Regulatory Developments in East Africa

E AST AFRICA Legal igation between the commercial parties regarding responsibility for tax pay - ments. Regulatory These are examples of increasing gov - ernment confidence. Despite adverse publicity accompanying such disputes, governments feel assured that their developments in exploration opportunities are attractive enough to foreign investors to withstand negative press coverage. In order to reach a position in which a East Africa petroleum project is producing (and therefore generating revenue for the host government) an international oil Marc Hammerson and John exploration dollars. A country with no company must first conduct exploration. history of exploration success must offer The government requires that explo - LaMaster , Partners in the attractive terms. However, once discov - ration is performed to a minimum level eries are made governments often (including use of 3D seismic surveys), London office of Akin change the investment climate. We have within an agreed timeframe and subject seen this recently across East Africa in to a minimum expenditure. The periods Gump*, discuss ways in well publicised cases. This trend is likely by which these obligations must be per - to continue. formed can be extended with which East African government consent. Historically, there Taxing times has been an assumption that govern - governments have adapted A government’s principal benefit in ments are willing to grant extensions licensing petroleum rights is the with limited questioning. However, now to the heightened generation of revenue. New petroleum- that oil production is a priority, exten - producing countries compete for sions are likely to be subject to increased commercial interest in investments and keep tax rates competi - scrutiny. Regional governments are eager tive. A country with proven resources, in to obtain the benefits from their newly- regional oil and gas contrast, can demand a higher fiscal discovered resources and are unwilling to opportunities. return. There are signs that East African grant extensions to licensees who have governments are becoming more been non-compliant in performing work assertive on tax. The recent sale of Cove obligations. These trends have also been ast Africa’s petroleum industry was, Energy, a UK company with East African seen in the mining sector. for many years, in the shadow of assets, provides an example. Cove struc - Estates such as Angola and Nigeria tured its takeover so that tax was not National priority (to the west) and Algeria and Libya (to payable in Mozambique. The govern - During a time when there was little the north). Those states hold vast ment, having previously received no tax regional interest from the oil majors, reserves and are significant producing from a cross-border merger in the countries issued speculative licences to nations. However, their petroleum basins mining sector, was determined to ben - small exploration companies. It is are now considered mature provinces efit from this $2bn deal. During the apparent that some of these companies and, more recently, the search for new acquisition process it announced a new lack the financial strength and know-how resources has focused on countries along law imposing capital gains tax at 12.8% to exploit the resource potential. the Great Rift Valley. This geological on the sale of non-Mozambican compa - Production is now a national priority – structure starts in Jordan and extends nies holding local assets. The and more credible companies are 4,000 miles south to offshore announcement of a new tax during a showing an appetite to acquire explo - Mozambique. It covers Ethiopia, public takeover affected Cove’s valua - ration positions in the region. East African Uganda, Rwanda, Kenya, Tanzania and tion, delayed the acquisition and led to governments are in the future likely to be Democratic Republic of Congo. the successful bidder paying an increased less forgiving of both large and small Large oil discoveries have recently price to compensate for the additional companies that fail to comply with work been made in Uganda and Kenya. tax. programmes. There is no shortage of Further south, Tanzania and Mozam- The imposition of this new tax in better financed and more technically bique hold significant natural gas Mozambique followed a dispute in competent companies willing to invest in potential. Because of their common Uganda resulting from Heritage Oil’s sale East African opportunities – and compa - geology, these countries are beginning of petroleum interests to Tullow Oil. The nies that can demonstrate these qualities to benefit from the attention of more parties similarly structured the transac - will be better placed to be successful in competent and better financed oil com - tion in the belief that no capital gains tax forthcoming licensing rounds. panies. Increased competition for was payable. The tax tribunal disagreed An increase in the manpower and exploration assets also causes govern - and based its ruling on the location of budgets allocated to exploration in East ments to consider the benefits that they the petroleum assets. To add to the par - Africa will benefit both the development receive from licensing these assets. ties’ difficulties, the government of the region’s oil and gas industry, and Governments, particularly in jurisdic - withheld its consent to Tullow devel - the employment and social benefits tions with no history of petroleum oping the assets (and selling a part-share which are generated by a thriving petro - developments, require international cap - to finance this) until Tullow provided leum sector. G ital to pay for, and foreign expertise to security for the tax payment. In order to conduct, petroleum activities. Both are obtain the required consents, Tullow *Hammerson and LaMaster are also co- scarce resources – and governments com - paid the tax and reclaimed the amount editors of a book on African oil and gas pete in the international marketplace for from Heritage. This prompted further lit - law due to be published in 2014. 36 PETROLEUM REVIEW APRIL 2014.

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