Tanzania to rake in capital gains from $55b buyout of BG Group by rival Shell

Saturday February 20 2016

Shell now has a 16 per cent controlling stake in the world’s LNG business. FILE PHOTO | AFP

Tanzania is set to collect millions of dollars in capital gains tax following Shell’s acquisition of BG Group, barely two years after banking $258 million in similar payments over the same gas resources.

On Monday, Shell officially acquired BG Group and its assets in a $55 billion deal, touted as the biggest energy deal in more than a decade — positioning Tanzania as one of the continents’ top supplier of gas.

Tanzania is expected to endorse the transaction and change of shareholding once the capital gains tax payment has been effected.

The takeover now gives Shell a 16 per cent controlling stake in the world’s liquefied natural gas (LNG) business, with Tanzania and Egypt as its anchor operation areas on the African continent. Tanzania has proven reserves of 55 trillion cubic feet of natural gas, which is expected to generate almost $5 billion annually.

The country is expected to construct an LNG plant at the start of next year, with a target completion date of 2024, depending on Shell’s strategies.

READ: Tanzania lifts gas estimate to 55 trillion cubic feet


ALSO READ: 19,000 acres available for LNG plant in Lindi

BG Group Tanzania, with its partner Ophir Energy, has invested over $1 billion in a fast-track exploration appraisal programme. BG owned 16 wells for blocks 1, 2 and 3, which contain an estimated one-third of Tanzania’s gas reserves.

BG Group declined to discuss the transaction details and the amount payable to Tanzania.

Three years ago, Tanzania received a capital gains tax of $258 million on the proposed $1.3 billion asset sale of Ophir Energy’s natural gas fields in the country to a unit of Singapore’s Temasek Holdings.

“Ophir sold a 20 per cent shareholding of Tanzania’s blocks 1, 3 and 4 to Temasek, for an initial $1.25 billion plus a further contingent consideration of $38 million, which earned us the $258 million payment,” said the then energy minister Sospeter Muhongo.

Tanzania Revenue Authority director of taxpayer services Richard Kayombo said they have been in discussions with both Shell and BG Group over the sale.

In 2013, Tanzania changed the terms for companies signing agreements for exploration and production contracts for crude oil and natural gas. The new model issued by the Tanzania Petroleum Development Corporation outlines capital gains tax obligations and a new royalty structure, which requires firms to make a one-off signature bonus payment of $2.5 million on signing of the agreement and pay at least $5 million when production starts.

The 2013 Energy Act stipulates that the negotiations between companies licensed in Tanzania with a non-affiliated entity will be subject to transfer or assignment fee payable to the government at rates corresponding to the value of the consideration. 

“For every dollar of the first $100 million, the fee will be one per cent. For every dollar of the next $100 million, the rate will be 1.5 per cent and for every dollar thereafter the fee will be two per cent,” reads the Act.

In the region, Uganda will in the next two years receive $72 million as a final payment of the $314.7 million British oil explorer Tullow Oil agreed to pay in a capital gains tax dispute. Uganda charges 30 per cent on capital gains for both residents and non-residents. 

Last year, Kenya reintroduced the capital gains tax at a rate of 37.5 per cent on the net gain for non-residents and 30 per cent for residents. 

In 2013, Kenya announced that it had good potential for gas in offshore Lamu, which is an extension of the Tanzanian and Mozambican geological belts. However, nothing substantial has been forthcoming about this gas finding.

Mozambique has more than 120 million cubic feet of gas reserves, which were discovered by PTT Exploration and Production through a $1.9 billion exploration.
Tanzania is keen to benefit from Shell’s vast network to market its gas once production starts.

Tanzania Petroleum Development Corporation director for upstream operations Kelvin Komba said that Shell’s experience and network will ease market access for the country’s gas.

Dolapo Oni, head of energy research for Ecobank Group, said Shell’s acquisition of BG Group is a boost to Tanzania because of the firm’s renowned appetite for risky investments.

“Shell is renowned for deployment of technology, strong appetite for risk and its proven track record with governments. These attributes will be useful for Tanzania, especially on production and sale of the gas resources,” said Mr Oni.

In Mozambique, Shell is also said to be conducting a feasibility study for a gas-to-liquid plant in the country in an agreement with state-owned oil company Empresa Nacional de Hidrocarbonetos (ENH).

“In Mozambique, Shell has an agreement with the state oil firm that provides for further discussions on joint bidding for exploration acreage between Shell and ENH in selected areas of interest,” Jonathan French, Shell spokesperson told Bloomberg.