Angola Eduardo Vera-Cruz Advogados (in association with FCB&A F Castelo Branco & Associados)
Introduction
Key legislation and regulatory structure
Onshore drilling for oil began in Angola in 1915, with the first commercial discovery in 1955. However, it was the discovery of the Girassol field in the deepwater Block 17 that launched Angola’s present day oil and gas industry. It is now the second biggest oil producer in Sub-Saharan Africa, with proven reserves of approximately 9.5bn barrels and average production in 2011 of 1.65mbpd. The Angolan government expects to increase average oil production to 2mbpd in 2014.
The key legislation governing the oil and gas sector includes the Petroleum Activities Law 2004 (PAL) and the Law on Taxation of Petroleum Activities 2004 (PTL).
The Angolan government, through the wholly state-owned national oil company Sociedade Nacional de Combustiveis de Angola (Sonangol), has now granted rights to conduct petroleum operations in relation to 33 of its 34 blocks to a ‘who’s who’ of international oil companies, including BP, Chevron, ENI, ExxonMobil, Petrobras, Statoil and Total. Recent PSAs include those entered into covering pre-salt blocks in the Kwanza Basin. Announcements by both Maersk and Cobalt International Energy of discoveries on their blocks have increased hopes that the Angola pre-salt will bring exploration success to match that in Brazil. The exploitation of Angola’s proven gas reserves of approximately 11tcf has lagged behind the exploitation of its oil reserves. With a limited domestic market for gas, the country’s first LNG plant is being developed near Soyo.
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According to the Angolan Constitution, solid, liquid and gaseous natural resources are the property of the state, and the National Assembly is the competent body for legislating in relation to the granting of concessions for the use of natural resources and the transfer of state assets. The oil and gas sector in Angola is primarily governed by the Ministry of Petroleum, which is responsible for the co-ordination, supervision and control of the activities of the oil and gas sector and the definition of its policies and guidelines. Under the PAL, the government, acting through the Ministry of Petroleum, is responsible for the grant of concessions for the exploration for and exploitation of hydrocarbons and the grant of prospecting licences. In 1976, the Angolan government established Sonangol, a public company that arose from the nationalisation of the company ANGOL, to control hydrocarbon resource exploration in Angola. Under the PAL, Sonangol is currently the exclusive concessionaire for exploration of oil and gas in Angola. Sonangol is also the entity responsible for the exploration, production, manufacturing, transportation and marketing of hydrocarbons and its derivatives in Angola. The activities of Sonangol are supervised by the Ministry of Petroleum.
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Historically, Sonangol entered into joint venture projects with the IOCs. However, since the enactment of the PAL in 2004, Sonangol has changed its practice and has entered into production sharing agreements with IOCs.
Licensing regime Petroleum operations in Angola may only be carried out under: • a prospecting licence issued by the Ministry of Petroleum and valid for the maximum period of three years. Any Angolan or foreign company with the necessary technical knowledge and financial capability may apply for this licence. A prospecting licence grants the holder the right to perform the activities of prospection, exploration and production of oil in a certain area (block) on an exclusive basis. The prospecting licence does not grant the holder any preferential rights in relation to the subsequent entry into an agreement with Sonangol regarding the exploration for and exploitation of hydrocarbons in the area to which the prospecting licence relates; or • a petroleum concession, issued by the Angolan government through publication of a concession decree, that will establish the term of the licence and its different periods and phases. As stated previously, Sonangol is the sole concessionaire for petroleum operations and therefore all concessions are granted to it. However, it may carry out petroleum operations on its own or may enter into arrangements with third parties in order to carry out petroleum operations jointly. If Sonangol wishes to carry out petroleum operations with one or more third parties, it must first apply for an authorisation from the Ministry of Petroleum to carry out a public tender for the purpose of entering
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into arrangements with such third parties. The arrangements entered into by Sonangol with third parties may be carried out by way of the incorporation of a joint venture vehicle, the establishment of a consortium or by entry into production sharing agreements or risk services agreements. The terms of whatever agreement is entered into are then approved by the concession decree. As noted above, to date, Sonangol has entered into arrangements with third parties by way of a production sharing agreement (PSA). There is model form PSA (the Model PSA), which forms the basis for negotiations. The PAL contemplates both bid rounds and open tenders, although typically an RFP is provided to a limited number of IOCs. The operator of the petroleum operations in respect of an area is appointed in the relevant concession decree after having been proposed as the operator by Sonangol. To be appointed as operator, a party will need to demonstrate the requisite technical and financial capability. Under the terms of the Model PSA, the exploration period and production periods are biddable items. The exploration period can be extended once. Following a declaration of a commercial discovery, a development and production plan must be approved by the Ministry and the start of commercial production requires a further approval. Parties must provide a bank guarantee of a value equal to 50 per cent of the budgeted work obligations for a prospecting licence and equal to the value of the work programme for a concession. Parties conducting petroleum operations in Angola must establish a permanent presence, either by way of an Angolan incorporated subsidiary or by setting up a branch. Typically, companies establish branches.
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National oil company/state participation Sonangol is involved in nearly all petroleum operations in Angola as a result of the provisions of the PAL, which require that any entity that wishes to carry out petroleum operations in Angola (except prospection activities) may only do so in association with Sonangol. As noted above, this may be through an incorporated joint venture, a consortium or a PSA. Unless a dispensation is granted by the government, when Sonangol enters into an SPV or consortium it must have a majority interest. However, there are no known cases where Sonangol has not had a majority interest and it is considered very unlikely that this would be permitted. Under a PSA, Sonangol’s interest is carried through exploration, development and production, but all petroleum costs are recoverable out of a specified percentage of production, which is a biddable item under the Model PSA. Under the Model PSA, Sonangol’s share of profit oil is a biddable item, determined on a sliding scale on the after tax, nominal rate of return achieved at the end of the preceding quarter by the contractor group.
Fiscal regime The PTL provides the fiscal framework generally applicable to petroleum operations in Angola, while the Model PSA sets out the relevant production sharing terms. According to the PTL, petroleum operations in Angola are subject to the taxes set out below. • Petroleum Income Tax (Imposto sobre o Rendimento do Petroleo) – petroleum E&P activities carried out under a PSA are subject to Petroleum Income Tax on taxable income at the rate of 50 per cent. Operations carried out under other E&P contracts, such as consortium agreements, are subject to Petroleum
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Income Tax on taxable income at a rate of 65.75 per cent. However, the applicable rate is 35 per cent in both situations for Angolan public companies and private companies wholly owned by Angolan citizens.
Petroleum Income Tax is assessed on taxable income generated by any of the following activities: —— exploration, development, production, storage, sale, exportation, processing and transportation of petroleum; —— wholesale trading of any other products resulting from the operations referred to above; and —— other activities resulting from occasional or merely incidental actions, provided that such activities do not take the form of an industry or business.
When petroleum operations are carried out under a PSA, Petroleum Income Tax is the only tax in respect of petroleum production, and the Petroleum Production Tax and Petroleum Transaction Tax described below do not apply. Where petroleum operations are carried out under other contractual arrangements the amount of Petroleum Production Tax and Petroleum Transaction Tax are deductible in determining taxable income for the purposes of the Petroleum Income Tax. • Petroleum Production Tax (Imposto Sobre a Producao do Petroleo) – Petroleum Production Tax is levied at a rate of 20 per cent on crude oil and natural gas measured at the wellhead less the quantities consumed by petroleum operations. The rate of taxation may be reduced for marginal or deep-water offshore fields. The state can determine whether the tax is paid in cash or in kind. Where paid in cash, the relevant volume of hydrocarbons are valued based on the FOB price for bona fide sales to third parties.
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• Petroleum Transaction Tax (Imposto de Transaccao do Petroleo) – Petroleum Transaction Tax is assessed at a rate of 70 per cent over the taxable income. • Surface fee (Taxa de Superficie) – a surface fee applies to the concession area or to the development areas if an agreement entered into under the PTL provides for such a surface fee to be paid. • Training levy (Contribuicoes para o Fundo Petrolifero) – companies operating in the oil and gas sector are subject to Angola’s training levy, which is intended to be used for creating a Petroleum Fund for training and development of Angolan human resources. The annual rate for a company that holds a prospecting licence is $100,000, while for a company in the production stage it is 15 cents per barrel produced during the year. Under the PTL, additional investment allowances may be granted by the government on an application by the Ministries of Petroleum and Finance. Further, the assessment of taxable income and computation of tax charges is done on an independent basis for each petroleum concession or, when a PSA applies, each development area. Under the Model PSA, the production sharing arrangements are that: • the contractor may recover the costs of petroleum operations out of an agreed percentage of the available production. Unrecovered costs can be carried forward; and • the balance of petroleum produced and saved and not used in petroleum operations or for cost recovery is shared between Sonangol and the contractor in an agreed ratio according to the after tax, nominal rate of return achieved by the contractor group at the end of the preceding calendar quarter. The nominal rate of return is determined by applying
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an agreed rate of return to the contractor’s cumulative net cash flow. Cumulative net cash flow is the market value of the contractor’s share of petroleum production (cost oil and profit oil) less Petroleum Income Tax and less development expenditures and production expenditures. The Model PSA provides for payment of social contributions and bonuses (signature and production), to be agreed.
Local content requirements Article 26.1 of the PAL expressly determines that the Angolan government should adopt measures to ‘guarantee, promote and encourage investment in the petroleum sector by companies held by Angolan citizens and create the conditions necessary for such purpose’. The PAL goes on to state that ‘[Sonangol] and its associates shall co-operate with governmental authorities in developing public actions to promote the socioeconomic development of Angola’ and that ‘before such public actions are undertaken, the parties involved shall agree upon the scope of the projects, the origin of the funds to be used and the recovery of costs related thereto, if applicable’. The PAL obliges Sonangol and its associates and any other entities that co-operate with them in carrying out petroleum operations to: • acquire materials, equipment, machinery and consumer goods of national production, of the same or approximately the same quality and that are available for sale and delivery in due time, at prices that are no more than 10 per cent higher than the imported items including transportation and insurance costs and customs charges due; and
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• contract local service providers, to the extent to which the services they provide are similar to those available on the international market and their prices, when subject to the same tax charges, are no more than 10 per cent higher than the prices charged by foreign contractors for similar services. In connection with implementing these requirements, the PAL states that Angolan companies must be consulted on the same terms and conditions as those used for consulting companies on the international market. In terms of regulating the recruitment and training of Angolan personnel, under the PAL entities carrying out petroleum activities in Angola are required to employ only Angolan citizens in all categories and functions, unless there are no Angolan citizens in the national market with the required qualifications and experience. To seek to ensure equal treatment of Angolan and expatriate workers, the PAL requires that Angolan and foreign workers, who occupy identical professional categories and carry out identical functions, enjoy the same remuneration and the same working and social conditions, without any type of discrimination. To implement Article 26 of the PAL, the Angolan government approved Decree 48/06 of 1 September 2006. This Decree regulates the selection of the associates of Sonangol in the performance of petroleum operations and the entities procuring goods and services for the execution of petroleum operations. Article 16 of Decree 48/06 sets out different procedures on the procurement of goods and services depending on the value or amount of the contract.
In addition, Minister of Petroleum Order 127/03 of 25 November 2003 enacted the General Regulatory Framework on the Contracting of Services and Goods from Angolan Companies by Petroleum Industry Companies. These regulations set out the conditions applicable to the employment of foreign contractors by oil companies.
Domestic supply obligations Under the PAL, the government may require Sonangol and its associates to supply their share of output to meet domestic consumption requirements. The amount required to be supplied shall not exceed the lesser of a proportion of the production from the relevant concession area equal to the total production from the concession as a proportion of total Angolan production and 40 per cent of the production from the concession area. Valuation of the petroleum is in accordance with the procedures under the PTL, being the market price calculated on the basis of actual FOB prices obtained from arm’s length sales to third parties.
Transfer of interests Consents Under Article 16 of the PAL: • Sonangol has a right of first refusal in relation to a transfer of any of its associates’ ‘contractual rights and duties’; • if Sonangol waives its right of first refusal, then the right of first refusal transfers to any of the contracting group’s Angolan incorporated partners that have the status of a ‘national company’, being a company the majority of the capital of which is held by Angolan nationals (natural or corporate); and • such transfer requires the consent of the Ministry of Petroleum by means of Executive Decree and also the approval of Sonangol.
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Under the PAL, a transfer of shares representing ‘more than 50 per cent of the share capital of the assignor shall be equivalent to the assignment of contractual rights and duties’ and therefore the restrictions set out above will also apply in those circumstances. Affiliate transfers are permitted; however, the assignor shall be jointly and severally liable with the assignee for the assignee’s obligations. Taxation Under Article 20.2(b) of the PTL, any gains or profits arising from the assignment of interests in PSAs and other exploration and agreements are subject to Petroleum Income Tax, under the rules described in the section headed ‘Fiscal regime’ above. Although there is some debate about the interpretation of the relevant provisions, gains or profits arising from the change of control of companies engaged in exploration and production activities will potentially also fall within the Petroleum Income Tax regime. On a disposal of an interest in a PSA or other exploration agreement, the buyer will step into the seller’s shoes with regard to cost recovery, and goodwill included in the purchase price may be subject to a deductible amortisation for Petroleum Income Tax and Petroleum Transaction Tax purposes.
Stabilisation/equilibrium and dispute resolution Under the PAL, all legislation that was inconsistent with the PAL was revoked while rights acquired to conduct petroleum operations before the enactment of the PAL are stated to remain fully valid and effective. However, the PAL also states that ‘in cases where it is deemed necessary and convenient, valid and effective’ contracts may be renegotiated ‘according to the principle of equity and balance of interests’ to gradually adapt contractual provisions deemed incompatible with the PAL and ancillary regulations. Under the Model PSA, if there is a change in law that adversely affects the obligations, rights and benefits thereunder, the parties shall agree on amendments to be submitted to the competent authorities (being the Ministry of Petroleum) for approval to restore the rights, obligations and benefits. The PAL states that disputes that are contractual in nature should be settled by agreement but, if not, in accordance with arbitration under the terms of the applicable agreements. The seat of an arbitral tribunal is to be Angola, applying Angolan law and conducted in Portuguese. The Model PSA includes dispute resolution provisions consistent with the foregoing applying the UNCITRAL rules and with the seat of arbitration in Luanda.
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