UPSTREAM GOVERNMENT PETROLEUM CONTRACTS LEGAL AND COMMERCIAL TERMS August -2, 2005 August 11-2, 2005 Rio Rio de de Janeiro, Janeiro, Brazil Brazil ©

Copyright King & Spalding LLP 2005. All rights reserved. This presentation was first distributed in connection with the PSC Course 2003 held in Singapore on September 16, 2003, and has subsequently been amended. No part of this presentation may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying or otherwise without the prior permission of a partner of the firm.

I. BUILDING OUR CONTEXT: HISTORICAL AND OTHER

PERSPECTIVES

What is an Upstream Government Petroleum Contract? ¾ A contract pursuant to which the host country owner of petroleum resources (“Host Country”) agrees to compensate a foreign or domestic private partner (the “Contractor”) for taking the risks associated with the successful exploration and production of a defined portion of those resources. ¾ A tool for generating profits for investors and revenues for governments. ¾ An instrument which expresses and implements the Host Country’s energy policy and supports a number of other government policies. ¾ Only one in a greater universe of contracts required for any project to explore and develop oil and gas resources. 3

PREMISE: THE PARTIES’ OBJECTIVE: TO BALANCE THE GOALS, REQUIREMENTS AND CONCERNS OF EACH PARTY IN ORDER TO ACHIEVE AN EFFICIENT, MUTUALLY PROFITABLE EXPLORATION AND PRODUCTION OF OIL AND GAS RESOURCES

CONTRACTOR

HOST COUNTRY

But is it that simple? 4

A Historical Perspective: The Evolution of the Global Petroleum Industry: ¾The Early Years - Few Contractors, Broad Grants, Underdeveloped Regulation ¾Revolution and Nationalization - Nationalization of Foreign Investor Holdings - Renegotiation of Broad Grants and Lax Terms

OIL

- Rise (and decline) of the State-Owned Oil Company ¾To Liberalize … Or Not? - Privatization, Liberalization or Status Quo?

5

From “The Prize” 1901 Iranian Negotiations ¾ “[Englishman William Knox] D’Arcy’s man in Tehran threw another five thousand pounds onto the table, since, he reported back to D’Arcy, “the Shah wanted some ready money and stood out for some on signing the concession.” That extra money did the trick, and on May 28, 1901, Shah Muzaffar al-Din signed the historic agreement. It provided him with twenty thousand pounds in cash, with another twenty thousand pounds’ worth of shares, as well as 16 percent of “annual net profits”  however that term was to be defined. (And the definition was to prove very contentious.) In turn, D’Arcy received a concession good for sixty years, covering three-quarters of the country.” 6

The Evolution of the Global Petroleum Industry: The Liberalization – Nationalization Cycle Argentina’s Plan Houston 1985

CIS Reopens 1990’s

West Africa in Focus Late 1990’s

Saudi and Mexico Gas 2003

WHERE DO WE GO FROM HERE? Indonesia Adopts PSC 1960’s

Other Global Expropriations 1950 - 1975

US / Baku Sumatra 1860-1880’s Rise of Crude Oil Use

LIBERALIZATION? or RETRENCHMENT?

Rise of LA Nationalism Mexican Expropriation 1938

Russian Revolution 1917 Middle East Concessions 1900 – 1930’s

7

Proved oil reserves at end 2004

BP Statistical Review of World Energy June 2005

8

Oil consumption per capita

BP Statistical Review of World Energy June 2005

9

Crude oil prices since 1861

BP Statistical Review of World Energy June 2005

10

Major oil trade movements

BP Statistical Review of World Energy June 2005

11

PIW's 2003 ranking of world's 20 largest oil companies Company Saudi Aramco Exxon Mobil PDV NIOC RD/Shell BP ChevronTexaco Pemex Total PetroChina KPC ConocoPhillips Pertamina Sonatrach Petrobras Adnoc Eni Repsol YPF Petronas

Country Saudi Arabia US Venezuela Iran UK & Netherlands UK US Mexico France China Kuwait US Indonesia Algeria Brazil UAE Italy Spain Malaysia

Lukoil

Russia

OIL

12

Proved natural gas reserves at end 2004

BP Statistical Review of World Energy June 2005

13

Natural gas consumption per capita

14

Major natural gas trade movements

BP Statistical Review of World Energy June 2005

15

16

II. THE COMMERCIAL CONTEXT: FOREIGN OREIGN OR R DOMESTIC OMESTIC PRIVATE RIVATE PARTNER ARTNER (CONTRACTOR ONTRACTOR)

THE COMMERCIAL CONTEXT: The Goal? Increase Profits and Share Value How? Correctly Assess Profit Potential; Skillfully Mitigate Risk ¾Geological Risk - Commit to Expend Reasonable Funds to Assess Potential Rewards

¾Commercial Risk - Commit to Work Obligations Commensurate with the Project’s Wealth-Generation Potential

¾Socio-Economic-Political Risk - Create Legal Certainty - Obtain Guarantees - If its great – then “go for it” 18

III. POLITICAL CONTEXT: HOST OST GOVERNMENT PERSPECTIVE ERSPECTIVE

THE POLITICAL CONTEXT: THE HOST COUNTRY Policy Tool and Revenue Source ¾Energy Policy - Ownership of Mineral Resource/Sovereignty - Energy Self-sufficiency - Industrialization

¾Domestic Socio-Economic Policy -

Infrastructure Employment Education Societal wealth creation

¾Hard Currency Revenue Source

Constructions Jobs From Chad – Cameroon Pipeline 20

Where Are We Now? Worldwide Competition for Capital? ¾ The lessons of the 20th Century are clear – Host Governments oil and gas companies are here to stay – But, Host Governments need private capital to grow their petroleum industries. Private capital is more efficient than public capital – The cost of private capital is affected by the perception of inherent risks – Without adequate protection and flexibility of treatment, private capital is very expensive, and sometimes unavailable ¾ There is a competitive inter-government market for private capital in the petroleum industry – Private capital will flow to the country of highest returns/lowest risks ¾ The upcoming “Natural Gas Century” should provide additional change 21

IV. THE LEGAL FRAMEWORK AND THE UNIVERSE OF CONTRACTS

TYPES OF UGPCs ¾ Concession or Licenses - Host Country Retains Ownership of Resource in Subsoil; Contractor has Exclusive Right to explore Contract Area and Owns Resource upon Production; Host Country Revenue Through Taxes, Royalties, and Fees - Contractor Revenue Through Sale of Petroleum

¾ Service Contracts - Host Country Owns Resource in Subsoil and Upon Production - Contractor Provides Technical Services for a Fee and may obtain Preferential Right to Purchase. - Host Country Revenue Through Sales of Petroleum

¾ Production Sharing Agreements -

Host Country Retains Ownership in Subsoil Contractor has Exclusive Right to explore Contract Area Contractor and Host Country Split Ownership of Production Host Country Receives Revenue Through Sales of its Share and from Taxes on Contractor’s Share

¾ Hybrids

23

TODAY - MOST COMMON CHOICE: PSC, CONCESSION, SERVICE OR MIXTURE?

PSC Concession / License

Service Mixture 24

TYPES OF UGPCs – WHERE WE WERE TWENTY YEARS AGO

“The concession was the original system used in world petroleum arrangements. It is still the most widely used system. Concessions …. are used in 121 countries.” Gordon Barrows, Worldwide Concession Contracts and Petroleum Legislation (1983) 25

PSCs – NOT FOR EVERYBODY “Iran's Oil Minister Bijan Namdar Zanganeh said his country isn't planning to drop the much criticized buyback scheme in oil development contracts in favour of the production sharing model, arguing the latter is mostly used by underdeveloped third world countries. "I am not in favour of arrangements based on production sharing... Such contracts are (fit) for the third world and backward countries in the oil sector," Zanganeh said. He said having some 90 years of active experience in the oil sector, Iran can't use the production-sharing model as a way of attracting foreign investment to its oil industry, adding why should Iran use the model if it has been discarded as no good in western industrial countries? Source: PetroEnergy Information Network 16-07-04 26

PSCs –DEAD IN RUSSIA? Sergey Oganesyan, Head of the Russian Federal Agency on Energy, in a June 2004 interview said (translated from Russian): “Potentially, it [a PSC] is an investment mechanism very useful for the industry and the country’s economy. We will have to develop new regions, Eastern Siberia where there is no infrastructure, and the shelves of the Arctic and Far East. These are multi billion investments in very risky long-term projects. Nobody would fund those projects without appropriate guarantees of stability. This is needed not only by foreign investors, the PSC mechanism is needed for Russian companies in the first place. Another matter that a government oversight in the existing PSCs in not effective enough. Why? Because the state tries to save money on experts, it limits itself to reviewing documents prepared by project operators. Yes, active role of the state in a PSC requires substantial expenditures measured in millions of dollars. On the other tip of the scale there are hundreds of millions of dollars which the country loses because of its inactivity. We need to address that. But generally, I believe, the rumors about the death of PSCs [in Russia] are grossly exaggerated. 27

PSC Signature – Ongoing… Jul 15, 2005 -… the Ministry of Oil and Minerals has signed a new Production Sharing Agreement with OMV, Central Europe’s leading oil and gas group, for a sum of $14m. Under the agreement, OMV (Yemen) is permitted to conduct exploration and production activities in Block 2, Shabwa province. OMV will start exploration activities as operator as soon as the Parliament of Yemen ratifies the contract. March 04, 2005 ConocoPhillips Signs a Production Sharing Contract For Appraisal and Development Offshore Sabah, Malaysia April 12, 2005-- Pecten Cameroon Company LLC has announced that Shell and Total E&P Cameroun have been awarded a new Production Sharing Contract in the offshore area of Rio del Rey by the Cameroonian Government. May 31, 2004 Lundin Petroleum AB and OMV Aktiengesellschaft have announced the signing of a new Production Sharing Contract with the Albanian Government for the exploration and production of oil and gas in a new offshore Albania block called 'Durresi'. During the first four years of the PSC, … will undertake exploration activities, reprocessing of existing seismic lines, acquisition off 400 km2 of new 3D seismic, and the drilling of at least one exploration well. 28

INTERNATIONAL EXPLORATION AND PRODUCTION: THE SOLAR SYSTEM Constitutional Provisions & Hydrocarbon Legislation HOST GOVERNMENT AGENCY/ STATE-OWNED ENERGY COMPANY Upstream Government Petroleum Contract

CONTRACTOR

CONTRACTOR

Joint Operating Agreement

Guaranties

CONTRACTOR / OPERATOR

PARENT COMPANIES

INTERNATIONAL EXPLORATION AND PRODUCTION: THE GALAXY Memorandum of Understanding International Study and Bid Group Agreements Non-Compete Agreement Joint Operating Agreement

Contractor

Confidentiality Agreement

Contractor

Accounting Procedures Agreement

Contractor / Operator Operation & Maintenance Agreement

Lender Financing Agreement

EPC Contractor

Facilities

Construction Agreement

Shareholder Agreement

Tech. Serv. Agreem.

State-Owned Energy Company

EXPLORATION AND PRODUCTION PROJECT COMPANY

Sales and Purchase Agreement

Government Petroleum Contract

Domestic or International Market

Host Government or State-Owned Oil Company Constitutional Provisions & Hydrocarbon Legislation 30

INTERNATIONAL EXPLORATION AND PRODUCTION: THE UNIVERSE Memorandum of Understanding Investor

Investor/ Operator

Investor

Shipping Company

LNG IMPORTING PROJECT COMPANY Government agreements

Host Government

Time charter or ship building agreements and ship operating agreements

Lender Financing Agreement

LNG Sales and Purchase Contract LNG Project Agreement

Feedstock Gas Supply Agreement

State-Owned Energy Company

Operation & Maintenance Contract

Investor

Investor

Tech. Serv. Agreem.

LNG EXPORTING PROJECT COMPANY

Investor/ Operator

Shareholder Agreement

Agreement

Tech. Serv. Agreem.

Financing Agreement

EPC LNG Plant Contractor Construction

Shareholder Agreement

Lender

Memorandum of Understanding

Host Government

Receiving Terminal

EPC Construction Contractor Agreement

Fuel Supply Agreement

Power Plant Power Purchase Agreement

Electricity Buyers 31

MAPPING THE COSMOS The AIPN and Its Model Form Agreements ¾ Confidentiality Agreement ¾ International Study and Bid Agreement ¾ Joint Operating Agreement (and Accounting Procedures) ¾ Secondment Agreement ¾ Farm-out Agreement ¾ Master Service Agreements ¾ Lifting Agreement 32

The AIPN and Its Model Form Agreements The Confidentiality Agreement ¾ Grants one party the right to access information in exchange for a promise to keep that information confidential ¾ Several exceptions to confidentiality – – – – – –

Receiving Party already knows the disclosed information Public already knows the disclosed information Disclosure is required by law or judicial/government order Information is acquired from a third party Information is developed independently Disclosure to affiliates, employees, contractors, advisors, etc.

¾ Restrictions on use can yield unintended results 33

The AIPN and Its Model Form Agreements The International Study and Bid Group Agreement ¾ Executed to share acquisition costs and minimize risks related to the evaluation of acreage that may be acquired ¾ Sets forth study and bid group members’ obligations, their relative percentage ownership of rights in study results, appoints an operator, and details the study and bid procedure ¾ Key provisions – Disclosure of information: voluntary or mandatory? – Initial participating interest and procedure for reallocation when members drop out of the consortium – Bid procedure: highest bid by any consortium member goes forward – Forbids independent bidding by consortium members 34

The AIPN and Its Model Form Agreements The Joint Operating Agreement ¾ Governs how Contractors will jointly perform the UGPC ¾ JOA is basis for sharing of costs for “Petroleum Operations” ¾ One consortium member acts as operator on behalf of consortium – neither gain nor loss from role as Operator ¾ A few Operator obligations (there are 15 individually listed in the AIPN Model JOA) – – – – – –

Maintain UGPC in full force Perform operations in accordance with UGPC and the law Conduct operations in a safe, diligent, and efficient manner Pay all taxes, royalties, fees, etc. due to the government Exclusive obligation to represent parties in negotiations with host government Manage the health, safety, and environmental plan to govern operations 35

The AIPN and Its Model Form Agreements The Farmout Agreement ¾ Common where a single party has obtained rights in a UGPC ¾ Company with UGPC rights allows other companies to earn their interest in the UGPC by performing work (this is why the agreement is also called an earn-in agreement) ¾ Is there a JOA already in effect? Farmee will have to abide by its terms as well as UGPC terms ¾ When are interests earned? – Upon commencement of work (what if work is not completed or is unsuccessful?) – Upon completion of work (what are farmee’s rights if work is not successful?) 36

V. UGPC’S CONTRACTUAL PROVISIONS

V. CONTRACTUAL PROVISIONS

A. PURPOSE CLAUSE LAUSE

V. CONTRACTUAL PROVISIONS (Cont’d)

A. PURPOSE CLAUSE ¾ Concept General statement of objectives, rights and risks of the parties, subject to terms and conditions of the contract and applicable laws. ¾ Basic Considerations - Host Country Legislation - Host Government Objectives - Contractor’s Objectives 39

V.

CONTRACTUAL PROVISIONS (Cont’d) A. PURPOSE CLAUSE (Cont’d)

1. Basic Considerations BROAD SPECTRUM OF APPROACHES

“Indicative”

v.

“Comprehensive”

40

V.

CONTRACTUAL PROVISIONS (Cont’d) A. PURPOSE CLAUSE (Cont’d)

1. BASIC CONSIDERATIONS (Cont’d)

¾ On one end: the “Indicative” Approach: “I am what I am.” - Merely identify type of contract - General grant of rights - Reference to general legal framework Example: Kazakhstan- Model Contract Approved by Decree No. 1015, July 31, 2001 Section 2. Object of the Contract The object of the Contract is the definition [thereof] in accordance with the state legislation current on the date when the Contract comes into force and the legal formulation of the contractual relations between the Competent Agency and the Contractor. 41

V.

CONTRACTUAL PROVISIONS (Cont’d) A. PURPOSE CLAUSE (Cont’d) 1. BASIC CONSIDERATIONS (Cont’d)

¾ The other end: Comprehensive Approach -

the

Statement of specific policy objectives of Host Government Detailed grant of rights to Contractor, including ancillary rights Source of granting authority Rights retained by Host Government Risk and cost allocation Oil production allocation Main obligations of Contractor Performance and liability standards for the Contractor Nature of relationship between Contractor and Host Government Legal framework and contract interpretation

42

V.

CONTRACTUAL PROVISIONS (Cont’d) A. PURPOSE CLAUSE (Cont’d) 1. BASIC CONSIDERATIONS (Cont’d)

¾Comprehensive Approach

Example: China, PSC (Model Contract for the 3rd Onshore Bidding Round 1995): Article 2- Objective of the Contract 2.1 The objective of the Contract is to explore for, develop and produce Petroleum that may exist in the Contract Area. 2.2 The Contractor shall apply its appropriate and advanced technology and assign its competent experts to perform the Petroleum Operations. 2.3 During the performance of the Petroleum Operations, the Contractor shall transfer its technology to the Chinese Personnel and train them in accordance with Article 16 hereof…. in order to enable CNPC to take over the Production Operations of any Oil Field and /or Gas Field in accordance with Article 8.8 hereof. 43

V.

CONTRACTUAL PROVISIONS (Cont’d) A. PURPOSE CLAUSE (Cont’d) 1. BASIC CONSIDERATIONS (Cont’d)

Example (Cont’d.): 2.4 The Contractor shall bear all the exploration costs required for the Exploration Operations. In the event that any Oil Field and /or Gas Field is discovered within the Contract Area, the development costs of such Oil Field and /or Gas Field shall be borne by the Parties in proportion to their participating interest: (…). In the event that CNPC opts to participate at a level less than 51% of the participating interests, or not to participate in the development of the Oil Field and/or Gas Field, the Contractor shall bear the remaining development costs necessary for the development of the Oil Field and /or Gas Field in accordance with Article 12.1.2 hereof. 2.5 If any Oil Field and / or Gas Field is discovered within the Contract Area, the Petroleum produced therefrom shall, from the Date of Commencement of Commercial Production of such Oil Field and /or Gas Field, be allocated in accordance with [specified provisions] hereof. 2.6 Nothing contained in the Contract shall be deemed to confer any right on the Contractor other than those rights expressly granted hereunder. 44

V.

CONTRACTUAL PROVISIONS (Cont’d) A. PURPOSE CLAUSE (Cont’d)

2. Summary of Common Elements ¾ Grant of Rights to Contractor -

Type/Scope of Rights Exclusivity Source of Granting Authority Sufficiency

¾ Rights Explicitly Reserved by Host Country - Ownership of Reserves/Production - Ownership of the Subsoil Generally - Ownership of Other Natural Resources

¾ Risk Allocation Principles - Exploration - Development and Production 45

V.

CONTRACTUAL PROVISIONS (Cont’d) A. PURPOSE CLAUSE (Cont’d)

3. Analysis of Common Elements ¾ Grant of Rights to Contractor - Type: Determined by type of granting instrument » License or Concession Agreement • Right to explore for hydrocarbons within Contract Area • Right to develop and produce discoveries • Right to dispose of production

» Production Sharing Agreement • Right to explore, develop and produce hydrocarbons within Contract Area • Right to dispose of share of production (except in-kind royalty)

» Services Agreement • Right to perform “petroleum services” • Right to payment for services rendered

» Hybrids/Joint Venture Agreements • Rights vary depending on scope of agreement 46

V.

CONTRACTUAL PROVISIONS (Cont’d) A. PURPOSE CLAUSE (Cont’d) 3. ANALYSIS OF COMMON ELEMENTS (Cont’d)

¾ Scope - Territorial Scope » Limited to Contract Area as defined in the agreement. » Surface Rights? » Depth/Horizon limitations

- Mineral Resources Scope » Hydrocarbons as defined in the agreement. » No other mineral or natural resources.

- Activity Scope » Core Activities: Exploration, development and production » Ancillary Activities: Transportation, storage, marketing, selling, exporting, building infrastructure, using existing infrastructure, etc.

47

V.

CONTRACTUAL PROVISIONS (Cont’d) A. PURPOSE CLAUSE (Cont’d) 3. ANALYSIS OF COMMON ELEMENTS (Cont’d)

¾ Exclusivity -Rationale » Risk assumption incentive; non-interference » Exclusive Rights • Generally Limited to Contract Area, Contract Term and Hydrocarbons • Generally limited to core rights granted » Exploration » Development » Production » Disposing of Share of Production » Non- Exclusive Rights • Generally ancillary rights not exclusive Examples: » Right to build and use existing infrastructure » Right to build and use transportation facilities 48

V.

CONTRACTUAL PROVISIONS (Cont’d) A. PURPOSE CLAUSE (Cont’d) 3. ANALYSIS OF COMMON ELEMENTS (Cont’d)

¾ Source of Granting Authority - Constitution - Host Country enabling legislation - Delegation of authority to National Oil Company or Ministry

¾ Sufficiency of Rights Granted - Sufficiently ample to entitle Contractor to conduct universe of petroleum operations from exploration to disposal of production and revenues - Express and/or implied - Required additional authorizations?

49

V.

CONTRACTUAL PROVISIONS (Cont’d) A. PURPOSE CLAUSE (Cont’d) 3. ANALYSIS OF COMMON ELEMENTS (Cont’d)

¾ Rights Typically Reserved by Host Country - Ownership of hydrocarbon reserves in situ - Ownership of other subsoil substances - Ownership of other natural resources in the Contract Area - Right to grant exploration rights to third parties for other minerals and natural resources - Right to supervise performance of petroleum operations 50

V.

CONTRACTUAL PROVISIONS (Cont’d) A. PURPOSE CLAUSE (Cont’d) 3. ANALYSIS OF COMMON ELEMENTS (Cont’d)

¾ Exploration Risks and Costs - Generally assigned to Contractor » Financial risks » Technical risks » Geological risks ¾ Development and Production Risks - Generally Host Government only shares risk under hybrid UGPCs upon acceptance of a commercial discovery and based on its percentage participation. 51

V.

CONTRACTUAL PROVISIONS (Cont’d) A. PURPOSE CLAUSE (Cont’d) 3. ANALYSIS OF COMMON ELEMENTS (Cont’d)

The following clause from the 2004 Mongolia PSC illustrates the risk the Contractor bears under a typical PSC: Article IV Cost and Expenses Except as otherwise provided herein, the Contractor shall bear all costs and expenses necessary to conduct Petroleum Operations. If such Petroleum Operations result in a Commercial Discovery of Petroleum, the Contractor may recover such costs and 40 (forty) percent of oil will be used for cost recovery. Neither party hereto guarantees that any such discovery will be made, or if made, that it will be Commercial Discovery. Accordingly, there shall be no guarantee that the Contractor will achieve any reimbursement of any costs and expenses incurred hereunder. 52

V.

CONTRACTUAL PROVISIONS (Cont’d) A. PURPOSE CLAUSE (Cont’d) 3. ANALYSIS OF COMMON ELEMENTS (Cont’d)

Example Brazil – 2003 Model Concession Agreement (5th ANP Round): CLAUSE TWO – Objective Operations 2.1

The objective of this Agreement is the performance, by the Concessionaire, of the Operations specified in Annex II (Work and Investment Program) and any other additional activities of Exploration that the Concessionaire may decide to undertake within the Concession Area specified in this Agreement, with the objective of producing Oil and Natural Gas under economic conditions in the referred Concession Area, and if any Discovery is made, the Evaluation, Development and Production of the Hydrocarbons concerned, all on the terms defined herein.

At the Responsibility and Risk of the Concessionaire 2.2

The Concessionaire shall always exclusively assume all costs and risks related to the performance of the Operations and its consequences, and shall receive in return, only and exclusively, the ownership of the Oil and Natural Gas that will be effectively produced and received by it at the Production Metering Point, pursuant to this Agreement, being subject to the taxes, charges and financial compensation as set out in Annex VI (Government and third-party Participation), according to the applicable Brazilian legislation. 53

V.

CONTRACTUAL PROVISIONS (Cont’d) A. PURPOSE CLAUSE (Cont’d) 3. ANALYSIS OF COMMON ELEMENTS (Cont’d)

Brazil – 2003 Model Concession Agreement (5th ANP Round) (Cont’d.): CLAUSE TWO – Objective Ownership of Oil and Natural Gas 2.3 Oil and Natural Gas Deposits which exist in the Brazilian national territory belong to the Federal Government, in accordance with Article 3 of the Petroleum Law. The Concessionaire shall only own the Oil and Natural Gas, which are actually produced and received by it at the Production Metering Point, pursuant to paragraph 2.2. No Rights Over Other Natural Resources 2.4 This Agreement exclusively refers to the Exploration, Development and Production of Oil and Natural Gas and it shall not extend to any other natural resources, which may exist in the Concession Area. Therefore, the Concessionaire is prohibited from using, enjoying or disposing, in any way and under any title, totally or partially, of such resources, except when duly authorized in accordance with applicable Brazilian legislation….

54

V.

CONTRACTUAL PROVISIONS (Cont’d) A. PURPOSE CLAUSE (Cont’d) 3. ANALYSIS OF COMMON ELEMENTS (Cont’d)

Brazil – 2003 Model Concession Agreement (5th ANP Round) (Cont’d.): CLAUSE TWO – Objective Acquisition of Data on a Non-exclusive Basis 2.5 The ANP may, at its exclusive discretion and whenever it deems convenient, authorize third parties to perform, within the Concession Area, geological and geophysical services aiming towards the gathering of technical data for the purpose of commercialization on a non-exclusive basis under the terms of Article 8, item III, of the Petroleum Law. It is expressly understood that the Concessionaire shall have no responsibility with respect to such services and their performance, which in no way may affect the normal course of the Operations.

55

V. CONTRACTUAL PROVISIONS B. CONTRACT ONTRACT TERM ERM CLAUSE LAUSE

V. CONTRACTUAL PROVISIONS (Cont’d) B. TERM CONTRACT CLAUSE (Cont’d)

1. Basic Considerations ¾ Concept - Durational limit of Contractor’s exploration and production rights - Generally runs from Effective Date until the expiration of a definite number of years from Effective Date or from date of a Commercial Discovery (but not to exceed x years in the aggregate). - Should be reasonably long to allow Contractor time to undertake exploration activities, meet Work Programs, appraise discoveries, prepare development plan, develop and produce discoveries until full economic depletion of the reserves. ¾ Effective Date - Date certain vs. occurrence of event (e.g., permits, Government approval, official publication) - Conditions precedent (e.g., execution and delivery of Contractor parent guarantees) 57

V. CONTRACTUAL PROVISIONS (Cont’d) B. TERM CONTRACT CLAUSE (Cont’d)

2. Summary of Periods/Phases ¾ Phases / Periods - Exploration » Generally divided in Sub-periods » Duration should consider size of Contract Area and complexities of exploration activities and Work Program

- Appraisal » Duration should be reasonably sufficient for Contractor to appraise, define and evaluate discoveries, assess commerciality and prepare support for declaration of commerciality. » May be part of Exploration Period

- Development » Duration should be reasonably sufficient for Contractor to continue evaluation of commercial discoveries, prepare development plan and design, procure or develop facilities to produce reserves. » Duration -- linked to individual field development areas or whole Contract Area?

- Market development for natural gas » Need time to develop market for economic commercialization of gas discoveries.

- Production » Should allow for full economic depletion of discoveries » Gas discoveries – special considerations

- Decommissioning/Abandonment » Plugging wells and removal of installations 58

V. CONTRACTUAL PROVISIONS (Cont’d) B. TERM CONTRACT CLAUSE (Cont’d) 2. SUMMARY OF PERIODS / PHASES (Cont’d)

Exploration Exploration Exploration

Appraisal Development Production Decommissioning

Contract Years

Extension/ Renewal Rights? 1

2

3

34

5

6

7

8

9

10

11

12

13

1314

1415

16

17

18

19

20

21

22

23

24

25

26

Gas Marketing Development Gas Development and Production

59

V. CONTRACTUAL PROVISIONS (Cont’d) B. TERM CONTRACT CLAUSE (Cont’d)

3. Analysis of Periods/Phases ¾ Progression between Phases - Exploration Period » Contractor’s absolute right? » Approvals by Host Government?

- Early Production Period » Early discovery of fields in commercially exploitable quantities. » Early exploitation should be allowed with no reduction of exploration period and no exemption from work commitments.

60

V.

CONTRACTUAL PROVISIONS (Cont’d) B. TERM CONTRACT CLAUSE (Cont’d) 3. ANALYSIS OF PERIODS/PHASES (Cont’d)

¾ Extensions - Exploration and Development Phases » Automatic extensions • Force Majeure • Failure of required permits and government approvals • Actions of Host Government

» Per Contractor’s request by showing due cause, subject to Host Government approval, provided Contractor is not in default

- Production Phase » Extensions throughout economic life of reserves?

- Other considerations » Extensions may not apply to the entire Contract Area » Effect of extensions of individual periods in total Exploitation Period » Arbitration/Expert Determination of Contractor’s right to receive an extension » Maximum extension of overall Contract Term – Sunset Date 61

V.

CONTRACTUAL PROVISIONS (Cont’d) B. TERM CONTRACT CLAUSE (Cont’d) 3. ANALYSIS OF PERIODS/PHASES (Cont’d)

Example China - Model Contract for the Third Onshore Bidding Round 1995: Article 4 Contract Term 4.1 The term of the Contract shall include an exploration period, a development period and a production period. 4.2 The exploration period, beginning on the Date of Commencement of the Implementation of the Contract, shall be divided into three (3) phases and shall consist of eight (8) consecutive Contract Years, unless the Contract is sooner terminated, or the exploration period is extended in accordance with Article 25 hereof and/or Article 4.3 herein. The three (3) phases shall be as follows: – the first phase of four (4) Contract Years (the first Contract Year through the fourth Contract Year); – the second phase of two (2) Contract Years (the fifth Contract Year through the sixth Contract Year ); – and the third phase of two (2) Contract Years ( the seventh Contract Year through the eighth Contract Year). 62

V.

CONTRACTUAL PROVISIONS (Cont’d) B. TERM CONTRACT CLAUSE (Cont’d) 3. ANALYSIS OF PERIODS/PHASES (Cont’d)

China - Model Contract for the Third Onshore Bidding Round 1995 (Cont’d.): 4.3 Where time is insufficient to complete the appraisal work on a Petroleum discovery made shortly before the expiration of the exploration period or where the time of the appraisal work on a Petroleum discovery in accordance with the appraisal Work Program approved by JMC as stated in Articles 11 and 18 hereof extends beyond the exploration period, the exploration period … shall be extended. The period of extension shall be subject to the approval of CNPC and shall be a reasonable period of time required to complete the above-mentioned appraisal work in order to enable JMC to make a decision on the commerciality of the said Petroleum discovery in accordance with Article 11 or 18 hereof, and until the Department or Unit approves or finally rejects the Overall Development Program. 4.4 The development period of any Oil Field and/or Gas Field within the Contract Area shall begin on the date of approval by the Department or Unit of the Overall Development Program of the said Oil Field and/or Gas Field, and end on the date of the entire completion of the Development Operations set forth in the Overall Development Program, excluding the time for carrying out additional development projects in the production period in accordance with Article 11.9 hereof. 63

V.

CONTRACTUAL PROVISIONS (Cont’d) B. TERM CONTRACT CLAUSE (Cont’d) 3. ANALYSIS OF PERIODS/PHASES (Cont’d)

China - Model Contract for the Third Onshore Bidding Round 1995 (Cont’d.): 4.5 The production period of any Oil Field and/or Gas Field within the Contract Area shall be a period beginning on the Date of Commencement of Commercial Production of the said Oil Field and/or Gas Field up to the date of the expiration of the production period as specified in the Overall Development Program approved by the Department or Unit however, the period shall not go beyond fifteen (15) consecutive Production Years beginning on the Date of Commencement of Commercial Production of the said Oil Field and/or Gas Field, unless otherwise provided in Article 4.6 herein and Article 18.2 or 25 hereof. Under such circumstances as where the construction of an Oil Field and/or Gas Field is to be conducted on a large scale, and the time span required therefor is long, or where separate production of each of the multiple oil or gas producing zones of an Oil Field and/or Gas Field is required, or under other special circumstances, the production period thereof shall, when it is necessary, be properly extended with the approval of the Department or Unit. 64

V.

CONTRACTUAL PROVISIONS (Cont’d) B. TERM CONTRACT CLAUSE (Cont’d) 3. ANALYSIS OF PERIODS/PHASES (Cont’d)

China - Model Contract for the Third Onshore Bidding Round 1995 (Cont’d.): 4.6 Suspension or abandonment of production of an Oil Field and/or Gas Field 4.6.1 Suspension of production from Oil Field and/or Gas Field within the production period In the event that the Parties agree to suspend temporarily production from an Oil Field and/or Gas Field which has entered into commercial production, the Production Area covered by that Oil Field and/or Gas Field may be retained within the Contract Area. In no event shall the period of such retention extend beyond the date of the expiration of the production period of that Oil Field and/or Gas Field, except as otherwise provided in Article 25.4 hereof. The duration of the relevant period of production suspension and the arrangement for the maintenance operations during the aforesaid period of suspension shall be proposed by the Operator, and shall be decided by JMC through discussion. With respect to the aforesaid Oil Field and/or Gas Field which has been suspended and retained within the Contract Area, in the event that production is restored during the period of such retention, the production period of that Oil Field and/or Gas Field shall be extended correspondingly.

65

V.

CONTRACTUAL PROVISIONS (Cont’d) B. TERM CONTRACT CLAUSE (Cont’d) 3. ANALYSIS OF PERIODS/PHASES (Cont’d)

China - Model Contract for the Third Onshore Bidding Round 1995 (Cont’d.): In the event that the Parties fail to reach an agreement on the restoration of production by the expiration of the production suspension period decided by JMC through discussion, the Party who wishes to restore production shall have the right to restore production solely. The other Party may later elect to participate in production but shall have no rights or obligations in respect of such Oil Field and/or Gas Field for the solely restored production period. 4.7 The term of the Contract shall not go beyond thirty (30) consecutive Contract Years from the Date of Commencement of the Implementation of the Contract, unless otherwise stipulated hereunder.

66

V.

CONTRACTUAL PROVISIONS

C. CONTRACT ONTRACT AREA REA

V. CONTRACTUAL PROVISIONS (Cont’d) C. CONTRACT AREA (Cont’d)

1. Basic Considerations ¾ Relevance - Physical limit of the exploration and production rights granted to Contractors. ¾ Size - Sufficient to allow for efficient and effective exploration, development and production of hydrocarbons optimizing use of technical and financial resources. - Generally larger areas are granted for unexplored land. - Maximum and/or minimum areas: » Established by Host Country legislation » Determined by Host Government in bidding/offer terms » Contractor’s selection from available acreage 68

V. CONTRACTUAL PROVISIONS (Cont’d) C. CONTRACT AREA (Cont’d)

2. Identification ¾ Identification - Key Considerations »Accuracy »Completeness - Description Techniques »Map »Coordinates »Depth limitations - Concern: possible overlap with another contract areas 69

V. CONTRACTUAL PROVISIONS (Cont’d) C. CONTRACT AREA (Cont’d) 2. IDENTIFICATION (Cont’d)

¾ Coordinates - Geographical coordinates defining surface area - Independently verifiable ¾ Depth Limitations: various approaches - No limitation of depth - Limitation by specific geological horizon - Limitation by depth from the surface - Limitation by depth from a specific geological horizon - Limitation to an absolute elevation - Concern: possible overlap with another contract area and exclusivity of operations within depth limitations granted by the Host Government 70

V. CONTRACTUAL PROVISIONS (Cont’d) C. CONTRACT AREA (Cont’d)

3. Area Revisions ¾ Revisions of the Contract Area - Reductions: » Relinquishment » Surrender - Increases: » Annexation Rights • Expanding Contract Area if structure is greater than originally determined by annexing other parcels not held by other parties • Host Government’s role 71

V. CONTRACTUAL PROVISIONS (Cont’d) C. CONTRACT AREA (Cont’d)

4. Unitization

¾ Concern - Discoveries extend beyond the limits of Contract Area into one or more adjacent Contract Areas. ¾ Objective - Exploitation of a field or group of fields as a single unit under a single authority to achieve most efficient exploitation. ¾ Types - Voluntary - Compulsory ¾ Host Government’s Role - Supporting negotiations to achieve unitization agreement - Compelling unitization - Determine or redetermine allocation of interests 72

V. CONTRACTUAL PROVISIONS (Cont’d) C. CONTRACT AREA (Cont’d) 4. UNITIZATION (Cont’d)

¾ Contractual approaches - Pre-unitization agreements - voluntary - Unitization agreements per consensus - Redetermination Disputes ¾ Effects - On exploration activities » Rational and economic use of exploration resources - On development and production operations » Preventing hydrocarbon waste; achieving most efficient and economic recovery of maximum volume » Costs and investment efficiencies - On apportionment of production » Fair share from common source 73

V. CONTRACTUAL PROVISIONS (Cont’d) C. CONTRACT AREA (Cont’d) 4. UNITIZATION (Cont’d)

Example Brazil – 2002 Model Concession Agreement (4th ANP Round): CLAUSE THREE - Concession Area Identification 3.1 The Operations shall be performed in the Concession Area, which is described, detailed and delineated in Annex I (Concession Area).

CLAUSE TWELVE - Unitized Production Agreement for Unitization of Production 12.1 In the case of a Discovery under this Agreement, in which the relevant Pool may extend outside the Concession Area, the Concessionaire will officially inform this fact to the ANP at the time the Concessionaire becomes aware of such extension. 12.1.1 If another Concessionaire has rights to the adjacent area to which the relevant Pool extends, the ANP will notify such Concessionaire with the purpose of having all interested parties get together and execute an agreement which results in common Development and the unitization of Production. 74

V. CONTRACTUAL PROVISIONS (Cont’d) C. CONTRACT AREA (Cont’d) 4. UNITIZATION (Cont’d)

Brazil – 2002 Model Concession Agreement (4th ANP Round) (Cont’d.): 12.1.2 If there is no Concessionaire with rights to such adjacent area, but the ANP in its sole discretion believes that a sufficient Evaluation of the Pool or Pools concerned has been done in order to permit the ANP to form a reasonable judgment regarding unitization, the ANP itself may act as if it were the Concessionaire of such area for purposes of negotiating and executing the agreement for unitization of Production contemplated in paragraph 12.1. However, at any time prior, during or after such negotiation and execution of the agreement, the ANP may offer for bidding the referred Block or Blocks, in which case, once the relevant Concessionaire(s) is selected, these will assume their responsibilities pursuant to this Clause Twelve and be obligated to fulfill the unitization agreement signed by the ANP.

75

V. CONTRACTUAL PROVISIONS (Cont’d) C. CONTRACT AREA (Cont’d) 4. UNITIZATION (Cont’d)

Brazil – 2002 Model Concession Agreement (4th ANP Round) (Cont’d.): Rights and Obligations of Interested Concessionaires 12.2 The agreement referred to in paragraphs 12.1.1 or 12.1.2 will equitably contemplate the rights and obligations of the interested Concessionaires, defining the unitized area, its Operator, the participation of each one in the Exploration, Evaluation, Development and Production of the Pool, the relevant Development Plan, the payment of Government and third-parties participations, respecting, for each involved Concessionaire, the amounts specified in the relevant Concession Agreement, and, in general, all other aspects usually covered in this kind of agreement according to Oil Industry Best Practice and the terms of the applicable Brazilian legislation and the Concession Agreements related to the Blocks in which the unitized area is located. 12.2.1 Before the approval of an agreement for the unitization of Production, the ANP may, in its sole discretion, allow an Operator from one of the adjacent areas to undertake Evaluation activities in the area to be unitized where this is unanimously agreed by all involved parties.

76

V. CONTRACTUAL PROVISIONS (Cont’d) C. CONTRACT AREA (Cont’d) 4. UNITIZATION (Cont’d)

Brazil – 2002 Model Concession Agreement (4th ANP Round) (Cont’d.): 12.2.2 If so requested, the ANP may act as mediator in the negotiations of the agreements for unitization of Production, seeking to reconcile the interests of the interested Concessionaires in order for them to reach a consensus. 12.2.3 If there is no Concessionaire for adjacent areas and/or the Evaluation of the Pool is insufficient to permit meaningful discussions regarding unitization, the Concessionaire may nonetheless proceed with the Declaration of Commerciality, as provided in this Agreement. If the Concessionaire believes that Development of those parts of the Pool lying inside the Concession Area can be done in accordance with applicable Brazilian laws and Oil Industry Best Practice, it may submit a Development Plan, conforming to the provision of Clause Nine.

77

V. CONTRACTUAL PROVISIONS (Cont’d) C. CONTRACT AREA (Cont’d) 4. UNITIZATION (Cont’d)

Brazil – 2002 Model Concession Agreement (4th ANP Round) (Cont’d.): Modifications to Agreement by ANP 12.3 If the Concessionaire enters into an agreement for unitization of Production, the ANP shall have 60 (sixty) days from the receipt of the agreement duly signed by all involved Concessionaires, to request any amendments the ANP deems advisable. In the event the ANP does not respond within such period, the referred agreement will be considered final and definitive. In the event the ANP requests amendments, the Concessionaire and the other interested parties shall have 60 (sixty) days from the date the request was made to discuss them with the ANP and submit to the ANP appropriate modifications to the previously submitted agreement for unitization, repeating in its entirety the procedures outlined in this paragraph 12.3. Once the agreement for unitization of Production becomes final and definitive, the interested Concessionaires will be obligated to fully comply with it and any amendments to it are subject to the prior written approval of the ANP, such amendments being subject to the procedure contemplated in this paragraph 12.3.

Suspension of Operations 12.4 Should the agreement for the unitization of Production contemplated herein not be approved by the ANP, pursuant to this Clause Twelve, the Development and Production of the relevant Pool will be suspended, unless otherwise approved by the ANP, at its sole discretion, until the unanimous and express agreement is obtained from all parties involved for this purpose.

78

V. CONTRACTUAL PROVISIONS (Cont’d) C. CONTRACT AREA (Cont’d)

5. Boundary Disputes ¾ Concern - Host Government loss of sovereign rights over all or part of Contract Area due to boundary disputes with neighboring countries or other events within the realm of public international law (Bilateral or Multilateral Treatises, ICJ decisions etc.).

¾ Consequences - Contractor’s obligations and damages - Host Government’s limitation or exemption from liability

79

V. CONTRACTUAL PROVISIONS (Cont’d) C. CONTRACT AREA (Cont’d) 5. BOUNDARY DISPUTES (Cont’d)

¾ Example - Danish 5th Round Model License, September 1997: “Where the area covered by this License, or any part of the same, is not within, or is withdrawn from, Danish sovereignty under rules of international law, including any international treaties, the Licensee shall be bound by any resulting restriction of the area, and shall not on his account have any claim whatsoever against the Danish Energy Agency or otherwise the Danish State.”

80

V.

CONTRACTUAL PROVISIONS

D. EXPLORATION XPLORATION WORK ORK COMMITMENTS OMMITMENTS

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d)

1. Basic Considerations ¾ Competing Interests But the Common Goal of Commercial Discovery (ASAP) - Host Government Interests » Minimum commitments in exchange for exclusive right to explore • Desire to “lock-in” the Contractor’s exploration obligation regardless of a change in circumstance (i.e., ensures progress towards production) • Develop as much information as possible about its hydrocarbon resources regardless of commercial discovery

- Contractor Interests & Considerations » Maximize flexibility with respect to minimum commitments • Desire to avoid minimum commitments that become unattractive due to a change in circumstance » Considerations – geology, potential costs, political risk, fiscal obligations, gov’t control, weighed against alternative investments 82

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 1. BASIC CONSIDERATIONS (Cont’d)

¾ Types of Minimum Commitments -

Minimum Exploration Work Commitments Minimum Exploration Expenditure Commitments Minimum Exploration Work & Expenditure Commitments “Work Units”

¾ Function of Minimum Commitments (Work or Expense) - Defines Contractor’s contractual exploration or expenditure obligations - May serve to provide liquidated damages for failure to perform - Establishes the minimum requirements to proceed to a subsequent exploration period or phase » Host Government – perception that minimum commitments provide sufficient information for the Contractor to make an informed decision on whether to proceed to the next phase 83

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 1. BASIC CONSIDERATIONS (Cont’d)

Example: Bangladesh 1997 Model PSC: 6.2 During the first three (3) Contract Years Contractor shall carry out at least the following Minimum Exploration Program: a) Geological: b) Geophysical: i) Carry out and process to state-of-the art standards at least line [__] Milometers of multifold seismic coverage, with shooting to commence within [__] days after the Effective Date. ii) Evaluate, integrate and map all seismic data related to the Contract Area. iii) Any other special survey(s) c) Drilling of at least [__] Exploratory Well(s). Note : In case the first phase of the Exploration Period consists of only Geological Geophysical survey with no commitment for Exploratory drilling, this phase/period shall not exceed two (2) consecutive Contract Years. 84

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 1. BASIC CONSIDERATIONS (Cont’d)

Example: Bangladesh 1997 Model PSC (Cont'd.) 6.3 During the first extension to the Exploration Period i.e. second phase, Contractor shall drill at least [__] Exploratory Well(s). 6.4 During the second extension i.e. third phase to the Exploration Period Contractor shall drill at least [ ] Exploratory Well(s). 6.5 During an extension to the Exploration Period granted pursuant to Article 4.5, Contractor shall use its best endeavours to achieve the objective for which the extension was requested and shall fulfil on a timely basis the minimum work obligation agreed between Petrobangla and Contractor at the time of grant of such extension. 6.6 For purposes of the Minimum Exploration Program in Articles 6.2 through 6.4 a) The obligations related to the first and second extensions to the Explorations Period will accrue only if Contractor continues to hold some part of the contract area during any part of such extension; b) Each Exploratory Well shall be drilled to a depth of at least [___] meters below the Kelly bushing or geological basement whichever is first to occur; c) Additional Exploratory Wells drilled beyond the minimum committed for any period may be carried forward to satisfy obligations to drill Exploratory Wells during a subsequent period. 85

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 1. BASIC CONSIDERATIONS (Cont’d)

¾ Technical Studies - Competing Interests » Contractor – only valuable in the event of commercial discovery » Host Government – all data is valuable

– Example: Kyrgystan 1993 Model Concession: 4.4. By the end of the first exploration phase, forty (40) percents of the territory under the use of Operator should be evaluated to make a conclusion on prospects for discovery of Hydrocarbons. The total evaluation of all sectors of the Concession Area, which are not taken on lease in consequence of the Commercial Discovery, should be made by the end of the 7-year Exploration Stage.

– Example: Bangladesh 1997 Model PSC: 6.7 Within ninety (90) days after completion of the Minimum Exploration Program under Articles 6.2, 6.3 and 6.4 respectively, Contractor shall prepare and present to Petrobangla a comprehensive technical evaluation of the Petroleum potential of all part of the Contract Area, base on its work to that date. 86

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d)

2. “Well” Issues ¾ Seismic – Specify 2D or 3D and the number of kilometers ¾ Wells – Issues » Number of Wells » Definition of “Well” » Well Classification » Minimum Depths » Deemed Satisfaction of Minimum Well Commitment 87

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 2. “WELL” ISSUES (Cont’d)

¾ Number of Wells – Tied to the Contract Area (> the Contract Area the more Wells)

¾ Definition of “Well” – Oftentimes critical for determining whether the Contractor fulfilled its minimum commitments » The Parties’ Interests • •

Host Government – likely to seek a narrow definition Contractor – likely to prefer a broad definition whereby any “well” (e.g., appraisal, deepening, “sidetrack” etc.) satisfies the commitment

» Disputes – can arise when the Contractor presents its annual work program and budget to the Host Government for approval •

Resolution – (e.g., negotiation, expert determination and/or arbitration) can be costly, so avoid disputes and define “well” well 88

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 2. “WELL” ISSUES (Cont’d)

¾ Well Classification and Minimum Commitments – Issue – whether a well must be a certain classification (e.g., exploratory) to satisfy the Contractor’s minimum exploratory commitment » Contractor – will seek the broadest classification, albeit clearly defined to avoid an ambiguity that might lead to a dispute

– Defining an “Exploratory Well” or “Appraisal Well” • Two General Definitional Approaches: Intent Based v. Distance Based • Intent Based – difficult to prove with objective evidence because it looks to the intent of the Contractor drilling the well • Distance Based – objective, relying on the distance to or from a discovery or potential discovery, but this approach is not without problems (i.e., what is the radius of the pre-existing discovery?) 89

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 2. “WELL” ISSUES (Cont’d)

¾ Well Classification and Minimum Commitments - Defining an “Exploratory Well” or “Appraisal Well” (Cont'd.) » Intent Based Example: Angola 1999 Model PSC: "Exploration Well" means a Well drilled for the purpose of discovering Petroleum, including Appraisal Wells to the extent permitted by Article 17 » Intent Based Example: Nicaragua 1999 Model Concession: "Exploratory Well" means any well drilled with the objective of finding Hydrocarbons in a structure or geologic trap in which Hydrocarbons in quantities having commercial potential have not previously been encountered. » Distance Based Example: Malaysia 1997 Model PSC: "Wildcat Well" means a well located on a geological feature which is structurally or stratigraphically separate from a geological feature previously drilled by Contractors under this Contract. 90

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 2. “WELL” ISSUES (Cont’d)

¾

Minimum Well Depth - Commitment » Depth; and/or » Geologic Formation – Contractor Concern – confronts the “unknown” when well depth is specified to a geologic formation only, or the conjunctive “and” is employed - Example: China 1995 Model for 3d Onshore Bid Art. 6.2.1(b) “drill and complete _____(__) Wildcat(s) with footage totaling ___________(____) meters;” 91

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 2. “WELL” ISSUES (Cont’d)

¾ Example: Togo 1999 Model Contract for Petroleum Exploration – any required Exploration Well shall be drilled to at least one of the following depths: (a) to a formation of _______ Age; (b) to Basement; (c) to _______ (_____) meters; (d) to that point below which further drilling becomes impracticable and drilling would be abandoned by a reasonable and prudent operator in the same or similar circumstances in accordance with Sound Petroleum Industry Practices; or (e) to such other depth as the Parties may mutually agree. 92

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 2. “WELL” ISSUES (Cont’d)

¾ Minimum Well Depth

1000 M 1500 M 2000 M 2500 M 3000 M 3500 M 4000 M

geologic structure

93

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d)

3. Deemed Satisfaction of Minimum Well Commitment ¾ Issue – the occurrence of an event prior to complete satisfaction of the Contractors drilling commitment that limits completion of the well – Possible Triggering Events » » » »

Well reaches its objective formation Basement encountered at a lesser depth Commercial discovery before reaching depth or formation Technical problems rendering drilling imprudent, or conditions that make the likelihood of commercial production unlikely

¾ Issue – who determines the occurrence of the specified triggering event and is deemed satisfaction conditional ¾ UGPC may be silent on deemed satisfaction – Issue – Host Government’s discretion to waive the commitment 94

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 3. DEEMED SATISFACTION OF MINIMUM WELL COMMITMENT (Cont’d)

Example: Cote D’Ivoire 1993 Model PSC 4.5 Each of the exploratory wells referred to above shall be drilled to a minimum depth of [___] meters, after deduction of the water depth or to a lesser depth, if the continuation of drilling performed in accordance with good international petroleum industry practice is prevented for any of the following reasons: 4.5.a the basement is encountered at a lesser depth than the minimum contractual depth; 4.5.b continuation of drilling presents an obvious danger due to the existence of abnormal formation pressure; 4.5.c rock formations are encountered the hardness of which prevents, in practice, the continuation of drilling by the use of appropriate equipment; 4.5.d petroleum formations are encountered the crossing of which requires, for their protection, the laying of casings preventing the minimum contractual depth from being reached. In the event that any of the above reasons occurs, the exploratory well shall be deemed to have been drilled to the minimum contract depth. Notwithstanding any provision in this Article to the contrary, the Government and the Contractor may, at any time, agree to abandon the drilling of a well at a lesser depth than the minimum contractual depth. 95

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 3. DEEMED SATISFACTION OF MINIMUM WELL COMMITMENT (Cont’d)

Example: Islamic Republic of Mauritania 1993 Model PSC: 4.4 Each exploratory well set forth above shall be drilled to the minimum contractual depth of ______ (___) meters, or to a lesser depth if authorized by the Government or if discontinuing drilling according to good international petroleum industry practice is justified by one of the following reasons: (A) basement is encountered at a depth less than the above-mentioned minimum contractual depth; (B) continued drilling is manifestly dangerous due to abnormal formation pressure; (C) rock formations are encountered, of which the hardness makes impractical to continue drilling with appropriate equipment; or (D) petroleum formations are encountered, requiring the installation of protective casings which prevent reaching the above-mentioned minimum contractual depth; In any of the above cases, the Contractor shall obtain prior approval of the Minister, prior to discontinuing drilling, which approval shall not be withheld without being duly justified, and the well in question shall be deemed to have been drilled to the abovementioned minimum contractual depth.

96

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 3. DEEMED SATISFACTION OF MINIMUM WELL COMMITMENT (Cont’d)

Example: Uganda 1993 Model PSC Art. 4.3: In such circumstances, the drilling of any Exploration Well may be terminated at a lesser depth and such Well shall, except where the circumstances described in subparagraphs (a) [basement], (b) [forseeable danger] and (c) [impenetrable formation] immediately above occur before Contractor has attained two thirds of the target depth provided for in the drilling programme relating to such well, be deemed to have satisfied the minimum depth criteria provided for hereunder. In all other circumstances in which a Well is terminated at a lesser depth, Contractor shall have the option to either (i) drill a substitute Exploration Well or (ii) pay to the Government the amount by which the drilling budget for such well on a dry hole basis, pursuant to paragraph 4.2 exceeds actual expenditure incurred in the drilling thereof. For the purpose of this paragraph 4.3, the term 'Basement' shall mean the geological basement below which hydrocarbons cannot be found and produced.

97

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d)

4.

Minimum Expenditure Commitments

¾ Contractor Benefit – represents less overall risk than a minimum work commitment because work obligation costs are never fixed ¾ Currency Conversion - index for potentially hyper-inflationary currencies or use a globally accepted currency (e.g., U.S. dollars) ¾ Issue – defining expenditures that will or will not count towards the minimum exploration expenditure commitment (e.g., parent company overhead) 98

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 4. MINIMUM EXPENDITURE COMMITMENTS (Cont’d)

Example: Indonesia 1990 Model PSC Art. 4.2 The amount to be spent by CONTRACTOR in conducting exploration operations pursuant to the terms of this Contract during the first six (6) Contract Years and in conducting Petroleum Operations pursuant to the terms of this Contract during the next four (4) Contract Years following the Effective Date shall in the aggregate be not less than hereafter specified for each of the Contract Years as follows: First Contract Year US$ ________ (_________ United States Dollars). Second Contract Year US$ ________ (_________ United States Dollars). Third Contract Year US$ ________ (_________ United States Dollars). Fourth Contract Year US$ ________ (_________ United States Dollars). Fifth Contract Year US$ ________ (_________ United States Dollars). Sixth Contract Year US$ ________ (_________ United States Dollars). Seventh Contract Year US$ ________ (_________ United States Dollars). Eighth Contract Year US$ ________ (_________ United States Dollars). Ninth Contract Year US$ ________ (_________ United States Dollars). Tenth Contract Year US$ ________ (_________ United States Dollars). 99

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d)

5. Minimum Exploration Work & Expenditure Commitments Example: Egypt 1998 Model Concession Art. IV(b) CONTRACTOR shall spend a minimum of ---- million ------U.S. Dollars on Exploration operations and activities related thereto during the initial --- (--) year Exploration period; provided that CONTRACTOR shall drill --- well(s) and acquire -------- Km of -- seismic. For the first ------ (-) year extension period that CONTRACTOR elects to extend beyond the initial Exploration period, CONTRACTOR shall spend a minimum of ------ million ( -------) U.S. Dollars and for the second --- (-) year extension period that CONTRACTOR elects to extend beyond the -- (-) year first extension period, CONTRACTOR shall also spend a minimum of ------ million (------) U.S. Dollars. During the first extension period that CONTRACTOR elects to extend beyond the initial Exploration period, CONTRACTOR shall drill -(.) well(s) and acquire ---- Km of --- seismic and, during the second extension period CONTRACTOR shall drill ---- (-)well(s).

100

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d)

6. Minimum Exploration Expenditure Commitments ¾ Liquidated Damages – Not a True Expenditure Obligation Example: Ethiopia 1994 Model PSA Arts. 5 Geological and geophysical operations, including _____(_____) kilometers of seismic surveys, such shooting to commence within _____(_____) months after the Effective Date, with minimum expenditure of _____(_____) United States dollars for such seismic operations; and Drill _____(_____) exploratory well(s) to a minimum depth of _____(_____) meters per well, the first such well to commence not later than _____months after the Effective Date, with minimum drilling expenditure of _____(_____) United States dollars for each such well. The fulfilment of any work obligations shall relieve the Contractor of the corresponding expenditure obligations but the fulfilment of any expenditure obligations shall not relieve the Contractor of the corresponding work obligations. If, at the end of the initial term of the Exploration Period . . . the Contractor has not made the minimum work obligations required during the initial term of the Exploration Period or any applicable extension thereof, the Contractor or its guarantor shall immediately pay the amount corresponding to the unfulfilled work obligations to the Government.

101

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d)

7. Work Units ¾ Minority of UGPCs specify minimum work in “Work Units” –

Contractor Benefit – more control or flexibility over exploration, but subject to approval of the annual work program and budget

Example: Pakistan 2001 Model Offshore PSC The minimum work (the "Minimum Work") to be carried out shall be as follows: INITIAL TERM: Phase One: Contract Years 1 and 2: __*__ Work Units plus 3 Work Units per Grid Area in the Original Contract Area, for each of Contract Years 1 and 2. Phase Two: Contract Years 3 and 4: __*__ Work Units plus 5 Work Units per Grid Area in the Contract Area, for each of Contract Years 3 and 4. Phase Three: Contract Year 5: __*__ Work Units plus 7 Work Units per Grid Area in the Contract Area. Work Units to be accomplished at any time prior to the end of the Initial Term. 102

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d)

8. Implementation of Minimum Commitments ¾ Host Government Oversight & Control – Performance conditioned on approval of work programs and budgets • Flexibility in Performance – depends on both the exploration period (short v. long) and the minimum commitments (work, expenditure, or work units)

¾ Timing Example: Bangladesh 1997 Model PSC Art. 6.1 Contractor shall commence Exploration Operations hereunder not later than sixty (60) days after the Effective Date, and continue such Exploration diligently for the duration of the Exploration Period and any extensions thereto.

103

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d)

9. Elastic Minimum Commitments (Minority of UGPCs) ¾ Effect of Commercial Discovery – Waiver of Minimum Commitments Example: Philippines 1993 Model PSC Art. 5.1 The first exploratory test well shall be commenced within _________ days from the Effective Date of the Contract. Thereafter, the drilling program shall continue in the years specified above until the programmed funds are expended and the drilling commitments are fulfilled or until petroleum is discovered in Commercial Quantity, whichever first occurs and in the latter event, CONTRACTOR will devote the remainder of the programmed funds to the delineation and development in supplement to such funds as may be needed to pursue actively the delineation and development program developed and presented for approval of the DEPARTMENT within ___________ days after the declaration of discovery of Petroleum in Commercial Quantity; 104

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 9. ELASTIC MINIMUM COMMITMENTS (Minority of UGPCs)

¾ Effect of Commercial Discovery (Cont'd.) – Additional Minimum Commitments Example: Yemen 1999 Model PSC Art. 3.5.1 A Commercial Discovery of Oil may consist of one producing reservoir or a group of producing reservoirs which is worthy of being developed commercially. After drilling a Commercial Oil Well, the CONTRACTOR shall undertake as part of its Exploration program the appraisal of the discovery by drilling one or more appraisal wells to determine whether such discovery is worthy of being developed commercially, taking into consideration the recoverable reserves and all other relevant technical and economical factors.

105

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d)

10. Default: Failure to Fulfill Minimum Commitments ¾ Fails Qualification to Proceed to Subsequent Exploration Phase Example: Pakistan 2001 Model Offshore PSC Art. 3.4: In addition, if Contractor does not carry out the Minimum Work during any Phase of the Initial Term or the First Renewal or Second Renewal, this Agreement shall automatically terminate upon the termination of the respective Phase or Renewal in which the Minimum Work was not carried out and Contractor shall not have any right to further extensions or Renewals provided however, this Agreement will continue to be valid for any Commercial Discovery(ies) pursuant to Article 3.1(f).

¾ Proving Damages v. Liquidated Damages Example: Oman 2002 Model PSC Art. 3.4: In the event that the Company, upon conclusion of the first optional extension to the initial term of this Agreement under Article 3.2 above, has not fulfilled its minimum work and financial obligations as set forth in Article 3.2 above, the Company shall pay to the Government the difference between ___________ ($____) U.S. Dollars and the amount actually spent by the Company on Petroleum Operations hereunder during such first optional extension.

106

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 10. DEFAULT: FAILURE TO FULFILL MINIMUM COMMITMENTS (Cont’d)

¾

Proving Damages v. Liquidated Damages (Cont'd.)

Example: Bangladesh 1997 Model PSC Art. 27.1: Petrobangla / Government shall have the right to terminate the contract and to take without payment all property of whatever nature of Contractor in Bangladesh or offshore of Bangladesh (i) if the Contractor shall a) fail to make any of the payments prescribed in the Contract on the dates prescribed for such payments; b) fail to fulfil the obligations provided for in Article 6 [Minimum Exploration Work Obligation] or a Development Plan hereof, ¾ Contractor Concern – that Host Government is not required to prove damages; fortunately Bangladesh is the exception 107

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 10. DEFAULT: FAILURE TO FULFILL MINIMUM COMMITMENTS (Cont’d)

¾ Carry-forward of Unsatisfied Commitments (minority of UGPCs) – Rationale – incorporates some flexibility into the UGPC for the benefit of the Contractor, albeit subject to government control (i.e., consent). Example: Indonesia 2002 Conventional Model PSC: If during any Contract Year after the third (3rd) Contract Year CONTRACTOR performed less work than required in such Year, CONTRACTOR, may with BADAN PELAKSANA's consent carry forward such work not performed in and add the work to be performed in the following Contract Years without prejudice to CONTRACTOR's right hereunder. Example: China 1995 Model Contract 3d Onshore Bid Round Art. 6.5: At the expiration of any phase of the exploration period, if the actual exploration work fulfilled by the Contractor is less than the minimum exploration work commitment set forth for the said exploration phase, and if the Contractor opts to enter the next phase and continue exploration under Article 6.4 (a) herein, the Contractor shall give reasons to CNPC for the underfulfillment, and, with the consent of CNPC, the unfulfilled balance of the said phase shall be added to the minimum exploration work commitment for the next exploration phase. 108

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d)

11. Credit for Excess Minimum Commitments ¾ Found in most UGPCs – Rationale – mutually beneficial to the Contractor and the Host Government » Host Government – avoids exploration delays » Contractor – presents opportunity for a more flexible exploration schedule

¾ UGPC is Silent on Credits for Work or Expenditures in Excess of Minimum Commitments – Issue – whether the law will permit the Host Government to exercise discretion in granting a credit for work or expenditures in excess of minimum commitments notwithstanding the UGPC’s silence on the issue 109

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 11. CREDIT FOR EXCESS MINIMUM COMMITMENTS (Cont’d). ¾ Types of Credit Provisions – No Consent Required Example: India 2002 Model PSC Art. 5.9: In the event that the Contractor has carried out work in excess of the Minimum Work Programme in any Exploration Phase, the excess exploration work done shall be set off against the Minimum Work Programme for the following Exploration Phase. – Consent Required Example: Belize 1995 Model Contract Art. 6.1.3: If, during any contract year in the exploration period, the contractor should expend more than the required minimum annual exploration expenditures, the contractor may subtract an amount equal to the excess amount spent from the required minimum exploration expenditures for the ensuing contract year in the exploration period. If works carried out in any contract year exceed the minimum work commitment relating to such contract year as provided in paragraph 6.1.2, the excesses may, with the Government's prior written consent, count towards the satisfaction of the minimum work commitments for the ensuing contract year. 110

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 11. CREDIT FOR EXCESS MINIMUM COMMITMENTS (Cont’d).

¾ Types of Credit Provisions (Cont'd.) – Conditional Credit (rarely found) Example: Central Africa Republic 1993 Model UGPC Art. 4.5: If either during the initial period of the Permit or during the first renewal period the Company drills a number of Exploratory Wells greater than the minimum drilling obligations specified for said period, the excess wells may be carried forward to the following renewal period(s) and shall be deducted from the obligations specified for said period(s), provided that at least one Exploratory Well shall be drilled during each renewal period of the Permit. 111

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d)

12. Security for Contractor’s Minimum Commitments ¾ Parent Guarantee v. Letter of Credit – Parent Guarantee » Generally cost free to the Contractor (i.e., no bank commission) » Presents enforcement issues for the Host Government – Letter of Credit » Imposes an additional cost on the Contractor » Host Government can draw down on the Letter of Credit pending the resolution of any dispute 112

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 12. Security for Contractor’s Minimum Commitments (Cont’d)

¾ Issue – whether the UGPC provides for a reduction of the security as the Contractor’s minimum commitments are satisfied Example: Bangladesh 1997 Model PSC: 7.3 The relevant bank guarantee shall be reduced in accordance with the following schedule upon delivery to the issuing bank of a certificate from Contractor countersigned by Petrobangla that the corresponding item of work has been completed in accordance with the Contract and that all technical data related thereto and a comprehensive technical report thereon required by Article 6.7 has been delivered to Petrobangla. Schedule [Note : Each identifiable item of work- such as the seismic program and each Exploratory Well within Articles 6.2,6.3 and 6.4 shall be assigned a value (equal to 100% of the estimated cost thereof) for purposes of reducing the relevant bank guarantee.]

113

V. CONTRACTUAL PROVISIONS (Cont’d) D. EXPLORATION WORK COMMITMENTS (Cont’d) 12. Security for Contractor’s Minimum Commitments (Cont’d)

¾ Issue – whether the UGPC provides for a reduction of the security as the Contractor’s minimum commitments are satisfied Example: Venezuela Model Services Agreement Art. 5.1: To guarantee the Minimum Work Schedule, THE CONTRACTOR shall submit, as decided by THE AFFILIATE. a "Stand By" Letter of Credit and/or a Performance Bond according to the text provided by THE AFFILIATE, both irrevocable, in favor of THE AFFILIATE and issued or confirmed by a first-class hank approved by THE AFFILIATE and using the form established in Appendix "D". Default by THE CONTRACTOR of the above minimum work commitments provided here in shall give THE AFFILIATE the right, notwithstanding any other available right or remedy, to immediately execute the above mentioned Letter of Credit and/or Performance Bond, as corresponds, for an amount representing the defaulted minimum guaranteed work commitment of THE CONTRACTOR. The amounts executed as provided herein shall, in no way be reimbursed to THE CONTRACTOR, nor deducted, offset nor otherwise reduced for any reason whatsoever, including, without limitation, the receipt of any benefits by THE AFFILIATE, the alleviation of whatever damage earned by the default of the Minimum Work Schedule or the real or possible existence of any claim against third parties or THE AFFILIATE.

114

V.

CONTRACTUAL PROVISIONS

E. GOVERNMENT OVERNMENT CONTROL ONTROL PROVISIONS ROVISIONS

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d)

1. Basic Considerations ¾ The Who, What, When & How of Petroleum Operations and Why It’s Important – Control! - The Issues » Who performs the petroleum operations? » What petroleum operations may be performed? • Disputes over Host Government discretion and applicable standards of review

» When must petroleum operations be performed? » How must petroleum operations get performed?

- Competing Interests (therefore potential for disputes) » Contractor – greater control leads to efficient exploration, development and production. » Host Government – need to manage hydrocarbon resources, develop citizenry (e.g., jobs and training), protect the environment, manage political risk (e.g., public perception) etc.

116

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d)

2. Who Performs Petroleum Operations? ¾ Potential Parties to Perform Operations » Contractor – majority » National Oil Company • Typically after commercial discovery

» Domestic Company • Typically formed after commercial discovery (e.g., equity joint venture)

Example: Egypt 1998 Model Concession Agreement Art. VI(a) On Commercial Discovery, EGPC and CONTRACTOR shall form in the A.R.E. an operating company pursuant to Article VI (b) and Annex (D) (hereinafter referred to as "Operating Company") which company shall be named by mutual agreement between EGPC and CONTRACTOR and such name shall be subject to the approval of the Minister of Petroleum. Said company shall be a private sector company. Operating Company shall be subject to the laws and regulations in force in the A.R.E. to the extent that such laws and regulations are not inconsistent with the provisions of this Agreement or the Charter of Operating Company. 117

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 2. Who Performs Petroleum Operations (Cont’d)

¾ Interests and Concerns – Contractor – concerned cost recovery made contingent on the performance of the NOC or a Domestic Company after a commercial discovery – Host Government – need to develop and train citizenry and enhance public perception that the host government is ultimately responsible for developing its hydrocarbon resources 118

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d)

3. What Petroleum Operations Can Be Performed and When? ¾ Types of Operations Subject to Government Control – – – –

Annual Work Programs and Budgets Appraisal Plans Declarations of Commerciality Development Plans

¾ Approval Mechanisms – Petroleum Ministry – National Oil Company » Issue – potential Host Government perception of a conflict of interest where the NOC is also a participant in the Contractor’s project

– Management Committee Approval – Multiple Approval Bodies (minority) (e.g., NOC and Ministry) 119

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 3. WHAT PETROLEUM OPERATIONS CAN BE PERFORMED AND WHEN?

¾ Disputes over Host Government discretion and applicable standards of review – Express right of recourse to third-party review – No express right of recourse to third-party review » Issue – whether Host Government discretion to approve or revise a petroleum operation is nonetheless subject to third-party review

– Approval Standards – can be ambiguous and subject to discretion » » » » » »

Generally accepted international petroleum practices Reasonableness (e.g., will not unreasonably withhold approval) Good faith – implied at law in many jurisdictions Mutual agreement Deemed approval (i.e., when approving body fails to act) No express approval standard 120

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 3. WHAT PETROLEUM OPERATIONS CAN BE PERFORMED AND WHEN?

¾ Annual Work Program & Budget – Alignment of Interests – presumed, at least during the exploration phase, providing Contractor complies with minimum work obligation – Who Proposes (e.g., Contractor, NOC, Domestic Company) – When Must it be Proposed – Approval (e.g., Ministry, NOC, Management Committee etc.) – Approval Standards – Host Government Discretion Regarding Non-Approval » No express right of recourse for third-party review » Express right of recourse to third-party review 121

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 3. WHAT PETROLEUM OPERATIONS CAN BE PERFORMED AND WHEN?

¾ Annual Work Program & Budget Example: Cote D’Ivoire 1993 Model PSC Art. 5: At least three (3) months before the beginning of each Calendar Year . . . the Contractor shall prepare and submit for approval to the Government an Annual Work Program together with the related Budget for the entire Delimited Area . . . If the Government wishes to propose any revisions . . . it shall, within thirty (30) days after receipt of that Program, so notify the Contractor, presenting all justifications deemed useful. In that event, the Government and the Contractor shall meet . . . to mutually establish the Annual Work Program and the related Budget in its final form, in accordance with good international petroleum industry practice. However, during the exploration period, the Annual Work Program and the related Budget for exploration established by the Contractor after the abovementioned meeting shall be deemed to be approved provided that they comply with the obligations set forth in Article 4. Should Government fail to notify the Contractor of its wish for revision or modification within the period of thirty (30) days above-mentioned, such Annual Work Program and the related Budget submitted by the Contractor shall be deemed to be approved by the Government. 122

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 3. WHAT PETROLEUM OPERATIONS CAN BE PERFORMED AND WHEN?

¾ Appraisal Plans – Who Proposes (e.g., Contractor, NOC, Domestic Company) – When Must Appraisal Be Proposed – Approval (e.g., Ministry, NOC, Management Committee etc.) – Approval Standards – Host Government Discretion Regarding Non-Approval » No express right of recourse for third-party review » Express right of recourse to third-party review 123

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 3. WHAT PETROLEUM OPERATIONS CAN BE PERFORMED AND WHEN? ¾ Appraisal Plans Example: Cote d’Ivoire 1993 Model PSC Arts. 11.2 and 32.1: If the Contractor wishes to undertake appraisal work relating to the abovementioned potential Petroleum discovery, the Contractor shall submit a request for an exclusive appraisal authorization to the Government within six (6) months after the date of the notification of said discovery along with the appraisal work program . . . it being understood that the submitted program may not be rejected or modified by the Government provided that it complies with good international petroleum industry practice. In the event of any dispute arising between the Government and the Contractor, relating to, or arising out of, the interpretation or execution of any of the provisions of this Contract, the Parties shall endeavour to settle such dispute amicably. If within three (3) months from the date of notice of such dispute by either Party to the other, the Parties have not reached settlement, the dispute shall, at the request of either Party, be referred for arbitration to the International Centre for Settlement of Investment Disputes . . . . 124

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 3. WHAT PETROLEUM OPERATIONS CAN BE PERFORMED AND WHEN?

¾ Appraisal Plans

Example: Trinidad & Tobago 1996 Model PSC Art. 13.4: If the Contractor fails to present an Appraisal Programme under Article 13.2 (a) or Assessment Plan under Article 13.3 that is acceptable to the Minister, the Contractor shall upon the request of the Minister at any time thereafter relinquish an area which shall contain as a minimum the geological structure or feature in which the Discovery was made. 125

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 3. WHAT PETROLEUM OPERATIONS CAN BE PERFORMED AND WHEN?

¾ Commerciality (decision to proceed to development) – Interests & Concerns » Contractor – desires to develop even marginal discoveries in order to recover costs » Host Government – will see little revenue from a marginal discovery – Approval (e.g., Ministry, NOC, Management Committee etc.) – Approval Standards (e.g., international petroleum industry practice) – Non-Approval » No express right of recourse for third-party review » Express right of recourse to third-party review 126

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 3. WHAT PETROLEUM OPERATIONS CAN BE PERFORMED AND WHEN?

¾ Commerciality (decision to proceed to development) (Cont’d.) Example: Cambodia 2000 Model Petroleum Agreement Art. 16: Contractor shall notify the CNPA immediately when Exploration Operations indicate a Discovery in commercial quantities within the Contract Area. This notice shall include all available details of the Discovery… If the CNPA challenges the notice given by Contractor and the parties cannot agree to a resolution of their difference of opinion, the parties shall submit the dispute to arbitration pursuant to Article 69 of this Agreement. If no challenge is made by the CNPA, the Discovery shall be deemed to be commercial. 127

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 3. WHAT PETROLEUM OPERATIONS CAN BE PERFORMED AND WHEN?

¾ Development Plans – Development Area – defined by area and/or depth – Time Period for Submitting Development Plan » Contractor’s Issues – complexity of the reservoirs, required infrastructure to develop and produce, marketing etc.

Example: Brazil 2002 Model Concession (4th ANP Round) Art. 9.1: Within 180 (one hundred and eighty) days from the date of delivery of the Declaration of Commerciality pursuant to paragraph 7.1 and except as provided for in paragraph 12.1, or on the date of the Declaration of Commerciality, in the case of paragraphs 7.1.2 or 7.1.3, the Concessionaire shall deliver to the ANP the relevant Development Plan, prepared in accordance with applicable Brazilian legislation and Oil Industry Best Practice. 128

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 3. WHAT PETROLEUM OPERATIONS CAN BE PERFORMED AND WHEN?

¾ Development Plans (Cont’d.) – Contents of the Development Plan Example: Bolivia 1997 Model MSC Annex B Art. 3: If the Holder declares a commercial discovery . . . he must submit the development plan to Y.P.F.B. and to the Department of Energy for information, consisting of: a) the identification of the exploitation area, in accordance with the regulations contained in Chapter VI of the Regulations on the Relinquishment and Retention of Areas; b) the report on proven and probable reserves; the production parameters; the number and spacing of the wells, their location and depths, together with the installations, equipment and infrastructure to meet the production forecasts; c) his plan of installations inside and outside the Contract Area, including storage and transport; d) his proposal for the use of the natural gas; e) his proposed location of the "well head", together with the metering and calibration systems for the auditing of the hydrocarbons, and f) a schedule of the activities and investments up to the start of production. 129

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 3. WHAT PETROLEUM OPERATIONS CAN BE PERFORMED AND WHEN?

¾ Development Plans (Cont’d.) – Approval of the Development Plan and Approval Standards Example: Bolivia 1997 Model MSC Annex B Art. 3: This development plan shall be understood to be approved if Y.P.F.B. makes no objection, in writing, within the thirty (30) calendar days following the date of its submission. Should Y.P.F.B. formulate any objections based on international practice in the hydrocarbons industry and the technical and safety standards in force, and should the Parties not reach agreement within the sixty (60) calendar days following the date of the objection, the Holder shall have the right to submit the resolution of the differences to an expert or to a Conciliation Board in accordance with the procedures specified in Section 14. 130

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 3. WHAT PETROLEUM OPERATIONS CAN BE PERFORMED AND WHEN?

¾ Development Plans (Cont’d.) – Approval of Development Plan and Approval Standards Example: Ethiopia 1994 Model PSA Art. 5.4.4: The Minister may require the Contractor to provide within a specified time period such further information as the Minister may reasonably need to evaluate the development plan for any Development Area. The Minister may also require that the Contractor makes such revisions to the development plan as are reasonable to contribute to the efficient development of Ethiopian infrastructure and to assist other national needs, without impairing the economic viability of the development of the Development Area.

131

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 3. WHAT PETROLEUM OPERATIONS CAN BE PERFORMED AND WHEN? (Cont’d) ¾ Development Plans (Cont’d.) – Revising the Development Plan » Issue – change in circumstance that necessitates a change in the development plan Example: Brazil 2002 Model Concession (4th ANP Round) Art. 9.4: In the event of a change in the technical conditions or economics used in the formulation of the Development Plan, the Concessionaire may submit revisions or amendments to the ANP, accompanied by supporting reasons, and in accordance with applicable Brazilian legislation and with Oil Industry Best Practice. If the Development Plan at any time ceases to comply with applicable Brazilian laws and regulations or with Oil Industry Best Practice, the Concessionaire shall be obligated to amend it so that it so compiles. Amendments shall be subject to the ANP's review and approval applying, mutatis mutandis, the provisions in paragraph 9.3. If the ANP believes that a Development Plan has ceased to comply with applicable Brazilian legislation and Oil Industry Best Practice, it may require the Concessionaire to make appropriate amendments. 132

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d)

4. How Must Petroleum Operations Get Performed?

¾ Procurement

– Reconcile Competing Interests » Contractor – desires to procure products and services of suitable quality at the best possible price » Host Government – desire to have domestic suppliers provide goods and services Example: Bangladesh 1997 Model PSC Art. 10.14 & 10.15: Give priority to local sub-contractors as long as their prices, equipment performance and availability are comparable with prices, performance and availability of international sub-contractors; Give preference to locally manufactured materials, equipment, machinery, supplies and consumable so long as their quality, price and time of delivery are comparable to internationally available materials, equipment, machinery supplies and consumable c.i.f. Bangladesh.

133

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 4. How Must Petroleum Operations get Performed? (Cont’d)

¾ Procurement (Cont'd.) Example: Brunei 2000 Model PMA 15.1: The Operator shall comply with the national objective of maximising the use of local equipment, facilities, goods, materials, supplies and services required for Petroleum Operations. In pursuance of the foregoing, the following shall be observed in the procurement of goods and services:

• the enhancement of effective local, especially Brunei

nationals, participation in equity, management and employment; • the acceleration of transfer of non-proprietary technology from the Operator or its subcontractor to local, especially, with the objective of developing local technical and managerial capabilities; • the need to minimise outflow of foreign exchange; and • the development of ancillary industries arising from Petroleum Operations to enhance the growth of the national economy. 134

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 4. How Must Petroleum Operations get Performed? (Cont’d)

¾ Personnel – Interests & Concerns » Host Government – political and economic incentive to maximize the employment and training of domestic personnel » Contractor – maximize efficiency in its operations, tempered by the cost of foreign personnel and public perception in the host country Example: Equatorial Guinea 1998 Model PSC Art 6.10 and 6.11: Contractor may only employ expatriate personnel and subcontractors if there is no possibility of recruiting Equatoguinean personnel in the required specialities. For that purpose Contractor shall establish . . . in agreement with the Ministry . . . a plan for recruiting Equatoguinean personnel and a plan for training and improving the skills of such personnel . . . and corresponding costs incurred by the Contractor shall be considered Petroleum Operations Costs. Contractor shall also contribute to training and improving . . . a minimum amount of one hundred thousand (100,000) Dollars per year. From . . . declaration of a Commercial Field . . . the said amount shall be increased to two hundred thousand (200,000) Dollars per year.

135

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 4. How Must Petroleum Operations get Performed? (Cont’d)

¾ Personnel (Cont'd.)

Example: Indonesia 2000 Model PSC Art. 12: CONTRACTOR agrees to employ qualified Indonesian personnel and after commercial production commences will undertake the schooling and training of Indonesian personnel for labor and staff positions including administrative and executive management positions. At such time, CONTRACTOR shall also consider with PERTAMINA a program of assistance for training of GOI's and PERTAMINA's personnel. Costs and expenses of training Indonesian personnel for its own employment shall be included in Operating Costs. Costs and expenses for a program of training for GOI's and PERTAMINA's personnel shall be borne on a basis to be agreed by GOI's, PERTAMINA and CONTRACTOR. 136

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 4. How Must Petroleum Operations get Performed? (Cont’d)

¾ Control Over Rate of Production

– Host Government Issues – production constraints (e.g., OPEC), reservoir preservation, pipeline capacity etc. Example: Venezuela 1995 Model Association Agreement: The members of any Consortium may be required to curtail Production as a result of Government measures adopted in implementation of Venezuela's international treaty commitments. Where the members of such Consortium are unable to recoup the resulting loss by causing the Consortium to increase its rate of Production to the extent necessary to recoup such loss, the members of such Consortium shall be entitled to receive an extension of the Operation Period, sufficient in duration to allow it to produce the same volume it failed to produce as a result of such curtailment, so long as such extension does not exceed the thirty-nine year limit on the duration of this Agreement set forth in Clause 21.1. 137

V. CONTRACTUAL PROVISIONS (Cont’d) E. GOVERNMENT CONTROL PROVISIONS (Cont’d) 4. How Must Petroleum Operations get Performed? (Cont’d) ¾ Control Over Rate of Production (Cont'd.) Example: Equatorial Guinea 2000 Model PSC Arts. 6.4 & 1.2 (v) Contractor will produce Crude oil from the Contract Area in such a manner that Production reaches the Maximum Efficient Rate. The Contractor and the MINISTRY will revise production programs before production starts in any Field and establish from the start the Maximum Efficient Rate and the Level of Production required for Natural Gas, and establish the dates when such coefficients and levels should be reviewed with the expectation of introducing any necessary adjustments. In the case of the Natural Gas, the Production Level will be no less than what is required in order to fulfill the requirements of any Natural Gas Buy/Sell Contract. In the case of Crude Oil the Production Level will be not less than what is necessary in order to satisfy any effective Contract for the sale of Crude Oil. In no case will Production Level be enough to cause damage to the reservoirs. Maximum Efficient Rate means the maximum rate of production of Hydrocarbons in a Field which will not cause damage to the formation and which will not cause a reduction in pressure below 90% of the initial pressure and in accordance with the customary international petroleum industry regulations and practices in accordance with Article 6.4 of this Contract.

138

V. CONTRACTUAL PROVISIONS F. RELINQUISHMENT

V. CONTRACTUAL PROVISIONS (Cont’d) F. RELINQUISHMENT (Cont’d)

1. Mandatory Relinquishment ¾ Linked to progression from exploration into development and production activities – Host Government issues: » Promoting efficient and timely exploration of the Contract Area » Preventing Contractor from holding inactive areas » Recovering inactive acreage for subsequent petroleum operations by third parties

– Contractor’s Issues: » Not being prematurely deprived of potentially productive areas » Retaining rights over areas required in connection with a discovery in order to conduct efficient development and production operations

– Balanced Approach: Clause should consider: » » » »

Particularities of Contract Area Proportionate to exigencies of exploration work program Proportionate to the time for completion Safeguarding rights of Contractor to use surface of relinquished areas as required for efficient petroleum operations

– Timing » Reasonable to allow IOC to identify non-prospective acreage » Relinquishment tied to contract years » Relinquishment tied to exploration phases or completion of phases of work program 140

V. CONTRACTUAL PROVISIONS (Cont’d) F. RELINQUISHMENT (Cont’d)

2. Area to be Relinquished ¾ Size – Host Government concerns: » Size suitable for petroleum operations by third parties or directly by the Host Government or National Oil Company. – Contractor’s concerns: » Retaining area of sufficient size to conduct additional exploration activities » Retaining rights to installing facilities or infrastructure required for development and production. – Balanced approach: » Carve-outs from relinquishment obligations or safeguards for Contractor’s rights » Proportionate to size of original Contract Area 141

V. CONTRACTUAL PROVISIONS (Cont’d) F. RELINQUISHMENT (Cont’d) 2. AREA TO BE RELINQUISHED (Cont’d)

Examples:

Brunei - 2000 Model Petroleum Agreement On the last day of the fifth (5th) Agreement Year, the Agreement Area shall be reduced to the greater of i. 50% of the original Agreement Area; or ii. the area of any Petroleum Field(s) in the Agreement Area to which a development and production plan having the approval of the Authority pursuant to Article 10.9 hereof applies on such day together with such further area as may be approved by the Authority as necessary to operate the Petroleum Field(s) in the Agreement Area. At least ninety (90) days prior to the last day of the fifth (5th) Agreement Year, the Operator shall submit to the Authority for its approval the area to be surrendered pursuant to this Article 2.2. 142

V. CONTRACTUAL PROVISIONS (Cont’d) F. RELINQUISHMENT (Cont’d) 2. AREA TO BE RELINQUISHED (Cont’d)

Examples:

Trinidad and Tobago – 2001 Model Production Sharing Contract The following areas are not subject to mandatory relinquishment: • Production Areas; • Appraisal Areas subject to an extension under Article 4.3; • Natural Gas Discovery areas retained for a market development phase under Article 16.2;and • Exploration areas retained in accordance with Article 6.1; (…) 143

V. CONTRACTUAL PROVISIONS (Cont’d) F. RELINQUISHMENT (Cont’d) 2. AREA TO BE RELINQUISHED (Cont’d)

Examples (Cont’d.)

¾ Contractor’s safeguards: Colombian 2000 Model Association Contract 8.2 Notwithstanding the obligation to relinquish the areas described in Clause 8 (Item 8.1), THE ASSOCIATE shall not be compelled to relinquish Commercial Fields that are in development or production, or under a Retention Period, including the two and a half (2.5) kilometer surrounding reserve area,(…)” The 2.5 kilometer reserve area refers to a reserve zone of a width of 2.5 Kilometers around each Commercial Field which Contractor is entitled to retain. The Retention Period refers to the period of time allowed to Contractor for the development of natural gas discoveries... 144

V. CONTRACTUAL PROVISIONS (Cont’d) F. Relinquishment (Cont’d)

3. Configuration of Relinquished Area ¾ Host Government concern: – Suitable for others to conduct future petroleum operations ¾ Contractor’s concerns: - Consistent with geological data » Efficiency of development and production » Potential for marginal discoveries in connection with a Commercial Discovery ¾ Balanced approach: - Allowing Contractor’s participation in defining configuration » Contractor’s right to define shape and location within stated parameters » Mutual agreement? Consent not unreasonably withheld?

145

V. CONTRACTUAL PROVISIONS (Cont’d) F. RELINQUISHMENT (Cont’d) 3. CONFIGURATION OF RELINQUISHED AREA (Cont’d)

Examples: – Contractor’s right within stated parameters Equatorial Guinea – 2000 Model Production Sharing Agreement: Contractor shall have the right according to generally accepted technical principles in the petroleum industry to define the size, shape and location of the portion of the Contract Area which it intends to keep and area which it intends to relinquish. The relinquished portion shall have a simple geometric shape, going from North to South and East to West or by natural boundaries. –

Agreement of the parties Yemen – 1999 Model Production Sharing Agreement The size and shape of the relinquishments made under this Article shall be determined by mutual agreement, provided that, unless otherwise agreed, all areas relinquished shall, at a minimum, be reasonably accessible for, and capable of, further Exploration and Development.

146

V. CONTRACTUAL PROVISIONS (Cont’d) F. Relinquishment (Cont’d)

4. Other Events Triggering Mandatory Relinquishment as a Penalty for Contractor’s Non-Compliance ¾ Failure to comply with Minimum Work Obligation Example: Indonesia – 2002 Model Production Sharing Agreement 3.2. If the Work Program during three (3) Contract Years from the Effective Date has not been completed by CONTRACTOR pursuant to Section IV clause Q 4.2, with the consideration and evaluation of BADAN PELAKSANA, CONTRACTOR shall be obliged to relinquish an additional fifteen percent (15%) of original total Contract Area at the end of the third Contract Year to BADAN PELAKSANA. 147

V. CONTRACTUAL PROVISIONS (Cont’d) F. RELINQUISHMENT (Cont’d) 4. OTHER EVENTS TRIGGERING MANDATORY RELINQUISHMENT AS A PENALTY FOR CONTRACTOR’S NON-COMPLIANCE (Cont’d)

¾ Failure to timely deliver Development Plan Example: Brazil – 2003 Model Concession Agreement “7.3 In the case the Concessionaire elects not to issue the Declaration of Commerciality for the evaluated Discovery, pursuant to this Clause Seven, or if, having issued the Declaration of Commerciality, fails to deliver to the ANP, within the proper period of time, the Development Plan required pursuant to paragraphs 7.2, 7.2.2 and 9.1, then the area concerned shall be subject to relinquishment as provided in this Agreement.” 148

V. CONTRACTUAL PROVISIONS (Cont’d) F. RELINQUISHMENT (Cont’d) 4. OTHER EVENTS TRIGGERING MANDATORY RELINQUISHMENT AS A PENALTY FOR CONTRACTOR’S NON-COMPLIANCE (Cont’d)

¾ Unjustified prolonged stoppage of production Example: Trinidad and Tobago – 2001 Production Sharing Agreement “5.6 The Contractor shall relinquish rights to conduct Petroleum Operations in a Production Area upon request of the Minister where, for reasons other than force majeure or scheduled maintenance under an approved Work Programme and budget, the Contractor has ceased normal production of such Production Area in a manner consistent with contractor’s obligation pursuant to 13.9(c) for more than one hundred and eighty (180) consecutive days.” 149

V. CONTRACTUAL PROVISIONS (Cont’d) F. RELINQUISHMENT (Cont’d)

5. Voluntary Relinquishment/Surrender ¾ Rationale – Contractor should not be forced to hold non-prospective areas and not required in connection with any discovery » Additional costs (rental payments, security costs, environmental) – Host Government benefits from recovering areas that otherwise would remain inactive ¾ Conditions – Completion of Minimum Work Program – Prior notice to Host Government – Security for abandonment, or prior clean-up and site restoration

150

V. CONTRACTUAL PROVISIONS (Cont’d) F. RELINQUISHMENT (Cont’d) 5. VOLUNTARY RELINQUISHMENT/SURRENDER (Cont’d)

Example: Bangladesh – 1997 Model Production Sharing Contract 5.5 Contractor may at any time relinquish voluntarily its rights hereunder to conduct Petroleum Operations in all or any part of Contract Area upon giving Petrobangla at least ninety (90) days prior written notice. Such voluntary relinquishments during the Exploration Period shall be credited toward the relinquishments required by Article 5. 1. Should the Contractor voluntarily relinquish the entire Contract Area, the Contract shall terminate. 5.6 No relinquishment shall relieve Contractor of accrued but unfulfilled obligations under the Contract. In the event that contractor desires to relinquish its rights hereunder to conduct Petroleum Operations in all of the Contract Area without having fulfilled all accrued minimum Exploration work obligations under Article 6 as well as all accrued appraisal obligations or Development obligations under Article 8, Contractor shall pay Petrobangla prior to the date of such proposed total relinquishment an amount equal to the amounts specified under Article 7.3 corresponding to all unfulfilled accrued items of work under the minimum Exploration program under Article 6, and an amount equal to the cost of all other accrued work obligation under the Contract.

151

V. CONTRACTUAL PROVISIONS (Cont’d) F. RELINQUISHMENT (Cont’d) 5. VOLUNTARY RELINQUISHMENT/SURRENDER (Cont’d)

¾ Credit against mandatory relinquishment obligation Areas voluntarily relinquished by Contractor should be credited against its mandatory relinquishment obligations Example: Yemen – Model Production Sharing Agreement 1999 The CONTRACTOR may voluntarily relinquish all or any part of the Agreement Area subject to having fulfilled all of its obligations at that time required to be performed under Article 4.1 of this Agreement. Any voluntary relinquishment shall be credited toward the mandatory relinquishments required under Article 5.1 above. ¾ Area Affected – Portions of Contract Area (same considerations regarding mandatory relinquishment apply) – Entire Contract Area – Contract terminates 152

V. CONTRACTUAL PROVISIONS (Cont’d) F. RELINQUISHMENT (Cont’d)

6. Decommissioning Obligations on Relinquished Areas ¾ Clean-up activities to restore site to conditions as nearly as possible to original conditions ¾ Actions to prevent hazards to life and property damage ¾ Removal of assets and reversion of installations to Host Government ¾ Environmental mitigation actions according to Host Country legislation Example: Trinidad and Tobago – 2001 Model Production Sharing Contract “5.8 Prior to relinquishment of any area, Contractor shall perform all necessary abandonment programme activities in accordance with internationally accepted petroleum industry standards to restore such area as nearly as possible to the condition in which it existed on the Effective Date, including removal of such facilities, equipment or installations as the Minister may instruct, and shall take action necessary to prevent hazards to human life, property and the environment which may be caused by its facilities, equipment or installations.” 153

V.

CONTRACTUAL PROVISIONS

G. COST OST RECOVERY ECOVERY / PAYMENTS AYMENTS & CURRENCY URRENCY

V. CONTRACTUAL PROVISIONS (Cont’d) G. COST RECOVERY/PAYMENTS & CURRENCY (Cont’d)

1. Cost Recovery ¾ Government Drivers – Revenue from project before full cost recovery and/or repayment of “carry” of Government share ¾ Contractor Drivers – Recovery of capital and cost of capital – Cash flow ¾ Big Picture Issues – Classification of Costs (affecting recoverability/timing and/or order of recovery) – Approval (discretionary or other non-core costs) – Location (ring fencing)

155

V. CONTRACTUAL PROVISIONS (Cont’d) G. COST RECOVERY/PAYMENTS & CURRENCY (Cont’d) 1. COST RECOVERY (Cont’d)

¾ Cost recovery schedule and limitations – Periods » Exploration » Appraisal » Development » Production » Uplift / interest – Percentage of production (flat or sliding scale) » Impact of royalty » Allocation of excess cost hydrocarbons – Amortization

156

V. CONTRACTUAL PROVISIONS (Cont’d) G. COST RECOVERY/PAYMENTS & CURRENCY (Cont’d) 1. COST RECOVERY (Cont’d)

¾ Cost recoverability; does it include: – Carry forwards • Interest?

– – – – – – – – –

Bonuses (if any) Funding of non-operations infrastructure Rentals (if any) Financing costs (actual vs. deemed interest expense) Environmental studies and monitoring prior to operations Decommissioning costs / contributions to fund Damage from operations Insurance premiums or similar charges Operations in absence of government approval of work program 157

V. CONTRACTUAL PROVISIONS (Cont’d) G. COST RECOVERY/PAYMENTS & CURRENCY (Cont’d) 1. COST RECOVERY (Cont’d)

ANGOLA 1999 MODEL PRODUCTION SHARING AGREEMENT: Article 11 Recovery of Costs and Expenditures 1.

CONTRACTOR GROUP shall recover all Exploration, Development, Production and Administration and Services Expenditures incurred under this Agreement by taking and freely disposing of up to a maximum amount of __________ per cent (__ %) per Year of all Crude Oil produced and saved from Development Areas hereunder and not used in Petroleum Operations. Such Crude Oil is hereinafter referred to as "Cost Recovery Crude Oil".

2.

The expenditures referred to in the preceding paragraph shall be recoverable only insofar as they are properly incurred in the execution of the Petroleum Operations. Notwithstanding the generality of this principle, all expenditures relating to the Petroleum Operations which are classified, defined and allocated in accordance with [the Accounting Procedures] shall be considered as properly incurred.

158

V. CONTRACTUAL PROVISIONS (Cont’d) G. COST RECOVERY/PAYMENTS & CURRENCY (Cont’d) 1. COST RECOVERY (Cont’d) 3.

Exploration Expenditures incurred in the Contract Area shall be recoverable from the unused balance of Cost Recovery Crude Oil existing from each Development Area after recovery of Development Expenditures, Production Expenditures and Administration and Services Expenditures, subject to the maximum amount of Cost Recovery Crude Oil specified in paragraph 1 above. In each Year such Exploration Expenditures shall be recoverable first from any Cost Recovery Crude Oil balance obtained from the Development Area having the most recent date of Commercial Discovery and then any balance of total Exploration Expenditures not already recovered shall be recoverable in sequence from Development Areas with the next most recent dates of Commercial Discovery.

4.

Development Expenditures in each Development Area shall be recovered only from Cost Recovery Crude Oil from that Development Area. Development Expenditures in each individual Development Area shall be multiplied by____ (...) and the resulting amount shall be recoverable at the rate of____ ( %) per Year in equal annual installments starting in the Year in which such Expenditures are incurred or the Year in which commercial production in that Development Area commences, whichever occurs last. 159

V. CONTRACTUAL PROVISIONS (Cont’d) G. COST RECOVERY/PAYMENTS & CURRENCY (Cont’d) 1. COST RECOVERY (Cont’d)

5. Production Expenditures in each Development Area shall be recovered only from Cost Recovery Crude Oil from that Development Area in the Year in which such expenditures are incurred or the Year in which commercial production in that Development Area commences, whichever occurs last. 6. In the case that, in any given Year, recoverable costs, expenses or expenditures exceed the value of Cost Recovery Crude Oil from the relevant Development Area for such Year, the excess shall be carried forward for recovery in the next succeeding Year or Years until fully recovered; but in no case after the termination of the Agreement. In the event that Development Expenditures for a Development Area are not fully recovered within five (5) years after the commencement of commercial production or within five (5) years after the Year in which such Development Expenditures are incurred, whichever is last, then 160

V. CONTRACTUAL PROVISIONS (Cont’d) G. COST RECOVERY/PAYMENTS & CURRENCY (Cont’d) 1. COST RECOVERY (Cont’d) (continued)

CONTRACTOR group's share of Crude Oil shall be increased from Year six up to__________ ( %) per Year to allow for the recovery of such unrecovered expenditures, provided that CONTRACTOR GROUP has fulfilled all of its contractual obligations to date. 7. If in any given Year, recoverable costs, expenses or expenditures are less than the maximum value of Cost Recovery Crude Oil the excess shall become part of, and included in the Development Area Profit Oil provided for in Article 12.

161

V. CONTRACTUAL PROVISIONS (Cont’d) G. COST RECOVERY/PAYMENTS & CURRENCY (Cont’d)

2. Accounting Procedure ¾ What does it do? – Description / categorization of recoverable and tax deductible costs – Limits and conditions on cost recovery values (e.g., materials/equipment) – Administrative overhead expense (limits or assigned value) – Mechanics of determining cost recoverability (to extent not addressed in body of UGPC) – Compatibility with JOA accounting procedure? 162

V. CONTRACTUAL PROVISIONS (Cont’d) G. COST RECOVERY/PAYMENTS & CURRENCY (Cont’d)

3. Payments, Currency and Financing ¾ Contractor Perspective – Ability to repatriate – Non-discriminatory treatment (preferential treatment) – Currency risk (valuation) – Risk of frozen funds (exchange controls) ¾ Government Perspective – Hard currency supply – Avoid appearance of preferential treatment

163

V. CONTRACTUAL PROVISIONS (Cont’d) G. COST RECOVERY/PAYMENTS & CURRENCY (Cont’d) 3. PAYMENTS, CURRENCY AND FINANCING (Cont’d)

¾ Repatriation of proceeds – Right of Contractor to receive, retain and spend abroad foreign currency proceeds from export sales – Domestic sales proceeds freely converted and repatriated? – Exclusion from general currency/Central Bank restrictions – “Most favored nation” provision ¾ Banking flexibility – Currency – Bank(s) used – Host Government assistance in obtaining approvals 164

V. CONTRACTUAL PROVISIONS (Cont’d) G. COST RECOVERY/PAYMENTS & CURRENCY (Cont’d) 3. PAYMENTS, CURRENCY AND FINANCING (Cont’d)

¾ Payments by Host Government (service fees; domestic supply) – Currency – Interest on amounts owed – Payment in kind? ¾ Offshore payment of expatriate personnel – Repatriation of expatriate personnel’s salaries

165

V. CONTRACTUAL PROVISIONS (Cont’d) G. COST RECOVERY/PAYMENTS & CURRENCY (Cont’d) 3. PAYMENTS, CURRENCY AND FINANCING (Cont’d)

¾ Financing – Flexibility • Currency • Mode – equity, debt, combinations – Related party loans? – Cost recoverability of financing costs • Actual interest vs. deemed interest • Tax deductibility of financing costs?

166

V. CONTRACTUAL PROVISIONS (Cont’d) G. COST RECOVERY/PAYMENTS & CURRENCY (Cont’d) 3. PAYMENTS, CURRENCY AND FINANCING (Cont’d)

GABON 1993 MODEL PSC: CURRENCY EXCHANGE CONTROL 31.1 The Contract will be governed by the currency exchange regulation in force. 31.2 No restriction will be imposed on importation by the Contractor of the funds intended for the performance of the Petroleum Operations. 31.3 The Contractor will be authorized to freely convert its assets in Gabon to convertible currencies; it will also have the right to export the funds it owns in Gabon in excess of its local needs, without being discriminated against. 31.4 In addition, the Contractor will have the right not to import into Gabon the funds intended for performance of the Petroleum Operations requiring payment to be made abroad when due. 167

V. CONTRACTUAL PROVISIONS (Cont’d) G. COST RECOVERY/PAYMENTS & CURRENCY (Cont’d) 3. PAYMENTS, CURRENCY AND FINANCING (Cont’d)

MONGOLIA 2000 MODEL PSC: Article XVII Exchange Rights 17.1 Foreign Currencies Purchase or sale of foreign currencies shall be transacted at the daily prevailing rates as quoted by the Mongol Bank. 17.2 Foreign Bank Accounts The Contractor is hereby authorized to open, maintain, control and operate accounts in any currency in foreign banks outside of Mongolia, to have full and complete control of such accounts, and to retain abroad and freely dispose of any funds in such accounts.

168

V. CONTRACTUAL PROVISIONS (Cont’d) G. COST RECOVERY/PAYMENTS & CURRENCY (Cont’d) 3. PAYMENTS, CURRENCY AND FINANCING (Cont’d) 17.3 Exchange Rights The Contractor is hereby granted the following exchange rights: a. To provide in freely convertible foreign currencies all funds needed to conduct Petroleum Operations and to convert such currencies to Mongolian currency through any bank of Mongolia at the exchange rate prescribed in Article 17.1; b. To hold and freely dispose of any funds held outside of Mongolia; c. To retain abroad and freely dispose of all proceeds received outside of Mongolia from the export, sale or exchange of it's share of Petroleum; d. To repatriate abroad and freely dispose of all proceeds received within Mongolia from the sale, exchange or export of it's share of Petroleum; e. To pay its Subcontractors and expatriate employees in foreign currencies, either inside or outside of Mongolia; such employees shall only be required to bring into Mongolia such foreign currencies as are required to meet their personal living expenses; and f. To maintain a special account or accounts in a bank in Mongolia chosen by the Contractor for non-Mongolian currency which can be disbursed for the purpose of making payments to the PAM or the Government of Mongolia hereunder, or making other payments required for Petroleum Operations. 169

V. CONTRACTUAL PROVISIONS (Cont’d) G. COST RECOVERY/PAYMENTS & CURRENCY (Cont’d) 3. PAYMENTS, CURRENCY AND FINANCING (Cont’d) 17.4 Payments Under This Contract Any payments made by either party hereto shall be made in U.S. Dollars unless the parties mutually agree upon another currency.

170

V.

CONTRACTUAL PROVISIONS

H. CRUDE RUDE OIL IL MARKETING ARKETING & VALUATION ALUATION

V. CONTRACTUAL PROVISIONS (Cont’d) H. CRUDE OIL MARKETING & VALUATION

1. Crude Oil Marketing ¾ What is “crude oil”? – Specific definition (condensate and other liquifiable products included?) SHAH DENIZ (AZERBAIJAN SECTOR OF CASPIAN SEA) PSC: "Crude Oil" means crude mineral oil, condensate, asphalt, ozocerite, and all kinds of hydrocarbons and bitumen regardless of gravity, either solid or liquid, in their natural condition or obtained from Natural Gas by condensation or extraction, including Natural Gas liquids at [the standard temperature and atmospheric pressure of 60°F/15.56°C and 1.01325 bars] and including products refined or processed from any of the foregoing. ECUADOR 2002 MODEL PSC: Crude Oil: Is the mixture of hydrocarbons in a liquid state at surface pressure and temperature.

172

V. CONTRACTUAL PROVISIONS (Cont’d) H. CRUDE OIL MARKETING & VALUATION (Cont’d)

2. Valuation (for Cost Recovery, Taxes, Domestic Sales, etc.) ¾ Basis of valuation and alternates (price received by Contractor or NOC; published reference price; basket of reference prices) ¾ Valuation for non-arm’s length sales ¾ Transportation costs ¾ Dispute resolution – expert / arbitration

173

V. CONTRACTUAL PROVISIONS (Cont’d) H. CRUDE OIL MARKETING & VALUATION (Cont’d)

3. Marketing Rights and Restrictions ¾ Contractor right to freely export and market its share of production ¾ Domestic supply obligation and/or preferential right of Government to purchase – Quantity limit/pro rata allocation – Price and currency

¾ Conditions precedent to exercise of Domestic supply requirement – Utilization of Government’s own share – Proportional obligations of other contractors

¾ Right/obligation of Contractor to market some or all of Government’s share of production 174

V. CONTRACTUAL PROVISIONS (Cont’d) H. CRUDE OIL MARKETING & VALUATION (Cont’d) 3. MARKETING RIGHTS AND RESTRICTIONS (Cont’d)

¾ Transportation Rights – Use of existing pipelines and facilities on non-discriminatory basis – Construction of pipelines and related facilities for development of field – Development of additional pipelines and infrastructure and cost recovery by Contractor (or joint development with gov’t) » ECUADOR 2002 MODEL PSC: 9.1. Internal Transportation: Contractor shall build, at its own cost, all the pipelines and transportation and storage facilities from the fields discovered to the Fiscal Inspection and Delivery Centers. 9.2. The tariff for the transportation of hydrocarbons by oil or gas pipelines that are the property of PETROECUADOR will be set by the Ministry of Energy and Mines. 9.3. The tariff for transportation by oil or gas pipelines that are not the property of PETROECUADOR, will be agreed upon between the Contractor and the operator of the transportation system; if there is no agreement, it will be set by the Ministry of Energy and Mines. 175

V. CONTRACTUAL PROVISIONS (Cont’d) H. CRUDE OIL MARKETING & VALUATION (Cont’d) 3. MARKETING RIGHTS AND RESTRICTIONS (Cont’d)

9.5. For the construction and operation of the principal hydrocarbon evacuation systems, PETROECUADOR can negotiate with the Contractors for their construction, financing, and manner of payment, administration and operation. Once these aspects are agreed upon, the pertinent contract will be submitted for the corresponding approval. 9.6. The Production Sharing Contractor has the same rights as the other hydrocarbon exploration and exploitation Contractors, to have its crude oil transported through pipelines belonging to PETROECUADOR.

176

V. CONTRACTUAL PROVISIONS (Cont’d) H. CRUDE OIL MARKETING & VALUATION (Cont’d) 3. MARKETING RIGHTS AND RESTRICTIONS (Cont’d)

MOZAMBIQUE 2000 MODEL PRODUCTION SHARING AGREEMENT, 30.7: f. The Government undertakes to ensure that under applicable legislation in force from time to time the Contractor or any customer purchasing from the Contractor, will have either:i. the right to construct and operate a transmission pipeline for the transportation of Petroleum from the Contract Area within Mozambique; or ii. access for that purpose on reasonable commercial terms to an existing pipeline.

177

V. CONTRACTUAL PROVISIONS (Cont’d) H. CRUDE OIL MARKETING & VALUATION (Cont’d) 3. MARKETING RIGHTS AND RESTRICTIONS (Cont’d)

JORDAN 1996 MODEL PRODUCTION SHARING AGREEMENT: ARTICLE XXIII PIPELINE(S) AND FACILITIES a CONTRACTOR shall have the right to construct and operate pipeline(s) and related facilities to transport Petroleum, and NRA shall render all assistance to CONTRACTOR on matters involving Jordanian law and rights-of-way. b NRA or JORDAN shall grant to CONTRACTOR free of cost, for the term of this Agreement, any pipeline(s) rights-of-way and rights to the use of the surfaces of lands owned or under the jurisdiction and control of NRA or JORDAN. c NRA or JORDAN will grant to CONTRACTOR free of cost the necessary permits, licenses or rights necessary for CONTRACTOR's carrying out of Petroleum Operations including the right to drill wells for and utilize fresh water, as may be reasonably required by CONTRACTOR in the conduct of Petroleum Operations under this Agreement. 178

V. CONTRACTUAL PROVISIONS (Cont’d) H. CRUDE OIL MARKETING & VALUATION (Cont’d) 3. MARKETING RIGHTS AND RESTRICTIONS (Cont’d)

ETHIOPIA 1994 MODEL PRODUCTION SHARING AGREEMENT: 5.4.9

Where the Minister and the Contractor agree that a mutual economic benefit can be achieved by constructing and operating common facilities (including, but not limited to, roads, pipelines and other transportation, communication and storage facilities), the Contractor shall use its best efforts to reach agreement with other producers on the construction and operation of such common facilities. Other producers may use the facilities of the Contractor where there exists excess capacity and on payment of a reasonable compensation which includes a reasonable return on investment to the Contractor and provided such use does not materially interfere with the Contractor's Petroleum Operations.

179

V. CONTRACTUAL PROVISIONS (Cont’d) H. CRUDE OIL MARKETING & VALUATION (Cont’d)

4. Procedures for Lifting and Determining Entitlements ¾ Lifting obligations and initial determination of entitlements ¾ Reconciliation

180

V. CONTRACTUAL PROVISIONS I. NATURAL ATURAL GAS AS

UPSTREAM GAS ISSUES

182

INTERNATIONAL EXPLORATION – A SIMPLE CASE CONSTITUTIONAL PROVISIONS

Any Natural Gas Legislation HOST GOVERNMENT/ STATE-OWNED ENERGY COMPANY Production Sharing Contract

INTERNATIONAL ENERGY PROJECT COMPANY

INTERNATIONAL ENERGY PROJECT COMPANY

Joint Operating Agreement

Guarantee

INTERNATIONAL ENERGY PROJECT COMPANY

PARENT COMPANIES 183

HOST COUNTRY LEGISLATION AFFECTS GAS E&P ¾ Gas monopolies by law (Saudi Arabia, Mexico, etc.) ¾ New legislation opening some activities (Venezuela) ¾ Flaring becoming more restricted by law (Argentina, UK, Indonesia, and just about everywhere else) ¾ Joint gas marketing may violate competition laws (EU, US, Australia) ¾ Export licenses may restrict marketing (Bangladesh, Venezuela) ¾ Pipeline infrastructure tariff and access (Energy Charter Treaty) ¾ Legislation governing host government contracts 184

PSC CONTRACT NATURAL GAS CLAUSE ¾ Most PSCs focus on crude oil rights and fail to adequately address basic gas rights ¾ Uniqueness of gas is ignored, with the majority treating gas on an Equivalent Basis with Oil - “Mutatis Mutandis” ¾ Great Variety in PSC Provisions – and very few address LNG or GTL

Simple Gas Clause

Complete Gas Clause 185

INDONESIAN ‘GAS CLAUSE’ Should PERTAMINA and CONTRACTOR consider that the processing and utilization of Natural Gas is economical and choose to participate in the processing and utilization thereof…, then the construction and installation of facilities for such processing and utilization shall be carried out pursuant to an approved Work Program. It is hereby agreed that all costs and revenues derived from such processing, utilization and sale of Natural Gas shall be treated on a basis equivalent to that provided for herein concerning Petroleum Operations and disposition of Crude Oil except…. [profit natural gas split differs] 186

KEY ISSUES IN GAS EXPLORATION, DEVELOPMENT AND MARKETING ¾ Basis of Commerciality

¾ Transportation rights

¾ Relinquishment delay pending gas market development

¾ Gas Pricing

¾ Production Period ¾ Contractor Fiscal Split

¾ LPG and Gas Operations ¾ Rights to Associated Gas ¾ Rights regarding “NonCommercial Reserves”

¾ Marketing rights and restrictions 187

BASIS OF GAS COMMERCIALITY ¾ Who Decides? – Contractor – Government – Management Committee – Arbitrator/Expert ¾ Economics of entire project considered? ¾ Gas price usually key ¾ Commercial for both Government and Contractor?

188

RELINQUISHMENT DELAY PENDING MARKETING DEVELOPMENT PERIOD ¾ Typical “develop or relinquish” PSC ignores need for gas market ¾ Need sufficient period to identify and secure a market for gas ¾ “Holding Period” (may require annual compensation to Gov’t) without development ¾ How long can Contractor wait to develop? What area is retained during this period? ¾ What required activities must be conducted during market development period and by whom? 189

PRODUCTION PERIOD AND CONTRACT TERM ¾ Commerciality based on long- term sales ¾ Longer periods required for gas than oil ¾ How long of a period is required? – 25 years, 30 years, life of reservoir ¾ Additional sales possible? Extensions? 190

COST RECOVERY AND FISCAL TERMS ¾ Different basis of cost recovery often needed to make commercial for Contractor ¾ Different sharing of profit gas than for oil? ¾ Income and import tax relief? ¾ Exemption from production bonuses? ¾ Government support for project financing possible?

191

MARKETING RIGHTS AND RESTRICTIONS ¾ Who is responsible for gas marketing? ¾ Contractor free to market its PSC share? – Domestic – Export ¾ Contractor also authorized to market Government’s share? ¾ Domestic market obligation / preference? If so, at what value? ¾ Cost recovery of marketing costs? 192

TRANSPORTATION ¾ New Infrastructure – Right to construct new pipelines – Cost recovery or tariff based? – Contractor’s preferential right to capacity ¾ Existing Pipelines and Facilities – Fair, non-discriminatory access to pipelines – Established and predictable tariff structure – “Most Favored Nation” clause ¾ Tariff Law may have primacy over the PSC 193

GAS PRICING ¾ Is the gas price “competitive” in the market? ¾ What is the market? Domestic pricing equal to export price? ¾ Does price provide incentive for development? An acceptable return? ¾ Does price adjust to market forces? – Inflation adjustment (CPI) – Indexed to changes in price of competitive fuels – Indexed to End Products – e.g. electricity – Other (floors/caps) 194

LPG AND GAS OPERATIONS ¾ Restrictions on right to process for LPGs? ¾ Restrictions on right to use gas in operations in the PSC Contract Area? – Injection – Gas Lift – Utility Needs ¾ Right to flare? – Subject to regulations ¾ Right to use gas in other operations? – Outside the specific gas Development Area – Outside the PSC Contract Area

195

ASSOCIATED GAS ¾ Different rules for associated gas and non-associated gas? ¾ Contractor obligation to produce associated gas for Government’s sole benefit? – for free? – for internal use? – if Government builds all facilities from delivery point? ¾ Right to use associated gas for power generation

196

NON-COMMERCIAL GAS RESERVES ¾ Effects of noncommerciality election or decision ¾ Non-associated or associated gas? ¾ Government’s right to develop? ¾ No interference with other Contractor operations

197

DETAILED GAS CLAUSE CHINA 1995 MODEL CONTRACT FOR THE THIRD ONSHORE BIDDING ROUND: Article 18 Associated Natural Gas and Non-associated Natural Gas 18.1 Associated Natural Gas 18.1.1 The Associated Natural Gas produced from any Oil Field within the Contract Area shall be primarily used for purposes related to the operations of production and production enhancement of Oil Fields such as gas injection, gas lifting and power generation. 18.1.2 Based on the principle of full utilization of the Associated Natural Gas and with no impediment to normal production of the Crude Oil, the Overall Development Program of each Oil Field shall include a plan of utilization of the Associated Natural Gas. If there is any excess Associated Natural Gas in any Oil Field after utilization pursuant to Article 18.1.1 herein (hereafter referred to as "excess Associated Natural Gas"), the Operator or the Contractor shall carry out a feasibility study regarding the utilization of such 198

DETAILED GAS CLAUSE (cont.) excess Associated Natural Gas of such Oil Field . . . and a report thereon shall be submitted to JMC for review and discussion. If the Parties decide to utilize the excess Associated Natural Gas of any Oil Field, the construction of facilities for such utilization and the production of the excess Associated Natural Gas shall be carried out at the same time as the Oil Field construction and production. 18.1.2.1 If the Parties agree that the excess Associated Natural Gas of an Oil Field has no commercial value, then such gas shall be disposed of by the Operator subject to relevant regulations concerning the environmental protection.

199

DETAILED GAS CLAUSE (cont.) 18.1.2.2 If any Party to the Contract considers unilaterally that the excess Associated Natural Gas of an Oil Field has commercial value, such gas may be utilized by that Party at its own expense without affecting timing and optimal development of the Oil Field(s) concerned, the amount of "cost recovery oil" and "allocable remainder oil" due to the other Party to the Contract which does not invest in such utilization. The Party which utilizes the excess Associated Natural Gas at its own expenses shall not repay a charge to the other Party to the Contract which does not invest in such utilization. 18.1.2.3 If the Parties agree that excess Associated Natural. Gas of an Oil Field has commercial value, they shall make further investment in its utilization in proportion to their respective participating interests in the development of the Oil Field. If the Parties disagree on the commercial utilization of such excess Associated Natural Gas of that Oil Field, they shall, guided by the principle of mutual benefit, carry out further negotiations to reach an agreement in writing. 200

DETAILED GAS CLAUSE (cont.) If the Parties fail to reach agreement through negotiations, CNPC shall reserve the right to dispose of the excess Associated Natural Gas of the said Oil Field unilaterally. If CNPC decides to utilize the said excess Associated Natural Gas, the Contractor shall have the right to join in the utilization of the said excess Associated Natural Gas within three (3) years after the facilities for utilizing the said excess Associated Natural Gas are completed unilaterally by CNPC …. If the Contractor decides in writing to participate in the utilization of the said excess Associated Natural Gas within the three (3) years mentioned above, then, the Contractor shall pay CNPC an amount of money, in addition to the forty-nine percent (49%) of the cost spent by CNPC on the said utilization of excess Associated Natural Gas with Deemed interests thereon up to the date of Contractor's submission of the written notice to CNPC. Such amount shall be equal to Two times (200%) of the foregoing forty-nine percent (49%) of the costs for utilization of the excess Associated Natural Gas with Deemed Interests

201

DETAILED GAS CLAUSE (cont.) thereon and such amount of money shall not be charged into the Joint Account. Thereafter, the costs to be incurred in such utilization of excess Associated Natural Gas shall be provided by the Parties in proportion to their respective participating interests in the development of the Oil Field. If the Contractor decides, after the three (3) years mentioned above, not to participate in the utilization of the excess Associated Natural Gas, the Contractor shall be deemed to have waived all its rights to use the said excess Associated Natural Gas. 18.1.3 Expenses incurred in the utilization of the Associated Natural Gas of any Oil Field as stipulated in Article 18.1.1 herein, and those incurred in carrying out a feasibility study on the utilization of the excess Associated Natural Gas after commencement of commercial production of the Oil Field referred to in Article 18.1.2 herein shall be charged to the development costs of the Oil Field.

202

DETAILED GAS CLAUSE (cont.) 18.2 Non-associated Natural Gas 18.2.1 When any Non-associated Natural Gas (hereafter referred to as the "Natural Gas") is discovered within the Contract Area, the Operator shall promptly report to JMC. If JMC or the Contractor makes the decision that the said Natural Gas discovery is worthy of appraisal, the Operator shall complete and submit to JMC an appraisal work program within ninety (90) days after JMC or the Contractor makes such decision. The content of such program shall include, but not be limited to, appraisal work and appraisal time table. 18.2.2 Within thirty (30) days after JMC receives the appraisal work program as mentioned in Article 18.2.1 herein, JMC shall review the said program and makes the decision of approval or disapproval of the said program. After the approval of the said program by JMC, the Operator shall carry out the operations in accordance with the approved time table and appraisal work stipulated in the said program. 203

DETAILED GAS CLAUSE (cont.) 18.2.3 Within one hundred and eighty (180) days after the completion of the last appraisal well, the Operator shall submit JMC an appraisal report with respect to the reserve dimensions of the said discovered Natural Gas reservoir. 18.2.4 If JMC decides unanimously that a discovered gas reservoir has no potential commercial value, the corresponding area covered by the gas reservoir may be retained in the Contract Area during the exploration period. But if, at the expiration of the exploration period, JMC still considers the said gas reservoir not to have potential commercial value, the corresponding area covered by the gas reservoir shall be excluded from the Contract Area.

204

DETAILED GAS CLAUSE (cont.) For a Gas Field which has potential commercial value but which has not been developed due to a lack of market or a shortage of consuming facilities, the period for which the Gas Field is retained in the Contract Area may be extended at the request of any Party to the Contract, such extended period, however, shall not exceed seven (7) consecutive Contract Years after the date of expiration of a phase of the exploration period into which the Contractor has entered hereunder. In case the time needed for developing the market and constructing the consuming facilities for the Gas Field exceeds such extended period, any further extension shall be subject to the approval of the Department or Unit. Prior to the expiration of the exploration period, if JMC considers that a gas reservoir which has been determined to be non-commercial needs to be reappraised because of some favorable factors, the Operator shall work out a new evaluation report on that gas reservoir and submit it to JMC for review and approval.

205

DETAILED GAS CLAUSE (cont.) 18.2.5 If the Contractor considers a gas reservoir to be noncommercial, the Contractor shall be deemed to have waived its rights to participate in the development of that gas reservoir. 18.2.6 Where the Parties consider a gas reservoir to be commercial and qualified to be developed, the Parties shall reach an agreement through negotiation on the development, production of the said Gas Field and sales of the said Natural Gas on the international and domestic markets. The agreement shall be a supplementary document to the Contract and an integral part hereof, and shall include the following principles: 18.2.6.1 The price of the Natural Gas produced from the Contract Area shall be determined based on general pricing principles prevailing internationally, taking into account such factors as the grade, quality, quantity, market of the Natural Gas and the prices of alternate energy resources in the domestic market, etc.;

206

DETAILED GAS CLAUSE (cont.) 18.2.6.2 The Contract term for the Gas Field within the Contract Area shall be separately determined according to the conditions for development and production of such Gas Field and marketing of the Natural Gas; and 18.2.6.3 The allocation of the Natural Gas shall be in conformity with general principles of allocation for the Crude Oil stipulated in Article 13 hereof. However, the percentages of the allocation shall be adjusted by the Parties through negotiations in light of actual conditions in the Gas Field so that the Contractor shall be able to obtain a reasonable economic benefit. If the Parties fail to reach such agreement through negotiations within three (3) years after the date of commencement of such negotiations, CNPC shall have the right unilaterally to put up the gas reservoir for bidding. In such case, the Contractor shall still be entitled to participate in the bidding.

207

DETAILED GAS CLAUSE (cont.) 18.3 Notwithstanding Article 18.2 herein, for the purpose of encouraging the exploration for and development of the Natural Gas, CNPC is willing to act as a buyer to purchase Contractor's share of Natural Gas produced from the Contract Area, provided that the total volume of the Natural Gas that CNPC purchases from one or more Contractors plus CNPC's share of Natural Gas shall be sufficient to supply an annual minimum volume of Natural Gas for export transportation and in accordance with the following provisions: 18.3.1 The Contractor shall submit CNPC an acceptable feasibility report including, but not limited to, engineering research report, estimated recoverable reserve, feasibility study and economic analysis, etc. 18.3.2 Purchase of the Natural Gas produced from the Contract Area and Associated Natural Gas of commercial value shall be made at the Delivery Point.

208

DETAILED GAS CLAUSE (cont.) 18.3.3 Payments for Natural Gas shall be made in U.S. dollars. 18.3.4 If, at the expiration of the exploration period, the total volume of the Natural Gas purchased by CNPC from one or more Contractors plus CNPC's share of Natural Gas has not met the annual minimum volume of Natural Gas for supplying the export transportation or even if the volume is met, the Parties failed to reach an agreement on the terms and conditions for the purchase of the aforesaid Non-associated Natural Gas, the above mentioned area shall be retained in the Contract Area, but such retention period shall not exceed the period stipulated in Article 18.2.4 herein.

209

V.

CONTRACTUAL PROVISIONS

J. DECOMMISSIONING ECOMMISSIONING / ENVIRONMENTAL NVIRONMENTAL PROTECTION ROTECTION

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d)

1. Decommissioning ¾ International context – Current focus on this issue generally (not just on Contractors!) – Provisions concerning performance security and procedures for decommissioning are a relatively new phenomenon; historically left to international and national law

211

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d) 1. DECOMMISSIONING (Cont’d)

¾ Funding of Decommissioning Operations – Amortization / deduction – Security » Decommissioning fund » Alternative security (letter of credit, insurance, etc.)

212

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d) 1. DECOMMISSIONING (Cont’d)

¾ Decommissioning Fund Issues – Decommissioning plan – Timing of initiation of contributions; periodic recalibration – Substitution of alternative forms of security – Cost recoverability / deductibility of contributions – Features of and restrictions on character of fund » Interest-bearing » Location » Type of institution » Control over and access to fund » Investment restrictions 213

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d) 1. DECOMMISSIONING (Cont’d)

¾ Decommissioning Fund Issues (Cont'd.) – Timing and conditions of disbursement – Treatment of funds for decommissioning assets retained by Government party; indemnification – Distribution of excess funds

214

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d) 1. DECOMMISSIONING (Cont’d)

POLAND JUNE 1993 MODEL CONTRACT FOR PETROLEUM EXPLORATION AND PRODUCTION: 9.5 Contractor shall notify the Minister in advance of all significant Petroleum Operations scheduled, such as geological and geophysical surveys and initiation of drilling. Contractor shall also notify the Minister in advance of any suspension of drilling or any abandonment of wells. In the event such advance notice is impossible, Contractor shall notify the Minister of any such suspension or abandonment within forty-eight (48) hours following such suspension or abandonment. 18.3.3 The Contractor shall provide for the safe and effective disposal of water and waste oil, and shall provide for the safe plugging of all boreholes and wells before such wells are abandoned.

215

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d) 1. DECOMMISSIONING (Cont’d)

TRINIDAD & TOBAGO 2000 MODEL PSC: ARTICLE 37 ABANDONMENT PROGRAMME AND BUDGET 37.1

Within sixty (60) days after the expiration of the term of the Contract or the sooner relinquishment of some or all of the Contract Area, the Contractor shall carry out to the Minister's satisfaction an abandonment programme agreed with the Minister for all installations and pipelines provided by Contractor under this Contract that the Minister elects not to have delivered up to him in accordance with Article 24.1. With respect to the area being relinquished and/or facilities thereon, such abandonment programme shall comply with internationally accepted standards prevailing at the time of abandonment.

216

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d) 1. DECOMMISSIONING (Cont’d)

(cont.) 37.2

Not later than five (5) years before the earlier of: (a)

the scheduled expiry of the term of the Contract; or

(b)

the Contractor's anticipated termination of Production of a Field or operation of a pipeline;

of

the Contractor shall submit for the Minister's approval a proposed abandonment programme and budget covering all such installations and pipelines provided by Contractor under this Contract. 37.3

The Minister shall act without unreasonable delay in reaching a decision on the Contractor's proposal under Article 37.2 and may approve or modify or impose conditions thereon. Before modifying or imposing conditions on the proposal, the Minister shall notify the Contractor of the proposed modification or conditions and give the Contractor the opportunity to make written representations within sixty (60) days thereafter about the proposed modifications or conditions. After taking into consideration such 217

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d) 1. DECOMMISSIONING (Cont’d) (cont.) representations the Minister and the Contractor shall make their best efforts to mutually agree on the proposed modifications or conditions of the abandonment programme and budget. In the event that the Minister and the Contractor cannot mutually agree on the proposed abandonment programme and budget, either Party may by written notice to the other Party propose that the dispute be referred for determination in accordance with the provisions of Article 33. Until such time that the determination has been made, the Contractor shall make payments into the escrow account referred to in Article 37.5, based on its proposed abandonment programme and budget. After the determination is made, Contractor shall adjust the payments to such escrow account to reflect the abandonment programme and budget so determined. 37.4

In the event that the Contractor does not present a timely proposal to the Minister under Article 37.2 the Minister, after giving thirty (30) days notice to the Contractor of his intention to do so, may prepare an abandonment programme and budget for the Contract Area if the Contractor does not 218

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d) 1. DECOMMISSIONING (Cont’d)

(cont.) present a proposal by the end of the thirty (30) day period. When the Minister has so prepared the abandonment programme and budget, it shall have the same effect as if it had been submitted by the Contractor and approved by the Minister. 37.5

The approved budget for carrying out the approved abandonment programme shall be provided for by the Contractor paying into an interest bearing account with an escrow agent approved by the Minister a per unit of production assessment calculated by dividing the approved abandonment budget by the estimated units of production to be produced and saved by the Contractor between the date of the Minister's approval and the anticipated date of the abandonment. All monies allocated to the abandonment programme and budget shall be recoverable as operating costs. If the Contractor carries out the abandonment programme the accrued interest and any portion of the escrow account not required for the abandonment programme shall be transferred to the Minister. If the escrowed amount is insufficient to complete the approved programme, the Contractor shall pay all such additional required 219

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d) 1. DECOMMISSIONING (Cont’d) costs. In the event the Minister elects to have the facility delivered up to him, the escrow account shall be transferred to the Minister, who shall assume all responsibility for the facility, its abandonment and hold the Contractor harmless against any liability with respect thereto accruing after the date of such transfer to the Minister.

220

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d)

2. Environmental Protection ¾ Contractor Considerations – Non-discriminatory obligations (no greater liability than under generally applicable law) – Exclusion of responsibility for existing and future consequences of prior conditions or those outside Contractor’s control – Predictable bases for liability – Exposure beyond insurance coverage ¾ Government Considerations – Protection of host country environment – Contractor responsibility for its actions – Application of methods and technology available to Contractors 221

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d) 2. ENVIRONMENTAL PROTECTION (Cont’d)

¾ Environmental regulation – General framework and authorities – Industry-specific regulation and authorities – Contract provisions – Changes in law » Exposure of Contractor to major changes » Reasonable period for implementation

222

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d) 2. ENVIRONMENTAL PROTECTION (Cont’d)

¾ Environmental baseline study ¾ Environmental impact assessment – Contractor's general environmental obligations » Standards » Preventive methods and technology ¾ Permitting ¾ Environmental liability – Types of damages – Limitations – Insurance – Guarantees

223

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d) 2. ENVIRONMENTAL PROTECTION (Cont’d)

ROMANIA 2000 MODEL CONCESSION AGREEMENT: 23.1

Environmental and Safety Measures

23.1.1. Title Holder shall undertake a full assessment of the base-level environmental factors for the purpose of preparing the environmental impact study and the environmental rehabilitation plan. 23.1.2 Prior to commencement of each Petroleum Operation performed in the field for which the legislation in force requires an impact study, Title Holder shall prepare an environmental impact study and a rehabilitation plan for the specific works envisaged to be carried on, which shall be the basis for issuing the environmental permits, in accordance with the applicable legislation. 23.1.3 Title Holder undertakes to observe and fulfill its obligations as determined under the environmental impact study and the rehabilitation plan, as well as those resulting from the environmental permit.

224

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d) 2. ENVIRONMENTAL PROTECTION (Cont’d) (cont.) 23.1.4. Title Holder shall conduct Petroleum Operations in a safe and proper manner in accordance with accepted internal petroleum industry practice and prevailing Romanian environmental legislation. Title Holder will take measures to protect the environment in all its components, including the surface soil and sub-soil, air, surface and underground waters, animal and vegetal life in order to avoid their degradation or destruction, as well as of other natural resources and Petroleum Fields. 23.1.5 In the event of a blow-out, accident or other emergency, Title Holder shall take immediate steps to bring the emergency situation under control and protect against loss of life and loss of or damage to property. Further, Title Holder shall take measures for preventing harm to natural resources and the general environment.

225

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d) 2. ENVIRONMENTAL PROTECTION (Cont’d)

(cont.) 23.1.6. Title Holder undertakes to notify the environmental authorities with respect to the occurrence of an accident or event having an emergency character and shall remedy the effects of such events over the environment within the shortest time possible. 23.1.7 Title Holder shall comply with all environmental permitting procedures required under prevailing Romanian laws in effect. 23.1.8 In the event AGENT or the Ministry of Waters and Environmental Protection or its local units determine and decide that any works or installations erected by Title Holder or any operations conducted by Title Holder may endanger persons or third party properties and/or harm the environment, Title Holder is obliged to take remedial measures in accordance with the programs and terms established by AGENT or by the Ministry of Waters and Environmental Protection.

226

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d) 2. ENVIRONMENTAL PROTECTION (Cont’d)

(cont.) 23.1.9 Title Holder shall take all necessary measures so that violations of the environmental protection legislation do not occur. Violation of environmental requirements by Title Holder will lead to the sanctioning of the defaulting persons in accordance with art.85, point 1, letter d) of the Environmental Protection Law no.137/1995 and its subsequent modifications, as well as to revocation of this Agreement in accordance with Article 23 (e) of the Petroleum Law. 23.1.10 Petroleum Operations shall be performed within the perimeter described in Annex B, save for the surfaces where the access is restricted under the environmental impact study and permit.

227

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d) 2. ENVIRONMENTAL PROTECTION (Cont’d)

BELIZE 1995 MODEL CONTRACT: 23.1 If the Government reasonably determines that any works or installations erected by the contractor or any operations conducted by the contractor endanger or may endanger persons or third party property or cause pollution or harm wild-life or the environment to an unacceptable degree, the Government may require the contractor to take remedial measures within a reasonable period established by the Government and to repair any damage to the environment. If the Government deems it necessary, it may also require the contractor to discontinue petroleum operations in whole or in part until the contractor has taken such remedial measures or has repaired any damage. In the event that the contractor fails to take the remedial measures required by the Government within the time period established by the Government, the Government may carry out such remedial measures for the contractor's account.

228

V. CONTRACTUAL PROVISIONS (Cont’d) J. DECOMMISSIONING / ENVIRONMENTAL PROTECTION (Cont’d) 2. ENVIRONMENTAL PROTECTION (Cont’d)

(cont.) 27.3 The contractor shall contribute _____ percent (%) of the value of the annual gross production of crude oil and/or natural gas produced and saved in each calendar year and not used or consumed in petroleum operations to a Common Fund to be held in trust by the Government and managed for the sole purpose of indemnification against any or all environmental damages caused during the petroleum operations. 27.4 Nothing contained in paragraph (27.3) above shall be construed to relieve the contractor of his obligations of indemnification as set out in this agreement.

229

V. CONTRACTUAL PROVISIONS

K. DEFAULT EFAULT AND ND FORCE ORCE MAJEURE AJEURE

V. CONTRACTUAL PROVISIONS (Cont’d) K. DEFAULT AND FORCE MAJEURE (Cont’d)

1. DEFAULT

¾ Events of Default – Should be clearly defined in the contract – Should be limited to events having certain degree of materiality – Subjective default determinations should be avoided ¾ Drafting Approaches – Exhaustive list of Events of Default – Breaches of “material” nature – Failure to fulfill any contractual obligation ¾ Materiality – Some contracts include a “materiality” standard » Caveat: materiality thresholds may change – Some contracts provide for third party determination of materiality disputes if parties fail to reach agreement

231

V. CONTRACTUAL PROVISIONS (Cont’d) K. DEFAULT AND FORCE MAJEURE (Cont’d) 1. DEFAULT (Cont’d)

¾ Events typically regarded as Events of Default – Certain events affecting Contractor » Bankruptcy » Liquidation » Insolvency » Change of control or assignment without Host Government approval, when required – Failure to comply with certain contractual obligations » Failure to make payments » Failure to deliver or maintain guarantees » Failure to meet work commitments » Interruption or suspension or failure to meet development program » Interruption or stoppage of production for certain period of time » Failure to comply with arbitration awards 232

V. CONTRACTUAL PROVISIONS (Cont’d) K. DEFAULT AND FORCE MAJEURE (Cont’d) 1. DEFAULT (Cont’d)

¾ Notice and Cure – Contractor should be given notice and reasonable time to remedy event of default. » Rationale: preventing premature termination. » Cure period might not be applicable given nature of default. » Disputes among the parties regarding whether a default can or cannot be cured • Third party decision maker

Example: Bangladesh – 1997 Model Production Sharing Contract b) If the party receiving the notice shall fail to comply with said notice, the Period, terminate the Contract provided, however, that where there is any dispute between the Parties as to: i) Whether there has been any material breach by the Party to which notice was given of any term, obligation, or condition of the Contract, or ii) whether any breach is remediable or as to the manner in which it should be remedied, either Party may, within the Specified Period, refer the dispute to arbitration under Article 29, and neither Party shall exercise its power of termination until the result of arbitration is known, and then subject to the terms of the award. Provided, however, that the Party which elects to refer the dispute to arbitration shall be diligent in prosecuting its claim in the arbitration proceedings. 233

V. CONTRACTUAL PROVISIONS (Cont’d) K. DEFAULT AND FORCE MAJEURE (Cont’d) 1. DEFAULT (Cont’d)

¾ Consequences of Default – Termination of contract by the non-defaulting party – Execution by Host Government of Performance Bond / Performance Guaranty » Issue: Contractor should carefully analyze risks for parent company/affiliate issuing performance guaranty and establish limits, as necessary.

– Return of facilities and installations to Host Government, if right of use was granted under UGPC. » Issue: Need to provide reasonable standard regarding conditions of return Contractor should not be liable for fair wear and tear

– Transfer of installations, equipment and facilities developed or acquired by Contractor to Host Government. » Issue: Leased equipment should be exempted.

– Obligations that arose prior to default and termination should be satisfied. 234

V. CONTRACTUAL PROVISIONS (Cont’d) K. DEFAULT AND FORCE MAJEURE (Cont’d) 1. DEFAULT (Cont’d)

Yemen - 1999 Model Production Sharing Agreement 21.1.6

If CONTRACTOR commits any material breach of this Agreement.

21.1.7

If CONTRACTOR causes, by his gross negligence or willful misconduct, material or substantial damage to any Oil and Gas field or any relevant facilities. Such cancellation shall take place without prejudice to any right which may have accrued to the GOVERNMENT against the CONTRACTOR in accordance with the provisions of this Agreement and, in the event of such cancellation, the CONTRACTOR shall have the right to remove from the Agreement Area all its personal property.

21.2

If the GOVERNMENT deems that one of the aforesaid causes (other than a Force Majeure cause referred to Article 22 hereof) exists to cancel this Agreement, the GOVERNMENT shall give to CONTRACTOR ninety (90) Days' written notice personally served on contractor's general Manager in a legally official manner and receipt of which is acknowledged by him or by his legal agent, to remedy and remove such cause; but if for any reason such service is impossible due to unnotified change of address, publication on the Official Gazette of the GOVERNMENT of such notice shall be considered as validly served upon the CONTRACTOR. If at the end of the said ninety (90) Days' notice period such cause has not been remedied and removed, this Agreement may be canceled forthwith by a Republican Resolution. 235

V. CONTRACTUAL PROVISIONS (Cont’d) K. DEFAULT AND FORCE MAJEURE (Cont’d) 1. DEFAULT (Cont’d)

Yemen - 1999 Model Production Sharing Agreement ARTICLE 21 BREACH OF AGREEMENT AND POWER OF CANCELLATION 21.1

The GOVERNMENT has the right to cancel this Agreement by a Republican Resolution, with respect to the CONTRACTOR, in the following instances:

21.1.1

If knowingly, CONTRACTOR has submitted any false statements to the MINISTRY which were of a material consideration for the execution of this Agreement.

21.1.2

If CONTRACTOR assigns any interest hereunder contrary to the provisions of Article 20 hereof.

21.1.3. If CONTRACTOR is adjudicated bankrupt by a court of competent jurisdiction. 21.1.4

If CONTRACTOR does not comply with the final decision reached as the result of court proceedings conducted under Article 23 hereunder.

21.1.5

If CONTRACTOR intentionally extracts any mineral other than Petroleum not authorized by this Agreement or without the authorisation of the GOVERNMENT, except such extractions as may be unavoidable as the result of operations conducted hereunder in accordance with accepted Petroleum Industry practices and which shall be notified to the MINISTRY or its Representative as soon as possible. 236

V. CONTRACTUAL PROVISIONS (Cont’d) K. DEFAULT AND FORCE MAJEURE (Cont’d)

2. FORCE MAJEURE ¾ Concept – Generally accepted in all legal systems – Event outside the control of affected party, without fault of negligence, that prevents perfect performance of contractual obligations – Resulting default is excused and affected party is relieved from normal consequences of default – Acts of God vs. Force Majeure ¾ Basic Considerations – Contractual definition is of utmost importance – Use of “boilerplate” language should be avoided – Force Majeure provision needs to be drafted within context of particular petroleum operations, country risks, applicable legal framework and relevant past contractual performance experience. – Excuses affected party

237

V. CONTRACTUAL PROVISIONS (Cont’d) K. DEFAULT AND FORCE MAJEURE (Cont’d) 2. FORCE MAJEURE (Cont’d)

¾ Definition – Relevance – Drafting approaches » Defer to applicable Law » Setting forth requirements / elements » Requirements and non-exhaustive list of examples Example: Equatorial Guinea – 2000 Model Contract 21.2 For purposes of this Contract, an event shall be considered Force Majeure if it meets the following conditions: It has the effect of temporarily or permanently preventing either of the Parties from performing its obligations under the Contract; and It is unforeseeable, unavoidable and beyond the control of the Party which declares Force Majeure and is not the result of its negligence or omission. Such an event may include, without limitation, earthquake, strike, riot, insurrection, civil unrest, sabotage, acts of war or acts attributable to war. The intent of the Parties is that the term Force Majeure shall be construed as defined under the principles and practice of the international petroleum industry. 238

Force Majeure Declared Again on Occidental Pipeline [2001] “Occidental was forced to again declare force majeure on deliveries from Colombia's Cano Limon oil field as of October 8 2001, following a wave of guerrilla bomb attacks. Occidental only resumed normal operations in mid-July, after five months of force majeure at the 120,000 bpd Cano Limon. Since January 2001 pipeline bombings had dramatically escalated, with 113 attacks recorded by early August. Production had plummeted from 118,900 barrels per day in January to only 2,815 b/d in June. In August and September 2001, production resumed to near normal levels until the current force majeure.” 239

V. CONTRACTUAL PROVISIONS (Cont’d) K. DEFAULT AND FORCE MAJEURE (Cont’d) 2. FORCE MAJEURE (Cont’d)

¾ Common Elements

– Beyond reasonable control. » Issues: Determining what is “reasonable” • Helpful criteria: economic investment, costs and benefit analysis, context of similar petroleum operations, petroleum industry practices. – Not caused by affected party – no negligence. – Unforeseeable, and /or if foreseeable, unavoidable. Example India – Model Production Sharing Contract 2003: For the purpose of this Contract, the term Force Majeure means any cause or event, other than the unavailability of funds, whether similar to or different from those enumerated herein, lying beyond the reasonable control of, and unanticipated or unforeseeable by, and not brought about at the instance of, the Party claiming to be affected by such event, or which, if anticipated or foreseeable, could not be avoided or provided for, and which has caused the non-performance or delay in performance.

240

V. CONTRACTUAL PROVISIONS (Cont’d) K. DEFAULT AND FORCE MAJEURE (Cont’d) 2. FORCE MAJEURE (Cont’d)

¾ Carve – outs – Risk allocation mechanism – Events typically excluded from Force Majeure » Acts of Host Government cannot be invoked as Force Majeure by NOC » Financing risk allocated to Contractor • Contractor cannot invoke failure to fund operations, lack of financing, insolvency. ¾ Burden of Proof – Party claiming Force Majeure ¾ Notice Requirement – Prompt – Including description of event, estimated time of duration and effects. 241

V. CONTRACTUAL PROVISIONS (Cont’d) K. DEFAULT AND FORCE MAJEURE (Cont’d) 2. FORCE MAJEURE (Cont’d)

¾ Consequences – Excuse of performance of affected obligations » To the extent non- performance or defective performance is caused by the Force Majeure – Obligations not excused » Typically obligation to make payments is not excused – Extensions of time » Equal to period of Force Majeure suspension » Need to build – in flexibility – Duty to mitigate » “Reasonableness” standard » Non-affected party duty to cooperate » Sometimes duty to mitigate allocated to both parties – Obligation to promptly resume performance once Force Majeure is overcome 242

V. CONTRACTUAL PROVISIONS (Cont’d) K. DEFAULT AND FORCE MAJEURE (Cont’d) 2. FORCE MAJEURE (Cont’d)

¾ Extended Force Majeure – Contractor’s concern: » Having right to terminate the contract if it is unclear when Force Majeure event would end – impossibility and frustration of purpose of contract, or upon completion of an extended period of time. • Rationale: not having financial and technical resources indefinitely tied to contract – Host Government’s concern: » Not allowing Contractor possibility to prematurely avoid the contract – Compromise approach: » Right to terminate subject to certain suspension time » Requiring parties agreement to terminate 243

V. CONTRACTUAL PROVISIONS (Cont’d) K. DEFAULT AND FORCE MAJEURE (Cont’d) 2. FORCE MAJEURE (Cont’d)

Example – Turkmenistani 1997 Model Production Sharing Agreement 31.2

Should the Force Majeure circumstances endure for more than twelve (12) months, any Party may request that the other Party(ies) meet to consider the desirability of amending or terminating this Agreement, either to accommodate the effects of the Force Majeure or to relieve the Parties from any and all rights and obligations under this Agreement; provided, however, that this paragraph 31.2 shall not be interpreted to impose any obligation upon any Party to agree to any such amendment or termination.

31.3

Should the Force Majeure circumstances endure for more than two (2) years, either of Competent Body or Contractor may unilaterally terminate this Agreement, upon giving thirty (30) days prior written notice thereof to the other Party. However, under circumstances of "Hardship", Contractor shall have the option to accept or refuse the aforesaid termination. For the purpose of foregoing, "Hardship” means Contractor’s inability to recover its financial exposure related to the conduct of Petroleum Operations owing to persisting Force Majeure.

244

V. CONTRACTUAL PROVISIONS (Cont’d) K. DEFAULT AND FORCE MAJEURE (Cont’d) 2. FORCE MAJEURE (Cont’d)

Example - Yemen - 1999 Model Production Sharing Agreement ARTICLE 22 FORCE MAJEURE 22.1

The non-performance or delay in performance by the MINISTRY and the CONTRACTOR and the Operating Company of any obligation under this Agreement other than the obligation to pay any amounts due or giving notices shall be excused if, and to the extent that, such non-performance or delay is caused by Force Majeure. The period of any such nonperformance or delay, together with such period as may be necessary for the restoration of any damage done during such delay shall be added to the time given in this Agreement for the performance of such obligation and for the performance of any obligation dependent thereon and consequently, to the term of this Agreement, but only if the extension of the term of this Agreement is relevant to the performance of such obligation.

245

V. CONTRACTUAL PROVISIONS (Cont’d) K. DEFAULT AND FORCE MAJEURE (Cont’d) 2. FORCE MAJEURE (Cont’d)

Example - Yemen - 1999 Model Production Sharing Agreement 22.2

"Force Majeure", within the meaning of this Agreement, shall be any order, regulation or direction of the GOVERNMENT, or (with respect to CONTRACTOR) of the government of the country in which any of the companies comprising CONTRACTOR is incorporated, whether promulgated in the form of law or otherwise, or any act of God, insurrection, riot, war, strike (or other labor disturbances), fires, floods or any cause not due to the fault or negligence of the party invoking Force Majeure, whether or not similar to the foregoing, provided that any such cause is beyond the reasonable control of the party invoking Force Majeure.

22.3

Without prejudice to the above and except as may be otherwise provided herein, the GOVERNMENT shall incur no responsibility whatsoever to the CONTRACTOR, and the Operating Company for any damages, restrictions or loss arising in consequence of such cause of Force Majeure.

22.4

If the Force Majeure event occurs during the First Exploration Period or any extension thereof and continues in effect for a period of Six (6) Months, thereafter the CONTRACTOR shall have the option upon Ninety (90) Days' prior written notice to the MINISTRY to terminate its obligations hereunder without further liability of any kind except for those accrued payments under this agreement. 246

V. CONTRACTUAL PROVISIONS

L. STABILIZATION TABILIZATION PROVISIONS ROVISIONS

V. CONTRACTUAL PROVISIONS (Cont’d) L. STABILIZATION PROVISIONS (Cont’d)

1. Basic Considerations ¾ General Considerations – Foreign investment history of country / region – Foreign investment laws of country and enforcement ¾ Contractor Interests – Preservation of the business deal negotiated – Preventing unilateral amendment by Government ¾ Government / NOC Concerns – Restrictions on sovereignty – Appearance of special treatment – Countervailing concern - attractive investment environment 248

V. CONTRACTUAL PROVISIONS (Cont’d) L. STABILIZATION PROVISIONS (Cont’d) 1. BASIC CONSIDERATIONS (Cont’d)

¾ Evolution of Stabilization Provisions – Early stabilization clauses simply froze the law that applied to the Contract to that which existed at the time (or at least attempted to do so) – Stabilization clauses have evolved to incorporate adaptation and compensation

249

V. CONTRACTUAL PROVISIONS (Cont’d) L. STABILIZATION PROVISIONS (Cont’d)

2. The Stabilization “Net” ¾ Laws that are in conflict with the Contract ¾ All new laws (and amendments, repeals) ¾ Carve-outs – Health, Safety, Environmental and Welfare – Meeting international standards

¾ Only specified areas or specific laws – Petroleum laws – Tax

250

V. CONTRACTUAL PROVISIONS (Cont’d) L. STABILIZATION PROVISIONS (Cont’d) 2. THE STABILIZATION “NET” (Cont’d)

¾ What effects are addressed? – – – –

All changes Changes that alter the economic balance Changes that negatively impact the Contractor Nationalization generally not addressed (right to nationalize generally recognized, subject to prompt and effective compensation) But see Mozambique 2000 Model PSA

¾ Coverage of “Laws” – National / regional / local – Edicts / statutes / regulations / court decisions / agency decisions – Where not specified, what about changes in the interpretation of “old” laws? 251

V. CONTRACTUAL PROVISIONS (Cont’d) L. STABILIZATION PROVISIONS (Cont’d)

3. Stabilization Mechanism(s) ¾ Pre-emption – the new law has no effect ¾ Automatic amendment of Contract ¾ Obligation to negotiate amendments ¾ Compensation / Indemnification – Reimbursement or refund – Reduced benefits or increased obligations may be offset by a reduction in the Government’s share of profit petroleum

¾ Two or more mechanisms may be contemplated in a single provision 252

V. CONTRACTUAL PROVISIONS (Cont’d) L. STABILIZATION PROVISIONS (Cont’d)

4. Additional Considerations ¾ Even if otherwise well-drafted, will a stabilization provision be given effect? – – – –

Ineffective attempt to prospectively restrict sovereignty? Choice of law Arbitration Waiver of sovereign immunity (implied from submission to arbitration?)

¾ Who is the “government” party? – If NOC, is the provision necessary? Effective? – Undertaking by NOC to ensure government actions

¾ Does stability automatically pass through to subcontractors or must it be specifically addressed? 253

V. CONTRACTUAL PROVISIONS (Cont’d) L. STABILIZATION PROVISIONS (Cont’d)

5. EXAMPLES CENTRAL AFRICAN REPUBLIC 1993 MODEL EXPLORATION AND EXPLOITATION CONTRACT: APPLICABLE LAW AND STABILITY OF CONDITIONS 27.1 This Contract and the Petroleum Operations carried out under said Contract shall be governed by the laws and regulations in force in the Central African Republic. 27.2 The Company shall be subject at any time to the laws and regulations in force in the Central African Republic.

254

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27.3 The Company shall not be subject to any provision which would give rise to an aggravation, whether directly or indirectly, in the charges and obligations arising from the regimes provided for in Part VIII of the Petroleum Code, as such regimes are determined by the legislation and regulations in force on the date of signing this Contract, unless as mutually agreed upon by the Parties.

255

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EQUATORIAL GUINEA 2000 MODEL PSC: APPLICABLE LAW AND STABILITY OF CONDITIONS 20.3 Should the income of the State or the Contractor be materially altered as a result of new laws, orders or regulations then, in such event, the Parties shall agree to make the necessary adjustments to the relevant provisions of this Contract, observing the principle that the affected Party shall be restored to substantially the same economic condition as it would have been in had such change in laws or regulations not occurred. The cost of such restoration to the other Party may not exceed the benefit received by such other Party as a result of such change. This provision shall not be construed as to deny to CONTRACTOR the benefit of any new law or regulation intended by the State to benefit Contractor. "State Income", for the purposes of this Article 20.3, means the amount of all revenues whether resulting from royalties, profit share, rental, fees or other form of financial income paid to the State by CONTRACTOR as a result of Petroleum Operations.

256

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SHAH DENIZ (AZERBAIJAN SECTOR OF CASPIAN SEA) PSC: 23.2 Economic Stabilisation The rights and interests accruing to Contractor (or its assignees) under this Agreement and its Sub-contractors under this Agreement shall not be amended, modified or reduced without the prior consent of Contractor. In the event that any Governmental Authority invokes any present or future law, treaty, intergovernmental agreement, decree or administrative order which contravenes the provisions of this Agreement or adversely or positively affects the rights or interests of Contractor hereunder, including, but not limited to, any changes in tax legislation, regulations, or administrative practice, or jurisdictional changes pertaining to the Contract Area, the terms of this Agreement shall be adjusted to re-establish the economic equilibrium of the Parties, and if the rights or interests of Contractor have been adversely affected, then SOCAR shall indemnify Contractor (and its assignees) for any disbenefit, deterioration in economic circumstances, loss or damages that ensue therefrom. 257

V. CONTRACTUAL PROVISIONS (Cont’d) L. STABILIZATION PROVISIONS (Cont’d) 5. EXAMPLES (Cont’d)

SHAH DENIZ (AZERBAIJAN SECTOR OF CASPIAN SEA) PSC: SOCAR shall within the full limits of its authority use its reasonable lawful endeavours to ensure that the appropriate Governmental Authorities will take appropriate measures to resolve promptly in accordance with the foregoing principles any conflict or anomaly between any such treaty, intergovernmental agreement, law, decree or administrative order and this Agreement.

258

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MOZAMBIQUE 2000 MODEL PRODUCTION SHARING AGREEMENT: 30.7 `The Government undertakes that so long as this Agreement subsists: a. The Government, its political subdivisions, agencies and instrumentalities, to the extent that they have or may acquire the power to do so, will not expropriate, nationalise or intervene in the assets, rights, interests or any other property of any kind of the Contractor held for the purpose of Petroleum Operations including the contract rights held by the Contractor hereunder. b. Without prejudice to the rights of the Government and ENH in the Management Committee, for the purpose of this undertaking, the Government shall be deemed to have intervened in the property or assets of the Contractor if (otherwise than in pursuant of a judgement or in exercise of its rights as a mortgage creditor, or in accordance with the law of insolvency, liquidation or creditor’s rights) it assumes power of management over such property or assets or exercises effective control of such property or assets.

259

V. CONTRACTUAL PROVISIONS (Cont’d) L. STABILIZATION PROVISIONS (Cont’d) 5. EXAMPLES (Cont’d) c. In the event of a breach of Clause 30.7(a), nothing in the provisions of Clause 6.3(e) shall be read or construed as preventing consideration of the projected flow of profits (if any) from Petroleum Operations hereunder for the purpose of determining the value of property or assets expropriated, nationalised or intervened with. d. The Government will not revoke or amend the Authorisation granted to ENH to explore for and produce Petroleum from the Contract Area without taking effective measures to ensure that such revocation or amendment does not affect the rights granted to the Contractor hereunder. e. The Government will not without the agreement of the Contractor, exercise its legislative authority to amend or modify the provisions of this Agreement and will not take or permit any of its political subdivisions, agencies and instrumentalities to take any administrative or other action to prevent or hinder the Contractor from enjoying the rights accorded to it hereunder.

260

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f.

The Government undertakes to ensure that under applicable legislation in force from time to time the Contractor or any customer purchasing from the Contractor, will have either:i. the right to construct and operate a transmission pipeline for the transportation of Petroleum from the Contract Area within Mozambique; or ii. access for that purpose on reasonable commercial terms to an existing pipeline. g. In the event that the Petroleum Law is repealed or amended, the Government undertakes to ensure that this Agreement remains in full force and effect provided always that nothing in this provision will be construed as requiring the Government to relieve the Contractor from compliance with the provisions of the law and regulations relating to Petroleum Operations, not incompatible herewith, which may be in force from time to time.

261

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¾ Jordanian Stabilization Clause (1964): – “The Government shall not by general or special legislation or by administrative measures or otherwise annul this agreement or alter the Jordan Income Tax Law to the detriment of [Contractor]; amendment may only be made by joint agreement.” – Restraint on sovereignty?

262

V. CONTRACTUAL PROVISIONS (Cont’d) L. STABILIZATION PROVISIONS (Cont’d) 5. EXAMPLES (Cont’d)

¾ Chinese Stabilization Clause (1997 Model PSC): – “If a material change occurs to the Contractor’s economic benefits after the effective date of the Contract due to the promulgation of new laws, decrees, rules and regulations or any amendment to the applicable laws, decrees, rules, and regulations of the People’s Republic of China, the Parties shall consult promptly and make necessary revisions and adjustments to the relevant provisions of the Contract in order to maintain the Contractor’s normal economic benefits hereunder.” – “Material change” – includes improvements in Contractor’s economic benefits?

263

V. CONTRACTUAL PROVISIONS (Cont’d) L. STABILIZATION PROVISIONS (Cont’d)

6. Applicable Law ¾ Laws of Host Country – Without qualification – Internationalized or otherwise qualified

¾ Laws of neutral jurisdiction ¾ International law ¾ Common laws/principles of two or more jurisdictions or systems ¾ Conflicts of law

264

V. CONTRACTUAL PROVISIONS (Cont’d) L. STABILIZATION PROVISIONS (Cont’d) 6. APPLICABLE LAW - EXAMPLES (Cont’d)

MOZAMBIQUE 2000 MODEL PRODUCTION SHARING AGREEMENT: Article 34 - Applicable Law This Agreement shall be governed by and construed in accordance with the Laws of the Republic of Mozambique and such rules of International Law as may be applicable.

BULGARIA 1993 MODEL PETROLEUM EXPLORATION AND PRODUCTION LICENSE: Article 16 - Application of Bulgarian Law All activities carried out under this Exploration and Production License and possible later Production License shall be governed by the conditions given in this License, the JOA and Bulgarian law as well as by the standards of good international petroleum industry practice. 265

V. CONTRACTUAL PROVISIONS (Cont’d) L. STABILIZATION PROVISIONS (Cont’d) 6. APPLICABLE LAW - EXAMPLES (Cont’d)

CAMBODIA 1994 MODEL PETROLEUM AGREEMENT: 71. Applicable Law This Agreement shall be interpreted and construed according to general principles of law, including the applicable laws of the Kingdom of Cambodia.

CHINA 1992 MODEL CONTRACT FOR FOURTH OFFSHORE BIDDING ROUND: 28.1 The validity, interpretation and implementation of the Contract shall be governed by the laws of the People's Republic of China. Failing the relevant provisions of the laws of the People's Republic of China for the interpretation or implementation of the Contract, the principles of the applicable laws widely used in Petroleum resources countries acceptable to the Parties shall be applicable.

266

V. CONTRACTUAL PROVISIONS (Cont’d) L. STABILIZATION PROVISIONS (Cont’d) 6. APPLICABLE LAW - EXAMPLES (Cont’d)

MONGOLIA 2000 MODEL PSC: 22.7 The parties hereto base their relations in respect of this Contract on the principles of goodwill and good faith. This Contract shall be given effect in conformity with the principles common to Mongolia and Contractor and in the absence of such common principles, the arbitration panel shall apply generally accepted principles of the international petroleum industry.

267

V. CONTRACTUAL PROVISIONS (Cont’d) L. STABILIZATION PROVISIONS (Cont’d) 6. APPLICABLE LAW - EXAMPLES (Cont’d)

SHAH DENIZ (AZERBAIJAN SECTOR OF CASPIAN SEA) PSC: This Agreement shall be governed and interpreted in accordance with principles of law common to the law of the Azerbaijan Republic and English law, and to the extent that no common principles exist in relation to any matter then in accordance with the principles of the common law of Alberta, Canada (except for laws regarding conflicts of laws). This Agreement shall also be subject to the international legal principle of pacta sunt servanda (agreements must be observed). Upon approval by the Parliament of the Azerbaijan Republic of this Agreement, this Agreement shall constitute a law of the Azerbaijan Republic and shall take precedence over any other current or future law, decree or administrative order (or part thereof) of the Azerbaijan Republic which is inconsistent with or conflicts with this Agreement except as specifically otherwise provided in this Agreement. 268

V. CONTRACTUAL PROVISIONS (Cont’d) L. STABILIZATION PROVISIONS (Cont’d) 6. APPLICABLE LAW - EXAMPLES (Cont’d)

– Libyan Applicable Law Clauses (1955-1968): » “This concession shall be governed by and interpreted in accordance with the principles of law of Libya common to the principles of international law and in the absence of such common principles then by and in accordance with the general principles of law, including such of those principles as may have been applied by international tribunals.”

– Brazil Model Concession Agreement (2002): » “This Agreement will be executed, governed and construed in accordance

with Brazilian law, which shall rigorously be complied with by the Concessionaire in the exercise of its rights and performance of its obligations contemplated herein.”

269

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M. DISPUTE RESOLUTION

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

1. Basic Considerations ¾ Contractor / NOC Consideration - Contractor wishes to have an impartial tribunal - Government does not wish to submit to jurisdiction of the courts of another country ¾ Additional reasons for arbitration - Enforceability of award - Flexibility and control (selection of rules, arbitrators, language, place) - Confidentiality - Speed - Finality of award

271

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d) 1. BASIC CONSIDERATIONS (Cont’d)

¾ Treaty law is a fundamental prerequisite – Potentially relevant international treaties » Treaties on the enforcement of arbitration agreements and arbitral awards, particularly New York Convention • Place of arbitration in most cases must be in a Contracting State

272

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

2. Applicable Treaties ¾ ICSID Convention – Investment dispute – Between Contracting State (or subdivision or agency designated by Contracting State) and national of another Contracting State » Limited number of NOCs have been designated to ICSID » Written consent of the parties to submit dispute to ICSID ¾ Bilateral investment treaties and Energy Charter Treaty – Can entitle Contractor to arbitration even if no arbitration provision in Contract ¾ UN Convention – The workhorse of arbitration treaties ¾ Other Treaties

273

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

¾ General considerations (Cont'd.) – Relevant national laws (and enforcement by courts) • Site of arbitration • Countries where enforcement of award likely to be sought – Power of Government party to agree to arbitrate disputes under Contract

274

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

3. Waiver of Sovereign Immunity ¾ Waiver of sovereign immunity may be implied from an arbitration agreement (in some jurisdictions, under some circumstances, to some extent) ¾ Contractors prefer the certainty of an express waiver as to jurisdiction over the Government party and enforcement and execution of an award against the Government party and its assets

275

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d) 3. WAIVER OF SOVEREIGN IMMUNITY (Cont’d)

SURINAME 2001 MODEL PSC: 44.1 Waiver of Immunity Parties agree that the activities contemplated in this Contract are commercial in nature. To the extent that any Party has or hereafter may acquire any immunity from the jurisdiction of any court, or from attachment in aid of execution or any other legal process (other than prejudgment attachment) in any action or proceeding in any manner arising out of or relating to this Contract with respect to itself or its assets, including any claim for sovereign immunity by Staatsolie, such Party hereby irrevocably agrees not to invoke such immunity as a defense and irrevocably waives such immunity.

276

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

¾ Basic Elements Typically Found in Arbitration Provisions – – – – – –

Scope – narrow or broad form Place of arbitration Procedures for appointing arbitrators Language of arbitration Choice of law (if not addressed elsewhere) Waiver of sovereign immunity

¾ Additional Provisions (if no rules incorporated) – Effect of non-cooperation of party in arbitration – Requirement of reasoned award

277

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

¾ Established International Arbitration Rules – Ad hoc arbitrations: UNCITRAL and CPR rules – Administered arbitrations: AAA; ICC; LCIA – ICSID » Advisable to include fallback arbitration method in case ICSID jurisdiction is denied or otherwise fails

278

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

4. Phased Dispute Resolution ¾ Typically negotiation first, then mediation (if applicable), before binding arbitration ¾ Specific triggers and deadlines for initiating the procedures and entering each phase are common ¾ Negotiation provisions may specify who must participate (senior executives or officials; individuals with no prior involvement in dispute) ¾ Mediation provisions may specify the time period and default procedure for appointing a mediator ¾ Parties may agree to tolling of limitations periods 279

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

5. Expert Determination ¾ Often used for resolution of technical disputes ¾ Sometimes utilized as interim mechanism in phased dispute resolution ¾ Less formal than arbitration and usually binding ¾ Potential issues – Distinction between disputes to be determined by expert and those to be arbitrated – Additional steps to enforce determination if a party does not comply voluntarily – Rules and procedures

280

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

HUNGARY DECEMBER 1994 MODEL CONCESSION AGREEMENT FOR EXPLORATION AND PRODUCTION: ARTICLE 16 - Arbitration 16.1 Any controversies or claims arising out of this agreement shall be settled by the Arbitration Court [not defined]. 16.2 This agreement shall be interpreted in accordance with the laws of the Republic of Hungary. 16.3 In case of controversy the Hungarian text of the agreement shall be used for arbitration.

281

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

IRAN 1999 MODEL SERVICE CONTRACT FOR FIELD DEVELOPMENT: 32. Arbitration The Parties shall use all reasonable efforts to settle amicably, through negotiations, any dispute arising out of or in connection with this Contract or the breach, termination or validity thereof. Any dispute, controversy or claim arising out of or relating to this Contract, or the breach, termination or invalidity thereof, shall be finally settled by arbitration before three arbitrators. Any award of the arbitrators shall be final and binding on the Parties. Either Party may seek execution of the award in any court having jurisdiction over the Party against whom execution is sought.

282

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

LIBYA MODEL EXPLORATION AND PRODUCTION SHARING AGREEMENT: SETTLEMENT OF DIFFERENCES - ARBITRATION 23.1 Amicable Settlement Periodically, the Parties shall meet to discuss the conduct of the Petroleum Operations under this Agreement and shall make every effort to settle amicably any dispute arising therefrom. 23.2 Arbitration Any controversy or claim arising out of or relating to this Agreement, or breach thereof, shall, in the absence of an amicable arrangement between the Parties, be finally settled by arbitration, in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce, in Paris, France, by three arbitrators. Each Party shall 283

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

appoint one arbitrator, and the International Chamber of Commerce shall appoint the third arbitrator who must be in no way related to either Party and who will be the Chairman of the arbitration body. The Parties agree that, in the event an arbitration is commenced under the Guarantee attached hereto as Exhibit "D" involving the same subject matter as an arbitration commenced hereunder, the arbitrations shall be consolidated and treated as one arbitration, with the arbitral body being the tribunal appointed pursuant to the foregoing provision of this Article 23.2.

284

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

NICARAGUA 1998 MODEL CONTRACT FOR PETROLEUM CONCESSION: Article 30: Settlement of Disputes 30.1 The Parties shall make their best efforts to settle amicably through consultation any dispute arising in connection with the performance or interpretation of any provision hereof. 30.2 If any dispute has not been settled through such consultation within ninety (90) days after the dispute arises, either Party may by notice to the other Party propose that the dispute be referred either for determination by a sole expert or by arbitration in accordance with the provisions of this Article 30. This waiting period will not apply in the cases foreseen in Articles 11.8, or 33.3. 30.3 Following the giving of notice under Article 30.2, the Parties may, by mutual agreement, refer the dispute for determination by a sole expert to be appointed by agreement between the Parties. 285

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

30.4 If the Parties fail to refer such dispute to a sole expert under Article 30.3 within sixty (60) days of the giving of notice under Article 31.2, the dispute shall be referred to arbitration pursuant to the Arbitration Rules, as in force on the Effective Date, of the International Center for Settlement of Investment Disputes (ICSID). 30.5 For purposes of an arbitration under ICSID rules: a. the Spanish language shall be the language used in the expert or arbitral proceedings; b. all hearing materials, statements of claim or defense, award and the reasons supporting them shall be in Spanish; and c. the place of the arbitration shall be Managua unless another place is agreed between the Parties. 286

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

30.6 Each Party hereto expressly waives the right to use as a defense any immunity it may have against service of process or execution of a judgment or seizure of property.

287

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

TANZANIA 1995 MODEL PRODUCTION SHARING AGREEMENT: ARTICLE 25 CONSULTATION AND ARBITRATION (a) T.P.D.C. and the Company shall periodically meet to discuss the conduct of the operations envisaged under this Agreement and shall make every effort to settle amicably any problem arising therefrom. (b) If any dispute or difference in relation to or in connection with or arising out of any of the terms and conditions of this Agreement should arise the same shall be resolved by negotiations between the parties. In the event of no agreement being reached, either party shall except in the case of a dispute or difference as provided in sub-article 7(c) (ii), 10(b) and 10(d), have the right to have such dispute or difference settled through arbitration as provided for herein below. 288

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

(c) Any unresolved dispute or difference aforesaid shall be finally settled by arbitration under the Rules of the Convention for the Settlement of Investment Disputes between States and Nationals of other States of 16 March 1965 and to the extent required by the said Convention, the parties hereto will, in that event, consent to the jurisdiction of the Centre. It is further agreed that although ABC Oil Company (as an Investor) is a Company established under the laws of Tanzania it is controlled by nationals of [ ] and shall be treated as a national of that State for the purposes of the said convention.

289

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

SHAH DENIZ (AZERBAIJAN SECTOR OF CASPIAN SEA) PSC: 23.3 Arbitration (a) Except for any matter to be referred to an expert pursuant to Article 13.1(c) in the event of a dispute arising between SOCAR and any or all of the Contractor Parties (including matters which are not resolved at the Steering Committee), the disputing Parties shall meet in an attempt to resolve the dispute to their mutual satisfaction by reference to the terms of this Agreement. If satisfactory mutual agreement is not achieved within thirty (30) days after receipt by a Party of notice of such dispute, such dispute shall be settled in accordance with the Arbitration Procedure and the applicable law provisions of Article 23.1. 290

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

(b)Nothing in this Agreement shall limit the rights of the Contractor Parties pursuant to Articles 11 through 15 of the Law on Protection of Foreign Investment dated 15 January 1992, which rights shall apply in addition to any other rights Contractor may have under this Agreement notwithstanding any other law, both current and future, in the Azerbaijan Republic. If any of Contractor's rights, interests or property are expropriated, nationalised or otherwise taken by reason of any act or failure to act of any Governmental Authority, then the arbitrators shall apply the principle of indemnification (including prompt, full and effective compensation in Dollars) at the full market value, on the basis of an on-going concern utilising the discounted cash flow method, assuming a willing buyer and seller in a non-hostile environment, and disregarding the unfavourable circumstances under which or following which Contractor shall be deprived of its rights, interest (including its interest in undeveloped reserves) or property. The 291

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

arbitrators shall select an investment bank of good international reputation for purpose of appraising the full market value of said rights, interest (including its interest in undeveloped reserves) or property of Contractor. (c) The rights and obligations under this Article 23.3 shall survive the termination of this Agreement.

292

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

SHAH DENIZ (AZERBAIJAN SECTOR OF CASPIAN SEA) PSC: ARBITRATION PROCEDURE 1.1 Except as otherwise provided in this Agreement, all disputes arising between SOCAR and any or all of the Contractor Parties, including without limitation, any dispute as to the validity, construction, enforceability or breach of this Agreement, which are not amicably resolved by the Parties in accordance with the provisions of Article 23.3 (a) shall be finally settled before a panel of three (3) arbitrators under the Arbitration Rules of The United Nations Commission on International Trade Law known as UNCITRAL (the "Rules"). In the event the Rules fail to make provision for any matter or situation the arbitration tribunal shall establish its own rules to govern such matter and procedure and any such rules so adopted shall be considered as a part of the Rules. For purposes of allowing such arbitration, and enforcement and execution of any

293

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

arbitration decision, award, issuance of any attachment, provisional remedy or other pre-award remedy, each Party waives any and all claims to immunity, including, but not limited to, any claims to sovereign immunity. 1.2 The arbitration shall be held in Stockholm, Sweden. The language used during the procedure shall be the English language and the English language text of this Agreement will be utilised by the arbitrators. 1.3 After providing thirty (30) days prior written notice to the other Party of intent to arbitrate, either SOCAR or Contractor may initiate arbitration (the Party initiating the arbitration shall hereinafter be called the "First Party") submitting a request for arbitration to the Secretary General of the Permanent Court of Arbitration in the Hague, as provided in the Rules, and appointing an arbitrator who shall be identified in said request. Within (30 days of receipt of a copy of the request the other Party to the dispute (“Second Party”) shall

294

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

respond, identifying the arbitrator that it has selected. If the Second Party does not so appoint its arbitrator, the Secretary General of the Permanent Court of Arbitration in the Hague shall appoint a second arbitrator in accordance with the Rules. The two arbitrators shall, within thirty (30) days, select a third arbitrator failing which the third arbitrator shall be appointed by the Secretary General of the Permanent Court of Arbitration in the Hague, in accordance with the Rules. Unless otherwise agreed in writing by the Parties, the third arbitrator to be appointed shall not be a citizen of a country in which any Party (including the Ultimate Parent Company of such Party) is incorporated. 1.4 The Parties shall extend to the arbitration tribunal all facilities (including access to the Petroleum Operations and facilities) for obtaining any information required for the proper determination of the dispute. Any Party shall be allowed only one absence or default beyond its reasonable control which

295

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

prevents or hinders the arbitration proceeding in any or all of its stages. Additional absences, or absences which are within a Party's reasonable control, shall not be allowed to prevent or hinder the arbitration proceeding. 1.5 Without limiting the generality of their powers, the arbitrators shall have the power to award costs and damages as necessary with respect to the Government Guarantee with respect to Article 23.2 [Economic Stabilisation]. 1.6 The arbitration tribunal's award shall be final and binding on the Parties and shall be immediately enforceable. Judgement on the award rendered may be entered and execution had in any court having jurisdiction or application may be made to such court for a judicial acceptance of the award and an order of enforcement and execution, as applicable.

296

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1.7 Each Party shall pay the costs of its own arbitrator and the costs of the third arbitrator in equal shares, and any costs imposed by the Rules shall be shared equally by the Parties. Notwithstanding the above, the arbitrators may, however, award costs (including reasonable legal fees) to the prevailing Party from the losing Party. In the event that monetary damages are awarded, the award shall include interest from the date of the breach or other violation to the date when the award is paid in full. The rate of interest shall be LIBOR plus four (4) percent over the period from the date of the breach or other violation to the date the award is paid in full. Each Party waives any and all requirements of any national law relating to notice of a demand for interest or damage for the loss of the use of funds.

297

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6. “Pathological” Clause 1.

Parties shall attempt to resolve any disputes amicably by negotiation.

2.

If they cannot agree to another method of resolution, either party may submit the dispute to the ICC in Geneva.

3.

Each party may appoint an arbitrator, and the umpire shall be appointed by the President of the International Court of Justice.

4.

The ICC shall have no authority to confirm or handle challenges to the arbitrators.

298

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d) 6. PATHOLOGICAL CLAUSE (Cont’d)

5. The arbitration shall be expedited, and the arbitrators and umpire shall decide the case within 60 days of their appointment. 6. The umpire shall be a national of Switzerland who is fluent in both English and Spanish, with an engineering degree, substantial experience as an international arbitrator and at least 20 years experience as an executive of an international energy company. 7. The procedural law of the arbitration shall be the Civil Code of France and the Civil Code of Venezuela, with due regard for the law of the place of the arbitration. 299

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d) 6. PATHOLOGICAL CLAUSE (Cont’d)

Arbitration. In the event that the parties are unable to agree on the applicable law of any of the provisions of this Agreement, the parties agree to submit such dispute or disputes to arbitration under the Rules of Conciliation and Arbitration of the International Chamber of Commerce (the “ICC”) then in effect. Law Governing Agreement. The validity of this Agreement and the rights, obligations and relations of the parties hereunder shall be construed and determined under and in accordance with the substantive laws of the State of Texas, United States of America.

300

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7. Clauses "English law--arbitration, if any London according to ICC Rules" "In case of discrepancies between the partners, it is agreed to request arbitration according to international laws of arbitration." "Eventual arbitration to be performed in London according to English law." 301

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8. ICC Model Clause All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.

302

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9. Add to Model Clause •

The number of arbitrators shall be [one/three].

•

The place of arbitration shall be [City and/or Country].

•

The language to be used in the arbitral proceedings shall be [ ______ ].

•

The governing law of the contract shall be the substantive law of [ ______ ]. 303

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

10. ADR Procedures Major Project - Sequencing ADR Procedures • Independent Expert's Decision • Mediation • Dispute Review Board • Binding Arbitration Other Options • Negotiations • Dispute Resolution Advisor/Ombudsman 304

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d) 10. ADR PROCEDURES (Cont’d)

Negotiation In the event any dispute arises, the parties shall first seek to resolve any disputes by negotiations between senior executives. Mediation If the dispute has not been resolved within 30 days after the date of the notice of a dispute... either party may initiate mediation of the dispute... 305

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d) 10. ADR PROCEDURES (Cont’d)

Arbitration If a dispute has not been resolved within 60 days after the original notice of a dispute or within 30 days after the date of a request for mediation, then either party may initiate arbitration proceedings, in which event the dispute shall be resolved by final and binding arbitration.

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V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

11. Arbitration Notwithstanding the above provisions, if either party deems that time is of the essence in resolving the dispute, it may initiate arbitration and then comply with the requirements for negotiations and mediation as long as they are fully completed before the commencement of the hearing on the merits in the arbitration proceeding.

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V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

12. Scope of Arbitration Any dispute, controversy or claim of any and every kind or type, whether based on contract, tort, statute, regulations, or otherwise, arising out of, connected with, or relating in any way to this Agreement shall be settled by final and binding arbitration.

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V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

13. Multi-Party Disputes ¾

All Claimants jointly appoint one arbitrator and all Respondents jointly appoint one arbitrator

¾

If not, Institution appoints all arbitrators

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V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

14. Consolidation Clause ¾ If the parties to this Agreement or others who are bound to this or another similar arbitration agreement initiate multiple arbitration proceedings, the subject matters of which are related by common questions of law or fact and which could result in conflicting awards or obligations, obligations then the Parties hereby agree that all such proceedings may be consolidated into a single arbitral proceeding. The parties do not agree by this provision to authorize a class action or a mass action.

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V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

15. Arbitrators Qualifications & Conduct ¾ All arbitrators shall be and remain at all times wholly impartial and shall provide the parties with a statement that they can and shall decide the case impartially. ¾ No arbitrator shall have any financial interest (direct or indirect) in the dispute or any financial dependence (directly or indirectly) upon any of the parties. ¾ The International Bar Association's Rules of Ethics for International Arbitrators shall be applicable to all arbitrators.

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V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d) 15. ARBITRATORS QUALIFICATIONS & CONDUCT (Cont’d)

¾ All arbitrators shall be knowledgeable of the __________________ business or the law applicable thereto. ¾ The presiding arbitrator shall not be of the same nationality as the parties.

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V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

16. Interim Measures Notwithstanding the requirements for negotiation, mediation and arbitration, prior to the constitution of the arbitral tribunal, any party may apply to a court for interim measures, measures and the parties agree that seeking and obtaining such measures shall not waive the right to arbitration. The arbitrators, or in an emergency the presiding arbitrator acting alone in the event one or more of the other arbitrators are unable to be involved in a timely fashion, may grant interim measures including injunctions, attachments and conservation orders in appropriate circumstances, which measures the parties agree may be immediately enforced by the arbitrators or by court order. 313

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

17. Expert Determination IF: Any management, technical or other decision arises on which the Parties cannot agree, and which requires unanimous consent of the Parties under the terms of their agreement, including the price redetermination and valuation decisions in sections _____ and _____. Then: The Parties hereby agree that such decision shall be made by expert determination conducted on an expedited basis by a single expert selected unanimously by the Parties. The decision of the expert shall be binding on the parties. 314

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d) 17. Expert Determination (Cont’d)

IF: The Parties are unable to agree upon the identity of an expert within 10 days... Then: The Parties hereby agree that the ICC Centre for Expertise shall appoint such an expert, upon the request of any Party, and shall administer such an expert determination on an expedited basis through the ICC's Rules for Expertise.

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V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d) 17. Expert Determination (Cont’d)

•

Such expert shall endeavor to resolve the dispute in question within thirty (30) days, but no later than sixty (60) days, after his appointment, taking into account the circumstances requiring an expeditious resolution of the matter in dispute.

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V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

18. Governing Law Clause May Select ¾

Conflicts Rules

¾

Substantive Law

¾

Procedural Law

¾

Laws to determine the validity and effect of the arbitral clause — Lex arbitrii

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V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

19. Procedural Law Options ¾

Ignore issue - arbitrators decide

¾

Place of the arbitration

¾

Country other than the situs

¾

Denationalized law - UNCITRAL Model Law

¾

Exclude national law and create your own procedural rules

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V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

20. Drafting the Governing Law Clause •

All disputes shall be governed by the law of ____________.

•

This Agreement shall be interpreted in accordance with the law of ____________.

•

The principles of law of ____________shall be applied.

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V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

21. Equitable Principles All arbitrators appointed pursuant to this Agreement shall: ¾

have the powers of an amiable compositeur

¾

decide the case ex aequo et bono

¾

decide the dispute based on equitable principles

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V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

22. Basis of Arbitrators’ Decision •

Governing Law Clause - “This agreement shall be governed by Syrian Law.”

•

Arbitration Clause - “The arbitrators shall judge any disputes according to general principles of law and justice.”

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V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d) 22. BASIS OF ARBITRATOR’S DECISION (Cont’d)

Arbitrators held second provision limited Syrian Law, protecting against: • •

Future modifications of law Exorbitant provisions that could only work to the disadvantage of one party

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V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

23. Arbitrability Arbitrators may be expressly granted the power to: ¾ Look at their own jurisdiction without waiting for a court to do so. ¾ Decide their own jurisdiction without court intervention until an award is rendered. ¾ Decide their own jurisdiction with no court review. First Options (U. S. Supreme Court)

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V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

24. Punitive Damage Waiver The Parties hereby disclaim and waive any damages of the following types: • • • • • • •

Punitive Exemplary Penal Treble Multiple Consequential Incidental

324

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

25. Waiver of Sovereign Immunity ______ hereby acknowledges its obligations are of a commercial nature and irrevocably and explicitly waives any sovereign or other immunity that it may now or hereafter have from: • any arbitration proceedings [jurisdiction] • any judicial or other proceeding to compel arbitration or to confirm, recognize, enforce, or give effect to any arbitral award by the arbitral tribunal[jurisdiction] • service of process • execution or attachment in aid of execution of judgment • pre-judgment attachment • interim relief such as injunctions and conservatory orders

325

V. CONTRACTUAL PROVISIONS (Cont’d) M. DISPUTE RESOLUTION (Cont’d)

26. Enforcement The Parties acknowledge that this Agreement and any arbitral award rendered under it may be enforced under the terms of:

•

The 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("New York Convention") [or]

•

The Inter-American Convention on International Commercial Arbitration ("Panama Convention").

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THANK YOU!

PHILIP WEEMS [email protected] 327