Policy and Legal Audit - Mining in Malawi · 3.2 The taxation regime for oil mining is grossly inadequate. Government should either enact a law specifically on oil mining taxation

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Citizens for Justice-(CFJ)

A report about

Oil Exploration and Production in Malawi

Policy and Legal Audit

Area 47, Sector 4, Plot # 776, Lilongwe, Malawi Contact: [email protected]

Phone: +2651761887 and +2651761886. Fax: +2651761885 Web: www.cfjmalawi.org

mailto:[email protected]

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Executive Summary Sub-Sahara Africa has been ranked as a top destination by the mining, oil and gas industry,

arguing that the region is in tandem with good governance principles. The reality on the

ground however is different. Most Sub-Sahara African countries score poorly on the

governance index, the policy and legal framework is archaic and the enforcement of legal

and policy frameworks is almost non-existent as political opinions over-ride technical

opinions.

Without an effective regulatory and enforcement system, poor communities and workers

experience negative environmental, social and economic impacts and threats to their

human rights as contained in the African Charter on Human and Peoples’ Rights, among

other instruments. Poor communities and workers carry much of the externalized costs,

including but not limited to: the erosion of local livelihoods; forced dislocations with no or

inadequate compensation; the undermining of social networks and survival supports; and

compromised health through air, water and soil pollution. In addition, the money states

must spend to deal with the externalized costs from extractive industries projects

counteracts the revenue from mineral investments states are able to collect. These include:

health care for affected communities and workers, and clean-up of waste, pollution or

spillage from oil drilling and transportation. Its therefore important that Malawi engages in

the Oil sector with a capacity to manage the positive and spill-over effects of the industry.

One of Citizens for Justice-(CFJ) primary objectives is to ensure that the extractive industry

complies with the international human rights principles and principles of ecologically

sustainable development, economic and social justice to ensure that necessary policies and

practices are in place to protect public interest. As an institution, we have gained significant

expertise in the application of the international human rights law and environmental

protection principles to the extractive industry sector.

As CFJ, we strongly believe that Malawi is endowed with abundant natural resources, which

can meaningfully transform the lives of its citizens if properly governed. As an organization,

we utilize a Human Rights Based Approach (HRBA) to ensure that development furthers the

realization of human rights grounded in principles of participation, non-discrimination,

empowerment, accountability, transparency, rule of law and good governance.

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In an attempt to protect social economic rights for Malawians, Citizens for Justice-(CFJ),

instituted this study to review the legal and policy regime that regulates the Oil exploration

and production in Malawi. The processes of awarding oil blocks on Lake Malawi have not

been transparent, consultative, and inclusive and Malawians have reasons to speculate for

the worst, as the processes to date have not inspired confidence.

We hope that this report will keep Malawians debating on how best to balance the need for

economic development vis-à-vis the protection of the environment and social economic

rights.

Enjoy the read.

Reinford Mwangonde

Executive Director, Citizens for Justice-(CFJ)

Lilongwe, September 2014.

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Contents

Executive Summary ......................................................................................................................................... 2

Abbreviations and Acronyms ........................................................................................................................... 6

Terms of Reference .......................................................................................................................................... 7

Summary of Findings and Recommendations .................................................................................................. 7

Potential Areas of Project intervention by CFJ and Fellow Civil Society Organisations (CSOs) ........................ 10

1 Introduction .......................................................................................................................................... 11

2 Vesting Arrangements ........................................................................................................................... 13

3 Oil Exploration and Production.............................................................................................................. 16

3.1 The Licensing Authority ....................................................................................................................... 16

3.2 The Licensing Procedure ...................................................................................................................... 17

3.3 Licensees ............................................................................................................................................. 20

3.4 Petroleum Licensing Agreements ........................................................................................................ 20

4 Petroleum Revenue Framework and the Fiscal Regime ......................................................................... 22

4.1 Contextual Issues ................................................................................................................................. 22

4.2 General Revenues ................................................................................................................................ 22

4.3 Tax Administration .............................................................................................................................. 23

4.4 Issues for consideration ....................................................................................................................... 26

5 Legislative and Policy Framework Relating to the Environment ............................................................ 28

5.1 Impacts of Oil Mining and International Perspective .......................................................................... 28

5.2 National Policy and Legislation ........................................................................................................... 32

5.2.1 Environmental Impact Assessment (EIA) ........................................................................................ 33

5.2.2 Standards of Equipment and Products............................................................................................ 36

5.2.3 Environmental Practices ................................................................................................................. 36

6 Legislative and Policy Framework relating to Public Health ................................................................... 38

6.1 Health Impacts and International Perspectives .................................................................................. 38

6.2 National Policy and Legislation ........................................................................................................... 40

6.3 Issues for consideration ....................................................................................................................... 42

7 Offences and Penalties Regime ............................................................................................................. 42

7.1 Illegal Exploration or Production Operations ...................................................................................... 42

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7.2 Pollution .............................................................................................................................................. 43

7.3 Miscellaneous Offences ....................................................................................................................... 44

8 Conclusion ............................................................................................................................................. 45

Bibliography .................................................................................................................................................. 46

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Abbreviations and Acronyms

ACHPR African Charter on Human and Peoples Rights

CFJ Citizens for Justice

EIA Environmental Impact Assessment

EITI Extractive Industries Transparency Initiative

EMA Environment Management Act

ERP Economic Recovery Plan

EMS Environmental Management Systems

EPE Environmental Performance Evaluation

FPIC Free, Prior and Informed Consent

GOM Government of Malawi

ICMM International Council on Mining and Metals

IFC International Finance Corporation

ILO International Labour Organisation

IMF International Monetary Fund

IPA Investment Promotion Act

IUCN International Union for Conservation of Nature

MERA Malawi Energy Regulatory Authority

MGDS Malawi Growth and Development Strategy

MMA Mines and Minerals Act

MGGSP Mining Governance and Growth Support Project

OGP Oil and Gas Producers

WBMSR World Bank Mineral Sector Review

PEPA Petroleum (Exploration and Production) Act

PRT Petroleum Revenue Tax

PCC Petroleum Control Commission

RFCT Ring Fence Corporation Tax

SEA Strategic Environmental Assessment

SIA Social Impact Assessment

UNEP United Nations Environmental Programme

WHO World Health Organisation

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Terms of Reference

The Terms of Reference for the Legal and Policy Audit of laws on Petroleum Exploration and

Production were as follows-

a) To critically analyse all statutes and policies regulating the oil industry in

Malawi for sufficiency;

b) To identify applicable international and regional instruments and practices

having a bearing on the oil industry in Malawi with a view to determine

adherence;

c) Make recommendations to Citizens for Justice (CFJ) on potential areas for

project interventions;

d) To produce an Audit Report on the state of the institutional, legal and policy

framework of the oil industry in Malawi incorporating potential areas for

project interventions by CFJ

Summary of Findings and Recommendations

1 Vesting arrangements

1.1 There is no mention of Minerals under the Constitution but the scheme of the

law indicates that minerals are recognised as part of land, which the

Constitution vests in the Republic. There are discrepancies between the PEPA

and MMA on the one hand and the Constitution on the other. The two statutes

should be aligned with the Constitution to vest minerals including petroleum in

the Republic without necessarily creating exceptions

1.2 The penalty for carrying out oil exploration and production without authority is

inadequate and should be enhanced to promote deterrence.

2 Oil Exploration and Drilling

2.1 The current licensing regime is grossly inadequate and ineffective. In order to

promote an efficacious, transparent and accountable licensing regime,

Government should establish an independent body under PEPA (such as a

Petroleum Exploration and Production Commission) to be charged with the

following responsibilities-

a) Receive applications for licenses

b) Issue licences

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c) Regulate the health, safety and environmental standards in the oil extraction

industry

2.2 Public health issues do not form part of the requirements that determine the

granting of a licence for exploration or production. Public health issues should be

incorporated as an aspect of requirements for the granting of a licence for

exploration or production in the quest to promote sustainable oil mining.

2.3 The PEPA gives the Minister discretion to determine contents of petroleum

agreements. This is inappropriate. The Act should be amended to dictate the

contents of petroleum agreements to promote consistency and safeguard such

agreements against corruption, bias and uncertainties and also to reflect best

practice.

3 Petroleum Revenue Framework

3.1 The revenue framework for upstream activities is neither coherent nor

progressive. The petroleum fiscal regime should be redesigned to reflect

flexibility, neutrality and stability and in this quest government should provide

space either in legislation or petroleum contracts to enable the introduction of a

threshold of profitability after which tax increases linked to the investor’s

expectations of the profitability of the oil field.

3.2 The taxation regime for oil mining is grossly inadequate. Government should

either enact a law specifically on oil mining taxation or incorporate

comprehensive provisions in the Taxation Act to specifically regulate oil mining

3.3 The legislative framework does not address issues of community development to

facilitate distribution of revenue from the national level to the local level nor does

it address issues of community development agreements in the context of

petroleum revenues. There is need to incorporate these issues in legislation

regulating petroleum exploration and mining.

3.3 There is need for Malawi to take deliberate steps to join the global initiative, EITI,

in view of the interest that the country is generating globally as one of the

upcoming destination for oil mining in Africa. In order to join this global initiative,

EITI, Government should enact legislation to-

a) establish a body to ensure that all payments and revenues emanating from oil

operations are reconciled, applying international auditing standards

b) incorporate civil society to provide oversight functions in monitoring and

evaluating collection, allocation and management of petroleum revenue

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c) require the publishing of receipts and payment of oil revenues in readily

accessible media for transparency and accountability

4 Legislative and policy framework in relation to the Environment

4.1 There are glaring discrepancies between the PEPA and the EMA regarding EIAs.

The two statutes should be harmonised to impose EIA for all oil mining projects

for which an exclusive prospecting licence is required.

4.2 Both the PEPA and EMA do not require the carrying out of a Social Impact

Assessment (SIA) as part of an EIA. It is important that both the PEPA and EMA

should be amended to require the mandatory carrying out of a SIA.

4.3 The requirement that an EIA should be carried out by the proponent of a project is

unsatisfactory since the proponent is an interested party in the issuing of a

licence. A better approach is to require that an EIA should be carried out by a

third party other than the proponent of a project or should be carried out jointly

with government and, in both instances, at the expense of the proponent.

4.5 There is no requirement under the law that local communities should be engaged

in EIA processes. Participation of local communities should be made mandatory

and an integral part of the EIA process to adhere to the aspirations of the

Constitution which advocates a participatory approach to environmental

management. This approach would also be in line with a key principle in

international law and jurisprudence related to indigenous peoples, that of ‘free

prior and informed consent’ (FPIC) as per ILO- 169 that empowers a community to

give or withhold its consent to proposed projects that may affect the lands they

customarily own, occupy or otherwise use

4.6 The Minister should promulgate Regulations under PEPA-

a) to regulate the standards of equipment and products to be used in petroleum

exploration and production

b) with respect to protecting the environment in petroleum operations in

recognition of the weaknesses of the EMA in this area and the hazards associated

with petroleum operations

5 Legislative and Policy Framework in relation to Public Health

5.1 Public health issues are completely neglected in the legislative and policy

framework regulating mining in Malawi. The legislative framework should be

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reviewed to establish a comprehensive and coordinated ‘health impact

management system’

6 Offences and Penalty Regime

6.1 The offences and penalty regime is grossly inadequate in terms of breath and

deterrence. The legislative framework should be reviewed to introduce new

offences to promote sustainable and beneficial mining in Malawi, particularly in

areas of environmental protection and public health.

6.2 There is need to review existing penalties for meaningfulness and to promote

deterrence.

Potential Areas of Project intervention by CFJ and Fellow Civil Society Organisations (CSOs)

1 CSOs should lobby government (ie Ministry of Finance, Ministry of Mining,

and Malawi Revenue Authority) for the enactment of two key statutes in the

following specific areas: oil taxation, and oil revenue collection and utilisation.

CFJ should consider engaging consultants to develop draft bills as strategic

instruments to facilitate the lobbying exercise.

2 CSOs should advocate the review of the PEPA and should corroborate with the

Law Commission to ensure harmonisation of this law with other legislation

impacting on oil extraction and address issues such as those to do with the

licensing authority and licensing procedures; environmental protection; public

health and public participation borrowing from best practice.

3 CSOs should look at issues of local content and communities such as policies

regulating employment of locals, training of locals, and local procurement in

terms of creating supply chains.

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1 Introduction

The mining sector is one of the priority sectors for economic growth and development by

the Malawi Government as outlined in the MGDS II. The sector has also been included in the

five priority economic sectors earmarked to underpin Malawi’s economic growth and

development in the Economic Recovery Plan (ERP) launched by Government in 2012. The

World Bank’s Mineral Sector Review (MSR) 2009 has projected the value of minerals output

reaching some US$250mn within three years with potential to double after 10 years

provided that some structural constraints are addressed.1

Currently, the sector contributes

10 to 12 % of GDP.2

The MGDS II predicts that mining shall contribute 20% of GDP by 2016.

The recognition of the potential of the mining sector has culminated in the establishment of

a stand-alone Ministry on mining in 2012 and the adoption of a mining sector reform

programme titled Mining Governance and Growth Support Project (MGGS) 2013 with the

broad objective of improving the efficiency, transparency and sustainability of mining sector

management.

However, the shift of economic focus from agriculture towards large scale mining in recent

years has taken place without an assessment of the capacity of the existent institutional,

policy and legislative framework to promote and ensure sustainable mining; accurate

estimation, transparent collection and utilization of resource revenue. Despite the shift, the

general regulatory structure in mines and minerals has seen little development consisting

largely of ad hoc and

secretive mining

agreements regulated

administratively whereas

ideally these should be

regulated under legislation.

The oil discovery on Lake

Malawi poses enormous

challenges for Malawi. The

Lake Malawi boundary with

Tanzania has to be settled.

The energy sector in

general is poorly regulated though it is a new area of focus by Government. It suffers from

inconsistencies and lack of compliance due to a fragmented legislative and policy framework

1

World Bank, Mineral Sector Review, 2009 2

GOM, Mining Sector Economic Report, Ministry of Energy and Mining, November 2012

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characterized by the non-existence of effective and coherent monitoring and enforcement

mechanisms. The Energy Regulation Act3

which is the most recent law in this area only

regulates the downstream selling of energy or commercial activities and employs

ambiguous terms such as ‘Energy Laws’ without necessarily providing a clear definition of

what these constitute. Similarly, the Liquid Fuels and Gas (Production and Supply) Act4

which makes provision for production and distribution of liquid fuels and gas among other

things in a liberalized economy is concerned with downstream petroleum activities. There is

also a general perception of corruption, incompetence and a lack of care for environmental

and public health issues by responsible Government agencies.

The institutional framework for oil mining is grossly inadequate and huge reliance is placed

on an ill equipped office of the Commissioner for Petroleum Exploration and Production as

opposed to a robust agency as has been done with downstream operations entrusted to the

Petroleum Control Commission (PCC) under the Petroleum Control Commission Act5

and

the Malawi Energy Regulatory Authority (MERA) under the Energy Regulation Act.6

A host of other regulatory institutions and agencies concerned with the petroleum industry

face specific challenges in their respective sectors. These include the newly created Ministry

of Mining; the Ministry of Energy; the Ministry of Environment and Climate Change; the

Malawi Revenue Authority; and the Department of Water. Notwithstanding these

challenges, Malawi considers oil extraction a potential future source of foreign income, a

source of taxation revenue and employment and an opportunity for the transfer of

technology from developed economies.

Upstream petroleum operations include geophysical surveys, exploration and appraisal of

production wells, drilling, production and terminating production including

decommissioning of facilities. The production of oil and gas in a country inevitably creates

conflicting interests affecting four major stakeholders. These are: (a) the Government which

has commercial interest and at the same time is tasked to ensure that its citizens are

protected from the hazards of petroleum production; (b) transnational companies, that

invest at a risk and expect early returns on an investment; (c) the communities hosting the

production whose health and livelihoods may be at risk but may also stand to benefit from

the operations; (d) the environment at large including the future generation which must be

protected; and (e) the citizens of the country that wish to benefit from the exploitation of

3

Cap. 73:02 of the Laws of Malawi 4

Ibid 5

Cap 50:08 of the Laws of Malawi 6

Cap. 73:02 of the Laws of Malawi

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their natural resources. To balance these conflicting interests host governments need to

devise coherent institutional, policy and legislative framework to promote efficient and

sound management of petroleum production operations.

In this context, the institutional, policy and legislative framework regulating oil industries in

the contemporary world generally seeks to address the following issues among other things:

the procedure for licensing, exploration periods, efficient development and the production

of the resource in accordance with good oil field practices; the financial benefits between

government and transnational companies and ensuring the utilisation of national goods and

services, subject to availability; the financial obligations of transnational companies and

their audit and monitoring; the acquisition and transfer of appropriate technology and the

training of nationals within the industry; and the standards for environmental protection

and health safety of the communities hosting the petroleum production, including the audit

monitoring of compliance with these standards and the resolution of disputes.

This legal audit critically analyses all statutes and policies regulating the oil industry in

Malawi for sufficiency and compliance with applicable international and regional

instruments and makes recommendations to Citizens for Justice (CFJ) on potential areas for

project interventions. The audit is divided into six broad themes incorporating subthemes

where appropriate. The thematic areas have been categorised as follows: vesting

arrangements; oil exploration and drilling; petroleum revenue framework; legislative and

policy framework in relation to the environment; legislative and policy framework in

relation to public health and offences and penalties regime.

2 Vesting Arrangements

The Constitution of Malawi is silent on vesting arrangements for mineral resources

specifically, but vests all land in the Republic.7

The Land Act8

does not define ‘land’. The

Registered Land Act,9

on the other hand defines land for the purpose of registration as

including ‘land covered with water, all things growing on land and buildings and other things

permanently affixed to land’.10

There is however a proposal to replace the Land Act with a

new land law. The proposed Land Bill,11

has sought to remedy the uncertainty occasioned

by the absence of an expansive definition of ‘land’ by incorporating the following definition

of ‘land’- 7

See section 207. 8


Cap.58:01of the Laws of Malawi 10

See section 2 11

See Gazette Extraordinary, the Malawi Government Supplement, 3rd

December, 2012

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“land” means the material of the earth, whatever may be the ingredients of which

it is composed, whether soil, rock or other substance, and includes the surface

covered with water, all things growing on that surface...

This proposed definition is in line with the commonly acceptable legal significance of land

that is understood to encompass gases and liquids below the surface of the earth.12

The

vesting of lands under the Constitution should therefore be understood in this context.13

The vesting of land in the Republic recognises and promotes the principles enunciated in the

African Charter on Human and Peoples Rights (ACHPR)14

under Article 21 which stipulates

that ‘all peoples shall freely dispose of their wealth and natural resources’ and that ‘this

right shall be exercised in the exclusive interest of the people’ and that ‘in no case shall a

people be deprived of it’. The Charter goes further to provide that the ‘free disposal of

wealth and natural resources shall be exercised without prejudice to the obligation of

promoting international economic cooperation based on mutual respect, equitable

exchange and the principles of international law.’ In this regard state parties to the Charter of

which Malawi is one, are tasked to ‘undertake to eliminate all forms of foreign exploitation

particularly that practiced by international monopolies so as to enable their peoples to fully

benefit from the advantages derived from their national resources.’15

Malawi has domesticated this international obligation under section 4 of the Environment

Management Act (EMA)16

which provides that the natural and genetic resources of Malawi

shall constitute an integral part of the natural wealth of the people of Malawi and shall be

protected, conserved and managed for the people of Malawi. The Act further provides that,

save for domestic purposes, natural resources shall not be exploited or utilized without the

prior written authority of the Government. This obligation places people at the centre as

beneficiaries of natural wealth and underscores the trusteeship role of Government.

The Petroleum (Exploration and Production) Act (PEPA) which is the principle legislation

regulating upstream oil and gas operations defines land to include ‘land beneath water’17

and vests the entire property in and control over petroleum in land in Malawi in the Life

12

See Butt, P., Land Law, 9 (2th

ed. 1988) 13

See also Black’s Law Dictionary which defines land to constitute a portion of the earth surface, the space above and below the surface. 14

Adopted June 27, 1981, OAU Doc. CAB/LEG/67/3 rev.5, 21 I.L.M. 58 (1982), entered into force Oct. 21, 1986 15

See Article 21 16


See section 2 of the Act

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President on behalf of the people of Malawi.18

Similarly, the Mines and Minerals Act (MMA)

which makes provision with respect to searching for and mining minerals vests the entire

property in and control over minerals in land in Malawi in the President on behalf of the

people of Malawi. The only exception is where a Mineral Right exists by virtue of a

Certificate of Claim or ownership of land made by or on behalf of the British Crown.19

Where mining operations are to be carried out on public water, it is important to note that

the Water Resources Act20

vests ownership of public water in the President.21

The Act

further vests the control of all public water in the Minister. Though rights to resources

below land or below water may be separately owned, it follows from a reading of the legal

framework that no person may carry out petroleum exploration or production operations

whether on land or water without a licence.22

Similarly, no person may carry on

reconnaissance, prospecting or mining operations without a non-exclusive prospecting

licence, a claim or mineral permit.

A number of issues arise in respect of the legal framework regulating the vesting of

petroleum and mineral mining in general in Malawi. First, there is need to align the MMA

and the PEPA with the Constitution which has removed the vesting of minerals on land in an

office and vests such in the Republic. Second, there is need to amend section 2 (2) of the

MMA which violates the Constitution by providing an exception where the Constitution has

unequivocally vested minerals and land in the Republic regardless of a land tenure regime.

The section may be perceived also to discriminate against citizens since beneficiaries of land

under Certificates of Claim or other dispositions made by or on behalf of the British Crown

were largely British subjects.

Further, though section 28 of the Constitution protects the right to property and prohibits

arbitrary deprivation of property, with the vesting arrangements discussed above, where oil

or other minerals are discovered on one’s land, the land can be acquired compulsorily for

public use. This is due to economic benefits associated with mining for developing countries.

It is worthwhile to note that both the MMA and the PEPA prohibits the holder of a licence

from exercising any of his rights under the licence or law except with the written consent of

the lawful occupier thereof. However, where the Minister considers that consent is being

unreasonably withheld by the lawful occupier he may direct in writing that the need for

18

See section 2 (1) 19



See section 3 of the Act 22

See section 2 (2)

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consent shall be dispensed with.23

This discretion conferred on the Minister may promote

arbitral deprivation notwithstanding that the law requires payment of fair and reasonable

compensation in such circumstances.

3 Oil Exploration and Production

3.1 The Licensing Authority

The basis for granting a licence for petroleum exploration or production is derived from

section 10 of the PEPA, which provides that with the consent of the Life President, the

Minister on behalf of the Republic may enter into an agreement with any person or body

corporate with respect to the granting of a licence … including the conditions to be included

in the licence. Applications for licences under the Act are to be made in accordance with the

Petroleum (Applications) Regulations promulgated in 2009 and are to be submitted to the

Minister or to the Commissioner if it is so provided in the Regulations. The Regulations have

not provided for instances where an application may be made to the Commissioner. It

follows therefore that the Minister is the final and sole licensing authority for petroleum

operations in Malawi. This scenario is not ideal for transparency and accountability.

Furthermore, though this Act was enacted two years after the Mines and Minerals Act, it

does not spell out the linkages or

complementarities of the

functions of the Commissioner for

Petroleum Exploration and

Production and that of the

Commissioner for Mines and

Minerals.

In considering applications for

exploration or production of oil or

gas, the law does not require the

Minister to liaise with or refer the matter to any other authority which might have a vested

interest in oil exploration activities whether from the perspective of resource revenue,

public health or environmental protection. In other jurisdictions in the region, such as in

Ghana whose discovery of oil reserves is recent, the practice has been to establish a

government agency to coordinate the licensing procedure for upstream oil and gas

operations. The Minister on receiving applications for licences refers them to this body for

evaluation and due diligence. The body issues a report which leads to negotiations between

the coordinating authority, Ministry of Justice, Ministry of Finance, the Revenue Authority,

the Ministry of Environment and the oil company. A draft petroleum agreement is then sent

23

See sections 103 of the MMA and section 63 of the PEPA respectively

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for the approval of Cabinet and Parliament. A licence is granted only after Parliament

ratifies the Petroleum Agreement. The advantage of this approach is that it ensures a

holistic and highly participatory approach by government agencies in addressing conflicting

interests. It also increases transparency if the contract is ratified by Parliament and ensures

that critical matters are taken into account, for example, environmental and public health

issues. The disadvantage is that it promotes excessive bureaucracy which might not be

opportune in the business world. A process should therefore be implemented so as to

streamline these processes, rather than let the potential for bureaucracy preclude

introduction of systems which increase transparency and review.

Consequently, Malawi might consider the establishment of a Petroleum Exploration and

Production Commission to be charged with the responsibility to receive applications and

issue licenses for specific upstream activities to promote an efficacious and a transparent

licensing regime. The Commission may also be charged with the responsibility of regulating

the health, safety and environmental standards in the industry. The Commission should

have ex- officio representation on its Board from relevant Government Ministries, for

example, Energy, Minerals and Mining, Environment, Justice, Finance.

3.2 The Licensing Procedure

Best practice demands that the licensing procedure should

be transparent. For example, it is important that the law

should require the publication of all applications, set out

clear evaluation criteria, and pre-qualification criteria such

as minimum financial and technical standards and

minimum work programmes. It is also important that

Malawi should develop a clear plan prior to allocating

licences, outlining what the country wishes to achieve from the development of its

petroleum resources to provide a basis on which to evaluate applications for petroleum

exploration and production.

Many countries use a competitive bidding system for allocation of licences. The potential

advantage of such a system is that it can overcome information asymmetries by revealing

the market value of the resources (assuming that companies will bid what they consider,

based on their analysis, of what the resource is worth) and that by making fiscal elements

biddable, the value will be increased. It is also possible to make other factors biddable too,

depending on the country’s priorities, for example, infrastructure and local content.

However, there are administrative challenges associated with competitive bidding. It is

important that if Malawi were to take this route, it must as a country develop the necessary

capacity to run the bids in order for the system to achieve any benefits. There is therefore a

need to weigh carefully the potential advantages of the system.

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The Petroleum (Applications) Regulations require that an application for a petroleum

exploration licence should include the name/s and nationality of the applicants, if a body

corporate the name and place of incorporation, names and nationality of the directors and if

it has a share capital, the name of any person who is the beneficial owner of more than five

per cent of the issued share capital; identify the block or blocks in respect of which it is

made; include a statement giving particulars of work to be carried out and minimum

expenditure, including an estimate of any significant effect of the proposed exploration

operations on the environment and on any monument or relic in any such block; and a

statement giving particulars of the applicants proposals with respect to the employment

and training of citizens of Malawi.

The procedure for an exploration licence raises a

number of issues that require immediate attention.

First, the requirement for proposals for employment

and training plans of Malawians provided in the

regulations conflicts with the Policy of Government

under the Investment Promotion Act (IPA)24

regarding

labour practices advocated by that Act. The Statement

of Investment Policies incorporated under a Schedule

to the IPA in its pursuit of promoting private investment and FDI provides that the

Government shall not interfere in employers’ choice of workforce’ in recognition of the fact

‘that investments may require expertise not available in Malawi.’ Further, notwithstanding

this conflict, the Regulations are also weak in that they have not provided for the detail

required in the plans and how government will monitor compliance with such plans.

Second, there is an obvious gap in terms of information on the financial status, technical

competence and experience of the applicant regarding exploration activities. It is important

that the law should demand this information from applicants to enable the authority

determine feasibility of an application. Third, it is important that in seeking to regulate the

beneficial owners with more than five per cent of issued share capital, the law should go

further to extend this requirement to the entire chain of ownership of companies with an

interest in the company applying for the mining licence. This is in view of the fact that most

companies interested in oil exploration and mining are transnational, and often such

companies will incorporate a subsidiary which will hold the licence. It is therefore important

that all of the necessary information is provided as to the chain of ownership of that local

subsidiary. Generally, the local subsidiary has no asset other than the licence itself.

Therefore in the event of non- compliance, the Government will not have recourse to any

compensation. Consequently, Government should demand security from the holder of the

licence, such as bank guarantees or parent company guarantees, to cover potential liabilities

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under the licence, so that in the event of non-compliance the government can access these

funds.

In terms of petroleum production licences, the particulars required of persons or

corporations are similar to those for exploration licences. The point of departure is that the

applicant is required to give full information of his financial status, technical competence

and experience; the number of the applicant’s petroleum exploration licences, if any; the

period for which the production licence is sought; identify the composition of the petroleum

which it is intended to produce; a comprehensive report of the petroleum deposit including

its description, the form of the petroleum, an estimate of the petroleum and the reserves;

technological report on production and processing possibilities.

The applicant is further required to include in the application a proposed programme of

production and processing operations including proposals for the prevention of pollution;

treatment of wastes; safeguarding of natural resources; progressive reclamation and

rehabilitation of lands. It is important that the law should go beyond the requirement of

rehabilitation of lands and demand a closure or decommissioning plan in the interest of

promoting sustainable oil extraction.

The applicant is also required to include proposals for the minimization of extraction on

adjoining or neighbouring lands, a statement of any significant effect of petroleum

production on the environment and any monument or relic and proposals for controlling or

eliminating that effect, detailed forecast of capital investment including operating costs,

sales revenues and the anticipated type and source of financing, proposals with respect to

the employment and training of Malawians, and a report of the goods and services required

for the production and processing operations which can be obtained within Malawi and the

applicant’s intention in relation thereto. In essence this constitutes what may be loosely

termed as a development plan.

These requirements strive to comply with international practice. The aim is to promote

efficient development and the production of the petroleum resource in accordance with

‘good oil field practices’.25

It is also intended to optimise the financial benefits between

government and transnational companies and ensure optimum utilisation of national goods

and services, subject to availability, and the acquisition and transfer of appropriate

technology and the training of nationals within the industry.

However, mere legislating for these requirements is not enough as has been the experience

with the operations of the Kayerekela Uranium Mines.26

There is need for Government and

25

Note that there is no consensus on what this terminology implies. The practice in most jurisdictions has been to incorporate specific standards in legislation and licences. 26

See Citizens for Justice, Scramble for the Yellow Cake (Friends of the Earth (Malawi)) 2011

20

civil society to be vigilant in monitoring and enforcing compliance. Government should also

be given the right to audit under the law.

There is also need to address the over imbalance in emphasis. Too much emphasis is placed

on the standards for environmental protection to the exclusion of the health and safety of

the communities hosting the petroleum exploration and production. This creates a gap in

the procedures for licensing and may create a perception that public health issues are non-

consequential in oil mining.

3.3 Licensees

The PEPA differentiates between a licence for exploration and a licence for production in

terms of eligibility of prospective licensees. It is however obvious that the Act seeks to

promote oil exploration and production by Malawian citizens or companies. For example, an

individual applying for an exploration or a production licence has to be a citizen or a

resident for a period of not less than 4 years. If it is a company or corporation applying for

an exploration licence it must be incorporated in Malawi.27

External companies have to be

approved by the Minister. However, a petroleum production licence shall only be granted to

companies or corporations incorporated in Malawi. So far companies or corporations that

have shown interest to engage in oil mining are transnational.28

This has been due to the

highly technical and expensive nature of oil mining ventures.

3.4 Petroleum Licensing Agreements

Licensing agreements under the PEPA are of two types: petroleum exploration licenses and

petroleum production licenses. The issue that arises pertaining to these licenses concern

their legal nature. Are they contractual or regulatory? It is not very clear whether the

provisions under PEPA seek to prohibit unlicensed exploration and exploitation of

petroleum resources or merely underscore the proprietary rights of the President exercised

through the Minister. English case law appears to favour the latter interpretation. For

example, the much cited case of Rederiaktiebolaget Amphitrite V. The Crown29

established

the principle that the Crown ‘cannot by contract hamper its freedom of action in matters

which concern the welfare of the state.’30

Similarly, in Commissioners of Crown’s Land v.

27

See section 13 (a) 28

Examples include Surestream Company and Paradin 29

[1921] 3 K.B. 500 30

Ibid., per Rowalt, J., at p.503

21

Page31

Devlin L.J. emphatically expressed the position of the law in relation to the

limitations on all contracts entered into by the Crown and all public authorities as follows-

‘When the Crown, or any person is entrusted, whether by virtue of the prerogative or

by statute, with discretionary powers to be exercised for the public good, it does not,

when making a private contract in general terms, undertake to fetter itself in the use

of those powers, and in the exercise of those powers.’

It is interesting to note that the provisions in the PEPA do not regulate the contents of

petroleum agreements and leaves this critical aspect to the discretion of the Minister. In

contrast, the Namibian Petroleum (Exploration and Production) Act of 1991 describes

critical information that should be included in petroleum agreements such as terms and

conditions relating to the basis on which the market value of petroleum may be determined

from time to time, minimum exploration or production operations to be carried out;

participation including acquisition of equity share capital by the state; financial and

insurance agreements and guarantees to ensure the due and proper performance by the

company of its operations.32

The arrangement under PEPA exposes this important aspect of licensing to corruption and

uncertainties including perceptions of bias. The MMA33

exhibits the

same weakness in relation to agreements granting mineral rights. 34

It

is important that petroleum legislation in Malawi should provide for

critical information that should be included in petroleum agreements

rather than require individual agreements with each licensee to

contain detailed terms. Aside from the issue of corruption and bias,

this would ensure transparency and limit the amount of issues

available for negotiation. This is critical for Malawi, a developing

nation, where resources available to the Government to negotiate agreements are generally

limited and far less than those available to the companies. Information asymmetries often

exist, which means that the country does not achieve the optimal deal.

In Malawi, licensing agreements have also been found to be inadequate due for example to

the insufficient involvement of technical staff during their preparation, and the inadequate

sharing of information between government institutions involved in the compliance

enforcement of agreements. In this increasingly global village, transparency of agreements

31

(1960) Q.B. P.274 32

See section 13 33

The Act defines a mineral right as a ‘reconnaissance licence, an exclusive prospecting licence or a mining licence’. 34

See section 10 of the Act

22

is vital. Many countries are now moving towards publishing all of their contracts for natural

resources so that the public can be aware of their terms. Malawi should consider taking this

direction to address perceptions of corruption and promote dissemination of information

about the exploitation of natural resources in the country.

4 Petroleum Revenue Framework and the Fiscal Regime

4.1 Contextual Issues

An effective petroleum revenue framework for upstream operations should seek to

promote efficient collection, allocation and management of revenues; provide for

transparency, accountability and public oversight of collection, allocation and management

functions; and provide for both internal and external audit of accounts of petroleum

revenues to avoid the ‘resource curse’ normally associated with oil or mineral mining on the

continent. It is therefore not surprising that there is a global movement advocating for

transparency over payments by companies from the oil and mining industries to

governments and government linked entities, as well as transparency over those revenues

by host country governments in terms of allocation and management through the Extractive

Industries Transparency Initiative (EITI). The heart of the EITI is

the report which consists of information provided by companies

about what they pay to governments, combined with

information provided by governments about what money they

receive from companies. These two sets of figures are then put

together in an independently-verified reconciliation report in a

process overseen by a multi stakeholder group.35

4.2 General Revenues

The legislative regime in this area for Malawi is scattered over a number of statutes and is

not coherent. The regime is also inadequate in terms of breadth. The two key statutes in

this area, the PEPA and the MMA largely focus on the issue of royalties. Royalty provides

early flows to the government before companies recoup their investment revenue and are

easier to administer. Royalties therefore ensure that government has guaranteed revenue in

any accounting period during the production phase. There is however a downside to

royalties. They raise the marginal cost of extracting oil and can deter investors if too high.

Royalties may also discourage development of marginal fields that have been discovered

35

See Report of the Natural Resources Forum, Proceedings of the Natural Resources Forum, 6-8 April, 2011

Commonwealth Secretariat, Marlborough House, London.

23

and lead to abandonment of productive oil and gas wells.36

They can also be regressive. For

example, at a high point in a mineral cycle, the government’s share of the overall benefit

from the resource decreases compared to the company’s share.

Part IV of the PEPA requires the holder of a petroleum production licence to pay royalty in

respect of petroleum recovered in a production area in accordance with his licence.37

However, the law does not specify what the royalty amount is or its basis (whether

production amounts or price). Further, the law does not specify any auditing procedures in

relation to such royalty. The royalty may be in monetary terms or in kind and it is at the

discretion of the Minister.38

In the exercise of this discretion, no guidelines are given to the

Minister for determining royalties payable. The discretion has been a source of concern

stemming from the experiences with the Kayelekela uranium mine, the largest mining

investment in Malawi where the percentage for royalty was pegged at 1.5 %.

Further, the Act does not stipulate procedures for collection of royalties and to whom such

royalties are payable. The MMA

on the other hand is specific on

this issue and requires a holder

of a mining licence to pay to the

Republic a royalty in respect of

minerals obtained by a

licensee.39

The weakness of the

Act lay in the fact that it does

not require regular publication

of all mining payments to

Government nor require

publication of material revenues

received by the Government to a wider audience in a publicly accessible, comprehensive

and comprehensible manner.

4.3 Tax Administration

Another crucial area under this topic is tax administration. Conventional wisdom indicates

that the more competitive a country’s fiscal system, the more likely it should attract

36

See Twinamatsiko, F., Is Uganda’s Petroleum Fiscal Regime Sustainable? An Assessment at

www.dundee.ac.uk/cepmlp/gateway/files.php?file=cepmlp) 37

See section 43 38


See section 86

24

investment. This is due to the fact that international capital is mobile and investors will go

elsewhere if the regime is uncompetitive. It is however important to note that the peculiar

nature of the extractive industry dictates that the commodity determines where investors

invest. The key statute for Malawi in this area is the Taxation Act,40

particularly the Second

Schedule to that Act. The Act defines mining operations for tax purposes as meaning ‘any

operation for the purpose of winning a mineral from the earth’ or ‘any operations for the

purpose of winning a mineral from any substance or constituent of the earth’.

Consequently, mining companies are taxed on taxable income at 30%, and if foreign

incorporated taxed at an additional 5%. Mining companies also pay a resource rent tax of

10% if the company’s rate of return exceeds 20%.41

This tax is designed to capture

economic rent and is progressive and based on deemed profitability after an investor earns

a minimum rate of return. In order to attract investors, Government policy promotes

income tax incentives for the mining sector in the form of 100% expensing of capital

expenditure in the initial year.42

The IPA under its Statement of Investment Policy provided

in the Schedule to the Act justifies this policy as a way of further enhancing Malawi’s

investment climate and international competitiveness. The Statement proclaims that the

‘Government is committed to continue the process of reducing rates of taxes and duties’

through the on-going tax and trade reform programmes.

The IMF has criticized the wanton and wide spread use of tax incentives in Sub-Saharan

Africa, particularly the provision of tax holidays as a mechanism for attracting investment.

The IMF laments that ‘such incentives not only shrink the tax base but also complicate tax

administration and are a major source of revenue loss and leakage from the economy’. Mc

Kinsey has also condemned popular incentives such as tax holidays as only serving to

‘detract value from those investments that would likely be made in any case.’43

Malawi

therefore needs to reconsider its position regarding these incentives.

The taxation regime for mineral mining is a typical developing country regime with royalties,

rentals, and income tax generally applicable across the board. For bigger investment such as

uranium mining government may also negotiate free carried interest (a percentage

ownership in a mining operation without investment). The key question is whether it is

40


See Phiri C.M., ‘Present Tax Regime for Mining’, Paper presented at Symposium on Extractive Industry

Transparency Initiative: The role of Members of Parliament in Providing Policy Direction and Oversight in Malawi,

Lilongwe Hotel, 8th – 9

th

November, 2012

42

Ibid 43

See Mc Kensey & Company, New Horizons: Multinational Company Investment in Developing Economies, www.mckinsey.com/insights/economic_studies/new_horizons_for_multinational visted on 24th March 2012.

http://www.mckinsey.com/insights/economic_studies/new_horizons_for_multinational

25

adequate and appropriate to treat oil mining in the same manner as any other mining in

terms of taxation. With these arrangements, Malawi will not obtain for the Consolidated

Fund anything like the share of the ‘take’ of oil operations on Lake Malawi that other

countries are obtaining within their territories on the continent particularly those that have

discovered oil recently. Indeed at present the only certain revenue from oil operations is the

royalty and licence payments. This situation needs redress. It is not farfetched to argue that

profits from oil operations could be offset by extraneous losses and capital allowances.

It is important that Government in ensuring a fairer share of profit for the nation while also

ensuring that oil companies receive a suitable return on their heavy capital investment,

should enact legislation to specifically regulate oil taxation given the unique nature of the

industry. This could be in the form of a standalone statute or the incorporation of

comprehensive provisions on petroleum in the Taxation Act. For example, Belize which

discovered oil in 2005 has adopted a three tier taxation approach and has adopted a

separate petroleum taxation law that has pegged petroleum tax at 40% while income tax is

pegged at 25% and corporate tax is based on gross revenue rather than income.

The United Kingdom on the other hand enacted an Oil Taxation Act in 1975 following the

recommendations of the White Paper issued by the department of Energy in 1974.44

The

Act imposed a Petroleum Revenue Tax (PRT) that specifically targeted the profits from oil

production. One of the innovations of this statute lay in the use of the oil as the basis of

taxation. There were three main objectives behind the PRT: allow a project rapidly to

recover its cost, then tax it an appropriate rate; ensure that tax due was paid as early as

possible; and ensure that projects where no economic rent was likely were protected from

tax.

The Act also introduced a ring fence around corporation tax profits from UK oil production

known as the Ring Fence Corporation Tax (RFCT) to prevent profits from UK oil resource

being diluted by losses or allowances on other activities. For a developing country such as

Malawi, such a tax may provide the necessary security to protect government ‘take’ since oil

exploration is risky business. Moreover, absence of ring fencing provisions may postpone

government revenue because companies that engage in a series of development projects

would be allowed a deduction from the income of the projects that are already generating

taxable income.45

Though the United Kingdom consolidated the Oil Taxation Act alongside

all other UK oil Industry taxation provisions under the 2009 and 2010 Corporation Taxation

44

See White Paper, ‘United kingdom Offshore Oil and Gas Policy’ Cmnd 5696 45

See Emil M. S., et al. ‘Revenue from the Oil and gas Sector: Issues and Country Experience,’ in J.M., Davis, et al

ed., Fiscal Policy Formulation and Implementation in Oil Producing Countries (New York, USA, IMF Graphics Section,

2003) 45-83

26

Acts, the PRT has not changed by these consolidating Acts for those fields which were

granted approval prior to April 1993 and the substance of the RFCT remains substantially

unchanged. There has been introduced also a ‘supplementary charge’ since 2002 which is an

additional tax applied on the same basis as corporate income tax, for example to the ring

fenced profits, except there is no deduction of financing costs.

4.4 Issues for consideration

The above analysis of the fiscal regime associated with the petroleum industry in Malawi

points to a royalty and tax regime as opposed to a production sharing arrangement.

Consequently, this arrangement implies that Malawi seeks to derive its share of oil and gas

through the levying of loyalty on production and tax on profits. The expected inflow includes

royalty, income tax, and resource rent tax and surface rentals. In pursuing this approach,

Government should ensure that the petroleum fiscal regime should reflect the actual

conditions on the ground. It should be designed to reflect flexibility, neutrality and stability

to sustain government’s desire to maximise revenue over short and long term, and sustain

investment. One way of achieving this, is for the Government to maintain the resource rent

tax that introduces a threshold of profitability after which tax increases linked to the

investors’ expectations of the profitability of the field. This should be enshrined in legislation

for transparency and general application. However, the threshold of profitability after which

a resource rent tax applies would be project specific. It is also important that the

Government should ensure that the fiscal regime is internationally competitive to reflect the

risk inherent in the oil industry sector relative to other mining sectors bearing in mind the

context of the objectives that Malawi is seeking to achieve through exploration and

production of oil resources.

There is also need to take into account the strengthening of the capacity of the

administration to monitor and audit compliance in designing the fiscal regime. One way of

achieving this would be for the Government to establish a body to ensure that payments

and revenues emanating from oil operations are reconciled, applying international auditing

standards. Provision for the establishment and responsibilities of such body should be made

in a law to regulate oil revenues. It is important also to incorporate civil society under the

law as a governance sector to provide a watch dog role in monitoring and evaluating

collection, allocation and management of petroleum revenue and generally for contributing

to public debate. Further, Government should adopt a practice of publishing receipts and

payments of oil revenues in readily accessible media for transparency and accountability.

Addressing all these issues in a piece of legislation could promote an approach that would

ensure that Malawi adheres to the standards set by EITI and make the country qualify for

membership to this global initiative.

For example, in order to adhere to EITI, Ghana as a country where oil mining is a new

phenomenon, has enacted a separate statute on petroleum revenues as a neater and

27

efficacious way of promoting good governance in this area and enhancing the watchdog role

of civil society to ensure that public interest is served.46

If Malawi were to take this

approach, such a statute may provide for the following matters among other things:

(a) an expansive definition of petroleum revenue;47

(b) establishment of petroleum accounts that can be easily monitored;

(c) the management and investment of petroleum funds in a transparent

manner;

(d) auditing, both internal and external;

(e) transparency, accountability and public oversight through civil society.

CFJ may take a lead role in this area and lobby for this necessary law and also specifically for

the establishment of a body under this law comprising of civil society to monitor and

evaluate compliance with the law by Government and other relevant institutions in the

discharge of their duties for the following specific objectives:

(a) in relation to the collection, use and management of resource revenues;

(b) to provide a formal active voice in the collection, use and management of

petroleum revenues by providing space and the platform for the public to

debate whether spending prospects and management revenues adhere to

development priorities;

(c) to ensure that petroleum revenue is used for the benefit of current and

future generations of citizens;

(d) to provide independent assessments on the use and management of

petroleum revenues and resources to assist Parliament and the Executive in

the oversight of, and performance of related functions.

Furthermore, the current legislative framework does not address issues of community

development to facilitate distribution of revenue from the national level to the local level

nor does it address issues of community development agreements in the context of

petroleum revenues. There is need to incorporate these issues in legislation regulating

petroleum exploration and mining.

46

See Ghana Petroleum Revenue Management Act 2011 47

For example, in Ghana this includes royalties from oil and gas, additional oil entitlements, surface rentals, receipts

from oil operations, sale or export of petroleum, income tax receipts, dividends and capital gains tax from sell of interest in

petroleum agreements.

28

5 Legislative and Policy Framework Relating to the Environment 5.1 Impacts of Oil Mining and International Perspective

Oil mining has the potential to cause severe environmental degradation. The Table below illustrates potential environmental problems in upstream operations at different stages of oil mining.

Table 1: Petroleum Environmental Problems in Upstream Operations48

Activities Problems Impacts

Seismic survey a. Physical presence b. Acoustic emission c. Accidental spills

Visibility and clearance Ground vibrations Pollution of water and land

Exploration and appraisal

a. Physical presence b. Drilling discharges / cuttings c. Atmospheric emission d. Accidental spills / blowout e. Waste disposal (solid) f. Noise

Visibility, interference with farming, shipping, fishing, etc. Land and marine pollution and effects on plants and soils Air pollution, human health Ground and marine pollution / safety Soil and water contamination Nuisance for inhabitants and animals

Development and production

a. Physical presence b. Operation discharges c. Atmospheric emission d. Accidental spills e. Waste disposal f. Noise g. Transportation collision h. Community i. Issues of ethics

Visibility interference Ground and marine pollution Air pollution Pollution of water and land Soil and water contamination Nuisance for inhabitants and animals Various environmental and safety risks Social, culture and biological effects Human rights and indigenous people

Abandonment a. Physical closure / removal b. Waste disposal c. Leave in situ (partial or total) d. Dumping at sea

Human safety On and off shore pollution Hazard to other human activities such as fishing and navigation Pollution, fishing and navigation hazards

48

Table compiled by Zhiguo Gao in Gao, Z., ‘Environmental Regulation of the Oil and Gas Industries’ The Journal

Volume 2-11 @ www.dundee.ac.uk/cepmlp/journal/html/vol2/article2-11.html

29

It follows therefore that the importance of having effective environmental laws to prevent

or mitigate the negative effects of oil and gas exploration and production cannot be

emphasized. Environmental laws in emerging economies are often ineffective either

because they are substantively inadequate or are inadequately enforced.49

This has led

human rights activists to call on transnational companies in the oil industry to voluntarily

subscribe to best practices since no treaties have been negotiated to regulate the activities

of the industry operating within the borders of individual states. In this context reliance is

placed on voluntary standards and guidelines developed by nongovernmental and

intergovernmental organizations,50

including oil industry association bodies51

to achieve

uniform standards and operating practices across the globe.52

The voluntary standards of the international oil industry contain about three broad

standards that assist in protecting the environment. First, are standards for equipment and

products, such as construction requirements for underground storage tanks and pipelines.

Defective or poorly designed, constructed or out-dated equipment may pose a greater

threat to the environment in terms of environmental pollution. The second set of standards

addresses environmental practices and aim to regulate limits on emissions and waste

disposal methods. Poor environmental practices such as the unsafe disposal of toxic drilling

wastes generally pose a greater threat to the environment. The World Bank’s Pollution

Prevention and Abatement Handbook 1998 illustrate effort to achieve uniformity of

standards in projects sponsored by the Bank in this regard.53

The third type of standard

seeks to aid mining companies to improve environmental performance by adopting

environmental management procedures and systems.

An example of an international environmental code in the mining industry is the

Environment Guidelines for Mining Operations.54

The guidelines address issues concerning

mining and sustainable development; regulatory frameworks; environmental management;

49

See Wawryk, A.S., ‘International Environmental standards in the Oil Industry: Improving the Operations of

Transnational Oil Companies in Emerging Economies’, @ www.dundee.ac.uk/cepmlp/journal/html/Vol 13/article13-3.pd 50

These include the United Nations Environment Programme (UNEP), the World Conservation Union (WCU),the

International Chamber of Commerce, the International Standards Organisation, the World Bank and the World Business

Council for sustainable Development. 51

Examples include the guidelines and standards of the International Association of Oil and Gas Producers (OGP)

and the American Petroleum Institute (API) 52

ibid 53

World Bank, Pollution Prevention and Abatement Handbook, (Washington DC, 1998). Among other things, the

guidelines set maximum levels for liquid effluents, air emissions and noise levels and describe industry practices, processes

that can reduce, prevent and control pollution, and treatment technologies. 54

Published in 1994 following the adoption of the Mining and Environment Guidelines at the International Round-

table on Mining and the Environment, Berlin, 25-28 June 1991

http://www.dundee.ac.uk/cepmlp/journal/html/Vol

30

voluntary undertakings and community consultation and development as applied to all

stages of a mining operation such as exploration, production, decommissioning, closure and

rehabilitation. It is important to emphasize that the guidelines are not prescriptive but

rather seek to provide guidance for sound and sustainable management of the environment

in relation to mining activities.

Another example is the Policy on Environmental and Social Sustainability.55

The Policy seeks

to regulate investment activities directly financed by IFC or implemented through financial

intermediaries, as well as those investments funded in part or in whole by donors. The

Policy dictates performance standards in eight areas. These are Assessment and

Management of Environmental and Social Risks and Impacts; Labour and Working

Conditions; Resource Efficiency and Pollution Prevention; Community Health, Safety, and

Security; Land Acquisition and Involuntary Resettlement; Biodiversity Conservation and

Sustainable Management of Living natural Resources; Indigenous Peoples; and Cultural

Heritage. These standards help IFC investments and advisory clients manage and improve

environmental and social performance through a risk and outcomes based approach.56

The following major practices may be identified as constituting existing or emerging ‘best

practice’ in the international oil industry that may be instrumental, when adequately

implemented, in reducing the negative impacts of oil and gas exploration and production on

the physical and cultural environment. On the top of the list are Environmental Impact

Assessment (EIA) and Social Impact Assessment (SIA). EIA requirements are incorporated in

many instruments of international environmental law. These include Principle 17 of the

1992 Rio Declaration on Environment and Development; Article 14 (1)(a) of the 1992 UN

Convention on Biological Diversity; and Article 4(f) of the 1992 UN Framework Convention

on Climate Change. The International Association of Oil and Gas Producers (OGP) also

emphasises the importance of social and environmental assessment in all aspects of project

planning to oil and gas companies and their contractors and recognises that EIA is an

integral part of project management and engineering for all operations from ‘seismic to

decommissioning’.57

Major multilateral and bilateral development institutions have also adopted environmental

policies and procedures. The World Bank’s EIA requirements rank as the most influential.58

55

http://www1.ifc.org/wps/wcm/connect/Topics_Ext_Content/IFC_Corporate_site/IFC+Sustainability/Sustainability

+Framework) adopted by the International Finance Corporation (IFC) on 1st

January 2012. 56

See page 3 57

See OGP, Principles For Impact Assessment: the Environmental and Social Dimension 1997 58

See Wawryk supra note 39

http://www1.ifc.org/wps/wcm/connect/Topics_Ext_Content/IFC_Corporate_site/IFC+Sustainability/Sustainability+Framework

http://www1.ifc.org/wps/wcm/connect/Topics_Ext_Content/IFC_Corporate_site/IFC+Sustainability/Sustainability+Framework

31

These are set out in the Bank’s Environmental Assessment Sourcebook.59

The Sourcebook

classifies oil and gas development projects as projects that are ‘likely to have significant

adverse environmental impacts that are sensitive, diverse, or unprecedented’ and require

an EIA.60

Under most national legislation, SIA ‘which is a method for assessing the impact of

development strategies and projects on societies and cultures, is undertaken as part of the

EIA process.61

Other major practices include environmental management systems (EMS); environmental

performance evaluation (EPE); environment monitoring and auditing; Strategic

Environmental Assessments (SEA) and environmental reporting.

SEAs are systematic decisions supporting the wider process which aim to ensure that

environmental and possibly other sustainability aspects are considered effectively in policy,

planning and programme making. Effective SEA works within a structured and tiered

decision framework, aiming to

support more effective and

efficient decision making for

sustainable development. It is

an evidence based instrument

aiming to add scientific rigour

to policy, planning and

programming, by using

suitable assessment methods

and techniques. SEAs have

proven useful for developing

countries in the early stages of

oil exploration for their ability

to facilitate multi-stakeholder engagement as well as capacity building and have been

implemented successfully in other countries in Africa such as Tanzania. SEAs could therefore

be an important step for Malawi to take as the country is just beginning in oil exploration.

59

World Bank, Environmental Assessment Sourcebook (Washington DC, 1991) The Sourcebook includes

Operational Policy 4.01 Environmental Assessment; Bank Procedure 4.01 Environmental Assessment, Good Practice 4.01

Environmental Assessment; together with Annexes. 60

See World Bank, Good Practice 4.01 Environmental Assessment, ‘Annex B: Types of Projects and their Typical

Classifications’, January 1999 61

See IUCN Inter-Commission Task force on Indigenous Peoples, Indigenous Peoples and Sustainability: Cases

and Actions (International Books, Utrecht, 1997) 150

32

Cumulative impact assessments could also be important in the context of Malawi’s newly

developing oil sector. This requires that the environment and social impacts of all projects in

a region be taken into account rather than determining effects on a project by project basis.

Since there will be a number of projects on Lake Malawi basing on the number of oil fields

blocks identified, the potential impacts of all of them combined should be taken into

account.

5.2 National Policy and Legislation

The Constitution of Malawi under section 13 (d)

requires the State to manage the environment

responsibly in order to prevent degradation; provide

a healthy living and working environment for the

people of Malawi; accord full recognition to the

rights of future generations by means of

environmental protection and sustainable

development of natural resources; and conserve and

enhance the biological diversity of Malawi.

The National Environmental Policy 2004 stipulates as one of its specific goals the promotion

of sustainable utilization and management of the country’s natural resources.62

In relation

to mining, the Policy states that its objective is ‘to ensure that the development of the

country’s mineral resources takes place within a framework of sustainable utilization of

natural resources and the management of the environment and the mining industry

contributes to the country’s economic growth and poverty reduction program.’ To this end,

the policy advocates the requirement of stringent EIA for all mining projects to ensure

sustainable environment and natural resources management; the polluter pays and the

precautionary principle; and safe waste disposal.

Pursuant to these constitutional and policy goals, section 47 of the PEPA requires the

Minister, in deciding whether to grant a licence or not, and on the conditions to be included

in a licence, to take into account the need to conserve natural resources. The position is the

same under section 94 of the MMA. Under the PEPA, the Minister may require

environmental impact studies. The use of the word ‘may’ confers discretion on the Minister.

The EMA, being the principal legislation in this area, incorporates general principles under

section 3 to guide the management of the environment in Malawi. The principles can be

summarised as follows-

(a) Every person has a duty to take all necessary and appropriate measures;

62

GOM, National Environmental Policy, Ministry of Mines, Natural Resources and

Environment 2004 par. 2.2.2

33

(i) to protect and manage the environment,

(ii) to conserve natural resources; and

(iii) to promote sustainable utilization of natural resources

(b) Every person required under any written law to exercise power or perform

functions relating to the protection and management of the environment

shall take such steps and measures as are necessary for:

(i) Promoting a clean environment in Malawi

(ii) Ensuring the sustainable utilization of the natural resources

(iii) Facilitating the restoration, maintenance and enhancement of the

ecological systems and the preservation of biological diversity

(iv) Promoting public awareness and participation in the formulation and

implementation of environmental and conservation policies of

Government

(v) Promoting corporation with foreign governments and international or

regional organisations in the protection of the environment and the

conservation and sustainable utilization of natural resources

(vi) Promoting scientific research, technological development and training

relating to the protection and management of the environment.

In addition to these principles, the Act has gone further to confer a right to every person to

a clean and health environment liable to be enforced through the court process.63

Two significant characteristics emerge from these provisions. First, they place emphasis on

the shared responsibility in the protection, conservation and management of the

environment between the people of Malawi and those exercising state power. This

approach seeks to promote a participatory approach to environmental management.

Second, is the recognition of a clean and health environment as a justiciable right, and

hence empowering citizens to seek legal redress where this right is infringed.

5.2.1 Environmental Impact Assessment (EIA)

63

See section 5 of the Constitution

34

In order to enforce the principles enunciated in the national environmental policy and

conform to international best practice, the Act requires the carrying out of EIA before

certain projects are carried out and stipulates the details required to be included in EIA

reports.64

The Environment (Specification of Projects Requiring Environmental Impact

Assessment) Notice demands an EIA for all Mining Projects for which an exclusive

prospecting licence or a mining licence is sought. This means that for all oil mining projects

for which an exclusive prospecting licence is required, an EIA is indispensable. This contrasts

sharply with the position under the PEPA, which gives the Minister discretion in this matter.

Considering the hazards associated with oil mining, it is important to harmonise the two

statutes and adopt the approach advanced by the EMA.

The details required in an EIA include the description of the segment/s of the environment

likely to be affected by a project and the means of identifying, monitoring and assessing the

environmental effects of the project; technology, method or process to be used; detailed

description of the likely impact the project may have on the environment and the direct,

indirect, cumulative, short term and long term effects on the environment; identification

and description of measures proposed for eliminating, reducing or mitigating any

anticipated adverse effects on the environment. The Act also permits public scrutiny of EIA

reports and requires the carrying out of periodic environmental audits of existing projects.

A notable omission in the requirements for EIA under the EMA is the glaring absence of any

provision to promote the carrying out of SIA. The Act exclusively focuses on the negative

impact of projects on the physical environment and completely ignores the social and

cultural effects. Thus,

consequences of projects on

human populations in terms

of alteration of the way in

which people live, work,

relate to one another,

organise to meet their needs

and generally cope as

members of society including

‘changes to the norms and

beliefs that guide and

rationalise their cognition of

themselves and their

64

See sections 24 & 25

35

society’65

have not been

addressed in the requirements

for EIA.

EIA procedures within the

Malawi legislative framework are

also known to suffer from a

number of weaknesses. First, the

law requires that the proponent

of a project in accordance with

such guidelines should carry out

an EIA as the Minister may by Notice published in the Gazette.66

This arrangement is liable

to open up the process to bias and inadequate environmental impacts statements since the

proponent has the greatest stake in acceptance of the project. One way of addressing this

challenge is for the law to require that EIA should be carried out by an independent third

party approved by the Government at the expense of the proponent. The alternative is for

the law to require a joint EIA by the proponent and Government at the expense of the

proponent.

Second, public participation including the participation of local communities is not an

integral part of the EIA process in Malawi. The law only allows public inspection of the EIA

report after it is concluded and restricts the use of information contained in such report

except for purposes of civil proceedings brought under the Act or under any written law

relating to the protection and management of the environment or the conservation or

sustainable utilization of natural resources.67

This needs to be revisited in view of the

aspirations of the Constitution which advocates a participatory approach to environmental

management. Malawi also appears to have assumed an attitude common in most emerging

economies and exhibited by most transnational companies of viewing EIA as a huddle to

development, rather than a useful tool for protection of the environment. Consequently,

approvals for projects in the mining sector tend to ignore results of EIA.68

There is an

urgent need to promote a change of attitude in this regard.

65

The Interorganisational Committee on Guidelines and Principles for Social Impact Assessment, ‘Guidelines and

Principles for Social Impact Assessment’ (1995) 15 Environ Impact Assessment Rev 11 at 11 (hereafter ICGPSIA Guidelines

and Principles for SIA). ‘Social Impacts’ have also been defined to include ‘cultural impacts’. 66

See section 25 67


The Kayerekela Uranium Mine is a typical example

36

EIA system in Malawi is also known to suffer from a lack of post-decision monitoring. Other

challenges hampering the achievement of an effective EIA system include a lack of trained

people and inadequate financial resources; inaccurate, inaccessible or non-existent baseline

socio-economic and environmental data; inaccessibility of EIA reports by the public since

they are often classified as confidential and copies made available for public inspection are

limited. A lack of coherent liaison between ministries concerned with resource exploitation

and the Ministry responsible for the environment means that compliance with EIA

legislation is inadequately monitored and enforced.

5.2.2 Standards of Equipment and Products

The legislative framework in this area is very weak, almost non-existent. Though section 48

of PEPA places responsibility on the holder of a licence ‘to control the flow and prevent the

waste or escape in the exploration or production area of petroleum or gas’; ‘to prevent the

escape of any mixture of water or drilling fluid and petroleum’; and ‘to prevent the pollution

of any harbour, lake estuary, river etc by the escape of petroleum, drilling fluid, chemical

additive, gas, or any waste product or effluent, there are no provisions in the Act to ensure

that appropriate equipment is used to minimise the occurrence of the stipulated

prohibitions. The Act merely empowers the Minister to make regulations prescribing the

construction, erection, maintenance, operation or use of installations or equipment.69

This

is the closest the law has attempted to regulate the standards of equipment and products to

be used in petroleum exploration and production. The Minister is yet to promulgate these

regulations.

Similarly, the MMA has not addressed the issue of standards of equipment and products

used in mining. With the imminence of petroleum production in Malawi, it is important that

the law should provide for this area to ensure that equipment and products employed in oil

mining are not poorly designed, constructed or out dated to minimise risks of

environmental pollution through leakages.

5.2.3 Environmental Practices

Section 48 of the PEPA prohibits certain work practices as described in the preceding

paragraph as a measure to protect the environment in petroleum operations. These

prohibitions, however, are provided in more general terms. The Act also empowers the

Minister to make regulations with respect to ‘the prevention of pollution and measures to

be taken for the purpose of preventing or reducing damage from pollution’ and also with

respect to ‘the underground disposal of petroleum, water and other substances produced in

association with exploration for or the production of petroleum’.70

The Minister is yet to

promulgate these regulations. The non-existence of the regulations creates the perception 69

See section 78 70

See section 78 (1) (g) and (k)

37

that the Act is meant specifically to confer ownership of Petroleum resources on the state

and regulate exploitation of such resources. This is not surprising since historically national

laws enacted in the first half of the twentieth century made little reference to

environmental protection and control.71

The MMA on the other hand provides that there may be included in a Mineral Right

conditions for the protection of the environment.72

These conditions may be with respect to

‘the prevention, limitation or treatment of pollution’ and ‘the minimizing of the effects of

mining on adjoining or neighbouring areas and their inhabitants’. It is worthwhile to note

that the inclusion of these conditions is not mandatory. In this context, the Act treats issues

of environmental protection as of secondary importance. This is evidenced by the fact that

the Act does not give the Minister power to make regulations with respect to the protection

of the environment in mining activities. Notwithstanding this weakness, the Act recognises

the potential adverse effect of mining activities on inhabitants thereby expanding its scope

to cover social and cultural impacts.

The Act defines a pollutant as ‘any substance whether in a liquid, solid or gaseous form

which directly or indirectly adversely alters the quality of the environment’ or is ‘dangerous

or potentially dangerous to public health, plant or animal life’.73

Despite this expansive

definition of a pollutant, the Act is grossly inadequate to address the gap inherent in the

PEPA and MMA concerning environmental protection regarding upstream petroleum

operations.

For example, in terms of waste management, the ambit of the Act is limited to domestic and

industrial waste that does not cover issues concerned with petroleum. In this context, the

Minister is empowered to make rules or formulate measures necessary to regulate the

collection, transportation and safe disposal of waste by local authorities. Pursuant to this,

the Minister has promulgated the Environment Management (Waste Management and

Sanitation) Regulations. Similarly, in dealing with the issue of management of chemicals and

toxic substances, the Act restricts itself to pesticides and hazardous substances relating to

agriculture.74

This is evidenced by the fact that the Environment Management (Chemicals

and Toxic Substances Management) Regulations promulgated under section 40 of the Act

make provision for the classifying of pesticides and hazardous substances; their registration,

labelling and packaging; for measures for controlling their manufacture, importation and

71

See Gao supra note 38 citing examples such as the 1969 Petroleum Act and the 1969 Petroleum (Drilling and

Production) Regulations of Nigeria; and the 1934 Petroleum (Production) Act of UK 72

See section 95 73

See section 2 74

See section 4

38

exportation; for their distribution, storage, handling and transportation; and for monitoring

their impact and residuary effect on public health, the environment and natural resources.

The upshot is that the existent legislative framework employs a very inadequate multi-

statutory approach to environmental protection in relation to upstream petroleum

operations. Additionally, there are little unified provisions specifically formulated for the oil

and gas industry. This may result in the ineffective regulation of the industry, due to

inconsistencies in the legislative framework, exclusion of the industry from environmental

laws and lack of coordination between regulators. There is therefore a need to incorporate

comprehensive provisions in PEPA to deal with issues of environmental protection as a long

term measure pursuant to an integrated legislative approach.75

In the interim, Government

could rely on the contractual approach which is a mode of regulating petroleum activities

through provisions in petroleum agreements concerning the environment, safety and

insurance. In pursuing the latter option, Government should desist from using vague and

simplistic provisions and should spell out legally binding and practically operative

obligations.

6 Legislative and Policy Framework relating to Public Health

6.1 Health Impacts and International Perspectives

Oil mining can have significant impacts on health and wellbeing of employees and

communities living in surrounding areas constituting of risks and opportunities. Some of the

risks include environment threat to health resulting from air, water and soil pollution;

nutritional problems resulting from changes in land use (clearing, deforestation); or

disturbances to ecosystems that have implications for food security and diet.76

Mining

projects also trigger migration to the project area in search of income opportunities. This

can result in competition for limited resources including health and social services.

Population influx may also affect communicable disease patterns such as sexually

transmitted diseases or HIV/AIDs.77

Research also indicates increases in pregnancies and

mine related injuries.78

75

Example of countries that employs an integrated petroleum environmental legislative approach are Latin

American countries such as Peru, Ecuador and Argentina. 76

See Report of the Second Ministerial Conference on Health and Environment in Africa, Luanda, Angola, 23-26

November 2010, from the Workshop on managing the’ health impacts of oil and gas and mining projects’ at

www.afro.who.int/index.php?option.com. 77

Ibid 78

See Shandro, J.A., et al., (2011) ‘Perspective on Community Health Issues and the Mining boom-bust cycle’

Resources Policy @ www.elsevier.com/locate/resourpol

39

Table 279

below illustrates some of the employee and public health impacts associated with

each stage of oil mining operations. EMPLOYEE AND PUBLIC HEALTH IMPACTS-TYPICAL OIL AND GAS OPERATION

PHASE EMPLOYEE HEALTH COMMUNITY HEALTH

Geological Surveys/Seismic Infectious Disease Foodborne/Waterborne illness Wildlife & Vector Induced Disease Noise

Infectious Disease Foodborne/ Waterborne illness Wildlife & Vector Induced Disease Noise

Drilling Chemical/Physical Agent Exposure Chemical/Physical Agent Exposure

-Drilling Mud -Petroleum Products -Radioactive sources -Noise

-Drilling Mud -Petroleum Products -Noise

Oil & Gas Production Chemical/Physical Agent Exposure Chemical/Physical Agent Exposure

-Drilling Mud -Petroleum Products -Treatment Chemicals -Radioactive sources -NORM* -Solvents -Metals -Temperature (heat/cold) -Silica/Asbestos -Noise/Vibration -PCB’s

-Drilling Mud -Petroleum Products -Solvents -Metals -Noise

Refining Chemical/Physical Agent Exposure Chemical/Physical Agent Exposure

-Petroleum Products** -Solvents -Treatment Chemicals -Metals -Silica/Asbestos -Temperature -Load -Noise/Vibration -PCB

-Petroleum Products -Solvents -Metals -Load -Noise

*NORM-Naturally Occurring Radioactive Material **Refining typically includes a higher concentration of lighter hydrocarbons and, possibly, heavier hydrocarbons such as polycyclic aromatic hydrocarbons

Mining projects may also present opportunities for improvement of public health. For

example, if a mining company incorporates primary prevention measures into project

design, this can contribute to wider health goals. Such positive health impacts include

investment in malaria and vector control programmes to help the health and performance

of workers. However, most countries in Africa have failed to harness these opportunities

79

Compiled by Robert Markussen in Markussen, R.W., Occupational and Public Health Issues in the Oil and Gas

Industry: Emerging Trends and Needs for Emphasis at www.touchbriefings.com/pdf/25/westmark.pdf

40

due to lack of awareness or good practice examples to influence the way in which health is

considered as part of policies, plans, and decisions taken in the natural resources sector.80

Consequently, development partners such as the World Health Organisation (WHO) and

United Nations Environment Programme (UNEP) have initiated a movement to encourage

countries to adopt a ‘health impact management system’ – a system which can be used to

monitor public health impacts affected by the growth of a sector such as the extractive

industry and mobilize resources to address those health impacts. With such a system in

place, the aim is to provide government with an overarching view of cumulative health risks,

benefits and opportunities associated with the sector.

Recently, the mining sector published an important document regarding the health of

communities, the International Council on Mining and Metals (ICMM) Good Practice

Guidance on Health Impact Assessment, 2010. The guide-book describes health beyond the

presence and absence of disease or environmental exposures. Identified determinants of

health include income and social status, social support networks, employment and working

conditions, social environments, physical environments, personal health practices and

coping skills.

6.2 National Policy and Legislation

One of the principles of national policy provided under section 13 of the Constitution

requires the state to provide adequate health care, commensurate with the health needs of

Malawian society and international standards. The state is also tasked to manage the

environment responsibly to provide a healthy living and working environment for the

people of Malawi.

The National Environment Policy specifies as one of its goals the securing ‘for all persons

now and in the future, an environment suitable for their health and wellbeing.’81

The Public

Health Act82

a comprehensive statute that professes to consolidate the law on preservation

of public health is silent on public health issues stemming from the mining sector. Similarly,

the EMA is silent on environmental issues concerning public health.

The PEPA on the other hand, requires the holder of a licence to take all reasonable steps

necessary to secure the safety, health and welfare of persons engaged in petroleum

80

ibid 81

Supra note 50 par.2.2.1 82


41

operations in and about the exploration or production area.83

This is as far as the Act has

attempted to address issues of public health. It is worthwhile to note that this requirement

is imposed as a work place practice as opposed to a guiding factor to influence the decision

of the Minister to grant a licence. Interestingly, one of the factors to be taken into account

by the Minister in deciding whether to grant a licence or not under section 47 is the need to

conserve and protect natural resources emphasising the importance of this ideal. The

importance of promoting and protecting public health of surrounding communities as an

ideal in granting petroleum mining licenses is conspicuously absent. Section 47 should

therefore be amended to provide for this.

The MMA follows the same pattern as the PEPA. It is more concerned with the protection of

the environment and emphasises the need to conserve natural resources as a consideration

for the Minister to grant a mining licence.84

However, section 95 recognises the importance

of safeguarding the health of people living in adjoining or neighbouring areas by giving the

Minister discretion to include in a Mineral Right conditions aimed at minimizing the effects

of mining on such areas. The weakness of the provision lies in the fact that this is not

mandatory. There is an obvious need to redress this.

Another important law in this area is the Occupational Safety, Health and Welfare Act.85

The Act incorporates provisions that seek to promote the health and welfare of employees

including their health and safety. The Act among other things make provision for the

regulation of the conditions of employment in workplaces as regards the safety, health and

welfare of persons employed therein and the prevention and regulation of accidents

occurring to persons employed or authorised to go into work places. In this context, section

16 (1) of the Act imposes a duty on every person having control of any premises to use the

best practicable means for preventing emissions into the atmosphere of noxious or

offensive substances and for rendering harmless such substances. Additionally, section 51

demands that in the use of all materials containing hazardous substances and in the removal

and disposal of wastes; the health of the workers and of the public and the preservation of

the environment be safeguarded. Contravention of these requirements attracts a fine of

K10, 000 and K500 for a continuing offence. The Act is however ill equipped to deal

adequately with issues of public health in general as they concern mining operations. Its

major focus is the protection of the health, welfare and safety of workers as opposed to

communities surrounding mining operations.

83

See section 48 (1)(b) 84

See section 94 85

Cap 55:07 of the Laws of Malawi

42

6.3 Issues for consideration

It is clear that the public health mining legislative framework is very porous and grossly

inadequate. Considering the health hazards associated with mineral mining, in particular oil

mining, there is need to review the legislative framework to establish a comprehensive and

coordinated ‘health impact management system’ to monitor public health issues in the

growing mining sector as an identified key strategic area for economic growth for Malawi.

CSOs may take up this issue as an area of project intervention to determine and propose the

modalities of setting up such a system within the current legislative framework.

7 Offences and Penalties Regime

7.1 Illegal Exploration or Production Operations

The PEPA prohibits petroleum exploration or production operations without a licence issued

under the Act and creates an offence attracting a fine of K1, 000 or imprisonment for two

years in the case of an individual, and fine of K50, 000 in case of a body corporate.86

The

MMA prescribes similar penalties for illegal reconnaissance, prospecting or mining

operations.87

The PEPA creates also the offence of obstructing a licensee and provides for

the same penalties.88

These penalties are inadequate to deter would be offenders.

However, it is worthwhile to note a global pattern that indicates that these offences are not

considered serious. For example, the Petroleum Act of Nigeria prescribes a similar offence

and imposes a fine not exceeding two thousand naira.89

Similarly, the Petroleum Act of

Northern Territory of Australia of 2011 imposes a fine of 100 penalty units or imprisonment

for six months in the case of a natural person and for a body corporate 500 penalty units.90

In terms of the offence of obstructing or interfering with the holder of a licence, the

Nigerian Act imposes a fine not exceeding two hundred naira or imprisonment for a period

not exceeding six months.

Notwithstanding, there is need to revise the penalties prescribed in the MMA and the PEPA

to reflect the importance of the mining sector as a vehicle for development in recent years.

86





See section 109 of the Act. Note that a penalty unit is AU$133, so the fine is AU$66,500, arguably not a large

amount to a company found to be in contravention of the Act, depending on the size of the company.

43

7.2 Pollution

Pollution attracts both civil and criminal liability. In terms of civil liability, the PEPA requires

reimbursement to any person (including the Republic) that suffers damage caused directly

by contamination following a discharge during petroleum operations.91

The licensee is also

required to pay for the cost of any measures

reasonably taken after the discharge for the

purpose of reducing or preventing damage

including reimbursement to any person

(including the Republic) that suffers damage

caused directly by any measures so taken.92

This position reflects the trend in the region

regarding civil liability flowing from oil

mining operations.93

The EMA, on the other hand empowers the Minister in his discretion to require the cleaning

up or removal of any pollutant in such manner, and within such time as the Minister shall

direct.’ It is important to note that the prohibition and the ‘polluter cleans’ rule are

expressed as general principles.94

The MMA simply indicates that there may be included in

a Mineral Right conditions with respect to the prevention, limitation or treatment of

pollution. It does not address issues of civil liability. Similarly, the Water Resources Act does

not create any civil liability for pollution of public water.

In terms of criminal liability for pollution, the PEPA and the MMA do not create any offences

in this regard. An analysis of statutes in the region including the Namibia Petroleum

(Exploration and Production) Act 1991, the

Sierra Leone Petroleum Exploration and

Production Act of 2001 exhibits the same

pattern. This pattern reflects the

competitiveness of oil mining in developing

countries and the zeal on the part of

governments to attract rather than scare

investors with the threat of criminal

penalties.

91

See section 55 (1) (a) Note that section 61 imposes compulsory insurance against liability for pollution. 92

See section 55 (1) (b) and (c) 93

See sections 54 and 55 of the Sierra Leon Petroleum Exploration and Production Act of 2001 94

See sections 42 and 44

44

The EMA on the other hand provides that any person who discharges or emits any pollutant

into the environment in contravention of that Act is guilty of an offence and liable to a fine

of not less than K20,000 and not more than K1,000,000 and to imprisonment for ten

years.95

The Act also penalises the violation of any environmental standard or guidelines

prescribed by the Act and stipulates a fine of not less than K5, 000 and not more than K200,

000 and to imprisonment for two years.96

These amounts are very low, the maximum being

the equivalent of US$2,700, so would not act as a deterrent to a company. Further, there is

need to empower the Government under the law, in particular the PEPA, to shut down

operations in the event of non-compliance with environmental laws.

Statutes such as the Water Resources Act creates the offence of pollution of public water

and provides a general penalty of a fine of K500 and imprisonment for six months; and the

Penal Code97

provides for the offences of fouling water and fouling air under sections 197

and 198 respectively as misdemeanours (minor offences). These penalties need revisiting

for inadequacy.

7.3 Miscellaneous Offences

The PEPA stipulates that any person who knowingly or recklessly includes false or

misleading information in connection with any application, report or affidavit; places or

deposits or is accessory to the placing or depositing of any petroleum or substance in any

place with the intention of misleading others as to the possibility of a petroleum reservoir is

guilty of an offence punishable with imprisonment for two years or, a fine of K20, 000 in the

case of a body corporate.98

The MMA provides similar offences and penalties, with slight

variation for the liability of a body corporate pegged at K30, 000.99

In other jurisdictions

such as India, the offence of providing false information attracts the penalty of a hefty fine

to the exclusion of imprisonment.100

The MMA creates additional offences prohibiting illegal possession of reserved minerals.

The penalties are a fine of K1, 000 and imprisonment for a term of two years, and in the

95



Cap 7:01 of the Laws of Malawi 98

See section 76 99

See section 127 100

See section 17 of the Indian Oil and Gas Act 1999, stipulating a fine of not less than $100,000

45

case of a body corporate, a fine of K20, 000.101

If the intention is to achieve a well

regulated and easily monitored mining sector, it is clear that the penalties incorporated

under these two laws are on the lower side and may not promote compliance to achieve the

intended objective. There is therefore an urgent need to revisit these penalties to create a

coherent regime of penalties.

The EMA prescribes penalties for failure to prepare an EIA report or knowingly giving false

information in such report. The penalties are a fine of not less than K5,000 and not

exceeding K200,000 and to imprisonment for two years.102

There is need to remove the

discretion conferred on the Minister in the PEPA regarding the issue of EIA and introduce

provisions to penalise failure to prepare an EIA in view of the hazards associated with oil

mining.

It is also important that for serious contraventions of law or contractual provisions such as

environmental non-compliance, failure to comply with work programmes, transfer of

licence without notification to the government, the Government should be empowered in

legislation to suspend operations. This would be an important deterrent to companies.

8 Conclusion

This legal and policy audit has sought to compare the policy, legislative and institutional

regulatory framework of oil mining in Malawi against applicable international and regional

instruments and other emerging practices for adequacy, efficacy and efficiency. The audit

has revealed serious deficiencies necessitating urgent attention in view of Government’s

identification of the mineral sector as one of the priority sectors for economic growth and

development. The need to introduce comprehensive provisions and harmonise the laws

regulating the mining sector in general, and the petroleum industry in particular, is apparent

in view of the fact that Malawi is progressively becoming a premier destination for

international mining, oil and gas industry. The current efforts to revise the MMA Act; to

develop a Minerals Policy; and the recent launch of the Mining Governance Support Growth

Project 2013 are all steps in the right direction. However, it is critical that Government

should take steps to revise the PEPA in relation to the following issues among others: the

licensing authority and licencing procedures; definition of revenue, revenue collection

including the fiscal regime; the legislative and policy framework in relation to the

environment, including the promulgation of relevant regulations; the legislative and policy

framework relating to public health; and the offences and penalties regime. There is also

urgent need to enact new legislation to regulate oil taxation and oil revenue in general in

terms of scope, collection and utilization.

101

See section 101 102

See section 63

46

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Liquid Fuels and Gas (Production and Supply) Act (Cap 14:01 of the Laws of Malawi)

http://www.elsevier.com/locate/resourpol

http://www.dundee.ac.uk/cepmlp/journal/html/Vol

48

Mines and Minerals Act (Cap. 61:01 of the Laws of Malawi)

National Parks and Wildlife Act (Cap. 66:07 of the Laws of Malawi)

Occupational Safety, Health and Welfare Act (Cap. 55:07 of the Laws of Malawi )

Petroleum (Exploration and Production) Act (Cap 61:02 of the Laws of Malawi)

Registered Land Act (Cap.58:01 of the Laws of Malawi)

Taxation Act (Cap. 41:01 of the Laws of Malawi)

Local Government Act (Cap. 22:01of the Laws of Malawi)

Water Resources Act (Cap. 72:03 of the Laws of Malawi)

GOM, National Energy Policy (2003-2011)

GOM, National Environmental Policy Ministry of Mines, Natural Resources and Environment

June 2004

Regional and international legislation and Instruments

Africa Charter on Human and Peoples Rights (ACHPR) Adopted June 27, 1981, OAU Doc. CAB/LEG/67/3 rev.5, 21 I.L.M. 58 (1982), entered into force Oct. 21, 1986

Oil and Gas Act of India

Petroleum Act 1990 of Nigeria

Petroleum Profits Tax Act 1990 of Nigeria

Petroleum Act of Northern Territory of Australia 2011

Petroleum Revenue Act 2011 of Ghana

Petroleum (Exploration and Production) Act 2001 of Sierra Leone

Petroleum (Exploration and Production) Act of 1991 of Namibia

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Documents

Policy and Legal Audit - Mining in Malawi · 3.2 The taxation regime for oil mining is grossly inadequate. Government should either enact a law specifically on oil mining taxation