Balancing Competitive Terms with Local Protections

COVID-19 has rendered the regulatory landscape a decisive criterion against which investors measure their decisions. Now more than ever, African hydrocarbon producers are reassessing their fiscal and regulatory frameworks, with a view to minimizing risk, prioritizing transparency and ensuring their competiveness within the global energy arena. Since March 2014, Equatorial Guinea has been working extensively with multilateral partners including the World Bank and International Monetary Fund (IMF) to overhaul its business climate. In December 2019, the IMF granted a three-year, $282-million loan under its Extended Fund Facility to support the country’s efforts in reducing financial sector vulnerabilities, driving economic diversification, cultivating good governance, increasing transparency and fighting corruption. From launching a one-stop shop for investors and entrepreneurs in January 2019 to implementing tax incentive-related measures in July 2020, the country is making every effort to achieve sustainable economic development via private sector-led growth. Moreover, Equatorial Guinea is actively seeking foreign direct investment in a range of diversified sectors, including agriculture, fishing, energy, mining, petrochemicals, manufacturing, tourism and finance, as evidenced through its Year of Energy (2019) and Year of Investment (2020-2021) campaigns.

Establishing Competitive Terms

Existing investment regulations in Equatorial Guinea seek to strengthen local participation within the extractive sector, while diversifying and attracting foreign investment in non-extractive sectors, where possible. Laws 7/1992 and 2/1994 regulate foreign investment in Equatorial Guinea, in conjunction with Foreign Investment Law (Decree 72/2018), with certain industries subject to additional regulations – for example, those operating in the extractive sector must also adhere to the 2006 Hydrocarbons Law and National Content Regulation. Under these regulations, Equatoguinean partners must hold at least 35% of share capital of foreign companies operating in the hydrocarbons sector; there is no minimum ownership requirement for non-hydrocarbons sectors. Another distinction is that apart from the hydrocarbons sector, investments must not be part of public-private partnership with a government entity. Most recently, the government enacted a new Petroleum Regulation 2/2020 in June 2020, with a view to streamlining the existing oil and gas regulatory framework, while maintaining its appeal to foreign investors.

Within the hydrocarbons sector, Equatorial Guinea’s fiscal terms are relatively flexible. The country’s production sharing contract (PSC) is governed by the 2006 Hydrocarbon Law and entitles the state to a minimum 20% stake in any PSC, carried through the exploration phase. Besides that, key fiscal provisions are set by negotiable fiscal parameters, including state participation, bonuses, royalty rates, cost recovery and profit share in recent licensing rounds, although royalties are subject to a minimum rate of 13%. Going forward, African oil and gas producers such as Equatorial Guinea will seek to ensure government revenues, while still remaining competitive and acknowledging project risks, local content requirements and high capital expenditures that E&P companies already face.

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Source: EnergyCapitalReport

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