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Legal Update

Angolan President Passes Presidential Decree Approving New Natural Gas Law

23 May 2018
Mayer Brown Legal Update

What is it?

Passed on May 18, 2018,  Presidential Decree No. 7/18 is the first law (with the exception of the special legal and tax framework of the Angola LNG Project) aimed to specifically regulate the exploration and production of natural gas in Angola. Natural gas is deemed to be the source of energy crucial to feeding  major Angolan projects to promote economic diversification and to internally produce food and other basic goods. In addition to being directly used as fuel, natural gas also could have a critical role in the production of electric power for both industrial and domestic use. 

Was it necessary?

Before this new law, the exploration and production of natural gas in Angola was subject to the following broad principles:

  • Associated natural gas surplus to the that used by oil companies in their activities was to be made available free to Sonangol (the national concessionaire);

  • Non-associated natural gas eventually discovered within a contract area could be jointly developed by the relevant oil companies and Sonangol as per terms agreed to on a case-by-case basis. If no agreement was reached within a certain pre-defined period, Sonangol was free to develop the discovery for its own account and risk. 

This regime has been considered too broad and as having too many gaps to incentivize any natural gas projects in Angola. In response to that, the new law brings up the basic terms under which natural gas projects could be developed.

What are those new terms?

General

  • Sonangol and the oil companies have the right to explore, upraise, develop, produce and sell natural gas, both in the international and domestic markets;

  • Oil companies continue to have the right to use, free of charge, natural gas in their own operations, and in case they do not wish to use or sell surplus gas, same should be made available free to Sonangol at a delivery point the latter shall designate;

  • Concessions Decrees and underlying agreements may set specific/longer periods for the natural gas exploration and production activities than the ones already set for crude oil’s. In particular, the periods of exploration, production, declaration of commercial discovery, term to develop the general development and production plan, and first production following the commercial discovery declaration, may all be extended to accommodate the features of a natural gas project;

Tax 

Rates

  • Petroleum production tax (royalty) is 5% (20% or 10% for crude oil);

  • Petroleum income tax is 25% (50% for crude oil). It can be reduced to 15% for non-associated gas projects which proven reserves are lower than 2 TCFs. This may apply to different fields subject to joint development;

  • Petroleum production tax – Exemption (70% for crude oil);

Cost deductions/recoverability

  • All costs incurred with the development and production of a non-associated gas discovery within a concession to explore and produce crude oil are deductible or recoverable for crude oil petroleum income tax (and petroleum production tax, where applicable) purposes;

  • All costs incurred with the development and production of associated gas (including making the gas available to Sonangol at the designated delivery point plus the pipeline construction, if necessary) are deductible or recoverable for crude oil petroleum income tax (and petroleum production tax, where applicable) purposes;

Other tax benefits

  • Other benefits, under the form of exemptions, rates reductions or amendments to the tax assessment/payment rules may apply whenever the economic conditions of a natural gas project so require; and 

Natural Gas Liquids (NGLs)

  • NGLs are subject to the same tax regime as natural gas.

What about existing concessions/rights on natural gas?

Rights to natural gas acquired under existing concessions or contracts between oil companies and Sonangol continue to be valid and in force for the benefit of contractual stability.

In addition, the parties to those pre-existing agreements may agree to amend those agreements for consistency with the new gas law, provided authorization is granted by means of a presidential decree.  

Authors

  • Alexandre R. Chequer
    T +55 21 2127 4212
  • Gonçalo Falcão
    T + 55 21 2127 4239
  • Norman Jacob Nadorff
    Special Counsel
    T +1 713 238 2653
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