12 June 2012 (Source: GMT / Reuters Africa)

Dar es Salaam (Reuters) – The largest gas producer in Tanzania – PanAfrican Energy, a unit of Toronto-listed Orca Exploration – said it refuses to pay $33 million that the government says is a legal obligation, in a dispute that could disrupt the country’s gas supplies.

For months, the accusation that PanAfrican has withheld money has put the company on unsteady ground in Tanzania, which is expected to become a significant source of natural gas after news of several big discoveries off its coast this year.

PanAfrican provides the natural gas to fuel generation of about half of the electricity in east Africa’s second-largest economy, which suffers from shortages of hydropower when its weather is dry.

A parliamentary investigation said last year that PanAfrican had denied state-run Tanzania Petroleum Development Corporation (TPDC) a share of gas revenues, a claim that Orca strongly rejects.
“Clearly the government is under pressure to increase its earnings, but we feel the approach taken to resolve this matter has been harsh,” Andrew Brown, PanAfrican’s general manager, told Reuters.
“We are not offering anything that would constitute an offer to compensate for any wrongdoing, as we haven’t done anything wrong.”

PanAfrican said that under the terms of its contract with the government, it is entitled to the money as it recovers the $160 million it has spent in Tanzania so far.

State officials say the funds should not be counted toward cost recovery and belong to the Treasury. The government demanded that the issue be one of many considered when the gas supplier’s contract goes under a routine review this year.

The TPDC says the company spent too much money on downstream network costs, such as the gas facility used to power an electricity plant, and should therefore reimburse the Treasury, because the expenses did not meet the terms of the PSA.

PanAfrican said the spending wasn’t excessive and was in line with international standards.

To settle the matter, PanAfrican agreed to change the terms of its 10-year-old production sharing agreement to give the state a bigger cut of future profits, among other things.

“The audit hasn’t delayed our investments, but clearly the rhetoric flying around has had a severe impact on the business,” Brown said.

The TPDC declined to comment on the issue. “We are still having meetings. I don’t know if there’s a way of discussing it because it’s still ongoing,” said Gabriel Bujulu, principal petroleum engineer at the TPDC, told Reuters.”I don’t think it’s wise to talk about it at this time.”

Orca said in its most recent financial report that PanAfrican collected $18.8 million in revenue from natural gas in Tanzania in the first quarter from the offshore Songo Songo field; made $2 million in profit; and paid $1.8 million to the Tanzanian government under its production-sharing agreement.

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