Unit 4: Contract Negotiation and Legal Framework Session xxx

1. Unit 4: Contract Negotiation and Legal Framework Session xxx

3. Contents & Objectives

4. Content Unit 4: Contract Negotiation and Legal Framework • Objectives : please fill in the objectives of this Unit. Learning goals are displayed on the next slide • Topic 1: Components of the regulatory environment of extractives contracts • Topic 2: Optimising government position within a • Key questions • Further reading/resources

5. What you can expect to learn from this Unit • You will gain an understanding of the implications of one contract type compared to another • You will learn about the components of a contract which interact to produce the overall result • You will learn about the legislative framework across the extractives sector, including stabilisation clauses • You will gain insights to the influencing factors for extraction decisions

6. Contract Negotiation and Legal Framework

7. Four Rules of Thumb About Extractives Contracts Rule of Thumb 1: Contracts live in a complex natural habitat Rule of Thumb 2: Negotiation is permanent Rule of Thumb 3: There is a lot not in the contracts Rule of Thumb 4: Contracts are a tangled web of interlocking parts

8. The difference between theory and practise… stories from the field… Secrecy: in many countries, even the minister of finance has not seen the contracts Random circumstance: a bid round failed because a phone message was not passed on The government’s task in negotiating is inherently more complex than a company’s – more issues and more actors need to be brought together. In addition to the line ministry and state companies, joined up government would require (potential) involvement of: finance, environment, labour, justice ministries, the revenue authorities, the auditor-general, the customs office, investment authorities, sub-national government authorities… and others! “Blind negotiation” – negotiating without number crunching Because negotiation is permanent: there should be as much emphasis on monitoring what is actually happening now as there is on negotiating what is supposed to happen in the future.

9. Rule of Thumb 1: Contracts in their natural habitat National Legal Framework Secondary legislation, or regulations Sector laws: the Petroleum Revenue Bill, or the National Mining Act General laws: environment law, labour law, investment law The Constitution: may specify characteristics of natural resource management International legal framework Bilateral investment treaties (over 4,000 exist in the world) Multilateral conventions: e.g. World Trade Organisation

10. Relative importance of the contract document Source: OpenOil, 2014

11. Rule of Thumb 2: Contract as permanent negotiation “Let’s talk about that later, or in another place” Future discoveries within the same exploration area Accounting Procedures (e.g. depreciation rules, tax status of decommissioning) How much the commodity is worth: “formula”… Placeholder Language “generally accepted international practices” “diligent” “prudent” “best efforts” The contract is a framework for permanent negotiation within it, not a set of results aka “marriage”

12. “As soon as is reasonably practical…” Source: OpenOil, 2014

13. Contracts themselves have renegotiation clauses Source: Daniel Johnston, International Petroleum Fiscal Regimes, 1994

14. Rule of Thumb 3: What Contracts don’t contain Predictable financial results – for either side Fiscal regimes are formulae at best – not hard numbers Everything depends on price – and even fixed contracts are tied to market indicators Costs: These will affect profits – and so taxes – but are not quantified in the contract Technical and Geological Data Knowledge of the resource increases during the lifetime – after the contract is signed Understanding of the technology – and cost – needed to produce is far from complete

15. How prices are specified in the contract Source: government of Ghana, (contract released)

16. Technical Data in Afghanistan oil contract 1 Source: government of Afghanistan, (contract released)

17. Technical Data in Afghanistan oil contract 2 Source: government of Afghanistan, (contract released)

18. Rule of Thumb 4: the Contract as a complex interlocking web Iraq model oil contract, 2009-10: The re-entry of international oil companies into the country after 40 years absence Massive oil fields lying un- or underproduced Low cost base: under $10 a barrel to produce Sample question: when does the contract start, and how long does it last?

19. Iraq “paperchase”: when does the contract start? Source: government of Iraq, (model contract released)

20. Iraq “paperchase”: when does the contract start? Source: government of Iraq, (model contract released)

21. Iraq “paperchase”: when does the contract start? Source: government of Iraq, (model contract released)

22. Iraq “paperchase”: when does the contract start? Source: government of Iraq, (model contract released)

23. Iraq “paperchase”: when does the contract start? Source: government of Iraq, (model contract released)

24. Iraq “paperchase”: so what’s the answer? Initially it lasts for 20 years But it does not start when the contract is signed • The contract needs to be ratified • The two parties need to have agreed on a production rate That initial period could be extended if there is Force Majeure It could also be extended for another five years – under new terms – if there is an agreement later on

25. But contracts are increasingly standardised – and follow project logic Source: OpenOil 2014

26. Rule of Thumb 4: the Contract as a complex interlocking financial web Source: Daniel Johnston, International Petroleum Fiscal Regimes, 1994

27. Gov’t revenues: which terms bring most money over project life? Source: OpenOil Pedagogical model, 2016

28. Answer: same amount of money, different revenue streams Source: OpenOil Pedagogical model, 2016

29. Answer: same amount of money, different revenue streams Source: OpenOil Pedagogical model, 2016

30. Results financial modeling have yielded for governments… West Africa: a five year tax holiday costs $110 million in one gold mine Central Africa: pricing a new field like an old one costs the government $200 million East Africa: a company may successfully resist paying income tax because of a cost allowance agreed 20 years ago Asia: making price hedging by the company tax deductible cost $300 million Latin America: an offshore oil field won’t be profitable under current cost assumptions Southern Africa: a shuttered uranium mine is never going to re-open

31. Different modes of contracts in oil & mining: a 5-minute history Concessions: companies paid only a “royalty” – 12.5% in the Gulf Independence in the global South: resource nationalism demands ownership Oil: the Production Sharing Agreement Oil and mining: state owned enterprises taking a share in operations and/or equity High rollers with strong market position: the service contract • Companies own none of the resource, and are paid only for their service in extracting • BUT: often mistaken assumptions that this leads to more money for the government Today: over 350 fiscal regimes throughout the world – nearly two per country!

32. Other major standing clauses & controversies in extractives contracts The role of State Owned Enterprises Linking extractives projects to broader development • Local Content • Shared Infrastructure • Beneficiation Environmental and social impact Legal Matters • Arbitration and disputes • Stabilisation clauses • Confidentiality

33. Exercise: a Contract Paperchase