How to read and understand an extractive industries contract

1. How to read and understand an extractive industries contract 11 June 2014 Amir Shafaie

2. Presentation Outline 1. Legal Hierarchy and Extractive Contracts 2. Content and Typology of Agreements 3. Key questions to ask when reading an agreement A. Who are the parties? B. What is the scope? C. Financial obligations D. Work / operational obligations E. Social / environmental obligations F. “Legal” provisions – stabilization and dispute resolutioes?

3. 1. Legal Hierarchy: Extractive Contracts

4. Reality can be messier Licenses Regulations Contracts Decrees Policy Constitution Legislation International Law

5. Example: State Participation in Timor Leste Basic principle Constitution General parameters on timing, process, maximum % Legislation Regulations ??? Details on election, timing, terms Contract

6. Licenses vs. Agreements

7. Licenses and Agreements Why agreements used? • Insufficient detail in legal regime. • Need for flexibility to accommodate specificities of a sector / project. But, important principles when using agreements, in order to facilitate negotiation and monitoring / enforcement: • Still important to establish as many terms as possible in the law and regulations, rather than creating a new legal regime in each agreement; and • Do not include in provisions contrary to law.

8. Which contracts / licenses are we talking about? State Source: King & Spalding Direct NOC sales (e.g. Long Term Sales Agreements)

9. 2. Content and Typology of Agreements • Duration and extensions • Work programme obligations • Contract area and relinquishments • Contractor rights, obligations and liabilities • Discovery and appraisal • Development and production • Cost recovery, Fiscal terms/production sharing • Measurement and valuation of petroleum • Natural gas • Management of Operations • Approval of work programmes • Confidentiality • Change of ownership • Environmental protection and safety • Training • Local content • Bonus payments • Abandonment of wells and installations • Accounting procedures • Company Guarantees • Termination • Governing law and arbitration • Stabilisation

10. Types of Agreements e.g. UK, US, Norway, Libya, Tunisia e.g. Indonesia, Angola Libya, Tunisia e.g. Iraq, Iran OIL &MINERALS OIL ONLY

11. Types of Agreements

12. Global Distribution of Agreements - Petroleum Courtesy Graham Kellas

13. Fiscal Regimes are Complex Courtesy Graham Kellas

14. Concessions: Financial Flows A Revenue from Sales B Royalty: % of Gross Gross Revenue to Company Production Costs Profits C Key Green = State Share Pink = Contractor Take-Home Profit Tax After-Tax Profit D

15. Concessions: Key Issues

16. Production Sharing Contracts (PSCs) Total Oil Extracted Royalty Cost Oil Profit Oil Sales by National Oil Company (NOC) Sales by Private Companies Remainder to State Treasury NOC keeps % of sales Profit Tax

17. PSA Financial Flows: Angola A Total Oil Produced B Royalty: 10% to 20% After-Royalty Net : 80% to 90% Cost Oil Profit Oil C Key Green = State/Sonangol Share Pink = Contractor Take-Home * Profit Oil Split between Sonangol and Contractor varies by contract. Sonangol retains 10% of its revenues, reverts rest to Treasury. Sales by Sonangol* Sales by Contractor Group D Profit Tax 50% After-Tax Profit E

18. PSAs: Key Issues

19. Service Contract Financial Flows: Bolivia Crude Gas Sales by YPFB A B IDH – 32% of Gross Royalty – 18% of Gross After-Royalty Net – 50% Recoverable Costs Distributable Profits after Costs C YPFB Share* Contractor Share Key Green = State/YPFB Share Pink = Contractor Take-Home * YPFB Share in Profits ranges from 1 – 72%, based on a formula incorporating profitability, production levels, and price D Profit Tax 25% After-Tax Profit E

20. Service Contracts: Key Issues

21. Other types of agreements to be aware of Joint Venture Agreements Financing Agreements Sale / Offtake Agreements Construction / Commercial Agreements Infrastructure linked agreements Joint Operating Agreements (JOA’s) Unitisation Agreements

22. 3. Key Questions to Ask In your role within your country, what are the most important things you want to understand when you are negotiating or reading an agreement?

23. A. Who are the parties?

24. A. Who are the parties?

25. How to identify the Parties…and why it matters How? • The declarations / parties section at the beginning of the contract • The description of the shareholding of the company (sometimes in the contract or the shareholder register) But, this has limitations… Why? • Capacity - financial, technical, environmental, etc. • Anti-corruption • Source for more information on the project (website, EITI, stock market disclosures, etc.)

26. Who are the Parties? An Example Who are the parties in the Ghanaianexample? Do youseeanypossible points for concern / further investigation? Wherecouldyoufind more information on thesecompanies?

27. B. What is the scope? Use the table of contents to get a lay of the land…..

28. C. What financial obligations does the agreement include? 1. What is the Obligation? 2. Is the rule in the country’s interest? 3. Who has the responsibility for monitoring/ enforcing? 4. Where can I find data on enforcement?

29. C. What financial obligations does the agreement include? 1. What is the Obligation? • How do the fiscal terms in the contract interact with the law? • What has to be paid? • When? • To whom?

30. Example – Gold royalties in Afghanistan and Liberia What do these clauses establish? • Who? • What? • When? How do these two royalty systems differ from one another? Can we say which is better?

31. Example – Cost Oil in Azerbaijan What does this clause establish? How might this provision be significant in analyzing the overall balance of the fiscal benefits between the contractor and the state?

32. Example – Model Production Sharing Agreement in Trinidad & Tobago Say that oil is at $120 per barrel and this field is producing 60,000 barrels per day. How would we determine the profit oil split between the government and the contractor (i.e. which box would you be in)? Does this example tell us anything about the importance of adaptability in designing contract regimes?

33. D. What work obligations does the agreement include? 1. What is the Obligation? 2. Is the rule in the country’s interest? 3. Who has the responsibility for monitoring/ enforcing? 4. Where can I find data on enforcement?

34. Obligations within the exploration phase Government objectives: • Ensure the development of a seriouswork plan during exploration • Avoidspeculation and non-investmentthatfreezes attractive areas

35. Speculation – Hyperdynamics in Guinea

36. Investment decisions – Shell Exploration projects Source: Shell Five-Year Fact Book, 2005 – 2009: http://www-static.shell.com/static/investor/downloads/financial_information/reports/faoi/faoi_2009.pdf

37. Minimum investment requirements

38. Relinquishment – East Timor Model Production Sharing Contract Relinquishment of : • 25% at end of 3rd contractyear • 25% at end of 5th contractyear • Voluntaryrelinquishment • Limitations on relinquished areas and non-relinquished areas End of year 3 End of year 5 Original Area

39. Example – Work Obligations in Ghana What are the work obligations facing the contractor in this project during the Initial Exploration Period?

40. E. What social / environment obligations does the agreement include?

41. Examples – Environmental obligations of Rumaila Technical Services Agreement • Article 9.17 - Allappropriate and necessary measures to safeguard the environment and prevent or minimise the effect of pollution • Article 24.6 – Maintaininsuranceagainsenvironmental damage and injury • Article 41 – Protection of the environment • Best International PetroleumIndustry Practices and complywith Law • Environmental Impact Studies (baseline and impact, with guidelines) submitted as part of Redevelopment Plan • Article 42 – Site restoration and decommissioning

42. F. How does the agreement interact with future changes in law? What happens in case of dispute between the parties? Stabilization Dispute Resolution/ Arbitration

43. State as sovereign vs. state as party to contract

44. Stabilization Clauses What are these clauses? What is their purpose? Are there different variations? What are the differences between the stabilization clauses in from Azerbaijan andMongolia in the handout?

45. International Arbitration What are these clauses? What is their purpose?

46. Example – Arbitration in Afghanistan Who will arbitrate any unresolved dispute? Under what rules? Where?

47. Resources – Tools for assistance http://openoil.net/contracts-booksprint/ http://www.resourcecontracts.org/blog/guides-to-contract-terminology.html http://www.revenuewatch.org/sites/default/files/RWI_Enforcing_Rules_FR12.pdf

48. Thank you / Questions? ashafaie@resourcegovernance.org