Local content requirements in Tanzania's petroleum sector

The petroleum sector in Tanzania has garnered significant attention in recent years. With the discovery of substantial offshore gas reserves, Tanzania stands poised to leverage its hydrocarbon wealth to foster economic growth and development. A robust regulatory framework is essential to ensure responsible and sustainable development in the petroleum sector.

The Government of Tanzania (GoT) has recently implemented policies to promote transparency and attract investment while ensuring local inclusiveness through strict local content requirements in the petroleum sector. The local content requirements are aimed at ensuring availability of opportunities for Tanzanians in the petroleum sector. With regards to legal framework, the petroleum sector is mainly governed by the Petroleum Act No. 21 of 2015 (the Petroleum Act) supplemented by the Petroleum (Local Content) Regulations, G.N. No. 197 of 2017 (as amended) (the Petroleum Regulations) (collectively referred to as “Petroleum Legislation”) which are specifically tailored to cater for local participation.

In this month’s legal update, we analyse the local content requirements in the petroleum sector.

Key Interpretations

The following key terms have been defined in the Petroleum Legislation which are applicable to this legal update:

“Contractor” means a second party or an entity to which any interest on the licence may be transferred in the application of the provisions of the relevant agreement;

“Downstream activities” means the transportation, distribution, storage, regasification and marketing of gas and petroleum products;

“Licensee” means a licensee or a holder of a licence granted by the Energy and Water Utilities Regulatory Authority (EWURA);

“Local content” means the quantum of composite value added to, or created in, the economy of Tanzania through deliberate utilisation of Tanzanian human and material resources and services in the petroleum operations in order to stimulate the development of capabilities of Tanzanians and to encourage local investment and participation;

“Midstream activities” means activities related to petroleum processing, refining, liquefaction, storage and transportation to the point of supply or loading as a commodity;

"Natural gas” means any hydrocarbons produced from the contract area which at a pressure of 1 atmosphere and a temperature of sixty degrees Fahrenheit (60ºF) are in a gaseous state at the wellhead, and include residue gas after the extraction of liquid hydrocarbons therefrom, both associated and non-associated natural gas, and all of its constituent elements produced from any well in the contract area and all non-hydrocarbon substances therein;

“Oil” means naturally occurring liquid hydrocarbon (crude oil) and the refined products obtained from this;

“Petroleum activity” means petroleum operations and all other petroleum and natural gas midstream and downstream activities;

“Petroleum products” means organic compounds, pure or blended, which are derived from refining or processing of petroleum crude oils, biofuels or synthetic fuels and includes:

• asphalts, bitumens, petroleum coke and other residual products;
• bunkers or heavy residual fuel oils for combustion engines or industrial heat processes, such as burners for boilers or heating furnaces;
• commercial gases, methane, ethane, propane, butane and other similar petroleum gases, biogas or mixtures of these gases, whether in gaseous or liquefied state;
• gasoil or automotive diesel, biodiesel, industrial marine diesels or synthetic diesel;
• gasolines, petrol or napths or bioethanol products;
• kerosene or other similar oils for illumination or combustion applications;
• lubricating oils, base oils or refined and blended finished oils;
• turbo fuels for jet propulsion engines; and
• other products or by-products of petroleum crude processing having a flashing point lower than 120 degrees Celsius; and

“Upstream activities” means and comprises of geophysical exploration, exploration for and development of petroleum, constructing and operating of wells, production of petroleum, construction, operating and use of storage reservoir, construction and operation of pipelines and other special infrastructure for petroleum.

Local Content Requirements

For entities engaging in the petroleum sector, the Petroleum Legislation poses strict requirements on local content to ensure local participation from the level of shareholding to management depending on the business of the petroleum product consumers. The requirement of local shareholding specifically applies to an entity which seeks to provide services to the oil and gas or mining companies (i.e., a service provider).

From a practical perspective, an entity licensed to undertake petroleum activity by EWURA (but is not a service provider to oil and gas or mining companies) may retain 100% foreign shareholding. However, such entity will be required to adhere to ongoing compliances which include submitting a local content plan and an annual local content performance report.

As part of ongoing compliances, the Petroleum Regulations provide the following requirements:

1. Submission of a local content plan for approval by EWURA. Please note that this requirement shall apply to a licensee, contractor, subcontractor or any person intending to undertake petroleum activity. It is a legal requirement for a local content plan to be submitted to EWURA prior to commencing the petroleum activities and on an annual basis. Regulation 11 of the Petroleum Regulations requires a local content plan to include the following details:
   1. employment and training;
   2. succession plan, where applicable;
   3. use of financial, banking, insurance, engineering and legal services;
   4. research, development and innovation;
   5. procurement of goods and services;
   6. technology transfer; and
   7. any other information as required by EWURA.
2. Submission of an annual local content performance report to EWURA. Regulations 34 and 35 of the Petroleum Regulations provide an obligation to a licensee, contractor, subcontractor or any person with a contractual relationship with a licensee, contractor, subcontractor, to submit this report for review within 60 days of the beginning of each calendar year.

Local content plan

1. Employment and training

• Regulation 14(1) of the Petroleum Regulations provides that a contractor, subcontractor, licensee or other person engaged in petroleum activity shall employ only Tanzanians for semi-skilled and unskilled jobs. “Semi-skilled labour” means jobs which require basic knowledge in the area of professionalism and “unskilled labour” means jobs which do not require special training or skills.
• An exemption can be granted by EWURA if a Tanzanian cannot be employed in the above-mentioned positions due to lack of qualifications. An entity may employ a non-Tanzanian in semi-skilled labour upon obtaining a written approval from EWURA pursuant to regulation 14(3) of the Petroleum Regulations.

2. Minimum local content levels and a sucession plan

• Regulation 29 of the Petroleum Regulations provides that any person carrying out petroleum activities shall maintain the minimum local content levels specified in the First Schedule to the Petroleum Regulations. The minimum threshold will depend on the number of years in which the relevant entity has been in operation. It is worth noting that the Minister of Energy may prescribe minimum local content levels in addition to those stipulated in the First Schedule to the Petroleum Regulations. Please see the table below containing the minimum local content levels.

• Please note that the Petroleum Regulations provide a timeframe within which any person carrying out petroleum activities shall be required to comply with the minimum local content levels. The Petroleum Regulations specifically provide that the minimum local content levels, among other local content requirements would become operational within six (6) months from the date of publication of the Petroleum Regulations. The Petroleum Regulations came into operation on 18 May 2017, therefore, the timeframe for compliance expired on 18 November 2017. 
• In addition to the above, regulation 13 of the Petroleum Regulations provides that the local content plan submitted shall, where applicable contain a detailed succession plan for any employment position which is occupied by a foreigner to ensure that the minimum local content levels are maintained. Despite this being a legal requirement under the Petroleum Regulations, a succession plan is also necessary for the purposes of applying for and renewing residence and work permits under the immigration laws.

3. Use of financial, banking, insurance, engineering and legal services

• From a finance perspective, regulation 26 of the Petroleum Regulations requires a contractor, subcontractor, licensee or other person engaged in petroleum activities to give priority to a Tanzanian financial institution or organisation with respect to petroleum activities. This means that in terms of procuring loans, the relevant entity should first consider procuring funding from Tanzanian financial institutions before it approaches foreign lenders. In the event where funding cannot be procured from a local financial institution or organisation, offshore financial services may be obtained, subject to prior written approval from the Bank of Tanzania (BoT).
• Furthermore, regulation 28 of the Petroleum Regulations provides the requirement for a contractor, subcontractor, licensee or other person engaged in petroleum activities to maintain a bank account with a Tanzanian bank and transact business through banks registered in Tanzania. A Tanzanian bank is defined to mean a bank that is licensed by the BoT to conduct banking business. This provision goes hand in hand with regulation 3(5) of the Foreign Exchange Regulations, G.N. No. 294 of 2022 (as amended) (the Foreign Exchange Regulations) which states that a resident, other than a bank or financial institution, shall not open or maintain an account outside Tanzania except for settlement of securities in the prescribed territory or unless expressly permitted by the Governor of the BoT. Regulation 2 of the Foreign Exchange Regulations defines a ‘resident’ to mean a person who resides consecutively or whose centre of predominant economic interest is in Tanzania for 12 months or more. This means that:
  • a business entity incorporated or registered in Tanzania is considered to be a resident, irrespective of nationality of the owner(s) of the business;
  • a person working in Tanzania for at least one year or intends to make Tanzania his or her principal dwelling or place of business is considered to be a resident; and
  • diplomats, peacekeeping and other military personnel, and civil servants employed abroad in government bodies, as well as members of their households are considered to be residents of the economic territory of the employing government (i.e., in this case Tanzania).
• With regards to insurance, regulation 21 of the Petroleum Regulations provides that a contractor, subcontractor, licensee or other person engaged in petroleum activity shall insure any insurable risk relating to petroleum activity with a Tanzanian insurer. However, in the event where no Tanzanian insurer can provide the required insurance cover, an exemption may be granted by the Tanzania Insurance Regulatory Authority (TIRA) for the contractor, subcontractor, licensee or other person engaged in petroleum activity to obtain insurance from a foreign insurance company. 
• Moreover, regulation 22 of the Petroleum Regulations requires a contractor, subcontractor, licensee or other person engaged in petroleum activity to retain the services of a local legal practitioner or a Tanzanian legal firm. 
• With respect to engineering services, regulation 24 of the Petroleum Regulations provides the requirement for a contractor, subcontractor, licensee or other person engaged in petroleum activity who seeks engineering services to use the services offered by a Tanzanian engineering firm.
• However, if such services are not available, the Engineers Registration Board (ERB) may allow the relevant entity to engage a foreign engineering firm as provided under regulation 24(2) of the Petroleum Regulations. Once approval is obtained from ERB, the relevant entity will be required to submit the approval to EWURA prior to procuring the engineering services.

4. Research, development and innovation

As part of the local content plan, a contractor, subcontractor, licensee or any other person engaged in petroleum activity shall be required to submit, on an annual basis, a detailed programme for research, development and innovation, the budget for the promotion of education, training and research as well as practical attachments in Tanzania in relation to its overall work programme and activities. This will specifically include the following information:

• outline an evolving 3-to-5-year programme for petroleum related research, development and innovation initiatives to be undertaken in Tanzania;
• details of the anticipated expenditure that shall be made in implementing the research, development and innovation, and budget plan;
• provide for public calls for proposals for research, development and innovation initiatives associated with the activities of the relevant entity and criteria for selecting proposals which qualify for support; and
• details of the manner in which the relevant entity shall collaborate with EWURA, as the case may be, higher learning institutions and other local training, learning and research institutes in the area of research, development and innovation.

5. Procurement of goods and services

It is a local content requirement that licence holders, contractors and subcontractors give preference to goods which are produced or available in Tanzania and services which are rendered by Tanzanian citizens or local companies. As such, the relevant entity will be required to include a detailed explanation on procurement of goods and services. 

6. Technology transfer

Regulation 17 of the Petroleum Regulations establishes the requirement for a contactor, subcontractor, licensee or any other relevant person to implement the local content plan on technology transfer and supplier development programmes and prioritise the promotion of technology transfer to Tanzania in relation to petroleum industry and its supply chain.

Annual local content performance report

The relevant entity will be required to submit an annual local content performance report covering all its activities for the year under review. According to regulation 34(2) of the Petroleum Regulations, the report shall:

• specify by category of expenditure the local content on both current and cumulative cost basis;indicate the employment achievement in terms of hours worked by Tanzanians and foreigners as well as their job positions;
• indicate the training, research, development, innovation, industrial and technology transfer availed to Tanzanians;
• indicate the actual procurement of goods, works and services executed and other information set out in the Third Schedule to the Petroleum Regulations. This information shall include a description of scope of work done and a list of bidders with their description in terms of corporate ownership;
• indicate changes of the implementation of the approved local content plan and assign reasons; and
• any other information as EWURA may require.

Default and Penalties

To ensure adherence to the local content requirements, the Petroleum Legislation imposes strict penalties in the event of non-compliances. In particular, regulation 47(3) of the Petroleum Regulations provides for a penalty of not less than TZS 100,000,000 (approximately USD 39,000) and/or imprisonment of a term of not less than 5 years for any person who colludes with a citizen or a local company to deceive EWURA as representing a local company to achieve the local content requirement under the Petroleum Regulations. It is crucial to note that there are other potential penalties imposed on licensees, contractors, subcontractors or any person engaging in the oil and gas sector. These include penalties for various failures such as carrying out petroleum activities without the required local content requirement.

Conclusion

Development of the petroleum sector in Tanzania presents significant economic opportunities. Furthermore, the availability of natural gas can reduce reliance on imported fuels and enhance energy security, thereby bolstering the country's economic resilience. To fully capitalise on petroleum resources, it is important for the GoT to invest in the necessary infrastructure, including pipelines, liquefied natural gas (LNG) terminals, and processing facilities. Infrastructure developments are crucial for attracting further investment and unlocking the petroleum sector's potential. The GoT has so far established projects such as the East African Crude Oil Pipeline (EACOP) and the construction of an LNG plant in Lindi, aimed at facilitating the transportation and monetisation of natural gas.