Tanzania Govt: We can benefit from BG Group’s £35bn takeover

Royal Dutch Shell

Tanzania has said that it would not only be gaining capital gain tax payment when BG Group transfers its shares to Shell, but it would also be assured of a market for its liquefied natural gas (LNG).

Investors in Royal Dutch Shell have given a green light to the Sh81.7 trillion (£35 billion) takeover bid for rival BG Group, making it a near certainty that the biggest energy deal in more than a decade will go ahead.

Barring an unexpected upset at a meeting of BG shareholders, the transaction will formally become effective on February 15, ending almost 20 years of independence for BG, which was spun out of the old British Gas, write Christopher Adams and Duncan Robinson.

The Tanzania Petroleum Development Corporation (TPDC) director for upstream operations, Mr Kelvin Komba, told BusinessWeek that Shell had majority control on the LNG market in the world which ultimately spelt certainty that Tanzania will have a buyer for the product without having to look for market.

He said BG is not only selling its Tanzania shares but all its shares across the world, making Shell the majority owner of the BG assets.

“When the transaction pushes through, structure-wise in Tanzania Shell will now be the majority shareholder who makes all the decisions while BG continues as it is performing all exploration and production activities,” he said.

According to him, Shell will own 81 per cent of all the total assets while BG remains with 19 per cent.

He stressed that Tanzania remains safe because according to the terms of the contract, 60 per cent of the total assets will be for BG and 40 per cent government through its Ministry of Energy and Minerals and TPDC. In view of this, he said Tanzania which has agreed to the transaction will only endorse it when the capital gain tax is paid.

Exploration for natural gas underway in Tanzania waters
Exploration for natural gas underway in Tanzania waters

Tanzania will be banking on the Income Act, 2004 which requires that the country has the right to collecting revenues when a transaction such as this happens.

Section 90 of the Income Tax Act requires a person who derives a gain from the realisation of an interest in land or buildings or share or securities held in a resident entity situated in the United Republic to pay Capital Gains Tax.

This simply means that it is one obligation to pay tax when a person, for example, parts with land/property that he/she previously owned – in this case, the shares.

The applicable rates are 10 per cent of gain for a resident person and 20 per cent for a non-resident.

Similarly, Section 56 (1) of the Income Tax Act, 2004 reads: “Where the underlying ownership of an entity changes by more than 50 per cent as compared with that ownership at any time during the previous two years, the entity shall be treated as realising any assets owned and any liabilities owed by it immediately before the change.”

Apparently, this applies to this deal.

Going by Section 56 (5) of the Finance Act 2014, the entity shall have the duty to report to the commissioner immediately before and after the changes referred to under subsection (1) had occurred.

The Tanzania Revenue Authority (TRA) director of education and taxpayer services, Mr Richard Kayombo, said they were in discussions with both companies.

According to him, the companies have asked for guidance on how to go about their account papers before committing themselves on their next course of action.

“When they are done, they will meet their tax obligations,” he said.

According to the TPDC director of downstream operations, Mr Wellington Hudson, until negotiations for transfer started BG owned 16 wells for block 1, 2 and 3.

 “According to the PSA, contract companies can sell their shares but subject to the ministry in charge’s approval,” he said.

He noted that the country remained safe in the transaction between the two companies but at the end of the day the BG assets still remained including the blocks which were yet to start production and if they went contrary to agreements the government had mandate to revoke the contracts.

He stressed that in the world it was only Shell and ExxonMobil that have the patent and technology for LNG.

“Any country that wants to do LNG business must either use the Shell or Exxon Mobil technology which will be an added advantage for Tanzania because it will not only be gaining a company that’s well acquainted with LNG but a company that’s also financially stable,” he said.

He stressed that at the end of the day, Tanzania had no choice on the transaction which was being done globally and to refuse would have meant the country remaining without a promising future and with a small portion of the BG shares.

According to the recently released reports, there are fears among some Shell shareholders that the Anglo-Dutch oil major is paying too much for BG after a 70 per cent-plus slide in crude prices to just $31 a barrel, 83 per cent of votes cast at a meeting in The Hague backed the deal.

However, a sizeable minority, some 17 per cent, were opposed.Ben van Beurden, Shell’s chief executive, told its investors ahead of the vote that the BG takeover would “provide a springboard to reshape” the group. Shell will gain billions of barrels in Brazilian deepwater oil reserves and become a global liquefied natural gas giant. He said: “It is a tremendous opportunity to create value for BG shareholders and our Shell holders. It will accelerate and derisk our strategy.”

In a general meeting, investors focused on whether Shell could cope with new targets aimed at cutting carbon emissions agreed in Paris by world leaders in December, rather than the merits of the BG deal and the recent drop in oil prices.

A handful spoke out against the transaction during the two hour meeting, worrying about whether the deal remained viable with oil at current spot prices of $30 per barrel. Some argued that Shell should concentrate more on renewable energy.

Mark Van Baal, who leads a group of 1,000 small “green” shareholders in Shell who declined to back the deal, said:  “There are a lot better ways to spend €50 billion. In a world with $30, the number that will roll out of the model will look terrible. . . At $100 [oil], this deal will look the steal of the century.”

Simon Henry, Shell’s chief financial officer, played down the prospects of oil staying at low levels, of $40 to $50 a barrel, over the long-term.

“Shell on its own would have challenges in that scenario,” said Henry, who also pointed out that the average cost of much of BG’s production was $20 per barrel.

Source: Rosemary Mirondo for The Citizen