africa energy frontiers cameroon

AFRICAENERGYFRONTIERS

CAMEROON

www.centurionlawfirm.com

MINISTRY OF MINES, INDUSTRY AND TECHNOLOGICAL DEVELOPMENT

Minister Hernest Ngoua Boubou

PETROLEUM LEGISLATIONPetroleum Code (Law no. 99/013 of December 22, 1999)

SOCIÉTÉ NATIONALE DES HYDROCARBURES Director General Adolphe Moudiki

ENERGY FRONTIERSVaried hydrocarbons geology; rapid gas industry development accompanied by increasing production; rising production of oil; construction of thermal power plants and infrastructure.

Cameroon in ProfileHistorically one of Africa’s largest producers, Cameroon is now experiencing an uptick in production, revitalizing a previously declin-ing sector. Dedication to gas development and an increase in oil production in 2014 point to a fresh round of opportunities in this mature province.

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ESTHER NCHAMA BICO MBASOGOAfrica Energy Frontiers, Cameroon Report Contributing Author

NJ AYUKChief Executive Officer

+1 647 308 6325 [email protected]

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OVERVIEWANDBACKGROUNDCameroon’s petroleum history dates back to 1947, when the French Office of Oil Research began the area’s first exploration campaign. The first commercial discovery was at the Betika oil field in 1972 and first commercial pro-duction was achieved in 1977 from the Kolé oil field in the Rio del Ray basin. Cameroon reached peak production of 186,000 barrels of oil per day in 1985. Twelve years later, fields in the Douala/Kribi-Campo basin were brought into production.Natural advantages have played to Cameroon’s strengths, so that while oil production has declined from the 1985 peak, the country has managed to implement measures to develop its gas industry, build key regional infrastruc-ture, as well as exploit its abundant hydropower resources.

The 1,070-kilometer Chad-Cameroon pipeline, one of Central Africa’s landmark projects, was completed in 2003 and carries Chadian oil across Cameroon from north to south, ending at the Kribi marine export terminal. The pipeline may soon be used to export oil from Niger.

In 2006 the government signed its first deal for gas development with Pe-renco, now the largest oil and gas operator in the country. Cameroon has two gas producing fields, Logbaba and Sanaga Sud, and is using the gas to power new thermal power stations. Equatorial Guinea’s national gas company SONAGAS and Cameroon’s state oil and gas company Société Nationale des Hydrocarbures (SNH) signed a memorandum of agreement in 2007 for potential gas exports to Equatorial Guinea.

The upstream segment in Cameroon is experiencing a resurgence due to production increases and new field operations. Production of 75,400 bopd represented an increase of 13.3 percent over 2013 oil production figures. Gas development continues apace, with new power generation facilities supplied by increasing production. A floating LNG facility is be-ing planned. Output doubled from 5.4 billion to 10.8 billion standard cu-bic feet from 2013 to 2014.

Cameroon has proved natural gas reserves of 4.8 trillion cubic feet and proved oil reserves of 200 million barrels.

GeologyCameroon’s geology is distinctive and volatile. The Cameroon Line, a 1,600-kilometer chain of volcanoes, extends from the mountainous bor-der region with Nigeria through Mount Cameroon, West Africa’s highest peak, to the volcanic islands of Bioko, Príncipe, São Tomé and Annobón.

Five sedimentary basins belonging to three active African petroleum sys-tems are present in the country’s territory.

Rio del Ray, a coastal sedimentary basin, covers 7,000 square kilome-ters offshore and produces around 90 percent of Cameroon’s oil. The Douala/Kribi-Campo basin, a 19,000-square-kilometer coastal sedimen-tary basin of which 7,000 square kilometers is onshore, accounts for the remaining output. Logone Birni (27,000 square kilometers), Mamfe (2,400 square kilometers) and Garoua (7,800 square kilometers) are in-tracratonic basins with no current production.

AFRICA ENERGY FRONTIERS

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Cameroon’s decades of experience in the petroleum sec-tor, and its need to promote an ageing energy industry to investors, have resulted in a stable and modern petroleum legislation system.

LEGALFRAMEWORK

The petroleum sector is regulated by the Pe-troleum Code (Law no. 99/013 of December 22, 1999).

• The code establishes in Article 3 that all discovered or undiscovered hydrocarbons located in Cameroon are the property of the state.

• Section 6 of the Petroleum Code states that the government, either directly or through an intermediary, is entitled to ac-quire a portion of any petroleum operation, in accordance with the terms of an exist-ing petroleum contract. The state’s interest through SNH is negotiable up to 25 percent.

• The Petroleum Code and accompanying model production sharing agreement allow for special fiscal regimes for contractors in the event that a changing environment (particularly in the case of regulations in-troduced post-signing) is detrimental to the economic performance of a project. The contractor should bring these issues to the attention of the Ministry of Mines, Industry and Technological Development.

• Any transfer of a petroleum contract is subject to the approval of the minister. Said activity is subject to a flat fee, unless it is an exploitation authorization. The Petroleum Code and Petroleum Regulations also re-quire the minister’s approval for transac-tions that result in a change of control of the contractor.

The Petroleum Code was modified and aug-mented by the Petroleum Regulations (De-cree 2000/465 of June 30, 2000).

Law no. 96/12 of August 5, 1996 lays out the legal framework for environmental manage-ment.

A 2002 decree (Decree no. 2002/032/PM) establishes provisions for hydrocarbons fees and royalties.

The Gas Code (Law no. 2012/006 of April 19, 2012) regulates the downstream gas sector, comprising transportation, distribution, stor-age, processing, import/export and market-ing within Cameroon. Its aim is to create “an enabling legal framework” and to set up “an attractive gas sector environment for private national and foreign investors.”

• Under the Gas Code, gas development plans must prioritize meeting national ener-gy needs.

• Gas agreements do not exceed 25 years, but may be automatically renewed by up to 10 years.

• Section 6 of the Gas Code states that any foreign or Cameroonian person may under-take any activity in the downstream gas sector.

Entities working in Cameroon are subject to OHADA regional legislation. The country was designated EITI-compliant in 2013.

A COMPREHENSIVE SET OF LAWS INCLUDING THE PETROLEUM CODE, GAS CODE, AND THE ELECTRICITY SECTOR CODE GOVERN CAMEROON’S DIVERSE ENERGY SECTOR. THE MOST RECENT UPSTREAM LEGISLATION IS THE GAS CODE, SIGNED INTO LAW IN 2012, WHICH AIMS TO CREATE AN ATTRACTIVE ENVIRONMENT FOR INVESTORS IN THE DOWNSTREAM GAS BUSINESS.


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ENERGYSECTORORGANIZATION

State regulation and actorsThe Ministry of Mines, Industry and Technological De-velopment, headed by Minister Hernest Ngoua Boubou, oversees the granting of licenses and authorizations in the oil and gas sector and the transfer of licenses or authorizations, and regulates petroleum operations in Cameroon.

Société Nationale des Hydrocarbures (SNH), founded in 1980 by decree (No. 80/086), manages the state’s interests in Cameroon’s oil and gas sector and is re-sponsible for the development of resources, monitoring petroleum activities and selling production.

The company works in partnership with international oil companies and operates one field. SNH markets Cam-eroonian crude and transfers sales revenues (after pro-duction cost deductions) to the state. Receipts amount-ed to 5 trillion CFA francs (almost $8.4 billion) for the decade to the end of 2014, according to the company. SNH is managed by Director General Adolphe Moudiki.

Upstream operatorsSNH’s sole operated asset is the Mvia field, which be-gan production in November 2013. The country’s three private sector operators with production are Perenco, Addax Petroleum and Victoria Oil & Gas. In October 2014 Woodside Petroleum farmed into the Tilapia PSC with operator Noble Energy and shareholder Glencore. The partners plan to drill the Cheetah-1 well in 2015.

Among the other international companies working in Cameroon, Sterling Energy operates the Ntem explora-

tion block, Bowleven operates Bomono under the name of EurOil and NewAge is operating the Etinde permit with partners Bowleven and Lukoil.

SNH launched a licencing round in January 2014 for the Bmana, Lungahe and Ndian River blocks in the Rio del Rey basin and the Manyu block in the Mamfe basin. In February 2015, SNH announced that six blocks were on offer in three basins: Rio del Rey, Mamfe and Douala/Kribi-Campo.

ContractsExploration and production contracts exist in three forms in Cameroon: concession contracts, pro-duction sharing agreements (PSA) and risk ser-vices contracts. A prospecting authorization can be granted for areas not covered by a petroleum contract, authorizing preliminary exploration.

All recent agreements are PSAs, and these are based on a model contract (no model contract exists for concession contracts or risk services contracts, which are not currently used). PSAs are signed by the Minister, SNH and the con-tractor. The agreement obliges the contractor to explore for and exploit petroleum resources on behalf of the state, either directly or through the national oil company SNH.

An initial exploration term is three years (five in the case of ‘Special Petroleum Operations Zones’ - locations that require more specialized activity). This can be renewed twice, for two years at a time.

An exploitation authorization, issued following a

commercial discovery, is granted for a maximum period of 25 years (for liquids) or 35 years (for gas), and can be renewed once, for 10 years.

Local contentThe Petroleum Code sets out local content provisions in sections 76 and 77. Section 76 states that contrac-tors must give preference to Cameroonian construction companes and suppliers of goods and services, pro-viding that they are able to match the quality, service, payment terms and after-sales service of competitors. Section 77 deals with personnel: The holder of a petro-leum contract (such as a PSA) should be prepared to finance and enact training and development programs for Cameroonians and that qualified locals should be given hiring priority.

MidstreamCameroon’s sole refinery, at Limbe, was commissioned in 1981 and processes up to 45,000 barrels of light crude per day. Since Cameroon’s crude is heavy, feed-stock is imported from Nigeria, Equatorial Guinea and Angola. The owner, Sonara (government of Cameroon, 66 percent; Total, 18 percent; ExxonMobil, 8 percent; and Shell, 8 percent) is currently refurbishing and ex-panding the Limbe refinery to process heavier blends and upgrade capacity from 2.1 million tonnes per an-num to 3.5 million tonnes.

The Chad-Cameroon Pipeline exports oil from three fields in Chad to a floating terminal 11 kilometers off-shore Cameroon. Over the 25-year lifetime of the proj-ect, which achieved first oil in 2003, Cameroon is ex-pected to accrue $500 million in taxes and transit fees.


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Contractors in Cameroon are subject to taxes and fees that are set out by the Petroleum Code, the General Tax Code and the relevant petroleum contract (in all recent cases, a PSA). In this docu-ment, we consider the fiscal regime for the dom-inant petroleum contract model in Cameroon’s upstream segment, the PSA.

Corporate income tax rate is outlined in the PSA and is negotiable between 35 percent and 50 percent of taxable profits - that is, profits from all upstream activities during the year. It is paid monthly or annually. Profits from one project may not be offset against losses from another.

Signature bonuses (upon signing of a PSA) and production bonuses are payable to the state. Production bonuses are lump sums paid at the beginning of production and after a set period determined by the PSA.

Surface rent tax is payable annually, before Jan-uary 31 for the coming year, and increases from 1,750 CFA francs per square meter in year one to 5,500 CFA francs in year five and beyond. This is only applicable for PSA holders. Concession contract holders are liable for royalty payments.

Cost oil, calculated on the basis of all costs borne by the contractor under the PSA regime, is recoverable. The state takes a share of profit oil after cost oil is calculated.

Signature bonuses, costs before PSA signing and penalties cannot be recovered. Some fixed assets (land is not included) can be depreciated as es-tablished by the General Tax Code and PSA.

The sale of participating interests and shares of companies holding authorizations are subject to capital gains tax of 16.5 percent.

Cameroon offers incentives in the form of VAT exemptions on contractors’ and subcontractors’ purchases of goods and services attributable to petroleum operations. Losses from operations can be carried forward up to four years.

TAX ANDFISCAL REGIME

POWERSECTOR

Cameroon’s power sector is managed by the Min-istry of Water Resources and Energy, headed by Minister Basile Atangana Kouna, and governed by the Electricity Sector Code (law no. 2011/022 of December 14, 2011).

Hydropower is the foundation of Cameroonian generating capacity, but gas is becoming a more important part of the energy mix as production increases. Outside of the area covered by the national grid, citizens use diesel-powered gener-ators. Cameroon’s national power company Eneo (co-owned by the government and Actis) has stat-ed it will invest $62 million in 2015, of which $34 million will go towards improving the country’s transmission and distribution networks.

Blackouts, due to seasonal dry spells that dimin-ish hydropower output, are regular in Cameroon. To alleviate the impact of dry weather on gener-ating capacity, the government and private part-ners are directing gas supplies to new thermal plants such as Kribi, Logbaba and Bassa, and building the $132-million 30-MW Lom Pangar hy-dro electric dam. Lom Pangar, to open in 2015, will reduce seasonal fluctuations on the Lom riv-er, which will in turn add 120 MW extra capacity to two dams downstream.

Cameroon possesses 12,000 MW of hydropower potential (ranking it third in Africa behind the DRC and Ethiopia) but has a total installed capacity of 1,400 MW, of which 60 percent is supplied by dams.

The Kribi 216-MW power plant was commissioned in 2013 and almost doubled Cameroon’s installed thermal capacity. The country’s ramped-up gas production, thanks to the work of companies such as Victorial Oil & Gas, means that gas-fired gener-ation and increased industrialization is more viable than ever before. In addition to new power gener-ation, industrial consumers such as Dangote Ce-ment are building facilities in Cameroon.

The country is Central Africa’s largest by popula-tion and GDP, but only 49 percent of people have access to electricity.


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KEYPROJECTS

PerencoIn 2011 Perenco acquired Total’s upstream Camer-oonian assets, making it the largest producer in the country, with operated production of 58,000 barrels of oil equivalent per day, according to the compa-ny. Its reserves are 173 million barrels of oil and 3 trillion cubic feet of natural gas.

Perenco operates the Rio del Rey, Moudi and Eb-ome Marine concessions, the Dissoni oil-producing PSA, the Sanaga Sud gas-producing PSA, and two exploration PSAs - Elombo in the Douala/Kribi-Cam-po basin and Moabi in the Rio del Rey basin. The company also holds a 10-percent interest in the Addax-operated Lokele-Mokoko Abana concession.

Addax PetroleumThrough two local companies (one a descendant of the Pecten Cameroon Company, acquired from Shell in 2008), Addax Petroleum operates three li-censes in Cameroon (two of them producing) and has interests in two more.

The Iroko PSC, signed in 2008, is 100-percent op-erated by Addax and SNH has a 30 percent back-in right. It produced around 4,340 bopd in 2014. Mokoko Abana is part of the Lokele Association concession, which covers 168 square kilometers and has 11 platforms. In 2014 Lokele-Mokoko Abana produced 17,530 bopd.

Addax’s third operated block is Ngosso, where it has a 60-percent interest. The block contains sever-al discoveries but no commercial production.

The Rio del Rey Association is Cameroon’s largest produc-ing complex, accounting for around half of Cameroon’s oil output, It is situated in a transboundary estuarine region close to the maritime border with Nigeria and covers an area of 858 square kilometers, in which a total of 405 wells have been drilled.

Perenco expects to drill the Tiko prospect in the Moabi block in 2015.

Addax also holds interests of up to 25 percent in the Per-enco-operated Rio del Rey Association producing complex and 37.5 percent in the Perenco-operated Dissoni block, in production since 2013.

Victoria Oil & GasLondon-listed Victoria Oil & Gas was awarded the Log-baba onshore concession in 2011, and holds 95 percent of the licence, with SNH holding the remaining 5 percent. The Logbaba gas-condensate field began production at the end of 2011: This is Cameroon’s first onshore gas pro-duction. In 2014 the field produced 1.3 billion scf of gas, which was distributed to industrial consumers in Douala via the network of Gaz du Cameroun, a fully owned sub-sidiary of Victoria, and to the Logbaba and Bassa power stations. In June 2015, Victoria purchased the Logbaba gas processing plant.


© Perenco

© SONARA

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Yaoundé

Douala

Komé Central Processing Facility (CHAD)

Belabo

Kribi Export Terminal

oil productionincreased by 13.3% to 75,400 bopdfrom 2013 to 2014

OILPRODUCTION

gas productiondoubled from5.4 billion to 10.8 billion scffrom 2013 to 2014

GASPRODUCTION

HYDROPOWER

Cameroon has12,000 MWof potential hydropowercapacity

BLOCKS

6 blocks offeredfor bidding in 2015

DISTANCE

REVENUEDELIVERY

EMPLOYMENT

CHAD-CAMEROONPIPELINE

1070 km in length exporting up to 250,000 bopd from 3 fields in Chad

$500 millionrevenue expectedfor Cameroon in transit fees

first oil deliveredin 2003,1 year aheadof schedule

employed 13,000 Chadian and Cameroonian workers during 3-year construction phase

LOGBABA GAS PROJECT

Operated by Victoria Oil & Gas in partnership with SNH

First gas produced in 2011

Delivers natural gas via Gaz du Cameroun to industrial consumersin Douala Powers the Logbaba and Bassapower stations

Heads of Agreement signedbetween Golar LNG, SNHand Perenco in January 2015

Kribi fields will feed floating LNG plant using GoFLNG technology

First production planned for 2017 Partners expect 1.2 million tpa LNG production over 8 years

FLOATING LNG

CONCLUSIONCameroon has implemented a stable and com-prehensive legal system to attract investors in the wake of declining production. Recent mas-sive increases in gas production and the state’s commitment to increasing power availability alongside foreign investors make for powerful incentives to enter this mature energy market.


Dompla

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