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Pablo Ferrante is a partner with Mayer Brown's Global Energy Group. He concentrates his practice on energy projects and transactions in Latin America. Pablo has extensive experience representing oil and gas companies on domestic and cross-border mergers and acquisitions, joint ventures, development projects and agreements, having represented companies such as Ecopetrol, Repsol, Petroamazonas and Pemex, among others. Pablo is a member of the Association of International Petroleum Negotiators (AIPN). Pablo has been recognized by Chambers Global for his expertise in oil transactions in Latin America (Energy & Natural Resources (Foreign Experts)Spotlight Table 2013), and by Chamber Latin America-Wide (Corporate M&A-Spotlight Table 2013). Pablo was recently distinguished by Law 360 for his work on some of the most innovative deals in the energy industry. He received his J.D. from Universidad Cat61ica Argentina, and his LL.M. from Northwestern University. He is admitted to practice in Argentina and New York. Mayer Brown is a leading international law firm, with more than 1 ,600 lawyers and 22 offices worldwide (www.mayerbrown.com).
1 MAYER • BROWN
Types of International Oil & Gas Granting Instruments
~ Modern Concessions License (Royalty-Tax)
~ Production Sharing Contracts (PSC)
~ Service Contracts
~Others
2 MAYER • BROWN
Common Elements
~ Exclusive Right to Explore and Produce Hydrocarbons
~Term
- Exploration Phase
- Production Phase
~Area
~ Minimum Work Program
~ Consideration
- Share of Production
-Royalty
3 MAYER • BROWN
Historical Considerations
~ The first forms of concessions had minimal requirements, low royalties payments and covered large areas.
~ Nationalizations: Russia (1917), Mexico (1938), Iran (1951), Bolivia (1969), Libya (1971), Iraq (1972), Iran (1973), Venezuela (1975)
~ First Production Sharing Contract (Indonesia; 1966)
~ PSCs were a nationalistic response to the control of hydrocarbon reserves by International Oil Companies
~ Emergence of Modern Royalty-Tax E&P Contracts
4 MAYER • BROWN
Production Sharing Contracts vs. Modern Royalty-Tax E&P Contracts
~ Different resource rent mechanisms.
- Royalty-Tax (RT): The Host Government (HG) extracts revenue in the form of royalties (percentage of gross revenue) and taxes
- PSC: Share of Production (Cost Oil; Profit Oil; Royalty Oil)
~ PSCs are designed to provide the state with more control over the operations.
- Participation of NOC/State; Operating Committee.
- Actual control varies.
- Not necessarily a function of the type of the granting instrument.
5 MAYER • BROWN
Production Sharing Contracts vs. Modern Royalty-Tax E&P Contracts (cont.)
~ Ownership of facilities
- But under a RT, the facilities revert to the government at the end of the contract.
~ Title transfer point at the wellhead (RT) vs at export point (PSC)
-Almost universally, the resources in the ground belong to the state.
- Both type of instruments can permit the "booking of reserves."
~ Equivalent "government take" can be achieved in both . reg1mens.
- "Government Take" is the total amount of revenue or petroleum that the HG receives.
6 MAYER • BROWN
Production Sharing Contracts vs. Modern Royalty-Tax E&P Contract (cont.)
~ According to Professor Thomas Walde (1995):
"the PSC produced a convenient marriage between the politically useful symbolism of the production-sharing contract (appearance of a service contract to the state company acting as master) and the material equivalence of this contract model with concession/licence regimes in all significant aspects"
~ TRs are generally preferred by free market oriented countries; PSCs are generally preferred by countries with a greater level of government direction over the economy.
7 MAYER • BROWN
Production Sharing Contracts vs. Modern Royalty-Tax E&P Contract (cont.)
Modern Royalty-Tax E&P Contract RT Brazil; Canada; Colombia; United States; Peru; United Kingdom; Norway; Ireland; Germany; France; UAE; Israel; Australia; Thailand; Others.
8
Production Sharing Contract PSC Brazil. {Pre-Salt); Bolivia; Venezuela; Algeria; Angola; Cote-D'lvoire; Egypt; Libya; Mozambique; Bangladesh; China; India; Indonesia; Malaysia; Vietnam; Others.
MAYER • BROWN
Contract Regimes Around the World
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(Source: Palantir, Inc.)
MAYER • BROWN
Contract Regimes Around the World
Types of HGI
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South & East Asia Middle East
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Australasia & Pacific
Production Sharing
No Resource Rent
(Source: Moyes & Co. May 2012)
10 MAYER • BROWN
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Case Study: Colombia's E&P Contract (RT)
~ In 2003 Colombia reformed the legal framework governing hydrocarbon and exploration production in the Country, ending Ecopetrol's monopoly and creating the Agencia Nacional de Hidrocarburos (ANH) to administer the country's oil and gas resources.
~ Contracts are awarded via public and competitive bid rounds
- Technical Evaluation Agreements - Exploration and Production Contracts
~ Production increased from 525,000 barrels/day in 2005 to 941 ,000 barrels/day in 2012.
)- Ecopetrol's transformation and internationalization.
13 MAYER • BROWN
Colombia E&P Contract: General
~ Contractor is granted the exclusive right to explore and produce hydrocarbons discovered in the contract area at its own cost and risk.
~ Different terms for:
- Conventional onshore
- Conventional offshore
- Unconventional
14 MAYER • BROWN
Colombia E&P Contract: Government Take
~ Royalties are calculated as a percentage of the production ·
- From 8°/o to 25°/o, increasing as the volume of the production increases
- Payable monthly, in cash or in kind -Contractor can be requested to market ANH's share of
production. ~ Additional participation payment after royalty (if offered)
~ Payment for high prices to share in the upside
- After certain minimum level of production is obtained - If the "WTI" exceeds certain amount
• Different if Oil/Heavy Oil/Natural Gas/Unconventional
~ Surface Fee based on the size of the contract area
~ Technology transfer fee
15 MAYER • BROWN
Colombia E&P Contract: Term
~ Initial Preparatory Phase
- 1 year
~ Exploratory Period
- 6 years (divided in 2 phases) - 9 years for unconventional (divided in 3 phases) - Contractor can resign after completing first phase
~ Production Period (from declaration of commerciality)
-24 years - 30 years for unconventional - Option to extend if enhanced recovery is applied
16 MAYER • BROWN
Colombia E&P Contract: Relinquishment
~ Partial relinquishment of 50°/o of the contract area at the end the first phase of the exploratory period (up to certain minimum area).
~ No partial relinquishment for unconventional.
~ After exploration phase, Contractor retains area covering the commercial discovery.
17 MAYER • BROWN
Colombia E&P Contract: State Involvement in Management
~ Contractor is solely responsible for conducting the operations, with managerial and technical autonomy.
~ The government does not participate with Contractor.
· ~ ANH's approval is required for:
- Exploration Program
- Appraisal Plan
- Development Plan
18 MAYER • BROWN
Colombia E&P Contract: Minimum Work Obligations
~ The minimum work obligations includes the drilling of exploratory wells and seismic
- Different requirements for convention/unconventional/offshore
~ Contractor can also commit to additional minimum work obligations, which is considered for purposes of evaluating and awarding the contract.
~ Failure to comply is a material breach of the contract.
19 MAYER • BROWN
Case Study: Brazil's Pre-Salt
~ In 1997, Brazil established a new legal framework utili'zing .
concess1ons.
- Created Agencia Nacional do Petrol eo, Gas Natural e Biocombustfveis (ANP) to manage, regulate and supervise the oil and gas industry.
- Created the Conselho Nacional de Polftica Energetica (CNPE) to generate energy policy.
- Petrobras required to compete with other companies in Bidding Rounds.
~ This framework attracted significant international investment, led to a new "independent" oil and gas industry in Brazil, and gave Petrobas more autonomy (which has allowed to the company to thrive in Brazil and around the globe and become one of the largest companies in the world).
20 MAYER • BROWN
Case Study: Brazil's Pre-Salt
~ In 2010, Brazil reformed its legal framework from a concession regime to a "mixed" regime with concessions and production sharing agreements. - Created Pre-Sal Petr61eo S.A. as a public company to
(PPSA) manage production sharing agreements awarded by the Ministerio de Minas e Energia.
- Production Sharing Agreement Regime for the Pre-Salt and Strategic Areas only.
- Petrobras as the sole operator of all Pre-Salt and Strategic Areas and a minimum 30°/o interest. -
• It can compete to get a higher share.
- Revenue from the Pre-Salt used to create a social fund for the purposes of making investments in reducing poverty and advancing education, the sciences and the environmental protection.
21 MAYER • BROWN
Case Study: Brazil's Pre-Salt
~July 15, 2013: The ANP published the draft Tender Protocol and draft Production Sharing Agreement for PreSalt Round 1.
~Contract Area Offered: Libra Prospect (Santos Basin)
- Ultra-deep water offshore block totaling 1 ,547 km2
- Estimated to hold between 8 and 12 billion barrels of recoverable oil.
- Potentially the largest offshore discovery in Latin America since the Cantarell field in 1976.
~Signing Bonus: USD $ 6.8 Billion
~October 21, 2013: Petrobras, Shell, Total, PetroChina and CNOOC were the only bidders with the following results:
Petr61eo Brasileiro S.A.
Shell Brasil Petr61eo Ltda.
Total S.A.
CNPC International Ltd
CNOOC International Limited
22
40% (increased total interest from
mandatory 30% to 40%)
20%
20%
10%
10%
MAYER • BROWN
Brazil Pre-Salt PSA: General
> Production Sharing Agreement (PSA)
- Contractor is granted the exclusive right to explore and produce hydrocarbons discovered in the contract area at its own cost and risk
- In the event of a c·ommercial discovery, Contractors will have the right to: ·
• Recovery of Cost Oil • Share in the Profit Oil, according to the percentages established
in the PSA
- PPSA acts as "Manager"
- Petrobras as the operator
23 MAYER • BROWN
p E
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Brazil Pre-Salt PSA: Government Take
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Cost Oil
24 MAYER • BROWN
Brazil Pre-Salt PSA: Government Take (cont.)
~ Cost Oil Recovery
- Exclusively in case of a commercial discovery. - Only costs approved by the Operating Committee that are
related to exploration, appraisal, development, production, decommissioning of facilities, certain mandatory R&D investments, and overhead.
- Excludes signature bonus, fees and royalties. - Monthly recovery capped at 50°/o of the gross value of
production in the first 2 years of production and at 30°/o in following years
• Costs that exceed these limits will be accumulated for recovery in subsequent years, without financial adjustments
25 MAYER • BROWN
Brazil Pre-Salt PSA: Government Take (cont.)
> Royalty: 15°/o
> Taxes: 34°/o of Profit Oil
> Signing Bonus
> Profit Oil - Exclusively in case of commercial discovery - The Profit Oil percentage initially established in the PSA
considers an oil barrel price between US$1 00 and US$120 and production per producing well of between 1 0 thousand and 12 thousand barrels/day
- The Profit Oil percentage may increase or decrease during the course of the contract in accordance with the variation of the barrel price and production levels
- High prices and more production = higher percentage for government
- Revised every 36 months
26 MAYER • BROWN
Brazil Pre-Salt PSA: Term & Relinquishment
);;- Exploration Phase - One single exploratory period of 4 years( can be extended but only under
limited circumstances) - Includes the term required for the Discovery Appraisal Plan (DAP)
);;- Phase - TerProduction m of 31 years counted as from a declaration of
commerciality (this term will be proportionally reduced in case of extension of the Exploration Phase)
- Includes the term required for the Development Plan (DP) - Production shall start within 5 years as from the Declaration of
Commerciality
);;- Area not under development or evaluation at the end of Exploration Phase is relinquished .
Example: . -------------------. I I . f I ______________ : Dec arat1on o :
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27 MAYER • BROWN
Brazil Pre-Salt PSA: State Involvement in Management
~ Consortium: PSA calls for the formation of a "Consortium" among winning bidders, PPSA and Petrobras. - PPSA is a member of the Consortium with 0°/o interest but
veto powers. - Consortium Agreement included in the PSA. - Petrobras serves as operator and has a minimum 30o/o
participating interest. - Qualified companies and Petrobras can bid for the
remaining 70°/o non-operational interest in the Consortium.
~ High degree of government involvement.
28 MAYER • BROWN
Brazil Pre-Salt PSA: State Involvement in Management (cont.)
> Operating Committee: has the power to (PPSA has 50°/o of the voting power and veto power over some decisions). - Responsible for decisions regarding the plans, programs, reports,
projects and all other matters regarding the operations under the PSA (e.g., approve the Development Plan and the Annual Work Program and Budget).
-. Each party shall appoint one member to the Operating Committee.
- PPSA will appoint the president and have 50o/o of the voting rights, including power of veto and casting vote.
- The voting procedures, as well as the conditions for the exercise of PPSA's powers, are defined in the Consortium Agreement.
- The Operating Committee and PPSA each have to approve the cost oil expenses.
29 MAYER • BROWN
Brazil Pre-Salt PSA: Local Content Requirements
~ Strong local content requirements. ~ Different percentages for different items. ~ Ensure preference to local providers in case of equal
conditions: - 37°/o for Exploration Period - 55°/o for Production Period (Module with first oil until 2021) - 59°/o for Production Period (Module with first oil as from
2022) ~ Contractual fines for failing to comply.
30 MAYER • BROWN
Brazil Pre-Salt PSA: Local Content Requirements (cont.)
)- ANP may waive local content requirements in the following cases: - No local supplier.
- Proposals of local providers with excessive terms or . pnces.
- New technology for which there is no local offer.
-The waiver is only for the specific item, and depends on formal request and evidence of the alleged conditions.
)- Contractor may request adjustment of local content 0/o of specific items, provided that the global 0/o remains the same.
31 MAYER • BROWN
Brazil Pre-Salt PSA: Minimum Work Obligations
~ Minimum Work Obligations include: -Conducting 3D seismic modeling of 1,547 km2
- Drilling two exploratory wells; and - Performing one long duration test.
~ Failure to comply is a material breach of the PSA.
32 MAYER • BROWN
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