Oil and Gas in Algarve - focus on oil contracts

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© 2014 – ASMAA – Algarve Surf and Marine Activities Association© 2015 – ASMAA – Algarve Surf and Marine Activities Association All rights reserved.

PETROLEO E GAS NO ALGARVE

OIL AND GAS IN THE ALGARVELET’S TALK OIL

CONTRACTSLaurinda Seabra

30 May 2015 - Faro


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© 2014 – ASMAA – Algarve Surf and Marine Activities Association

TYPICAL OIL CONTRACTS

OIL INDUSTRY LEGAL CONTRACTUAL FRAMEWORK


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TYPES OF CONTRACTS IN THE OIL INDUSTRYSeveral types of oil contracts are in use throughout the world1.Concessions or Licenses in which the contractor owns the oil/gas in the ground in return they are required to pay royalties, taxes and fees to government; 2.Production sharing agreements (PSC/PSA) in which the contractor owns a share of oil/gas only once it is out of the ground – meaning they only have a share of any profit with the government recouping the balance of profits as well as collecting royalties. The IOC pays taxes and fees as well.3.Risk-service contracts in which the contractor receives a fee for extracting the oil/gas from the ground (service contracts are often depicted as a subset of PSAs); IOC’s often have the right to buy extra production.and any of the above may be subject to a Association or a Joint Venture (JV) in which the state enters into partnership with one or more oil companies.



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WHAT THEY HAVE IN COMMON?All oil contracts must address two key issues:•How profits, often called "rents", are divided between the government and participating companies, and•How costs are to be treated.

Latest development – Guidelines - not enforced yet:•Oil and Gas Sector Guide on Implementing the UN Guiding Principles on Business and Human Rights•The EU Directive on Safety of Offshore Oil and Gas Operations



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CONCESSIONS• Concessions are the oldest form of a petroleum contract, having first been developed during

the oil boom in the United States in the 1800s.

• Concessions are often one-sided contracts favouring companies.

• Concessions are based on the American system of land ownership, in which a land owner owns all resources in the ground under the land he owns and theoretically all resources in the air above it.

• Concessions grant an area of land, sub-soil resources included, to a company so that if a company discovers oil on a piece of land, it owns that oil.

• In concession contracts the contractor also has exclusive rights to explore and prospect for oil in that pre-defined area.

• While the benefit to companies comes directly in the form of ownership over any oil and gas found, governments granting concessions benefit in the form of taxes and royalties on oil and gas produced.[5]

• Companies compete by offering bids, often coupled with signing bonuses, for the license to these rights.

• This type of agreement is quite common throughout the world and is used in countries such as Kuwait, Sudan, Angola, Ecuador and Portugal.

WHAT DOES THE EU SAY?OIL INDUSTRY LEGAL CONTRACTUAL FRAMEWORK

http://wiki.openoil.net/index.php?title=Types_of_Oil_Contracts


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CONCESSIONS ADVANTAGES & DISADVANTAGES• For governments, concession contracts have the advantage of being more straightforward

than other kinds of agreements, and the degree of professional support and expertise required is often less complex than that needed to negotiate joint ventures or PSAs.

• Also, the host government keeps the fees paid by the contractor regardless of whether oil is found and commercial production takes place.

• All financial risks of development, including the costs of exploration, are absorbed by the contractor.

• The main disadvantage, for governments, of concession contracts is that companies bidding for the contract tend to be more cautious in their bids.

• If oil and gas reserves are not proven then there is no guarantee that a company's costs will be covered, so the host government may not maximize its potential return.[7]




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PRODUCTION SHARING AGREEMENTS• Production sharing agreements (PSAs), sometimes called production sharing contracts (PSCs),

does not vest a contractor with ownership over the oil/gas in the ground; Ownership of the resource lies with the state.

• In this situation the PSA is drafted so that a contractor can extract the government's oil/gas on behalf of the government.

• The PSA was first used in Indonesia in 1966, when the government decided to maintain ownership of the oil in the ground, so that the international company had the right to explore for oil but gained the right to own it and sell it (or a portion of it) once it had been extracted.

• In Indonesia, according to Revenue Watch, the concession licensing method had been discredited as a legacy of imperialistic and colonial periods and the PSA system was developed in the context of a broader movement of "resource nationalism" among oil-producing countries worldwide.

• Since that time PSAs have spread globally and are now a common form of doing business, especially in Central Asia and the Caucasus.[9]

• Oil companies are entitled to cost recovery for operating expenses and capital investment, and receive money from annual earnings - "cost oil" - to this effect. Once the companies have used annual earnings to repay themselves, the rest - "profit oil" - is shared according to the agreed percentage division with the host government.[10]





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PRODUCTION SHARING AGREEMENTSAdvantages and Disadvantages

•All financial and operational risk rests with the international oil/gas companies in the PSA arrangement, and a host government has the added advantage that it shares any potential profits without having to make an investment, unless it agreed to do so.

•A disadvantage of the PSA for host governments is that it puts a premium on highly professional negotiations, and the government must have access to technical, environmental, financial, commercial, and legal expertise.



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SERVICE CONTRACTS• Like a PSA, a service contract does not give an ownership right to oil in the ground.

• Unlike a PSA, in a service contract the international company never actually gains ownership, or "title", to the oil produced either.

• In these cases the company is simply paid a fee for its services in extracting the government's oil.



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JOINT VENTURES• Another arrangement, sometimes considered to be a fourth type of contractual

arrangement, is the joint venture (JV), which involves the state, through a national oil company, entering into a partnership with an oil company or a group of companies.

• The JV itself is in this case awarded the rights to explore, develop, produce and sell petroleum.

• Because there is no commonly-accepted form or structure for JVs, they are less commonly used as the basic agreement between an oil company and a host government.

• JVs require host governments and companies to do things jointly, so if the parties fail to work together the negotiations can be painstaking and disagreements common.



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JOINT VENTURESAdvantages and Disadvantages

•For the government, the only advantage of a JV is that it is not alone in decision-making on oil and gas matters and can count on the expertise and shared stake of a major international company.

•One of the main disadvantages of JVs is that they require more extended negotiations and require much more legal advice because their format is so ambiguous.

•Additionally, costs must also be shared between the parties, meaning that the host government is a direct and responsible participant in the natural resource extraction, and responsibility also brings with it liability, including for environmental damage.



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TYPICAL CLAUSES

DEEP OFFSHOREOIL INDUSTRY LEGAL CONTRACTUAL FRAMEWORK


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ENVIRONMENTAL STANDARDS CLAUSESMost contracts should have a section on the environmental standards to be applied to the project:

•Ref to domestic environmental laws

•Ref to international industry standards

•Ref to international (EU) environmental agreements

•Development of project-specific environmental standards

“Problem statements without definitions”

•Good oil field practices

•Good production practices

•Generally acceptable standards

How to measure it?



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STABILIZATION CLAUSES• They come in a variety of forms

• They “freeze” the law that applies to the investment at the time the contract was signed.

• It can also be written to allow for “economic equilibrium” which requires a government to restore the balance of risks and rewards when these are challenged by new regulations or laws.

But these clauses can in fact “leave-out” such issues as environmental protection amongst others – unless written with a caveat.

“provided however that no amendment to this agreement shall be required as a result of (o) change to Laws concerning health, safety or environmental protection that cause sch laws to be consistent with international standards for health, safety or environmental legislation and are applied on a non-discriminatory basis”

Although not a perfect clause it is better than the ones that are worded in such a broad manner that stifles any future regulation that might be perceived to undermine the profitability of an investment, including efforts to address corruption, safeguard human rights and to protect the environment.



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ENVIRONMENTAL IMPACT CLAUSES• EIA’s should be a part and parcel of the entire life-cycle of the project and not just for

“approval” of a project.

• The World Bank has raised concerns that they are excluded from many contracts.



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ACESS TO PROTECTED AREAS• Many governments are prepared to sacrifice “off-limits” areas and Portugal is no different.

• NGO’s battle areas.



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ACCESS TO WATER & OTHER NATURAL RESOURCES• All operations requires natural materials during construction phases, and access to

significant amounts of water and electricity.

• For example: giving access for “free” the use of water and to impound surface waters or allow for the “free” use of sand, water, electricity and any other natural resources located inside or outside the contract area of the operations.



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GAS FLARING• In a World Bank report in 2004 – it was estimated that every year 110 billion cubic metres

was being flared (enough to power Germany and France for 1 year)

• Many contracts fail to address the “flaring” monitoring requirements.

• Justification is that it’s not economically viable.

• Very seldom is “flaring” included in contracts to be used only in emergency orsafety reasons.



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EMERGENCIES AND ACCIDENTS RESPONSE• Up to 2008 – 32 companies reported nearly 3000 spills greater than one barrel in size,

releasing over 19,000 tons into territorial and marine environments

• The contract should make provision for either within the EIA’s or separate from it for an emergency response plan by the contractor as part of the project agreement.

• The emergency plan should cover:

• Notification

• Response

• Consequences for failure to respond

• Notification should be to government and to local communities



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LIABILITY, INDEMNITY & INSURANCE• Provision should be made for who is responsible for what.

• The what should cover the types of harms (death, injury, environmental damage, pollution, etc.)

• The legal form of liability (fault, strict or absolute)

• Whom the contractor is liable – liability to the country and liability to third parties

• Insurance coverage requirements

• Poorly defined clauses leaves much room for “interpretation”

WHAT DOES THE EU SAY?


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DECOMMISSIONING & REMEDIATIONWhat happens when the operation reaches the end of production?

-Clauses need to specify what, where and how – and whom will be responsible.

-Performance mechanisms such as performance bond or a reserve fund …



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ROYALTY FEES, RENTS, CONTRIBUTIONS, ETC• Contributions annually to universities, etc

• Use of local labour

• Use of local suppliers

• Scholarships, etc

• What costs are allowed and disallowed, etc



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LOOKING FOR ANSWERS

WE WANT ANSWERS! HOW ABOUT YOU?QUEREMOS RESPOSTASE VOCES?


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ACT - PARTICIPA


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Understanding Oil Contracts

Download the book on this linkhttp://openoil.net/understanding-oil-contracts/

FURTHER READING …


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THANK YOU FOR YOUR TIME.MUITO OBRIGADA

YOU HAVE BEEN A TERRIFIC AUDIENCE …


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End of presentation

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Oil and Gas in Algarve - focus on oil contracts