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Tanzania has embarked on a major domestic gas production project that is likely to transform the country's economy in fundamental ways, officials say.

Tanzania signed a contract with three Chinese companies on July 21st to immediately start construction of a 512-kilometre pipeline from Mtwara to Dar es Salaam, according to Ministry of Energy and Minerals Permanent Secretary Eliakimu Maswi.

Maswi told Sabahi the project will cost 1.86 trillion shillings ($1.2 billion), funded by a loan from the Export-Import Bank of China. Construction is expected to be completed within 18 months, he said.

The plan involves building a 36-inch pipeline for 487 kilometres and a 24-inch pipeline for 24 kilometres, connecting the mainland to the gas source on Somanga Fungu, a small island in the Indian Ocean, Maswi said.

Maswi said the gas used to generate electricity currently costs $0.42 (663 shillings) per megawatt.

"But with this pipeline in place, it is unbelievable," he said. "The cost of the same gas, enough to produce a unit, will drop to $0.02, almost 32 shillings, after completion of the construction. This is going to mean a lot to the Tanzanian economy."

Since 2006, Tanzania has experienced periodic power rationing, which Maswi says he hopes will be resolved when this project is completed and production begins.

China Petroleum Technology Development Corporation, Petroleum Pipeline Engineering Bureau and China Petroleum Pipeline Engineering Corporation have been awarded the contract to set up the pipeline.

Yona Killagane, director general of the Tanzania Petroleum Development Corporation (TPDC), says the new pipeline will have the capacity to transport 784 cubic feet of gas per day, which will generate 3,920 megawatts of electricity.

Tanzania's current demand is 720 megawatts per day. Therefore, by generating 3,920 megawatts through domestic gas reserves, the country will have a surplus of more than 3,000 megawatts to be used for export or to develop new industries, Maswi said.

Economist Benson Mahenya, director of Andrew's Consulting Group (ACG), says the project is likely to boost the economy.

"Obviously, gas is the cheapest and most efficient source of energy," he told Sabahi. "If the reduction is passed to the end consumer, Tanzanians will be relieved."

Mahenya says the lower price of gas will encourage new investments in various industries through reduced production costs. "The multiplier effect will be unique. With the energy cost down, we are going to have a lot of factories that will generate many employment opportunities," he said.

However, he voiced scepticism about how soon the market will see benefits reach end consumers. He says since the Tanzania Electrical Supply Company (TANESCO) is highly indebted, the windfall profit will not be seen for at least two years after the construction's completion.

"They will use this super profit to service debts and buy new plants," Mahenya said. "Maybe by 2015, when we are holding the next elections, gas will be used as a political weapon through reducing the price per unit to show voters the government in power is quite responsible."

TPDC Senior Research and Development Officer Charles Sangweni says Tanzania's gas reservoirs will last for more than 100 years, Tanzania's Daily News reported. Established gas deposits at Songosongo, Mnazi Bay, Mtwara, Noria, Mikindani and Mkuranga in the Coast region amount to 30 trillion cubic feet.

He said available gas deposits are worth 626 trillion shillings ($397 billion) and Tanzania can capitalise on the natural resource by supplying its neighbours.