Trends in oil contracts By Dr. Mohammed Amin Adam

1. Global Trends in Oil and Gas
Contracts
Mohammed Amin Adam
GIMPA, Accra
27 JUNE 2013

2. The basis for a petroleum contract
• Petroleum in its natural state belongs to the
state
• Investors invest money to explore for oil,
develop and produce
• Petroleum industry is risky, hence the need to
apportion risks between the state and the
investor
• This is through a contractual agreement

3. The basis for a petroleum contract
• A model contract contains
– Ownership rights
– Rights acquisition – and periods for exploitation
– Share of costs
– Share of petroleum
– Fiscal terms
– Measurement of petroleum
– Environmental protection
– Health, Safety and Environment
– Decommissioning
– Local content

5. Global Choice of Contracts

6. Global Contractual Issues
• Major Issues
– Changes in Fiscal Regimes
– New Environmental Codes (gas flaring, spills, etc)
– Contract Transparency
– Stability of contracts
• Others
– Local content
– Corporate Social Responsibility & Community rights

7. Fiscal Regimes
• Except in a few countries in the world, the State is the owner
of petroleum resources in the subsoil.
• Governments have responsibility and the right to maximize the
benefits from the exploitation of petroleum resources for the
benefit of the state.
• The word “fiscal” includes all government revenues from
petroleum exploitation
• The government revenues as a percentage of the total divisible
income (revenues less costs) is defined as “government take”
• Misunderstanding between ‘Government Take’ and
‘Government Revenues’
• In this presentation, they are used interchangeably.
7

8. Trends of Government Take
• 1974 – 1984: strong increases in government take:
- Increase in oil prices
- Reduction in acreage through nationalizations
• 1984 – 2003: decreases in government take:
- Decrease in oil prices
- Expansion of acreage (political, technological)
• 2003 – 2010: increases in government take:
- Increase in oil prices and also greater volatility of
oil and gas prices
- No more new acreage
- New discovery countries free-riding high
government take regimes
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9. Trends in Government Take
2003 – 2010
• Different methods in different countries.
• A number of countries had already created fiscal systems that
automatically resulted in a higher government take under higher
oil prices (Progressive Additional Oil Entitlements). Examples:
– Angola
– Malaysia
–Trinidad and Tobago
– India
– Libya, and
– Russia
• Using the bid system for new acreage to increase terms: Libya,
India
• Creating higher levels of state participation: Venezuela,
Algeria, or
• New legislation and renegotiations: Nigeria
9

10. Future Trends in Government Take
• The main trends in the structure of the oil and gas
government take are the following:
– Reduction of corporate income tax rates
– Globalization of VAT
– Possible wider introduction of carbon taxes
– Reduction of import duties and cost base taxes
– More emphasis on price sensitive fiscal features
–Transition to fiscal structures designed for “expensive”
oil and gas resources
• Oil fields production is declining
• Oil and gas development costs increasing
10

13. Conventional Oil Discoveries and Production
World Wide

14. Proven Oil Reserves in Top 15 Countries, end -
2009

15. The Environment
• Contracts contain provisions for Environmental Impact
Assessments and decommissioning (or abandonment)
– They establish the baseline for subsequent allocation and
apportionment of environmental costs and responsibilities within
contracts.
– Respond to International Environmental Conventions
• Remedial provisions for environmental issues in contracts are:
– The ‘’polluter-pay-principle’’
– ‘’Best practises’’ clause
– ‘’Industry standards” clause
– ‘’Oil companies country standards’’ clause
• New Environmental Codes emerging
– Climate change considerations
– Change in bargaining power of mature producers
– The BP oil spill in the Gulf of Mexico

16. Environment: Future Trends in Contracts
• Introduction of Carbon taxes
• Strategic Environmental Impact Assessments are becoming
popular in developing countries
• Exclusion of environmental requirements from stability clauses.
E.g. Kazakhstan’s oil and gas contracts have not extended
stabilisation provisions to environmental requirements
– The State and civil society argument
• Evolving nature of environmental issues globally
• Environmental penalties have become increasing sources
of revenues for local authorities
– Oil companies raise issues of uncertainty
• Mandatory Environmental reporting (IFC Environmental
disclosure)
• Consultations with communities on Decommissioning Plans
(World Bank, 2009 – Environmental Resource Management)

17. Some Best Practices (Lowe & Anderson, 2010)
Provision Best Practice
Environmental
Impact
Assessment
Reference to applicability of domestic environmental legislation
· Requirement that EIA be conducted by a reputable firm that is approved by
the environmental ministry
· Requirement for community consultation
Protected Areas · Prohibition on entry to or passage through protected areas without
express permission of the environmental ministry
Emergencies &
Spills
· Requirement for a contingency plan
· Requirement to immediately notify government when accident/spill occurs
· Requirement to take immediate and appropriate action
· Stipulation that if action is not taken by the contractor the state can step in
and charge the contractor for expenses
Flaring · Prohibit except in emergencies
Liability, Indemnity
&
Insurance
· Strict liability for environmental damage
· Requirement that state be indemnified for third party claims except for (i)
environmental damage existing
prior to operations; or (ii) environmental damage caused by state actors
· Development of an indemnity fund
· Requirement that insurance cover environmental damage
Transparency · Broad definition of environmental damage included in the contract
· Requirement for environmental reporting

18. Transparency and Contracts
• Principles of transparency require that there should be:
– access to information
– rights of public participation (right to comment on oil and
gas Contracts)
– Right to monitor their implementation
• Confidentiality in Contracts
– Most Contracts contain commercially sensitive information
– There are moves to limit confidentiality to technical
provisions
– E.g. Ghana’s Petroleum Commission Act, requires public
reporting on most operational aspects of Contracts
– In some countries, there is Confidentiality reversal –
Norway (1981 vrs 2002) Columbia (1987, 1998 vrs 2005,
2006 for 5 yrs)

19. Transparency - Current Global Trends
• Contract disclosure is becoming very important. E.g. Liberia,
Timor Leste and Ghana – published contracts
– Mandatory Disclosures required in Ghana
• Open bidding process on the increase - Libya, India, Brazil
• The EITI and United States’ Dodd Frank are changing the trend
in contract transparency ( payment disclosure requirements
by companies)
• Now EU Transparency Directives
• Open contracting initiative
• Some countries have legislated transparency – Freedom of
Information laws
• But Stabilization clauses remain challenges for new
legislations

20. Contract Stability
• ‘Stabilisation clauses’ in oil and gas contracts are legal devices
that foreign investors commonly use to manage so-called
‘non-technical risks’. Used in contracts with host countries:
– Where there is considerable political, regulatory or
institutional uncertainty
– when standards addressing potential impacts of the
investment have not been developed in host states.
• Why Stabilization in petroleum investment contracts?
– Investments are Long term
– Investments are capital intensive
– The risks of vulnerability in petroleum investments are
very high
• Origin – the period of nationalizations in Latin American
countries

21. Forms of Stabilization
• Freezing clauses – Applicable law will be the law in effect on the
Effective Date of the Contract – In Angola and Tunisia contracts, no
laws on fiscal and non-fiscal terms can be changed during contract
period.
• Intangibility clauses – Contract cannot be modified/amended
except by mutual consent of the parties
• Allocation clauses – NOC bears fiscal risk
– NOC pays all taxes and royalties out of its share
– NOC pays all taxes and royalties regardless of its source of funds
– NOC indemnifies IOC for IOC’s payment of taxes and royalties
• Renegotiation clauses – Parties agree that in the event of change of
circumstances or law, they will negotiate to modify contract to re-
establish economic equilibrium
• Adoption clauses – Contract provision that calls for host govt to
adopt parties’ agreement as the law

22. The Future of Stabilization
• Increased constitutional democratization (rule of law) in the
governance of countries reduces relevance of stabilization
• Legislative amendments in the sphere of defence, national
security, the environment/environmental safety/ecological
security and public health are excluded from the scope of
stabilisation guarantees.
• Negotiated self-contained and/or stabilised normative
regimes

23. Local content
• Benefits from oil and gas to local economic development
depends on:
– The transfer of technical skills by oil and gas companies
– The extension of the buying power of oil and gas
companies to local businesses
• The main issues
– the role of law versus voluntary initiatives
– Broad provisions in the Petroleum Law and regulations
– Comprehensive local content law to enforce compliance
– Protectionism or competitiveness
– Issues of international standards remain a challenge

24. The Argument for Local Content –
Protectionism versus Competitiveness
• Protectionism: the economic policy of restraining
trade between states, through methods such as
tariffs on imported goods, restrictive quotas
(including Local Content targets), and regulations
designed to discourage imports
• Competitiveness: a comparative concept of the
ability and performance of a firm or country to
sell and supply goods and/or services in a given
market

25. Protectionist Local Content
Regulations
• Infant industries Argument
• Providing breathing-space to catch up – nascent
industries often do not have the economies of scale of
older competitors from other countries, and need to
be protected until they can attain similar economies of
scale.
• Market Power Argument
• Powerful international contractors with global sourcing
arrangements and repeat use of preferred suppliers
may lock-out fully capable and competitive domestic
suppliers

26. Protectionist Local Content
Regulations
DegreeOfProtection
T0 T1
Infant Industry Argument
Protected Local Industry
Source: Michael Warner Local Content in Procurement

27. Reconciling protectionism and
competitiveness
• Protectionist Preferential Clause
• “Where a Nigerian indigenous company has the capacity to
execute a contract it will not be disqualified for the sole
reason that it is not the lowest financial bidder provided the
value does not exceed the lowest bid price by 10%”.
• Competitive Concession Clause
• “Give preference to local contractors and locally
manufactured materials and equipment so long as their
performance, quality and time of delivery are competitive
with international performance and prices”
• There must be a progressive move from protectionism to
competitiveness

28. From Protection to Competition

29. The case of Trinidad and Tobaggo

30. Corporate Social Responsibility and
Community Rights
• Governance of companies’ social investment programmes, and
their contributions to skills transfer, community development
and education, are also mandated, in a variety of ways, by oil
and gas contracts.
• The concept of ‘’Social license’’
• The social investment contributions provided for under the
terms of oil and gas contracts may be significant source of
revenue for regional authorities in regions where oil and gas
developments takes place
• The focus
– Common provisions mandate spending on educational and
training efforts
– tax incentives for this kind of spending work are provided
– contain provisions on community relations

31. Future Trends in CSR
• The current debate over CSR to define future trend in
contracts
– Community development is responsibility of Government
and not companies
– Issues of cost recoverability in respect of social and
community investment programmes may deny
Government significant revenues
– National regulations for CSR to ensure compliance with
national policy
– Integration of CSR into local development plans
– Land rights and compensation must follow the principles
of ‘’Free Informed Prior Consent’’

32. DISCUSSIONS
maminadam@acepghana.com