Update on the Republic of the Congo Oil & Gas Industry Regulations (October 2023)

Publié le 29 octobre 2023 par mayilou brialy

Note to the readers: This article was primarily released on this blog Almost 6 years ago when Congo-B adopted its actual Petroleum Act, replacing the previous applicable in the Country since 1994. Meanwhile, the Country has developed LNG infrastructures with ENI and sollicitated the World Bank support (along other stakeholders) to initiate a "Gas Code" to regulate that new industry in the Country. So, before that Code being disclosed officially and commented on this blog, I estimated to republish what I wrote back in 2017 for anyone looking to have more on this topic.

The new oil/gas Petroleum Act (loi N°28-2016) entered into force since October 2016 for all Production Sharing Contracts (PSC or PSA) or Operational Service Contracts (OSC) signed off as of October 2016. That said, PEX operating under concessions agreements are disallowed in the Republic of Congo (Art.10).

Furthermore, to prevent any future negative impact related to the so-called "Dutch desease", the Country was facing from une 2014 to Q1 2021, couple of key innovations have been adopted by the time by host authorities and can be summarized as follows :

A – Legal and environmental innovations:

Mining permits are exclusively granted to the National Oil Company (NOC) in this case SNPC ;
Different entities (called members or partners in that law) with solid financial and technical backgrounds are selected based on a bidding process monitored by a MinPet (acronym referring to the Ministry of Petroleum in the region) steering committee. Final decisions are adopted by a decree based on a sort of « mutual agreement ».

Furthermore, Those members will be part of the « contractor » party in a Joint-venture with the NOC (Art.9) ;
Even though all contracts are granted to the NOC, contractor members only are accountable when technical uncertain events occur (Art. 13 al 3);
Possibility to finalize all operations related to the abandonment phase (or decommissioning) after the end of the contract granted by an express agreement from Minpet (Art. 15) ;
Possibility to get a research authorization despite a lack of financial and technical resources if a guaranty from the associated parent entity located abroad or a bank caution are available. This apply for 1 year and renewable for onother additional year on the same perimeter (Art.31) ;
Exploration permit is initially granted for 4 years. For special areas such as deep water's zones (>500 m) and the Congolese Cuvette zone, it may be extended to 6 years ;
Any exploitation permit released on a part of an exploration area cancels legally the related exploration agreement for that area and progressively, the exploration zone is geographically replaced by the associated exploitation agreements ;
For work-over operations, a special authorization from Minpet is granted if those ones require a long period to be executed. Otherwise, crude oil extracted there belong to the contractor (Art.55)
Obligation for any entity with a working interest in a Joint Venture to have in the country a subsidiary legally repenting its interests in the county during the exploration phase and an enterprise under congolese jurisdiction (a branch) between the Final Investment Decision (FID) and the first oil.
Level of NOC working interests could be a key selecting criteria when it comes to select partners or members which willing be part of a contractor pool;
Implementation of the « Local content » paradigm and the« National EP companies » concept
«oil land registry file » set up ;
Firing natural gas or gasoline is forbidden (Art 136)
obligation to store unusual fuel gas (that said, there is no clarification about unusual fuel oil);

B- Fiscal and PSAs new provisions :

NOC working interests will no more below 15% (Art. 23) even though the contractor will continue to carry out its costs through the process of cash calls .
Royalties paid in kind will no more below 15% except for deepwater oilfields and Congolese basin area. Host authority may request an occasional a cash payment (it's not specified how this will be done). If so, bank fees attached to those transfers are not part of OPEX (Art.155). On the other hand, 12% may apply for deepwater's or Congolese basin areas.
Per art 159: al1, royalties paid in kind for LPG and shales (if applied) will be only 5% of net production. To me, this is the first real long term tax relief for contractor members view the local potential of the development of a LPG industry...
Cost stop cannot exceed 50% of net production , except for deepwater areas and the « cuvette congolaise » one where it may reach out 70% (Art. 74).
Costs are recovered by following this priority : OPEX and PID (1% annual field (or net) production paid cash with the purpose to promote local content), Abandonment costs, CAPEX, and exploration costs (Art. 75).
A National Plan for environment is put in place and will be funded by a tax on pollution based on 0,05% of yearly net production (Act. 98). That one is cost recoverable and tax deductible as contractors do for PID currently (this provision is not really an innovation since a similar taxation clause had been implemented by the 2012 fiscal law);
Per Art 134, when host authorities request a non commercial natural gas for their own use purposes, costs related to such operations are cost recoverable (there is no mention if they are tax deductible as well).
10% of tax will apply on any goodwill triggered by Working interests sales based on the following formula: Goodwill=Amount (sale) – uncovered costs>0 (Art.163)
bonuses are not cost recoverable but are tax deductible (art.156)
Surface royalty is part of OPEX and is tax deductible (art.157)
All Exploration and production entities should pay a license (or “patente”/ “taxe professionnelle” in french) on a yearly basis. That tax is based on the entity building assets net book value (or the rented one) associated to other tangible assets indicators plus a per capita tax which apply on each employee.
OPEX and other costs directly associated to oil/gas operations are free of VAT. Now it's clear because that mention was not concise in the previous petroleum code released in 1994.
Per art 168, only straight line DDA methodology is accepted. Exploration costs should be depreciated as simple expenses (100%) and a 20% straight line rate should apply on others assets once the project go live...However, the revised version of SYSCOHADA (the local GAAP which also apply in 16 other countries) included the Unit of production Methodology (UOP) for amortizing facilities, wells and Abandonment (or ARO) assets...
Interest expenses will be cost recoverable and tax deductible only based on 50% of the associated CAPEX acquisition costs (art.169).
Separate general accounting ledgers should be set up for an exploration permit and an Exploitation permit (Art 170).
When exploitation permit is granted, write-back of provisions related to exploration costs should be recorded (art.170, al.2). That means it's legally compulsory to record a provision for all exploration costs before.
To me, the second key fiscal innovation (which is different from the fiscal optimization concept) based on a microeconomic point of view is related to the tax on salaries (or TUS) which decreased from 7,5% to 2,5%. (art. 149). It's really a tax relief for employers...
Implementation of concept the “PSA tax stabilization provisions” per art 152;
Obligation de hold accounting records in USD and in french (art.153)

Note that below provisions apply only for PSAs (I do believe there is no OSAs in the country as of now). For further guidance related to this topic, please, you may refer to the 2017 Global oil and Tax Guide released by EY.

Other sources: https://www.google.com/amp/s/businessfinanceint.com/le-congo-brazzaville-va-se-doter-dun-code-gazier-avant-la-fin-de-lannee