The Tanzanian government and a consortium of companies are negotiating a host government agreement that will govern a game-changing liquefied natural gas (LNG) plant and be a significant part of the regulatory framework governing the entire offshore gas sector.
In this brief, we take a closer look at some of the key decisions in this process and use a financial model to examine their potential impact on whether the LNG project proceeds and the government revenues that the project could generate.
Based on specific assumptions, we estimate that a long-term LNG price of USD 14 per mmBtu would be required over the life of the project for investors to earn a return comparable to that seen in other LNG projects—significantly higher than forecasts of long-term prices in east Asia of $8 and the average real price over the past 15 years of approximately $11.
Companies and investors will have their own views of long-term prices and other market variables, and economic conditions may also change prior to the investment decision. It is still possible that investment will go ahead. Nevertheless, it would be advisable for the government to start considering ways to increase its chances of securing this investment while ensuring that the country still fully benefits from the project if it does proceed.
As we discuss in the brief, the government will need to make difficult decisions that involve economic trade-offs. However, it can also increase investment prospects without making a trade-off. Improvements in the business climate—including establishing a regulatory framework that is stable and predictable—would be beneficial. Another part of the solution is to be more transparent, which would help to manage the public’s expectations and therefore make acceptance of the final terms more likely.