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.