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close this bookThe Courier N 130 Nov - Dec 1991 - Dossier: Oil - Reports: Kenya - The Comoros (EC Courier, 1991, 96 p.)
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View the documentOil and gas in Ethiopia: the legal basis
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View the documentThe pace of oil: an environmentalist’s viewpoint

Oil and gas in Ethiopia: the legal basis

by Girma HAILU and Wondemagegnehu G. SELASSIE

Ethiopia, which is one of the countries of the Horn of Africa, has a land mass of 1.2 million square kilometres and a population of 53 million. The geology of the country has been carefully studied and documented by Ethiopian geologists. For present purposes, it suffices to note that the great marine sedimentation of the Mesozoic period, which resulted in huge thicknesses of sediment in the Ogaden, southern Somalia and on the eastern side of the Danakil Horst, occupy the great basins which are now known to be petroliferous. An inventory of 1300 billion cubic metres of gas has been proven in a certain segment of the Ogaden region while the search is on for commercial oil in the Red Sea and the South and Eastern provinces of the country.

Over the past two decades, states - notably developing nations - have been making great efforts to attract foreign investment which had been declining since the 1973 oil crisis. This has led countries such as Ethiopia and many others to restructure the general investment climate and update the information available, especially on the countries’ potential oil and gas resources.

In the early 1980s, a project was launched by the Ethiopian Government, assisted by the World Bank and the UNDP. Its objective was to upgrade the already existing legal regime, to undertake additional geological surveys in selected areas and to organise the available technical data. The project was successfully completed in 1986 with the production of a package of documents that met the requirements of the international oil and gas industry. These included petroleum operations and tax legislation, a model petroleum production sharing agreement and technical information on the potential oil and gas resource areas, identified in blocks.

Under the 1986 Petroleum Law, the Government has established that ownership of natural resources in the ground lies with the state. Furthermore, the investor has the right to exploit such resources with the proper licence issued by the Government. The licence is based on the conditions of {he Model Petroleum Agreement that is to be negotiated and signed by the Minister of Mines and Energy, representing the Government, and by the investor. This is a comprehensive document which covers particulars such as financial and work obligations, procedures for assignment, transfer of rights or obligations, requirements related to environmental protection and so on.

The term of a petroleum agreement depends on the phase of the activity and the type of licence. Activities under a nonexclusive exploration licence, an exclusive exploration licence and a production licence have initial periods of two, four and 25 years respectively. In addition to the extensions provided in the law, the responsible Minister has the power to grant further extensions for the completion and evaluation of work.

While encouraging the investor to perform his work programme diligently, and to meet the financial obligations, the law has improved the licensing procedures so that operators begin mobilising in due time. In order to facilitate the initial and subsequent investment on capital goods and to expedite the actual operation, the law grants exemptions from customs duties and other levies. A contractor and a sub-contractor are entitled to import into Ethiopia, machinery and equipment necessary for the petroleum operation. Furthermore, the expatriate employee is exempted from personal income tax where such income is derived from activities under a petroleum agreement. Personal effects are also exempt from import duties.

The assurance that petroleum produced at the end of the day would be marketed and disposed of by the investor is clearly provided for in the law and in the Model Agreement. There is also a liberal mechanism for the repatriation of revenue. The investor is allowed, according to the law, to open a foreign bank account, retain or dispose of any funds outside Ethiopia - including such funds as may result from petroleum operations, the sale or lease of goods or performance of services - and freely export funds which have been imported under a petroleum agreement. This arrangement enables the investor to have access to a free inflow and outflow of foreign exchange requirements, provided his obligations to pay any debts and taxes are met. According to the Law and the provisions of the Model Agreement, the investor is not only protected from future Government measures, but also from global price fluctuations under the stablisation clause.

It is a principle of the Law that any disputes that may not be resolved through the nagotiation of the contracting parties are to be submitted to an arbitral tribunal whose judgement is final and binding.

The Petroleum Tax Law, on the other hand, encourages the inflow of the much-needed foreign investment by allowing a short period for its recovery. The mechanism put in place for this involves a five-year period over which the investor may recoup his initial investment. In circumstances where the investor sustains losses in a given year, he is allowed, under the provisions of the Law, to carry forward such losses for a maximum of ten consecutive years add charge that on future revenue. The concept of depreciation of capital goods is also well-provided for. The depreciation allowance is one of the facilities available for the investor to recover his investment as soon as reasonably possible.

The Petroleum Tax Law, in a nutshell, represents the general understanding and appreciation of the special features underlying investments in the oil and gas industry; that is, a huge investment requirement, a long gestation period and a high risk business.

A general reading of the 1986 petroleum legislation reveals the extent to which the Government has committed itself to accomodate reasonably, the claims of different groups involved in such a resource development scheme, namely the state, the investor and the public at large.

After considerable promotion activity by the Ministry of Mines and Energy, and as a result of the awareness of the international investor community, Ethiopia has succeeded in attracting oil companies such as BP, AMOCO, HUNT MAXUS and IPL who are currently engaged in exploration activities on the offshore and onshore blocks. In addition, a number of oil companies have expressed interest in acquiring acreage in the remaining blocks.

The improved conditions in the international oil and gas industry, combined with the appropriate general investment environment, especially in the legislative framework and technical facilities, has marked the positive development of the oil and gas industry of Ethiopia since the end of the 1980s.