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2018 | OriginalPaper | Chapter

8. Contractual and Fiscal Arrangements in the Extractive Industry

Author : Damilola S. Olawuyi

Published in: Extractives Industry Law in Africa

Publisher: Springer International Publishing

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Abstract

This chapter provides a detailed analysis and discussion of the prevalent fiscal and commercial arrangements in extractives industries in Africa. It examines the meaning, nature and essential characteristics of the ten main contractual arrangements relied upon by state-owned enterprises and governments in Africa to convey titles and interests: concessions; production sharing contracts; joint ventures; service contracts; farm out contracts; pooling agreements; unitization contracts; long term oil and gas supply contracts; mining development agreements and impact benefit agreements. It also discusses the legal effects of the agreements on the conduct of extractive operations.

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Footnotes
1
Radon (2005), p. 63; Natural Resources Governance Institute (2015), pp. 1–2.
 
2
Kaiser (2004), p. 2; Radon (2005), p. 63.
 
3
Ibid.
 
4
Black’s Law Dictionary (2004). Also, Williston (1959).
 
5
Radon (2005).
 
6
See Likosky (2009), pp. 2–3 stating that the earliest forms of concession contained terms that were “highly uneven, at times teetering on the verge of the unconscionable. Companies paid small sums to the host government for the rights over its natural resources.” Also see Omorogbe (1997), pp. 58–60.
 
7
The following is an example of this type of clause found in a concession agreement in Oman in 1937:
In consideration of the payments described in Article (...) the Sultan hereby grants to the company for the remainder of the period of this Agreement the exclusive right to explore, search for, drill for, produce, win, refine, transport, sell, export and otherwise deal with or dispose of the substances and to do all things necessary for all or any of the above purposes within the Leased Area.
 
8
For example, the Oil Concession of 1934 between the State of Kuwait and the Kuwait Oil Company Limited (United Kingdom) states:
“(d) For the purpose of this Agreement and to define the exact product to which the Royalty stated above refers, it is agreed that the Royalty is payable on each English ton of 2.40 lb. of net crude petroleum won and saved by the Company from within the State of Kuwait-that is after deducting water sand and other foreign substances and the oil required for the customary operations of the Company’s installations in the Sheikh’s territories” (Oil Concession of 1934: Article 3(d)).
Similarly, the Iraqi Agreement with the Khanaquin Oil Company in 1926 called for payment of four gold shillings per ton of crude oil produced and saved; while the 1949 Agreement between Saudi Arabia and Getty Oil provided for a royalty of US $00.55 per barrel.
 
9
For example, in 1948, The Kingdom of Saudi Arabia granted an oil concession covering the entire kingdom to the Standard Oil Company of California. The King received for the concession an immediate payment of $1,500,000 in gold.
 
10
In Nigeria for example, the early concession granted to Shell in 1938 was in respect of the entire mainland of Nigeria. See Omorogbe (1997).
 
11
Article 1 of the Oil Concession of 1934 between the State of Kuwait and the Kuwait Oil Company Limited (United Kingdom).
 
12
Likosky (2009).
 
13
Likosky (2009); also Blinn et al. (2009).
 
14
Etteh (1973).
 
15
Extractive Industries Transparency Initiative (2014), p. 21.
 
16
Radon (2005).
 
17
Consider the example of Nigeria whereby there is a fixed limit on the acreage for all oil concessions. This limit is fixed at 500 square miles.
 
18
Tordo et al. (2010).
 
19
Ibid 13.
 
20
Ibid 12.
 
21
Paragraph 23(1) of Schedule 1 of the Petroleum Act. See also Section 90 of South Africa’s MPRDA which holds that the Minister has the authority to suspend or cancel exploration and production rights. Section 47 establishes the conditions upon which such suspension or cancellation may occur.
 
22
Para 18 of Schedule 1 of the Petroleum Act.
 
23
Para 19 of Schedule 1 of the Petroleum Act.
 
24
Likosky (2006) Chapter 2.
 
25
Indonesia was first country to utilize employ production-sharing agreements in 1966, also they have remained one of its most consistent users. In direct response to some of the criticisms of concessions, the Indonesian government refused to grant new concessions in the 1960s. Instead PSAs were developed and considered acceptable because they allowed governments to retain national ownership of produced resources, with the foreign investor accepting all of the E&P risks and expense. If hydrocarbons were produced from the field, the foreign investor would be compensated for its efforts with a share of the production. The idea was based upon the agricultural practice of sharecropping. The earliest PSAs were approved in 1960. However, the first significant contract was signed in 1966 with a US consortium known as IIAPCO. These first generation PSAs allowed for up to 40% of exploration and operation costs to be recovered each year. See Barnes (1995). See also Machmud (1993), p. 179; Fabrikant (1975), p. 3030.
 
26
Bindemann (1999), pp. 1–15.
 
27
PSC was first introduced in Nigeria in 1973 (Ashland PSC) in a contract between the Nigerian National Oil Corporation and Ashland Oil Nigeria Company. The first round of PSCs were executed in 1993 and the second round in 2000. The PSC has undergone a few amendments both formal and informal. Section 18 of the Petroleum Act defines “deep offshore” as any water depth beyond 200 m and “Inland Basin” means any of the following Basins, namely, Anambra, Benin, Chad, Gongola, Sokoto and such other basins as may be determined , from time to time by the Minister.”
 
28
Bindemann (1999).
 
29
The recovery cost from production is set at thirty percent in Gabon, see Bindemann (1999).
 
30
Final Consolidated Version 3/30/96: Preamble.
 
31
Royalty payable for deep offshore and inland basin PSCs are determined in accordance with section 5 of the Deep Offshore Decree 1999, while royalty for onshore and shallow water PSCs are determined by the provisions of the Petroleum (Drilling and Production) Amendment Regulations 1969. Section 7, Deep Offshore and Inland Basins Production Sharing Contracts Decree 1999.
 
32
See Section 8, Deep Offshore Decree, ibid.
 
33
Muscolino et al. (1993).
 
34
Most of the earlier PSCs in Nigeria did not place any cap on cost recovery, however the 2005 Model PSC has capped cost recovery at 80%.
 
35
The main implications of PSCs with no cost recovery are twofold. First, total profit oil increases meaning that the IOC and the host government each obtain more crude in terms of volume from their respective shares in profit oil. Second, the IOC has to recover its costs out of its share of profit oil. See Bindemann (1999).
 
36
See Section 12, Deep Offshore Decree. Also, section 4 of the decree also provides statutory backing for Investment Tax Credit/Investment Tax Allowance provisions which were originally present in the 1993 PSC model clause.
 
37
International Monetary Fund (2012).
 
38
See Section 2 Deep Offshore Decree; section 10 Petroleum Act and section 12(1) Petroleum Act respectively.
 
39
EPSAs and DPSAs are commonly utilized in Qatar to limit the scope of operations of an IOC to either exploration and/or development.
 
40
Nigerian National Oil Company used JV’s for a considerable amount of time as an exception in the petroleum industry. But this has changed, Nigeria has shelved JVs in favor of PSAs. See Omorogbe (1997), Radon (2005). Tordo et al. (2010).
 
41
See Wilkinson (1997), pp. 1–10.
 
42
For example, the Azerbaijan JVC provides that: “The Rights and Obligations under this Agreement of each of the Contracting Parties shall be held in the following respective percentage of Participating Interests as of the date this Agreement is executed…”.
 
43
Per Wigley (1978) “I know of no other agreement in use in the petroleum industry, or any other industry for that matter, that can be compared to the Operating Agreement from the standpoint of frequency of use and the multitude of complicated situations and eventualities it is required to anticipate in its provisions.”
 
44
See Al-Emadi (2010).
 
45
Taylor and Tyne (1992).
 
46
Ibid.
 
47
On the legal nature of JOAs, see Ithaca Energy (UK) Ltd v North Sea Energy (UK) Ltd (Rev 1) [2012] EWHC 1823; also Euroil Ltd v Cameroon Offshore Petroleum Sarl [2014] EWHC 12 (Comm) (06 January 2014).
 
48
Pierce (2007), pp. 1–2.
 
49
These are more prevalent in OPEC countries where technological know-how is of a requisite level and capital is in abundance. Barrows gives an example of the Saudi Arabian service contract with Aramco. Under the contract, Aramco carries on production operations for a net fee of 15 cents per barrel after tax. Often the service contract is accompanied with a legally unconnected but parallel purchase contract for part of the oil being produced from the contract area as is the case in Saudi Arabia. See Tordo et al. (2010), p. 10.
 
50
Smith (1992); also Neto (1985), p. 114.
 
51
See Holland and Hart LLP (2014). Also, para. 17 of Schedule 1 to the Nigerian Petroleum Act defines a farm out as “an agreement between the holder of an oil mining lease and a third party which permits the third party to explore, prospect, win, work and carry away any petroleum encountered in a specified area during the validity of the lease”.
 
52
Martin and Kramer (2009); Martin and Kramer (2012), p. 500.
 
53
For detailed and extensive discussion, see Lowe (1987).
 
54
Lowe (1987).
 
55
Under the Guidelines, a marginal field is defined as any field that has reserves booked and reported annually to the Department of Petroleum Resources and has remained un-produced for a period of over 10 years. See the Office of the Presidential Adviser on Petroleum and Energy, “Guidelines for the Farmout and Operation of Marginal Fields (August 2001). [the Marginal Fields Guidelines].
 
56
See generally, the Marginal Fields Guidelines.
 
57
Para 14 of Schedule 1 to the Petroleum Act. See also section 11 of South Africa’s MPRDA, which prohibits the cession, transferal, letting, subletting, alienation, assignment or disposal of a mining or prospecting right, interest therein, or a controlling interest in respect to a company or closed corporation, in the absence of ministerial consent. See also the South African case of Mogale Alloys (Pty) Ltd v Nuco Chrome Bophuthatswana (Pty Ltd) and Others (2011) holding that where a majority shareholder of a petroleum or mining company disposes of shares in such a way that would result in a change of control, ministerial consent is required for such share transfer.
 
58
Para 16, ibid. Also Para 17 of Schedule 1 to the Petroleum Act provides that “The holder of an oil mining lease may, with the consent of and on such terms and conditions as may be approved by the President, farm out any marginal field which lies within the leased area”. The President shall not give his consent to a farm-out or cause the farm-out of a marginal field unless he is satisfied that: (a) it is in the public interest so to do, and, in addition, in the case of a non- producing marginal field, that the marginal field has been left unattended for an unreasonable time, not being less than 10 years; and (b) the parties to the farm-out are in all respects acceptable to the Federal Government.
 
59
Kramer and Martin (2006), pp. 1–3.
 
60
See for example, Section 1509.26 of the Ohio Revised Code, which provides that “The owners of adjoining tracts may agree to pool the tracts to form a drilling unit that conforms to the minimum acreage and distance requirements…”.
 
61
See Section 4.021 of Alberta’s Oil and Gas Conservation Rules (OGCR) which provides that no well shall be produced unless there is common ownership throughout the drilling spacing unit (DSU). This means that if there are separate tracts within a DSU with different ownership, all owners within the DSU must have an arrangement to share in the costs and revenues associated with drilling and producing a well from that spacing unit. Applications for compulsory pooling are made under section 80 of the Oil and Gas Conservation Act (OGCA) RSA 2000, c O-6 [“OGCA”], specifically, s 79 (1), and generally, ss 79(1)-(6).
 
62
Handlan and Sykes (1984); also Anderson (1985), pp. 91–92; also see Ballem (2008), pp. 251–255; Neave (1970), pp. 231–232. See also section 1509.27 of the Ohio Revised Code which provides that “If a tract of land is of insufficient size or shape to meet the requirements for drilling a well thereon…and the owner of the tract who also is the owner of the mineral interest has been unable to form a drilling unit under agreement…, on a just and equitable basis, such an owner may make application to the division of oil and gas resources management for a mandatory pooling order.”
 
63
Handlan, ibid; also Bankes (1997). For more on unit operations under Alberta’s conservation regime, see Onuma (2015), p. 5. See also the OGCA, s 80(1).
 
64
Ibid, also Alberta Energy Regulator, Compulsory Pooling.
 
65
Ibid.
 
66
Martin and Kramer (2012).
 
67
In other parts of the world, usually, a pooling agreement gives lessee the option to join up other leases in the vicinity of the lessee’s own lease to form a single unit. In terms of numbers, the optimal size of an oil field is 40 acres in accordance with spacing regulations while that of gas is 640 acres. Larger areas normally require governmental approval. See M Wigley, Review of Pooling and Unitization. Also Williams and Meyers (1957).
 
68
Kramer and Martin (2006), pp. 1–3, also Andrews Kurth Kenyon LLP (2014).
 
69
See Anderson (1985), pp. 91–92. See also Ballem (2008), pp. 251–255.
 
70
See Neave (1970), pp. 231–232.
 
71
Neave (1970), pp. 231–232.
 
72
See the Marginal Field Guidelines, 8, 20–21.
 
73
See the Marginal Fields Guidelines, ibid.
 
74
Handlan and Sykes (1984).
 
75
See generally, Freehold Owners Association (FHOA), Unit Agreements.
 
76
M Wigley, Review of Pooling and Unitization.
 
77
This is also known as a take or pay contract. A take-or-pay contract is essentially an agreement whereby the buyer agrees to either: (1) take, and pay the contract price for, a minimum contract quantity of commodity each year (the “ TOP Quantity”); or (2) pay the applicable contract price for such TOP Quantity if it is not taken during the applicable year. See Rogers and White (2013).
 
78
van Schaik (2012).
 
79
Ibid.
 
80
United States Energy Information Administration (EIA).
 
81
van Schaik (2012).
 
82
van Schaik (2012). Also see for example, General Conditions for Sale and Purchase of Nigerian Crude.
 
83
United States Energy Information Administration (EIA)b.
 
84
While many countries that export oil use a mixture of both term and spot contracts. There are others that solely export oil through term contracts, for instance Saudi Arabia and Nigeria. Then there are others that solely trade their oil in the spot market. For instance, Congo and Norway sell all their oil on the spot market. See General Conditions for Sale and Purchase of Nigerian Crude Oil.
 
85
See the Negotiations Portal for Host Country Governments.
 
86
South Africa is one African nation that does not rely on mining agreements as it has a strong and robust legislative framework on mining. See Extractive Industries Transparency Initiative (2014).
 
87
Allen and Overy LLP (2013).
 
88
Ibid.
 
89
Ibid, 35.
 
90
Ibid.
 
91
Liberia follows this approach. Allen and Overy LLP (2013), p. 6.
 
92
Sierra Leone is an example for this approach. Ibid.
 
93
Guinea follows this approach. Ibid.
 
94
The submission of geological maps and reports to the government is mandatory in Liberia. See Allen and Overy LLP (2013), p. 7.
 
95
Ibid.
 
96
World Bank Sustainable Energy – Oil, Gas and Mining Unit (2012), p. 5.
 
97
Brickner (2016).
 
98
For a model template Mining Development Agreement, see generally, Mann et al. (2013).
 
99
Brickner (2016).
 
100
Agreements focused on community development take many names other than IBA. Some examples are community development agreements, participation agreements, landowner agreements, benefits sharing agreements, etc. Community Development Agreement is the term adopted by the World Bank. For a complete list of different names given to IBAs and also a complete guide towards negotiating an effective and sustainable IBA, see World Bank Sustainable Energy – Oil, Gas and Mining Unit (2012).
 
101
Sustainable Development Division of Economic Commission of Africa (2004).
 
102
Papua New Guinea, South Africa and Chile are examples of countries where IBAs are required by the law. See World Bank Sustainable Energy – Oil, Gas and Mining Unit (2012).
 
103
Ghana provides a good example of a working IBA. Newmont Mining Corporation, in line with its commitment to economic and social development of impacted communities, developed formal agreements with local communities covering responsibilities of different stakeholders. The main focus was on employment and development of a new foundation titled the Newmont Ahafo Development Foundation (NADeF). Leaders from ten Ghanaian villages entered into IBAs with Newmont. Ibid.
 
104
For the complete list see ibid 11.
 
105
On the importance of multi-stakeholder approach, see Odumosu-Ayanu (2014).
 
106
Ruggie (2011), paras 8–12; Special Rapporteur on the Rights of Indigenous Peoples (2009), Promotion and Protection of All Human Rights, Civil, Political, Economic, Social and Cultural Rights, Including the Right to Development: Report of the Special Rapporteur on the Situation of Human Rights and Fundamental Freedoms of Indigenous People, 48, UN Doc. A/HRC/12/34 (15 July 2009).
 
107
See Articles 1, 12, 20, 27, 30 and 32 of the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP) A/RES/61/295, adopted 2 October 2007; also Art. 1 of both the International Covenant on Civil and Political Rights and the International Covenant on Economic, Social and Cultural Rights (ICESCR); Articles 6, 7, 16, 16 and 22 of the International Labour Organization’s Convention on Indigenous and Tribal Peoples in Independent Countries - 169/1989.
 
108
Anaya (2005), p. 7; Colchester and MacKay (2004), pp. 8–14.
 
109
See United Nations Environment Program (2012), p. 7.
 
110
Ibid.
 
111
Ibid.
 
112
In Ghana, a complaints resolution committee is set up for the Ahafo Project. The resolution process involved community representatives. See World Bank Sustainable Energy – Oil, Gas and Mining Unit (2012), p. 13.
 
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Metadata
Title
Contractual and Fiscal Arrangements in the Extractive Industry
Author
Damilola S. Olawuyi
Copyright Year
2018
DOI
https://doi.org/10.1007/978-3-319-97664-8_8