Energy Contracting & Negotiation-3

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CHAPTER 3PRODUCTION SHARING CONTRACTSIntroduction

There are various mechanisms and systems in the field of upstream oil business of theworld on which host government award right to explore and exploit petroleumresources. For exploration and exploitation of natural resources, India has adopted amixture of concessionary and production sharing regimes which has been adoptedunder a Model Production Sharing Contract..

Development of Production Sharing Concept

In 1960, Law No. 44 was passed in Indonesia providing that Oil companies willbe known as “contractors” rather then “concessionaires”. The Western Oil Companieswere very upset and much worried because of its possible impact on their Middle Eastconcessions. The companies working in Indonesia refused to accept this Law.Negotiations failed and Government of Indonesia declared that in case agreements arenot reached, the companies will be nationalized. In this backdrop and after theintervention of USA, an agreement was reached through which these companies wereallowed to carry on the operations under a “Contract of Work” arrangement. The sharingof production and control under a production sharing arrangement was not agreed to bymajor oil companies operating in Indonesia but when some Japanese and AmericanIndependents entered in to such contracts , others followed suit. So, after 1970, thethings were concretized and a new era of joint ventures of oil companies with the hostgovernment started. With the passage of time these Contract of Work graduated in toProduction Sharing Contracts.In India, PSC incorporates the charging of Petroleum Exploration License feesand royalty as well as sharing of profit oil left after cost recovery. Thus, it a hybrid ofboth the concessionary and production sharing regime. The Indian PSC makesfollowing declarations as to its legal position in the Recital clause, which put PSC inproper legal perspective:

For offshore areas Recital in the Contract provides as follows:-

By virtue of article 297 of the Constitution of India, Petroleum in its natural state in theTerritorial Waters and the Continental Shelf of India is vested in the Union of India. TheOil Fields (Regulation and Development ) Act, 1948 (53 of 1948) and the Petroleum andNatural Gas Rules, 1959, made there under (hereinafter referred to as "the Rules")make provisions, inter alia, for the regulation of Petroleum Operations and grant oflicenses and leases for exploration, development and production of Petroleum in India.The Territorial Waters, Continental Shelf, Exclusive Economic Zone and otherMaritime Zones Act, 1976 (No. 80 of 1976) provides for the grant of a license or letter of

authority by the Government to explore and exploit the resources of the continental shelf andexclusive economic zone and any Petroleum Operation under this Contract shall be carriedout under a license or letter of authority granted by the Central Government;The above Acts and Rules provide for the grant of exploration license/letter ofauthority and mining lease in respect of any land or mineral underlying the ocean, withinthe territorial waters, the continental shelf and exclusive economic zone of India by theCentral Government. Rule 5 of the Rules provides for an agreement between theGovernment and the Licensee or Lessee containing additional terms and conditionswith respect to the license or lease;Clause 12 of the Oilfield Regulation and Development Act provides thatGovernment in certain cases can award a license on terms different from those given inPetroleum and Natural Gas Rules. The above statement has been incorporated toreflect this aspect of the matter.For onshore areas following has been provided in the Recital of PSCThe Oil Fields (Regulation and Development) Act, 1948 (53 of 1948) (hereinafterreferred to as "the Act") and the Petroleum and Natural Gas Rules, 1959, madehereunder (hereinafter referred to as "the Rules") make provision, inter alia, for theregulation of Petroleum Operations and grant of licenses and leases for exploration,development and production of Petroleum in India;The Rules provide for the grant of exploration licenses and mining leases inrespect of land vested in a State Government by that State Government with the priorapproval of the Central Government. Rule 5 of the Rules provides for an agreementbetween the Central Government and the Licensee or Lessee containing additionalterms and conditions with respect to the license or lease. The provisions of PSC aresuch additional terms.Initially it started with a concession arrangement but changed world scenarioand big oil discoveries after World War II, forced a rapid change in the policies andpractices followed and joint venture type of relationship started taking shape wherein oilcompanies jointly operate petroleum discovery and develop it at its risk and cost withthe right of pay back from the production. This was the initial form and starting point ofproduction sharing arrangement.

The clauses of PSC deal with technical, administrative, financial andlegal aspects. There are also clauses, which manage uncertainties, as durationis 20 years, like force- majuere, assignment, guarantees, termination etc.

Management Committee

Article 6 of the PSC deals with the issue of Management Committee as follows:There shall be constituted a committee to be called the Management Committee.Government shall nominate two (2) members representing Government in theManagement Committee, whereas each Company constituting Contractor shallnominate one member each to represent Company in the Management Committee.Each Party may nominate alternate members with full authority to act in the absenceand on behalf of the members nominated under Article 6.2 and may, at any time,nominate another member or alternate member to replace any member nominatedearlier by notice to other members of the Management Committee.One representative of the Government is designated as the Chairman of theManagement Committee and the second representative of the Government shall bedesignated as the Deputy Chairman. The member of the Operator in the ManagementCommittee shall be designated as the Secretary of the Committee.Operator on behalf of Contractor with the approval of Operating Committee shallsubmit important matters to the Management Committee. But during explorationoperations Management Committee has review and advisory functions only. DuringDevelopment and production operations, it has approving functions as well.The Management Committee is required to meet at least once every six (6)months during the Exploration Period and thereafter if exploration results in commercialdiscovery and development and production operations are carried on then, at least onceevery three (3) months or more frequently at the request of any member.The Chairman or Deputy Chairman, as may be the case, shall preside over themeetings of the Management Committee and, in their absence, any other memberrepresenting Government and present shall preside over the meetings. The Chairmanshall appoint the member nominated by the Operator as Secretary to the ManagementCommittee with responsibility, inter alia, for preparation of the minutes of every meetingin the English language and provision to every member of the Management Committeewith two copies of the minutes approved by the Chairman not later than fourteen (14)days after the date of the meeting.

Unanimous Vote

The important matters with few exceptions, requiring the approval of theManagement Committee, are generally approved by a unanimous vote of the membersof the Management Committee present as well as the views of the members receivedby some other mode of communication.The Management Committee, if it considers necessary, may appoint legal,financial or technical subcommittees.

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