In Mozambique, contrary to other jurisdictions, Petroleum Operations are carried out based on an Exploration and Production Concession Contract ("EPCC") and not in a Production Sharing Contract. Recently in 2016, the Government of the Republic of Mozambique (the "Government"), through Resolution no. 25/2016 of 3 October, approved the new 2016 EPCC Model and corresponding annexes, including the Joint Operating Agreement ("JOA"), in order to respond to the need to harmonize the sectorial legal framework following the approval of the Petroleum Law (Law no. 21/2014, of 18 August), its respective Petroleum Operation Regulation (Decree no. 34/2015, of 31 December) and the tax regime (Law no. 27/2014 of 23 September and Decree 32/2015 of 31 December). In previous public tenders, the EPCC Model was not formally enacted by the Government, much less published in advance in the Official Gazette ("BR"), this being the first time that such a situation has occurred.

As a result of this harmonization, the 2016 EPCC Model contains, a "structured compilation" of all mandatory rules applicable to Petroleum Operations. As a general rule, and as a result of the public tender, the winning bidders are invited to enter into an EPCC, the Model of which is typical, with specific variations in relation to investment values, work programmes, the national oil company carried interest or timelines, and the rest remains standardized based on the approved model.

In this article, we will briefly address some of the key points introduced by the 2016 EPCC Model, namely:

Removal of the "stability clause" - one of the remarkable aspects of the 2016 EPCC Model is the removal of so-called stability clauses. Without legal, economic and fiscal stability, the Government no longer contractually undertakes to compensate concessionaires in the event of legislative amendments that may prejudice them, by changing the pre-existing conditions, as was customary in previous EPCCs Models. However, it is given that somehow the Government will have to reach a compromise on the stabilization of rights with concessionaires.

Possibility of negotiating additional "fiscal stability" - an innovation in the EPCC is the possibility for concessionaires to negotiate with the Government an additional period of fiscal stability beyond the initial 10 years, when the Plan of Development is approved. This period of fiscal stability may be extended until the end of the initial concession (30 years), upon payment of an additional 2 percent of the tax on royalties after the period of 10 years initially negotiated. The current royalty rate is 6 percent for natural gas and 10 percent for crude oil.

Conduct of Petroleum Operations - concessionaires must establish and maintain, in national territory, an organizational structure capable of independently managing all aspects of Petroleum Operations related to or arising from the EPCC. It should be noted that the organizational structure and installed competencies vary according to the complexity of the responsibilities of the concessionaire in question, and it is expected that concessionaires with operator status will have a presence more in line with their responsibilities in the conduct of Petroleum Operations, unlike the non-operating Concessionaires.

Export of documents and samples - the export of documents and samples requires authorization from the National Petroleum Institute ("INP"). In order for the INP to authorize the export of the original samples and/or documents, the concessionaire must submit documents and samples of equal size and quality, or copies of equivalent quality to the INP. This measure is understood as an attempt by the INP to ensure the creation of an internal database to enhance the development of technical skills locally.

Contracting of compulsory insurance in Mozambique – as a result of the new legal regime of the insurance sector in Mozambique (Decree no. 1/2010 of 31 December), the concessionaires are compulsorily required to obtain certain insurance in Mozambique, through insurers qualified to carry out insurance business in Mozambique, namely civil liability insurance, car insurance, insurance against third parties, insurance against work accidents and occupational diseases and/or any other insurance required by law. There is also a requirement that prior authorization from the Mozambique Insurance Supervision Institute be obtained for the contracting of insurance from non admitted insurers, ie foreign insurance companies.

Acquisition of Oil for reasons of "national interest" - The Government has reserved the right to acquire oil belonging to the concessionaires by invoking imperative reasons related to the national interest. It should be noted that in order to exercise this right, the Government must first notify the concessionaires in writing, at least 45 days in advance, of the quantities that it intends to acquire and pay the concessionaires the full value of the market of the Petroleum so acquired. There is an expectation in the private sector regarding the treatment that the Government intends to give to the "value of the losses" that the concessionaires may incur by breaching long-term supply contracts with third parties to meet eventual demand from the Government.

A JOA previously approved by the Government as a condition and an integral part of the EPCC - the 2016 EPCC Model maintains the obligation to subject the approval of the JOA by the Government, such approval being one of the mandatory conditions for the conclusion of the EPCC. What changes is that in the 2016 EPCC Model, the JOA could be signed by the concessionaires in the "Model substantially described in Annex F", contrary to the 2016 EPCC Model, which requires it to comply with the provisions of Annex F, being interpreted as not allowing any changes or variations to the JOA Model in Annex F.

It should be noted that a certain sector of the industry challenges this approach, arguing that in the case of a contract concluded only between the concessionaires, in which the Government is not a party and dealing with regulation of relationship aspects between them, matters relating mainly to the exercise of Petroleum Operations, if these matters should not be freely available to the parties. Another important issue is that JOA cannot be organically an integral part of the EPCC because it has its own parties, objectives and conflict resolution mechanisms, different from those of the EPCC and that if it had to be an integral part, JOA would not need a new conflict resolution provision, as it would refer the matter directly to the provisions of the EPCC, which is not the case.

INP participation in the JOA Operational Committee meetings - unlike the last JOAs concluded in 2006, which did not provide for the participation of third parties in the meetings of the JOA Operational Committee, the 2016 EPCC Model requires the inclusion of representatives nominated by the INP at such meetings, and in addition, that the INP is copied in all notifications or any sharing of documents, including notices and minutes in connection with such meetings. In an attempt to safeguard the equidistance between the INP as the regulator and the concessionaires, it is provided that the representatives appointed by the INP attend such meetings as observers and shall not interfere with or participate in any discussions or decisions during such meetings or offer advice or views on the issues raised or discussed. However, doubts remain about the effectiveness of INP participation in these meetings since it is the industry regulator and all decisions of the JOA Operating Committee may be subject to review by the INP. In addition, the rationale of this participation is further questioned if we consider that Empresa Nacional de Hidrocarbonetos, EP ("ENH"), which is the Government's commercial arm in Petroleum Operations, is an active participant in all EPCCs and JOAs, presumably safeguarding and defending the interests of the Government.

Foreign Exchange regime - contrary to the 2006 EPCC Model, the 2016 Model refers the matters related to foreign exchange regime to the general exchange legislation in force, stating that the matters related to foreign exchange transactions are governed "... under the Applicable Law in force ... ". This "remission", in addition to subjecting the foreign exchange regime applicable to EPCC (with 30 year validity) to amendments in the "applicable law", it ignores the vicissitudes of the petroleum industry in terms of its financing and the need to maintain revenues abroad to be able to fulfill the debt servicing and pay suppliers with some certainty and agility.

In conclusion, the approval and publication of an EPCC Model is positive, insofar as it brings legal certainty and predictability that are important to investors. However, our reading of the 2016 EPCC Model is that it represents some setbacks in terms of its inflexibility and its failure to follow the movement of some experienced jurisdictions that introduce some flexibility in certain critical aspects and that would therefore allow a greater margin of negotiation to the parties. On the other hand, the objective of the Government in introducing a very prescriptive EPCC is that it would save time and bring an additional layer of transparency to the conclusion of the same and would put all concessionaires on an equal footing. However, regrettably this goal is proving rather difficult to achieve, as no EPCCs have been executed after the 2015 public tender whose results were announced on 28 October 2015.

 

Originally published in the SAL & Caldeira Advogados LDA client newsletter, No 30. It is reproduced with permission from SAL & Caldeira.

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