Monetization Strategies for Joint Development of Border Fields in MENA Region

1. Monetization Strategies for Joint Development of Border Fields in MENA Region Presentation delivered before the 12th MENA Oil & Gas Conference, organized by Target Exploration, Imperial College, London, UK. 18-19 September 2019 Ahmed Mousa Jiyad, MENA/ Development Consultancy & Research, Norway Email: mou-jiya(at)online(dot)no AMJ I/DC&R

2. Acknowledgment and Disclaimer I am thankful to Target Explorationfor the kind invitation to attend this important Conference. The contents of the presentation are my own responsibility and thus do not represent the views and positions of any entity referred to therein and/or involved directly and indirectly in organizing this event. This contribution is for public knowledge and thus it is not intended to be and should not be construed as recommendation and/ or advice in any “legal” aspect. AMJ I/DC&R

3. Necessary Caveats & Basic Issues 3Gs’ Necessary caveats: Geology knows no borders- (political/administrative); Geography is sovereign; Geopolitics is circumstantial. So far, cross-sovereign border fields/blocks have been source of conflicts, contentious and acrimonious relationship; it’s about time to pursue the other mutually beneficial approach whenever possible and feasible. Development of sovereign border fields/blocks should have a priority regardless of the "comparative economic feasibility" that determine priorities and sequences of fields’ development and their timing. That is premised on the international experience with the "rule of capture" and the rationale of “use it before lose it” Development Strategies for Sovereign Cross-Border Fields/ Blocks are: Unilateral & Competitive OR Bilateral & Collaborative (Voluntary Unitization) Provincial/Regional (Sub-National) shared fields/blocks are subject to Mandatory Unitization; TELG approach is relevant & useful for both types of Unitization, but indispensable for assessing investment options regarding Sovereign Cross-Border Fields/ Blocks- Voluntary Unitization. AMJ I/DC&R

4. The Scale & Magnitude of Border Fields/Blocks in MENA Region • It is a matter of too many fields/blocks, billions BOEs of proven O&G reserves, with more to come, and Billions of Cash Flows! • Iraq has (24) border oilfields with Iran, Kuwait and Syria; • Iran has (23) border O & G fields/blocks with Iraq, Saudi Arabia, Kuwait, Qatar, UAE, Oman, and Turkmenistan. • Saudi Arabia-Kuwait NZ (Al-Khafji & Al-Wafra); • The Mediterranean: Lebanon vs. (Israel); Cyprus vs. Turkey**; Egypt vs.!! • Red Sea: Egypt vs, Sudan (HalayibwaShalateen) • Other MENA countries……. AMJ I/DC&R

5. The Essence of Soverein Border Fields Extraction • Two (or more) Countries have a common hydrocarbon structure; its asymmetric exploitation would lead to externalities because of resource (O&G) migration. • They face a kind of Hotelling game with optimal choice of well locations near the border. • There is an incentive to move closer to the border for strategic capturing of resource from the other country, even when cost of doing so is high. • Using directional drilling expedites and maximize capturing gains. AMJ I/DC&R

6. Basic StrategiesforSovereign Cross-Border Fields Development Unilateral & Competitive Bi/trilateral & Collaborative Feasibility, Optimization & Economies of Scale; Adheres to prudent natural resource management and international best practices; “Bi/trilateral inclusivity”; “Mutuality of interests”; “Phasic orientation” ; “Burden-sharing”.; Multiple Agreements/ Contracts/ JOAs & Unit OA (or Super JOA); Multiple Operators & one Unitization Operator (Unit Operator); “Win-Win” & voluntary; Difficult, Complex, Time-consuming & susceptive to procrastination tactics. • “Use it or lose it”/ “Rule of Capture”; • Harmful to the field, its structure and reservoir(s)/ fast & premature depletion; • “Sovereign exclusivity”; • “Conflict-prone”/geopolitical leverage; • “Short-term focused”; • “Own-risk” ; • One Contract/JOA; • One Operator; • “Zero-sum-game”; a kind of Hotellinggame. • Premised on (Modeled) one contract AMJ I/DC&R

7. Phases of Cross-Border Unitization Agreement AMJ I/DC&R

8. “Specifics” version of Unitization Agreement for A & B; why? AMJ I/DC&R

9. TELG Approach for Unitization Agreement: Components, Team Composition and Function AMJ I/DC&R

10. SCOR Analysis for TELG Approach AMJ I/DC&R

11. The main functions, working procedures, modus-operandi and role of each group in the team working need careful identification, division of labor & responsibility and adherence. AMJ I/DC&R

12. Provincial/Regional Unitization Agreement-P/RUA • Rationale for P/RUAs is very different: efficiency of operations; cost effectiveness; avoidance of competitive duplicating activities; economies of scale and prudent resource management to ensure maximum recovery of petroleum. • P/RUAs, unlike SCBU, are mandatory; hence, MoO has to prepare the model for these domestic unitization agreements and make them ready for adoption when related IOCs fail to unitize voluntarily. • Also, MoO should consider options in case the discovery extends beyond the block boundaries to uncontracted adjacent area. • For P/RUAs, there is a need for minor modification to TELG by adding Domestic “politics”-D instead of geopolitics. Domestic politics addresses provincial/ regional concerns emanating from unitization effects. AMJ I/DC&R

13. Unitization Provisions in IMoO’ ELTSCs: • MoO ELTSC (BR4/5) contains provisions regarding «Unitization and Redetermination Agreement-URA»; it distinguishes between the case in which «Discovery» extends beyond the boundary of the «Contract Area or any Development Area» within the sovereign boundaries and the discovery that extends «across international borders»; • “In the event that any Discovery extends across international boundaries, ROC shall be the Party representing Contractor in any international Unitization and Redetermination Agreement and all terms and conditions agreed thereto by ROC shall, after consultation with Contractor, be binding on Contractor. ”!!!???? • But MoO does not provide any terms of reference for or the contents & provisions of such «Unitization and Redetermination Agreement»; Ironically, provisions of ELTSC are more detailed for the P/RUAs than SCBU; • Thus, it is vital for MoO to develop the Model of «Unitization Operating Agreement-UOA» for both domestic and international purposes, since UOA involves many more issues than just “Redetermination”. • For Iraq, in addition to exploration blocks there is an urgency to develop “Special” version of unitization agreements to reflect the reality of existing “brown” and “green” border fields with similar or different development status on the other side of the borders. AMJ I/DC&R

14. Iraq, Kuwait Contract with ERCE, July 2019 • The contract singed, in Amman, after 6 years of discussions within the Iraqi-Kuwait Joint Committee for Economic Cooperation- intergovernmental entities; • Select ERC  Equipoise Pte.Ltd.UK (ERCE) from four international firms/companies (!); • ERCE prepares a technical study and legal modalities to determine the optimum capitalization of the joint field; • ERCE presents the studies within two years and half at most; • The contract covers Rumaila/Ratqaand Safwan/Abdaly. • Possible options are, according to Al-Ameedi, sole operator or NOCs of both countries or request IOCs in both sides to conclude unitization agreement (????). Who are they & why this one AMJ I/DC&R

15. UK-Norway Cross-Borders Unitization Modalities • Inter-Governmental Agreements & MoUs: 4 • Joint guidelines for developing trans-sovereign boundary O & G fields; • Involved authorities and entities: 4 in UK and 5 in Norway • Related online issue-references: 8 UK and 10 Norway • Legislations, regulations and guidelines: 10 UK and 7 Norway • Structure of a unitization agreement- 32 articles and 8 annexes AMJ I/DC&R

16. Concluding Remarks • Strategies of Unilateral & Competitive vs. Bilateral & Collaborative should be considered carefully, thoroughly and professionally when considering unitization agreement for cross-sovereign borders fields and blocks. But due to highly possible difficulties, complexities, procrastination tactics and the trilateral requirement it might be advisable to adopt a strategy of “use it until unitise it” since sovereign cross-border unitization-SCBFU is voluntary undertaking. • For provincial and domestic shared fields or blocks the guiding principles or rationale for unitization are the highest national interest of maximum, effective and efficient extraction of discoveries. Hence, compulsory unitization prevails. • For sovereign and provincial cross-border unitization agreements, TELG approach could be very helpful in assessing investment options and feasibility. As mentioned above, because of the nature of sovereign cross-border unitization-SCBFU, the TELG application for SCBFU is challenging and demanding but indispensable. • Unitization agreement should be understood as “case-specific”; it depends entirely on the details, particularities and the history of the related field/block. • Careful due diligence regarding the “Unit Operator” is fundamental prerequisite with special attention to principle of natural justice, i.e., the absent of “conflict of interest”; • Due to high-stake level of national interest, all SCBFU deliberations and related agreement should adhere to highest standard of good governance and transparency; and for SCBFU there should be legal instrument validating and enforcing the unitization agreement by both countries since such bilateral agreement fall under category of international agreements that require legislative ratification. • Strong association with Energy Charter Treaty-Secretariat helps both countries in addressing arbitration matters pertaining to unitization agreements; • P/RUAs, unlike SCBU, are mandatory; hence, MoO/Iraq has to prepare the model for these domestic unitization agreements and make them ready for adoption when related IOCs fail to unitize voluntarily. AMJ I/DC&R

17. We Should call on OAPEC, ESCWA and the Social and Economic Council (of the Arab League!!) to initiate specific actions to shed more light on Border structures (fields/blocks) in MENA region and encourage countries to pursue unitization policies; • Arab Petroleum Professionals (Technical, Economic and Legal among others) produce a “best practices”, practical “guide” and “basic model” for petroleum unitization contract or agreement benefiting from AIPN example and global experience with and literature on Unitization. • Creating database on Border structures in MENA region, convening specific workshops on the topic, writing background/research papers, issuing focused Newsletter and develop a capacity development “Negotiation Game” are a few proposals that deserve attention and consideration. AMJ I/DC&R

18. Illustrative Hypothetical Case for Negotiation Game Tract A; Tract Participation B Unitized Area A D C Discovered Structure (field/reservoir) AMJ I/DC&R • The “unitized area” is determined on the understanding of the surface extent of the reservoir based upon seismic studies and exploration and appraisal drilling or by depth (i.e. the three dimensional boundaries of the reservoir obtained through subsurface data because the field itself is a threedimensional entity). • The “tract” is the portion of the unitized area which is operated by the consortium; the initial tract participation will be expressed as a percentage. • The “tract participation” is the interest of a consortium within the discovery/reservoir which is allocated to a tract. The tract participation is expressed as a percentage and will be subject to redetermination over the life of the field

19. Thank You Q & A