East Africa is fast becoming a lucrative area for natural gas and oil reserves. But local governments must balance national interests and those of the oil companies if they are to develop a successful mining strategy, write Peter Kasanda, Paul Jones and Lucy Minde

East Africa's oil and gas market has transformed over the past year following significant gas finds off the coasts of Tanzania and Mozambique, the discovery of oil in Kenya and the movement of Uganda towards development and production of its petroleum reserves.

In Tanzania, it is hoped that natural gas discoveries in offshore blocks operated by BG Group and Statoil will lead to the development of a combined liquefied natural gas (LNG) plant requiring tens of billions of dollars' worth of investment. 

The proximity of East Africa's second biggest economy to Asia makes it well-positioned to reap the benefits of surging fuel import demand in Japan, China and 

India, enticing investors to fund export projects.

Across the region, the finds have raised expectations that natural resources will have a transformative effect on already growing local economies. But an effective legal framework will need to be put in place to manage this growth and balance domestic interests with those of international oil companies (IOCs).

Changing frameworks 

Developing countries coming to terms with major oil and gas finds are routinely required to overhaul underdeveloped legal and regulatory frameworks not equipped to manage commercial production.

This is true of East Africa where host governments are each looking for their own formula to maximise national take and at the same time maintain investor confidence. 

In Tanzania, the Petroleum (Exploration and Production) Act 1980 governs the exploitation of oil and gas. The Tanzania Petroleum Development Corporation (TPDC) is the Government body responsible for exploration, promotion and development.

As well as participating commercially in Tanzania's production sharing agreements (with back-in rights of up to 20%), TPDC also acts as the regulator in the upstream sector. Its Government has identified the need to develop more specific regulations and mid- and downstream activities are currently in focus as IOCs gear up to make final investment decisions. 

The Ministry of Energy and Minerals published a draft Natural Gas Policy on 1 November 2012, which is intended to precede a Natural Gas Utilisation Master Plan and a Natural Gas Act. The policy was subject to a 21-day consultation period, after which it was intended to be revised and published before the end of 2012. 

But the timetable has since slipped and a slow legislative process means that the proposed Act is unlikely to become law in this calendar year. Separate upstream regulations to replace the current 1980 Act are likely to follow once the position on mid- and downstream natural gas is established. 

And while the regulatory landscape continues to be in flux, there remains an unofficial moratorium in place over both offshore and onshore licensing. 

Areas of the policy that have come under closest scrutiny from IOCs and analysts have included domestic supply obligations that are likely to conflict with the terms of existing production sharing agreements (PSAs) and the role of the TPDC as an 'aggregator' of natural gas. The policy does envision the creation of an independent regulator with this role moving away from the TPDC. 

Other issues faced by Tanzania include managing territorial disputes with both semi-autonomous Zanzibar and Malawi. Zanzibar is looking for the management of oil and gas blocks to be removed from the list of union matters currently governed by Tanzania, while Malawi claims full entitlement to Lake Nyasa which sits on the border between the two nations and has several prospective blocks.

Mediation by the African Union has so far proved unsuccessful in the latter case and in line with the United Nations Charter; arbitration through the International Court of Justice appears the most likely next step.

Neighbouring efforts 

Mozambique is Tanzania's major competitor in the race to produce East Africa's first LNG. While clearly in front in terms of the size of its finds (an estimated 150 trillion cubic feet (tcf) discovered to date compared to 33 tcf in Tanzania), it is also arguably further along in the development of its regulatory framework. 

Mozambique is currently considering a draft Petroleum Law that will replace the Petroleum Code of 2001. A Natural Gas Master Plan has also been presented, drafted by US-based consultants IFC International, with funding from Norway and the World Bank. 

Mozambique has apparently been more open to such foreign assistance than other East African states and its Government has faced criticism from some quarters that its regulations are overly favourable to investors as a result.

Other recent legislative changes include amendments, effective from this January, to the fiscal regulations governing the extractive industry with the introduction of a tax applying to non-resident companies on the sale of Mozambican assets.

Uganda is the East African country closest to commercial production of its reserves and it now faces major infrastructure challenges to ensure that the country is able to service both domestic and export markets. 

Uganda put in place a National Oil and Gas Policy in 2008 which was to underpin the passing of new legislation. The Petroleum (Exploration, Development and Production) Bill 2012 was approved by Parliament during December 2012 and now requires Presidential assent to become law.

The Petroleum (Refining, Gas Processing and Conversion, Transportation and Storage) Bill 2012 and the Public Finance Bill 2012 are currently under consideration by its parliament and, once the legislation is in place, Uganda aims to hold its first competitive licensing round. 

Kenya's first ever crude oil discovery during March 2012 led to a clamour for open oil exploration blocks as well as a need to regulate the sector and control demand. Kenya is reviewing its Energy Policy and the Petroleum (Exploration and Production) Act 1986 with a view to strengthening upstream provisions and also aligning them to the 2010 Constitution.

A further interesting aspect of this simultaneous framework development is the strengthening of the East African Community (comprising Kenya, Uganda, Rwanda, Burundi and Tanzania) and its eagerness to harmonise policy across member states. 

While the respective policies have no legal effect, they are persuasive and underlay the approach taken by East African governments and any move towards harmonisation will be monitored by IOCs.

Balancing both interests

East Africa is currently playing host to many of the world's major oil and gas companies. While exact positions will vary, in general IOCs will be looking for conditions including fair and stable fiscal terms and legal framework; market transparency; limited restrictions on export; sanctity of contract; limited regulatory intervention and market-based pricing. 

By comparison, the respective governments will be looking to increase stakes in equity and decision making; advance local content; develop institutional capacity and channel resources downstream. The challenge host governments face is to balance these interests with the often competing interests of their investors. 

In Tanzania, a lack of communication from Government, delays in the timetable for regulatory change and recent protests by local citizens surrounding the development of a major new gas pipeline have raised concerns among IOCs trying to get a steer on the Government's likely approach to key issues. 

The importance of fair and consistent fiscal terms and legal framework cannot be underestimated, particularly for those companies operating in the capital-intensive and high-risk LNG industry.

While most production sharing agreements (PSAs) will contain stabilisation clauses seeking to protect IOCs from legislative change, this is unlikely to stop host governments from expecting key requirements in respect of domestic gas supply and other areas from taking precedence over pre-existing PSA provisions. 

The Tanzania Government has in the past successfully renegotiated contracts in the mining sector that were seen to be unfavourable and incompatible with new legislation, including agreements with mining giants African Barrick Gold and Resolute Mining.

In addition to whatever protection can be sought under the PSA, investors need to consider whether they have Bilateral Investment Treaty protection and look to the terms of any political risk and other insurance that has been taken out. Bilateral Investment Treaties are in place between Tanzania and countries including the Netherlands and the UK. 

Tanzania is also a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the International Centre for Settlement of Investment Disputes (ICSID) Convention, while being recourse to arbitration under the Rules of the Convention for Settlement of Investment Disputes may be available if provided for.

The need to balance national interests with those of IOCs will be crucial for East African governments. The region is competing with other emerging sources of oil and gas reserves (both traditional and non-traditional in the case of shale gas) globally, so establishing a clear, stable legal and regulatory framework will be key to securing the investment that has the potential to transform east Africa. 

Peter Kasanda (top) is the legal director, Paul Jones (above) is a senior associate and Lucy Minde is an associate at Clyde & Co's Tanzania office.