‘Expropriation threat’: Tanzania hit by $1.2 billion damages claim in bitter gas field dispute

Upstream | 8 August 2024

‘Expropriation threat’: Tanzania hit by $1.2 billion damages claim in bitter gas field dispute

Toronto-listed Orca Energy has hit Tanzania’s government with a US$1.2 billion claim in an increasingly bitter dispute over a producing gas field it has run in the country for 20 years.

The news emerged just weeks after Orca chief executive Jay Lyons told Upstream that there was a “crisis coming” because the government does not see eye to eye with the company.

At the heart of the dispute on the Songo Songo asset on the country’s south coast is the failure of the government to grant an extension to the production licence, despite years of attempts by Orca to break the impasse, as well as a rancourous dispute over what is known as ‘protected gas’.

As a result, two of Orca’s subsidiaries — PanAfrican Energy Tanzania (PAET) and PanAfrican Energy Corporation Mauritius — have issued a notice of dispute and financial claim under a bilateral investment treaty between Mauritius and Tanzania.

Separately, the Canadian junior is in dispute with Tanzania’s government and state-owned Tanzanian Petroleum Development Corporation (TPDC), claiming $1.2 billion over alleged breaches of the terms of Songo Songo’s production sharing agreement and gas agreement.

In 2001, Tanzania granted a development license to TPDC for Songo Songo for a 25-year term that ends on 10 October 2026.

The government needed foreign investment and technical assistance to develop the field, so stuck a deal with PAET to help commercialise the discovery.

Last year, on 14 April, PAET formally requested that TPDC apply to the Minister of Energy for an extension of the development license as set out in the PSA.

Orca said “TPDC has not done so, providing no credible justification for its inaction.”

According to the Canadian player TPDC “has made clear that its failure to apply for an extension” is linked to its view on ‘protected gas’ at Songo Songo.

State-owned Songas had the exclusive right to explore for and develop what is called ‘protected gas’ in the Songo Songo area, with most of this resource used to generate electricity from Tanesco’s power complex near Dar es Salaam.

Orca said that on 15 April this year, the Permanent Secretary at Tanzania’s Ministry of Energy wrote to TPDC — copying in PAET and Songas — directing the state oil and gas company to “ensure that ‘protected gas’ continues to be produced to the end of the development licence on 10 October 2026”.

Orca described this plan as “baseless and legally flawed” because under the original agreement, this arrangement was due to expire on 31 July 2024.

On 8 July, PAET wrote to TPDC, detailing the commercial terms under which it would supply what was previously called ‘protected gas — and is now defined as additional gas — to Songas.

Four days later, Orca said TPDC rejected these terms and on 23 July also rejected the commercial terms of a new gas sales agreement between PAET and a cement company which has previously been supplied with protected gas.

Orca appealed these decisions to the Ministry of Energy, but on 5 August received a letter from the ministry demanding PAET propose suitable wording for an “interim arrangement” to extend the provision of protected gas.

The ministry, said Orca, warned that if this was not done, “other parties willseek alternative means to operate the field”.

Orca interpreted “as a clear threat that if PAET does not tolerate TPDC and the government of Tanzania’s violation of its rights, the government… will expropriate PAET’s rights” over Songo Songo.

All gas now being produced from the field — given the expiry of the ‘protected gas’ agreement — is now designated as additional gas, so the operator is entitled to compensation.

Orca also claimed that TPDC has “repeatedly made unsubstantiated allegations about purported breaches by PAET of its license terms, which PAET has robustly rebutted”.

“These rebuttals have gone effectively unanswered,” explained the Toronto-listed player, which is one of the reasons the company believes “it has no further option but to launch these legal actions, to safeguard shareholders”.

Orca said it issued a notice of dispute to the government and TPDC on 7 August, which estimates the of amount of damages to be in excess of $1.2 billion.

Further negotiations between all parties could still take place but the Canadian player will pursue arbitration if there is no satisfactory outcome.

Upstream has approached TPDC and Tanzania’s Ministry of Energy for comment.