Legal Issues: Bid and Production Legal Issues: Bid and Production Sharing ContractsSharing Contracts

byby

Jatin AnejaJatin Aneja

amarchand & mangaldas & suresh a. shroff & co. amarchand & mangaldas & suresh a. shroff & co.

Amarchand Towers216, Okhla Industrial Estate

New Delhi-110020

Telephone 91 – 112 690 2500Facsimile 91 – 112 692 4900 jatin.aneja@amarchand.com

Exploration & Production Framework

Petroleum Exploration License and Mining Lease

Brief overview of the contractual arrangements

NELP-V: Salient Features

NELP-V: Key Issues of Bid/PSC

Presentation Overview

Exploration & Production Framework

BIDDER 1 CONSORTIUM / CONTRACTOR GOVERNMENTBid

License

Production Sharing Contract

Work program & budget approvals Exploration Activities

DISCOVERY

Notification to Government Appraisal and testing

COMMERICAL

mining lease Development and production

BIDDER 2

BIDDER 3

The Oilfields (Regulation and Development Act), 1948 - Enabling statute for licensing and leasing of oil and gas blocks by the appropriate government.

The Petroleum and Natural Gas Rules, 1959 (the “Petroleum Rules”) - Provides the framework for grant of petroleum exploration licenses and mining leases.

Rule 4 of the Petroleum Rules prohibits the prospecting or exploitation of any oil or gas unless with a license or lease granted under the Petroleum Rules.

Petroleum Exploration Licence and Mining Lease

For offshore areas – Grant of license and lease by the Central Government

For on land areas – Grant of license and lease by the State Government, with prior approval of the Central Government

Every license or lease granted may contain terms and conditions in relation to the Block in addition to those contained in the Production Sharing Contract

Petroleum Exploration License entitles the licensee to exclusive right to a lease for extracting the oil and gas from the contract area.

Petroleum Exploration Licence and Mining Lease

Brief overview of the contractual arrangements

Joint Bidding Agreement Entered into at the formative stage between consortium

members for preparing and submitting a joint bid.

To reduce individual levels of risk and to share the high application costs

Sets out the broad terms and conditions of the Joint Operating Agreement, which the parties shall enter into upon award of Block.

Contractual Arrangements

Production Sharing Contract Entered into between the Government of India and

consortium members with respect to exploration and exploitation of development blocks

In accordance with Rule 5 of the Petroleum and Natural Gas Rules, 1959, which provides for an agreement between the Government and the Licensee or Lessee containing additional terms and conditions with respect to the License or Lease.

Contractual Arrangements

Production Sharing Contract (Cont.)

Provides, inter alia, for - the Participating Interest of the respective consortium

members vis-à-vis the development block and assignment thereof;

License and exploration period; Setting up the Management Committee; Designation of the Operator and its various

obligations and responsibilities; Discovery, Development and Production operations;

Contractual Arrangements

Production Sharing Contract (Cont.) Unit Development (if mandated); Environmental Standards and Safeguards Recovery of Cost Petroleum and sharing of profit

Petroleum; Royalty payments; Disposal obligations; National economic interest provisions Dispute resolution, etc...

Contractual Arrangements

Joint Operating Agreement: Entered into post award of development block between

consortium members setting out the rights and obligations of parties vis-à-vis the development block.

Roles and responsibilities of the Operator and setting up of the Operating Committee.

Contractual Arrangements

NELP - V

Salient Features

Opens access to 20 blocks in 12 sedimentary basins: special emphasis on Onshore Blocks (12 Blocks in 8 Basins).

Companies having a net worth of US $ 1 Billion (deep water contracts) or US $ 500 Million (on land and shallow water contracts) shall not be required to furnish bank guarantee towards Minimum Works Programme.

NELP-V

Salient Features (cont.) ,

Upto 100% participation by foreign companies permitted with full repatriation of profits.

7 year tax holiday from commercial production (Sec. 80 I-B)

Exemption from import duties ,

No minimum expenditure commitment

No up front payments

Low to moderate royalty rates between 5% to 12.5%

NELP-V

NELP – V

Model Production Sharing Contract

Clear definition of Participating Interest (share of rights and obligations) of parties

Several liability to the extent of participating interest alone

Operator designated to carry out Petroleum Operations and to perform all functions required of the contractor under the Agreement on behalf of all constituents of the Contractor.

Government control over appointment and change of Operator

Participating Interests and Operator’s Role

Exploration in three phases with walk out option at each phase.

The contract shall be terminated if no commercial discovery has been made by the end of the exploration period.

Exploration Phase and Relinquishment

EXPLORATION PHASE I

EXPLORATION PHASE II

EXPLORATION PHASE III

RELINQUISHMENT OF CONTRACT AREA

100% of contract area less discovery areas

25% of contract areanot being discovery areas

50% of contract areanot being discovery areas 100 % of contract area

not being discovery areas

100% of contract area less discovery areas

Comprises of representatives of Government and consortium members

Operator to submit, inter alia, the following matters to the Management Committee for its approval:

Annual Work Programmes and Budgets in relation to Development Operations and Production Operations;

Proposals for approval of Development Plans; Determination of a Development Area; Collaborations with licensees or contractors of other

areas; Proposals for abandonment plan, etc…

Management Committee

Member entitled to appoint alternate or vote by telex/ fax, etc or appoint another member as proxy

All matters requiring approval of Managing Committee shall be generally approved by unanimous vote.

If no unanimity, then by Majority Participating Interest of 70% and Affirmative Government Representative Vote.

Management Committee

The ‘take’

REVENUE

GOVERNMENT TAKE

CONTRACTOR TAKE

Royalty

Cost Petroleum

Profit Petroleum

Tax

Profit Petroleum

Cost petroleum linked to volume of petroleum produced and saved and ‘contract costs’

Contract Costs - means Exploration Costs, Development Costs and Production Costs as set out in the Accounting Procedure.

Annual Production Costs and Royalty payments recoverable from Cost Petroleum for such Year.

Upto 100% of production in a year can be assigned for cost recovery (biddable).

Carry forward of unrecovered portions of Contract Costs till entire Contract Costs recovered.

Priority: Royalty; Production Costs; Exploration Costs; and Development Costs

Cost petroleum

Profit petroleum – total value of product saved from a particular contract area – calculated in specified manner

Use of investment multiple Contractors bid on IM Complex proportions are intended to make sharing of oil

more favorable to the Government at higher production levels

Production sharing and profit petroleum

Government option to take Petroleum either in cash or in kind in any year.

With respect to Associated Natural Gas or Non-Associated Natural Gas, such option to be exercised by the Government at intervals of every five (5) years.

Inability of contractors to finalize long term contracts with buyers.

Production sharing and profit petroleum

Common Reservoir in two Contract Areas

The Government may, in order to secure effective recovery, require the two contractors to collaborate and agree on the joint development of the Reservoir.

Unit Development

Contractor under an obligation to employ modern oilfield and petroleum practices to ensure that Petroleum Operations are conducted in an environmentally acceptable and safe manner.

Where environmental damage caused, Contractor obliged to take all necessary and reasonable measures to remedy the failure and the effects thereof.

If Government has good reason to believe that property, person or environment is endangered: require remedial measures and if deem necessary discontinue Petroleum Operations.

Detailed provisions on environmental studies and protection of environment.

Environment and abandonment

On expiry or termination of the Agreement or relinquishment of any part of the Contract Area, contractor to remove all equipment and installations from Contract Area (or part thereof) in a manner agreed with the Government pursuant to an Abandonment Plan and to perform all necessary Site Restoration.

Site Restoration Scheme involves a sinking fund and annual contributions based on estimated pay outs at abandonment.

All payouts by contractor to be cost recoverable

Environment and abandonment

Local employment – Operator and subcontractors shall, to the maximum extent possible, employ citizens of India having appropriate qualifications and experience.

Local goods, services and resources – Preference to local local goods, subcontractors, manufacturers, etc.

Technical assistance agreements – At the request of the Government, foreign companies shall separately endeavour to negotiate, in good faith, technical assistance agreements with the Government or a company nominated by the Government

National Economic Interest Safeguards

Any of the constituents of the Contractor may assign their respective Participating Interest with prior written approval of Government, which approval shall not be unreasonably withheld.

To affiliates – with prior approval of Mgmt Committee Change in the status of a company or its shareholding

leading to change in control – with prior approval of Government

Deemed approval – if Government does not respond within 120 days, consent shall be deemed to have been given

Assignment

Minimum participating requirement – An assignment shall not be made where resulting Participating Interest shall be less than 10%, except where the Government, on the recommendations of the Management Committee, may, in special circumstances, so permit.

Financing – Parties are entitled to pledge, charge or in any other manner encumber Participating Interest as security for financing.

Provided however, in case of foreclosure or default by a borrowing party, the mortgagee/ lender shall not be deemed to have acquired a right to carry on either by itself or through an agent, the Petroleum Operations, without the written consent of the Government of India.

Assignment

Each Contractor to provide Bank Guarantee equivalent to 35% of its Participating Interest share of the total estimated annual expenditure in respect of the Minimum Work Programme to be undertaken by the Contractor in the Contract Area during the relevant year of a phase.

This Bank Guarantee shall be renewed annually.

Guarantee to be released after completion of Minimum Work Programme for a particular Exploration phase.

Provided however, for subsequent phases of Exploration Period, bank guarantee for such succeeding phase to be provided.

Guarantees: Bank Guarantee

A Financial and Performance Guarantee from a parent company acceptable to the Government.

Where there is no such parent company, the guarantee shall be from the company itself - ?

* In the event of any assignment, The Government shall release the guarantees given by the assignor if the assignee provides the aforesaid Bank Guarantee and Performance Guarantee.

Guarantees: Performance Guarantee

Standard principles of Force Majeure apply Extension of time – specific mention of extension of

‘exploration phase’ and all dates stand extended for period of downtime caused by force majeure

Extended force majeure – No principles have been laid down in particular.

If an event of force majeure occurs or is likely to continue for a period in excess of thirty days, then parties to meet and discuss the consequences of such force majeure event.

No distinction between Political / Non-Political Force Majeure.

Force Majeure

Governing law is Indian law

Conciliation Procedure - Prior to submitting any disputes to arbitration, Parties to submit the matter to conciliation in accordance with Part III of the Arbitration and Conciliation Act, 1996

Certain matters reserved for determination by Expert – as per the terms of the contract, “the decision of the sole expert shall be final and binding on the Parties and shall not be subject to arbitration.”

Expert is not arbitrator; decisions - enforceable?

Dispute resolution

Thank you !

Jatin AnejaJatin Aneja

amarchand & mangaldas & suresh a. shroff & co. amarchand & mangaldas & suresh a. shroff & co.

Amarchand Towers216, Okhla Industrial Estate

New Delhi-110020

Telephone 91 – 112 690 2500Facsimile 91 – 112 692 4900 jatin.aneja@amarchand.com