Production Sharing Contracts Key Contractual Issues

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Production Sharing Contracts Key Contractual
Issues
Session IV Key Legal Issues in the EP Sector
by
Jatin Aneja, Senior Associate
amarchand mangaldas suresh a. shroff co.
Amarchand Towers216, Okhla Industrial
EstateNew Delhi-110020 Telephone [phone]
2500Facsimile 91 112 692 4900
jatin.aneja_at_amarchand.com
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PSCs Key Contractual Issues Presentation
Overview

• Legal framework
• Contractual framework
• Parties
• Term
• Participating interest and operator
• Carry
• The take
• Cost petroleum

• Production sharing and profit petroleum
• Unitization
• Environment and abandonment
• National economic interest provisions
• Assignment
• Force majeure
• Dispute resolution

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PSCs Key Contractual Issues Legal Framework

• Constitution of India, 1950
• The Oilfields (Regulation and Development) Act,
  1948
• The Petroleum and Natural Gas Rules, 1959
• Territorial Waters, Continental Shelf, Exclusive
  Economic Zone and other Maritime Zones Act, 1976
• Income Tax Act, 1961
• Customs Act, 1962
• Foreign Exchange Management Act, 1999
• Environment Protection Act, 1986
• Arbitration and Conciliation Act, 1996

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PSCs Key Contractual Issues Contractual
Framework
BIDDER 1
CONSORTIUM / CONTRACTOR
Joint Bidding Agreement
Bid
GOVERNMENT
BIDDER 2
License
BIDDER 3
Production Sharing Contract

• Work program budget approvals
• Exploration Activities
• DISCOVERY
• Notification to Government
• Appraisal and testing
• COMMERICAL
• mining lease
• Development and production

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PSCs Key Contractual Issues Parties

• For offshore areas Grant of license and lease
  by the Central Government
• For onshore areas Grant of license and lease by
  the State Government, with prior approval of the
  Central Government
• Every license or lease granted to contain
  additional terms and conditions as provided for
  in an agreement between the Central Government
  and the licensee or the lessee (the PSC)
• Where license or lease to be granted by a State
  Government merely an obligation to consult
  the State Government

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PSCs Key Contractual Issues Parties

• NELP V Special emphasis on onshore basins
• Issues and options
• In the case of onshore PSCs
• (1) delays in post contract clearances and
• (2) procurement of mining leases from the
  State Government seen as a major bottle neck
• Though concurrence already received, States
  should be better involved by
• (1) Involvement at bidding stage
• (2) Involvement as confirming parties to
  contracts

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PSCs Key Contractual Issues Term

• Exploration Phase multiple exploration periods

EXPLORATION PHASE II
EXPLORATION PHASE III
EXPLORATION PHASE I
100 of contract area less discovery areas
25 of contract areanot being discovery areas
50 of contract areanot being discovery areas
100 of contract areanot being discovery areas
100 of contract area less discovery areas
RELINQUISHMENT OF CONTRACT AREA
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PSCs Key Contractual Issues Participating
interests and operator

• Clear definition of the participating interests
  (share of rights and obligations) of the parties
• Several liability to the extent of participating
  interest alone
• Operator designated to carry out Petroleum
  Operations on behalf of contractors vide Joint
  Operating Agreement which will also deal with
• (1) establishment of operating committee
• (2) decision making and pass marks etc
• Government control over appointment and change of
  Operator

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PSCs Key Contractual Issues Carry

• Where a NOC has paid out past costs for EP
  activities
• Released from obligation to make payments to
  extent of paid out past costs contractors will
  pay additional sums, adjusted pro rata to the
  extent of shortfall
• Once such additional amounts equals paid out past
  costs, NOC will start making required payments
  under PSC
• Necessity to clarify rights and obligations of
  parties triggers, past amounts due, rights to
  benefits, etc.

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PSCs Key Contractual Issues The take
REVENUE
Royalty
Cost Petroleum
Profit Petroleum
Profit Petroleum
Tax
CONTRACTOR TAKE
GOVERNMENT TAKE
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PSCs Key Contractual Issues Cost petroleum

• Cost petroleum linked to volume of petroleum
  produced and saved and contract costs
• Control over costs a legitimate state concern
• Issues and options
• Inclusive definition - dispute Eg.- local
  community or outside contract area operations
  costs allowable? Accounting procedures unclear
• Options may be examined. For instance
• (1) Expanded, albeit inclusive definition with
  a negative definition of unrecoverable costs
• (2) Enunciation of criteria for when costs are
  acceptable

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PSCs Key Contractual Issues Production sharing
and profit petroleum

• Profit petroleum total value of product saved
  from a particular contract area calculated in
  specified manner
• Use of investment multiple
• Contractors bid on IM
• Complex proportions are intended to make sharing
  of oil more favorable to the Government at higher
  production levels

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PSCs Key Contractual Issues Production sharing
and profit petroleum

• Government option to take Petroleum either in
  cash or in kind
• Government has not really exercised the option
  to take in kind
• Inability of contractors to finalize long term
  contracts with buyers
• Justified as being mandatory under Petroleum
  Rules and Oilfields Act correct interpretation?

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PSCs Key Contractual Issues Unitization

• Article 12 - Joint Development Plan - where
  there is a common reservoir in two contract areas
  to safeguard against (1) capture and consequent
  competitive drilling along the lease lines and
  (2) for securing more effective recovery
• Internationally - Unit Operating Agreements to
  develop a common reservoir as a single unit
• Each party owns all unit property and unitised
  petroleum in undivided shares in proportion to
  unit equity
• On discovery, parties will enter in to ancillary
  agreements (1) data exchange (2) joint
  studies etc leading to a penultimate pre
  unitization agreement

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PSCs Key Contractual Issues Unitization

• On establishment of a commercial discovery,
  parties will enter in to the unitization
  agreement which supersedes the pre unitization
  agreement
• Issues and options
• Typically protracted, lengthy negotiations. If
  no unitization agreement within time period
  Government intervention. To mitigate against
  this
• (1) Incorporation of principles of pre
  unitization agreements in the MPSC
• (2) Time limits
• (3) Pre-set criteria

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PSCs Key Contractual Issues Unitization

• Other issues
• Precise definition of unit area
• Tract participation based on initial
  determination based on detailed technical
  rules - first technical determination and then
  fiscal determination
• Reevaluation of tract participation based on
  principles of re-determination at specified time
  intervals for changes above a de-minimis
  percentage if below this level, party calling
  for re-determination to bear costs
• Pass mark for fair and efficient decision
  making
• Default provisions and ancillary agreements

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PSCs Key Contractual Issues Environment and
abandonment

• Abandonment Plan
• Contingency plans and emergency operations
• All payouts to be cost recoverable what about
  penalties, fines and damages?
• Site Restoration Scheme involves a sinking fund
  and annual contributions based on estimated pay
  outs at abandonment
• Issues
• Need to examine alternatives such as securing
  payment obligations by guarantees, etc.
• Protection from absolute liability?

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PSCs Key Contractual Issues National Economic
Interest Provisions

• Local employment
• Local goods, services and resources
• Technical assistance agreements
• Data transfer
• Issues and options
• Contracts in Malaysia and China strong
  emphasis on NEIPs
• Incentivising compliance with non mandatory
  NEIPs cost recoverable vs. non cost
  recoverable

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PSCs Key Contractual Issues Assignment

• Generally - with prior approval of Government
• To affiliates with prior approval of Mgmt
  Committee
• Change in shareholding leading to change in
  control with prior approval of Government
• Link to shareholding questionable degree of
  control
• Two tier up change covered?
• Change in control other than through change in
  shareholding covered?
• Deemed approval
• Minimum participating requirement

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PSCs Key Contractual Issues Assignment

• Facilitating financing
• The broader issues of step in rights vs.
  government control
• Clarity required
• Direct Agreement?

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PSCs Key Contractual Issues Force Majeure

• Standard principles of Force Majeure apply
• Extension of time specific mention of extension
  of exploration phase and all dates stand
  extended for period of downtime caused by force
  majeure
• Extended force majeure principles?
• Differential treatment for different phases
• Minimum period of two years
• Political / non political force majeure?

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PSCs Key Contractual Issues Dispute resolution

• Governing law is Indian law
• Best efforts to settle disputes
• Certain matters reserved for determination by
  Expert
• Issues and options
• Expert is not arbitrator decisions -
  enforceable?
• Arbitration covers only matters other than
  those referred to expert backdoor to civil
  court litigation?
• Possible options include
• (1) Making decision of expert a binding
  agreement
• (2) Only recourse to expert decision
  arbitration

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PSCs Key Contractual Issues Dispute resolution

• Article 30.6 till NELP III - If circumstances
  that would otherwise result in termination are
  the subject matter of dispute resolution process
  there will no termination during the pendency of
  such process
• NELP IV onwards deleted
• Unresolved issues. For instance
• termination occurs, arbitration rules it
  invalid after a period of time and contractor
  has been expelled?
• termination occurs, arbitration rules it
  invalid and on account of interruption in
  operation economic/ physical difficulty
  resulting in abandonment no remedy?

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PSCs Key Contractual Issues Dispute resolution

• Similarly, section 1.9.7 (accounting procedures)
  - notwithstanding any reference under dispute
  resolution provisions, in case any amount is
  claimed as due to the Government, the Contractor
  shall deposit such claimed amount in a escrow
  account
• Government agreed to an amendment
• Amendment at its sole discretion Government
  may instead of requiring a deposit into an escrow
  account, accept bank or corporate guarantee
• Unprecedented One sided discretion with
  Government
• Cost of capital locked interest payments?

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PSCs Key Contractual Issues
Thank you !
Jatin Aneja, Senior Associate
amarchand mangaldas suresh a. shroff co.
Amarchand Towers216, Okhla Industrial
EstateNew Delhi-110020 Telephone [phone]
2500Facsimile 91 112 692 4900
jatin.aneja_at_amarchand.com