New Petroleum Law in the Democratic Republic of Congo: will a new Regime Eventually Emerge?

After years of development, an initial draft of the new petroleum law governing upstream and downstream activities in the Democratic Republic of Congo was finalised at the end of 2014 and submitted to parliament. The draft law has had a turbulent passage through the parliamentary process, with the two houses of parliament – the National Assembly and the Senate – unable to agree (independently and as a joint commission) on the final draft petroleum law.

We understand that the initial version of the draft petroleum law, which had been approved by the National Assembly, was sent to the President for promulgation in order to be passed into law. The deadline for the President to object to promulgation and send the draft back to the two houses of parliament has now expired. The new petroleum law will therefore enter into force as and when the President promulgates it.

In this briefing we have set out a summary of the key features of the draft new petroleum law. We have distinguished between the pros and the cons of the new regime (particularly from an international oil company perspective).

The pros of the new regime

• Rights are to be awarded by way of a tender process on the basis of technical and financial criteria established by the Council of Ministers, giving the regime greater transparency.
• The award process has been simplified, with awards to be made only on the basis of a petroleum contract. It excludes exploration permits and zones exclusives de reconnaissance et d'exploration, which had led to significant confusion in the past.
• The geological coordinates of the petroleum blocks are to be determined by order of the Minister of Hydrocarbons, therefore avoiding the materialisation (delimitation) of the zones exclusives de reconnaissance et d'exploration (exclusive exploration and reconnaissance areas), which had also led to confusion in the past.
• The award formalities are simple and clear: execution of contracts (and all amendments) by the Minister of Hydrocarbons and the Minister of Finance after deliberation of the Council of Ministers, and entry into force after approval by ordinance from the President.
• Hydrocarbon rights awarded are to be included in a specific register at the Ministry of Hydrocarbons, also giving the regime greater transparency.
• The processes for the renewal and the extension of exploration rights, the approval of the development plan and the authorisation of transfers on the basis of a decree by the Minister of Hydrocarbons have also been simplified and clarified.
• The law expressly recognises the right of the contractor to exploit all discoveries it considers commercially viable, subject to the approval of a development plan, and of the right to recover the related costs.
• There is provision for disputes to be resolved by negotiation, and for subsequent referral to arbitration as necessary. Technical or operational disputes are to be referred to expert determination.
• Importantly, there is a separation of the commercial functions of the national oil company from the functions of determination of the national policy, the award of rights and regulation exercised by the Minister of Hydrocarbons.
• Petroleum blocks are to be allocated into different fiscal zones taking into account "geological and environmental characteristics". There is also provision for the establishment of a specific fiscal regime for each zone.

The cons of the new regime

• The provisions dealing with production sharing are somewhat uncertain: the mechanism for the determination of royalties, cost oil, excess oil, and profit oil is not completely clear.
• The fiscal regime is overly burdensome: in addition to the customary royalties, cost oil, excess oil and profit oil, the fiscal regime includes:
  • a participation interest for the national oil company (20 per cent minimum);
  • a commitment to fund community sustainable development infrastructure projects, training for Congolese nationals, and a programme of "secondary activities";
  • a transfer tax;
  • a "super profit oil";
  • custom duties; and
  • not less than fifteen various additional royalties, taxes, bonuses and contributions.
• There is no provision for the stabilisation of the fiscal regime. This means that international oil companies are not protected from future changes to the fiscal regime.
• The law does not set out a regime applicable to the transport of hydrocarbons. This is a significant oversight given that transportation is a key issue in the context of oil and gas development: the DRC is a vast territory, which is difficult to access, and has limited maritime export capacity, thereby requiring petroleum companies to consider hydrocarbons transport and export through neighbouring countries.
• The regime applicable to natural gas has not been developed in any detail. The law does not address issues specific to gas, such as the need to extend exploration rights during the period necessary to complete a feasibility study for the determination or the development of a market and the implementation of the corresponding transport, liquefaction and export infrastructure, as well as the establishment of a specific fiscal regime.
• The contractor is not authorised to transfer any exploration rights before the completion of the work programme for each contractual year. This acts as a limitation on companies' ability to farm-out.
• For all transfers, the national oil company has a pre-emption right. However, the law does not specify how that right is to be exercised.
• The national oil company is to be a party to a joint operating agreement with other members of the contractor group during the exploration phase. However, the exploration costs are to be borne solely by the other members of the contractor group and are not to be refunded by the national oil company. This runs contrary to the generally accepted notion that the right to attend operating committee meetings, the power to make decisions and the right to access data and information should only be given to parties who finance the related costs.
• Foreign companies are required to incorporate a local company in order to undertake exploration and exploitation activities.
• Current contracts remain in force but any renewal and extension will have to be in accordance with the new petroleum law. The law does not specify the implementation mechanism for this to happen.

The new petroleum law includes various features which are an improvement on the existing regime. However, as outlined above, the law also has various flaws and deficiencies. Ultimately, the attractiveness of the new regime will be tested as and when the Congolese Government holds the next licensing round.