‘Removal of unfair terms in oil deals an industry norm’

Apr 01, 2022 News

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– Chatham House says countries have right to renegotiation

Kaieteur News – According to UK based transparency watchdog, Chatham House, it is quite reasonable and even considered normal practice in the petroleum industry, for countries to engage oil companies in the review and removal of terms contained in deals which may leave the country in a disadvantageous position.
In fact, the not-for-profit organisation said the refusal to do so can have a destabilising effect on countries.

Chatham House is a non-governmental organisation whose mission is to analyse and promote the understanding of major international issues and current affairs. The organisation which has worked with local authorities on oil related matters since 2015, said that new data about a country’s reserves may prompt its government to seek to revise the terms of investment to its advantage. This is quite normal it said. Similarly, Chatham House said that companies sometimes approach governments to ask for a revision of terms to reduce the taxation or operational obligations they face during periods of economic difficulty.

Chatham House said, too, that over the course of 25–30 years, circumstances may change beyond the scope of pre-existing contracts and broader legislation, and governments may want to amend the investment terms, just as companies do. It said, “Against this backdrop…, our group debated the legitimacy of renegotiating an existing agreement. A near consensus emerged that renegotiation of terms was sometimes necessary in order to maintain a long-term partnership between oil companies and governments because the refusal to review terms could be destabilizing and unfair to some countries.”

Chatham House continued, “It is also in the long-term interest of companies engaged in the country to ensure that the deal is viable. Discussions focused on one avenue for renegotiation, which is to include periodic review, renegotiation, economic balancing and adaptation clauses in contracts from the outset, allowing renegotiation when specific triggers are activated. Such clauses can add significantly to perception of investment risk for companies and require careful design.”

The transparency institute added, “But they have proven to be more efficient and fair mechanisms in comparison with classic freezing or stabilization clauses. In case an oil company has not met its obligations under the applicable deal (or the laws/regulations) then the country may be within its rights to terminate the contract.” Going forward, Chatham Hose recommended that governments should design progressive fiscal terms at the outset, in order to capture maximum windfalls as the geological and price contexts evolve. It said too that governments should request external support where necessary to achieve this effectively.

Further to this, Chatham House advised that governments should seek to design contracts with a renegotiation or periodic review clause – which would allow renegotiation when specific triggers are activated. In this regard, the UK Body said, “Governments should ensure that the clause is phrased in very clear language; that it specifies which terms are subject to renegotiation (local content, fiscal, environmental, financial terms); that it specifies what triggers would lead to renegotiation (political, cost, commodity price, and legal or tax changes); that it specifies clearly what is the baseline of the renegotiation/rebalance ex ante; and that it specifies the process of the renegotiation/rebalance ex ante.”
Chatham House also noted that there are several groups which can support governments in contract renegotiations. It said that these include the World Bank; the African Development Bank’s African Legal Support Facility; the International Senior Lawyers Project; and the Commonwealth Secretariat’s Ocean Governance and Natural Resources Management Section.

LOPSIDED PROVISIONS

Kaieteur News would have exposed via an extensive study published in 2019 that Guyana’s PSA for the Stabroek Block has some of the world’s worst provisions when compared to 130 other deals. For example, the PSA says sees the government paying the contractor’s income tax out of the country’s share of the profits. However, none of the 130 PSAs examined shows this arrangement.

Further, Guyana’s PSA is the only one out of 130, which has very moderate work obligations for contractors who are vested with offshore licenses. Additionally, the Guyana-ExxonMobil PSA is the only one out of 130 contracts, which has no ring-fencing provisions to prevent costs of unsuccessful wells being carried over to that of successful wells. There is also no sliding scale for royalty to increase as production improves. And that is not all. Guyana’s PSA is the only one out of 130 that allows insurance premiums to be fully recovered as well as interest on loans and financing costs that are incurred by the contractors. The 130 PSAs examined are part of a register on www.resourcecontracts.org. (https://resourcecontracts.org/search?q=Production+Sharing+Agreement+)
That website offers over 620 PSAs from around the world for perusal. The Stabroek Block PSA was signed on June 27, 2016 with ExxonMobil and its partners, Hess Corporation and CNOOC/NEXEN.

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