FINANCIAL’INSTITUTIONS’ TRANSPORT’ … - Norton Rose.pdf · Mitigating Risk - Legal tools to maximizing ... • Due to supremacy of geology, a good petroleum regime ... –

FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORT TECHNOLOGY AND INNOVATION PHARMACEUTICALS AND LIFE SCIENCES

Mitigating Risk - Legal tools to maximizing the success of African petroleum investments

Trent J. Mercier Senior Associate - Energy Group Norton Rose Canada LLP June 19, 2012

Africa Oil & Gas Investments • Exciting Opportunities - Huge Potential! • Large existing production • Tremendous remaining opportunities

– many areas have minimal exploration

• Recent 'world-class' discoveries - 'Eastern El Dorado' (The Economist, April 7, 2012)

– Uganda (Lake Albert) – offshore Tanzania – offshore Mozambique

Norton Rose Canada LLP

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Petroleum Investment - Weighing the Risks • Oil and Gas investment is a high-risk

business •  ~1 in 10 exploration wells are successful

• Geology & fiscal regime "trumps" legal factors

• ….nonetheless, petroleum regime risks can have a significant impact on the valuation of a petroleum investment.


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Mitigating Risk - and Overview • This presentation will highlight:

– the key risks that may exist in a petroleum regime – the key risks frequently existing in African jurisdictions – the tools to mitigate these risks


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Norton Rose Expertise in Africa Oil & Gas • Norton Rose Canada has broad and deep expertise

– governments, – NGO's, –  financial institutes, – E&P companies, – service companies

• Co-prepared for APPA (African Petroleum Producers

Association) a comparative analysis of the petroleum regimes of its member states.

• Global Norton Rose platform provides additional expertise in

major centers in Africa, as well as in Europe and Asia


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Petroleum Regime: an Overview


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Constitution

Petroleum Law

Petroleum Regulations

Host Government Contracts

Legislative

Ministerial/ Regulatory

Ministerial/ Regulatory/ State Oil Co.

Four flavours of Host Government Contracts


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Key Features of the 4 types of HGCs • Concession - "tax and royalty regimes"

•  State transfers full mining title to IOC •  IOC owns the assets and has total management control •  State is entitled to: signature bonus, production royalty and corporate

income tax

• Production Sharing Contracts – State retains ownership of the 'unsevered' minerals –  IOC is a service provider and performs work approved by the State –  IOC compensated with 'in-kind' share of production –  IOC compensation is risk based – State is entitled to: signature bonus, share of net (profit) production

– no royalty or corporate income tax


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Key Features of the 4 types of HGCs (con't) • Service Agreements

– State retains ownership of the unsevered minerals –  IOC is a service provider and performs work approved by the State –  IOC compensated with a fixed fee (paid in 'in-kind') – State is entitled to: signature bonus, corporate income tax

– no royalty or production bonuses

• Joint Venture – State retains ownership of the unsevered minerals – State participates (through a NOC) in the petroleum operations

frequently its share of expenses (particularly during the exploration phase) is paid (carried) by the IOCs


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Key Features of the 4 types of HGCs (con't)


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• One more flavour….Hybrid

• Mix and match of different features to created blended flavours • Most common blended flavours include:

• State participation • Royalty • Corporate tax

Petroleum Regimes in Africa • Africa has preference for shared investor/state responsibility • …many classified as "PSC" regimes column should be

considered "hybrids"


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Requirements of a durable Petroleum regime • Due to supremacy of geology, a good petroleum regime

cannot attract investment … but it can avoid being a break to investment

• Requires a proper balance between States' and Investors •  7 standards of States •  3 pillars of Investors

• Absence of any of these jeopardizes the integrity of the petroleum regime

•  can result in change of initial terms and conditions, loss of interest •  can negatively impact share valuation, and divestment of investment


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7 Standards of States


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3 Pillars of Investors


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Pillar I: Right to Monetize • Right to conduct appraisal, development,

production, market (possibly export) and transport

• Right to transfer interest (all or partial)

• Government consents or approvals jeopardize this

– e.g. risks involved in obtaining the required approvals for development, production, export


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Pillar II: Stability •  Investor want assurances that terms and conditions which

investment is based upon will remain stable • The Problem of the "obsolescing bargain" • Fiscal stability is the most important but not the only issue

•  If the rules are changed there should be suitable compensation or adjustment to contract terms


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Enforceability of Stability provisions • Arbitration and litigation has established the validity of stability

guarantees – Agip v Congo, BP v Libya, – Kuwait v AMINOIL, – Liamco v Libya – TOPCO v Libya, – Amoco International Finance v Islamic Republic of Iran

• But these were all expropriation cases – There is NO known jurisprudence relating to economic re-balancing

provisions in cases of creeping expropriation for petroleum activities


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Pillar III: Enforceable Rights •  Investor will want to be able to enforce its rights

–  international arbitration is the norm for dispute resolutions

• Considerations • what type of international arbitration process applies • what law governs the contract? •  to what extent can local courts intervene in the arbitration? •  is the arbitral award enforceable? • has there been a waiver of sovereign

immunity?


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International arbitration and Expert Determination • Arbitration

•  LCIA •  ICC •  UNCITRAL •  AAA •  [sweden]

•  Enforcement of the Arbitral award •  ICSID •  New York Convention •  UNCITRAL

•  Expert DeterminaRon •  appoint an expert to seSle technical disputes

•  Investment TreaRes (BITs) Norton Rose Canada LLP

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How does Africa stack up?


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Africa - susceptible to certain of the key risks • Particularly susceptible to:

• Geopolitical risk –  ethnic tensions, border disputes – Coup d'Etat, change of government, riots,

war, civil unrest – corruption

– Resource nationalism – confiscation, expropriation, nationalisation

– Changes of the law

– change in legislation – unilateral modification of the contract – breach of contract

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Comparative of Petroleum Regimes in Africa • Norton Rose co-prepared for APPA (African Petroleum

Producers Association) - Comparative Study of the Legal and Contractual Framework of Hydrocarbon Matters Among Member Countries of the APPA

• Prepared recommendations for improving the regimes • main standards • best practices •  latest trends • balanced & attractive regime • model contract


Results of Comparative Study • Fiscal

– only 15 of the 34 countries surveyed have progressive systems that respond to price

– of those: – several have weak price progressivity; and – some are designed in a way in which encourages ‘gold plating’ (e.g.

Angola)

• Few have designed there system to accommodate

'unconventional' resources


Results of Comparative Study (con't) • Stability

•  Many do not have full fiscal stability •  Countries that do have full fiscal stability are Egypt, Eritrea, Ethiopia,

Equatorial Guinea, Morocco, Mozambique, Nigeria

• Administrative

– African petroleum regimes tend to be more complex than in most other regions, requiring sophisticated administration

– …yet many African jurisdictions have constrains on administrative ability


Reducing Risks - Mitigation Strategies • Due diligence

• Legal, Political, Financial

• …Others: •  Security •  Environment •  Local population •  Infrastructure


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Due Diligence: Legal, Political and Financial • Country information

– political history – current political situation – sanctions, embargoes, trade restrictions

• Understand the Petroleum Regime

– constitution, legislation, regulation, contract –  the rights of the State (e.g. back-into a development)

– on-going legislative initiatives (e.g. new regulations in Kenya)

–  land-use restrictions – marketing and export –  repatriation of funds


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Due Diligence: Legal, Political and Financial (con't) • Understanding other domestic laws

– customs, duties, imports, –  tax and accounting laws – corporations/companies laws –  labour laws

•  Identifying applicable registrations – mining grants, overlapping interests, liens, litigation, etc.

•  Effective corporate structuring

–  transfer restrictions, preferential rights, assignment bonuses –  tax planning


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Due Diligence: Legal, Political and Financial (con't) • Transparency and anti-corruption

initiatives – FCPA, CFPOA, Bribery Act – EITI

• Treatment of investors in the resource sector

– historical treatment –  recent pronouncements

• Accessing durability of the Petroleum Regime


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Anti-corruption is becoming a BIG deal!


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*Transparency International

Existing Interests - Extra Care Required • Understanding who your partners are is important!

• Additional due diligence is required on the existing and historical interest-holders (not just the predecessors)

• UK Bribery Act, 2010 can impute the actions of partners onto you.

•  this is new legislation, and its potential scope is still being established.


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… Other Due Diligence • Environmental • Security •  local populations •  infrastructure

Transparency InternaRonal

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Conclusion: Getting it wrong can be Costly! • Due diligence

–  legal – political –  financial – other

• Violation of sanctions, restrictions, anti-corruption laws may not

be fixable and may: –  result in delays or denial of public listing –  internal audits (costly and a distraction) – external investigations / prosecutions –  loss of potential joint venture partners or purchasers

• Can result in loss of value or can facilitate monetization


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Thank you for your time Presented by: Trent J. Mercier Energy - Calgary Norton Rose Canada LLP / S.E.N.C.R.L., s.r.l. 400 3rd Avenue SW, Suite 3700, Calgary, Alberta T2P 4H2 Canada T: +1 403.267.9435 | F: +1 403.264.5973 [email protected]


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The purpose of this presentation is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of [Norton Rose Group Contracting Party] on the points of law discussed.

No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any constituent part of Norton Rose Group (whether or not such individual is described as a “partner”) accepts or assumes responsibility, or has any liability, to any person in respect of this presentation. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of, as the case may be, Norton Rose LLP or Norton Rose Australia or Norton Rose Canada LLP or Norton Rose South Africa (incorporated as Deneys Reitz Inc) or of one of their respective affiliates.

Disclaimer


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Our international practice

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FINANCIAL’INSTITUTIONS’ TRANSPORT’ … - Norton Rose.pdf · Mitigating Risk - Legal tools to maximizing ... • Due to supremacy of geology, a good petroleum regime ... –