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

The DRC Government has finally officiallypublished the new petroleum law (Law No.15/012 dated 1 August 2015), putting intoforce a new regime for the upstream oil andgas sector. In our briefing of July 2015(New petroleum law in the DemocraticRepublic of Congo: will a new regimeeventually emerge? [see article here]) wereported on the key features of the draftlaw. Now that the law has been finalised,we recap on those key features, once againdistinguishing between improvements tothe regime and some deficiencies(particularly from an international oilcompany perspective).

Improvements

Rights are to be awarded by way of a tender processon the basis of technical and financial criteriaestablished by the Council of Ministers, giving theregime greater transparency.

The award process has been simplified, with awards tobe made only on the basis of a petroleum contract. Itexcludes exploration permits and zones exclusives dereconnaissance et d'exploration (exclusive explorationand reconnaissance areas), which had led tosignificant confusion in the past.

The geological coordinates of the petroleum blocks areto be determined by order of the Minister ofHydrocarbons, therefore avoiding the materialisation(delimitation) of the zones exclusives dereconnaissance et d'exploration (exclusive explorationand reconnaissance areas), which had also led toconfusion in the past.

The award formalities are simple and clear: executionof contracts (and all amendments) by the Minister ofHydrocarbons and the Minister of Finance afterdeliberation of the Council of Ministers, and entry intoforce after approval by ordinance from the President.

Hydrocarbon rights awarded are to be included in aspecific register at the Ministry of Hydrocarbons, andcontracts are to be published in the Journal Officiel(official journal) and on the website of the Ministry ofHydrocarbons within 60 days after approval, giving theregime additional transparency.

The processes for the renewal and the extension ofexploration rights, the approval of the developmentplan and the authorisation of transfers on the basis ofa decree by the Minister of Hydrocarbons have alsobeen simplified and clarified.

The law expressly recognises the right of thecontractor to exploit all discoveries it considerscommercially viable, subject to the approval of adevelopment plan, and of the right to recover therelated costs.

There is provision for disputes to be resolved bynegotiation, and for subsequent referral to arbitrationas necessary. Technical or operational disputes are tobe referred to expert determination.

Importantly, there is a separation of the commercialfunctions of the national oil company from the policymaking and regulatory functions exercised by theMinister of Hydrocarbons.

Petroleum blocks are to be allocated into differentfiscal zones taking into account the "caractéristiquesgéologiques et environnementales" (geological andenvironmental characteristics). There is also provisionfor the establishment of a specific fiscal regime foreach zone.

Production figures, payments and tax collections fromoil and gas companies are to be published on thewebsite of the Ministry of Hydrocarbons, again givingthe regime enhanced transparency.

Deficiencies

The fiscal regime is overly burdensome: it includes thecustomary royalty, cost oil, and profit oil, andadditional excess oil, as follows:

It also includes:

• a participation for the national oil company (20 percent minimum);
• a commitment to fund community sustainabledevelopment projects, community infrastructureprojects, and a programme of activités secondaires("secondary activities");
• a commitment to fund the training of Congolesenationals;
• 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 aresomewhat uncertain: the mechanism for thedetermination of royalties, cost oil, excess oil, andprofit oil is not completely clear. There is no provisionfor the measurement and valuation of production atthis stage.

There is no express tax exemption in the law. In thiscontext, it is not entirely clear whether the fiscalregime applies in addition to or instead of the generaltax regime.

There is no provision for the stabilisation of the fiscalregime. This means that international oil companiesare not protected from future changes to the fiscalregime.

The law does not set out a regime applicable to thetransport of hydrocarbons. This is a significantoversight given that transportation is a key issue inthe context of oil and gas development: the DRC is avast territory, which is difficult to access, and haslimited maritime export capacity, thereby requiringpetroleum companies to consider hydrocarbonstransport and export through neighbouring countries.

The regime applicable to natural gas has not beendeveloped in any detail. The law does not addressissues specific to gas, such as the need to extendexploration rights during the period necessary tocomplete a feasibility study for the determination orthe development of a market and the implementationof the corresponding transport, liquefaction and exportinfrastructure, as well as the establishment of aspecific fiscal regime.

The contractor is not authorised to transfer anyexploration rights before the completion of the worksprogramme pertaining to each contractual year. Thiswill certainly act as a limitation on companies' abilityto farm-out.

For all transfers, the national oil company has a preemptionright. However, the law does not specify howthat right is to be exercised.

The national oil company is to be a party to a jointoperating agreement with other members of thecontractor group during the exploration phase.However, the exploration costs are to be borne solelyby the other members of the contractor group and arenot to be refunded by the national oil company. Thisruns contrary to the generally accepted principle thatthe right to attend operating committee meetings, thepower to make decisions and the right to access dataand information should only be given to parties whofinance the related cost.

The transitional provisions are not very clear orcomprehensive at this stage: current contracts areexpressly stated to remain in force and it is implicitlyunderstood that they will therefore remain governedby the previous petroleum law (ordinance-law No. 81-013 dated 2 April 1981). Current contracts are then tobe governed by the new petroleum law upon anyrenewal. The law does not, however, specify theimplementation mechanism for this to happen.

Next steps

The transitional provisions mentioned above are statedto apply to current contracts which were validlyawarded. It is intended that the Minister ofHydrocarbons will publish a list of current valid contracts within 30 days after entry into force of thenew petroleum law.

The new law also contemplates that implementationprovisions will be enacted within six months afterentry into force of the new petroleum law. It isanticipated that implementation provisions will includea new model contract.

Conclusion

The new petroleum law includes features which are asignificant improvement when compared to the existing regime. However, there are also somesignificant deficiencies. In particular, although it is notpossible to determine the precise level of Governmenttake at this stage, it is likely to be relatively highcompared to the geological and environmentalcharacteristics of the blocks in the context of theglobal competition to attract investment frominternational oil companies. Ultimately, theattractiveness of the new regime will be tested as andwhen the Congolese Government holds the nextlicensing round.