PROVISIONS MODIFIED TO IMPROVE CAMEROON OPERATING ECONOMICS

A.P. Jaffe
Consultant
Dallas

H. Marafa Yaya
Soc. Nationale des Hydrocarbures
Yaounde, Cameroon

Cameroon recently modified certain terms and provisions applicable to exploration and production companies to significantly improve economic incentives.

Many attractive improvements have been made.

Among the most important are:

The after tax company profit share has been raised from 13% to as much as double that percentage.

The "ring fence" has been eliminated within the same major geologic basin so that a company can recover exploration expenditures of "dry" permits from production in a successful permit.

Societe Nationale des Hydrocarbures will devote 30% of field production (versus 20% previously) to repayment of its share of E&P spending.

Financing of advances by company or parent company for E&P expenditures will bear interest.

EXPLORATION LEGISLATION

Cameroon, like all nations in which modern petroleum E&P are conducted, has a body of mining law that establishes and regulates how those activities are carried out on land and off shore.

Principal pertinent legislation follows:

Law 64-LF-3 of Apr. 6, 1964.
Law 64-LF-4 of Apr. 6, 1964.
Decree 64-DF-162 of May 26, 1964.
Decree 64-DF-163 of May 26, 1964.
Law 78-14 of Dec. 29, 1978.
Law 78-24 of Dec. 29, 1978.
Decree of Mar. 12, 1980, creating SNH, the national hydrocarbon company.
Law 82-20 of Nov. 26, 1982.

REVISED CONDITIONS

The Cameroon E&P "Contract" is not one of the prevalent ones, such as conventional production sharing or royalty types. Some important aspects can be distinguished:

- When a company wishes to conduct E&P in Cameroon, it must enter into an establishment convention that specifies the economic, tax, and legal framework applicable to the company. This applies to all operators and other partners, if any, are covered by the operator's convention. Use of such a convention is prevalent in former French protectorates or colonies and rare elsewhere.

- The operator must also enter into an association agreement. That agreement, limited to either oil or gas, contains the detailed terms of E&P, including government participation in production through SNH. The principal determinant of the economic return granted to the company is the percentage of the "rente miniere" (mining return) to which it is entitled after tax.

- The operator applies for, or bids for, one or more exploration permits. The permits, issued by government decree, specify the area granted, based on the recommendations of SNH and the Ministry of Mines, Water, and Power. There are nominal application and area rental fees but no signature bonus.

CAMEROON TERMS

The fundamental terms follow.

Exploration:

Obligation: As negotiated, based on work commitment for each period. All exploration expenditures and risk undertaken by the company.

Period: Four years, renewable for three additional 4 year periods provided work obligation has been satisfied for each period.

Development-production concession:

If one or more discoveries are made that the company believes can be commercially produced, the company can apply for one or more concessions. Granted by government decree, these confer the right to develop-produce in the concession area for 25 years and are renewable for a further 25 years.

There is a concession bonus and production bonuses at high levels of achieved production. Applicable terms follow:

Development. The company or lending institutions, which may include the parent company, advance all development capital. The government (SNH) will reimburse 50% out of its share of production.

Production: The company advances initial operating costs. SNH will reimburse 50% out of its share of production. After the revenue stream starts, the operator cash calls SNH for its 50% share.

Past exploration: For new permits, SNH will reimburse 50% of past exploration expenditures in the basin from which the concession was derived.

Reimbursement or cash call limitation: For any fiscal year (July 1-June 30), total SNH reimbursements (operating costs, development depreciation, past exploration amortization-in that order) are initially, under 60-40 production sharing, limited to 30% of total production value. Any remaining amount eligible for reimbursement is carried over to the following year.

The reimbursement limitation increases by 5% (to 35%) for 65-35 production sharing and by 5% more (to 40%) for 70-30 production sharing. Also, for each production sharing ratio, reimbursement limitation increases by 5% if the market price of oil, indexed as of Jan. 1, 1990, is below $13/bbl.

Production sharing entitlement applicable to each oil concession (no terms exist to date for gas concessions):

For cumulative production of up to 15 million metric tons (about 110 million bbl), SNH 60% and the company 40%.

For cumulative production of 15-30 million metric tons (110-120 million bbl), SNH 65% and the company 35%.

For cumulative production of more than 30 million metric tons (about 220 million bbl), SNH 70% and the company 30%.

Cost recovery (of unreimbursed amounts): Out of the company's share of production. Until payout, the company effectively obtains 70% of total revenues, including reimbursement.

Company profit share (RMG): Percentage of rente miniere guaranteed to company after tax annually (for each basin), where:

Rente miniere equals total revenues less the sum of operating costs plus development depreciation plus exploration amortization plus finance costs, all for the same basin.
For Rio del Rey basin, RMG equals 22%.
For any other basin, currently only Douala basin, RMG equals 26% for R<1.5, 24% for R of 1.5 to 2, and 22% for R>2.

R equals the ratio of cumulative revenues to cumulative investment, excluding producing costs.

Ring fence: From 1990, allowable past exploration expenditures include all exploration in a basin against revenues from any new concessions in that basin.

Finance costs: Allowed on capital borrowed from either third party institutions at the negotiated interest rate or the parent company at the rate for loans made by Banque des Etats de I'Afrique Centrale plus 2 percentage points.

Tax rate: General hydrocarbon tax rate is 57.5%. For U.S. companies, the general tax rate for companies remitting dividends abroad is applicable, i.e., 48.65% on net profits after royalty. This tax is creditable against U.S. taxes.

Royalty. Adjustable, set to yield the company's profit share (RMG) after tax. Royalty can be positive or negative.

Amortization-depreciation (linear):

Exploration:

Geology-geophysics, 20%/year. Drilling, 50%/year; 33.3%/year if no discoveries are made on the permit.

Development-production:

By table in the association agreement, averages 20%/year.

Customs duties:

Duties do not apply to exploration and are 5% on development. On production, duties are 5% for the first 5 years. Prolongation of the 5% rate is negotiable.

Many other detailed provisions exist, such as crude export, repatriation of after tax profits, training, and so on, but this summary permits an appreciation of the economics applicable to E&P ventures in Cameroon.

In addition, Cameroon presents a highly stable political climate, and the authorities sincerely desire to attract new E&P ventures.