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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)