| The Production Sharing Contract INTRODUCTION The purpose of a petroleum production sharing contract is to facilitate the finding and commercialization of deposits of oil and gas. But production sharing is not the only regime used for that purpose nor- within a production sharing regime- is the production sharing contract the only instrument used and- as with all such regimes- production sharing- and each individual production sharing contract- exists within an historical- geopolitical and legal framework- and a global market- that informs its principles and its detailed implementation. The study seeks to place the production sharing contract within that framework- and to examine the impact on it of the physical- financial and political basics of the industry – the chemistry and geology involved in the formation- migration and trapping of oil and gas and the politics- science and operations involved in the finding- recovering- transporting and commercialization of it – and the political- legal- operational and commercial mechanisms used to facilitate those operations: law and regulation industry joint venture- operating- field work- transportation and sales arrangements project structuring and project financing. The comment consists of: - 1. Petroleum and its Commercialization No one should negotiate or draft a production sharing contract without a sound knowledge of its purpose- and of why various issues arise. That knowledge must begin with an understanding of what petroleum is- how it was formed- and what- in both a physical and commercial sense- is required to commercialize it- all of which form the environment in which the contract- and its underlying legal system- must operate- and operate efficiently- if they are to fulfill their purpose we have to looking for the following: • the physical- commercial and geopolitical world of oil and gas- and other primary energy sources- and the impact of that world on the contract • the formation- migration and trapping of oil and gas- and historical and modern uses of petroleum • the geographic spread of reserves and consumption- and the operation of markets • future use projections- and environmental impact 2. Oil and Gas Exploration and Production The study included on its article commitment covered following important geological and geophysical survey- drilling- development- production and off-take techniques and structures utilized by the industry- and their implications for the contract. 3. The Role of the Production Sharing Contract in the Right to Explore and Produce Production sharing is but one of a number of legal regimes used to encourage and regulate the upstream oil and gas industry- and the production sharing contract is by non means the only source of law and regulation in a production sharing regime according to : • the principal regimes- their similarities and differences o production sharing o private lease o licensing- royalty and tax o service contracts o risk service o joint ventures and o combinations- • the historical concession • other sources of law and regulation in production sharing o international law and treaties o constitutions and local law 4. The Relationship of the Production Sharing Contract to the basic Industry Exploration and Production Agreements Whilst the production sharing contract must be compatible with the underlying legal system upon which it is based- both must also be crafted in the light of the manner in which the industry seeks to organize itself and go about its business • joint ventures • joint operating agreements • lifting and allocation • joint bidding • areas of mutual interest • confidentiality • unitization • operational work contracts. 5. The Relationship of the Production Sharing Contract to Basic Industry Transportation and Sale Agreements The purpose of the production sharing contract is the commercialization of oil and gas deposits- and the manner of that commercialization- principally by sale- must be accommodated by it. • crude oil and natural gas spot and long-term sales arrangements • processing and transportation considerations- • downstream investments and agreements (including LNG) 6. The Role of the Production Sharing Contract in the Financing of Commercialization Without finance- be in debt or equity- there will be no exploration- production or other commercialization and the production sharing contract must seek to facilitate. • the principal methods of financing o shareholder equity o farm out- sell-down- overriding royalties and net profits interests o debt (limited or full recourse- and Islamic financing); • the international legal- regulatory- tax and other structures needed • reserves reporting • the requirements of social and environmental sustainability • the impact of anti-corruption laws- and of their ever expanding extra-territorial reach. 7. The Production Sharing Contract- Resource Rent and Petroleum Economics Within the overall objective of oil and gas commercialization- there is a natural tension between the state grantor- directly or indirectly- of the right to explore and produce- and the holder of that right- as to the division of the benefits of success (and the sharing of the costs of failure), that the regime must address. It is in neither party’s interest that the other feel aggrieved and- whilst the market and other factors play their part- it is important that each understands the imperatives of the other. This module looks at the economic impact of common resource rent tools. • common tools o signature bonuses (and bonus bidding) o cost and profit oil percentages o first tranche petroleum o royalties o production bonuses o success fees o income- profit and gain taxes o amortization and depreciation o surface rents o additional profits taxes o ring fencing • the progressive nature of production sharing • the economic impact • social investment • profit re-investment • net back and other transfer pricing protections • downstream profit 8. The Production Sharing Contract as an Administrative Tool The contract both underpins the investment- and regulates the activities of- the contractor. This module will examine- in the light of the previous models- and an outline of a typical contract. • the award process o open tender or private negotiation o the requirements of transparency in that process and in subsequent administration (including from the extractive industries transparency initiative- and anticorruption legislation • the basics of the contract o the identity of the granting party and of the contractor o joint and several liability o the strength- and relationship to the contract- of the underlying constitutional and legal and regulatory system o the nature of a contract as embodied in that system o tax and other forum shopping o the scope of the contract • required standards and obligations o standards of operation and liability for loss o health- safety and environmental requirements o the relationship between work and expenditure obligations o decommissioning and security o default (including partial default) o force majeure o termination o dispute resolution • management and decision making o management control o commercial discovery o operational and development approvals o depletion controls and quotas o domestic market supply o local preferences o training o surface and other ancillary rights • resource rent o the production sharing mechanism o the impact of double taxation o import- export and expatriate employment and taxation o exchange controls and re-investment o social investments • monetization o assignment o relinquishment renewal and surrender o unitization (local and international) o sales and downstream investment approvals • grantor discretions and contractor made industry agreements 9. The Production Sharing Contract as an Investment Agreement This module will examine the contract in its other capacity of underpinning the investment of the contractor: • stability • predictability • enforceable international arbitration • litigation- mediation and expert determination • sovereign immunity • international and bi-lateral investment protection treaties |