INTRODUCTION TO EFFECTIVE NEGOTIATION SKILLS ON OIL AND GAS

AGREEMENTS

By Prof Handley Mpoki Mafwenga,

[Ph.D, MSc, LLM, MBA, PGDTM, ADTM, LLB, FCTA (UK)]Macro-Fiscal Policy, Advocacy & Tax Expert[Gov-URT]

MINISTRY OF ENERGY AND MINERALS (TMAA)Oil & Gas Contracting and Negotiation Workshop Organized by the Tumaini University Makumira-Dar-es-salaam College Held at Tamar

Hotel Dar-Es-Salaam on 13th to 18h April, 2015

A: INDUSTRY SEGMENTS [Simplified Example]

A: INDUSTRY SEGMENTS [SIMPLIFIED EXAMPLE]Upstream: All necessary activities to find hydrocarbon reserves and bring them to the surfacePhases of Upstream Operations; (1)Initial prospecting (2) Mineral right acquisition (3) Exploration (4) Appraisal (5) Development [proved] (6) Production and (7) Abandonment & restorationThe common feature of the upstream Phase is the high risk involved, which enforces companies to seek high IRR.Midstream and Downstream: Activities related to crude oil/ petroleum products’, importation, storage, transportation, further processing supply [refining], marketing and selling of petroleum and the activities of associated industries; they are basically less risky ventures.

B: BUSINESS CYCLE

Licensing ProspectExploration

DrillingProduction

Drilling Downstream

-Negotiation with

Governments /

Individuals (URT)

- Different types of

contracts: royalties,

PSA, service contract, etc

- Geological characterist

ics- Seismic evaluation

- Infrastructur

e set-up .-Uncertainty- Analysis of formations

and hydrocarbon characteristi

csOnshore / Offshore

- Full scale project- Field

optimization-Definition of

drilling program and well profiles

C: LEGAL FRAMEWORK OF OIL AND GAS SECTORUpstream legislations;

National Energy Policy 2003Petroleum (Exploration and Production) Act, 1980The Model Production Sharing Agreement, 2008(MPSA) between the Government, TPDC and the Oil Company.

Downstream legislationsNatural Gas Policy, 2013.Natural Gas Act (in the making )National Gas Utilization Master Plan

Crosscutting Legislations Occupational Safety and Health Act, 2003Environmental Management Act, 2004Tax Legislations Public-Private-Partnership Act, 2010

D: THE LINK BETWEEN INDUSTRY SEGMENTS AND CONTRACTS• Upstream, Midstream and Downstream

operations are legally framed by contracts.

• Due to the location of the resources such as hydrocarbons, infrastructure, economic, human capital, and the global nature of the demand, these contracts are usually international.

• During Negotiation some issues may not be anticipated in the contract, and the circumstances may change causing parties difficult to comply with its obligations or national policies can be modified. Hence, oil and gas contracts become risky for IOCs which, in order to gain returns on their investment, need a certain degree of juridical stability.

QUALITIES AND ROLE OF THE NEGOTIATOR ON INDUSTRY SEGMENTS AND BUSINESS CYCLE • Negotiators are required to know the

industry segments and Business Cycle so as to know what are they negotiating for. They are entitled to know the risk factors that could erode the contractual integrity and come up with the options that could put in place sustainable development of operations, credibility of the Contracts, and predictability of positive outcomes

QUALITIES AND ROLE OF THE NEGOTIATOR ON INDUSTRY SEGMENTS AND BUSINESS CYCLE • Staff involved in contracting should have,

at a minimum, a broad understanding of the legal and policy framework, as well as a practical working knowledge of contracting practices that apply to the particular contracting activity in which they are engaged

• They should know a range of policy and legal requirements and supporting guidance that addresses various aspects of procurement (eg PPRA).

E: THE NEGOTIATION LIFE CYCLE IN THE STAGES OF OIL PROJECT DEVELOPMENT

F: STAGES & CASH FLOW CYCLE FOR OIL EXPLORATION

G: NEGOTIATIONS AND OUTCOMES• Conducting negotiations Properly would

likely attracts oil and gas companies and this should go in tandem with proper regulation of their activities in order to yield positive final outcome

• when actually negotiating contracts—it is important to have a clear sense of the role the contract plays within the overall policy and legal frameworks and, as a related point, what the country hopes to accomplish through the contract.

• Likewise, it is important to understand what companies might reasonably hope to accomplish through the contracting process. [This is a Mirror effects approach]

G: NEGOTIATIONS AND OUTCOMES• Any contractual system must be evaluated

in the context of the capacity of the government to administer that contract. Every case within the contractual framework has to consider the capacity of the government to administer multiple contracts at the same time.

• Entrenching contract negotiations into the overarching development strategy is fundamental to enable a country reap a good deal and use its mineral wealth wisely.

H: COMMON ISSUES IN SUCCESSFUL CONTRACTINGManaging Risks Managing relationships- To keep the

communications between the parties open and constructive, non adversarial and based on mutual understanding

Managing resources- eg senior management support, the ability to access expert advice as necessary; availability of personnel with interpersonal, subject matter and project management skills.; contractor’s capabilities

Specifying responsibilities-Establishing clear lines of responsibility and accountability for all decision-making

H: COMMON ISSUES IN SUCCESSFUL CONTRACTINGBehaving ethically-Ethical behaviour

supports openness and accountability in a procurement process and gives suppliers confidence to participate in the Government market place. Reduce the cost of managing risks associated with fraud, theft, corruption, and other improper behaviour, and enhance confidence in public administration.

Keeping records- Records must be created and received in procurement activity at the beginning of a procurement process and throughout the contracting cycle, in accordance with the entity’s recordkeeping policies and procedures so as to provide evidence of business and decisions made, manage legal and other risks, and meet its accountability obligations.

I: DRIVERS OF CHANGEPrices: record-high oil price highlights

inadequacies in contracts signed under low-price conditions.

Control: some government want greater control over petroleum sector (e.g. to leverage public policies, equity gains, patronage) or resource nationalism.

Competition: most hydrocarbon reserves are hold by NOC and more players compete for new acreage, which provides countries an opportunity to impose tougher terms and makes companies willing to pay.

Incentives to investment: reducing government take is still common in mature producers, net energy importers, frontier areas, marginal fields, deep-water projects.

J: CONTRACTUAL INSTRUMENTS/TERMS [HYDROCARBON LEGAL ARRANGEMENTS ]

HOW TANZANIA ABIDE TO THE PSA IN Petroleum Fiscal Regime NEGOTIATIONS

K: BASIC OBSTACLES IN THE RUN UP TO NEGOTIATIONS1. Skills Capacity: Low skills capacity in

the generic techniques of negotiation;2. Expert Knowledge: Limited access to

expert knowledge in the field of international law;

3. Issue-based Knowledge and Expertise: Limited availability of issue-based knowledge and expertise, especially where diplomats have been following or pursuing negotiations on behalf of a country;

4. Prior and Agreed Policy Position: The related problem of not having a prior and agreed policy position on an issue; and

5. Regional important issues: A limited grasp of the most important issues pertaining to a particular developing country or its region.

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THANK YOU

CONTACTS: mafwenga2000@yahoo.com; hmafwenga@tmaa.go.tz +255758888884; +255754555666; +255766125125;+255767616868:

+255713616868: +255768722222: +255768622222