Organisation of Petroleum activity Licensing system and Joint Operating Agreements

Organisation of Petroleum activityLicensing system and Joint Operating Agreements

Energy resources are valuable and strategic important for states

States are interested in controlling access to the resources

Petroleum in a special position due to the strategic and economic value of petroleum

Access can be controlled by ownership or by legislation (concession systems)

Concession necessary for production of hydro-electricity (waterfalls), wind-energy etc.

Systems for governance of petroleum resources

Introduction

States seldom want to make exploration for petroleum on its own costs and risks

Technology, knowledge and financial strength are brought in by national or international Oil Companies

The States position as resource-owner forms a basis for granting licences to or entering into contracts with companies who wants to search for and produce petroleum

Different legal models are used

Relation between oil companies (often multinational corporations) on one side and States (often developing or weak States) on the other side

State Governance of Petroleum Resources

States and Oil Companies

International Oil Companies

(IOC)

National or State owned

oil companies

State

Discovery and production of as much petroleum as possible

Development of the total area under its jurisdiction, not only of each single field

Information on geological and other factors of interest

Resource management

Development of national industry and business

Technology transfer

Procurement of goods and services

Fiscal interests. Taxation

Long term and stable development of the society

Environmental considerations, other activity etc.

The state interest

Discovery of as much petroleum as possible

Profitable recovery of oil and gas from the fields it possesses

Low costs

Low taxes

Have no direct interest in the recovery of petroleum from other fields on the territory or continental shelf

The main interest is to have a reasonable return on invested capital, in relation to the risk involved

Companys interest

Long term interests and great uncertainty

Uncertain if petroleum will be discovered

Uncertain what the costs will be

Uncertain what the price and thereby the value of the petroleum will be during the life time of the field

Legal and political risk

Difficult to make an agreement for e. g. 30 years

Flexibility necessary

Balancing of the interests and the risk

The state can give license for exploration or the state can enter into a contract with the licensee

License can be combined with a Joint Operating Agreement (JOA) with or without state participation

State participation give the state revenue, insight and influence of the activity

Conditions can be attached to License or Contract

A general problem to divide the risk for future development in a balanced way

License system or Contract system

A Production Sharing Agreement (PSA) is a commercial contract between the investor and the state, which allows the investor to undertake large scale, long term and high-risk investments. The purpose of the PSA is to define the terms and conditions for the exploration and development of resources by replacing existing tax and license regimes with a contract based arrangement that exists for the life of the project.

Product sharing agreements Definiton

Agreement of exploration for a company or group of companies

Regulates the condition on which the company gets access to the resources

Division of production

Different systems for cost coverage

Regulation of rights and obligations for the company and regulation of the activity

Product sharing agreements cont.

A license and a PSA gives a right to explore for and produce petroleum owned by the State

The conditions in licenses as well as PSA s might differ widely. The name not so important.

A license gives a right to explore and produce, within the existing legislation at any time

A PSA will typically regulate all or most relations between the state and the company

License and Product Sharing agreements (PSA)

Most industrial or developed States uses a license system

Product sharing agreements are used in States with less developed political and legal systems

Important that the State should not bind future legislation

License system

The Norwegian License System

Licence categories:

Exploration licence

Production licence

Licence to install and to operate facilities for transport and utilisation of petroleum

The central category is the production licence

A production licence entails an exclusive right to exploration, exploration drilling and production of petroleum deposits in areas covered by the licence. The licensee becomes the owner of the petroleum which is produced.

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The licensing system licence categories

Preference for Norwegian Oil Companies

Transfer of technology

Norwegian goods and services should be used if competitive in price and quality

Support of Norwegian industry

State participation

EEA-agreement. Development of EU-competition law

Directive 94/22/EC (license-directive)

Procedure

Objective and transparant criteria for granting of licenses

Historical development

Before production licences may be awarded for a particular area, the area must have been opened for petroleum activities.

The opening of new areas requires that an evaluation of the various interests in the relevant area has been made.

The evaluation shall include an assessment of the impact of petroleum activities on trade, industry and the environment, and the possible risk of pollution, as well as the economic and social effects that may be a result of the petroleum activities

Environmental impact assessment

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Award of production licences (1 of 3)

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Normally production licences are awarded through licensing rounds.

The Government announces a number of blocks for which companies may apply for production licences.

The Government decides on:

which companies shall participate in the different licences

the size of the participation interest of each participant

who should be the operator

The Government stipulates the terms of the cooperation agreements to be signed by all participants

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Award of production licences (2 of 3)

The award criteria shall be objective, and the requirements and conditions used to distinguish between companies shall be stated in the notice.

The criteria shall be formulated and applied in a non-discriminatory manner

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Award of production licences (3 of 3)

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Technical expertise

Financial capacity

The geological understanding of the geographical area in question, and how the applicant propose to perform efficient exploration

The applicants experience on the NCS or equivalent relevant experience from other areas

The Norwegian authorities experience regarding the applicant

Main criterias

Normally a specific work obligation is stipulated for the licence.

The duration of the licence (initial period) is normally 10 years.

If the work obligation has been fulfilled the licensee may demand that the licence period is extended.

The extension period shall as a normal rule be 30 years, but may in specific cases be up to 50 years.

The size of the area to be retained shall as a rule be 50 % of the original area, but at least 100 square kilometres.

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General terms and conditions of the production licence

Based on Joint Operating Agreements used in international petroleum industry

Developed over the years

The Joint operating agreement a very specialised agreement developed for exploration of petroleum. No direct backgroundlegislation. Sui generis?

The problem: What kind of arguments and models for solutions can be used in these kind of cooperation?

Development of the Joint operating agreement

Under the SDFI, the state becomes a partner in offshore licenses for exploration and production in the Norwegian continental shelf.

Governance from within. Participation an instrument for control, technology transfer, information, industrial development and economic gain

Participation through Statoil from the start

Later (1983 1985) divided into a State direct financial interest (SDFI) and Statoil participation all managed by Statoil

Statoil now partly privatized. SDFI managed by a new State owned company Petoro, see https://www.petoro.no/home

State participation SDFI

The value of the SDFI was estimated to NOK 865billion as of 1 January 2010 (Mckenzie-report).

Net income in 2013 was nearly NOK 125 billion

Interest in 100 production licenses, including 10 largest fields

http://www.regjeringen.no/en/dep/oed/press-center/press-releases/2010/sdfi-values-of-865-billion-kroner-.html?id=611066

4/7/2015

Tina Hunter

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SDFI

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The SDFI portfolio todayThe value of the SDFI is estimated to NOK 625.7 billion as of 1 January 2005. This is according to a value estimation carried out by Wood Mackenzie.

SDFI evaluation 2005

Interests in the 10 largest fieldsThe state has a direct financial interest in 100 production licences. The 10 largest fields in this portfolio are:

The government also has direct interests in a number of transport systems and land-based plants.

Cash flow from the SDFIThe SDFIs accounts are kept on a cash basis in the central government budget and accounts. This means that revenues and expenses are posted in the period when they are paid and investment is expensed as incurred. Net cash flow to the SDFI is the difference between receipts and outgoings.

Until 1996, the net cash flow to the SDFI was lower than NOK 10 billion per annum or negative. This reflects the fact that the arrangement was in a build-up phase, with a high level of capital spending.

Both production and prices in 1996 were higher than in previous years, while the level of investment was lower. The result was a substantial increase in net cash flow to the SDFI, which reached NOK 37 million in 2001 value.

Production and investment rose in 1997 by comparison with the previous year, while prices remained at roughly the same level. That produced a net cash flow of NOK 42.8 billion.

Low oil prices in 1998 caused a substantial decline of NOK 27.5 billion in net cash flow, to NOK 15.3 billion. An improvement in 1999 raised the figure to NOK 26.6 billion.

A clear annual record for net SDFI cash flow was set in 2000, at NOK 98.2 billion. An average realised oil price of NOK 250 per barrel was very significant for this good performance.

Net cash flow in 2001 declined to NOK 94.3 billion. That represented a very good result, however, given that the government sold 15 per cent of the SDFI portfolio with effect from 1 January 2001.

The SDFI is expected to yield a somewhat lower net cash flow in coming years, partly as a result of the governments disposal of 21.5 per cent of the portfolio in 2001-02. This included the sale of 15 per cent to Statoil and 6.5 per cent to other companies.

The net cash flow from the SDFI in 2004 was NOK 80.2 bn. Estimated net cash flows for the years 2005 and 2006 are NOK 105.9 bn. and NOK 123.7 bn.

The cash flow from the SDFI will continue to account for a substantial proportion of central government revenues from petroleum activities in coming years.

Development of petroleoum legislation and management systems the examle of Uganda

Emerging petroleum countries

Uganda: oil discoveries in the rift valley

Uganda has entered into PSAs with some companies

New petroleum legislation are being drafted by assistance of Norwegian expertise

Uganda faces huge challenges in developing petroleum resources:

Weak adminstrative resources, internal political unrest, conflicts with Congo, corruption etc.

We will return to Uganda as example later

Uganda petroleum legislation

Joint operating agreements

A combination of state regulation and business contract

Petroleum activity involves great risk

Necessary to find ways of minimizing that risk

Sharing of risk with others is one way of reducing the risk and spread the investments

Joint ventures or Joint Operating Agreements JOA are developed in the petroleum industry as a special form of business organisation for the upstream activity

Utilized also by States for State participation and as a tool for governance of the activity

Introduction

Joint operating agreements (Joint ventures) as organizational form

International background in the Petroleum and Mining industry

Special form of Joint Venture developed for mining and petroleum

Cooperation in exploration for petroleum Risk management

Used in many countries as organizational form for petroleum upstream activity from the early 1900s

Developed as a contractual form for cooperation between states and IOCs

Introduced in Norway in the early 1970s first as State participation agreements, later as a more comprehensive Cooperation agreement

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Joint venture in the Upstream Activity

The participants cooperate in the exploration for and production of petroleum but not in distribution and sale

Investments in search for and production of petroleum is divided between the participants

Produced petroleum are divided between the participants in kind, at the field

Each participant will market or refine and distribute his share of the petroleum

No cooperation in the downstream activity

No joint organization

Standard Joint operating agreement

Norway and England and also other countries has developed a standard Joint operating agreement

Drafted by the Ministry and imposed on the participants as a license condition

Regulates the relations between the parties and is formally an agreement between the parties

Also secures public interests and is a part of the total license system

Joint ventures can also be established voluntary between the participants, but the main structure will usually be the same

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Management of petroleum Joint ventures

Steering committee or Management committee

Supreme body of the Joint venture

Organisation of the Management Committee

One member from each participants means all partners are represented. More a partners meeting than a board

Partners expected to be active

Competence of the Management Committee

Budget and overall plans for the activity

Strategy process

Any case put before the Committee by the operator

Any case the Committee demands to decide

Some decisions has to be unanimous

The general rule is majority decisions by a combination of participant share and numbers of participants. Designed for each group

Special decision process for commerciality declaration: Each participant has to make a written statement that the company declare the field to be commercial, based on the plan for development, and will participate in the development

Decision process in the Mangement Committee

Operator

The business is run by one of the partners as operator

Makes day to day decisions

The Operator uses his organization to carry out the work. Often establishes a project organization

Can on behalf of the Joint venture enter into contracts for drilling, fabrication of installations, services etc.

The Operator shall in its capacity as such neither have profit nor loss through the execution of its duties, unless otherwise provided in this Agreement.

Representation

The Operator shall act on behalf of the Parties of the joint venture. This includes the rights and obligations to obtain all necessary consents, approvals and licences, to enter into requisite agreements in the name of and on behalf of the joint venture, and to make timely payments in accordance with the Agreement of all expenses incurred from the activities for the Parties of the joint venture.

The Operator shall prepare the matters that are to be considered by the management committee. He shall keep the management committee informed of events and circumstances which may be of importance to the joint venture. The Operator's organization of the activities shall enable the management committee and the Parties to supervise and, moreover, have access in Norway to all information concerning the activities.

Operators liability

If the joint venture or any of the Parties sustain losses arising from the Operator's performance of its functions as an operator, the Operator shall only be liable for such losses provided it is the result of wilful misconduct or gross negligence by the management or supervisory personnel of the Operator or any of its Affiliated companies.

The Operator shall under no circumstances be liable for losses caused by delay in or stop ofproduction. Nor is the Operator liable for any loss suffered by the Parties in connection with damages to third parties caused by a spill of Petroleum outside the safety zone in excess of the loss the Operator suffers as a Party.The same limitation of liability shall apply to a Party performing the Operator's functions in its place.

Ownership of Joint venture Assets

Each Party owns an ideal share of the capital assets, including rights of any kind which have been acquired or developed by the Operator or by any of the Parties on behalf of the joint venture.

Produced Petroleum which has not been disposed of by any Party owned jointly

The size of the ideal share is equal to the Participating interest.

DUTY OF CONTRIBUTION

Costs of the joint venture are divided between the partners

Parties are obliged to provide sufficient funds to cover all expenses relating to the activities of the joint venture, in accordance with the Participating interest

Accounting agreement

Work programme, budget etc

Work program and budget shall specify the main activities and the economic framework for the coming Year and shall include preliminary estimates for activities which are planned to be submitted to the management committee for approval during the budget year (optionalbudget).

The work program shall, among others:a) Define clear goals, deliverables and deadlines for significant activities,b) Clarify how the activities in the coming Year will contribute to realizing goals set forth for the activities, andc) Identify significant risk factors and relevant actions to manage risk.

Procurement of goods and services

The Operator shall prepare an overall procurement and contract strategy for significant purchases adapted to the various phases of the activities, to be submitted to the management committee for approval.

When presenting a budget proposal for activities in the coming Year, the Operator shall nclude an overview showing what significant purchases the Operator is planning for the budget year..

The management committee shall decide which purchases are to be included in the plan for significant decisions for the coming Year.

For purchases, the duration of which exceed the budget for the Year, the Parties shall organize themselves such that the joint venture may commit itself according to the duration of the purchase.

In respect of purchases which the Operator expects will have a contract price of more than NOK 50 million, or NOK 25 million without competitive bidding, a proposal shall be made to the management committee for a decision concerning specific purchase strategies including a bidding list and approval of the supplier

Division of petroleum

Each Party has the right and obligation to take in kind and dispose of a share of the produced Oil, which shall be equivalent to his Participating interest.

The property right, and the liability and risk pertaining to the produced Oil, is transferred to the individual Party at a point of delivery which shall be determined by the management committee prior to the commencement of production.

The point of delivery is usually the boy on tne field or terminal onshore of transport by pipeline

Production and lifting programme

The Operator shall [] submit to the management committee a production program covering the Year in which production is to commence. [] Thereafter, and before 1 June of each Year, the Operator shall submit to the management committee and to the Ministry a production program which comprises the three (3) subsequent Years and a production estimate for the rest of the field's life. The program shall be specified for each Quarter and shall describe the quality of the Oil which is expected to be produced.

At the same time as the production program is submitted, the Operator shall submit to the management committee a draft Petroleum lifting program for the Program period in question.

The draft lifting program shall be adapted to the production program and to information collected in advance concerning the Parties' plans for lifting and shipment of Oil. The draft shall contain a schedule for the lifting as well as detailed terms and conditions concerning lifting, delivery and transportation of Oil, and shall specify the requisite steps in a lifting and shipment procedure.

Division of natural gas

Each Party has the right and obligation to take in kind and dispose of a share of produced Natural Gas which shall be equivalent to its Participating interest

The property right, and the liability and risk pertaining to the Natural Gas are transferred to the individual Party upon lifting at a delivery point which shall be determined by the management committee prior to commencement of production.

Gas lifting and balancing agreement which is subject to approval by the Ministry prior to the commencement of production.

For adoption of the gas lifting and balancing agreement, a unanimous vote by the management committee is required.

Sole risk operation

The JOA is about joint operations, and all partners have the right to participate in the operations within the scope of the JOA

A Party may still propose that a project which is not adopted by the management committee be carried out as a sole risk project by one or more of the partners

Sole risk development shall take place in accordance with the provisions set for this in the agreement

Different regulation for sole risk projects like drilling, water injections etc. and sole risk production

ASSIGNMENT OF PARTICIPATING INTEREST

A Party may assign its Participating interest or a part thereof.

The assignee shall be bound by the Joint operating agreement and the conditions of the Production License

Before the obligatory work commitment pursuant to the Production Licence has been carried out a Party cannot, without the consent of the management committee, assign its Participating interest or part thereof to others than an Affiliated company

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Typical organisation of a Norwegian JOA

Statoil

22% participating interest

Operator

Shell

18 % participating interest

Total

Exxon

12% participating interest

15% participating interest

SDFI

33% participating interest (usually lower than this)