Africa's new petroleum codes: A drive to maximise value in anticipation of a low carbon future?

One of the key themes at the recent World Economic Forum meeting in Davos was climate change, and a gathering sense of urgency to transition away from fossil fuels. Until that is accomplished, fossil fuels will continue to have a place in the world's energy mix – particularly cleaner-burning fuels such as natural gas. Our carbon economy, however, is potentially on borrowed time.

Straddling the transition

This leaves hydrocarbon producers facing crucial choices – particularly those currently reliant on hydrocarbon resources for foreign exchange revenue:

• Do they maximise the extraction of value from their hydrocarbon reserves before these become stranded assets is a post-carbon world? or
• Do they diversify their economies away from hydrocarbons?

The two aims are not mutually exclusive. There is arguably a case for leveraging the former in the short to medium term (global demand and environmental factors permitting), in order to achieve the latter in the longer term. With financing of the oil and gas sector facing greater curbs and scrutiny over climate change, and investors becoming more cautious and selective, it is perhaps a question of "now or never": hydrocarbon producers have to ensure their upstream regimes are competitive, while committing to channel their hydrocarbon proceeds towards more sustainable alternatives.

2019: The year of new petroleum laws

It is against this backdrop that we consider the revisions to the petroleum legislation promulgated by various francophone African jurisdictions (namely Algeria, Benin, Cameroon, Gabon and Senegal) over the past year. These new laws seek:

• to enhance the attractiveness of their respective jurisdictions to investors and partners who have the right technical and financial credentials; and

• in some cases, to cater more robustly for the development of natural gas discoveries.

There has also been a general trend towards reinforcing local content requirements, to facilitate the transfer of skills and technology and to capture more value in-country.

Despite certain commonalities across the five jurisdictions, it is important to bear in mind that each country's petroleum legislation speaks to its specific context. Algeria is a significant oil and gas producer with a long-standing history as a liquefied natural gas exporter, while Benin is a former producer seeking to revive production. Cameroon and Gabon are both crude oil producers. Senegal has seen major offshore gas discoveries, which are in the process of being developed.

Inevitably, the new laws themselves only tell part of the story. Where relevant, related regulations and model or standard contract clauses also need to be considered in order to arrive at a proper understanding of the applicable legal regime.

Other recent developments

In addition to francophone Africa, there have been similar developments in the hydrocarbon sectors elsewhere on the Continent, such as:

• the recent approval of the new hydrocarbons law for Somalia; and
• proposals to introduce a 20% carried interest for the State, as well as a 10% participating interest for black economic empowerment purposes, in South Africa.

Figure 1 summarises some of the key features of the new petroleum laws.

We also explore some of the common themes below.

Figure 1:

1. Algeria

Law no. 19-13 of 11 December 2019
Although Algeria is a significant hydrocarbons producer, most existing production is from mature fields. Vast areas remain under-explored and under-exploited.
The new law seeks to attract investor interest to boost exploration and output.
Key legislative changes include:

• Reintroduction of production sharing contracts.
• Improved fiscal regime for investors.
• Statutory local content requirements introduced.

2. Benin

Law no. 2019-06 of 21 January 2019
Benin has had no significant hydrocarbon production since the offshore Seme field ceased production in the late 1990s.
Onshore discoveries have since been made, and plans to restart production from Seme field have been reported.
Key legislative changes include:

• Greater clarity on cost recovery and profit oil split.
•  State back-in right of up to 15%.
• Statutory local content requirements introduced.

3. Cameroon

Law no. 2019/008 of 25 April 2019
Cameroon's new petroleum code replaces a regime that was 20 years old, and reportedly seeks to revive exploitation activity, improve production, and foster the development of populations living near hydrocarbon fields.
Key legislative changes include:

• Recovery of "exploration expenses".
• Simpler tax regime and tax holiday of 5 years (for liquids) and 7 years (for gas).
• Enhanced local content requirements.

4. Gabon

Law no. 002/2019 of 16 July 2019
Gabon's new petroleum code improves terms for investors, given material changes in the oil price environment since 2014 (when the law was last updated). The new regime is expected to support the extended 12th bid round.
Key legislative changes include:

• Higher cost recovery limits and lower minimum State profit share.

• Lower maximum State back-in rights.
• Lower royalties and taxes for investors.

5. Senegal

Law no. 2019-03 of 24 January 2019
Senegal could join the ranks of major hydrocarbon producers once the Greater Tortue/Ahmeyim liquefied natural gas project comes onstream. The new law is expected to support the offshore bid round that was launched at the end of January 2020.
Key legislative changes include:

• A statutory (instead of contractual) basis for key production sharing provisions.
• Higher royalties and maximum State back-in rights.
• More robust local content requirements under a separate local content law (law no. 2019-04).

6. Somalia

New petroleum law

7. South Africa

•  20% carried interest for the State
•  10% BEE participating interest

Common themes under the new petroleum laws

1. Production sharing overview

The production sharing regime is the main – but by no means the only – petroleum contract regime under the new petroleum laws.

In keeping with production sharing regimes elsewhere, these provide for:

• certain hydrocarbon royalties to be payable to the State;
• cost recovery for the contractor, up to specified thresholds;
• profit sharing with the State above the cost recovery thresholds; and
• tax.

Algeria and Gabon have offered an improved royalty and/or tax regime for investors, while Cameroon has offered a limited tax holiday. It is worth noting, however, that Senegal has raised its hydrocarbon royalty rates.

Gabon has additionally increased cost recovery limits in favour of contractors, and introduced a sliding scale on profit sharing based on the level of incremental production.

2. State participation

The State (or a nominated State-owned entity) will typically:

• be a party to the production sharing contract from the outset (albeit with a carried interest during the exploration phase); and/or
• have a right to back-in and participate in development and production once a commercial discovery is made.

While the legislation in Benin and Gabon limits the State's back-in rights to a stipulated maximum percentage, other jurisdictions are silent on the point. In Algeria, Sonatrach typically holds a 51% interest in upstream projects.

Somewhat unusually in Gabon, the State may additionally acquire on market terms an interest of up to 10% in the share capital of the operator requesting or holding an exclusive development and production authorisation.

3. Local content requirements

As noted above, local content obligations have been enhanced in all of the jurisdictions. These typically require preference to be given to:

• local goods and service providers (where costs and service levels are competitive); and
• local human resources (with training programmes to be established and implemented to upskill the local workforce).

While the relevant frameworks are generally set out in the new petroleum laws, Senegal has passed a separate local content law (law no. 2019-04 of 1 February 2019) for the hydrocarbons sector, which imposes detailed requirements applicable to both existing and new petroleum contracts (subject to the stabilisation provisions of the existing contracts). Many of the laws also envisage implementing regulations being adopted (which, for Senegal, are likely to follow in the coming weeks).

Note that the local content regimes in both Gabon and Senegal also impose explicit obligations that extend to sub-contractors involved in petroleum operations.

4. Transitional provisions

The new petroleum laws generally do not have retrospective effect. Contractors may, however, request to bring their existing arrangements under the new regime, within the time frames set out in the relevant laws.

In limited instances, however, certain provisions of the new laws will apply to existing petroleum contracts entered into under the previous regime, for example, the provisions relating to environmental, health and safety, and abandonment and rehabilitation obligations in the case of Algeria, the provisions relating to the establishment and maintenance of a fund for rehabilitation in the case of Gabon, and the local content obligations noted above in the case of Senegal.

Properly managed, the judicious use of hydrocarbon resources today could serve as a catalyst for the development of a lower carbon future tomorrow – while promoting social development and improving the lives of local communities.

Our Africa desk regularly keeps abreast of these developments, so do not hesitate to drop a line to the key contacts below should you wish to discuss.

Authors: Yann Alix, Partner; Shan Koh, Senior Associate; and Claudia Cicone, Associate