AFRICA ENERGY FRONTIERS CHAD
www.centurionlawfirm.com
Centurion Law Group is a pan-African corporate law conglomerate. Operating at the cutting edge of business practices today, Centurion stands ready to provide outsourced legal representation and a full suite of legal services to new, expanding and established corporations. From our main offices in Malabo, Equatorial Guinea; Douala, Cameroon; and Johannesburg, South Africa, we specialise in assisting clients that are starting or growing a business in Africa. We navigate the regulatory environments of the region’s different legal jurisdictions to make sure that you can do business efficiently and successfully.
NJ AYUK
Chief Executive Officer +1 647 308 6325 nj.ayuk@centurionlawfirm.com
DAMIEN LANUZA Africa Energy Frontiers, Chad Report Contributing Author
CENTURION OFFICES A37 Katherine & West, 114 West St., 3rd Floor Sandton 2031
South Africa Malabo II, Carretera en Medio de Arab Contractor En Malabo il SOGECO, Casa Acsa Planta Baja
Equatorial Guinea
1
Rue de la Messe/Ave. du Général de Gaulle Douala
Cameroon info@centurionlawfirm.com
Chad
in Profile
Chad has Africa’s 10th largest oil reserves but its output has been slipping in recent years because of maturing fields. The Central African country is trying to raise daily output to 260,000 barrels by the end of 2015 on the back of new discoveries. Reaching those levels will depend a lot on oil price volatility over the coming year.
PETROLEUM LEGISLATION Law no. 006/PR/2007 of April 20, 2007
MINISTRY OF PETROLEUM, MINES AND ENERGY Minister Djérassem Le Bémadjiel
SOCIÉTÉ DES HYDROCARBURES DU TCHAD Director General Mahamat Kasser Younous
ENERGY FRONTIERS The country continues to yield oil discoveries; severely underdeveloped power industry and latent potential for renewables; lack of gas development to date
2
AFRICA ENERGY FRONTIERS
OVERVIEW AND BACKGROUND The landlocked country of Chad is the fifth largest in Africa in terms of landmass and it must rely on neighboring Cameroon for seaborne oil exports. With one of the lowest rankings on development indices, especially for poverty and corruption, the investment climate is challenged by inadequate infrastructure, a shortage of trained labor and government bureaucracy. Chad’s population has historically subsisted on farming and raising livestock but the advent of an oil industry in 2003 gave the economy a huge boost. Today oil accounts for 80 percent of government revenue and nearly all exports. Non-oil export earnings come from cotton, cattle and gum. Remittances are also a large source of income and the country continues to rely on foreign aid.
3
Since first oil exports in 2003 the economy grew regularly but it was routinely affected by a decade-long period of instability stemming from violence in Darfur, Sudan and the fleeing of thousands of refugees into eastern Chad. Nevertheless, Chad’s economic performance fared well during 10 years of buoyant oil prices and strong harvests. In 2014, the economy grew by 7.2 percent. With 1.5 billion barrels, Chad has the 10th largest proven oil reserves in Africa, according to the BP Statistical Review. The country has not made any gas discoveries. Other than oil, Chad has no other known hydrocarbon resources. The primary source of energy consumption is wood.
The Doba Consortium, led by Exxon-Mobil, is Chad's sole large producer and is responsible for all the country's historic production. New fields operated by Glencore Xstrata and the China National Petroleum Corporation will be responsible for raising production through 2016. Oil production was ramping up to 130,000 barrels per day (bpd) at the end of 2014. The increase in Chad's oil output will depend greatly on the stability of oil prices.
4
AFRICA ENERGY FRONTIERS
CHAD’S LEGAL SYSTEM AND COMMERCIAL LAW IS BASED ON THE FRENCH CIVIL CODE, WITH A MIXTURE OF TRADITIONAL LAW AND SUPRA-NATIONAL ARRANGEMENTS AS AGREED AMONG THE MEMBERS OF REGIONAL GROUPS CEMAC, CEEAC AND OHADA.
5
LEGAL FRAMEWORK
Chad's 2007 Hydrocarbons Law, in combination with the national constitution and a series of related laws and amendments, govern the petroleum sector in the country.
The following laws are applicable: • The Constitution of 1996 with amendments through 2005. • Law no. 006/PR/2007 dated 20 April 2007 on hydrocarbons, as amended and supplemented by Ordinance no. 001/ PR/2010 dated September 30, 2010. • Decree no. 796/PR/PM/MPE/2010 dated September 30, 2010 implementing the Hydrocarbons Law. • Ordinance no. 001/PR/2010 dated 30 September 2010 approving standard production sharing agreements and modifying the 2007 Law.
the surface and subsoil of Chad, discovered or not, belong to the state. The Hydrocarbons Law (and its implementing decree) governs the conclusion of petroleum agreements (concession and production sharing agreements), the authorizations required to operate in an oil and gas area, and the conditions in which oil operations must be conducted. Chad’s government is currently working on reforms to the Hydrocarbons Law. Chad has made several international commitments, including: • Compliance with EITI requirements as of October 15, 2014.
Furthermore, other laws related to oil and gas activities include:
• 14 bilateral investment treaties (three are in force: Germany, Italy and Switzerland).
• Law no. 014/PR/98 dated 17 August 1998 related to the environment.
• Six intergovernmental investment agreements (Cotonou Agreement, AU Treaty, ECCAS Treaty OIC Investment, CEMAC Convention on Liberalization and CEMAC Investment).
• Law no. 67/23 dated 22 July 1967 defining the status of the state’s property. Chad’s Constitution makes private property inviolable and sacred. Article 41 adds that one may only be dispossessed for cause of duly declared public utility and with a just and prior indemnification. According to Article 2.1 of the Hydrocarbons Law, all hydrocarbons reserves that exist in
• 19 investment-related instruments (including GATS, ICSID Convention, UN Code of Conduct on Transnational Corporations, UN Guiding Principles on Business and Human Rights, World Bank Investments Guidelines, Charter of Economic Rights and Duties of States and Permanent Sovereignty UN Resolution).
6
AFRICA ENERGY FRONTIERS
ENERGY SECTOR ORGANIZATION
State regulation and actors The Ministry of Petroleum, Mines and Energy (MPME) is the primary policy maker and regulator for the sector and is headed by Minister Djérassem Le Bémadjiel. The MPME is responsible for issuing licensing rights and concessions to explore, develop and produce oil and gas in Chad. On the MPME’s behalf, the National Commission for the Negotiation of Petroleum Contracts is tasked to negotiate all upstream and downstream contracts in Chad. The state-owned oil company, Société des Hydrocarbures du Tchad (SHT), was established in 2006 with the mandate to execute Chad's commercial objectives in the oil and gas industry. It is responsible for upstream activities, including exploration, development and transportation of oil and gas. SHT’s downstream rights include refining, transportation, storage, distribution and trading of petroleum products. Following the declaration of a commercial discovery, SHT has the right to acquire a maximum 25 percent stake in a petroleum contract. If the state wants to participate in a licence exclusively, then a 10 percent participating interest is reserved for a contractor carrying out exploration and development work. The National Commission for the Negotiation of Petroleum Contracts (NCNPC) was created by Decree no. 0015/PR/PM/MP/2007 dated 3 January 2008. The NCNPC is chaired by the MPME and members include the director general of SHT. Its role is to negotiate, on behalf of the Republic of Chad, the upstream and downstream petroleum contracts to be entered into by the country.
7
Recent activities Caracal Energy, acquired by Glencore Xstrata in 2014, brought online the Mangara field in February and will initially pump 6,000 bpd before scaling up to 10,000 bpd later in 2015. But Glencore’s CEO, Ivan Glasenberg, has signaled that the company may cut back capital expenditures to develop its Chad assets, calling them a “reserve for the future.” Glencore also operates the Badila field, which began producing in 2013. In October 2014, the Chad government and the China National Petroleum Corporation (CNPC) reached a settlement after a disagreement involving environmental damages. Chad had accused CNPC of dumping excess crude oil. In August 2015 it fined the Chinese state-owned company $1.2 billion and cancelled its operator’s license at 5 drilling sites. CNPC agreed to pay $400 million and transfer a 10-percent stake of its producing fields to SHT. Until the deal, CNPC had been sending all its production to the 20,000-bpd N'Djamena refinery. CNPC entered Chad in 2003 via an agreement with Swiss company Cliveden to purchase its stake in Block H, which covers seven onshore basins. Over the next decade, it would make several high-yield discoveries, establishing the presence of multiple oil-bearing reservoirs in the Bongor basin.
Contracts Only the state can grant rights for exploration and exploitation of petroleum resources under a petroleum agreement. These may be a concession contract or a production sharing agreement.
As per Article 2 of Decree no. 796/PR/PM/MPE/2010, the concession contract is defined as "the oil contract attached to a license by which the state or the national company confers to a qualified legal entity, and which assumes all risks about it, the right to perform research and exploitation in a defined area." Ordinance no. 001/PR/2010 dated 30 September 2010 defines the production sharing agreement as "the oil contract in which the holder takes a commitment to carry out oil operations, and to bear all expenses and risks referred to those operations, on behalf of the state, in exchange of a share of hydrocarbons produced on the relevant contractual zone, in case of discovery of a commercial reserve." Ordinance no. 001/PR/2010 provides a model production sharing agreement. Since 2007 all petroleum contracts entered into by the state are in the form of production sharing agreements.
Local content Chad’s Hydrocarbons Law requires contractors to prioritize qualified Chad nationals over foreign employees, subject to equivalence of qualifications. Every work program in the development and production phase must consider the recruitment of Chadian employees and establish a training program that enables nationals to move up the ranks from qualified worker to company manager and executive. Contractors and subcontractors must also give priority to Chadian companies for service and construction contracts, subject to qualifications with respect to industry standards, price, quantity, timing, delivery and payment conditions.
8
AFRICA ENERGY FRONTIERS
TAX AND FISCAL REGIME
Chad's government applies the following fiscal regime for petroleum operations: A monthly royalty of 14.25 percent to 16.5 percent on total crude oil production and 5 percent to 10 percent on total natural gas production is applied. Percentages are negotiated and finalized in the production sharing agreement. This can be payable in cash or in kind, according to the decision of the state. Contractors must submit a monthly report of production. This includes net production (total hydrocarbons minus water and hydrocarbons used for operations); hydrocarbons volumes attributed to a cash or in-kind royalty payment; hydrocarbons volumes attributed to cost recovery; and hydrocarbons volumes delivered at the export point. The royalty payments are not recoverable under a production sharing agreement. The cost oil deduction for recovering petroleum costs may not exceed 70 percent of net production. The profit oil is shared between the state and the contractor in a ratio determined based on the ‘R factor’ (cumulative revenues over cumulative expenditures). The oil tax on profit oil is minimum 40 percent. An annual surface rent tax is applicable. This is paid in advance and is not recoverable Corporate income tax in Chad is 35 percent. However, Article 15 of the 2010 Ordinance says that contractors are not subject to taxes other than those defined by the Ordinance and production sharing agreement. The model production sharing agreement states that the contractor for an exploitation authorization is exempt from corporate income tax. The production sharing agreement sets out the goods and services that are exempt from VAT. Those items are directly linked to operations. Goods to be imported for petroleum operations are exempt from taxes and customs duties. Contractors' exports are also exempt.
9
Despite a wealth of hydrocarbons, Chad has a very underdeveloped electricity sector. It is estimated that as little as 3 percent of the population has access to power and there is no interconnected grid in the country. More than 80 percent of the capacity is used in the capital city of N’Djamena. The installed power capacity is 31 MW, all of which is thermal power derived from oil products refined at the N’Djamena refinery.
POWER SECTOR
Like many of its African neighbors, Chad possesses a wealth of untapped renewable energy resources. Chad has significant amounts of daily solar radiation and great wind potential, although neither showed any commercial or technical feasibility, at least in the mid term. In the short term, hydropower appears to be a more likely option, with up to 150 GW hours per year in overall generation potential. Discussions between Chad and its oil pipeline partner Cameroon are ongoing to create an interconnection to share hydroelectric power capacity.
10
AFRICA ENERGY FRONTIERS
KEY PROJECTS
11
Chad-Cameroon Pipeline Chad exports all its oil through the Chad-Cameroon Petroleum Development and Pipeline Project. The pipeline runs underground for 1,070 km from the Doba oilfields through southern Chad to the port of Kribi in Cameroon and has a total capacity of 250,000 bopd. The project was completed in 2003 and required the creation of two joint venture pipeline companies on both sides of the Chad and Cameroon border. The Doba Con
sortium members funded about 95 percent ($2.2 billion) of the project. The World Bank also supported the project through debt financing. To date, the project has dispatched more than 500 million barrels of crude oil to world markets through the pipeline.
Doba Consortium
N'Djamena Refinery
The ExxonMobil led consortium produces 130,000 bopd from seven oil fields in the large Doba complex. Output commenced in October 2003. The consortium has invested nearly $4 billion since 2007 to maintain existing production levels through a high-pressure water injection program, well stimulation and additional production wells. In 2014, Chevron sold its 25 percent stake in the Doba project to SHT for $1.3 billion. The deal was made possible by a crude oil-backed $1 billion loan from Glencore. The commodities giant entered Chad in 2012 when it acquired stakes in multiple fields for $300 million.
Chad’s refinery 25 miles north of the capital of N’Djamena was built for $60 million and opened in 2011. It produces 20,000 bpd of gasoline, diesel, fuel oil, LPG and polypropylene which are supplied to the local market. The complex is owned through a joint venture between the Chad government (40 percent) and CNPC (60 percent). The refinery’s associated power station feeds power to the capital.
12
AFRICA ENERGY FRONTIERS
CONCLUSION Chad is one of the most difficult countries in the world to do business, ranking 185 out of 189 in the World Bank's Ease of Doing Business index. The complicated procedure of starting a business and high taxes (the total tax rate is 63.5 percent) are cited as the biggest challenges. Limited access to electricity and difficulty in acquiring properties are listed as others. Still, Chad has a well-established oil industry and export infrastructure in place to make upstream investment enticing for high-level players.
OIL RESERVES
Chad possesses oil reserves of 1.5 billion barrels. Commercial gas deposits have not been found
OIL PRODUCTION
The country's current oil production is 130,000 bopd
2016 OIL PRODUCTION
Chad aims to bring new fields onstream and produce 260,000 bopd by 2016
CONTRACT REGIME
All of the country's petroleum agreements since 2007 are production sharing agreements
CHAD-CAMEROON PIPELINE OPERATORS Tchad Oil Transportation Company The consortium that operates and owns the export pipeline on the Chad side of the border. The pipeline begins at the Komé gathering facility. ExxonMobil 40.19 % Petronas 30.15 % Société des Hydrocarbures du Tchad 21.54 % Republic of Chad 8.12 %
13
Cameroon Oil Transportation Company The Chadian portion of the pipeline ends at the Mbére River. From there until Kribi, Cameroon receives its revenue for the project via transit fees. ExxonMobil 41.06 % Petronas 29.77 % Société des Hydrocarbures du Tchad 21.26 % Republic of Cameroon 5.17 % Republic of Chad 2.74 %
OILFIELDS
THE DOBA OIL COMPLEX
The first fields, Bolobo, Miandoum and Kome, began production in 2003
%
The 7 fields at the Doba Complex produce 130,000 barrels of oil per day
PARTNERS
COST
Nearly $4 billion spent since 2007 to maintain existing production levels
DELIVERY
The consortium consists of: • ExxonMobil operator 40 % • Petronas 35 % • SHT 25 %
FARM OUT
In 2014, Chevron sold its 25 percent stake to SHT for $1.3 billion
N'Djamena
Chad-Cameroon Pipeline
14