Angola

Eduardo Vera-Cruz Advogados

(in association with FCB&A F Castelo
Branco & Associados)

Introduction

Key legislation and regulatory structure

Onshore drilling for oil began in Angola

in 1915, with the first commercial
discovery in 1955. However, it was the
discovery of the Girassol field in the
deepwater Block 17 that launched
Angolas present day oil and gas industry.
It is now the second biggest oil producer
in Sub-Saharan Africa, with proven
reserves of approximately 9.5bn barrels
and average production in 2011 of
1.65mbpd. The Angolan government
expects to increase average oil production
to 2mbpd in 2014.

The key legislation governing the oil and gas

sector includes the Petroleum Activities Law
2004 (PAL) and the Law on Taxation of
Petroleum Activities 2004 (PTL).

The Angolan government, through the

wholly state-owned national oil company
Sociedade Nacional de Combustiveis de
Angola (Sonangol), has now granted rights
to conduct petroleum operations in
relation to 33 of its 34 blocks to a whos
who of international oil companies,
including BP, Chevron, ENI, ExxonMobil,
Petrobras, Statoil and Total. Recent PSAs
include those entered into covering
pre-salt blocks in the Kwanza Basin.
Announcements by both Maersk and
Cobalt International Energy of discoveries
on their blocks have increased hopes that
the Angola pre-salt will bring exploration
success to match that in Brazil.
The exploitation of Angolas proven gas
reserves of approximately 11tcf has
lagged behind the exploitation of its oil
reserves. With a limited domestic market
for gas, the countrys first LNG plant is
being developed near Soyo.

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According to the Angolan Constitution,

solid, liquid and gaseous natural resources
are the property of the state, and the
National Assembly is the competent body
for legislating in relation to the granting
of concessions for the use of natural
resources and the transfer of state assets.
The oil and gas sector in Angola is primarily
governed by the Ministry of Petroleum,
which is responsible for the co-ordination,
supervision and control of the activities of
the oil and gas sector and the definition of
its policies and guidelines. Under the PAL,
the government, acting through the
Ministry of Petroleum, is responsible for the
grant of concessions for the exploration for
and exploitation of hydrocarbons and the
grant of prospecting licences.
In 1976, the Angolan government
established Sonangol, a public company
that arose from the nationalisation of the
company ANGOL, to control hydrocarbon
resource exploration in Angola. Under the
PAL, Sonangol is currently the exclusive
concessionaire for exploration of oil and
gas in Angola. Sonangol is also the entity
responsible for the exploration, production,
manufacturing, transportation and
marketing of hydrocarbons and its
derivatives in Angola. The activities of
Sonangol are supervised by the Ministry
ofPetroleum.

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March 2013

Historically, Sonangol entered into joint

venture projects with the IOCs. However,
since the enactment of the PAL in 2004,
Sonangol has changed its practice and has
entered into production sharing agreements
with IOCs.

Licensing regime
Petroleum operations in Angola may only be
carried out under:
a prospecting licence issued by the
Ministry of Petroleum and valid for the
maximum period of three years. Any
Angolan or foreign company with the
necessary technical knowledge and
financial capability may apply for this
licence. A prospecting licence grants the
holder the right to perform the activities
of prospection, exploration and
production of oil in a certain area (block)
on an exclusive basis. The prospecting
licence does not grant the holder any
preferential rights in relation to the
subsequent entry into an agreement with
Sonangol regarding the exploration for
and exploitation of hydrocarbons in the
area to which the prospecting licence
relates; or
a petroleum concession, issued by the
Angolan government through publication
of a concession decree, that will establish
the term of the licence and its different
periods and phases. As stated previously,
Sonangol is the sole concessionaire for
petroleum operations and therefore all
concessions are granted to it. However, it
may carry out petroleum operations on
its own or may enter into arrangements
with third parties in order to carry out
petroleum operations jointly.
If Sonangol wishes to carry out petroleum
operations with one or more third parties, it
must first apply for an authorisation from
the Ministry of Petroleum to carry out a
public tender for the purpose of entering

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into arrangements with such third parties.

The arrangements entered into by Sonangol
with third parties may be carried out by way
of the incorporation of a joint venture
vehicle, the establishment of a consortium
or by entry into production sharing
agreements or risk services agreements. The
terms of whatever agreement is entered into
are then approved by the concession decree.
As noted above, to date, Sonangol has
entered into arrangements with third
parties by way of a production sharing
agreement (PSA). There is model form PSA
(the Model PSA), which forms the basis for
negotiations. The PAL contemplates both bid
rounds and open tenders, although typically
an RFP is provided to a limited number
ofIOCs.
The operator of the petroleum operations in
respect of an area is appointed in the
relevant concession decree after having been
proposed as the operator by Sonangol. To be
appointed as operator, a party will need to
demonstrate the requisite technical and
financial capability.
Under the terms of the Model PSA, the
exploration period and production periods
are biddable items. The exploration period
can be extended once. Following a
declaration of a commercial discovery, a
development and production plan must be
approved by the Ministry and the start of
commercial production requires a
furtherapproval.
Parties must provide a bank guarantee of a
value equal to 50 per cent of the budgeted
work obligations for a prospecting licence
and equal to the value of the work
programme for a concession.
Parties conducting petroleum operations in
Angola must establish a permanent
presence, either by way of an Angolan
incorporated subsidiary or by setting up
abranch. Typically, companies
establishbranches.

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National oil company/state participation

Sonangol is involved in nearly all petroleum
operations in Angola as a result of the
provisions of the PAL, which require that
any entity that wishes to carry out
petroleum operations in Angola (except
prospection activities) may only do so in
association with Sonangol. As noted above,
this may be through an incorporated joint
venture, a consortium or a PSA.
Unless a dispensation is granted by the
government, when Sonangol enters into an
SPV or consortium it must have a majority
interest. However, there are no known cases
where Sonangol has not had a majority
interest and it is considered very unlikely
that this would be permitted. Under a PSA,
Sonangols interest is carried through
exploration, development and production,
but all petroleum costs are recoverable out
of a specified percentage of production,
which is a biddable item under the
ModelPSA.
Under the Model PSA, Sonangols share of
profit oil is a biddable item, determined on a
sliding scale on the after tax, nominal rate
of return achieved at the end of the
preceding quarter by the contractor group.

Fiscal regime
The PTL provides the fiscal framework
generally applicable to petroleum operations
in Angola, while the Model PSA sets out the
relevant production sharing terms.
According to the PTL, petroleum operations
in Angola are subject to the taxes set
outbelow.
Petroleum Income Tax (Imposto sobre o
Rendimento do Petroleo) petroleum E&P
activities carried out under a PSA are
subject to Petroleum Income Tax on
taxable income at the rate of 50 per cent.
Operations carried out under other E&P
contracts, such as consortium
agreements, are subject to Petroleum

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Income Tax on taxable income at a rate of

65.75 per cent. However, the applicable
rate is 35 per cent in both situations for
Angolan public companies and
privatecompanies wholly owned by
Angolancitizens.

Petroleum Income Tax is assessed on

taxable income generated by any of the
following activities:
exploration, development, production,
storage, sale, exportation, processing
and transportation of petroleum;
wholesale trading of any other
products resulting from the
operations referred to above; and
other activities resulting from
occasional or merely incidental
actions, provided that such activities
do not take the form of an industry
orbusiness.

When petroleum operations are carried out

under a PSA, Petroleum Income Tax is the
only tax in respect of petroleum production,
and the Petroleum Production Tax and
Petroleum Transaction Tax described below
do not apply. Where petroleum operations
are carried out under other contractual
arrangements the amount of Petroleum
Production Tax and Petroleum Transaction
Tax are deductible in determining taxable
income for the purposes of the Petroleum
Income Tax.
Petroleum Production Tax (Imposto Sobre
a Producao do Petroleo) Petroleum
Production Tax is levied at a rate of 20 per
cent on crude oil and natural gas
measured at the wellhead less the
quantities consumed by petroleum
operations. The rate of taxation may be
reduced for marginal or deep-water
offshore fields. The state can determine
whether the tax is paid in cash or in kind.
Where paid in cash, the relevant volume
of hydrocarbons are valued based on
theFOB price for bona fide sales to
thirdparties.

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 Petroleum Transaction Tax (Imposto de

Transaccao do Petroleo) Petroleum
Transaction Tax is assessed at a rate of
70per cent over the taxable income.
Surface fee (Taxa de Superficie) a surface
fee applies to the concession area or to
the development areas if an agreement
entered into under the PTL provides for
such a surface fee to be paid.
Training levy (Contribuicoes para o Fundo
Petrolifero) companies operating in the
oil and gas sector are subject to Angolas
training levy, which is intended to be
used for creating a Petroleum Fund for
training and development of Angolan
human resources. The annual rate for a
company that holds a prospecting licence
is $100,000, while for a company in the
production stage it is 15 cents per barrel
produced during the year.
Under the PTL, additional investment
allowances may be granted by the
government on an application by the
Ministries of Petroleum and Finance.
Further, the assessment of taxable income
and computation of tax charges is done on
an independent basis for each petroleum
concession or, when a PSA applies, each
development area.
Under the Model PSA, the production
sharing arrangements are that:
the contractor may recover the costs of
petroleum operations out of an agreed
percentage of the available production.
Unrecovered costs can be carried
forward; and
the balance of petroleum produced and
saved and not used in petroleum
operations or for cost recovery is shared
between Sonangol and the contractor in
an agreed ratio according to the after tax,
nominal rate of return achieved by the
contractor group at the end of the
preceding calendar quarter. The nominal
rate of return is determined by applying

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an agreed rate of return to the

contractors cumulative net cash flow.
Cumulative net cash flow is the market
value of the contractors share of
petroleum production (cost oil and profit
oil) less Petroleum Income Tax and less
development expenditures and
production expenditures.
The Model PSA provides for payment of
social contributions and bonuses (signature
and production), to be agreed.

Local content requirements

Article 26.1 of the PAL expressly determines
that the Angolan government should adopt
measures to guarantee, promote and
encourage investment in the petroleum
sector by companies held by Angolan
citizens and create the conditions necessary
for such purpose.
The PAL goes on to state that [Sonangol] and
its associates shall co-operate with
governmental authorities in developing
public actions to promote the socioeconomic development of Angola and that
before such public actions are undertaken,
the parties involved shall agree upon the
scope of the projects, the origin of the funds
to be used and the recovery of costs related
thereto, if applicable.
The PAL obliges Sonangol and its associates
and any other entities that co-operate with
them in carrying out petroleum
operationsto:
acquire materials, equipment, machinery
and consumer goods of national
production, of the same or approximately
the same quality and that are available
for sale and delivery in due time, at prices
that are no more than 10 per cent higher
than the imported items including
transportation and insurance costs and
customs charges due; and

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 contract local service providers, to the

extent to which the services they provide
are similar to those available on the
international market and their prices,
when subject to the same tax charges, are
no more than 10 per cent higher than the
prices charged by foreign contractors for
similar services.
In connection with implementing these
requirements, the PAL states that Angolan
companies must be consulted on the same
terms and conditions as those used for
consulting companies on the
internationalmarket.
In terms of regulating the recruitment and
training of Angolan personnel, under the
PAL entities carrying out petroleum
activities in Angola are required to employ
only Angolan citizens in all categories and
functions, unless there are no Angolan
citizens in the national market with the
required qualifications and experience.
To seek to ensure equal treatment of
Angolan and expatriate workers, the PAL
requires that Angolan and foreign workers,
who occupy identical professional categories
and carry out identical functions, enjoy the
same remuneration and the same working
and social conditions, without any type
ofdiscrimination.
To implement Article 26 of the PAL, the
Angolan government approved Decree 48/06
of 1 September 2006. This Decree regulates
the selection of the associates of Sonangol in
the performance of petroleum operations
and the entities procuring goods and
services for the execution of petroleum
operations. Article 16 of Decree 48/06 sets
out different procedures on the
procurement of goods and services
depending on the value or amount of
thecontract.

In addition, Minister of Petroleum Order

127/03 of 25 November 2003 enacted the
General Regulatory Framework on the
Contracting of Services and Goods from
Angolan Companies by Petroleum Industry
Companies. These regulations set out the
conditions applicable to the employment of
foreign contractors by oil companies.

Domestic supply obligations

Under the PAL, the government may require
Sonangol and its associates to supply their
share of output to meet domestic
consumption requirements. The amount
required to be supplied shall not exceed the
lesser of a proportion of the production from
the relevant concession area equal to the
total production from the concession as a
proportion of total Angolan production and
40 per cent of the production from the
concession area. Valuation of the petroleum
is in accordance with the procedures under
the PTL, being the market price calculated
on the basis of actual FOB prices obtained
from arms length sales to third parties.

Transfer of interests
Consents
Under Article 16 of the PAL:
Sonangol has a right of first refusal in
relation to a transfer of any of its
associates contractual rights and duties;
if Sonangol waives its right of first
refusal, then the right of first refusal
transfers to any of the contracting
groups Angolan incorporated partners
that have the status of a national
company, being a company the majority
of the capital of which is held by Angolan
nationals (natural or corporate); and
such transfer requires the consent of the
Ministry of Petroleum by means of
Executive Decree and also the approval
ofSonangol.

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Under the PAL, a transfer of shares

representing more than 50 per cent of the
share capital of the assignor shall be
equivalent to the assignment of contractual
rights and duties and therefore the
restrictions set out above will also apply in
those circumstances.
Affiliate transfers are permitted; however,
the assignor shall be jointly and severally
liable with the assignee for the
assigneesobligations.
Taxation
Under Article 20.2(b) of the PTL, any gains
or profits arising from the assignment of
interests in PSAs and other exploration and
agreements are subject to Petroleum Income
Tax, under the rules described in the section
headed Fiscal regime above. Although there
is some debate about the interpretation of
the relevant provisions, gains or profits
arising from the change of control of
companies engaged in exploration and
production activities will potentially also
fall within the Petroleum Income
Taxregime.
On a disposal of an interest in a PSA or other
exploration agreement, the buyer will step
into the sellers shoes with regard to cost
recovery, and goodwill included in the
purchase price may be subject to a
deductible amortisation for Petroleum
Income Tax and Petroleum Transaction
Taxpurposes.

Stabilisation/equilibrium and dispute

resolution
Under the PAL, all legislation that was
inconsistent with the PAL was revoked while
rights acquired to conduct petroleum
operations before the enactment of the PAL
are stated to remain fully valid and
effective. However, the PAL also states that
in cases where it is deemed necessary and
convenient, valid and effective contracts
may be renegotiated according to the
principle of equity and balance of interests
to gradually adapt contractual provisions
deemed incompatible with the PAL and
ancillary regulations.
Under the Model PSA, if there is a change in
law that adversely affects the obligations,
rights and benefits thereunder, the parties
shall agree on amendments to be submitted
to the competent authorities (being the
Ministry of Petroleum) for approval to
restore the rights, obligations and benefits.
The PAL states that disputes that are
contractual in nature should be settled by
agreement but, if not, in accordance with
arbitration under the terms of the applicable
agreements. The seat of an arbitral tribunal
is to be Angola, applying Angolan law and
conducted in Portuguese. The Model PSA
includes dispute resolution provisions
consistent with the foregoing applying the
UNCITRAL rules and with the seat of
arbitration in Luanda.

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