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sharing in governance of extractive industries

New oil and gas model for Tanzania should base on appraised reserves, not on production sharing

Production sharing model in oil and gas Tanzanian Government introduced recently is not one of good options developing countries like Tanzania could have considered to pick from.

It is bad because it only prescribes Tanzania a share of the minor profits which would realize from oil and gas sales after many years of waiting for costs recovery to accomplish, and not of other more important forms of oil and/or gas profit which could start generating as soon as appraisal of oil and/or gas prospect has been made.

A good model for Tanzania or any other developing country should be one which gives the developing country a deserved share in the ownership and management of any oil and gas appraisal and exploitation, and of all forms of important profits which could be generated from such appraisal and exploitation happening in the developing country.

Profits from mined oil or gas sales are comparatively minor and take a very long period of waiting for costs recovery to accomplish before they could start generating and are just a mere fraction of the natural capital inherent in the appraised oil and gas reserves.

On the other hand, the profits which could be generated from partial or total sale of appraised oil or gas reserves, or partial utilization of the rights on appraised oil and gas reserves as collateral in the mobilization of loans for investing in other high and quick return investment opportunities, like in oil and gas appraising elsewhere could enable player to regenerate profit many times the market value of sold oil or gas reserves still in ground and partially in the hands of the player.

It means, owning shares (preferably majority) on appraised oil and gas reserves enables developing country like Tanzania to maximize her benefit by selling all or part of her shares on appraised oil or gas reserves for profits to invest in other high and quick returning investment opportunities like in oil and gas appraising elsewhere, from which re-generated profit could be many times the market value of sold oil or gas reserves still in ground.

Again, owning shares of rights on appraised oil and gas reserves enables oil and/or gas rich developing country like Tanzania to use all or portion of her rights on the same as collateral in loans mobilization for investing in other high and quick return investment opportunities like in oil and gas appraising elsewhere, from which profits many times the market value of the appraised oil and gas reserves still in ground and in her hands could also be generated.

Optimal benefit here could be achieved when the loan mobilization and investing in other higher value investment opportunities like in oil and gas appraising accomplishes successfully and repeatedly.

Therefore, optimal for Tanzania and any other oil or gas rich developing country is the model enabling the country to exploit the most important profit generation potentials in any oil and gas appraisal and exploitation, which are the profits which could be generated from partial sales of rights on appraised mineral reserves and partial utilization of the rights on appraised oil and gas reserves as collateral in loan mobilization to invest in other high and quick return investment opportunities like in oil and gas appraisal elsewhere.

These are the main profit generation opportunities multinational oil and gas companies are exploiting to maximize their benefit, and should be main basis of partnership between oil and gas rich developing countries and the multinational oil and gas companies operating in their countries, on which interests of oil and gas rich developing countries should be pegged.

Best model for oil and gas rich developing countries like Tanzania should therefore be a free carried plus paid for shares of the rights in any oil or gas appraisal which would take place in the developing country in partnership with foreign investors.

If the private sector and workers of a developing country like Tanzania are also enabled to invest in, such share of a developing country like Tanzania could come to 60 % or anything more than that in any rights on appraised oil or gas reserves in the country.

Such share of appraised oil or gas qualify the developing country a minimum share of 60 % of the price involved in any joint venture sale of rights on jointly appraised oil and/or gas reserves to another shareholder or owner plus capital gain tax on the maximum of 40 % of the sale price which would go to the multinational oil and gas partner.

Moreover, such model very well enables private sectors and workers (through their social security savings) in developing countries to participate comfortably and effectively in any oil and gas appraisal which would take place in their countries in partnership with foreign multinationals.

Sensible entrepreneur wouldn’t invest in the appraisal of oil or gas prospects for the paltry and uncertain production profits which could only start generating at the end of many years of waiting (e.g. 20 years) for costs recovery by the foreign joint venture partner (s) to accomplish, when it is possible to invest for the most important profits which could be realized from selling all or part of ownership rights on appraised oil and gas reserves at the end of very short waiting of let’s say 3-5 years appraisal period or using partial share of rights on appraised oil or gas reserves as collateral for loans mobilization to invest in other more important investments like oil or gas appraisal elsewhere.

Reconsideration of the production sharing model Tanzania has chosen is therefore a must, because other options exist, which could enable the country to use her heritage oil or gas prospects wisely and generate profits for herself timely and many times the market value of the would be appraised oil or gas resources in Tanzania.

Good model for oil and/or gas rich developing countries like Tanzania is one which gives the countries ownership shares (preferably majority shares-let’s say 60 %) of any oil or gas appraised in the countries they could peg on their interests in the profits realized from sales of oil or gas produced and/or sale and/or utilization of their rights on appraised oil or gas as collateral for loans mobilization to invest in other more important investment opportunities like in oil or gas appraisal elsewhere.

Production sharing is main behind the noticeable failure of the foreign companies led appraisal and exploitation of the huge natural capital inherent in the mineral resources of developing countries to contribute noticeable and sustainable economic growths in the developing countries.

Instead, mineral rich developing countries continue becoming poorer as the foreign led appraisal and exploitation of the profit potentials inherent in their mineral resources continue pegging them only on the minor profits which generate after a long waiting period for costs recovery to accomplish from sales of extracted minerals, and nothing of the most important appraisal profits and appraised mineral reserves they could have timely used as collateral in their mobilization of loans for investing in other high and quick return investment opportunities in the development of their economies for the benefit of their generations.

Wondering why distinguished government economists in developing countries like Tanzania are unable to recognize and advice their governments accordingly on ways out of the suicidal models of production sharing in oil or gas they keep on copying from one another, and which deny the developing countries a share of the most important profits realized in the business of oil or gas appraisal and exploitation. Probably it is the bad economics our economists are equipped with.

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