Checklist 2.
Key Issues for Operating Companies in
Resource Agreements
Area & Period for Exploration
 Provide for a large enough exploration area.
 Sufficient period of time to provide for an
appropriate exploration programme.
 Possible extension of time period to develop
gas discovery.
Work Programme
 Work and financial obligations should be
directly related to the geology of the area.
 If the area is unexplored and lacking sufficient
data, there should be a willingness to give a
seismic option. A drilling commitment would
be conditional until the company believes that
drilling is justified.
Commercial Discovery
 A reasonable definition of what constitutes a
commercial discovery with flexibility to
determine the nature and level development
at the Operator’s discretion.
 Unless the company determines the project to
be economic, it will not go forward with
development.
 A production license should provide for
automatic extensions, rather than be subject
to the Host Governments’ discretion.
Signature Bonus
 At the time the contract is signed, bonus has a
high degree of risk because no recovery is
available if discovery is not made.
 Any bonus should be eligible for cost
recovery.
Production Bonus
 Payments by the contractor at selected
intervals.
 Usually the timing of this payment is
associated with the achievement of some
predetermined level of productive capacity
and has a less negative impact on the energy
companies than a signature bonus.
State Participation
 Some Host Governments require an interest
in a project through the participation of the
state oil company that is carried in the
exploration phase.
 Even though the state company pays its
shares of the investment in the production
phase and the company retains the same rate
of return.
 The state has not assumed the risk of
exploration and the level of the profit
remaining for the company may be too small
to be of interest.
Cost Recovery & Amortization
 Operators require access to a significant
portion of the revenue generated in the early
years to recover costs.
 Provide for a high percentage of cost recovery
in Production Sharing Contract and for rapid
amortisation rates in Tax and Royalty
Contracts.
Production Splits & Profit Sharing
 The fiscal provisions must ensure profitability
over a wide range of reserve sizes, costs, and
oil prices.
 Each Operator will develop its own standards
to determine the economic viability of a
project, the levels of production splits/profit
sharing will play a critical part in such
determinations.
 If the split is made according to profits, rather
than production, the value of production
should be determined by a neutral third party
not a price unilaterally set by a Host
Government.
Governing Law
 For an agreement to be effective, it must be
interpreted and enforced in the context of an
established legal system.
 Some Operators attempt to provide that the
contract be governed by general principles of
law common to both countries or general
principles of international law, which
complicates interpretation.
 Choice of law rules and other objectionable
provisions must be expressly excluded from
the governing law.
Continued
Checklist 2. Continued
Assignment
 An Operator would like to have the right to
assign its interest to third parties to earn a
financial reward from the transfer.
 These “farmouts” are an important element in
international exploration. The right to “farmout”
should not be denied although the
government should have the right to approve
the assignee for its suitability as a participant.
 Governmental approval of the assignment
should not be unreasonably withheld.
Extraterritorial Application of Laws of
Operator’s Country of Incorporation
 In some instances, the activities of an
Operator, its affiliates, and controlled foreign
subsidiaries are subject to the laws of the
company’s country of incorporation, even
though these activities take place beyond the
territorial limits.
Tax Ring Fence & Consolidation
 The absence of any “ring fence” provision in
the agreement is an incentive for continued
exploration once has established production.
 Investments made on any area may be
recovered against income from other
operations within the country.
 Tax rates and the deductions for operating
expenses should be considered in
determining the effective split of profit with the
Host Government.
Contract Stability
 Under the stability of contract provision, the
Host Government guarantees the stability of
the terms of the contract for the duration of the
contract.
 No new law or regulation would be permitted
to change the fiscal benefits agreed to in the
contract.
Arbitration
 Self -executing mechanism: a self-executing
mechanism provides for arbitration to take
place in accordance with the terms of the
arbitration provision, regardless of the conduct
of either party. This ensures that there can be
no frustration of the arbitration process.
 Impartiality: arbitration should take place in a
neutral forum and the arbitrators should be
nationals of neutral countries
 Enforcement: the Host Government should
wave sovereign immunity and ratify New York
convention.
Independent Expert
 A third-party expert is used for deciding issues
involving technical questions.
 Useful as a substitute for domestic arbitration
in those jurisdictions, which exclude the use of
an international arbitration.
Foreign Exchange
 No restriction should be placed on an
Operator to freely import or export funds
resulting from the conduct of its operations.
 Any company should also have the right to
convert payments and sums into convertible
currency at market rates, not artificial and
discriminatory rates, and must not be
compelled to keep funds in local currency.
Control of Operations
 When a company is assuming the risk of an
exploration venture, it should have control
over operations.
 State participation should not be used to seek
control of operations when the state entity is
not assuming an appreciable risk.
 The regulatory powers of the Host
Government should not be used to hinder
efficiency in operations.
Reference Price
 Any price used as a basis for calculating tax,
royalty or other payments should be
objectively ascertainable or a market price
Environmental Issues
 Operations will comply with the Host
Governments laws, or in there absence, with
standards agreed in the contract.
Sovereign Immunity
 The defence of sovereign immunity may
permit Host Governments to avoid some or all
of their obligations under the contract.
 These contracts are commercial and not
governmental in nature and it is not
unreasonable to expect that Host
Governments waive sovereign immunity.
 Check whether the New York convention on
enforcement of arbitration awards been
ratified.
Government Guarantees
 Does the Host Government provide partial or
full faith and credit guarantees for state
enterprises that have commercial obligations.
Force Majeure
 Suspension of obligations for specific events
including acts of Host Government