Authors: Stéphane Brabant, Bertrand Montembault, Paul Morton and Etienne Marque
Senegal has been at the forefront of the emergence of the MSGBC basin (covering Mauritania, Senegal, the Gambia, Guinea-Bissau and Guinea-Conakry) in the global upstream industry. Accordingly, the new revision to the country’s petroleum legislation has been expected with anticipation.
On 1 February 2019, President Macky Sall signed into law two pivotal pieces of legislation for the oil and gas sector in Senegal. The key development is the introduction of a new petroleum code1 (the “Revised Code“), replacing the earlier 1998 petroleum code2 (the “1998 Petroleum Code“). The new Revised Code is complemented by a stand-alone law local content in the petroleum sector (the “Local Content Law“)3. Together, these laws represent a substantial update to the previous framework.
The new regime is consistent with the regional trend within the extractive sector, whereby the economic relationship between the host state and investor is being shifted in favour of the state (see our discussion on developments in other jurisdictions in Africa – The Democratic Republic of Congo’s revised mining code and Heightened Risk? Resource Nationalism on the rise in Sub-Saharan Africa). The Government will be hoping that the updated regime will strike the right balance between maximising returns for the country and maintaining an attractive and stable investment climate.
This note provides a brief overview of the key features and changes brought about by the legislation.
EXPLORATION AND EXPLOITATION RIGHTS
Exploration authorisations are issued by decree for an initial period not exceeding four years. These may be renewed up to two times for no longer than three years on each occasion. Extensions may be requested at the end of the initial period and the first renewal (for up to a year), as well as at the end of the second renewal in order to appraise a discovery.4
The Revised Code provides for exclusive exploitation authorisations that may be granted for an initial period of 20 years, renewable once for a period of up to 10 years.5 This is a change from the regime under the 1998 Petroleum Code, which provided for a maximum 25-year term for an exploitation concession (also renewable once for 10 years). The Revised Code now also provides that an exploitation authorisation may only be granted to a Senegalese-incorporated entity (whereas previously exploitation rights could be held by local or foreign entities). This last change will have a practical impact in terms of how investors look to structure their upstream interests in the country.
The Revised Code has also taken a more prescriptive approach with respect to the participation of PETROSEN, the national oil company, in petroleum operations. Whereas the 1998 Petroleum Code provided for the State to take an interest in a mining title or production sharing contract, the terms of this participation were simply to be agreed in the convention governing the mining title or the production sharing contract.6
By contrast, the Revised Code provides for a minimum 10% interest, carried during the exploration and development phases. This can be increased to 20% during the development and production phases (on a full paying basis).7 Although now on a clear statutory footing, the position in the Revised Code on this point reflects recent practice in negotiated production sharing contracts.
FISCAL AND ECONOMIC TERMS
Similarly, the Revised Code sets out the economic framework for production sharing and royalties, whereas these matters were previously addressed in the production sharing contracts.
The Revised Code sets out a maximum percentage of production (net of the royalty, on which see below) from which petroleum costs may be recovered. The maximum percentage varies by location as follows:8
(0m – 500m depth)
(500m – 3,000m depth)
(> 3,000m depth)
The Revised Code provides for a profit oil split between the state and the contractor based on an R-factor (ratio of revenues to costs) as follows:9
|R < 1||40%||60%|
|2 > R ≥ 1||45%||55%|
|3 > R ≥ 2||55%||45%|
|R ≥ 3||60%||40%|
The Revised Code has also brought in increased royalty rates, again split by onshore/offshore and water depth:10
|Onshore Liquid Hydrocarbons||10%|
|Shallow offshore liquid hydrocarbons (0m-500m depth)||9%|
|Deep offshore liquid hydrocarbons
(500m – 3,000m depth)
|Ultra-deep offshore liquid hydrocarbons
(> 3,000m depth)
Surface rentals are set at the following rates:11
- Initial exploration period: $30/km2
- First renewal period: $50/km2
- Second renewal period: $75/km2
Finally, the Revised Code has also reintroduced the notion of signature bonuses (to be set out in the production sharing contract), which had been left out of the 1998 Petroleum Code.
The Revised Code favours alternative methods of dispute resolution and arbitration, providing for resolution of disputes under petroleum contracts by consultation, mediation, conciliation or arbitration.12 This reflects the growing trend in favour of these processes in the region, notably following the adoption of the OHADA Uniform Acts on Arbitration and Mediation.
Senegal has placed considerable emphasis on transparency in the resources sector in the past several years, having participated in the Extractive Industries Transparency Initiative (EITI) since 2013. Senegal began implementing its beneficial ownership roadmap for companies in the extractives sector in 201713 and, in 2018, Senegal was declared the first jurisdiction in Africa to have made satisfactory progress in implementing EITI standards.14 This emphasis has been reflected in the Revised Code, which requires titleholders to participate in the relevant transparency mechanisms, as well as provide all necessary information for annual audit purposes, declare all oil and gas revenues paid to the state and disclose information in relation to beneficial ownership.15
TRANSITIONAL MEASURES AND STABILISATION
Petroleum contracts entered into before the Revised Code came into effect remain valid and subject to the prior legal regime.16 The parties may agree to apply the Revised Code within 24 months of it coming into effect. This approach is broadly consistent with the regime under the 1998 Petroleum Code (with a 12-month period to opt into the new code).17
The 1998 Petroleum Code permitted stabilisation provisions in petroleum contracts but did not provide any further guidance or limitations on such clauses, leaving the matter to be negotiated in the petroleum contract. The Revised Code also explicitly permits stabilisation clauses, based either on the non-application of financially prejudicial provisions of future legislation or on the adjustment of the contractual provisions to reestablish the economic equilibrium. However, the new code has introduced two key parameters for such stabilisation clauses:18
- both the state and the contractor have the benefit of the stabilisation, where the economic equilibrium of the contract is affected by subsequent legislation; and
- Changes in law in relation to safety, protection of the environment, supervision of petroleum operations and labour matters are excluded from the scope of any stabilisation (unless the changes are not consistent with international practice or are applied in a discriminatory manner).
More robust local content regimes have been a common feature of revisions to mining and petroleum legislation across the region, linked to a growing recognition of the importance of linking the extractive industries to the wider economic development objectives of the host country.19
The 1998 Petroleum Code included certain basic requirements to give preference to local suppliers and personnel.20 The substantially reinforced regime under the stand-alone Local Content Law, which applies specifically to the petroleum industry therefore brings the Senegalese legislation in line with the wider regional trend.
Key requirements of the Local Content Law include:
- submission of a local content plan (updated annually) by contractors, sub-contractors, services providers and suppliers directly or indirectly involved in oil and gas activities;21
- preference to be given to Senegalese personnel with the necessary qualifications;22
- an obligation to use procure goods and services locally, unless such local suppliers are not able to provide the relevant goods or services on the same terms as international suppliers and in accordance with international industry standards;23
- compulsory use of a government-regulated electronic platform for all tender process;24
- an obligation on all sub-contractors and service providers to incorporate a local subsidiary and open up their shareholding to Senegalese investors (the details of which are to be set out by subsequent decree);25
- a requirement for all insurance and reinsurance to be subscribed for locally, unless the coverage required exceeds the capacity of the local market;26
- preference to be given to Senegalese firms in respect of all financial and intellectual services.27
The provisions of the Local Content are immediately applicable to all oil and gas operations in Senegal. However, in the case of existing petroleum contracts the legislation will only apply to the extent consistent with any stabilisation provisions in those contracts.
Although more far-reaching than the previous regime, the Local Content Law leaves much of the detail of these requirements to be set out in subsequent regulations. The practical impact, and ultimately the effectiveness, of the new legislation will therefore only be fully appreciated once these implementing regulations are in place.
In order for any local content regime to succeed, it must be tailored to develop the capacity of local industries, as well as transfer skills and technology. A collaborative approach to developing the details of the new framework, in consultation with industry stakeholders, would help maximise the positive impact of the petroleum industry on the wider Senegalese economy.
1Law no. 2019-03 of 24 January 2019 enacting the Petroleum Code.
2Law no. 1998-05 of 8 January 1998 enacting the Petroleum Code.
3Law no 2019-04 of 24 January 2019 related to local content in the hydrocarbon sector.
4Articles 18 and 19 of the Revised Code.
5Article 30 of the Revised Code.
6Article 7 of the 1998 Petroleum Code.
7Article 9 of the Revised Code.
8Article 34 of the Revised Code.
10Article 42 of the Revised Code.
11Article 47 of the Revised Code.
12See Article 71 of the Revised Code.
15Article 55 of the Revised Code.
16Article 73 of the Revised Code.
17Article 69 of the 1998 Petroleum Code.
18Article 72 of the Revised Code.
19See for instance the Organisation for Economic Cooperation and Development’s “Guiding Principles for Durable Extractive Contracts”, 2018 (https://www.oecd.org/dev/Guiding-Principles-public-consultation.pdf).
20Article 53 of the 1998 Petroleum Code.
21Article 6 of the Local Content Law.
22Article 7 of the Local Content Law.
23Article 8.1 of the Local Content Law.
24Article 8.2 of the Local Content Law.
25Articles 8.3 and 8.4 of the Local Content Law.
26Article 10, paragraphs 1-3 of the Local Content Law.
27Article 10, paragraph 4 and Article 11 of the Local Content Law.
For more information, please contact Stéphane Brabant, Bertrand Montembault, Paul Morton or your usual Herbert Smith Freehills contact.