A foreign exchange revolution for the oil sector
15 June 2012
Law firm Tauil & Chequer’s Goncalo Falcão explains what the Foreign Exchange Regime law means for the Angolan oil sector
Earlier this year the Government of Angola passed Law 2/12 (January 13), setting a new Foreign Exchange Regime (“FER”) for the Angolan oil sector. As further explained below, this new FER introduces new requirements on how oil companies operating in Angola use their cash to make payments related to oil & gas activities.
Before explaining what the new requirements are, it is important to emphasize that the FER applies to oil companies, i.e. entities directly engaged with Angola National Concessionaire (Sonangol E.P.) on the performance of petroleum exploration & production activities. The new FER also has a major impact on oilfield service providers and other entities providing services to the oil companies since it impacts significantly on the way payments are made by oil companies to its suppliers.
The main features of the FER are:
Oil companies will be entitled to retain outside Angola only the estimated profits and cost recovery funds. Funds necessary for the payment of all business expenses (i.e. for the payment of goods and services whether provided by Angola or offshore-based entities) shall be kept inside Angola in local bank accounts. In other words, oil companies shall credit their Angolan bank accounts with the export oil proceeds necessary to pay all business expenses, less the estimated profits for the year in question.
The impact of this for oilfield service providers is that all payments owed by oil companies will be wired from Angolan Bank accounts. Prior to the new FER, offshore service providers (i.e. service providers without a Permanent Establishment “PE” in Angola) could be paid directly outside Angola as oil companies were able to use offshore bank accounts to make these payments.
In our view, the use of local bank accounts to make all these payments may have some detrimental effect as both local banking fees and the time necessary to process payments may increase. We are aware that the Angola Central Bank has been working together with the local financial sector with the aim of implementing rules and procedures to help banks effectively and promptly deal with this massive inflow and outflow of cash and keep fees within international acceptable standards.
Fortunately, and in respect of payments to entities based outside Angola, under the FER oil companies are released from prior Central Bank clearance to make such payments abroad, which will definitely expedite the payment process.
Another major impact of the new FER is the requirement to have Angola-based suppliers (i.e. Angolan companies or Angolan PEs of foreign companies) paid in local currency AKZ (up until now, USD were often used to make such payments). As from the moment this becomes mandatory, Angola-based entities (local companies and PEs) will be flooded with AKZ, a situation which has been cause of concern giving the associated foreign exchange devaluation risks. Despite the relatively low fluctuation of AKZ vis-à-vis USD in the last few years, Angola-based service providers have been showing some apprehension.
Given the significant impact of the FER, the Central Bank has set a calendar for the gradual implementation of these new requirements, basically to give time for both companies involved and the local financial sector to get ready. Therefore, and as per the Angola Central Bank Order 20/12, of April 12, the FER will be implemented as follows:
- As from October 1st, 2012 – Oil companies will have to pay Angola-based suppliers using the Angolan bank accounts only;
- As from July 1st 2013 – Oil companies will have to pay Angola-based suppliers using Angolan bank accounts only and with local currency AKZ;
- As from October 1st, 2013 – Oil companies will have to pay both international and Angola-based suppliers using Angolan bank accounts only, AKZ continuing being used on the payments of Angola-based suppliers. Foreign suppliers may be paid in local currency.
Other features of the FER, these with no impact on oilfield service providers are the following:
- Oil companies excess funds deposited on Angola bank accounts could be invested in or outside Angola;
- Oil companies capital transactions (e.g. loans) to fund oil operations require Central Bank authorization;
- Oil companies are allowed to have offshore escrow accounts to secure debt (finance) transactions;
- Local banks may not provide loans or extend credit to foreign oil companies unless authorized by the Central Bank or if such credits are covered by local guarantees;
- Oil companies netting for intercompany settlements require special authorization from the Central Bank;
- Oil companies are required to register all foreign exchange transactions and quarterly filing of a list of all supply contracts (pertaining to services and goods supplied by non-residents);
- The former foreign exchange regime existing in the various petroleum Concession Decrees are revoked by the new FER.
Gonçalo Falcão is a partner in the Rio de Janeiro office of Tauil & Chequer Advogados´ International Tax Matters and Corporate & Securities practices. He represents clients around the globe and particularly throughout Africa, including Angola, Mozambique, Cape Verde, Equatorial Guinea, and São Tomé & Príncipe. Much of his work in these countries involves representing oil and gas exploration and production companies and service providers. Gonçalo also has substantial experience in oil and gas, corporate, foreign investment, labor and immigration, and foreign exchange matters. He is licensed to practice law in both Brazil and Portugal.