Chad

CAC International
Introduction
According to the 2012 BP Statistical
Energy Survey, Chads commercial oil
reserves were estimated at 1.5bn barrels
at the end of 2011. Companies currently
producing include a consortium
comprising ExxonMobil, Chevron and
Petronas (which has seven blocks in the
Doba Basin) and CNPC. In 2011, Griffths
Energy International, a Canada-based
company, entered Chads upstream oil
sector, signing three production sharing
contracts. Griffths anticipates that it
will start production in 2014 on the two
blocks for which exploitation licences
were granted in 2012. In 2012, Glencore
International farmed in for a 25 per
cent interest in Griffths
exploitation licences.
The construction of the pipeline
between Chad and Cameroon from 2000
has enabled Chads oil production to
access international markets. That
accessibility and the discovery of
commercial reserves in Niger, which it
is expected will be transported via the
Chad-Cameroon pipeline, have
increased interest in Chads oil sector.
Key legislation and regulatory structure
Key legislation relating to the upstream
hydrocarbons sector includes law No. 006/
PR/2007 dated 20 April 2007 on
hydrocarbons, as amended and
supplemented by ordinance No. 001/PR/2010
dated 30 September 2010 approving a model
production sharing contract regulating the
activities of exploration and production of
liquid or gaseous hydrocarbons in the
Republic of Chad (together, the Petroleum
Law) and decree No. 796/PR/PM/MPE/2010
dated 30 September 2010 implementing the
Petroleum Law (together with the Petroleum
Law, the Petroleum Legislation).
The key institutions involved in the
upstream petroleum sector include the
government (through the Minister of Energy
and Petroleum (MEP)), the National
Assembly and the national hydrocarbons
company named Socit des Hydrocarbures
du Tchad (SHT).
According to the Petroleum Law,
hydrocarbons in their natural state are
vested in the Republic of Chad. Only the
state can grant rights for exploration and
exploitation of petroleum resources under a
petroleum contract that may be either a
concession contract or a production sharing
contract. The entry into force of a petroleum
contract is subject to ratifcation by the
National Assembly.
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The MEP is mandated to conceive,
co-ordinate, implement and follow-up
policies for the hydrocarbons sector. Under
the Petroleum Law, the MEP is responsible
for, among other things:
granting rights to explore for, develop
and produce hydrocarbons; and
granting consents to the transfer of rights
to explore for, develop and
produce petroleum.
A National Commission for the Negotiation
of Petroleum Contracts (NCNPC) was created
by decree No. 0015/PR/PM/MP/2007 dated
3 January 2008. The NCNPC is chaired by
the MEP and members include the general
manager of SHT. Its role is to negotiate, on
behalf of the Republic of Chad, the upstream
(and downstream) petroleum contracts to be
entered into by the Republic of Chad.
SHT was established by law No. 27/PR/2006
dated 23 August 2006. SHT is placed under
the supervision of the MEP. SHTs mandate
is to implement the industrial and
commercial policies of the Republic of Chad
in the hydrocarbons sector, principally
through the following activities:
prospecting, exploration, development,
production and transportation of
hydrocarbons;
refning, transportation, stocking and
distribution of petroleum products; and
trading of hydrocarbons and
petroleum products.
In respect of upstream petroleum
operations, SHT is granted a number of
rights under the Petroleum Law, including
the right in any petroleum contract to an
option, following a declaration of
commercial discovery, to acquire a
percentage interest in the rights and
obligations under the petroleum contract.
Licensing regime
Under the Petroleum Legislation, no
petroleum company may engage in
petroleum exploration, development and
production unless it enters into a petroleum
contract with the Republic of Chad
(represented by the MEP).
Any petroleum company that wishes to
enter into a petroleum contract for a
particular block must submit an application
to the MEP, who, under the Petroleum
Legislation, may establish a competitive
bidding procedure.
The MEP administers the application
process, which involves reviewing, assessing
and making recommendations for the award
of petroleum contracts. The NCNPC is
involved in the negotiation of the terms of
the petroleum contracts.
Awards of petroleum contracts have, to date,
been via the open door policy rather than
through competitive licensing bid rounds.
Criteria considered in any application include
the fnancial capability and technical track
record of the applicant, the proposed work
programme, budget and fnancial terms
proposed by the applicant. Once the terms of
the petroleum contract have been agreed
between the NCNPC and the petroleum
company, the contract is signed by the parties
(the MEP executes the contract on behalf of
the Republic of Chad). However, the contract
is signed subject to a condition subsequent
that it is ratifed by the National Assembly
and will not be effective until it is ratifed.
The timetable for approval is usually short but
is subject to the National Assembly sitting.
The Petroleum Law prescribes a number of
matters that must be included in any
petroleum contract. A model production
sharing contract has been issued
incorporating, among other things, the
matters prescribed by the Petroleum Law
(the MPSC). The MPSC forms the basis for
negotiations with contractors. No model
concession contract is available, as all recent
petroleum contract awards have been made
within the production sharing framework.
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One of the basic requirements of the
Petroleum Legislation is that any foreign
petroleum company must incorporate a
company in Chad (under the OHADA
Uniform Act on commercial companies) that
shall hold the awarded petroleum interests
and carry out the petroleum operations.
This local entity must, however, not be the
signatory to the petroleum contract at the
time it is actually executed.
Under the production sharing framework,
the Petroleum Law prescribes an initial
exploration period of a maximum of fve
years that may be extended only once for a
maximum of three years. In case of
discovery, the contractor must notify the
Republic of Chad. If the contractor considers
that it is worth appraising the discovery,
then the contractor submits the proposed
programme and corresponding budget of
the feasibility study to the management
committee (composed of the state and the
contractor) for approval. If, further to the
study, the contractor declares commerciality
of the discovery, the contractor shall apply
for an exclusive exploitation authorisation to
carry out the development of the discovery.
The total duration of the development and
production phase is 25 years.
National oil company/state participation
Under the production sharing framework,
the Petroleum Law grants the Republic of
Chad a right to elect to participate in any
exclusive exploitation authorisation
(ie development and exploitation permit), up
to a maximum 25 per cent participating
interest. The participating interest of the
Republic of Chad may be held either directly
or by a designated public entity (eg SHT). If
the Republic of Chad elects to participate in
an exclusive exploitation authorisation, it
becomes an entity comprising the contractor
with respect to this authorisation and shall
enter into an association agreement (or joint
operating agreement) with the other
entity(ies) comprising the contractor.
If the Republic of Chad elects to participate
in an exclusive exploitation authorisation, a
minimum of 10 per cent of the total
participating interest of the Republic of
Chad must be carried by the other entities
comprising the contractor for exploration
and development operations. It may also be
carried for production operations, as
contemplated by the MPSC. The contract
shall determine the percentage of the
participating interest of the Republic of
Chad that shall be carried by the other
entities comprising the contractor (such
percentage shall not exceed 25 per cent and
may not be less than 10 per cent) and such
costs shall bear interest. These costs and the
related interest shall be reimbursed by the
state, using the carried participating interest
share of Cost Oil.
Fiscal regime
Under the Petroleum Legislation and
the MPSC:
the Republic of Chad is entitled to a
production royalty from 14.25 per cent to
16.5 per cent on the total production of
crude oil and from 5 per cent to 10 per
cent on the total production of natural
gas (the Royalty). Percentages are
negotiated and agreed in the contract.
The Republic of Chad can decide whether
to take the royalty in kind or in cash;
a percentage of the net production of
hydrocarbons after deduction of the
Royalty is allocated to the recovery of
petroleum costs (the Cost Oil); such
percentage not to exceed 70 per cent. The
balance of production after the allocation
of Cost Oil (the Proft Oil) is shared
between the Republic of Chad (as state
party) and the contractor in a ratio
determined periodically based on the
R-Factor, which is a function of
cumulative revenues over cumulative
expenditures. The share of Proft Oil to
which the state is entitled (known as the
Tax Oil) increases as the R-Factor
increases. The Tax Oil comprises at least
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40 per cent of the Proft Oil and the state
can decide whether to take the Tax Oil in
kind or in cash. The share of Proft Oil
allocated to the contractor is shared
among the entities comprising the
contractor (including the Republic of
Chad/SHT as contractor party holding a
participating interest) in accordance with
their respective participating interests;
the contractor must pay an annual cash
royalty based on the surface area covered
by the authorisations awarded to the
contractor. The amount of such royalty,
which varies from exploration phase to
exploitation phase, is negotiated and
agreed upfront in the contract;
the contractor is exempt from corporate
income tax with respect to the activities
carried out under the contract;
exports of petroleum from Chad are not
subject to any export tax or other
duty; and
the contractor may import equipment
and materials (to be used directly, solely
and permanently for the petroleum
operations) free of customs duties. Under
the MPSC, this exemption shall apply
during the exploration phase and the fve
frst years of the exploitation phase only.
Local content requirements
The Petroleum Legislation and the MPSC
include a number of local content
requirements relating to employment and
training as well as procurement, including
the following:
the contractor must employ Chadian
qualifed employees, in priority to foreign
qualifed employees, subject to
equivalence of qualifcations;
the annual work programme to be
submitted by the contractor during the
development and production phases must
include: (i) a programme of recruitment
for Chadian personnel and the related
budget; and (ii) a training programme for
the Chadian personnel and the related
budget, being noted that such
programme must enable the Chadian
personnel to accede to any positions
from qualifed worker to executive
and director;
the annual and semi-annual reports to be
provided by the contractor must specify
the number of employees dedicated to the
petroleum operations, with a
breakdown between expatriates and
Chadian nationals;
the contractor must submit an annual
report on: (i) the current recruitment of
Chadian personnel, divided by seniority;
and (ii) the nature and costs of actual
training provided to Chadian
employees; and
the contractor and its sub-contractors
must give priority to Chadian companies
for construction and services contracts,
subject to equivalence of conditions in
respect of quality, price, quantity, timing
for delivery, payment conditions, offered
guarantees and after-sales service.
Domestic supply obligations
In the situation where the Republic of Chad
cannot meet the national crude oil
consumption needs by using its crude oil
share entitlement with respect to all crude
oil produced on the territory, the contractor
is bound to sell the state the share of crude
oil necessary to enable the state to meet
such needs.
Under the MPSC, the contractor shall supply
the Republic of Chad with a volume of oil
based on a ratio of the contractors
entitlement to the entitlement of all
other producers.
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Transfer of interests
Consent
The Petroleum Legislation requires any
direct or indirect assignment (in whole or in
part, including by way of a change of control
of the contractor) of rights and obligations
deriving from exploration and/or
exploitation authorisation(s) and of the
related contractual rights to be approved by
the Republic of Chad (represented by the
MEP). The approval process enables the state
to ensure that the transfer of such interests
will not jeopardise the fnancial and
technical capabilities of the contractor
(taken as a whole) in connection with its
carrying out of the petroleum operations.
Any refusal of a request for approval must
be duly justifed by the Republic of Chad and
notifed to the contractor within 60 days of
the request. Reasons for refusal must be
major and be of a political, legal, technical
or fnancial nature. In case of approval, the
state may not impose any
additional obligations.
Assignments to affliates or between entities
comprising the contractor are deemed to be
pre-approved by the Republic of Chad.
However, the requirement for fling
documents in the context of a related party
transfer remains broadly equivalent to the
document fling obligations for assignments
to third parties.
Taxation
Based on the Petroleum Law and the MPSC,
capital gains from direct sales of rights and
obligations deriving from exploration and/or
exploitation authorisation(s) and of the
related contractual rights are subject to a
specifc levy at the rate of 25 per cent, to be
paid by the assignor. Tax relief from this
specifc levy applies to any assignment to
any Chadian affliated company.
This levy does not apply on a change of
control of a contractor, but only to
direct assignments.
Under the Petroleum Legislation, fat fees
shall apply separately on any assignment
caught by the state approval restriction
(including in a situation of a change of
control of the contractor). The amount of
these fees is to be fxed by way of a
regulation that has not yet been passed.
Stabilisation/equilibrium and
dispute resolution
Under the MPSC, during the term of the
contract, no change to Chadian law may be
imposed on the contractor without its
consent if such change has the effect of: (i)
worsening, directly or indirectly,
immediately or at a later stage, the
obligations and charges imposed on the
contractor by the provisions of the
Petroleum Legislation or the provisions of
the contract; or (ii) undermining the
economic rights and advantages of the
contractor deriving from the Petroleum
Legislation and the contract.
In case of change to Chadian law that, if
applied to the contract, would have the
effect of modifying the economic and
fnancial conditions, obligations and charges
as well as the rights and advantages
provided by the contract, the contractor and
the Republic of Chad shall agree the
amendments to the contract that are
required to preserve its economic
equilibrium. If the parties fail to reach an
agreement on such amendments within 90
days of the opening of negotiations, the
relevant change to Chadian law shall not
apply to the contract.
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The MPSC dispute resolution clause states that
the Republic of Chad and the contractor shall
use all efforts to fnd an amicable settlement
to any dispute by themselves, failing which
the dispute shall be submitted to an ad hoc
conciliation procedure as described in the
MPSC (save for technical disputes that shall be
submitted to an administered expertise
procedure to be held in accordance with the
expertise regulation of the International
Chamber of Commerce (ICC)).
If the parties fail to settle their dispute
amicably (either by themselves or by way of
the conciliation procedure or, as regards
technical disputes, by way of the expertise
procedure), such dispute shall be settled by
way of arbitration to be held in Paris, France,
in accordance with the rules of the
International Centre for Settlement of
Investment Disputes (ICSID). Governing law
shall be Chadian law and the applicable
rules of international law.