This update addresses the main features of the New Hydrocarbons Law of Mozambique, which became effective on August 18, 2014.

The New Hydrocarbons Law is the greater part of a set of new laws to implement Mozambique’s new  hydrocarbons regime, pending further regulations that should be published in the coming months.

Overview

The New Hydrocarbons Law (Law No. 21/2014) sets the new legal framework for all hydrocarbon-related  activities in Mozambique. The law establishes the concession of rights system to perform oil and  gas operations in the Republic of Mozambique (and beyond its borders); including oil activities,  oil transportation and any infrastructure owned by the titleholder of concessions or third parties,  such as mobile infrastructures of foreign countries with the purpose of leading and assisting the  oil and gas operations. The law does not cover refining processes, industrial use, distribution and  trading of oil and gas products. In essence, the law introduces relatively small changes to the old  hydrocarbons law (Law No. 03/2001), maintaining all the major principles and aspects of the older  legislation.

The new legal regime conserves the principle of state ownership of prospecting, research,  production, transport, trading, refining and transformation of liquid and gaseous hydrocarbons and  their products. The state is granted the opportunity to develop, directly or indirectly, the  complementary or secondary activities involved. The National Hydrocarbons Company (Empresa Nacional de Hidrocarbonetos - ENH), remains the state’s exclusive representative to invest in the improvement and stabilization of its  participation in the oil and gas businesses. The National Oil Institute (Instituto Nacional de  Petróleos – INP) also remains responsible for the regulation and promotion of the oil and gas  operations. However, the state maintains the concession regime for partnering with the private  sector.

Concession Agreements Mozambican entities or foreign entities registered in Mozambique may be a  right holder to conduct oil and gas operations, provided they prove to have expertise, technical ability and financial means adequate to conduct  such operations effectively. However, foreign entities shall be established, registered and  administrated from a transparent jurisdiction, which, according to the law, means a jurisdiction in  which the state can verify the ownership, management and control and tax status of such foreign  entities. The law also states that under the same circumstances, Mozambican entities or foreign  entities associated with Mozambican entities have a pre-emption right in the signing of concession  agreements. Also, any investor that has interest in oil and gas exploration in Mozambique shall  make a partnership with ENH, the exclusive representative of the state.

The types of concession agreements under the law are:

  • Recognition: grants the non-exclusive right to conduct preliminary research and assessment in  the area of the concession agreement, through aerial, terrestrial and other surveys, including geophysical, geochemical, paleontological, geological and topographical  studies. It is recognized and executed throughout the maximum period of 2 (two) years and is not  renewable. It grants the ability to drill to a depth of 100 (one hundred) meters below the earth's  surface or seabed;
  • Research and Production: grants the exclusive right to conduct oil and gas operations as well as  the non-exclusive right to construct and operate infrastructure for the production and  transportation of oil and gas through a concession agreement area. This is subject to there being  no availability of access to oil or gas pipelines or other infrastructures already existing under  acceptable commercial terms and conditions. The term can be no more than eight years, subject to  renewal by equal or inferior periods, whichever is more beneficial to the national interest and is  subject to the provisions on the abandonment of areas;
  • Construction and Operation of Oil and Gas Pipeline Systems: grants the right to build and  operate oil and gas pipeline systems for transportation of crude oil and natural gas purposes when  these operations are not covered by a research and production concession agreement. It needs to be  accompanied by a development plan of oil and gas pipelines; and
  • Construction and Operation of Infrastructure: grants the right to build and operate  infrastructure for oil and gas production, such as for processing and conversion, which are not  covered by an approved research and production development plan.

For the investors, the concession agreements aim to guarantee security and legal protection of  property rights on goods, including industrial property rights comprised in the approved  investments made for oil and gas activity. Expropriation may take place only exceptionally, and  with a public interest justification, but such cases are subject to the payment of just compensation. However, all data obtained under any concession agreement shall be state property. It is also important to note  that, in compliance with the terms and conditions contained in a concession agreement permit,  operators must provide a financial guarantee.

Taxation

The legal entities conducting oil and gas operations in Mozambique are subject to the payment of  the following general taxes in addition to the specific taxes:

  • Income tax (32% on net profits)
  • Value-added tax (17% on sales, as debt rate - creditable)
  • Local taxes when applied (not significant)
  • Other taxes established by law

The specific taxation on oil and gas operations (Petroleum Production Tax) is established by law,  currently regulated by Decree No. 04/2008, and applies to oil and gas produced in Mozambique, from  the producing area. The Petroleum Production Tax is similar to a royalty and becomes chargeable  from the time the oil or gas produced is extracted from an oil field/gas field and at the current  rates: 10% for crude oil and 6% for natural gas. The tax base is the amount of oil or gas produced  and the value is determined on the basis of the weighted average prices that were sold by the  producer and its contractors in the month that corresponds to the tax payable, being referenced to  international prices of major international oil and gas export centers.

Land Issues

The right to explore oil and gas is different from the use of land rights or other rights  established by law. Thus, the granting of rights for oil and gas operations shall not imply the  allocation of rights for use of land. Fair indemnification will need to be paid by the  concessionaires to the people or community that hold the use of land rights. In addition, the  concessionaires must ensure the resettlement of populations when the 

concession area is located in an area inhabited by families or communities. After the end of oil and gas exploration, the holders of previous use  of land rights have preference in the reallocation of such rights.

Environmental Issues

The areas surrounding the infrastructure of oil and gas operations in a 50 foot strip are  considered zones of partial protection. If the concessionaires cause any damage to cultures, soils,  constructions, equipment or improvements, they have the obligation to indemnify the owners of the  mentioned goods, in compliance with the applicable laws. If the concessionaires cause damage to the  environment or pollution, they are required to indemnify the affected party for the harm and damage  caused, regardless of fault.

The state shall ensure the strict observance of the norms of environmental protection and  rehabilitation, in accordance with the applicable laws and conventions and good international  practices. The concessionaires must be responsible for the damages to infrastructure, environment,  territorial waters and the public health concerning the handling, transport, research and  exploration of oil and gas. The concessionaires must guarantee the coexistence with the fauna and  marine and other ecosystems, especially in areas of conservation and development of fishing  activities. In the cases, where explosives are to be used, techniques and measures of safety during  planning, execution and monitoring must be adopted and submitted to the competent authorities for  approval. The use and improvements of oil and gas resources shall observe the existing rules of  protection against exposure to radioactive substances.

Local and Social Issues

Foreign entities that provide services to oil and gas operations are required to associate  themselves with Mozambican individuals or entities. The acquisition of goods or services by  concessionaires, above a certain value, must be made by tender and should be published through the media with the highest circulation or audience, including newspapers and electronic media. Preference should be given  to local  products and services that are  available at the time of tender when comparable in terms of quality  to international products and services. However, this preference is only to the extent that the  price difference, including taxes, does not exceed 10% percent of the price of imported products  and services available.

Beyond the resettlement and indemnity obligations imposed on the concessionaires, with the help of  the state, concessionaires are required to create structures to ensure the organization and  participation of the communities that are located in the concession areas. The concessionaires will  also be  required to ensure the harmonious environment for labor relations. The concessionaires  shall guarantee the employment and technical-professional training for the Mozambicans and ensure  their participation in management positions of oil and gas operations.

Concessionaires shall take the necessary measures to guarantee the health and safety of their  employees under the Mozambican legislation, and under the best international practices. The  recruitment of personnel by the concessionaires must be published in the newspapers or on the  radio, television and internet, indicating the required conditions and the publication of results.

Dispute Resolution

Any disputes caused by the concession agreements must be resolved firstly by negotiation. If no  agreement is reached, the matter can be submitted to arbitration or to competent judicial  authorities, in compliance with the terms and conditions established by the concession agreement.  The arbitration between the state and foreign investors shall be in compliance with: the Mozambican  law that regulates arbitration; conciliation and mediation as dispute resolution; the rules of the International Centre for Settlement of  Investment Disputes, approved in Washington on March 15, 1965, or in compliance with the Convention on the Settlement of Investment Disputes  between States and Nationals of Other States; and the rules of other international bodies widely  recognized in compliance with that agreed in the concession agreement.