Petroleum laws in Africa are mostly structured to reflect the value chain of petroleum activities. In other words, the legislation is a sequence reflecting the normal life span of a successful petroleum project. Its purpose is to provide the rules which govern petroleum activities in a Host Nation and how they are regulated.

In line with international best practice, the petroleum legislation must encompass the contractual and fiscal regime for petroleum activities in line with the legislative framework of the Host Nation and international best practice for petroleum operations.  Thus, the preliminary section of most petroleum laws, contain general provisions on the scope of the law and the policy aims and objectives of the Host Nation in developing its petroleum resources.

After assertion of the Host Nation’s ownership rights and policy imperatives for developing the sector, this section of the petroleum law sets out the type of rights on offer. The key issue considered by Host Nations in designing petroleum rights are mainly how profits, or rents from petroleum resources are shared between the Host Nation and investors, and how the costs of petroleum activities will be treated. Answers to these issues determine the type of fiscal system to be adopted by a Host Nation, which in turn influences the nature of petroleum rights a Host Nation decides to award to investors. Against this background the details of the fiscal regime could also be designed to achieve further governmental policy objectives, which are not necessarily tied to mere profit, but may include skills and knowledge transfer, attraction of technology and investment to an undeveloped basin, and local content maximisation.[1]

There are two main legal frameworks governing acquisition of rights to petroleum resources and the rights and obligations of a Host Nation and investors:  Concessions and licences utilised in civil law jurisdictions, such as Cameroon, Algeria, and Angola, and contract-based approaches, such as Production Sharing Contracts (PSC) or Production Sharing Agreements (PSA) utilised in common law jurisdictions, such as Ghana, Kenya, and Tanzania.

Differences in the two main systems boil down to the extent of the IOC’s control, and the NOC’s level of participation in petroleum activities. Another key distinguishing feature is the compensatory arrangements for the Host Nation’s petroleum resources. These are further dealt with below under the Payments Topic. Despite the distinguishing features, it is possible to combine a number of tools from each approach to achieve the desired optimal fiscal outcome. As a result, it is becoming increasingly rare for an award of petroleum rights to fit into any one particular system. In reality, most arrangements for award of petroleum rights by Host Nations combine elements of both systems with a resulting blend of fiscal systems designed to maximize the Host Nation’s share of profit from its petroleum resources. Nevertheless, the PSC is now the most common approach in Africa by which Host Nation’s awards petroleum rights.

In considering the route by which petroleum rights are awarded, a Host Nation must ensure that its policy imperatives in the upstream petroleum sector will be ultimately achieved. 

The Licensing Procedure is the process by which rights to petroleum resources may be acquired. The petroleum law must clearly set out the licensing procedure, together with supporting information, and requirements for negotiation of the petroleum agreement.[1]

As a matter of best practice, the petroleum law must first and foremost delimit the prospective acreage under offer via graticulation (geographic demarcation or division into “petroleum blocks”), which should ideally be uniform areas referred to as the “Contract Area”. Following delineation of the Contract Area, the petroleum law must state the procedure by which a Licence to acquire acreage for petroleum activities can be acquired. There are two broad routes to acquisition of a Licence, namely either through competitive bidding, [2] or direct negotiation and the petroleum law must clearly state the details of each approach and specific requirements.

The openly competitive nature of the bidding approach is preferred, despite the fact that a number of countries still persist in adopting the direct negotiation route, which is fraught with allegations of corruption by public officials and cheating by foreign investors.  The petroleum law must therefore specify the procedure by which bidding will be conducted both locally and internationally.  

Key issues including the following must be addressed: -

1. description of the size of the contract area on offer;
2. petroleum activities anticipated;
3. technical and financial competencies required;
4. details of the proposed fiscal package;
5. processes for bid submission;
6. criteria for evaluation and award; and
7. and negotiation of the Petroleum Agreement

Despite the move towards a more transparent approach to petroleum licensing, most legal regimes nevertheless provide for direct negotiation. Some regimes restrict direct negotiation to only acreage which is not included within that offered for competitive bidding. Other regimes co-mingle direct negotiation with competitive bidding by making provision for the Competent Authority to conduct direct negotiation with prospective investors where it determines that such an approach is in the public interest, without setting out the nature of the public interest justifying a departure from best practice. The challenge inherent in such an approach is that it is unclear the stage at which the choice to undertake direct negotiation supersedes the national interest for openness, transparency, and fairness.

Irrespective of the nature of the petroleum rights on offer, the route to acquisition, whether via direct negotiation or bidding, the terms and conditions for the grant, nature of petroleum activities, and the fiscal regime must be subsequently captured in a petroleum agreement. There are different approaches as to how this is dealt with in petroleum legislation.  Some regimes set out in extensive detail the matters to be addressed in the petroleum agreement such as Mozambique and Senegal. Others such as Ghana, set out the broad outline and make provision for a Model Petroleum Contract, which is sometimes appended to the petroleum law. The Model Contract forms the basis of the negotiation between the Competent Authority and investors for the award of petroleum rights. It is aimed at limiting the parameters for negotiation of the key commercial terms between the parties.

 

Both approaches have their merits, and Host Nations must judge whether putting all the contents of the petroleum agreement in the petroleum law, which is not easily changed is a superior approach. As opposed to the flexibility of setting out only the broad outlines of the contract in the petroleum law, with further details in a Model Contract, which is capable of being negotiated between the Host Nation and investors. Despite the flexibility of the Model Contract approach, arguably, setting out all the contents and terms of the petroleum agreement in the petroleum legislation also provides clarity, openness and certainty for investors.

 

Most petroleum laws in Africa usually also list various additional categories of licences, permits or authorisations that may be granted in relation to petroleum activities.[3] These range from non-exclusive reconnaissance licences for seismic surveys and data collection and interpretation; exploration licence for initial well drilling for exploratory work; and licences for field development and production of petroleum resources.

 

Some jurisdictions may however grant a main petroleum agreement for both exploration, development, and production with the need for the Contractor to acquire permits and authorisations for the various stages of petroleum activities, subject to performance of certain work obligations within specified periods. Failure to obtain these permits and authorisations could result in termination of the petroleum agreement.

Petroleum laws must address the specific requirements for development and production of petroleum. In principle, most petroleum agreements and contracts grant investors and IOCs the right to explore, develop, and produce petroleum. Following a commercial discovery, and appraisal, the next stage in the petroleum value chain is to develop and produce the petroleum resources. The key objectives at this stage is to consider options for development and optimal recovery of the petroleum resources. The petroleum law must set out the requirements, and procedure for application of the requisite licences to enable development and production of the petroleum resources.

Although issues, such as technology transfer, value addition and employment are important considerations, which may require certain payments to a Host Nation and as such impact the fiscal arrangements for an IOC, the key focus of this part of the legislation should be on revenue generation from petroleum resources. The fiscal regime will determine how revenue from petroleum resources are apportioned between the Host Nation, investors, and IOCs, and will employ a combination of tools, including royalties, bonuses, corporate income taxes(CIT), and surface rental fees.[1]  

The fiscal regime adopted by a Host Nation will determine its approach to award of petroleum rights. For instance, a Host Nation’s choice of regime is fundamental to whether a contractual approach, such as PSC or RSC, or public law systems, such as tax/royalty approach ensues. However, it is possible to replicate a particular regime by combining different tools and instruments, for instance, a PSC can be replicated by a combination of royalties and taxes. This approach has been adopted in Ghana whose fiscal system is based on a Concession and PSC approach, sometimes referred to as a Royalty/Tax with State Participation system. Thus, where such a combination or “hybrid” approach is adopted, it is open to a Host Nation to combine various fiscal instruments to ensure the desired optimum package. [2]   

Host Nations tailor fiscal systems to address their individual interests, such as:

1. ownership of petroleum resource base;
2. attract investment, technology and capacity building;
3. knowledge and skill transfer;
4. optimise local content; and
5. level of exploration, development, and production and whether continental shelf has been de-risked.

Although a case-by-case negotiation of fiscal terms is possible based on a broad framework in the petroleum legislation, best practice for petroleum resource governance is for the petroleum law to set out the essential terms of the fiscal package, with minimal scope for negotiations on a project-by-project basis. As opposed to setting out the provisions in petroleum agreements or licences, which are individually negotiated and may not be disclosed to the public. This enables investors to easily understand the nature of a Host Nation’s fiscal package, and amount of taxes and payments required. A transparent approach to a Host Nation’s fiscal requirements in its petroleum legislation avoids allegations of corruption and extensive negotiations between the Host Nation and sophisticated investors who may have a better appreciation of the resource base. An open approach also enables investors readily compare investment opportunities, enabling an investor to quickly determine where to conduct petroleum activities within a specific region.  Algeria’s petroleum law adopts such an approach, where the detail, including the formula for computation of certain taxes and royalties are set out in the law.

Despite best practice in this sector, a Host Nation may decide for reasons in the national interest to only refer to certain aspects of the fiscal regime, such as royalties and surface rentals in the petroleum law. Although this approach is not advised, where a Host Nation so determines to go down this route, the petroleum law must reference other applicable tax laws, such as CIT, Value Added Taxes and Withholding Taxes, for the avoidance of doubt in application, and so investors are fully aware of the totality of their tax obligations.

Crucially, application of the regime must be easily understood by IOCs and potential investors, and the extent to which the fiscal rules will apply to their affiliates, sub-Contractors and petroleum activities. Broadly, the fiscal framework provisions in petroleum legislation should be stable and aim to provide a fair and equitable taxation regime. It must be capable of being applied to all kinds of petroleum agreements, such as concessions, PSCs, and RSCs and aim to avoid double taxation.[3] 

The key issues to consider in setting a fiscal regime for petroleum activities is first and foremost the extent to which the regime will attract investors and IOCs, given competition for investment funding from other nations with petroleum resources.  As such, the fiscal package must reflect the potential state of development, nature of reserves and maturity of a Host Nation’s petroleum sector, with a more generous regime for countries whose petroleum resources have not been de-risked. 

Timing and risks are also crucial in deployment of tools for the fiscal regime. For instance, bonuses and royalties tend to be paid in the early part of the project life cycle, or when production begins, as opposed to profit-based taxes, which may not kick-in until the project makes a profit after recouping costs, which may take a long time. Profit-based approaches such as CIT may not also yield sufficient results since they come into effect only after the project becomes profitable, which may also take a long time. A Host Nation must therefore carefully consider how it deploys relevant tools to ensure that it captures sufficient revenue on a timely basis from exploitation of its petroleum resources.

To encourage investors and IOCs, the regime must also offer appropriate incentives, and avoid vague and sweeping provisions open to arbitrary interpretations and discretionary application, which could encourage potentially corrupt practices. Public perception of the fairness of application of the regime to investors is also important as a regime which appears to reward investors and foreigners over local citizens will be considered unacceptable.[4] Thus a standard uncomplicated fiscal regime for all petroleum activities, which is easy to understand and administer is advocated rather than a multiple complicated bespoke regime, which is beyond the administrative capacity of the Host Nation to administer.

Political risks and the stability of a Host Nation also play a role in determination of the fiscal system. For example, a country with a credible governance system, efficient institutions, a reputation for fairness, and due process is likely to attract more investment for exploitation of its petroleum reserves than a country with an unstable political system with risks of expropriation of assets of investors. Nevertheless, a fiscal regime must strike a balance between stability and being flexible enough to adapt to changing circumstances, such as increases in production and future profitability.

The regime must also be progressive enabling the Host Nation acquire an increasing proportion of profits as the overall profit of the project increases. Approaches in which the Host Nation’s share remains static despite increases in costs and changes to the profitability of the project are unattractive to investors. Moreover, such approaches tend to be politically unpopular during periods when revenue exceeds costs and the Host Nation appears unable to capture the resulting windfall profits.

This section of the legislation addresses the impact of petroleum activities on the environment, in particular, pollution of the air, sub-surface water, soil and sub-soil, and protection of flora and fauna. However, the extent to which issues pertaining to the environment are dealt with in petroleum legislation varies across different countries in Africa.

The common approach is to set out a general provision requiring the Contractor to ensure activities are conducted in accordance with international best practice on environmental protection, and abide by all existing laws and regulations, since most countries have a separate comprehensive legal framework and regulatory agencies responsible for ensuring compliance with the regulations.

However, in terms of best practice, specific provisions for environmental protection, pollution, its remediation, and decommissioning should be provided in the petroleum law. Where relevant, the law must also provide for protection of the historical, cultural and archeological heritage of the region within which petroleum activities are conducted. For example, the impact of petroleum activities on livelihoods, such as farming and fishing, and preservation of archaeological finds. For the avoidance of doubt these provisions must further cross-reference the Host Nation’s pre-existing regulations and measures for environmental protection. It must also provide for the cost of decommissioning and its financing, which in principle, must be borne by the Contractor.

Simply defined, local content is the benefits and added value brought to a Host Nation through natural resource extraction. Local content requirements are interventions in the upstream petroleum sector designed to ensure participation and development of a Host Nation’s labour, usage of local goods and services, technology, and capital. Proponents of local content believe that job-creation and growth of small and medium-sized companies are key components of   industrialisation in countries endowed with petroleum resources. Thus, without local content, the anticipated economic diversification and development will not occur and the enclave nature of the petroleum sector, which relies on imported goods, services and staff, with limited impact on the local economy will persist.[1] In practice, local content policies in Africa have not led to the promised large-scale benefits, economic diversification and industrial development anticipated. Current research has therefore become focused on why these policies have failed.

Nevertheless, local content has become a global phenomenon with pioneers including Brazil, which is often cited as best in class.[2] Other proponents include Malaysia which has developed local content within a market-oriented context, and Norway, which did not impose local content targets as such, but rather instituted an incentive–based system to encourage local content development.

The common threads running through local content development is a focus on linkages between the petroleum sector and other aspects of the economy, and stimulation of broad-based economic growth through spill-overs into non-resource sectors. Underpinning these objectives is the creation of employment opportunities, in-country spending on local goods and services, skills and technology transfer, and equity participation of Host Nation citizens.[3]

Prior to the boom in oil and gas discoveries in Africa, the debate on natural resources and its role in economic development in Africa was conducted primarily in the context of mining, focusing on exploitation of minerals, such as gold, diamond, bauxite and other commodities. Nigeria and Angola were however the exception to this, given their discoveries of oil and gas in the 1950s, which led to attempts to develop basic local content requirements. More recently, a number of African countries, such as Tanzania, Ghana, Senegal, and Uganda have either enacted petroleum sector-specific local content legislation, or revised their petroleum laws to deal more specifically with local content issues.[4] In practice, the laws must be understood in the context of petroleum agreements, Concessions, international bilateral treaties, and other investor-state agreements.

Despite these developments, weak industry capacity in many African countries means that local content enforcement has not made much headway in petroleum activities, and a large proportion of the goods and services required for petroleum resource extraction are still obtained from non-indigenous African suppliers. Local content enforcement has also become bogged down by lack of strategic direction in some African countries and insistence by regulatory authorities on ownership and compliance with unrealistic targets, which bear no relation to the capacity of African Host Nations.

In line with the one-stop shop approach, the petroleum law must set out in broad outline a Host Nation’s local content policy in relation to petroleum activities. Processes relating to application of various local content permits and targets must be dealt with in subsidiary legislation, as is now the common practice.  Regulations may also be issued to clarify the provisions in the legislation. In drafting local content obligations in the petroleum law, the following key issues must be considered:

1. local content must not be seen as a panacea for all developmental challenges in all sectors of the Host Nation’s economy;
2. local content must be focused on value-addition, employment and capacity and skills development in operational, technical and managerial areas within the domestic labour force, rather than mere ownership of petroleum resources and companies by locals;
3. technology transfer and research and development requirements must align with national priorities for the petroleum sector flowing from a national Technology Transfer Programme embedded within an overarching industry policy for the Host Nation;
4. targets must be based on realistic assumptions and take into account the industrial capacity of the Host Nation;
5. requirements must be openly and transparently formulated by a Competent Authority and criteria for exemptions and waivers must be designed in conjunction with relevant stakeholders in the upstream sector;
6. requirements must be rolled-out incrementally over time in tandem with the pace of development of petroleum resources and capable of being adjusted in line the general state of economic development of a Host Nation. It must be seen as a marathon and not a sprint; and
7. ideally a good local content regime must be inclusive with buy-in from all relevant stakeholders. Broad principles and requirements can be set out in the petroleum legislation, it is however advisable to set out the detailed targets and reporting obligations in subsidiary sector-specific legislation.

Most petroleum laws in Africa contain minimal provisions on local content and reserve the specific details of local content obligations for subsidiary regulations or contractual obligations in the petroleum agreement. A few countries, such as Ghana and Kenya, include specific and detailed local content obligations in their petroleum law.

Most petroleum laws contain general provisions requiring the Contractor or IOC to conduct petroleum activities in line with the Host Nation’s pre-existing laws on health and safety. These general provisions are supported by references to international best practice without specifically defining in the legislation what the best practice entails. This is because there are several standard international laws and regulations relating to health and safety, which have become recognised best practice. This reflects the current practice which entails moving away from detailed and prescriptive ex-ante rules towards a more goal-oriented regime.  Also referred to as the “internal control principle”, this approach places the responsibility on the Contractor to convince the relevant Regulator that its plans and operations are safe and comply with international standards.

It is an objectives-based approach, where the law or regulations set out the aims of the regime allowing the Contractor flexibility in determining the methods for compliance and achievement.  This is a dynamic approach, which enables problems that may arise from prescriptive requirements, which have become outdated because of rapid changes in the operational environment, to be addressed expeditiously. It also ensures that the Contractor is fixed with the responsibility of taking action in ensuring that petroleum activities comply with international standards.

Although the petroleum law should broadly follow the value chain of petroleum operations, there are cross-cutting issues that may not necessarily sit well within specific chapters of the law, or may not be sufficiently important enough to merit detailed treatment within the general provisions of the law. For instance, the power to make sector-specific regulations, which provides the flexibility to deal with changes and issues which arise following passage of the legislation, and dispute resolution mechanisms.  Thus, a section on miscellaneous issues becomes necessary to deal with these important issues, which must also be considered to ensure a comprehensive legal regime for regulation of petroleum resources.

Sources and references used in this report:

1. A Local Content Decision Tree for Emerging Producers

New Producer’s Group of Chatham House

https://www.chathamhouse.org/2016/07/local-content-decision-tree-emerging-producers

 

2. An economic analysis of Iranian petroleum contract

Fazel M. Farimani· Xiaoyi Mu · Hamed Sahebhonar · Ali Taherifard

https://link.springer.com/article/10.1007/s12182-020-00486-2

 

3. An evaluation of Ghana’s petroleum fiscal regime. Amoako-Tuffour, J., Owusu-Ayim, J. (2010). Ghana Policy Journal, 4, 7-34. Vol. 4, No. 3, 2014, pp.400-410

ISSN: 2146-4553 www.econjournals.com

 

4. Fiscal Regimes for Extractive Industries: Design and Implementation

Prepared by the Fiscal Affairs Department, International Monetary Fund

Approved by Carlo Cottarelli August 15, 2012

https://www.imf.org/external/np/pp/eng/2012/081512.pdf

 

5. Guidelines for Good Governance in Emerging Oil and Gas Producers

Research Paper Valérie Marcel (Editor) Energy, Environment and Resources Department July 2016

https://www.chathamhouse.org/sites/default/files/publications/research/2016-07-13-guidelines-good-governance-2016-marcel.pdf

 

6. Guide to Extractive Industries Documents – Oil & Gas

World Bank Institute Governance for Extractive Industries Programme

https://www.allenovery.com/en-gb/global/news-and-insights/publications/guide-to-extractive-industries

 

 

7. Local Content in the Oil and Gas Sector. Tordo, Silvana; Warner, Michael; Manzano, Osmel E.; Anouti, Yahya. 2013. World Bank Study; Available at https://openknowledge.worldbank.org/handle/10986/15930.

 

8. Local Content Policies and Cameroon‟s Petroleum Industry: Emerging Challenges and the Way Forward. Baiye E.G. [2019] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3607533.

 

9. Local content requirements and the green economy

Silva, Sacha, UNCTAD 2014. Available at https://unctad.org/system/files/official-document/ditcted2013d7_en.pdf.

 

10. Managing Petroleum Resources: The 'Norwegian Model' in a Broad Perspective

Al- Kasim, Farouk 2006

 

11. Model Petroleum Agreement Ghana

https://www.petrocom.gov.gh/wp-content/uploads/2018/12/ghana_model_petroleum_agreement1.pdf

 

12. Natural Resource Charter Precepts

https://resourcegovernance.org/sites/default/files/NRCJ1193_natural_resource_charter_19.6.14.pdf

 

13. Oil, Gas, and Mining: A Sourcebook for Understanding the Extractive Industries

Cameron, Peter D., and Michael C. Stanley. 2017

Washington, DC: World Bank. doi:10.1596/978-0-8213-9658-2.

https://openknowledge.worldbank.org/handle/10986/26130

 

14. Overview of Local Content Regulatory Frameworks in Selected ECCAS Countries. Dr. Babafemi Oyewole May 2018. https://unctad.org/system/files/official-document/ditccominf2018d4_en.pdf

 

15. Petroleum Exploration and Production Rights Allocation Strategies and Design Issues.

Silvana Tordo with David Johnston and Daniel Johnston

World Bank Working paper

https://openknowledge.worldbank.org/handle/10986/5954?show=full

 

16. Production Sharing Agreements in Africa: Sovereignty and Relationality

By John Paterson

https://www.abdn.ac.uk/law/documents/001.19%20-%20Paterson.pdf

 

17. Resource Contracts:  https://resourcecontracts.org/
18. Selling Oil Assets in Uganda and Ghana–A Taxing Problem, By Keith Myers. Revenue Watch

16th August 2010 https://resourcegovernance.org/sites/default/files/documents/myers_rwi_taxing_problem_082010.pdf.

19. TAT rules that Capital Gains Tax applies on gains on the sale of rights in oil fields

PwC Tax Alert  March 2022 at https://pwcnigeria.typepad.com/files/pwc-tax-alert-tat-rules-that-capital-gains-tax-applies-on-gains-on-the-sale-of-rights-in-oil-fields.pdf Accessed 22/07/22

 

20. The Optimal Petroleum Fiscal Regime for Ghana: An Analysis of Available Alternatives, D. Kankam & I. Ackah (2014) International Journal of Energy Economics and Policy.

 

21. Tullow and Uganda Production Sharing in Respect of the Kanywataba Prospect Area

file:///C:/Users/ANOJUL/Downloads/contract_kanwatanya%20(2).pdf

 

22. Tying Their Hands? How Petroleum Contract Terms May Limit Governments’ Climate Policy Flexibility

Nicola Woodroffe NRGI Briefing September 2021 Policy Research Working Paper 1420 https://resourcegovernance.org/sites/default/files/documents/tying_their_hands_how_petroleum_contract_terms_may_limit_governments_climate_flexibility.pdf

 

23. University of Aberdeen School of Law Working Paper Series 001/19

https://www.abdn.ac.uk/law/documents/001.19%20-%20Paterson.pdf

 

24. World Petroleum Legislation: Frameworks That Foster Oil and Gas Development

William T. Onorato and J. Jay Park, 2001

https://albertalawreview.com/index.php/ALR/article/view/509. Accessed 23/07/22