of tax/royalty revenue and act as good neighbours (CSR).

C: Some Highlights of Local Content in Tanzania• Specific requirements for Local Content within

existing primary legislation in the petroleum sector are weak

• Obligations in Production Sharing Contracts (PSAs) on Local Content are stronger. However, the PSAs I. lack clear definitions around Local

Content, II. contain limited guidance on how

Contractors’ expenditure might align with Government policy to build the domestic industrial base so that Tanzania citizens and suppliers can participate in the petroleum industry, and

III. limit TPDC approval of commitments to Local Content to the training, employment and staff progression of nationals within the Contractors immediate organisation.

• The current laws and regulations lack mechanisms for accountability to assure implementation of Contractors’ and TPDC’s commitments to Local Content

C: Some Highlights of Local Content in Tanzania

D: CURRENT POLICY AND STRATEGIC FOCUS FOR TANZANIA

Local Content Policy

Goal 1: Increase Employment Goal 2: Reduce CostsGoal 3: Enhance Operational Efficiency

High Performance Culture

Operational Excellence

Integrated Performance Management

Capital Expenditure

• National skills / gap assessment

• Legislative Review / Recommendations

• Develop strategic Partnerships between GOVT & MNC’s

• etc

STRATEGIC PYRAMID

E: Trade and Investment Treaties As Prohibition for LCTrade and Investment Treaties restrict domestic local content policy discretion through WTO which Aims at lowering tariffs and non-tariff barriers by:

• Limiting performance requirements related to trade in goods (TRIMs Agreement in 1995): local content measures are explicitly prohibited if these oblige the purchase or use by an enterprise of products of domestic origin or from a domestic source, whether this be specified in terms of particular products, the volume or value of products, or in terms of a proportion of volume or value of local production.

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• Limiting performance requirements related to trade in services (GATS Agreement in 1995) “all WTO members should accord services and service providers from other WTO members treatment no less favourable than that provided for under the common terms, limitations and conditions mutually agreed within the WTO”.

• Limiting performance requirement related to government procurement (The plurilateral Agreement on Government Procurement (GPA Agreement) in 1996) “intended to counter internal political pressure to discriminate in favour of domestic suppliers of goods and services over foreign competitors, and thereby open up government transacted business to international competition”.

E: Trade and Investment Treaties As Prohibition for LC

E: Trade and Investment Treaties As Prohibition for LC• Exclusion to the Rule: under WTO, Special and Differential Treatment (SDT) for developing countries, allows for some discrimination, eg transition countries, Least Developed Countries

F: Development of Industrial Clusters Can Promote Increased Local Content [Local Content Drivers]

Petrochemicals

Power & Water

Exploration & Developme

nt

Refining &

Processing

Training

Research

InfrastructureElectrical Maintenance

Fabrication

Services

F: Development of Industrial Clusters Can Promote Increased Local Content [Local Content Drivers] 1. Capacity Building and technology transfer; 2. Participation of Tanzanians and Tanzanian

owned entities [The Tanzania Mainland and its people and Business which is incorporated under the applicable laws of Tanzania and is wholly owned by Tanzanians or with at least 51% of shares owned by Tanzanian Nationals and is registered to offer goods or services in the oil and gas industry];

3. Procurement and usage of locally produced goods and services [goods obtained, produced or manufactured and have after-sales services in Tanzania Mainland and Services provided in Tanzania Mainland];

4. Fabrication and manufacturing in-country; and

5. Socio-economic responsibilities.

F: Development of Industrial Clusters Can Promote Increased Local Content [Local Content Drivers] 6. Research & Development

• Active government participation (facilitation, funding etc.) proves effective in supporting establishment of world class, leading edge research institutions that contribute to more efficient development of domestic resources and capabilities

• Leadership by resource development companies of applied research and experimental development proves to be more effective than by direct government involvement

1. Lack of human capacity and education skills,

Developing Countries’ Perspective: skills shortages hinder the incorporation of local workers into the extractive industries and the development of an industrial base necessary to spread the benefits of these sectors to other areas.

Operating Companies’ Perspective: skills shortages can cause the delay of new projects, increase costs and even hamper the fulfilment of local content requirements.

2. Poor infrastructure, A weak infrastructure prevents the expansion

of the manufacturing base. Public utilities as roads, railways and air transport, telecommunications, electricity and water supply constitute an environment which is more or less enabling for business development and productivity.

G: THE MAIN CHALLENGES

To address the lack infrastructure, host countries must focus on:

I. building the appropriate legal, institutional and regulatory framework,

II. managing different forms of private involvement and financing,

III. looking for support in investment promotion agencies for foreign investment, and,

IV.taking into consideration social factors related to the investment in infrastructure.

3. Weak industrial base [Building Solid IB],

EI must be based on existing domestic capabilities in manufacturing and services. However, in many countries the industrial base is weak, narrow, has poor access to technology, financing and information, and consequently, is not competitive in the international industry context.

4. Poor governance and inadequate business environment.

Rich natural resources countries lack an enabling business environment to stimulate local business creation.

H: HOW TO ADDRESS CHALLENGES Lack of human capacity and education skills: Enhance general educational base through local capacity building (to support development in the long run) including designing primary, vocational, secondary and university education syllabus suitable to support the development in different areas and levels of specialization.Enhance vocational and technical training; Ensure availability of school accreditation; and Increasing demand for higher skilled workers in the industry.improving the direct participation of the local workers with companies in the industry value chain.

Poor infrastructure,Governments should attract a greater involvement of the private sector - including local and transnational companies (TNC) - in infrastructure financing, investment, ownership and management, and concentrate their efforts in providing a clear regulatory and legal framework, as well as proper stimulus to private participation. Govt should focus in

(i) building the appropriate legal, institutional and regulatory framework,

(ii)managing different forms of private involvement and financing,

(iii)looking for support in investment promotion agencies for foreign investment, and,

(iv)taking into consideration social factors related to the investment in infrastructure.

H: HOW TO ADDRESS CHALLENGES

Poor governance and inadequate business environment.Provides an appropriate legal, regulatory and institutional framework in which companies, local and foreign, have the incentives to invest and develop productive activities;Gives enough guarantees to prevent corruption and rent seeking behaviour; In line with the international initiatives, promotes transparency and accountability in the extractive sector, with different treatment of business confidentiality and government sovereignty issues. Two well-known approaches are the Publish What You Pay (PWYP) campaign and the Extractive Industries Transparency Initiative (EITI)

H: HOW TO ADDRESS CHALLENGES

H: HOW TO ADDRESS CHALLENGES Improving Workers participation in EI, Boost local capabilities through:Research and Development (R&D) programmes, funds and specialized institutes. The link between major companies and local universities and training institutes is key to design programmes with the proper syllabus to meet the skills requirements of the industry, as well as for the development of on-the-job training programmes;Introduction of local content provisions for training and hiring national workforce at different levels of the value chain; andCreation of industry linkages and extensive supplier development programmes, including training, product development, testing and factory auditing.

I: Role of regulatory and legal frameworkPoor infrastructurei.Before committing funds to any project, investors consider whether laws and contracts are likely to be properly enforced and whether their rights and responsibilities are well defined and likely to be respected. ii.The legal and regulatory framework for issuing licenses or concessions should define the rights and obligations of utilities, clarify pricing mechanisms and establish procedures for dispute resolution. iii.The establishment of a strong and autonomous regulatory agency is essential to implement laws and regulations in infrastructure industries.

I: Role of regulatory and legal frameworkPoor governance and inadequate business environmenti.Clear legal framework governing the exploration and exploitation of extractive industries that establishes clear ownership and property rights;ii.Independent regulatory powers strictly separated from operating activities. This is essential to ensure transparency and to avoid creating a fertile ground for rent-seeking and corruption;iii.A clear legal framework on the fiscal and administrative framework for the extraction of natural resources. This involves, for example, stable and clear taxation policies and efficient processes for the issue of licenses; A system of revenue management governing the sharing and distribution of the rents from extractive industries;iv.Clear regulation and policies on workers’ rights (including health and safety), the protection of the environment and the rights of local communities.

J: POLICIES AND RULES GOVERNING LOCAL CONTENT VALUE CHAIN

The 2014 draft local content begins with the statement: “Natural gas resource found in Tanzania belongs to the people of the United Republic of Tanzania, and must be managed in a way that benefits the entire Tanzanian society.”

The Local Content Policy of Tanzania for Oil and Gas Industry – 2014

Model Production Sharing Agreement (MPSA)Article 21 (c): The contractor in consultation with TPDC within six months of the grant of a development licence must implement the training and employment proposals of Tanzanian citizens; must ensure the transfer of management and operation functions to Tanzanian nationals within the period not exceeding 5 years of the start of commercial operations

ARTICLE 20(b): Give preference to the purchase of Tanzanian goods, services and materials provided such goods and materials are of certified standard and quality in accordance with TBS, TFDA, or any other relevant authorityARTICLE 20(d): Make maximum use of Tanzanian service companies and contractors at certified standards and competitive prices and termsARTICLE 20(i): Ensure that sub-contracts are scoped to match the capability of local enterprises and manage risk to allow their participationARTICLE 20 (j): Maximise the level of usage of local goods and services, businesses, financing and employment of Tanzanian nationals

Model Production Sharing Agreement (MPSA)

ARTICLE 20(m): Give equal treatment to local enterprises by ensuring access to all tender invitations and by including high weighting on local value added in tender evaluation criteriaARTICLE 21(a): Employ Tanzanian citizens having appropriate qualifications to the maximum extent possible. In this connection, the oil company in consultation with Government and TPDC must propose and carry out an effective training and employment programme for Tanzanian employees in each phase and level of operationsUnder the MPSA, if domestic demand exceeds the TPDC’s total entitlement to profit oil or gas, the contractor may be required to sell its share of profit oil or gas in Tanzania on a pro rata basis with other producers in Tanzania (except the TPDC).

Model Production Sharing Agreement (MPSA

A development licence must include conditions requiring registered holder to supply petrol to meet the local needs of Tanzania. Applications for exploration or development licences must be accompanied by proposals with respect to the training and employment of Tanzanian citizens.

The utilization of domestic resources“should be utilized to build adaptive capacity for promoting economic activities that enjoy comparative and competitive advantages with a view to minimize the impact of external economic shifts and shocks”Transformation of the economy towards competitiveness[The diversification of the economy must be based on a dynamic industrialization programme focused on local resource-based industries (agro-industries) and capable of meeting the needs of other sectors …….]

The Petroleum Act 1980

National Development Vision 2025, [Driving Forces For Realization Of Vision]

GOOD GOVERNANCE AND THE RULE OF LAW Promoting democratic and popular participation[“Deliberate efforts must be made to empower the people and catalyse their democratic and popular participation. The strategy should entail empowering local governments and communities and promoting broad-based grassroots participation in the mobilization of resources, knowledge and experience ………”.]The National Petroleum Policy of Tanzania 2014One of its Specific Objectives [(viii) To maximize national benefit by promoting local value addition and building local competencies…….] Sub-Article 3.1.2.4: Local Content and Capacity Buildingi.Ensure that training needs assessment is carried out to identify the capacity and competence required in the upstream sub-sector. iv.Ensure that contractors/operators prepare and implement acceptable succession plans for the transfer of technological know-how and skills relating to petroleum operations

v. Encourage local companies to enter in partnerships with international companies to acquire technology transfer and develop competence in Tanzanian companies.

vi. Ensure that fabrication and manufacturing industries, wherever feasible, are established in the country and that Tanzanian goods and services are given preference in petroleum operations.

The National Petroleum Policy of Tanzania 2014

National Empowerment Policy and Act 2004National Empowerment Act, 2004: Preamble …..”Now Therefore, with a view to promoting rapid economic growth that will facilitate broader economic ownership by Tanzanians deliberate measures are taken to establish structures and mechanism to redress the existing economic inequalities among various of the populations….”

Definition of Economic Empowerment (Section 3)“Economic empowerment” means deliberate and affirmative actions and measures undertaken by the Government for the purpose of promoting and enhancing knowledge, skill, economic prowess and financial prudence of Tanzanians to enable them to meaningfully participate in economic activities and includes all plans, strategies, policies and measures taken to achieve the goal, be it by public or private sector

National Empowerment Policy and Act 2004

National Empowerment Policy , 2004Clause 3.3:“The primary objective of the policy is to provide general guidelines which will ensure that the majority of the citizens of Tanzania have access to opportunities to participate effectively in economic activities in all sectors of the economy……”

Clause 3.2 (iii)• Policy is intended to address all economic empowerment needs of the individual citizens of Tanzania and local companies in which Tanzania citizens hold not less than fifty percent of the shares.

• Facilitate the improvement of the quality of locally made products, reduce the cost of production and raise the skills level used in productive activities

National Empowerment Policy , 2004

Sub-Clause 4.4.3 (iii): Assisting learning institutions and companies to render material assistance that will encourage most Tanzanians to undertake technical training in institutions that meet their needs. Cost Sharing Approach should apply with the objective of encouraging more citizens of Tanzania to enhance their technical skills Sub-Clause 4.7.2: The Government will ensure that market information is made available to Tanzanian producers, develop local markets and improve access of Tanzanian products in neighbouring countries and in the global market. Sub-Clause 4. 7.3 (i): Ensuring that local companies are given preferential treatment when the Government awards procurement tenders

Five Year Development Plan (2011/12 - 2015/16)One of the Five Core Priorities of Plan’s strategy to unleash Tanzania’s latent growth potentials: “Industrial development specifically targeting industries that use locally produced raw materials such as textiles, fertiliser, cement, coal, iron and steel, as well as development of special economic zones, using public-private partnerships”;Natural Gas Policy, 2013Clause 3.1.7: Local Content and Capacity Building : The Government shall; Ensure that the local communities benefit from the natural gas activities in their respective localities. Work with IOGCs to ensure opportunities for supply of goods and services, employment and investments are made available to Tanzanians; that the capacity of Tanzanians is developed in the natural gas value chain through skills development, transfer of technology and applied research

• Work with IOGCs to explore possibilities that companies participating in natural gas value chain are listed on the DSE

• Establish oil and natural gas centre of excellence and strengthen capacity of the training institutions to impart requisite knowledge skills and innovations to Tanzanians.

2nd NSGRP/MKUKUTA 2010/11 - 2014/15 (NSGRP/MKUKUTA II).Balance of payments:Addressing the import side prudently in order to reduce the import bill. Interventions in this area relate to promoting consumption of locally produced goods and services to out-compete imports, and curtailing dumping of imports, such as counterfeits known to be of poor quality and in some cases unfit for human consumption

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TUDARCO-Principles and rules governing Oil & Gas