New Local Content Requirements for Oil Companies - International Law Office

Background
New Local Content Requirements
Impact

On November 25 2003 the Ministry of Petroleum issued Order 127/03, which sets out requirements on the procurement of goods and hiring of services by oil companies operating in Angola. Although these companies were already subject to certain restrictions under the terms of their agreements, the Ministry of Petroleum seems committed to tightening up the hiring of foreign contractors by the oil industry.

Background

Prior to the introduction of Order 127/03, the procurement of goods and hiring of services by oil companies were subject to the rules set forth in each oil concession. Typically, oil companies have been required to hire local contractors where (i) their services and goods are equivalent to those available in the international market, and (ii) their prices, when subject to the same tax charges, are no more than 10% higher than those charged by foreign contractors.

New Local Content Requirements

Order 127/03 sets out a number of additional requirements to be complied with by oil companies in connection with the hiring of services and procurement of goods for petroleum operations. The wording of Order 127/03 is not clear in many respects, but the most significant rules seem to introduce the following obligations.

Competitive tender requirement
Oil companies must always hold competitive tenders to contract the supply of goods and the provision of support services for their operations. They can only resort to direct hiring for urgent technical reasons or if the relevant services and/or goods are not available on the domestic market, provided always that prior authorization from the Ministry of Petroleum has been granted.

Services and goods reserved for local contractors
The provision of services and supply of goods that do not require substantial investment or expertise (eg, catering, gardening, cleaning, transportation or water supply) is reserved to Angolan companies: that is, companies in which 51% of the share capital is held by Angolan nationals. Angolan contractors may subcontract foreign companies to perform the contract.

Services and goods that require a reasonable level of investment and know-how (eg, geographical and geodesic surveys, mud logging or construction of drilling and production facilities and equipment) may be performed either by Angolan companies or by joint ventures between foreign and Angolan companies.

The order includes a list of goods and services covered by these 'exclusive' and 'semi-competitive' regimes, which is to be reviewed and updated annually by the Ministry of Petroleum and the Angolan Chamber of Commerce and Industry.

Preferential treatment
Angolan companies benefit from preferential treatment in competitive tenders for services and goods. The order provides that they should be awarded the relevant contract whenever their bid is no more than 10% higher than the bids submitted by foreign competitors.

Impact

If the Angolan authorities enforce Order 127/03 strictly, it will have a significant impact on the scope of services that may be directly provided by foreign contractors to oil operators. As a result, foreign service companies wishing to do business in Angola will increasingly opt to structure their businesses through joint ventures with local partners.

In addition, the elimination of free competition between local and foreign contractors for the provision of certain services and the supply of a number of goods may well drive up prices.

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).