Abstract
This paper considers Desta’s critique of how contracts in the extractive industries involving host nations in Sub-Saharan Africa and international companies have been drafted and adjudicated. It first sets out the options that the state has in setting out a legal framework for the development of its hydrocarbon sector before going on to examine the dynamic risk matrix that characterises oil and gas projects. It then sets out the principles underpinning the design of fiscal systems for upstream oil and gas. With these foundations laid, the paper goes on to complexify the understanding of stabilisation in modern state-investor contracts, first, in terms of self-adjustment mechanisms and, secondly, in terms of the shift towards economic equilibrium clauses. It then examines the extent to which these contracts are best understood as relational in nature and concludes by proposing the development of principles to guide arbitral adjustment of contract terms based on this observation.
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Notes
- 1.
Desta (2016).
- 2.
From the perspective of the investor, the challenges to sovereignty can be characterised to the contrary as “pillars of security”. See Alexander (2010), p. 1 who refers to the right to monetise a discovery, the right to stability and the right to enforceable international arbitration.
- 3.
The Natural Wealth and Resources Contracts (Review and Re-Negotiation of Unconscionable Terms) Act 2017, s. 5.
- 4.
Ibid., s. 6.
- 5.
Ibid. s. 7.
- 6.
Halabi (2011), for example, is more concerned about the imbalance between the interests of host states and investors in the context of bilateral investment treaties, finding that investment contracts, by contrast, more often manifest the hallmarks of efficient contracting.
- 7.
For further details see, for example, Taverne (2008) pp. 255ff.
- 8.
The UK, for example, uses such an approach. For a discussion, see Gordon (2018).
- 9.
- 10.
Johnson (1994), p. 39.
- 11.
Taverne (2008).
- 12.
For an up-to-date overview of the situation, see Finizio (2017).
- 13.
- 14.
See, for example, Daniel and Sunley (2010).
- 15.
Stevens et al. (2013), p. 48.
- 16.
Kunjan (2016).
- 17.
- 18.
See Allen and Aitken (2018).
- 19.
- 20.
Nolan and Thurber (2010), pp. 15ff.
- 21.
See Styles (2018).
- 22.
See Carmalt (2017) pp. 3–23.
- 23.
Bearing in mind also that these concerns often exist in a broader context of heightened, but perhaps misplaced, public expectations regarding the benefits the industry will bring. For a discussion, see Kakonge (2011).
- 24.
- 25.
For a fuller discussion, see Tordo (2007), pp. 13–15.
- 26.
For a discussion of the use of these tools in the context of the UKCS, see Kemp and Stephen (2018).
- 27.
- 28.
Historically, despite the fact that PSAs essentially set out potentially the most important fiscal terms relevant to a given country and could thus be easily argued to be of paramount public interest, such contracts were frequently treated as confidential. Today, notably under the impetus of the Extractive Industries Transparency Initiative, more and more countries are beginning to make them public as a matter of course. Insofar as signing up to the EITI is a voluntary arrangement and at the time of writing disclosure of licence and contract terms is not mandatory for implementing countries, the situation is by no means yet as good as could be. See EITI Standard 2016, Requirement 2.4. https://eiti.org/document/standard#r2-4.
- 29.
- 30.
A draft version of the PSA between the Government of the Republic of Uganda and Heritage Oil and Gas Ltd. has been made available on the OpenOil website at https://repository.openoil.net/wiki/Uganda_Block-3A_dd20070123_PSA.
- 31.
Contrat de Partage de Production entre la République Islamique de Mauritanie et Dana Petroleum (E & P) Limited et Hardman Petroleum (Mauritania) Pty Ltd. et Elixir Corporation Pty Ltd., 1999, Bloc 1, Article 10.3.
- 32.
Contrat de Partage de Production d’Hydrocarbures entre La République Islamique de Mauritanie et Blue Chip Energy S.A sur le Bloc 25 du Bassin Cotier, Février 2007, Article 10.3.
- 33.
Republic of Madagascar, Model Production Sharing Contract, Offshore and Onshore versions, 2007, Article 24.2.
- 34.
Exploration and Production Sharing Contract between the Republic of Gabon and Vaalco Gabon (Etame) Inc., Etame, 7 July 1995, Article 25.
- 35.
Exploration and Production Sharing Contract between the Gabonese Republic and Total Gabon, Diana Licence, 13 December 2006, Article 25.
- 36.
The Republic of Equatorial Guinea, Model Production Sharing Contract, 2006, Article 7.2.
- 37.
Contrat de Partage de Production conclu entre la République Democratique du Congo et South Africa Congo Oil (Pty) Ltd. et la Congolaise des Hydrocarbures, Bloc III du Graben Albertine, 26 May 2010.
- 38.
Royalty and Production Sharing Agreement between the Republic of Guinea and USOil Corporation, 2002, Article 13.
- 39.
Hydrocarbon Production Sharing Agreement between the Republic of Guinea and SCS Corporation, 22 September 2006, Article 13.
- 40.
For example, Production Sharing Contract between the Republic of Equatorial Guinea and Triton Equatorial Guinea, Inc. For Block F, 26 March 1997.
- 41.
For example, see Exploration and Production Contract between the Islamic Republic of Mauritania and Kosmos Energy Mauritania Ltd. in relation to C12, 2012.
- 42.
Federal Republic of Nigeria, Model Production Sharing Contract for 2005 Bid Round, Clause 9.1.
- 43.
Great Socialist People’s Libyan Arab Jamahiriya, Model Exploration and Production Sharing Agreement, 2006, Article 12.
- 44.
Exploration and Production Sharing Agreement between National Oil Corporation and Verenex Energy Area 47 Libya Limited and Medco International Ventures Limited, Contract Area 47, 12 March 2005.
- 45.
Sonangol, Model Production Sharing Contract, December 2007, Article 12.
- 46.
Production Sharing Agreement between Sonangol EP and Vaalco Angola (Kwanza) Inc., Sonangol Pesquisa e Produção SA, Interoil Exploration and Production SA in the Area of Block 5/06, 1 November 2006, Article 12.
- 47.
Production Sharing Agreement between Sonangol EP and CIE Angola Block 20 Ltd., Sonangol Pesquisa e Produção SA, BP Exploration Angola (Kwanza Benguela) Limited, China Sonangol International Holding Limited in the Area of Block 20/11, 20 December 2011, Article 12.
- 48.
Republic of Liberia, Model Production Sharing Contract, October 2007, Article 16.
- 49.
Production Sharing Contract between National Oil Company of Liberia (NOCAL) and Broadway Consolidated PLC, Offshore Block 13, 31 May 2005, Article 16.
- 50.
Restated and Amended Production Sharing Contract between The Republic of Liberia by and through the National Oil Company of Liberia and ExxonMobil Exploration and Production Liberia Limited and Canadian Overseas Petroleum (Bermuda) Limited, Offshore Block 13, 8 March 2008.
- 51.
Republic of Kenya, Model Production Sharing Contract, 2008, Clause 27.
- 52.
Production Sharing Agreement between the Government of the Republic of Kenya and Lion Petroleum Inc. relating to Block 2B, 17 September 2008.
- 53.
Government of the United Republic of Tanzania, Model Production Sharing Agreement, October 2008, Article 11.
- 54.
Government of the United Republic of Tanzania, Model Production Sharing Agreement, October 2008, Article 15.
- 55.
Production Sharing Agreement relating to the Songo Songo Gas Field between the Government of the United Republic of Tanzania and PanAfrican Energy Tanzania Limited, 11 October 2001.
- 56.
Ghana National Petroleum Corporation, Model Petroleum Agreement of Ghana, 2008, Article 10.
- 57.
Petroleum Agreement among the Republic of Ghana, Ghana National Petroleum Corporation, Kosmos Energy Ghana HC and the EO Group in respect of the West Cape Three Points Block, 22 July, 2004, Article 10.
- 58.
Republic of Mozambique, Model Exploration and Production Concession Contract, 4th Bidding Round, May 2010, Article 9.10.
- 59.
Contrato de Concessão e Produção entre o Governo da República de Moçambique e Artumas Moçambique Petróleos Limitada e Empressa Nacional de Hidrocarbonetos EP para Área “Onshore” do Bloco do Rovuma, 18 April 2007, Artigo 9.
- 60.
Production Sharing Contract between the Republic of Cameroon and Kosmos Energy Cameroon HC, Ndian River, 2006, Article 13.
- 61.
Democratic Republic of Sao Tome and Principe, Exclusive Economic Zone Model Production Sharing Contract, March 2010, Clause 10.1(d).
- 62.
Contrat de Partage de Production, entre la République de Tchad et Griffiths Energy (Chad) Ltd., 19 January 2011, Article 42.
- 63.
Arab Republic of Egypt, English Model Concession Agreement for Petroleum Exploration and Exploitation, 2010, Article VII.
- 64.
Production Sharing Contract between Benin and Addax Petroleum Benin Limited and Abacan Resources (Benin) Limited, Offshore Block 4, 1 February 1997, as disclosed in Form 10-KSB, Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange Act of 1934 for the Fiscal Year ended December 31, 1998 Commission File Number 33-99978, Abacan Resource Corporation.
- 65.
Federal Democratic Republic of Ethiopia, Model Petroleum Production Sharing Agreement, 26 August 2011, Section 7.2.
- 66.
For example, Hydrocarbon Exploration and Production Sharing Contract between the Republic of Senegal and Petro-Tim Limited and Petrosen, Cayar Offshore Profond, 17 January 2012, Article 22.
- 67.
In the absence of any specific insight into the negotiations in these cases, one can only speculate as to why Ethiopia and Benin join Uganda in continuing to use relatively unsophisticated profit oil arrangements at such a late stage. It is, however, one of the frustrations of the oil and gas lawyer that mistakes made by other countries are sometimes repeated by those entering the field at a later date when it would have been a relatively simple matter to avoid them if proper advice had been sought.
- 68.
Contrat de Partage de Production entre la République de Congo et Elf Congo SA et la Societé Nationale de Recherche et Exploitation Pétrolières, Haute-Mer Nkossa, 21 April 1994, Article 8.
- 69.
Contrat de Partage de Production entre la République de Congo et Total E&P Congo, Haute-Mer C, 7 January 2004, Article 8.
- 70.
It is sometimes contended that this step is not inevitable inasmuch as things tend to happen differently in developed countries. Whilst it is generally true that stabilization clauses are a feature of petroleum arrangements in developing rather than developed countries, as observed by Erkan (2010), there is at least one recent exception in the UK which may point to the direction of travel in the later stages of the development of a hydrocarbon basin. This exception relates to the Decommissioning Relief Deed by which the Treasury guarantees the current value of decommissioning allowances under the fiscal regime by agreeing contractually to compensate an operator in the event that a future parliament legislates to reduce the value of those allowances or even to remove them altogether (see Aldersey-Williams 2018, p. 447). Quite what would happen were such a parliament also to take a dim view of the Treasury’s pre-emptive efforts to negate the effects of its actions raises constitutional questions beyond the scope of this paper. Equally, whilst it is also generally true that developed countries do not tend to negotiate petroleum contract or licence terms, as observed by Cameron (2006), preferring to offer standardized terms, even a country like the UK has been open to the idea of a bespoke licence. It is also important to realise that some of the industry allowances to be found in general tax legislation in the UK are there only as a result of lobbying by operators who claim to be unable to develop marginal discoveries without some form of tax relief. The format of the negotiation may be different in developed countries, but it is not absent.
- 71.
The clause we have been discussing so far is generally referred to as a stabilisation clause stricto sensu. A variation of the clause may seek to insulate the contract from any material adverse effect of existing or later laws, thus freezing the contract rather than the surrounding law, by prohibiting unilateral changes and requiring mutual consent. Such a stabilisation clause is sometimes referred to as an intangibilité clause. These two versions are sometimes referred to as classic stabilisation clauses. See Maniruzzaman (2008), pp. 122ff.
- 72.
For example, Government of Kuwait v Aminoil 1982.
- 73.
- 74.
I draw here on the categories suggested by Maniruzzaman (2008), pp. 127–132.
- 75.
Indeed, an argument can be made that the self-adjustment mechanisms discussed above, such as sliding scale elements in profit sharing clauses, are varieties of stipulated economic balancing.
- 76.
It is a question whether returning the contractor to its original position must by definition so return the state actor also if we are genuinely talking about equilibrium or whether the latter variant rather sees the “negotiation” as something more akin to a zero-sum game.
- 77.
The clause at the heart of the dispute in Amoco International Finance Corp. v Iran was similarly headed “Applicable Law” and was found not to be a stabilisation clause, but that clause expressly protected the contractor only from the “provision of any current laws and regulations which may be…inconsistent with” it. See the discussion in Maniruzzaman (2007), p. 24.
- 78.
Great Socialist People’s Libyan Arab Jamahiriya, Model Exploration and Production Sharing Agreement, 2006.
- 79.
“The Contractor shall not be subject to any legislative provision which would give rise to an aggravation, whether directly or indirectly, in the charges and obligations arising from this Contract and from the legislation and regulations in force on the date of signing this Contract, unless as mutually agreed upon by the Parties.” Islamic Republic of Mauritania, Model Production Sharing Contract, 1994, Unofficial English Translation, Article 27.3 (Applicable Law and Stability of Conditions).
- 80.
“No provision may be applied to the Contractor the purpose of which is to directly or as a consequence thereof increase the charges and obligations deriving from the systems mentioned in Chapter 7 of the Oil Code, as these systems are defined by the legislation and the regulations in effect as of the date this Contract is signed, without prior agreement of the Parties.” Hydrocarbon Exploration and Production Sharing Contract between the Republic of Senegal and Petro-Tim Limited and Petrosen, note 66, Article 33.3.
- 81.
“If at any time or from time to time there should be a change in legislation or regulations which materially affects the commercial benefits afforded the Parties under this Contract, the Parties will consult each other and shall agree to such amendments to this Contract as are necessary to restore as near as practicable such commercial benefits which existed under the Contract as of the Effective Date.” Federal Republic of Nigeria, Model Production Sharing Contract for 2005 Bid Round, Clause 27.3 (Changes in Legislation).
- 82.
“Without prejudice to other rights and obligations of the Parties under the Agreement, in the event that any change in the provisions of any Law, decree or regulation in force in the Republic of Angola occurs subsequent to the signing of this Agreement which adversely affects the obligations, rights and benefits hereunder, then the Parties shall agree on amendments to the Agreement to be submitted to the competent authorities for approval, so as to restore such rights, obligations and forecasted benefits.” Sonangol, Model Production Sharing Contract, December 2007, Article 37(2) (Double Taxation and Change of Circumstances). Note that insofar as this contract is designed to be entered into by the state oil company rather than the government, Sonangol can only undertake to present any agreed alterations for approval to the competent authorities.
- 83.
“In the event of changes in circumstances from those existing at the Effective Date, that have a material effect on the terms of this Agreement, either NOCAL [the state company] or the Contractor shall at the request of the other consult together. If it is established that such Profound Changes in Circumstances have occurred, then the Parties shall effect such changes in or clarifications to this Agreement that they agree are necessary. The Parties shall meet in good faith to make the necessary revisions and adjustments to the Agreement in order to maintain such expected economic benefits to each of the Parties, provided that the economic benefits to the Parties shall not be reduced as a result of exercising the terms of this article”. Republic of Liberia, Model Production Sharing Contract, October 2007, Article 36.3 (Stability of Conditions).
- 84.
“If after the effective date of this contract the economic benefits of a party are substantially affected by the promulgation of new laws and regulations, or of any amendments to the applicable laws and regulations of Kenya, the parties shall agree to make the necessary adjustments to the relevant provisions of this contract, observing the principle of the mutual economic benefits of the parties.” Republic of Kenya, Model Production Sharing Contract, 2008, Clause 40(3) (Governing Law).
- 85.
“In the event that after the Effective Date of this Agreement the economic benefits to be derived by a Party from the Petroleum Operations under this Agreement are substantially affected by the promulgation of new laws and regulations or of any amendments to the applicable laws and regulations of Ethiopia and if the affected Party so requests, the Parties shall agree to make the necessary adjustments to the relevant provisions of this Agreement, in order to ensure that the affected Party is restored to the same economic condition it would have been in if such change in the applicable laws had not taken place.” Federal Democratic Republic of Ethiopia, Model Petroleum Production Sharing Agreement, 26 August 2011, Section 16.1.3 (Governing Law).
- 86.
“In the event of changes in Petroleum legislation or in other Mozambican legislation affecting Petroleum Operations that may, individually or in the aggregate, create a material adverse effect to the economic benefits of the Concessionaire or to the Government in terms of this EPC, the Parties shall, as soon as possible after any of the above-mentioned situations occur, meet to verify and agree on the changes, in all cases, that may be required to the EPC in order to restore, as closely as possible, the economic benefits that the Concessionaire would have derived if the change in the legislation had not been effected.” Republic of Mozambique, notes 58 and 59, Article 27.13 (emphasis added).
- 87.
“If at any time or from time to time, there is a change in legislation or regulations which materially affect the commercial benefit afforded to the Contractor under this Contract, the Parties will consult each other and shall agree to such amendments to this Contract as are necessary to restore as near as practicable such commercial benefits which existed under this Contract as of the Effective Date.” Democratic Republic of Sao Tome and Principe, Exclusive Economic Zone Model Production Sharing Contract, March 2010, Clause 27(2) (Review/Re-negotiation of Contract and Fiscal Terms).
- 88.
“In case of changes in existing legislation or regulations applicable to the conduct of Exploration, Development and production of Petroleum, which take place after the Effective Date, and which significantly affect the economic interest of this Agreement to the detriment of CONTRACTOR or which imposes on CONTRACTOR an obligation to remit to the A.R.E. [Government] the proceeds from sales of CONTRACTOR’s Petroleum, CONTRACTOR shall notify GANOPE [the State Company] of the subject legislative or regulatory measure and also the consequent effects upon issuing legislation or regulation which impact on the stabilization. In such case, the Parties shall negotiate possible modifications to this Agreement designed to restore the economic balance thereof which existed on the Effective Date. The Parties shall use their best efforts to agree on amendments to this Agreement within ninety (90) days from aforesaid notice. These amendments to this Agreement shall not in any event diminish or increase the rights and obligations of CONTRACTOR as these were agreed on the Effective Date. In case of the parties’ failure to solve the disputes, Article XXIV of this Agreement shall be applied.” Arab Republic of Egypt, Model Concession Agreement for Petroleum Exploration and Exploitation, 2010, Article XIX (Stabilization).
- 89.
Republic of Cameroon, note 60, Article 29.
- 90.
République de Tchad, Note 62, Article 56.2.
- 91.
“No legislative or regulatory provision occurring after the Effective Date of the Contract may be applied to the Contractor which would have as a direct or an indirect effect to diminish the rights of the Contractor or to increase his obligations under this Contract and the legislation and regulations in force upon the Effective Date of this Contract, without the prior agreement of the Parties… However, it is agreed that the Contractor cannot, with reference to the preceding paragraph, oppose the application of the legislative and regulatory provisions which are generally applicable, adopted after the Effective Date of the Contract, in the matter of safety of persons and of protection of the environment or employment law.” Islamic Republic of Mauritania, note 41, Article 26.3.
- 92.
Ghana National Petroleum Corporation, Model Petroleum Agreement of Ghana, 2008.
- 93.
“As of the Effective Date of this Agreement and throughout its Term, the State guarantees Contractor the stability of the terms and conditions of this Agreement as well as the fiscal and contractual framework hereof specifically including those terms and conditions and that framework that are based upon or subject to the provisions of the laws and regulations of Ghana (and any interpretations thereof)”. Ibid, Article 26.2.
- 94.
“Where a Party considers that a significant change in the circumstances prevailing at the time the Agreement was entered into, has occurred affecting the economic balance of the Agreement, the Party affected hereby shall notify the other Parties in writing of the claimed change with a statement of how the claimed change has affected the relations between the Parties… The other Parties shall indicate in writing their reaction to such representation within a period of three (3) months of receipt of such notification and if such significant changes are established by the Parties to have occurred, the Parties shall meet to engage in negotiations and shall effect such changes in, or rectification of, these provisions as they may agree are necessary.” Ibid, Article 26.3 and 26.4.
- 95.
The Republic of Equatorial Guinea, Model Production Sharing Contract, 2006.
- 96.
Republic of Madagascar, Model Production Sharing Contract, Offshore and Onshore versions, 2007, Article 39(3)(d).
- 97.
République de Congo, note 68.
- 98.
Republic of Gabon, notes 34 and 35, Article 43.
- 99.
Government of the United Republic of Tanzania, Model Production Sharing Agreement, October 2008.
- 100.
It is worth noting that concerns on the part of government that it is the junior partner in such negotiations are not confined to developing countries. Tony Benn, Secretary of State for Energy in the late 1970s, states in an explanatory note in his diary: ‘Some oil companies are comparable in strength and wealth to national governments...As Secretary of State, I learned that relations between governments and oil companies were much like treaty negotiations’ Benn (1990), p. 3.
- 101.
- 102.
Desta (2016), pp. 140–141.
- 103.
See the extensive discussion in Maniruzzaman (2008), pp. 138ff.
- 104.
Given this observation, it is surprising that the link has not been more widely made. Only one example appears in the literature, as far as I am aware, in relation to contracts for diamond mining. See Bernstein (1992).
- 105.
Macneil (1983), p. 342.
- 106.
For a discussion see, Saliba (2001).
- 107.
Bordacahar (2018).
- 108.
- 109.
Ibid.
- 110.
Macaulay (1999).
- 111.
OECD Development Centre, Guiding Principles for Durable Extractive Contracts, Advanced Draft, available at: https://www.oecd.org/dev/Guiding-Principles-public-consultation.pdf.
- 112.
See Masnadi et al. (2018).
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Paterson, J. (2019). Production Sharing Agreements in Africa: Sovereignty and Relationality. In: Yihdego, Z., Desta, M., Hailu, M. (eds) Ethiopian Yearbook of International Law 2018. Ethiopian Yearbook of International Law, vol 2018. Springer, Cham. https://doi.org/10.1007/978-3-030-24078-3_6
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