The Marriage Of Landowners And Upstream Companies – A Match Made In (Unconventional) Heaven

A recent news article about the partnership between Scottish Power, owned by Spain's Iberdrola, and UK’s Egdon Resources to tap shale prospects in acreage held by the former has generated a lot of interest within the E&P space in the United Kingdom. This partnership is propitious, not so much about the fact that a power generator is now moving upstream along the value-chain to tie in its gas supplies, but because an industrial house is putting to use its acreage for exploration and production activities.

Whist land may seem to be the least problematic link in the chain of operations for an unconventional project, in places other than North America this is a particularly sticky topic for most project managers trying to extract either CBM or hydrocarbons from stubborn shale formations beneath the ground.

Even when the availability of land is identified as a major hindrance, the root of this problem varies from one geography to another. In a place like UK, the concerns are mainly environmental with the entire philosophy of shale extraction being anathema to the Greens. In India, the availability of land is a major issue since most drill sites would sit on lush pockets arable land whose produce a poor farmer – and a developing hungry country can ill afford to forfeit in exchange for gas (or oil) molecules. In other places like Indonesia large tracts of land belong to varied indigenous populations who are loathe to see the influx of drilling crews and large machinery which they see as in-amicable to their local way of life.

Whatever the reason that a landowner, or his neighbourhood environmentalist, might have in letting go of his precious acres, obtaining that 8000 odd sq mtrs required to spud an unconventional well (s) is hard to come by in some (most) places around the world.

It is in such a scenario where an upstream company requires land which is either hard to come by, or comes with an assorted set of protesters and tree-hugging/ ply-card bearing/ traffic-obstructing intelligentsia, an easy to reach plot of land usually within a fenced industrial area and having basic infrastructure can act as manna for an project manager.

On an average a large industrial unit with spare acreage can add the following benefits towards a conventional drilling program:

              i.        A prime landowner will make available good quality drilling sites its land.

             ii.        An industrial unit will have good infrastructure connectivity in the form of used and unused pipelines in place.

            iii.        Existing water hydrants for water intake and WTPs/ evacuation pipelines for produced water an easy to install (if not already present).

            iv.        Communication/ fibre optic cabling are (generally) in place to link rig SCADA units

             v.        Significant offtaker of gas, (methane) for firing up plants but fertilizer and refinery complexes also use heavier molecules (Ethane/ Butane) as feedstock.

            vi.        Extensive goodwill will exist within the local community on account of having provided employment opportunities to the local populace.

 This is by no means the first shale land deal that has taken place in the UK (I list below past similar deals) and I know this will by no means be the last!

1- Centrica acquired a 25% interest in PEDL165 in Lancashire from Cuadrilla Resources Ltd and AJ Lucas for £40 million in cash. Centrica will also pay exploration and appraisal costs of up to £60 million.

2- GDF Suez acquired a 25% share in Dart's 13 onshore licences for $12 million with GDF also agreeing to meet Dart's share of exploration costs within the license areas up to an amount of $27 million.

3- Total acquired 40% interest in two shale gas exploration licences in Lincolnshire from IGas for $1.6m in back costs and will fund a work programme of up to $46.5m, with a $19.5m minimum commitment.

Iranian Oil & Gas contracts - Buy backs Vs the new Iran Petroleum Contract (IPC)

The Iranian constitution prohibits foreign or private ownership of natural resources, and all production-sharing agreements are prohibited under Iranian law," as outlined by the Energy Information Administration (EIA).

To get around this issue, buyback contracts allowed international oil companies to enter into exploration and development contracts through an Iranian affiliate. Through these buyback contracts, investors were paid in oil and gas from projects they developed with their own money, and then ownership of the field reverted back to the National Iranian Oil Company once development completed. With the lax in economic sanctions and Iran's attempt to lure foreign investment, it is believed that these contracts would be amended.

Salient points of a Buy Back Contract:

• Buy  Back  contracts,  are  arrangements  in  which  the  contractor  funds  all  investments, then  transfers  Operatorship of  the  field  to  NIOC (Hand Over) after  the  facilities are in place and production has commenced and then receives  remuneration  from NIOC ( National  Iranian  Oil  Co.),
• In  other  words , Buy  Back’s  are  essentially  risk-service  contracts, according  to  which  the  contractor  funds  all  investments, takes all risks such as exploration risk, production risk, etc.
• The  contractor  then  recoups  it’s  investment  after commercialization and subsequent development  of the field  and  receives  remuneration  from  the  NIOC. The  remuneration fee is  based  on  an  agreed  contracted  Rate  of  Return (ROR) and  can be paid  in  the  form  of  NIOC’s  allocation  of  a  share  of  it’s  production  equal  in  value  to  the  amount  due or cash.
• In addition to this, the Contractor is entitled to bank charges at LIBOR plus 0.75% on the costs incurred till it has recovered the same.
• Cost Recovery by Contractor: The Contractor is allowed to recover all costs, bank charges, Iranian tax and Remuneration fee from a maximum of 50% of gross revenue less operating costs of the year. Capital Costs and Non-Capital Costs, incurred and paid by Contractor together with Bank Charges shall be amortized in equal monthly installments over 8-10 Cost Recovery Years from commencement of production. 
• Remuneration Fee to Contractor: Remuneration Fee will be calculated immediately after Development Ceiling Costs are determined so as to give a ROR (as bid) to Contractor based on the Production profile as per the Development Plan. The calculation of ROR will be based on the Contractors’ Net Cash flow calculated as the difference between Cash Outflow by Contractor and the Cash Inflow to Contractor. Cash Outflow is defined as the sum of Capital Costs and Non-Capital Costs and Cash Inflow is defined as the sum of Capital Costs recovery, Non-Capital Costs recovery and Remuneration Fee. The ROR will be the nominal discount rate that brings the NPV of the Contractor Net Cash flow to zero.
• If the actual production is lower than MDP production profile, the Remuneration Fee decreases consequently the return decreases, as the difference between the resulting adjusted monthly installment and the initially projected monthly installment is not allowed for carry over and thus is not recoverable by contractor.
• If actual production is higher than the production profile as per Development Plan, the ROR may be increased by up to 1% for the relevant installment.
• No recovery of Capital Costs beyond the agreed amount is allowed.

Proposed new Iran Petroleum Contract (IPC):

The new Iran Petroleum Contract( IPC) is still a work-in-progress. It was expected to be unveiled at a conference in London in November 2014 (earlier it was July) but now its been further pushed back to perhaps early 2015. However this is probably linked to the lifting of sanctions. In no way does it move away from the basic tenet of the Iranian Constitution that ownership of oil and gas produced from Iranian fields rests with the Iran. However for the first time, there is recognition/acknowledgement that transfer of ownership of hydrocarbons at certain defined delivery points is legally permissible.

Key objectives of the IPC are:

• Integrating both the Exploration and Production phases;

• Helping the Iranians achieve enhanced capacity, maintenance and reserve recovery;

• Attracting foreign capital, services, know how and technology;

• Establishing long term relationships with foreign partners; and reducing the investment risks by offering more flexibility in investment costs.

Under the new terms, state-run National Iranian Oil Co. will form joint ventures for crude and gas production with international companies to manage projects, provide financing and maximize hydrocarbon recovery. Foreign companies conducting exploration projects will be paid for their work with a share of the output, according to presentations at a recent oil and gas conference in Tehran.

International companies seek access to hydrocarbons to book reserves, a form of reporting by which they can claim a share of oil and show they can replace barrels they produce. Under the IPC, there will be provisions allowing transfer of ownership of hydrocarbons to the foreign parties at defined deliver points. The companies, which would have no rights over the reserves, would be able to report output they receive as payment once a field reaches its production targets and after exploration is complete.

International companies will act as the sole operator at oil and gas exploration blocks and will be responsible for the risks of those projects. NIOC may be a technical partner in the developments. The ventures will have 15 to 20 years to pump oil after seven to nine years of exploration under the new contracts.

Fees paid to international companies will be linked to the oil price and determined on a sliding scale, with riskier developments paying more. Iran is giving priority to investment in common fields shared with neighboring countries such as Iraq and Qatar, and work on those deposits will be remunerated at the higher rate.

The IPC is also to be designed to take advantage of the IOCs marketing expertise and give Iran access to their supply network to find an export market. However, the IOC will be required to meet the Iranian local content requirement which will be 51% of the contract value. Additionally disputes will be settled under Iranian Laws.

It is clear that the IPC is geared for the large IOCs and for the shared fields ( i.e. fields shared with other countries – Iraq, Qatar, Saudi Arabia). Iran is seeking to access technology and upgrade it’s technical capability through joint ventures. Iranian content is to be at 51% as currently proposed. The new IPC seeks to alleviate concerns associated with buybacks as under:

1. Avoidance of all existing obstacles in current Buy-Backs

2. Moving towards international recognized concept

3. Balance the Risk-Rewards of the investors

4. Maximize incentives for investors in low and high risk Areas

5. Integrated operation (E ,D, P)

6. Maximize alignment of the benefits of the parties

7. Best technical approach to the operations ( E,D,P)

8. Partnership for better operations

9. maximize recovery factor

10. Adoption of model for IOR/EOR operations

11. Premiership of the common fields

12. Flexibility in scope and costs changes

From credible Leadership to invaluable Opposition. The meandering AAP schematics just don’t add up

Off late we been sensing a tectonic shift in the rhetoric emanating from the AAP faithful – till just about a month back all we would receive from Shri Shri Kejriwal and Co is the good that AAP can do for the country if it comes into power (no matter the absolute zilch achieved during their 49 days stint in government). And now, we hear of them wanting to provide a clean opposition, a reliable conscience against the next government in power.

But this blurb isn’t a tirade against AAP and its antics (surprise, surprise), on the country I am advocating that we all do consider voting for them (!!) but not this year, not this time.

The call of the hours is that we have a government which has proved its self, a leader who has shown the way on development, on progress and on improving every single measurable human-development index in his state.

So here’s how I think this nightmarish scenario just might pan out.

If perchance the BJP is not able to win a significant number of seats which doesn't give the NDA a clear majority, it will be heavily reliant on not just its current allies but would also need to seek outside support from the likes of mercurial featherheads including, but not limited to, M/s Amma, Didi & Chichi’s – all of which dot the current Indian political landscape!

And to put this in perspective – spare a thought for our poor current PM; Maun Mohan Singh knows just as well what one can (mostly cannot) achieve when he is hemmed-in by a capricious women… a feeling, I'm sure, most married men will attest to!

So given this rather scary scenario we might have a government which is so reliant on its allies that it is almost held hostage to their whims and fancies. Would such a government be capable of pushing through big ticket economic reforms, of unleashing the bitter medicine that our economy, indeed the country needs to shake of years of socialist lethargy? We have for far too long been driven by policies that aim to please a particular bastille just in the name of garnering votes.

10 years and multiple mega scams later, where is our nation headed? Let us destroy the crooks from this government and their small-time selfish regional satraps who have cultivated their own private vote banks at the cost of this countries growth. At the same time filling their own coffers and banks accounts in Switzerland or Liechtenstein or Dubai.

Every vote that goes against BJP to people like the AAP who have yet to prove their mettle in any forum (adept handling of social media and drama bazi don’t count!) just might bring in one less seat to BJP, make it just a little bit weaker and ever so slightly more reliant on outside support. And is this a happy scenario? Does this in any way make for a strong decisive government?

Every vote for AAP doesn't bring in a stronger opposition; it just brings in a slightly weaker government who might be held beholden to some whimsical ally!

BJP is the best chance we have today, maybe the only chance the nation has! Let us bring in BJP with a strong and clear mandate required to clean up this unholy mess.

And if after 5 years they too turn out to be a bunch of muppets, I will personally wear the AAP topi to work each day thereafter till the 2019 elections!

Love and longing - the Indian political way

Churchill once quoted of Russia as a riddle, wrapped in a mystery, inside an enigma.

But perhaps when it comes to understanding India, he just might have needed some additional puzzle solving skill sets.

Even in its most mundane form the Indian political tamasha can be mind numbing in its spectacle and sumptuousness. Most times the common Indian (less said of the poor foreigner, the better) is left scratching his, or her head, in wonderment as this juggernaut rolls on – sometimes with scant heed to propriety.. or even sanity!

The Indian election is an event of gargantuan proportions with the 2014 general expected to be the biggest democratic exercise in history with more than 800 million people casting their electronic ballots. But what adds a little bit (more) colour to these mammoth and impressive numbers are the honourable men and women who seek to get elected in to India’s hallowed corridors of the power – The Lok Sabha.

For most of us bored with the usual suspects – BJP, Congress, the communists, the regionalists, and of course the latest entrant AAP here are some other parties who, sadly, are much lesser known but pack an entertainment quotient no less than Ragul Gandhis IQ or Arvind Kejriwals perennial U-turns.

For all of us wallowing in the cruel, hateful world of today;  we have the Indian Lovers Party.

This lovely congregation led by B Kumar Sri Sri (not to be mistaken for either Sri Sri Ravi Shankar or Shri Shri Arvind Kejriwal) was launched as a regional party of Tamil Nadu on 14^th Feb (of course!) 2008.

This party’s aim is as bold as their symbol is colourful – to stand steady by star-crossed lovers from Indians myriad different castes, sub-casts and sub-sub casts of each religion … not to mention a plethora of religions too, whose draconian elders don't approve of their relationship.

Keeping in line with this party’s gallant ethos and in order to fulfil its noble and affectionate agenda, the party proudly aims to: “heal the wounds inflicted in the hearts of lovers by society.”

For all this talk about love, Mr. Kumar has a clear political roadmap in place. Although he is keen to make it clear that his heart truly belongs to this cause, he also readily admits that he adopted this platform as a foolproof way of garnering immediate attention for his party. He says that he has attracted over 100,000 supporters to his party so far, many of them youngsters.

He has helped organize and fund 15 weddings personally and in other cases has mediated with the parents on both sides to convince them to allow their children to marry. Mr. Kumar takes great care to ensure that he helps only “genuine lovers,” or couples who are both of legal age and want to get married to each other.

So all of you out there worried about what your parents, relations, the society or neighbours stand in the way of your true love – fear not! There is help at hand and like the caped crusader this one’s calling symbol is just as distinctive – the Taj Mahal framed in a heart, surrounded by pink with an arrow running across it

Economic Stability in Production Sharing Contracts (PSC)

Economic Stability and Change of Law provisions in a PSC

The use of stabilization clauses is a direct response to material changes in legislation that altered the economic positions of foreign companies under previously concluded long term investment agreements. Investors rely on stabilization clauses to ensure relative stability of the main investment conditions needed for the successful performance of their investment ventures.

For the foreign investors and their bankers, stabilization concerns among other things, the stability of the fiscal regime to ensure investment recovery, security of tenure over property and title, the ability to sell, the ability to retain and repatriate foreign exchange earned and the ability to operate the project under reasonably foreseeable conditions. Foreign Investors would also be concerned about non financial matters like changes in labour and environmental law or changes in the interpretation of the existing law to the extent that it affects their interests adversely.

In the period between the first and second world war, American companies began to include stabilization clauses in the concession contracts to prevent acts of nationalization by Latin American governments.

Stabilization Clause can be primarily of 2 types:

1.       Freezing provision

2.       Economic Balance provision

1.       Freezing Clause :

It stipulates that neither the fiscal, nor the non-fiscal elements (social & environmental  issues)  of  the  contract  may  be  changed  by  the  host government during life of the contract  without the two parties consent (Angola, Tunisia, Mozambique etc) .

Examples:

a.       Cl 30.7(d) Mozambique PSC Model (2001) :

The Government shall not revoke or amend the Autorisation granted to ENH to explore for and produce Petroleum from the contract Area without taking effective measures to ensure that such revocation or amendment does not affect the rights granted to the Contractor hereunder

CL 30.7(e) The Government will not without the agreement of the contractor exercise its legislative authority to amend or modify the provisions of this Agreement and will not take or permit any of its political subdivisions, agencies and instrumentalies to take any administrative or other action to prevent or hinder the contractor from enjoying the rights accorded to it hereunder.

b.      Cl. 18(m) Ivory Coast 1996 Petroleum Code

The petroleum contract in particular must set…. The legal conditions concerning the applicable law, the stability of conditions, the cases of force majeure and the regulation of disagreements

c.       Cl. 24.1 Tunisia 1989 PSC Model

The contractor shall be subject to the provisions of this Contract as well as to all laws and regulations duly enacted by the Granting Authority and which are not incompatible or conflicting with the Convention and/or this Agreement. It is also agreed that no new regulations, modifications or interpretation which could be conflicting or incompatible with the provisions of this Agreement and/or the Convention shall be applicable

2.       Economic Balancing Clause:

Essentially, the provision stipulates that if the host government adopts a measure subsequent to the conclusion of the petroleum contract in which the fiscal terms are stated, that is likely to have damaging consequences to the economic benefits for one or both parties, a re-balancing will take place in order to restore the economic balance of the contract.

Two (2) ways to achieve the economic balance:

         i.            Adjustment may be automatic or achieved in a manner stipulated in the contract.

       ii.            Make express provision for the parties to negotiate how amendments should be handled

Examples of this are Vietnam, India, Indonesia, Egypt etc.

a.       Vietnam PSC Cl 18.1.3

If after the Effective Date, existing law(s) and regulation(s) are amended or annulled or new law(s) and regulation(s) are introduced in Vietnam, or an official interpretation or application of changes of regulations of a law, or licence is cancelled, not renewed, or the conditions therefore are revised adversely affecting the economic interest of the CONTRACTOR under this Contract, then upon notice from the CONTRACTOR the Parties shall consult promptly with each other and make such changes to this Contract as are necessary both to maintain the CONTRACTOR’s rights, benefits and interests hereunder, including CONTRACTOR’s share of Profit Oil or Profit Gas, as at the Effective Date and to ensure that any revenues or incomes or profits, including any one or more of the foregoing, derived or to be derived to the CONTRACTOR under this Contract, shall not in any way be diminished in comparison to that which was originally contemplated as a result of such changes of laws or annulment therefrom or their interpretation or application or as a result of such changes, cancellation or non-renewal of approvals or licences.  

b.      Egypt

Exploration, Development and Production of Petroleum, which take place after the Effective Date, and which significantly affect the economic interest of this Agreement to the detriment of CONTRACTOR or which imposes on CONTRACTOR an obligation to remit to the Arab Republic of Egypt the proceeds from sales of CONTRACTOR’s  Petroleum, CONTRACTOR shall notify EGPC (the NOC) of the subject legislative or regulatory measure. 

c.       Indonesian PSC Cl 15.4.3

It is agreed further in this CONTRACT that in the event that a new prevailing Indonesia Income Tax Law comes into effect, or the Indonesia Income Tax Law is changed, and CONTRACTOR becomes subject to the provisions of such new or changed law, all  the percentages appearing in Section VI of this CONTRACT as applicable to the portions of CONTRACTOR and GOI’s share so affected by such new or changed law shall be revised in order to maintain the same net income after tax for CONTRACTOR or all  Participating Interest Holders in this CONTRACT.  

d.      Indian PSC Cl 17.10.

If any change in or to any Indian law, rule or regulation dealing with income tax or other corporate tax, export/import tax, excise, customs duty or any other levies, duties or taxes imposed on Petroleum or dependent upon the value of Petroleum results in a material change to the expected economic benefits accruing to any of the Parties after the date of execution of the Contract, the Parties shall consult promptly in good faith to make necessary revisions and adjustments to the Contract in order to maintain such expected economic benefits to each of the Parties, provided, however, that the expected economic benefits to the Parties shall not be reduced as a result of the operation of this Article.

In the early 1980s, revision of petroleum contracts and nationalisation of petroleum industry assets triggered confrontational  arbitration procedures:  a few cases:

·         Saudi Arabia v. Arabian American Oil company (Aramco)
·         Kuwait v. American Independent Oil Company (Aminoil)
·         Agip Company v. People’s Republic of the Congo
·         Amoco International Finance Corporation v. Islamic Republic of Iran.


It is important to note however that there are many petroleum rich host countries that do not offer clauses designed to provide STABILIZATION and that IOCs have no difficulty living with such a legal regime, as the legal and political risks are low in those host countries (UK, Norway are few examples).

In other countries, while the legal and political risks may be high, the perception of the geological risk is so low that IOCs accept a contract without stabilization provisions (Saudi Arabia, Brazil are some examples).