New DRC Oil and Gas Legislation

August 19, 2016

Introduction

The Democratic Republic of Congo (DRC) is considered to hold considerable crude oil reserves - perhaps 6% of the entire African continent’s reserves. They are mainly located in Bas-Congo (along the DRC’s Atlantic Ocean coastline), the Central Basin and the Albertine Graben. However, the DRC’s crude oil production has plateaued at the very modest level of around 25,000 barrels per day for the last fifty years. Thus, the DRC oil and gas sector has a significant development potential and the country could see an important increase in its GDP if it succeeds in implementing an environment that is favourable to attracting major investment. One important element is the recent modernisation of the oil and gas legislative framework.

Oil and gas sector reform and current legislation

The DRC oil and gas sector was until recently governed by Ordinance-Law No. 81-013 establishing general legislation on mines and hydrocarbons, as modified by Ordinance-Law n°82-039 dated 5 November 1982 and Law n°86-008 dated 27 December 1986 (the Mines and Hydrocarbons Law). However, since 2002, the mining sector has been governed by a separate mining code, which rendered many provisions of the Mining and Hydrocarbons Law obsolete.

After several years of deliberations on the reform of oil and gas legislation, the DRC adopted Law n°15/012 dated 1 August 2015 establishing a general regime for hydrocarbons (the Hydrocarbons Law). The legislative reform process was recently concluded by the adoption of Decree n°16/010 dated 19 April 2016 establishing hydrocarbons regulations (the Regulations), which, among other things, adds more details to the applicable fiscal regime. This briefing summarizes the main provisions of the new Hydrocarbons Law and Regulations relevant to oil companies engaged in upstream activities.

Petroleum rights

The Hydrocarbons Law specifies that the State owns all national hydrocarbon resources up to the point of export, but that rights to carry out petroleum exploration or exploitation operations may be granted to local or foreign legal entities selected through competitive bidding on the basis of technical and financial criteria established by the Minster of Hydrocarbons and approved by the Council of Ministers. Such rights are granted pursuant to a petroleum contract (as further discussed below). The Hydrocarbons Law no longer provides for concessions, unlike the old Mines and Hydrocarbons Law.

Foreign entities must form local subsidiaries under DRC law in order to engage in petroleum exploration or exploitation activities.

Exploration rights are valid for 3 years (or 4 years for areas with difficult geological or access conditions), renewable twice for the same period. The maximum duration of exploration rights under the Mines and Hydrocarbons Law was 8 years.

At each renewal, an exploration rights holder must relinquish at least half of the surface area subject to such rights. Holders of exploration rights who demonstrate the existence of a commercially viable deposit are granted exploitation rights upon the approval by the Minister of Hydrocarbons (after consultation with the Council of Ministers) of a development and production plan submitted by the holder. This plan must contain, among other things, an environmental and social impact study, as well as a community development contribution plan.

Exploitation rights are granted for a maximum period of 20 years, renewable once for a maximum of 10 years (comparable to concessions under the Mines and Hydrocarbons Law). Holders must commence work within 12 months after the approval of the development and production plan.

Prospecting authorisations may also be granted, but they do not provide for an exclusive right and are not subject to petroleum contracts.

In an important step towards increased transparency, the Hydrocarbons Law provides that exploration, exploitation and prospecting rights must be recorded in a register maintained by the Minister of Hydrocarbons. The Regulations specify that access to the register is available upon motivated request and the payment of a fee.

Petroleum contracts

Petroleum contracts grant and define exploration and exploitation rights under the Hydrocarbons Law. Such contracts are entered into by the State and a contractor consortium comprising (i) the successful bidder(s) selected by the Minister of Hydrocarbons pursuant to the tender process prescribed by the Hydrocarbons Law and Regulations, and (ii) the State-owned oil company (as discussed in more detail below).

Petroleum contracts and their amendments are executed on behalf of the State by the Minister of Hydrocarbons and the Minister of Finance, after deliberation in the Council of Ministers. However, such contracts are only effective upon approval by Presidential order, a controversial provision which creates uncertainty.

Petroleum contracts comprise production sharing agreements (PSAs) and services contracts (Services Contracts).

PSAs must, among other things, set out the surface area of the relevant block, the minimum exploration work program and investment, environmental provisions, obligations relating to the discovery and development of commercially viable deposits, production sharing obligations, the terms and conditions of State participation, the cost recovery procedures, the tax and customs regime, renegotiation procedures, community and sustainable development contributions, a training program for Congolese technicians and senior executives, dispute resolution and arbitration procedures, and any other negotiated provisions consistent with applicable law.

Services Contracts encompass the delegation by the State or the State-owned oil company of the performance of all or part of the petroleum works to a third party. Services Contracts include technical assistance contracts and risky services contracts. The terms and conditions of Services Contracts are subject to negotiation and will be set forth therein.

Neither the Hydrocarbons Law nor the Regulations contain model petroleum contracts, nor do they specify in which cases PSAs, as opposed to Services Contracts, may be used.

Petroleum contracts must be published in the Official Journal of the DRC and on the website of the Ministry of Hydrocarbons within 60 days of approval. A list of the entities who submit bids for such contracts and of those who win them must also be published in the same manner, as well as in the local and international media. These provisions are a welcome contribution to transparency.

Last but not least, the Hydrocarbons Law states that petroleum contracts cannot, under any circumstances, contain any derogations from such law, and will be null and void if they do.

Fiscal regime for PSAs

The PSA fiscal regime set forth in the Hydrocarbons Law and the Regulations is mandatory and comprehensive. Thus, PSA parties are subject to all specified fiscal obligations (although negotiated rates and amounts may be higher than the prescribed minimums, where applicable) but are exempt from any non-enumerated taxes. The fiscal regime for Services Contracts is established in such agreements.

The tax regime introduced by the Hydrocarbon Law and Regulations is based on the division of oil blocks into four categories (A through D) based on their desirability (in decreasing order), to be determined by taking into account known reserves, geological risk, access conditions and other factors specified in the Regulations. The tax treatment of each block with respect to bonuses, minimum royalties, cost recovery and Profit Oil due to the State depends on the fiscal zone it is assigned to, with the most desirable blocks (Zone A) being subject to the most onerous fiscal regime.

The fiscal obligations of PSA holders specified in the Hydrocarbons Law are as follows:

Bonuses

Bonuses are non-reimbursable fees payable to the State upon: (i) the execution of a petroleum contract; (ii) any amendment thereof (including in connection with a transfer, as discussed below); (iii) the recording of an exploration right; (iv) the renewal thereof; (v) the renewal of an exploitation right; and (vi) the production of the first barrel of oil.   The bonus amounts are specified in the relevant contract, subject to minimum levels to be set by joint decree of the Minister of Finance and the Minister of Hydrocarbons. Bonuses are not recoverable as costs.

Statistical Tax

A so-called Statistical Tax equal to 1% of output value is assessed on oil production before the deduction of royalties, as compensation for the services of the various State agencies involved in managing petroleum contracts.

Royalties

Royalty rates are established in the relevant contracts based on production levels, subject to minimum rates set forth in the Hydrocarbons Law, which range from 12.5% for Zone A blocks to 8% for Zone D blocks.

Cost Stop/Excess Oil

After deducting royalties, the producer may allocate oil output towards the recovery of its costs, subject to a cap (Cost Stop), the maximum levels of which are specified in the Hydrocarbons Law and range between 55% of production for Zone A and 65% of production for Zone D. If actual recoverable costs are lower than the Cost Stop, the difference is considered Excess Oil and is equally divided between the State and the producer.

Profit Oil

The remaining output after the above-mentioned deductions (Profit Oil) is shared between the producer and the State according to a negotiated progressive formula, subject to legally required minimums for the State’s share, ranging from 45% of Profit Oil for Fiscal Zone A to 35% of Profit Oil for Fiscal Zone D.

Super Profit Oil

If the price of oil exceeds a contractually designated level, the difference constitutes Super Profit Oil. The Hydrocarbons Law requires that Super Profit Oil be shared “in favor of the State,” while the Regulations state that the procedures for calculating Super Profit Oil will be established by contract. The scope and impact of these provisions is not entirely clear, although “super profits” do not appear to be an immediate concern in light of the current price of oil.  

Social Contributions

During the exploration phase, the PSA contractor is obligated to pay an annual contribution towards social and sustainable development projects, as established by contract but no less than 1% of the budget for the minimum work program. During exploitation, the contractor must allocate .5% of its Profit Oil to such projects. These costs are recoverable.

Surface Rights

Contractors must pay an annual surface rights tax based on the surface of their block(s), amounting to US$100 per square kilometer during exploration and US$500 per square kilometer during exploitation.

Value Added Tax (VAT)

The contractor, its subsidiaries and its subcontractors are exempt from VAT during the exploration phase, but subject to it during the exploitation phase. However, according to the Regulations, VAT paid during exploitation will be reimbursed by the Ministry of Finance.

Transfer Tax

As discussed in more detail below, transfers of exploration and exploitation rights are subject to significant capital gains taxes, as well as amendment signature bonuses.

Other Taxes and Fees

In addition to the fiscal obligations mentioned above, the Hydrocarbons Law requires the payment of administrative fees, an exceptional tax on the salaries of expatriate personnel, and a professional tax on the salaries of Congolese nationals.

Customs Regime

Hydrocarbons exports, as well as imports and exports of goods specifically intended for oil operations, are exempted from customs duties. All other imports and exports must comply with generally applicable customs legislation.

Stabilization

Importantly, there are no provisions in the Hydrocarbons Law or the Regulations regarding the stabilization of the fiscal framework applicable to PSAs. Thus, a new act of Parliament, amendments to the Regulations, or an interministerial decree setting forth minimum bonus amounts, for example, could render the DRC oil and gas tax regime even more onerous. To protect themselves from this outcome, PSA parties should seek to include stabilization clauses in their contracts, whereby the State will agree not to make adverse changes to the applicable legal framework for the duration of the PSA and to compensate the investor if such changes occur.

State participation

It is noteworthy that under the Hydrocarbons Law, the State-owned oil company (presumably COHYDRO (Congolaise des Hydrocarbures) created by Decree-Law n°245 dated 9 August 1999) is entitled to a 20% minimum stake in upstream petroleum activities pursuant to an association contract to be entered into with third parties (which does not create a separate legal entity).

Moreover, the Regulations provide that the Operations Committee, which manages each petroleum contract, is composed of eight voting members, divided evenly between State and contractor representatives. However, one of the latter must be a representative of the State-owned oil company (which, as mentioned above, is an obligatory member of the contractor consortium). Thus, five of the eight Operations Committee members will be State-affiliated, which raises concerns about the State’s influence on project management. However, Article 30 of the Regulations does provide that the decisions of the Operations Committee cannot infringe on the rights and obligations of the parties to the relevant contract.

Transfer of rights

Exploration and exploitation rights may be totally or partially transferred. The Hydrocarbons Law states that any direct or indirect transfer is subject to the prior approval of the Minister of Hydrocarbons (who will inform the Council of Ministers). However, the Regulations provide that transfers to affiliates only require informing the Minister.

Under the Hydrocarbons Law, the State-owned oil company has a pre-emption right in connection with any transfers to non-affiliates. The Regulations extend this right to any other members of the contractor consortium if the State-owned oil company fails to exercise it.

Pursuant to the Hydrocarbons Law, any transfer of exploration or exploitation rights is subject to capital gains tax. The Regulations set the applicable tax rate at 40% for exploration rights and 30% for exploitation rights. The basis for calculating capital gains is to be jointly determined by the Minister of Finance, the Minister of Hydrocarbons and the transferor, and cannot exceed the total cost of work for the relevant period. Under the Regulations, the transferor must also pay an amendment signature bonus prior to the approval of such amendment by Presidential order.

These transfer tax provisions are unusual and onerous, especially since the law does not seem to make an exception for inter-affiliate transfers.

Dispute resolution

Encouragingly for international investors, the Hydrocarbons Law requires disputes regarding hydrocarbons activities that are not amicably resolved to be submitted to international arbitration. Technical experts must be used for technical or operational disputes. Any dispute is governed by DRC law.

Other rights and obligations

The Hydrocarbons Law and Regulations contain detailed provisions on the relations between petroleum contract holders and land owners, as well as the construction and use of infrastructure necessary for petroleum activities.

The new legislation also introduces specific provisions relating to environmental risk assessment and protection, health and safety.

Petroleum companies are to give preference to local employees and subcontractors, subject to equal qualifications.

Finally, the new legislation provides for monetary contributions to social and sustainable development projects, as detailed above.

Transitional provisions

The Hydrocarbons Law contains minimal transitional provisions. It nevertheless confirms that rights lawfully acquired prior to the entry into force of the law remain valid until their expiration, subject to the environmental protection, safety and hygiene provisions of the Hydrocarbons Law, which are effective immediately. When existing rights are renewed, they will be governed by the Hydrocarbons Law. Finally, the law requires the Minister of Hydrocarbons to publish a list of all hydrocarbon contracts then in effect within thirty days of the effective date of the Hydrocarbon Law.

Conclusion

The new DRC hydrocarbons legislation sets out a relatively straightforward and very detailed framework for upstream oil and gas rights. While the level of detail is useful in international investors’ acquiring a fairly accurate view of their rights and obligations, it does leave little space for negotiation or for agreeing a tailored made regime, when the project justifies it. In addition, the fiscal and state participation provisions are more onerous than in several neighboring countries and may be subject to future adverse changes due to the absence of any stabilization clauses. Oil companies interested in upstream investments in the DRC should carefully craft approaches that will maximize the advantages of the recent reforms and minimize their disadvantages.

Norton Rose Fulbright has a strong understanding of the legislative framework and context in the DRC and a long standing relationship with the main stakeholders in the country. We regularly advise petroleum companies on their investments throughout the African continent and around the world.