Cameroon: A New Petroleum Code That Rebalances Interests

Cameroon has just adopted a new petroleum code through Law No. 2019/008 of April 25, 2019, within the context of reforming petroleum legislation in Francophone sub-Saharan Africa and a renewed commitment to rebalancing the interests of investors and states. This law repeals and replaces Law No. 99-013 of December 22, 1999, the Petroleum Code, under which twenty-three (23) petroleum contracts were signed, the most recent of which was dated February 21, 2019.

Formally, the new text is more comprehensive. It contains one hundred and thirty-eight (138) articles, compared to one hundred and twenty-five (125) in the previous Code. In terms of content, the new articles are more exhaustive and provide precise information on their subjects.

This emphasis on precision is further confirmed by the definitions of the terms used. In total, there are forty-nine (49) definitions: twenty-six (26) new and eight (8) revised, compared to twenty-one (21) in the previous Petroleum Code.

In essence, the innovations of the new code are focused on improving the legal framework for petroleum contracts (II), improving the local content regime (III), establishing investment incentives (IV), restructuring petroleum taxation (V) and implementing specific sanctions for non-compliance with petroleum legislation (VI).

A new scope of application of the petroleum code and clarifications in terminology

The material scope of the new code has been clarified. Thus, the new Petroleum Code applies only to the upstream petroleum sector (Article 1), defined as the sector encompassing the exploration, research, and production of hydrocarbons.

This contrasts with the downstream petroleum sector, which includes the activities of pipeline transportation, refining, processing, storage, marketing, and distribution of hydrocarbons. This distinction between upstream and downstream petroleum activities was not clearly established in the 1999 law.

Furthermore, the new Code applies to petroleum contracts signed from its promulgation date. However, holders of petroleum contracts concluded under the old Code, who wish to benefit from the application of the provisions of the new Code, are required to accept the renegotiation of said contracts in accordance with said Code and its implementing regulations.

The Code also provided semantic clarifications on the terms used. These definitions, provided for in Article 2 of the new Code, relate in particular to local content, risk service contracts, petroleum products, collection points, subcontractors, discovery, unitization, and environmental impact assessments.

An improved legal framework for hydrocarbon contracts and permits

In addition to concession agreements and production sharing contracts, the service contract has been newly established. This is a risk service contract defined as a petroleum contract attached to an exclusive exploration license, and where applicable, to an exclusive production license, under which the holder assumes responsibility for conducting and financing petroleum operations and receives cash compensation.

The main characteristic of this contract is that the beneficiary assumes all the financing risks inherent in hydrocarbon exploration and production operations.

Regardless of their type, oil contracts are subject to common rules regarding the conclusion procedure. A permanent commission established by the National Hydrocarbons Corporation (SNH) now participates in the negotiations. This commission will be composed of representatives from the relevant ministerial departments (Finance, Water and Energy, and Land Affairs, in particular) and those of the SNH itself.

Furthermore, the contract is signed on behalf of the State by the Minister of Energy and Water and the Director General of the SNH. This will clearly be a joint signature, as evidenced by the use of the conjunction “and.” The previous Code did not explicitly provide for such a scenario.

These common rules also extend to the procedures for transferring rights and obligations arising from petroleum contracts or related to hydrocarbon authorizations. A priority option for acquiring the rights concerned by the transfer now exists for the benefit of the State and the jointly holding public entity. This right must, however, be exercised within ninety (90) days of the request for approval being submitted to the Minister of Energy and Water. Furthermore, it is stipulated that the rights and obligations of the petroleum contract and all the various authorizations are transferable, either partially or in full.

It should also be noted that the principle of parallelism must be respected when transferring hydrocarbon authorizations. If the rights to be transferred were granted by decree, a new decree is required for their transfer. In addition, the waiver of rights related to petroleum contracts is subject to two innovations. Thus, when a petroleum contract is concluded with several holders, the withdrawal of one or more joint holders does not result in the cancellation of the authorizations arising from the contract, nor in the termination of the contract itself, provided that the remaining joint holder(s) assume all the commitments undertaken within the framework of said contract.

Furthermore, the possibility of relinquishment also applies to the holder of a transportation authorization. However, the holder must notify the Minister of Energy and Water of their intention to relinquish their authorization within one (1) year and must fulfill the obligations prescribed by their petroleum contract and by regulations, particularly with regard to environmental protection and the decommissioning of facilities.

A clearly defined regime for local content

It is worth recalling that the old Petroleum Code already contained some rules relating to local content. It is important to note that through the implementation of local content measures, the State aims to facilitate the transfer of technology to national companies. This will be achieved through subcontracting. Thus, the holder of an oil contract is obligated to prioritize awarding contracts for construction, insurance, services, materials, equipment, and products directly or indirectly related to oil operations to companies incorporated under Cameroonian law that have their principal place of business in Cameroon and meet recognized international standards.

However, the new Code has not established a quota for the allocation or awarding of subcontracting contracts, which would have allowed for better monitoring and evaluation of these measures. Oil companies also have a hiring obligation and a continuing training obligation.

The holder of an oil contract must first and foremost employ, as a priority and with equal qualifications, qualified Cameroonian nationals in all socio-professional categories and for all functions required by its operations.

Subsequently, once they are recruited, the oil contract holder must provide them with ongoing professional training to upgrade their skills through vocational and technical training programs that will enhance their qualifications in the oil industry.

The new Petroleum Code now includes sanctions to ensure the effectiveness of local content provisions. Specifically, a fine of two hundred million (200,000,000) CFA francs can be imposed on the holder of an oil contract who fails to comply with contractual commitments regarding local content.

Incentives for investment in the oil sector

This is one of the main innovations of the new Petroleum Code. In Law No. 2013/004 of April 18, 2013, establishing incentives for private investment in the Republic of Cameroon, Article 2 (3) had expressly excluded from its scope investments governed by specific texts, notably the upstream petroleum sector, the mining and gas sector, and partnership contracts.

From the outset, it should be noted that these measures are subject to the State’s discretion and are of an “exceptional” nature. In this case, the State intervenes to support oil companies in order to encourage onshore exploitation of particularly difficult-to-access mining areas, or deep-sea exploitation beyond two hundred (200) meters, or of difficult and risky exploration themes, or to encourage the implementation of tertiary recovery programs designed to increase the productivity of deposits. Moreover, investment incentives can also be fiscal or economic in nature, such as revising oil contracts to grant advantages that accelerate investment recovery and improve profitability. These incentives include waiving the signing bonus for certain oil contracts, exempting companies from corporate income tax for up to five (5) years for liquid hydrocarbons and seven (7) years for gaseous hydrocarbons, and consolidating research expenses for tax purposes.

Finally, the SNH considers a set of criteria when deciding whether to grant the requested incentives. These criteria include the work programs submitted by the applicant, the risks involved, the size of the hydrocarbon discoveries targeted by the exploration work, and their potential for increasing production, particularly for appraisal or tertiary recovery programs.

Meanwhile, the application of these incentives cannot reduce the State’s oil revenue to less than 51% of the total oil revenue generated by the holder’s activities within the national mining domain.

A revamped oil tax system

Several important innovations in tax matters can be noted in the new code. Regarding Corporate Income Tax (CIT), while the previous tax code established a variable rate between 38.5% and 50%, the new Petroleum Code sets a fixed rate of 35%. As can be seen, this new rate remains higher than the standard CIT rate of 33%.

Regarding tax exemptions, the Code now expressly includes the Special Tax on Petroleum Products (TSPP) among the taxes and duties concerned, unlike the old code. The new Code also lowers the IT levy rate. This is now set at 0.45% with a cap of one hundred thousand (100,000) CFA francs per declaration. It should be noted that in the old Code, it was set at 0.5% without any cap (art. 108).

Specific sanctions for non-compliance with petroleum legislation

This is one of the major innovations of the new Petroleum Code. In the old Code, Article 62(1) referred to applicable criminal penalties without further specification, in addition to the civil liability regime for the holder of a petroleum authorization or contract regarding environmental damage related to petroleum operations.

The new Petroleum Code goes further in reflecting the Cameroonian legislature’s commitment to regulating the petroleum sector through enforcement. In addition to these two mechanisms, there are new provisions relating to the determination of reprehensible behavior and corresponding sanctions.

Among the offences, we can cite in particular the violation of rules relating to the conduct of petroleum operations, the failure to comply with contractual commitments relating to the agreed work program, the violation of accounting, tax and customs rules and the exchange regime, the failure to comply with contractual commitments relating to local content and the failure to comply with technical, safety and hygiene rules relating to hydrocarbon exploration and exploitation operations.

A system of sanctions is in place for this purpose. The amounts of the fines to be imposed have been determined. The least serious fine is seventy-five (75,000,000) CFA francs, and this applies to the offense of obstructing the inspection of sworn and/or authorized agents. Apart from this, all other offenses are punishable by a fine of two hundred (200,000,000) or five hundred (500,000,000) million CFA francs. In the event of failure to pay the imposed fine on time, a surcharge of 10% per month of delay in payment is stipulated.

Ultimately, the new Petroleum Code aims to attract more investment to this sector, which is vital to the national economy, while streamlining the legal framework for petroleum operations in Cameroon.