International Oil and Gas Joint Ventures

197 Pages·2002·0.73 MB·English

International Oil and Gas Joint Ventures:
A Discussion with Associated Form Agreements
by
Andrew B. Derman

© 1992 Andrew B. Derman. All rights reserved.
Table of Contents
INTRODUCTION......................................................................................................................1
Acknowledgements.....................................................................................................................1
International Oil and Gas Joint Ventures:
A Discussion with Associated Form Agreements
A. CONFIDENTIALITY AGREEMENTS..........................................................................3
1. AIPN Model........................................................................................................5
2. Exhibit "A" to Confidentiality Agreement............................................................9
B PARTICIPATION AND BIDDING AGREEMENTS...................................................10
C. STUDY AND BIDDING AGREEMENT......................................................................15
1. Definitions.........................................................................................................15
2. Technical Study.................................................................................................23
3. Disclosure of Information :................................................................................25
4. Responsibilities of the Parties............................................................................25
5. Participating Interests........................................................................................29
6. Application Procedure.......................................................................................31
7. Applications and Contracts................................................................................33
8. Application and Negotiation Costs.....................................................................35
9. Invoicing...........................................................................................................37
10. Audit .................................................................................................................37
11. Default...............................................................................................................39
12. Undertaking.......................................................................................................41
13. Withdrawal........................................................................................................41
14. Confidentiality...................................................................................................43
15. Press Releases....................................................................................................45
16. Assignment........................................................................................................45
17. Termination.......................................................................................................47
18. Non-Waiver.......................................................................................................47
19. Notices..............................................................................................................49
20. Applicable Law and Dispute Resolution............................................................51
21. Warranties as to No Payments, Gifts and Loans.................................................57
22. Counterpart........................................................................................................57
23. Entirety..............................................................................................................59
D. HOST GOVERNMENT CONTRACTS........................................................................62
1. Who is in control?..............................................................................................62
2. Who owns the oil and gas?.................................................................................62
3. What happens in the event of war?.....................................................................63
4. What law applies?..............................................................................................64
5. What is the conflict mechanism?........................................................................64
6. Are bonuses and rentals paid?............................................................................64
7. Are there other commitments?...........................................................................65
8. What is the Contract term?.................................................................................65
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Table of Contents
9. What is a phased term?......................................................................................65
10. What are the relinquishment and surrender rules?..............................................65
11. Are there restrictions on the number of people a
company can transfer to the host country?..........................................................65
12. Is the training of nationals required?..................................................................66
13. Is priority given to subcontractors of the host
country?.............................................................................................................66
14. How should customs duties be handled?............................................................66
15. Who owns the equipment brought into the host
country?.............................................................................................................66
16. Will the national oil company be your partner?..................................................66
17. Are there restrictions on the transfers of data?....................................................66
18. Can the oil companies freely sell their production?............................................67
19. Are there any restrictions on the repatriation of
profits?..............................................................................................................67
20. How should oil and gas be valued?....................................................................68
21. Who determines if the field should be developed?..............................................68
22. Are overhead or administrative expenses cost
recoverable or reimbursable?.............................................................................69
23. Can disparate exchange rates cause problems?...................................................69
24. What is the oil companies' standard of care?......................................................69
25. Do the oil companies have free discretion to spend
money as they wish or must they follow a budget?.............................................69
26. What version of the Contract controls, the host
government language or English?......................................................................69
27. Are stabilization or equilibrium provisions helpful?...........................................70
28. Are transfers or assignments of all or a portion of
party's interest permitted?..................................................................................70
29. Are other agreements with the government
necessary to produce oil and gas?.......................................................................70
30. What are the fiscal terms?..................................................................................71
a. INDONESIA..........................................................................................72
(1) Basic Example............................................................................73
(a) Cost Recovery.................................................................73
(b) Entitlement......................................................................73
(c) Contractor's Share of Oil.................................................74
(d) Contractor's Revenue......................................................74
(e) Tax.................................................................................75
(f) After Tax Split................................................................75
(2) 15,000 b/d Example (First Oil) ...................................................76
(a) Cost Recovery.................................................................76
(b) Entitlement......................................................................76
(c) Contractor's Share of Oil.................................................77
(d) Contractor's Revenue......................................................77
(e) Tax.................................................................................78
(f) After Tax Split................................................................78
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(3) 15,000 b/d Example (8th Year)...................................................79
(a) Cost Recovery.................................................................79
(b) Entitlement......................................................................79
(c) Contractor's Share of Oil.................................................80
(d) Contractor's Revenue......................................................80
(e) Tax.................................................................................81
(f) After Tax Split................................................................81
b. ECUADOR............................................................................................82
(1) 15,000 b/d Example First (Oil) ...................................................83
(a) Reimbursable Expenses...................................................83
(b) Entitlement......................................................................83
(c) Service Fee.....................................................................84
(d) Contractor's Share of Oil.................................................85
(e) Tax.................................................................................85
(f) After Tax Split................................................................85
(g) Comparison with Indonesia.............................................85
(2) 15,000 b/d Example (8th Year)...................................................86
(a) Reimbursable Expenses...................................................86
(b) Entitlement......................................................................86
(c) Service Fee.....................................................................87
(d) Contractor's Share of Oil.................................................88
(e) Tax.................................................................................88
(f) After Tax Split................................................................88
(g) Comparison with Indonesia.............................................88
E. INTERNATIONAL OPERATING AGREEMENT.......................................................89
Model Form International Operating Agreement...........................................................90
Table of Contents..........................................................................................................91
1. Definitions.........................................................................................................95
2. Effective Date and Term..................................................................................101
3. Participating Interest........................................................................................101
4. Operator..........................................................................................................103
5. Operating Committee.......................................................................................117
6. Work Programs and Budgets............................................................................121
7. Operations by Less Than All the Parties...........................................................129
8. Default.............................................................................................................151
9. Disposition of Production................................................................................155
10. Abandonment of Wells....................................................................................157
11. Surrender, Extensions and Renewals................................................................159
12. Transfer of Interest or Rights...........................................................................161
13. Withdrawal......................................................................................................167
14. Relationship of Parties and Tax........................................................................171
15. Confidential Information -- Proprietary Technology........................................173
16. Force Majeure..................................................................................................175
17. Notices............................................................................................................179
18. Applicable Law and Dispute Resolution..........................................................181
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19. Allocation of Cost Recovery Rights.................................................................187
20. General Provisions...........................................................................................187
SUMMARY...........................................................................................................................191

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INTERNATIONAL OIL AND GAS JOINT VENTURES:
A DISCUSSION WITH ASSOCIATED FORM AGREEMENTS
by
Andrew B. Derman*
INTRODUCTION
THE NORTH WIND AND THE SUN
A dispute arose between the North Wind and the Sun, each
claiming that he was stronger than the other. At last they
agreed to try their powers upon a traveller, to see which
could soonest strip him of his cloak. The North Wind had
the first try; and gathering up all his force for the attack, he
came whirling furiously down upon the man, and caught up
his cloak as though he would wrest it from him by one
single effort: but the harder he blew, the more closely the
man wrapped it round himself. Then came the turn of the
Sun. At first he beamed gently upon the traveller, who soon
unclasped his cloak and walked on with it hanging loosely
about his shoulders: then he shone forth in his full strength,
and the man, before he had gone many steps, was glad to
throw his cloak tight off and complete his journey more
lightly clad.
Persuasion is better than force
Aesop's Fables

For decades the oil and gas industry has been prohibited from exploring in many
closed societies. With the opening of these societies, the economic pendulum has begun to
shift from the host governments to the oil companies. Now host governments are
aggressively seeking out investment and technology.

*Chief Counsel, International and U.S. Exploration, Oryx Energy Company; B.A.,
New York University; J.D., Temple University Law School.
I want to acknowledge my wonderfully talented secretary, Julie Whitmire. During the
lengthy preparation process, Julie's positive attitude and eye for perfection substantially
contributed to the success of this project.
I would also like to acknowledge my wife, Lynn, and my children, Peter and Rachel,
who have always helped me attain a healthy balance between my work and personal
endeavors.
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In reaction to this change, the oil and gas industry has begun to rethink the way it
conducts business. Moreover, new legal and business concerns are confronting the industry.
Issues of liability, abandonment, government participation, sole risk/non-consent, horizontal
drilling, the environment and many others have recently taken on increased importance.
Opportunities will abound and creativity and quickness will be the hallmarks of
success in this new environment. Successful negotiators and lawyers will need to master
emerging legal and business issues and, at the same time, substantially decrease the time
spent negotiating and drafting agreements. To do so will require a thorough command of
both business and legal issues and the ability to effectively negotiate with both host
governments and one's co-venturers. No side can win today with brute force. The winners
will be armed with knowledge, creativity and (like the Sun in the above fable) a strong power
of persuasion.
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A. CONFIDENTIALITY AGREEMENTS
Although the typical Confidentiality Agreement is only a few pages long, companies
often devote dozens of hours to negotiating and preparing the Agreement. To avoid
unnecessary negotiations and to expedite the future interpretation of Confidentiality
Agreements, a Model Confidentiality Agreement was developed by a committee of the
Association of International Petroleum Negotiators in 1990.
Most Confidentiality Agreements begin by describing the information and data
covered. It is critical that information and data included within the scope of the Confidential
Agreement be described in sufficient detail to ensure future coverage. Frequently, an exhibit
will be used wherein all information and data covered will be delineated.
Confidentiality Agreements generally prohibit the sale, trade, publishing or disclosure
of such delineated information and data to any third party. Some Agreements go a step
further and limit or prohibit even the reproduction of such information and data.
Disclosure of confidential information is generally permitted where the information
is:
(1) already known to the receiving party;
(2) in the public domain;
(3) required by law, regulation or a stock exchange to be disclosed; or
(4) acquired independently by the receiving party from a third party.
Moreover, confidential information may be disclosed to affiliated companies;
employees, officers and directors of the receiving company and its affiliated companies and
consultants and banks if they execute similar confidentiality agreements.
If the confidential information is highly sensitive, it may not be advisable to permit
disclosure to consultants and banks. In light of the breaches of confidence in the investment
banking community, one might be cautious about disclosing highly sensitive and confidential
information to investment bankers. Likewise, consultants outside the investment banking
community should be scrutinized. Larger companies are generally the international players
and these large companies usually rely on in-house staff to review information and data.
Only in rare instances will a larger company desire to disclose such information and data to
an outside consultant. The situation is, of course, different for the smaller international
players who will make extensive use of consultants and will insist that the Confidentiality
Agreement explicitly authorize disclosure to outside consultants. If the information and data
disclosed involves an exploration property, it is unlikely that a bank will be reviewing the
data as banks generally do not fund international exploration efforts. Consequently, the
authorization to disclose confidential information to banks can normally be deleted when the
transaction involves only exploration properties.

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The receiving party warrants that it will ensure that the information is kept
confidential and that there will be no unauthorized disclosures. Some Agreements have
attempted to put teeth into this undertaking by providing for liquidated damages in the event
of a violation. Other Agreements avoid the harsh result of a liquidated damage covenant,
only permitting compensatory damages. Recently, it has become common for the parties to
agree that punitive, special and consequential damages will not be sought.
Some Agreements require that all information and data given must be returned within
a specified time. Others provide that all information and data must be returned within a
specified number of days after a request for such information and data has been made. If
reproduction of the confidential information is permitted, all such reproductions must either
be destroyed or given to the party disclosing the information and data. Some Confidentiality
Agreements explicitly prohibit the reproducing of any information and data. This prohibition
will probably never be completely complied with and, as a consequence, it is rarely inserted.
It should be noted, however, that once reproductions are made, it is virtually impossible to
police compliance with the mandate that all copies must be destroyed or given to the
disclosing party. To address this issue, provisions are sometimes incorporated which restrict
a party's right to acquire an interest in the area under review for a specified period. Without
such a provision, a tire-kicker can examine your data today and become your competitor
tomorrow.
The Confidentiality Agreement terminates when the receiving party legally acquires
an interest in the property; or if the receiving party does not acquire such interest, after a
specified number of years (e.g., two to five years).
The customary disclaimer of liability for any expenditures made in reliance of the
quality, accuracy or completeness of the information and data is usually incorporated. The
disclosing party warrants only that it has the right to disclose such information and data.
Most Confidentiality Agreements let the parties select the relevant law (often Texas,
New York or England) and provide for arbitration. To control costs and to expedite the
conflict resolution process, arbitration is often employed and a mutually selected single
arbitrator is frequently used. The parties generally select the rules and procedures of the
American Arbitration Association or the International Chamber of Commerce to govern the
arbitration or provide for ad hoc arbitration. (For a more comprehensive discussion of
arbitration, see the text that addresses the Arbitration provision in the Model Form
International Operating Agreement.)
In summary, companies spend many millions of dollars in their geoscience efforts. It
is this information and data that will shape the future of most oil and gas companies.
Appropriate prophylactic measures must be undertaken to ensure that critical and sensitive
information is not expropriated without compensation by one's competitors. Although
Confidentiality Agreements are short, relatively non-controversial documents, they serve an
important purpose.

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AIPN Model
CONFIDENTIALITY AGREEMENT
THIS AGREEMENT, entered into this the _____ day of __________, 199___,
by and between ______________________, a corporation organized and
existing under the laws of _____________ (hereinafter referred to as the
"Disclosing Party") and _________________, a corporation organized and
existing under the laws of _________________ (hereinafter referred to as the
"Receiving Party").
1. In connection with the evaluation and the possible acquisition by the
Receiving Party of certain petroleum exploration and production rights
held by the Disclosing Party in __________________ (hereinafter
referred to as the "Area"), the Disclosing Party is willing, in accordance
with the terms and conditions of this Agreement, to disclose to the
Receiving Party certain confidential information, which is proprietary,
relating to the Area which includes, but is not necessarily limited to,
geological and geophysical data, maps, models and interpretations and
may also include commercial, contractual and financial information, as
more fully described in Exhibit "A" attached hereto and made a part
hereof (hereinafter referred to as the "Confidential Information").
2. In consideration of the disclosure referred to in Paragraph 1 hereof, the
Receiving Party agrees that the Confidential Information shall be kept
strictly confidential and shall not be sold, traded, published or otherwise
disclosed to anyone in any manner whatsoever, including by means of
photocopy or reproduction, without the Disclosing Party's prior written
consent, except as provided in Paragraphs 3, 4 and 5 below.
3. The Receiving Party may disclose the Confidential Information without
the Disclosing Party's prior written consent only to the extent such
information:
(a) is already known to the Receiving Party as of the date of
disclosure hereunder;
(b) is already in possession of the public or becomes available to
the public other than through the act or omission of the
Receiving Party;
(c) is required to be disclosed under applicable law or by a
governmental order, decree, regulation or rule (provided that
the Receiving Party shall give written notice to the Disclosing
Party prior to such disclosure); or
March 19, 1990 -1-
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