First licences under new exploration and production regime - International Law Office

International Law Office

Energy & Natural Resources - Zambia

First licences under new exploration and production regime

March 21 2011

Introduction
Regulating agencies
Ownership structure and types of rights
Transfer of petroleum interest
Termination of petroleum rights

Fees and taxation
Other energy sector laws

Interaction with other sectors
Comment


Introduction

Zambia is richly endowed with mineral resources and is the largest producer and exporter of copper and cobalt in Africa. However, it has also been increasingly engaged in a quest for its petroleum reserves. Zambia started embracing this vision in the early 1970s as a result of the rise in price of crude oil on the international markets and the dwindling revenue from the country's copper exports.Although attempts at petroleum exploration started earlier, efforts to regulate the sector began in earnest with the introduction of the Petroleum (Exploration and Production) Act 1985. Over 20 years later, the government decided to overhaul the regulation of the sector through the enactment of the Petroleum (Exploration and Production) Act 2008, which repealed and replaced the 1985 act. The new act regulates the exploration and production of naturally occurring petroleum in Zambia. This update reviews the regulation of the petroleum sub-sector in Zambia following the granting of the first two licences under the act in 2011.

Regulating agencies

The 2008 act has a relatively complex arrangement of regulators, each of which is assigned a special role, largely depending on policy development and implementation. The key regulators include the minister for mines, the Petroleum Committee, the Petroleum Technical Committee and the Hydrocarbon Unit.

The main regulator is the minister, who is also the issuing authority for all petroleum rights under the act. Despite wielding considerable power, the minister cannot act without coordinated input from other regulators. For instance, the minister may not approve the grant or renewal of a petroleum right without first referring the matter to the technical committee for scrutiny.(1) Similarly, the Technical Committee is mandated to make recommendations to the Petroleum Committee, without whose approval the minister may not act.(2)

The Petroleum Committee was established under the 1985 Act and has continued under the 2008 Act. It is mainly mandated to:

  • formulate policies for the exploration, development and production of petroleum;
  • approve applications for the grant and renewal of petroleum rights; and
  • approve the suspension, cancellation or termination of such rights.

The committee is probably the most powerful regulator under the scheme and, unsurprisingly, most of its members are politicians. They include:

  • the minister, who chairs the committee;
  • four other ministers appointed by the president;
  • the governor of the central bank;
  • three other persons appointed by the president; and
  • the permanent secretary of the Ministry of Mines.(3)

The Technical Committee is comprised of experts who provide technical support, mainly to the Petroleum Committee.(4) It is chaired by the permanent secretary for the ministry and is responsible for:

  • evaluating applications for petroleum rights;
  • recommending the issuance or refusal of petroleum rights; and
  • performing other functions assigned by the Petroleum Committee or the minister.

The Hydrocarbon Unit is part of the civil service and is the implementing agency for official policy on petroleum. The chief civil servant is the director of the unit and its main functions include:

  • implementing government policy on the exploration, development and production of petroleum;
  • monitoring the operations of petroleum rights holders;
  • receiving and processing bids and applications for petroleum rights; and
  • advising and informing the minister.(5)

Ownership structure and types of right

The new act identifies the president as the exclusive owner - on behalf of the state - of all property and control over all naturally occurring petroleum and accompanying substances in Zambia.(6)

On behalf of the president and the state, the minister has the power to issue petroleum rights to qualifying persons. The new act provides for the issuance of petroleum exploration licences(7) and petroleum development and production licences.(8) An application for an exploration licence is reserved for a successful bidder for a block or area earmarked for exploration. It is granted for an initial period of four years and gives the holder the exclusive right to explore for petroleum in the exploration area.(9)

Only holders of an exploration licence that have made a commercial discovery of petroleum may apply for a development and production licence.(10) Such licences are generally granted for an initial period of 25 years and give the holder the exclusive right to carry out exploration, development and production of petroleum within the designated area.(11) The minister is generally required to refer an application for a petroleum right to the Technical Committee for evaluation within five days of receipt. The committee has 30 days in which to make recommendations to the Petroleum Committee.

Among other things, in order to hold a petroleum right, a corporate body must have an established office in Zambia.

Transfer of petroleum interest

A petroleum right may not be transferred or assigned without the minister's prior approval; otherwise, such transfer or assignment is null and void.(12) A petroleum right may be indirectly transferred through a transfer or change in control of the right holder, which is also subject to similar prior approval process before the transfer or change in control becomes effective.(13)

An interest in a licence, whether legal or equitable, may be created only by an instrument in writing.(14) In effect, no interest in a petroleum right may be legally created, transferred or assigned except by such an instrument.

The new act requires the minister to maintain a register of all petroleum rights, setting out prescribed details of the type, duration and ownership of the rights.(15) All assignments (and instruments in support thereof) must be recorded in the register.

Termination of petroleum rights

The minister may suspend or cancel a petroleum right granted under the new act, subject to approval by the Petroleum Committee. The main grounds for suspension or cancellation are breach of the act or a condition of the licence, insolvency and disqualification.(16)

Termination at the minister's initiative on grounds of a breach is ineffective unless the minister has previously notified the holder of the breach and the remediation period has expired.

Outside the act, the state can undertake the nationalisation or compulsory acquisition of a petroleum right under the Constitution, provided that such action is supported by an act of Parliament and adequate compensation is paid to the holder.

Fees and taxation

The main fee is charged for the execution and issue of the exploration licence. This costs approximately $54,000 and is the only form of fee to have been imposed under the act so far following the issue of first two exploration licences in early 2011.

A petroleum right holder is generally subject to the same tax regime as other corporate bodies in Zambia. However, it is additionally subject to payment of a petroleum royalty at a rate prescribed by the minister.

Other energy sector laws

Zambia has a set of laws that deal with the regulation of the gas and oil sector for petroleum products imported into the country (as opposed to those occurring naturally within the Zambian territory).

The Energy Regulation Act established the Energy Regulation Board, which may issue licences under the act. The Energy Regulation Act provides that a person may not establish or operate an undertaking except in accordance with the act and a licence issued thereunder.

The act defines an 'undertaking' as, among other things, "any commercial undertaking, whether public or private, for the production, refining, transportation, storage or supply of fuel". 'Fuel' is defined to include petroleum and petroleum products.

The focus of the Petroleum Act is the importation, conveyance and storage of petroleum and similar products, regardless of whether such activities are undertaken for commercial purposes. The regulating authority under the act is the minister of energy, who may delegate some of his or her regulatory powers to a local council. The act provides that the council may issue licences for keeping over 200 litres of dangerous petroleum; such licences will ordinarily be granted only when the intended storage premises meet the conditions of construction, maintenance and operation for storage sheds.

Interaction with other sectors

The regulation of petroleum rights may clash with the regulation of mining rights and surface rights. There are no clear provisions on precedence in respect of the relevant statutes in the event of such a clash. Analysis of the Lands Act and the Lands and Deeds Registry Act, which regulate surface rights, makes clear that a surface right holder does not acquire mineral rights or petroleum rights by that status alone. A petroleum right holder is in turn specifically excluded from acquiring mineral rights by virtue of its petroleum right.(17) A mining right holder appears to be exempt from such restrictions, except to the extent that there are pre-existing surface rights and the definition of 'mineral' does not include petroleum under the Mines and Minerals Development Act. A right of entry and access to a mining area appears more entrenched than the right of access to a petroleum exploration area or production well by a petroleum right holder. On this basis, a mining right holder may have an overriding interest in the event of a clash of interests.

Comment

The Petroleum (Exploration and Production) Act 2008 exclusively regulates the acquisition, exploitation and termination of petroleum rights with respect to petroleum naturally occurring within Zambia. As regards petroleum products imported into Zambia, the Energy Regulation Act and the Petroleum Act are the principal statutes that regulate refining, production, trade, storage and conveyance. In the event of conflict between statutes that regulate the petroleum sector, the real property sector and the mining sector, the protection of the mining sector appears to be overriding.

For further information on this topic please contact Charles Mkokweza at Corpus Globe Advocates by telephone (+260 1 235 479), fax (+260 211 238 657) or email (cmkokweza@corpus.co.zm).

Endnotes

(1) Sections 10, 13, 23, 31 and 37.

(2) Id.

(3) Sections 87 to 90.

(4) Sections 91 to 93.

(5) Sections 81 to 83.

(6) Section 4.

(7) Part III.

(8) Part V.

(9) Sections 15 and 16.

(10) Section 31.

(11) Section 36.

(12) Section 51.

(13) Section 61.

(14) Section 50.

(15) Section 49.

(16) Section 48.

(17) Section 3.


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