How to avoid sanctions for lack of compliance in Equatorial Guinea

Companies are being advised to be mindful of local compliance rules ahead of doing business in Equatorial Guinea. Pablo Mitogo, associate attorney, Centurion Law Group, has outlined some of the common problems that companies have with local content rules in country. He explained: “In 2018, the Ministry of Mines and Hydrocarbons of Equatorial Guinea informed operators Exxon Mobil, Noble Energy and Marathon Oil that they should stop doing business with several companies because they were not in compliance with local content regulations under the country’s hydrocarbons law and the clauses of their PSCs. “The truth is that it was not the first time that happened. In 2015 and 2016, there were also economic sanctions for the breach of local content requirements. With the local content Ministerial Order covering only 20 pages, it seems surprising that companies could be risking their operations and contracts over something very straightforward.” Mr Mitogo added that between 2015 and 2016, “we had the opportunity to assist the government in a plan to audit oil and gas companies and verify their compliance with their local content obligations”, adding: “We were very surprised to see how the legal departments of large oil companies did not know exactly how to protect their organisations against these demands. Because the number of companies that did not comply was very high, the Ministry decided to adopt a more collaborative than penalty approach, without which all operators and contractors would have been sanctioned in some shape of form.” His firm identified three common problems: Determining who is obligated to do what under local content regulations Knowing what local content includes Correctly developing a local content plan that meets very specific points required by applicable laws. The oil and gas industry is governed by agreements and many companies have to form alliances and joint ventures to operate together. This may create doubts about who is obliged to comply with local content laws. According to Article 2 of Ministerial Order 1/2014 on local content, all companies that carry out activities in the petroleum and mining sectors are obliged to comply with local content requirements. This includes operators, explorers, contractors, sub-contractors and their associates, even if they are local businesses. According to the article: a) you have to have a contract in the sector; and b) you have to operate in Equatorial Guinea. However, despite this clarity, there are many doubts that may arise, for example: what happens to companies that have contracts in the sector but are only licensed to provide material from abroad? Equally, if two companies are linked by a joint-operation agreement, must they comply individually or jointly? Another question that may arise is whether a local company has to comply with all obligations or if it must simply comply with some. For example, it makes no sense that a local company would be forced to transfer technology just because it is from the oil sector. The main obligations that any company should pay attention to: Local content is much more than building a primary school in a village or drilling a small water well in a local community. In our experience, it is very common for companies to present small works carried out in the villages as being works of compliance with local content. While the value of such efforts should not be minimalised and corporate social responsibility (CSR) should be encouraged, a company could still be sanctioned for lack of local content compliance despite having spent money and time on CSR. Local content mainly includes five obligations that must be structured in detail in a local content plan. These obligations include: Procurement of goods and services. All necessary goods and services must be hired in order of preference established by the local content regulations. To prove it, companies must keep their invoices or any other document proving that they hired local services. Qualified workforce. All workforce must be hired in the order of preference (local, regional and continental). Foreign workforce can be hired only with an authorisation, after demonstrating that the company has made substantial efforts to find a specialised local workforce and has not found it. However, the authorisation to import foreign labour only gives you an extension of time, because the obligation to train local labour prevents you from keeping your foreign workforce for a long period. Technology transfer. This is another common problem for companies. We know that nobody is going to transfer the tools they can earn a profit from and which give them an edge on the market. Forcing foreign companies to transfer their knowhow is very complicated to achieve. However, the spirit of the law is not that business or industrial secrets are transferred to local premises. So how do you know that a company transfers technology within the framework of local content legislation? That question is also not easy to answer. Training. The clearest and most difficult clause to ignore is that pertaining to the training of local employees to enhance their skills. Although this obligation is already included within labour laws, the object and spirit of both laws must not be confused. What is the difference? If in the labour laws it is envisaged that an apprentice gains experience or acquires the skills of a profession or trade, the purpose of the local content law is to specialise these in very specific tasks within the petroleum industry so that they are able to carry them out in the future autonomously with the same technical competence as a foreign expert. Social infrastructures development. What do the local content regulations refer to when they impose the obligation to run infrastructure in the communities? And is any particular infrastructure expected to be developed by oil companies and their contractors? Article 93 of the hydrocarbons law says “they must (the infrastructures) be of the widest impact on the public”. In other words, infrastructure must be meaningful and of the quality that a community would need. It’s very important to make sure that the infrastructure is also sustainable to the community; you don’t want to build a school without a plan to provide teachers or learning materials, or build a health centre in a poor community without any nurses. What should be in your local content plan? The local content regulations oblige all oil and gas companies to have a detailed, long-term local content plan and implement it. Companies must also demonstrate that they are reasonably executing the plan they themselves have prepared. The important thing about this plan is that: a) It is flexible b) It is a plan that can be adapted to the individual circumstances of each company c) It must be approved by the General Directorate of Local Content. The design of the local content plan, its evaluation and presentation to the authorities when undergoing an audit is the most critical part. Almost all companies that have been sanctioned have breached some of the essential points of their own plan. We can organise these into four large groups: Documentation related to the incorporation of the company Documentation related to the procurement of goods and services Documentation related to technology transfer and training of personnel Documentation related to infrastructure development. How serious is the local content compliance issue? The highest penalty for breaching local content standards is that the government can order operators to terminate contracts or prohibit them from renewing contracts they have with a company that does not comply; and this has already happened in the past. Other sanctions include fines, which in the past have reached anywhere between $500,000 and $3m. Other much lighter sanctions have included a warning, with the company being given a short amount of time to meet very specific requirements. Furthermore, if a company demonstrate a track record of non-compliance, they will lose the confidence not only of the government but of the operators, because every time a company is sanctioned, all its partners are affected in some way. So far, three things must now be clear: Failure to comply with local content requirements may jeopardise not just a company's contracts, but its very existence in Equatorial Guinea and its ability to renew or obtain new contracts Local content is a complex issue Managing compliance is not a big deal, providing the right steps are taken early on.

How to avoid sanctions for lack of compliance in Equatorial Guinea

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