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Fueling economic diversification and growth: Angolan oil & gas takes center stage

Angola’s first oil wells were drilled more than a century ago, but the country’s rich history in oil goes back far further. In the 1700s, Portuguese colonialists first discovered oil seeps and asphalt deposits just 60 kilometers north of Luanda. Today, Angola is consistently one of Africa’s top-four oil-producing countries, alongside Libya, Nigeria and Algeria. Its first commercial onshore deposits were proven in 1955, followed in 1968 by its first offshore discovery, the Malongo. Eight years later, in 1976, following its independence from Portugal, Angola established Sonangol U.E.E. to manage the exploitation of the nation’s hydrocarbon resources.

With the discoveries at Girassol in 1996 by Total Fina Elf (now part of TotalEnergies SE), deep-water reserves have been a major driver of Angola’s increased prominence on the world stage, and of the oil industry’s transformation of its national economy. Ultra-deep pre-salt reserves in blocks awarded in 2011, which reach depths of more than 5,000 meters below sea level, are today broaching new frontiers in deep-water discoveries. With crude oil production now on the rise again—increasing by more than 580,000 barrels month-on-month from December 2022 to January 2023—Angola is now aiming to stabilize its output to approximately 1.3 million barrels per day in the next three years.

Angola’s economy is heavily dependent on its oil & gas industry. Oil & gas products make up more than 90 percent of its exports. Crude oil exports alone accounted for US$39.94 billion in 2022, an uplift of 44 percent from 2021. And the lion’s share of that oil comes from its offshore fields. These fields produce a much sought-after light, sweet crude oil with low sulphur, used typically for processing light, refined petroleum products.

Current trends in deep-water discoveries give investors good reason to be enthusiastic about Angola’s prospects. Dealmaking in Angola’s oil & gas sector is even shaping the face of African M&A. In 2022, according to a study by Rystad Energy, oil & gas M&A accounted for 70 percent (US$15 billion) of all M&A transactions on the continent.

As with any heavily petroleum-dependent economy, though, market volatility in the oil & gas sector plays a significant factor in shaping Angola’s investment landscape. 2021 saw Angola emerge from half a decade of persistent recession. In the past two years, though, oil production has risen, and the price of oil has surged because of the conflict in Ukraine. This mix of high oil revenues coupled with the implementation of the National Development Plan (2018 – 2022) under the coordination of an International Monetary Fund (IMF) financial support program (December 2018 – 2021) has provided a much-needed boost to Angola’s economic recovery, and to investments to stimulate other industrial sectors that will reduce the country’s monolithic dependence on oil.

Legal and regulatory reform

Under the Constitution of Angola, all onshore and offshore petroleum reserves are the property of the State. The Angolan legal framework for oil and natural gas exploration and production is set out primarily in Law No. 10/04 of 12 November 2004, as amended in 2019 by Law No. 5/19 of 18 April 2019 (Petroleum Activities Law). The Petroleum Activities Law states that all petroleum operations can only be conducted under specific licenses issued by the Ministry of Mineral Resources, Oil and Gas (MIREMPET), or by an oil concession awarded by the Angolan government. This includes prospecting, exploration, development and production of crude oil and natural gas.

Following his election in 2017, Angola’s President João Lourenço moved quickly to enact regulatory and structural reforms in the oil & gas sector. Besides the amendment to the Petroleum Activities Law, this included creating a new oil & gas regulator, namely the National Agency for Oil, Gas and Biofuels (ANPG), through Presidential Decree (No. 49/19 of 6 February 2019). This decree establishes ANGP as the regulatory body in charge of regulating, supervising and promoting oil & gas operations. Regulatory reforms further included the enactment of decrees to simplify investment in the oil & gas industry, and the approval of new rules and procedures for oil & gas public tenders.

ANPG’s creation ended state-owned Sonangol’s multiple roles as regulator, concessionaire and operator in the country’s oil sector. Changes were also made to Sonangol’s board. A Sonangol executive, Sebastião Gaspar Martins, was appointed as its new chairman. Free of its regulatory function, the company’s activities now focus on research, production, and related petrochemical activities, as well as exploring other sectors such as renewables and hydrogen. The long-term intent is to transform Sonangol into an energy company.

Further reforms include a decree under Angola’s privatization regulations that provides for the privatization of Sonangol. As part of the country’s four-year privatization program, Angola is planning to divest a 30 percent stake in Sonangol within the next five years.

Commentators have noted that the Angolan government’s move to transfer the regulatory function from Sonangol to ANPG is proving successful. Quicker approvals of work plans have already resulted in new discoveries and the development of oil fields, including by TotalEnergies and ENI.

Sonangol’s divestment of non-core companies and assets to focus on oil and to attract foreign investors will likely also increase investor and operator confidence, as will enhancements in governance and transparency generally in the Angolan oil & gas industry.

Other recent legislative and fiscal reforms are also paving the way for increased oil & gas production. In May 2018, the government reduced the headline tax rates for marginal fields. For fields with discoveries of fewer than 300 million barrels of oil, the petroleum production tax was reduced from 20 percent to 10 percent, while the petroleum income tax was also reduced from 50 percent to 25 percent. Paulino Jerónimo, the President of ANPG, stated that the new fiscal and contractual terms are “focused on incentivizing the exploration and the production of such reserves for both African and international medium-sized E&P companies.” The State Budget Law for 2021 (Law No. 42/20 of 31 December 2020) further evolved the tax landscape by approving a reduction from 15 percent to 6.5 percent of the withholding tax rate applicable to services provided by non-resident entities to oil companies with permanent establishments or residency in Angola.

A new private investment law, Law No. 10/18 of 26 June 2018, also reduces the minimum capital requirement, facilitates the repatriation of capital and eliminates the requirement that local investors must have a 35 percent stake in foreign investment projects. This last point is a significant development, given the economic and legal challenges created by what was typically a carried interest.

Foreign investors to develop new upstream discoveries

Angolan hydrocarbons are found both onshore and offshore, the latter dominating. Fifty offshore “blocks” have been designated and identified simply by numbers. By contrast, onshore blocks are typically identified by one of five main oil basins (Congo, Lower Congo, Kwanza, Benguela, Namibe) accompanied by a number. Two further inland basins also exist: “Kassanje” and “Etosha/Okavango,” neither currently produces any oil.

Angola’s most significant current investment initiative is its 2019 – 2025 Bidding Strategy. The intent of this strategy is to auction off 55 oil & gas blocks by 2025. In 2019, Angola offered ten oil & gas blocks for public auction. Eni and TotalEnergies won operatorships. In 2020, three blocks in the Lower Congo Basin and six blocks in the Kwanza Basin were allocated for public tender. Operatorships were secured by MTI Energy, Somoil, Grupo Simples, Alfort Petroleum and Angola Integrated Services. The 2021/2022 bid round was launched in February 2022, involving eight blocks in the Lower Congo and Kwanza Basins. Proposals for this round are still being evaluated. The 2023 auction includes four blocks in the Congo Basin and eight in the Kwanza Basin. The final auction, to take place in 2025, will allocate ten pre-salt blocks in the deep-water Kwanza Basin.

Angola’s upstream oil & gas market shows promise, too, and is likely to attract increased investment in coming years. Signs of this are already evident. In July 2022, ANPG and TotalEnergies, along with the other Block 17 partners, announced an US$850 million final investment decision with respect to the CLOV Phase 3 development for offshore Block 17. Production for this development is expected to start in late 2024 and will involve extending the submarine infrastructure and five new wells at water depths ranging from 1,100 meters to 1,400 meters. Once completed, it is anticipated that this extension of the subsea production network and its interconnection to the CLOV FPSO will reach a peak of 30,000 barrels per day.

As recently as November 2022, ExxonMobil (as operator), ANPG and the other Block 15 partners announced a new oil discovery at the Bavuca South-1 exploration well (which is 1,100 meters deep). This was Block 15’s first discovery in nearly 20 years.

In addition to oil prospects and development, Angola’s New Gas Consortium (NGC) has also made strides, reaching a final investment decision for the Quiluma and Maboqueiro gas project. This is Angola’s first non-associated gas project, and NGC expects its first gas production for 2026. Production is expected to plateau at 330 million cubic feet per day. NGC includes Eni, Chevron, BP, TotalEnergies and Sonangol, together with ANPG.

While distribution has not yet attracted the same level of attention, expected increases in oil refinement also create opportunities for oil majors and strategic investors to improve and expand the existing infrastructure.

Midstream and downstream developments and opportunities

Since 2001, Angola’s downstream industry has been served by the Luanda refinery. This refinery can meet only 20 percent of the country’s total demand, processing up to 65,000 barrels per day. Angola must consequently import most of its refined oil products. A US$235 million project currently underway to expand the Luanda refinery’s capacity to 72,000 barrels per day is just one project aimed at reducing dependence on imports and enhancing fuel security.

The Angolan government plans several new greenfield oil refineries, the first of which will be the Cabinda refinery. Sonangol was awarded a contract for the construction of this new refinery in May 2019, and Phase 1 of the work was completed in 2022, with added capacity of 30,000 barrels per day. Phase 2, scheduled for completion in 2024, will add capacity of a further 60,000 barrels per day for the production of gas oil, gasoline, fuel oil and Jet A1.

The Cabinda refinery will be followed by the Soyo and Lobito refineries. A call for tenders was published in 2019 for a public-private partnership (PPP) to build the Soyo oil refinery in the Zaire Province. This refinery is scheduled for completion by 2025 and it will add capacity of a further 100,000 barrels per day.

The Lobito refinery, with an initial investment of US$10 billion, is expected to process roughly 200,000 barrels of crude oil per day. It is also scheduled for completion in 2025. Construction of this project was suspended in 2016, given the fall in oil prices. Since then, Sonangol has made significant efforts to accelerate the formation of the consortium and finalize its shareholder structure.

Investment protection and dispute resolution

Foreign investors are almost always concerned about the ability to enforce their rights and resolve disputes that can arise throughout the life cycle of their investments. These include issues relating to investment structuring and inception; conduct and management of daily business; and the ability to exit investments and repatriate capital and profits. In such circumstances, foreign investors may prefer to avoid local courts. Investors tend to prefer disputes to be resolved in jurisdictions perceived to be more neutral and/or that have a wider body of judicial precedents dealing with similar or tangential issues. In this regard also, positive developments have emerged in Angola.

Angola has traditionally adopted a mixed approach to investor protection and dispute resolution. In September 2021, the country deposited its Instrument of Ratification of the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) with the World Bank. This allows foreign investors to bring claims against the state in case of certain measures affecting member-state investors’ rights. Through ratification of the ICSID Convention, Angola hence accepts that, in certain situations, foreign investors may have a right to bring an international investment arbitration against the state and have the ability to access neutral, independent, enforceable investor-state arbitration.

ICSID arbitration is held under the auspices of the World Bank. It is a self-contained dispute resolution system, in which proceedings are “delocalized from domestic procedures and local courts do not intervene in the ICSID process.” If the tribunal finds the state to have violated its treaty obligations, it issues an award in favor of the investor. The most frequent remedy for aggrieved investors is monetary damages, seeking to put the investor in the position it would have been if not for the state’s violation(s).

Angola has also entered into bilateral investment treaties (BITs) with several countries. Four of these BITs—with Portugal, Cape Verde, Italy, Germany and Russia—allow investors to have recourse directly against the state. Its treaty with Brazil, however, does not.

In other earlier developments, Angola enacted its Arbitration Act (Law No. 16/03 of 25 July 2003). This Act is partially aligned with the United Nations Commission on International Trade Law (UNCITRAL), which expressly allows the state and state entities to agree to arbitration. Although discussions are apparently ongoing about perhaps aligning the Arbitration Act more closely with UNCITRAL, the United Nations website shows that Angola has yet to formally ratify, accede to or enact this model law. Specific areas reportedly under discussion include several relevant to oil & gas disputes, including: the participation of state entities in arbitration (which is already authorized by law); the use of provisional measures and improved court support; and the arbitration of labor and corporate disputes.

Furthermore, in 2017, the New York Convention of 1958 came into force in Angola. This makes awards in Angola-seated arbitrations enforceable globally. Sonangol, in particular, has regularly entered into contracts providing for arbitration and has publicly engaged in arbitration proceedings.

Since then, the Angolan government has also adopted arbitration in a number of other laws that are important to international investors in the oil & gas market (and other sectors of the economy). These include amendments to the Securities Code in Law No. 9/20 of 16 April 2020, the new Law on Public-Private Partnerships, Law No. 11/19 of 14 January 2011, and the previously mentioned new Private Investment Law. These constitute a clear assurance to global investors that Angola accepts arbitration as a key dispute resolution mechanism.

Angola continues to develop its dispute resolution legal landscape, although it is yet to be fully tested by the oil & gas industry. Whether investors will be comfortable arbitrating in Angola will depend on their familiarity with the country’s practices, government investments and a sophisticated local legal community to ensure the courts support arbitration and help protect and enforce awards.

The combination of recent progress in reforming the country’s regulatory, fiscal and legislative environment with the sheer size of oil discoveries represents good reason for cautious confidence in Angola’s recovery and justifies the increasing interest of domestic and foreign investors. As the next decade unfolds, it is expected that Angola will continue its trajectory of regulatory and economic reforms. These initiatives will not only be crucial for the diversification into other sectors, but also for reducing dependence on revenues from hydrocarbons, potentially ushering in a new phase of transformation through the Angolan economy.

Source: White & Case