The Democratic Republic of Congo enacts new petroleum law: a mixed report

The DRC Government has finally officially published the new petroleum law (Law No. 15/012 dated 1 August 2015), putting into force a new regime for the upstream oil and gas sector. In our briefing of July 2015 (New petroleum law in the Democratic Republic of Congo: will a new regime eventually emerge? [see article here]) we reported on the key features of the draft law. Now that the law has been finalised, we recap on those key features, once again distinguishing between improvements to the regime and some deficiencies (particularly from an international oil company perspective).

Improvements

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 (exclusive exploration and reconnaissance areas), 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, and contracts are to be published in the Journal Officiel (official journal) and on the website of the Ministry of Hydrocarbons within 60 days after approval, giving the regime additional 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 policy making and regulatory functions exercised by the Minister of Hydrocarbons.

Petroleum blocks are to be allocated into different fiscal zones taking into account the "caractéristiques géologiques et environnementales" (geological and environmental characteristics). There is also provision for the establishment of a specific fiscal regime for each zone.

Production figures, payments and tax collections from oil and gas companies are to be published on the website of the Ministry of Hydrocarbons, again giving the regime enhanced transparency.

Deficiencies

The fiscal regime is overly burdensome: it includes the customary royalty, cost oil, and profit oil, and additional excess oil, as follows:

It also includes:

• a participation for the national oil company (20 per cent minimum);
• a commitment to fund community sustainable development projects, community infrastructure projects, and a programme of activités secondaires ("secondary activities");
• a commitment to fund the training of Congolese nationals;
• a transfer tax;
• a super profit oil;
• custom duties; and
• not less than fifteen various additional royalties, taxes, bonuses and contributions.

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. There is no provision for the measurement and valuation of production at this stage.

There is no express tax exemption in the law. In this context, it is not entirely clear whether the fiscal regime applies in addition to or instead of the general tax regime.

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 works programme pertaining to each contractual year. This will certainly act as a limitation on companies' ability to farm-out.

For all transfers, the national oil company has a preemption 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 principle 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 cost.

The transitional provisions are not very clear or comprehensive at this stage: current contracts are expressly stated to remain in force and it is implicitly understood that they will therefore remain governed by the previous petroleum law (ordinance-law No. 81- 013 dated 2 April 1981). Current contracts are then to be governed by the new petroleum law upon any renewal. The law does not, however, specify the implementation mechanism for this to happen.

Next steps

The transitional provisions mentioned above are stated to apply to current contracts which were validly awarded. It is intended that the Minister of Hydrocarbons will publish a list of current valid contracts within 30 days after entry into force of the new petroleum law.

The new law also contemplates that implementation provisions will be enacted within six months after entry into force of the new petroleum law. It is anticipated that implementation provisions will include a new model contract.

Conclusion

The new petroleum law includes features which are a significant improvement when compared to the existing regime. However, there are also some significant deficiencies. In particular, although it is not possible to determine the precise level of Government take at this stage, it is likely to be relatively high compared to the geological and environmental characteristics of the blocks in the context of the global competition to attract investment from international oil companies. Ultimately, the attractiveness of the new regime will be tested as and when the Congolese Government holds the next licensing round.