Reform of Petroleum Legislation Progresses - International Law Office

International Law Office

Energy & Natural Resources - Mozambique

Reform of Petroleum Legislation Progresses

November 24 2003

Background
Petroleum Operations Regulations
Comment


Background

In an attempt to create a more attractive legal framework for foreign oil companies, in 2001 Mozambique initiated a reform of the law governing petroleum exploration and production operations.

The first step of this reform was the enactment of a new Petroleum Law (3/2001), which superseded the somewhat outdated Law 3/81.

The Mozambican government subsequently issued Decree 16/2002, approving a new Code of Tax Benefits for investment in the country. The innovation of this code was that, for the first time, the tax benefits and incentives available to investors in petroleum upstream operations under the Petroleum Law were covered in a statute applicable to all other economic sectors. At that point, Decree 14/82 - which covered the tax benefits applicable to the oil industry, among other things - was partially revoked.

The latest step of this reform is the approval of the Petroleum Operations Regulations, a draft of which has been under discussion for over two years now. The regulations are expected to be finally approved by the end of the year.

It is also likely that the Council of Ministers will make use of its power under the Petroleum Law to approve a specific tax and customs regime for upstream operations. This would be welcomed by the oil industry, as it is currently felt that uncertainties exist as a result of the recent reform of the country's tax system.

There are also calls for the creation of a special labour regime addressing the specific needs of the oil industry. At present, concession holders are generally subject to the Labour Law (8/98) and the special regime on the hiring of foreign workers (Decree 25/99), without prejudice to the specific labour provisions agreed to with the government in the corresponding concession contract.

Petroleum Operations Regulations

Pursuant to the Petroleum Law, both Mozambican and foreign corporations may hold petroleum upstream concessions, provided that they can exhibit (i) suitable technical capability, in the form of expertise and staff capable of performing the relevant operations, and (ii) sufficient financial resources to meet the costs that will be incurred. The forthcoming Petroleum Operations Regulations are expected to shed further light on the requirements applicable to prospective concession holders.

The Petroleum Law affords a right of first refusal in the granting of rights over any petroleum block to Mozambican companies or foreign companies associated with Mozambican companies.

A petroleum upstream concession may be awarded pursuant to a public tender procedure, through simultaneous negotiation or through direct negotiation, the latter being the most common method. Since the enactment of the Petroleum Law, there is no national concessionaire and concessions are negotiated directly between the government and prospective concession holders. The government body with power to award concessions is the Council of Ministers. However, it is normal for the Council of Ministers to grant powers to negotiate and sign concession contracts to the minister of mineral resources and energy.

The forthcoming Petroleum Operations Regulations will detail the procedure to be observed for each form of award. Most importantly, the regulations are expected to clarify when a tender procedure is required.

Under the Petroleum Law, the types of concession contracts available include:

  • survey contracts;
  • exploration and production contracts; and

  • pipeline contracts.

In principle, the forthcoming Petroleum Operations Regulations will provide further guidance on the specific features and requirements of each of such contract. In particular, the regulations will specify certain mandatory terms and conditions to be covered in concession contracts.

According to the Petroleum Law, other matters which should be addressed in the regulations include:

  • petroleum practices such as management of resources, health and safety and environmental protection;

  • the submission of plans, reports, data, samples, information and accounts by concession holders to the authorities pursuant to the corresponding contracts; and

  • the use of oil and gas pipeline systems. In this case the regulations will further elaborate on the obligation of holders of oil and gas pipeline concessions to grant third-party access.

Comment

The long-awaited Petroleum Operations Regulations will be a significant step in the implementation of the guiding principles and provisions of the Petroleum Law. For investors, they will provide further guidance and clarity on how to negotiate petroleum concessions with the government. However, another step needed to attract more international players to Mozambique remains outstanding - the special tax and customs regime for petroleum operations. The enactment of a decree by the Council of Ministers to this effect is now of critical importance, as it will assist in clarifying the current controversies surrounding taxation of petroleum operations in light of the new Corporate Income Tax Code, which became effective on January 1 2003.


For further information on this topic please contact Alberto Galhardo Simões at Miranda Correia, Amendoeira & Associados' Lisbon office by telephone (+351 21 781 4800) or by fax (+351 21 781 4802) or by email (Alberto.GalhardoSimoes@mirandalawfirm.com).


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