African country hit with $1.2 billion claim as Orca Energy embarks on legal fight over breach of gas contracts

Toronto-listed oil and gas player Orca Energy with assets in Tanzania intends, through its subsidiaries, to kick off arbitration proceedings against the country’s government and a state-owned company for alleged violations of several agreements related to a gas field in Tanzanian waters, if no agreement is reached within the timelines the firm has set to try to sort out the issue.

As disclosed by Orca, its affiliates, Tanzania-based PanAfrican Energy (PAET) and Mauritius-headquartered Pan African Energy Corporation (PAEM), issued a notice of dispute against the government of Tanzania for breach of the bilateral investment treaty (BIT) between the governments of the two countries. 

Additionally, the UK firm’s subsidiaries initiated a contractual dispute against the government of Tanzania and state-owned Tanzanian Petroleum Development Corporation (TPDC), for breaches of the production sharing agreement (PSA) between the government of Tanzania, TPDC, and PAET, and the gas agreement (GA) between the government of Tanzania, TPDC, Songas, and PAET. Orca values the amount of damages at over $1.2 billion.

The disputes relate to Songo Songo, a field located in shallow water 15 km off the coast of Songo Songo Island and 200 kilometers south of Dar es Salaam. Orca operates the field’s eight wells, four offshore and four onshore, and the island’s gas processing facility on behalf of Songas. It also owns and operates a 50 km downstream distribution network and a compressed natural gas facility in Dar es Salaam.

The gas in the Songo Songo reservoir is categorized as either protected gas (PG) or additional gas (AG), the former owned and sold by TPDC under a 20-year gas agreement to Songas and the Tanzania Portland Cement Company (TPCPLC). Songas uses PG, which Orca was obligated to make available through July 31, 2024, for powering its gas turbines at the Ubungo power plant. Additional gas is the gas in the discovery bocks that is in excess of protected gas. Orca is entitled to produce and sell all AG until October 2026.

In 2001, TPDC won the development license for the Songo Songo field for an initial term of 25 years, ending on October 10, 2026. The Tanzanian government recognized that foreign investment and technical assistance were needed to develop the field, and accordingly, entered into several agreements with PAET, including the PSA and GA.

22 years later, PAET formally requested that TPDC apply to the Minister of Energy of Tanzania for an extension of the license set out in the PSA, which TPDC did not do, without explaining why. The state-owned company said that the failure to apply for an extension relates to its position on the continuation of PG, which the UK player deems baseless and legally flawed.

As explained by Orca, TPDC made repeated allegations about breaches of license terms by PAET, which the latter rebutted. As the rebuttals were not answered, the company feels it has no choice but to launch legal action to protect shareholders’ interests.

Furthermore, on April 15, 2024, the Permanent Secretary of the Minister of Energy of Tanzania asked TPDC to “ensure that Protected Gas continue to be produced to the end of the Development Licence on 10th October 2026,” with TPDC deciding that PG should continue although the initial term ended. 

After PAET informed TPDC of the commercial terms on which it would supply AG to Songas, which was supplied as PG before the end of the contractual term, TPDC stated it would reject those terms and the commercial terms of a new gas sales agreement (GSA) between PAET and TPCPLC, according to which PAET would provide TPCPLC with AG previously supplied as PG.

As TPDC claims PG continued after July 31, 2024, PAET appealed these decisions to the Ministry of Energy which rejected this, asking that the latter propose suitable wording for an “interim arrangement” to extend the provision of PG, or “alternative means” to operate the field would be sought. PAET interpreted this as a threat indicating that its refusal to tolerate TPDC and the government of Tanzania’s violation of its rights would lead the government to expropriate PAET’s rights to the field.

As the supply of PG ended on July 31, 2024, PAET considers all gas produced from the field after that date to be AG,  believing that it is entitled to compensation at commercial rates for any gas supplied as such. Thus, on August 7, 2024, PAET and PAEM issued a notice of dispute to the government of Tanzania and TPDC for violations of the Mauritius-Tanzania BIT by the government of Tanzania and the violations of the PSA and GA by TPDC and the African country’s government. 

Under the notice, the two companies ask for additional negotiations with the government of Tanzania and TPDC. However, in the absence of a resolution within six months from the date of the notice of dispute for the BIT, and within 45 days of the notice of dispute for the PSA and GA, PAEM and PAET intend to launch their respective arbitral proceedings in line with relevant legislation.

The African country has recently been a site of seismic surveys as TGS was tasked with collecting 2D and 3D seismic data relating to the maturity and distribution of source rocks off the coast of Tanzania to estimate hydrocarbon plays, helping energy players understand the region’s oil and gas potential.