Mitigating compliance risks for oilfield services operations in Central Africa

Carl Mbeng – Director of Centurion Law Group

With the predicted crude oil price for 2019 averaging $65.15/bbl, exploration and production activity in the Central African sub-region, as in other parts of the world, is slowly being revitalized. Between January 2019 and August 2019 for instance, the Baker Hughes GE Rig Counts shows an increase of rigs deployed from 1 to 2 in Cameroon, 0 to 7 in Chad, and 2 to 6 in Gabon. Consequently, oilfield services companies that had downsized or temporarily shut down operations are gradually making their way back into the sub-region. Unsurprisingly, they are met with new compliance requirements which arise as a result of policy trends and sporadic legislative reforms put in place by regulatory authorities in their move to brace the sector and ensure continuous revenues therefrom.

Equatorial Guinea and Cameroon are regarded as key markets and springboards into Central Africa for oil and gas activities. Oilfield services companies seeking to enter these markets must put in place adequate mechanisms to comprehend the existent regulatory frameworks and challenges associated to their operations. The salient issues are: (1) Registration essentials and licensing; (2) Conditions associated with operating as a resident or non-resident entity; (3) Taxation mechanism and; (4) the Framework for banking, payments, and repatriation of funds. These issues must be addressed appropriately before kicking off operations.

The dos and donts of registering and licensing your oilfield services activities

Oilfield services companies must note that there exists a rather extensive framework for the conduct of oil services operations under Equatorial Guinean and Cameroonian legal systems. Equatorial Guinea and Cameroon are both members of the Organisation for the Harmonisation of Business Laws in Africa (OHADA) and the Economic Community of Central African States (CEMAC). Thus, the incorporation, administration, and conduct of business operations must be carried out in compliance with the rules laid down by the OHADA Uniform Act relating to Commercial Companies and Economic Interest Groups (‘The Uniform Act’), as well as other applicable OHADA and CEMAC regulations. In addition, specific provisions of municipal laws within host countries will apply to issues relating to required documentation, procedures, and costs.

With regard to licensing for the conduct of oilfield operations per se, one should bear in mind that petroleum operations in Equatorial Guinea and Cameroon are respectively governed by the Hydrocarbons Law and Petroleum codes, albeit these legal instruments do not specifically regulate oilfield services operations. Companies must be aware that the fact that the above-cited instruments do not expressly make provision for a licensing regime for oil services operations does not imply that operational permits will not be required. Information on compulsory permits and the procedures, fees & costs for the acquisition are generally stated in Ministerial Decrees, Arrêtés, Instructions, and Directives which may not be easily accessible. It will require the assistance of a lawyer with knowledge of the sector to conduct an evaluation of specific circumstances in an effort to determine required permits and ascertain compliance with the requirements. In addition, legal assistance is imperative to quash the likelihood of innumerable administrative procedures and bureaucratic delays associated with the acquisition of relevant licenses.

Resident or non-Resident?

It is worth noting that oil services companies have the option to operate either as non-resident or resident entities within both markets. Under Cameroonian law, the criteria for determination of residence of companies is defined under its General Tax Code (GTC). Generally, this determination is based on the location of the head office, place of effective management or permanent establishment and actual registration. The intervention of a lawyer will be required to review the scope of operations and advise on the plausible options regarding residency requirements.

In Equatorial Guinea, a company in the oil and gas sector operating for more than three (3) months in one calendar year or more than six (6) months within two-calendar years is considered a resident company. Thus, companies with service contracts whose execution periods exceed the stated timelines, should ordinarily opt to operate as resident entities. Exceptionally however, an oil services company may acquire Special Authorizationsissued by the Minister of Mines and Hydrocarbons by virtue of Ministerial Order N˚ 1/2018 of May 14th 2018[1] to execute specific tasks within a stated timeline without necessarily registering a local entity in Equatorial Guinea. The Special Authorization is generally granted for the duration of the short-term service contract and will automatically loss its validity and cannot be renewed following it expiration. The terms and conditions relating to the duration of the Special Authorisation are not clearly stated in the Ministerial Order. Accordingly, oilfield services companies must make sure the lawyers they hire can navigate the existent loopholes and press for a non-restrictive interpretation of these instruments. In our experience, these Authorizations are generally issued for the duration of the principal contract between the service provider and operator. The statutory cost currently stands at approximately USD $2,900 (XAF 1,500,000) and renewal can be pursued for no more than three (3) times.

What about taxes?

Within the Equatorial Guinean context, recent changes in the taxation mechanism applicable to non-resident companies have greatly affected the manner in which oilfield services operations will be carried out. It is interesting to note that, under the country’s 2019 General Budget Law (GBL), the Withholding Tax (WHT) rate applicable to non-resident companies (regardless of the industry they operate in) is set at 20% of the gross income realised in Equatorial Guinea. This doubles the 10% WHT rate which was applicable before 2019 and widens the gap between the WHT rate for non-resident companies which has remained at 6.5%.

In the case of Cameroon, non-resident companies benefit from a rather competitive tax rate. There is a reduced Special Income Tax (SIT) rate of 5% applicable to remuneration for services provided to all kinds of hydrocarbons activities at the research and development phase and a standard rate of 15% for operations at theexploitation operations. Resident services companies are given a possibility to choose between the conventional tax system based on a declaration of profits realised and the Special Income Tax regime which provides a flat rate of 15% on all sales realised. Adequate advice is imperative to ensure compliance with the applicable WHT, CIT, Employee tax, Social Security contributions and other exigent fiscal obligations.

Banking, Payments and Repatriation of Funds

The regulatory frameworks for banking, payments, and the repatriation of funds in the Central African sub-region is unanimous resulting from all six (6) countries which make up this subregion are members of the Economic and Monetary Community of Central Africa (CEMAC). Before March 1st, 2019, local companies could create and run bank accounts in local or foreign currency without restrictions. On December, 21st 2018, Regulation 02/18/CEMAC/UMAC/CM on Foreign Exchange Regulation was signed into law to apply Member States of the CEMAC. This regulation lays down the generic framework for payments, settlement of transactions and capital movement to or from the CEMAC sub-region for all resident and non-resident economic operators. Following the entry into force of this Regulation on March 1st 2019, the Governor of the Bank of Central African States (“BEAC”) further signed on the June 10th 2019, eleven (11) Instructions related to several aspects of foreign exchange and capital movements which would directly affect the manner in which oil services companies and other companies carry out monetary transactions.

Oilfield services companies must record that the December 21st, 2018 Foreign Exchange Regulation and its subsequent instructions unravel a stringent monetary policy for CEMAC states which will have a direct effect on transactions for most of them regardless of whether they operate as residents or non-residents. In effect, the most noteworthy of these is Instruction n°005/GR/2019 relative to the Conditions and Modalities for Opening and Functioning of Foreign Exchange Accounts for Residents and non-Residents. Under its provisions, resident companies are now prohibited from opening foreign currency accounts out of CEMAC except otherwise authorized by the BEAC (Article 2). Similarly, these companies are now required to get authorizations from the BEAC to open foreign currencies accounts within the CEMAC Member States. In cases where this authorization is granted, the foreign currency account cannot be credited or debited in CFA Francs and it can only be operated for two years, unless a renewal is approved by the BEAC.

Companies must also consider that all transfers and payments to non-CEMAC destinations for routine business transactions now require justification.  It is common knowledge that executing oil services contracts is capital intensive by nature and requires recurring movement of funds for payment of expatriate staff, equipment and sub-contractors. The new CEMAC regulation and its instructions subject companies to several banking and administrative procedures which may evidently slow down the pace of cash movements. This assistance of a lawyer becomes imperative to ensure that applicable deadlines are met and required documentation are filed in time.

Conclusion

Oilfield services companies are at the cutting edge of oil and gas activity across the globe. Amidst the current regulatory and compliance challenges associated with their work in Equatorial Guinea and Cameroon, there is much hope that upstream activities in these markets will entirely be revamped. In our experience, the ability to succeed in these markets very much depends on how well compliance risks are mitigated. Companies must ensure that they get adequate legal counsel up front as well as throughout the operational phases of their projects to ensure legal and regulatory checks are properly conducted and compliance requirements discussed hereto are met.


[1] Ministerial Order N˚ 1/2018 of May 14th, 2018 regulating the registration and authorization of companies that carry out activities in the hydrocarbon and mining sectors within the Republic of Equatorial Guinea