New petroleum laws in Mozambique – October 2014

The IX Regular Session of the VII of the Legislature of the Assembly of the Republic of Mozambique (AR), which closed last August 25, has brought long-awaited news in terms of legislative amendments, of which we highlight mainly the adoption of the following diplomas:(i) the Parliamentary bill for the review of the Petroleum Law; (ii) the Parliamentary bill for the review of the Mining Law, (iii) the Parliamentary bill which enacts the Specific Tax Arrangements and Tax Benefits Applicable to Mining Activities, (iv) the Draft Law which enacts the Specific Tax Arrangement for Petroleum Operations and(v) the Draft Law of the Legislative Authorization regarding the Legislative Special arrangement relating to projects of Liquefaction of Natural Gas of Areas 1 and 4 of the Rovuma Basin.

We will, within the next coming weeks, continue with the analysis of each of the diplomas listed above and the subsequent publication of our findings in this blog, but for the time being, we will confine ourselves to undertake a brief overview of the main amendments and legal implications brought by the new Petroleum Law, approved by Law 21/2014 of 18 August 2014.

The parliamentary bill for the review of the Petroleum Law has been submitted to the Assembly of the Republic by the Ministers Council, with the main aims thereof as follows:

• The need to convert issues relating to policies and objectives of the Government of the Republic of Mozambique (“GoM”) set out in these contracts into rights and duties regulated by law and to ensure that the scope of the law encompasses all phases of petroleum operations, according to principles of Public International Law.
• The need to follow up the development of the legal and tax regimes in terms of what has been happening at global level and to follow the principles of economic and social policy,inter aliathe protection of national interests, the promotion of local development, environmental protection and the rational use of petroleum resources.
• The need to make the legal framework for the petroleum industry more predictable and transparent for investors and make Mozambique an attractive destination for investments in the petroleum industry.
• The need to fit certain sectors of the petroleum industry into the legal framework (liquefaction of natural gas), as well as for certain resources (methane gas present in the coal layers), thereby preventing the approval of contracts for these resources outside the procedures set in terms of the law.

In terms of the amendments contained in the new Petroleum Law (“NLP”), we emphasize the following considerations:

• Regarding the subject matter and scope of application, under the Old Petroleum Law (“ALP”), the activities undertaken in Mozambique were the only ones encompassed. The NLP now encompasses the activities undertaken far from the Mozambique borders, insofar as it complies with international law. Unlike what has happened with the ALP, the scope of application of the NLP explicitly stretches to any infrastructure owned or held by the right holder or third parties used in connection with petroleum operations, subject to the Mozambican jurisdiction, including the mobile foreign-flag infrastructures for the purpose of conducting or assisting oil operations.
• The NLP made it mandatory to provide prior information to the local communities on the commencing of research activities as well as the reallocation of local communities, where such is necessary. Moreover, with the NLP, the petroleum operations can only start after prior consultation with the local communities.
• The ALP did not encompass any provision for the hiring and training of citizens of Mozambican nationality, while the NLP includes a provision regarding this matter and, especially, introduces a new requirement that there is an obligation to publish in newspapers with the largest circulation in country, or through radio, television and internet, the recruitment of personnel for exploitation companies, stating the nearest place of delivery and the conditions laid down and publication of the results. This requirement, in our opinion, does not seem to be applicable to subcontractors of the concessionaires.
• The NLP establishes that the GoM must create mechanisms and conditions for the engagement of national entrepreneurs in oil and gas ventures. It is difficult to assess the implications of this legal provision, since it is rather vague and calls for future action of the GoM (perhaps this issue will be governed in new regulations of petroleum operations that comes to be approved by the GoM). Moreover, the NLP also states that oil and gas companies must be registered in the Stock Exchange of Mozambique.
• The NLP has created a new authority called the “High Authority of Extractive Industry” to perform a function in the controlling of petroleum activities, but is silent as on the duties and responsibilities of this authority.
• In accordance with the NLP, the direct transmission of rights and obligations granted under a concession agreement, to an affiliate or third parties must be made in accordance with Mozambican law and is subject to approval by the GoM. This provision also applies to other direct or indirect transmission of participatory interests in the concession agreements, including transfer of shares, quotas or other forms of equity, to the entity having rights under the concession agreement.
• The types of concession contracts provided in the NLP now include a new legal type of concession called the concession agreement for the construction and operation of infrastructures. Nevertheless, these concessions are only applicable to infrastructures for petroleum production such as processing and conversion, which are not covered by an approved development research and production plan.
• The NLP provides that the GoM may authorize concessionaires that have discovered deposits of oil and natural gas not associated to develop projects for the design, construction, installation, ownership, financing, operation, maintenance, use of wells, facilities and related equipment, whether on land or at sea for the production, processing, liquefaction, delivery and sale of gas in the domestic market and for export. Thereby, it has been clarified that the activities of liquefaction, whether on land or at sea, can be undertaken under research and production concession agreements research subject to the approval of the GoM but with no need to obtain an independent agreement.
• As opposed to the ALP, the NLP sets an obligation on the GoM to ensure that a quota of not less than 25% of oil and gas produced in the country be devoted to the domestic market, however, the terms related to the acquisition of such quota shall also be regulated by the GoM.
• The NLP obliges the concessionaires to give preference to domestic products and services as to quality when compared in terms of quality, products, materials and international services that are available timely and in the required quantities and when the price (inclusive of taxes) is not greater than 10% of the prices of imported goods. Moreover, the NLP now provides that (i) the acquisition of goods or services by concessionaires, above a certain amount, must be performed by tender and this should be published in the media particularly in newspapers with the largest circulation in the country and on the internet on website of the concessionaire; (ii) foreign natural or legal persons providing services to petroleum operations should be associated to Mozambican natural or legal persons; and (iii) the evaluation of tenders, should be taken into consideration having regard to the quality of service, price, delivery time and the guarantees offered.
• The NLP has explicitly set procedures which direct, national and foreign investment may take. It is an innovation in the petroleum sector legislation, since similar provisions already existed in relation to foreign investment legislation but did not apply to investments in the petroleum industry.
• In respect of dispute resolution, the NLP states that disputes arising from contracts and concession agreements must be settled, preferably by negotiation. If the dispute cannot be settled by agreement, the matter may be submitted to arbitration or to the competent courts under the terms and conditions set forth in the concession agreement or, if there no arbitration clause in the concession agreement, the judicial courts. This may help to dispel doubts concerning the subscription by ENH, E.P. of arbitration agreements.
• In terms of the offenses punishable by the NLP, the types of the offenses do not differ substantially from earlier offenses provided for in Mozambican law and the Petroleum Operations Regulation (which still remain in force in all matters not contrary to the NLP), however it should be noted that the NLP now clearly provides that the infringement of the NLP and contractual obligations is liable to the application of sanction measures that can range from a mere warning to withdrawal of the concession agreement (on terms to be regulated in the future).The rights acquired under contracts and concession contracts in force, and concluded under the ALP regarding petroleum operations are still valid. After the prescribed period of the contracts, the new contracts and concessions are executed under the NLP.
• The GoM has jurisdiction to regulate matters contained in the NLP within 60 days after publication thereof. Nevertheless, and in accordance with our experience it is often the GoM that fails to comply with these legal deadlines. Thus, as referred to above, we are of the opinion that the Regulation of the Petroleum Operations shall remain valid until the entry into force of the new regulation of petroleum operations in all matters that do not conflict with the the NLP.
• The NLP came into force on August 18, 2014 (which is the date of the publication thereof in the Official Gazette) and explicitly repealed the ALP and other legislation contrary to the NLP.

As mentioned above, this paper aims only to provide a brief overview of the NLP and raise a discussion of ideas on this statute, which has been awaited with great anxiety and expectation.

We realize that we did not exhaust all matters related to the NLP and various other issues remained to be addressed and analyzed.