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Checklist 2.

Key Issues for Operating Companies in


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