Local Content in Ivory Coast’s Oil and Gas Sector: A Barrier for Foreign Operators?
Andy Lionel Biaou and Saria Abou Khalil of Houda Law Firm examine certain implications of the Local Content Decree in Ivory Coast’s oil and gas sector, covering, inter alia, categorisation of subcontracting activities, structuring options for foreign operators, the role of the General Directorate of Hydrocarbons, and the evaluation of local content through specific indexes.
Andy Lionel Biaou
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Saria Abou Khalil
View LinkedIn profileClassification of Oil and Gas Activities Under the Local Content Decree
Oil and gas subcontracting activities, service provision and supply are classified under three main categories according to the Local Content Decree, as follows:
- category A refers to activities to be exclusively conducted by Ivorian companies;
- category B refers to activities to be conducted primarily by companies incorporated under Ivorian law, but that can also be conducted by foreign companies in partnership with one or more Ivorian company; and
- category C refers to activities that can be conducted by either companies under Ivorian Law or foreign companies.
The activities of category B are divided into two sub-categories:
- B1 refers to activities that should be conducted by companies incorporated under Ivorian Law; and
- B2 refers to activities that should be conducted by Ivorian companies in partnership with foreign companies.
For clarification, Ivorian companies are defined as companies in which at least 51% of the capital is owned by individuals holding Ivorian nationality or legal entities controlled by Ivorian individuals. The control of a legal entity means that at least 51 % of the capital is directly or indirectly owned by a legal entity or an individual, granting such entity or person voting rights.
As for companies incorporated under Ivorian Law, they refer to companies incorporated before the commercial register in Ivory Coast, with no restriction regarding the nationality of their shareholders.
The Local Content Decree outlines an exhaustive list of activities corresponding to each category. It is imperative for every operator to precisely identify the specific type of activities they intend to undertake based on this classification, as this will significantly influence the structuring of the relevant project.
“JVs are the most common type of agreement entered into between international and local oil and gas companies”.
Available Structuring Options
In light of the foregoing, depending on the activity, the operator may have several structuring options, including:
- One option is to create a local entity. This involves establishing a local entity in conformity with the nationality conditions imposed by law.
- Another option is to participate directly in the share capital of a local partner. Operators can choose to acquire shares in the capital of an Ivorian company.
- A third option is to sign a partnership agreement with a local partner. The Local Content Law or Decree does not currently impose any specific form or restrictions on the nature of the partnership agreement between foreign operators and local partners (Ivorian companies), so the parties are entirely free to choose the form of such partnerships, such as a memorandum of understanding, service agreement or sub-contracting agreement.
- A fourth option is to enter into a Joint Venture (JV) with a local partner. JVs are the most common type of agreement entered into between international and local oil and gas companies. JVs provide an opportunity for two operators (or more in case of a consortium) to pool capital and transfer best practices to complete a specific project. The conditions of such JVs depend on the commercial terms of the project, delivery timelines, technical standards, logistical support, the duration of the project, responsibilities, assets required and risks to be incurred by each party, and the exit strategy.
The JV arrangement can be structured in a way that offers the most preferred tax benefit to both parties of the JV. Applicable taxes should always be discussed with tax advisers prior to the implementation of any project due to the risk of requalification of permanent establishment, especially in the case of multiple continuous projects over the long term.
Last but not least, any type of partnership must involve a local partner that actually operates in Ivory Coast. In other words, the local partner cannot be “a shell entity”. The General Directorate of Hydrocarbons (Direction Générale des Hydrocarbures or DGH) reserves the right to conduct verifications in this regard. Partnership agreements must be submitted to the DGH within 30 days of their signing.
The DGH will review certain aspects of the partnership agreement such as experience, technical and financial competence, active participation by both parties of the JV, and the ability to transfer skills and knowledge. The DGH verifies the real and effective transfer of competences and know-how.
Role of the DGH in Monitoring the Implementation of the Local Content Decree
All operators involved in oil and gas activities, including subcontractors, service providers and suppliers shall obtain a prior authorisation issued by order of the minister of hydrocarbons. It is valid for three years, renewable, and is granted specifically to the operator, which means it cannot be transferred to any other person or entity.
Also, the award of contracts is subject to a mandatory open tender when the thresholds for the amounts of these contracts exceed a certain amount fixed by the DGH, unless an exception is made under specific conditions, with the preference given to Ivorian companies.
In this respect, the DGH has recently launched a digital platform allowing local players to connect with foreign companies to carry out projects in the oil and gas sector. Operators must register (subject to membership fees) in order to establish the company’s identity and access the platform’s functionalities.
Furthermore, local content is evaluated by means of indexes, including:
- the Local Expenditure Index;
- the Local Goods Index;
- the Local Services Index; and
- the Local Staff Index.
On-site visits are conducted by the DGH to verify compliance with these indexes.
On a final note, foreign operators must, within a maximum period of two years from the commencement of their activities, conclude and finance partnership agreements with at least one Ivorian university or training institute. These agreements should encompass various aspects such as internships, training programmes, seminars, equipment or software donations, scholarships, as well as research and development grants.
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