Papers and materials presented at the SOPAC-OIC

PAPERS AND MATERIALS PRESENTED AT THESOPAC-OIC HYDROCARBON

LEGISLATION AND POLICY WORKSHOPPort Vila, Vanuatu, 13-17 July 1992

Jon Rodd and Anna Elaisi (Eds)SOPAC Secretariat

February1993 SOPAC Miscellaneous Report 143

Prepared for: South Pacific Applied Geoscience Commission (SOPAC)Hydrocarbon and Training Programs

[3]

PREFACE

This report presents papers submitted by speakers at the Workshop on Hydrocarbon Legislation

and Policy for SOPAC Member Countries held at Port Vila, Vanuatu, on 13-17 July 1992.

Variations between the contents here and the Agenda arise where no written papers were

submitted.

No digital copies of some material were available, particularly the overhead presentations, and

these are included here as handed out at the Workshop.

The formal proceedings of the Workshop, including the conclusions and recommendations, are

presented in SOPAC Miscellaneous Report 140.

[MR143 - Rodd and Elaisi]

[4]

ACKNOWLEDGEMENTS

The Workshop was funded by Canadian International Development Agency and was supported

by The Commonwealth Fund for Technical Cooperation, the Oceans Institute of Canada, and

the United Nations Centre for Transnational Corporations

[MR 143 - Rodd and Elaisi]

[5]

CONTENTS

1. BACKGROUND

1.1 Present state of national oil exploration and objectives for theWorkshop (national representatives of Vanuatu, Solomon Islands,Cook Islands, New Caledonia, Fiji, Papua New Guinea, Tonga) 8

Attachment 1 - Status of legislation in Solomon Islands . . . . . . . . . . . . . . . 10Attachment 2 - Status of oil exploration in Papua New Guinea 17Attachment 3 - Status of hydrocarbon exploration in Tonga 27

1.2 Hydrocarbon potential of the South West Pacific, J.A. Rodd 31

1.3 Evaluation of oil and gas properties, W. Barclay 'j6

1.4 Overview of economics of the world petroleum industry, P. van Meurs 43

1.5 Developing legislation and policies for hydrocarbon exploration, R. Harrison . . . . 55

2. MINERAL RIGHTS OWNERSHIP AND JURISDICTION

2.1 Offshore hydrocarbon rights and boundary issues, I. Townsend-Gault 65

2.2 Customary rights and land ownership issues in Fiji, A. Qetaki 66

2.3 Mineral and petroleum resources ownership issues in Papua New Guinea,M. Yalapan 73

Addendum - Customary rights and offshore development inPapua New Guinea, M. Yalapan 80

2.4 National perspectives (national representatives of Tonga, Solomon Islands,New Caledonia, Cook Islands, Vanuatu) 81

Attachment 1 - Mining laws in New Caledonia 82Attachment 2 - Mineral rights in the Cook Islands . . . . . . . . . . . . . . . . . 85Attachment 3 - Custom rights and jurisdiction in Vanuatu 87Attachment 4 - General discussion 88

3. FISCAL REGIME

3.1 Concept of economic rent, P. van Meurs 90

3.2 Overview of government share of revenue: government objectives inchoosing revenue mechanisms, S. Siwatibau ..... . . . . . . . . . . . . . . . . . .. 109

3.3 Rovaltv, carried interest, windfall profits and production sharing,P. van Meurs 110

3.4 Outline of the fiscal regime of petroleum exploration and development inPapua New Guinea, R. Moaina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 118

3.5 Petroleum policy in Papua New Guinea, S. Dobunaba 121

3.6 Corporate tax, royalty and production sharing, P. van Meurs 133


[6]

4. LICENSING AND PERMITTING

4.1 Legal methods used in petroleum licensing, I. Townsend-Gaultand R. Harrison 156-157

4.2 Comparison of petroleum laws and regulations in SOPAC member countries,K. Havard 163

4.3 Legal aspects of model petroleum agreements, R. Harrison and I. Townsend-Gault169

4.4 Work Commitments, Ian Townsend-Gault 171

4.5 Safeguarding exploration commitments and assignments, R. Harrison . . . . . .. 172

4.6 Assessment of prospective licensees, R. Harrison " 173

4.7 Accounting and cost control, P. van Meurs 177

5. RESOURCE MANAGEMENT

5.1 Data management and promotion5.1.1 Data management and ownership, K. Havard. . . . . . . . . . . . . . . . . .. 1845.1.2 Promotion to oil companies, J.A. Rodd " 185

5.2 National oil companies: pros and cons, I. Townsend-Gault 187

5.3 Training and transfer of technology, P. van Meurs 188

5.4 Commercial development, R. Harrison " 189

5.5 Pipelines ownership, P. van Meurs 191

5.6 Safety regulations, R. Harrison 192

5.7 Work commitments and assignments under a petroleum licenceor agreement, C.W. Dundas " 194

5.8 Safeguarding petroleum exploration commitments, C.W. Dundas 200

6. NEGOTIATING WITH OIL COMPANIES

6.1 Negotiating with oil companies, C.W. Dundas 207

APPENDIX

List of participants 213


[7]

Section 1

BACKGROUND


[8]

1.1 PRESENT STATE OF NATIONAL OIL EXPLORATIONAND OBJECTIVES FOR THE WORKSHOP

National Representatives

Vanuatu

Vanuatu is at the stage where it can commence drilling. Legislation covering hydrocarbonactivities are in the process of being put before parliament. Thus, an important objective ofVanuatu at this workshop is to get as many ideas as possible for its legislation. Also, Vanuatu isa tax haven, with no tax laws and this makes it a very special case in the context ofhydrocarbon development. Discussion of this special situation is also an objective of Vanuatu atthis workshop.

Solomon Islands

Offshore exploration in the Solomon Islands began in 1969. There has been no field work inrecent years but a number of reports have been produced on the petroleum potential of theSolomon Islands and these reports identify 5 target areas. In 1987, the Petroleum Act wasenacted and regulations under this Act are still in draft form. The objectives of the SolomonIslands at this workshop are to obtain information on hydrocarbon legislation, resourceownership, resource management etc. Further details on the state on oil exploration in theSolomon Islands are set out in Attachment 1.

Cook Islands

The Cook Islands are an observer nation at this workshop, as it has no hydrocarbon potential. Itis therefore an objective of the Cook Islands at this workshop to listen to the development ofpolicies and law in other countries, particularly with regard to indigenous peoples rights inresources and ownership rights. The Cook Islands do have potential for development of offshoreminerals, with a focus on deep sea minerals.

New Caledonia

New Caledonia has existing mines and therefore legislation exists already. This legislationcovers mineral exploration and production. No petroleum has been found to date.

Fiji

Fiji's objectives at this workshop are to:

1. examine the rights of indigenous peoples and compare the policies of Fiji with the policies ofother South Pacific countries.

2. discuss fiscal policy3. conditions and clauses in an ideal petroleum agreement4. examine Fiji's legislation and identify deficiencies5. identify oil companies' corporate aims6. identify environmental and safety regulations which are internationally recognised.

Present petroleum activities in Fiji have concentrated in the shallow waters around Viti Levu.


[9J

Papua New Guinea

There has been petroleum exploration in PNG for the past 80 years, with the final reward beingthe discovery of oil and gas in commercial quantities which is now being developed andexported. This has created its own share of problems with regard to policies and therefore,PNG's objectives with regard to this workshop is to share experiences of member countries,both good and bad, so that they may learn from these experiences and to get advice onregulation and policy. A more detailed explanation of petroleum exploration and development inPapua New Guinea is set out in Attachment 2.

Tonga

Exploration in Tonga for 20 years. The first survey was done in 1970, resulting in the drilling of4 wells. In 1974, 3 more wells were drilled. After this, activity moved offshore, where 3 wellswere drilled. There was little activity then until 1984.

A more detailed explanation of the state of hydrocarbon activity in Tonga is set out inAttachment 3.

[MR143 - Rodd and ElaisiJ

1.1 Attachment 1 [10j

MINES AND MINERAL ACT, 1990

PETROLEUM ACT, 1987

Mineral resources in Solomon Islands is governed by two pieces of

legislation, namely Mines and Mineral Act 1990 and the Petroleum

Act 1987. Both Acts provide the general framework within which

these mineral resources could be exploited, so that the Solomon

Islands Government and its people (in this case the customary land

owners) could also enjoy maximum benefit in terms of foreign

exchange earnings, royalties and employment opportunities.

The early parts of the Acts deal with the administration aspects,

that is an Advisory Board is established in each case to advise the

Minister responsible for minerals on matters pertaining to mining

policies, which may requiregovernment approval or consideration.

Section 6 of the Petroleum Act, for instance, provides in general

terms the functions of the Petroleum Advisory Board. They advise

the Minister on the following matters -

(i} the terms and conditions attached to the grant and

renewal of licences;

...2/ cancellation of

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(li) cancellation of licences or terminating of agreement;

(iii) amount of royalty to be paid and the manner and

conditions of payment of any royalty;

(iv) terms under which the state or its agency may acquire

any interest in any venture for the recovery of

petroleum; and

(v) any matters which the Minister may from time to

time assign.

The next major issue is the issuing of licences. In both legislations

there are more than one licences that the Minister/Board may

issue. For instance, in the Mining Act, there are at least four

different types of licences which are issued in the form of licence,

lease or permit. Prior to issuing of any of these licences, the

prescribed procedure must be complied with and the prescribed

Iees paid. These licences, permits or leases when issued permit the

holder to perform certain acts within the confines of the legislation.

The Acts aiso provide for the appointment ,:.f insii~;:iars whose

main task is to ensure that the applicants are not in breach of the

...3/ conditions specified

[12]

for instance, provides for this. This provides for the creation of

Committees to be responsible for the administration of the Fund

or other funds that are established under the Act.

A similar provision appears in the Petroleum Act. Section 31

provides for the payments of royalties. However, section 41 gives

the Minister power to make regulation prescribing the amount of

any royalty to be paid and the manner of payment of any royalty.

Both Acts are quite general in dealing with the issue of royalties.

It is left to the Minister to regulate taking into mind the

prescribing circumstances.

I am of the view that this is a reasonable approach for two reasons.

The first is that, (circumstances may change and do change over a

period of tlrne., Secondly, changes may have to be made at some

later date, hence it is easier to change the regulation rather than

bringing an amendment Bill before Parliament.

Royalties, in our part of the world is a very sensible issue which

must be addressed properly. As stated above these technical but

sensible matters should be dealt with by regulation.

The latter part of the two Acts are, of course, the usual provisions .

.../5 There are three things

[13]

There are three things which I wish to deal with before I resume

my seat. They are the ownership of reefs, negotiation with land

owners and petroleum found beneath the surface of customary

land.

Ownership of Reefs

Customary land ownership in Solomon Islands include ownership

of coastal reefs. in respect to Petroleum Act, section 4 states, and

I quote ....

" 4. (1) Ownership of all petroleum existing in

its natural state in strata in Solomon islands,

including its offshore area, the bed and subsoil of its

territorial sea, its continental shelf and other area

declared under section 2 to be with the maritime

resource jurisdiction vests in the State".

The present law in Solomon Islands relating to the offshore is that

they are considered Crown land. (See section 10 of the Land and

Titles Act, (Cap.93)). Allardyce Lumber Company -v- Laore, (CC

64 of 1989).

Th· . 1 ••• th tradltl I' th- .IS, nowever, !S conrrary LO (.C common traer ronai view at«,

coastal reefs and coastline are or can be owned. There is I believe

...6/ a confusion between

[14]

a confusion between the concept of ownership and right of use. It

is held in the Allardyce case that claim of ownership over the shore

or coastal reefs must be proved. In most cases this is not always

easy, hence the Courts are always inclined to hold in favour of the

State.

Regardless of these long held notions ownership of mineral

resources vest in the state. The state has exclusive rights over

these resources. (Section 5 of the Delimitation of Marine Waters

Act 1978, defines the territorial waters of Solomon Islands, sections

2 and 3 of the Continental Shelf Act, 1970). So for the purpose of

mineral exploration and development, all mineral resources vests

in the state.

NeeotiatiQn with customary land owners

The Regulation provides for the procedure for negotiation, with

customary land owners. Where it appears that negotiation with the

land owners is. not going to be successful, the land may be

compulsorily acquired under section 70 of the Lands and Titles Act

and section 8 of the Constitution. The usual provisions for

compensation Ior damages are also there in the Act.

...7/ Finally, the issue

[15]

Finally, the issue of Environment is dealt with in the Regulation.

These deal with -

(a) Safety standards at the mining sites, and for workers,

(b) Waste disposal and treatment.

These are dealt with in more detail in the respective Regulations.

What do we seek to achieve in this Workshop

1. Obtain as much information from regional countries who are

some how advanced in their petroleum development and the

experiences of other countries;

.2. Uniform set of legislation dealing with petroleum resource,

in particular the regulation/subsidiary legislation, dealing

with the detail aspects of the subject matter;

3. How do regional countries especially Papua New Guinea

deal with the issue of royalties;

...8/ The relationship between

[16]

4. The relationship between the National Government and the

Provincial Governments in dealing with petroleum

development;

s. Relationship between Provinces;

6. Negotiation with Oil Companies; and

7. Involvement of the local population.

1.1 Attachment 2 [17]

INTRODUCTION

The highlight of current petroleum activity in Papua New Guinea has been the

export of the Nation's first crude oil from the Kutubu Petroleum Development

area of PDL-2 on 27 June 1992. The historic shipment of about 450,000 barrels of

oil was bought by Mitsubishi Oil Co. Ltd (MOC) for "refineries in Japan. MOC

also owns a 4.84% interest in the Kutubu Joint Venture through its subsidiary,

Japan (PNG) Petroleum. PDL-2 was granted on 10 December 1990 and consists

of 12 graticular blocks (each 5 minutes by 5 minutes) over the Iagifu/Hedinia and

Agogo oil fields' formerly of PPL 100. The oil fields are located onshore in the

Fold and Thrust Belt of the Papuan Basin (Figures 1, 2 & 3).

Other significant events have been the production of gas from the Hides Gas Field.• .~

in PDL 1 since December 1991, the declaration of a Location over the SE Gobe

prospect in PPL 56 irrDecernber 1991, and the completion of the Papua New

Guinea oil and gas reserves audit study in late June 1992.

The construction of the Kutubu export system was completed during early June

1992. It consists of a 261 kilometers long 20 inch diameter pipeline from the

Iagifu/Hedinia field to a marine terminal in the Gulf of Papua (Figure 4). "

N~minal capacity under gravity flow is 150,000barrels of oil per day. A further

capacity of up to 270,000 barrels may be obtained with the installation of one or

more pumps. Other major facilities are a Central Processing Facility where the

oil and gas are separated in a three train stabilization process, three 100,000

barrels tanks for temporary storage, and a mini-refinery to supply fuel foroperational needs.

In the Kutubu Project area ..oil is trapped and produced from Lower Cretaceous

and Jurassic age sandstone reservoirs in thrust faulted anticlinal folds, within "the

Iagifu/Hedinia and Agogo fields. The lower Cretaceous Toro Formation is the

[19]

primary reservoir, and the upper Jurassic Digimu sandstone member of the

Imburu Formation is the secondary prod ueing horizon. The total oil recoverable

is estimated to be about 200 million barrels .. Initial production commenced at

6,000 BOPD from the Iagifu/Hedinia fields. This will increase to more than

110,000 BOPD with addition of more wells in the field and production from the

Agogo field. Production may reach up to 128,000 BOPD early in 1993. To date,

a total of 19 development wells, 4 gas injection wells and 1 water injection well

have been drilled in PDL-2.

The Hides Gas Field in PDL-1 commenced production in December 1991. PDL-1

was granted on 27 September 1990 and consists of 7 blocks over the Hides Gas

Field discovered in formerly PPL 27 (now PPL 138). A total of 5.0 MMSCFD of

gas is being curently produced daily from on of two production wells.

Production will-berincreased up to 15 MMSCFD to generate about 60 mega-watts

of electricity for the Pogera Gold mine operations approximately 70 kilometers

northeast of Hides. The total gas recoverable is estimated to be about 1.4 TCF

and the total condensate recoverable is estimated to be 4.0 MMSTB. The gas

occurs in the Lower Cretaceous Toro Sandstone Formation.

Appraisal drilling of the SE Gobe prospect has been very encouraging with good.

results from two wells by Command Petroleum initially, and one well by the

MIM subsidiary, Barracuda Pty Ltd more recently. Oil was successfully tested

from the Iagifu sandstone member of the Jurassic Imburu Formation during Drill

Stem Tests and Production Tests at rates between 2500 and 8900 BOPD. In

November 1991, a Location was declared over the SE Gobe-1 and SE Gobe-2 oil

discovery wells by the Minister on the request of the Licencees. It is the intention

of the Licencees to commence the.study on the feasibility of developing the field.

The proximity of the field to the Kutubu Pe~roleum Project export pipeline is an

irnpo, rant factor for this potential development.

[21]

A hydrocarbon reserves audit study was completed in late June 1992 by Scientific

Software Intercomp (SS1) of 'Denver USA in conjunction with the Petroleum

Branch Department of Minerals and Energy, on 19 discoveries in the Papuan

Basin. SSI was commissioned by the Government through the Department of

Minerals and Energy in 1991 to audit the reserves determined by operating

companies, to provide information needed for planning of hydrocarbon

development, reserve management and budget purposes. The objective of the

study was to assess the quantities of the reserves and to investigate the economics

of further oil and gas development. All the discoveries are located in the Papuan

Basin. The reserves occur in Miocene reefs in onshore and offshore areas, and in

Cretaceous and Jurassic sandstone reservoirs in faulted anticlines of the Papuan

Fold and Thrust Bel t and the Foreland in the onshore area.

A historical account of Petroleum Activity in Papua New Guinea is enclosed as

Appendix 1.

EXPLORATION ACTIVITY

PAPUAN BASIN

The Papuan Basin is currently covered by 32 Petroleum Prospecting Licences, 2

Petroleum Development Licences, and 2 Pipeline Licences (Fig. 3). Two

applications are currently under consideration. Vacant areas are present in parts

of the Platform, the Foreland and the southeastern Fold Belt areas.

More recent exploration activity in the Papuan Basin has included appraisal

drilling in PPL 56 (SE Gobe-3) and PPL 100 (Gobe 2X); seismic data acquisition

in PPL's 94, 123 and 143; aeromagnetic and aerogravity data, acquisition in PPL's

173 and 76; Magn~~otei1urics (MT) data acquisition in PPL 56; and geological

surveys in PPL's 56, 76, 106, 101, and 100.

[24]

The wells in PPL's 56 and 100 were designed to appraise the Gobe/SE Gobe

Structure and delineate the extent of oil reserves in the Iagifu sandstone. The

Gobe 2X well is being side-tracked down-dip to investigate the potential of a

thicker oil column in the Iagifu sandstone after log evaluation of the straight hole

indicated gas with a possible gas-oil contact near the base of the sandstone unit.

One well is anticipated to be drilled later this year in the Papuan Basin.

Between August 1991 and June 1992 the following surveys were carried out:

a) 621 line kilometers of seismic data with a further 360 line kilometers of

data to be recorded later this year;b) 553 kilometers of gravity data with a further 5600 kilometers to be

recorded later this year;

c) 28 kilometers of MT data; andd) 171 kilometers of geological surveys with a further 95 kilometers being

currently surveyed.

NORTH NEW GUINEA BASIN

The North New Guinea Basin is currentlysubject to four Licenses (PPL's 120, 144,

145, & 146) (Figures 1 & 3). One application (APPL 150) was recently lodged for

acreage in the Aitape infra-basin, and one application is on offer (APPL 148).

The re-introduction of a reefal exploration play concept by Anderman/Smith in

PPL 120 spurred Mobil recently to obtain three areas (PPL's 144, 145 & 146) across

the North New Guinea Basin. This concept has been successfully pursued in the

Salawati Basin in neighbouring Irian [aya, Indonesia since 1970, and where over

400 million barrels of oil have been discovered. Anderman/Smith plan to drill

two wells to tes; two prospects laterth is year.

[25]

Mobil is currently conducting reconnais::;ance to semi-detailed geological surveys

in PPL's 144, 145 and 146.

OTHER BASINS

The other basins include Cape Vogel, Manus, New Ireland and Bougainville

(Figures 1 & 3). The Cape Vogel Basin is covered by one Licence (PPL 119), but

the others are all vacant. They are mostly offshore basins and located in deep

water areas.

DISCUSSION AND FUTURE ACTIVITIES

To date a total of 234 exploration wells and 19 development wells have been

drilled in Papua New Guinea. The number of exploration wells drilled in each

basin are, 181 in the Papuan Basin, 7 in the North New Guinea Basin, 2 in the

Cape Vogel Basin, and 1 in the BougainviIIe Basin. All the development wells

were drilled in the Papuan Basin. A total of about 73,351 line kilometers of

seismic data have been acquired up to July 1992. The amount of seismic data

acquired in each basin are, 55,621 line kilometers in the Papuan Basin, 7,000 line

kilometers in the North New Guinea Basin, 8,300 line kilometers in the Cape

Vogel Basin, 1,820 line kilometers in the BougainviIIe Basin, and 610 line

kilometers in the New Ireland Basin.

Exploration activity is anticipated to increase in the Papuan and North New

Guinea basins if the three wells which are planned to be drilled later this year are

successful. In 1993licence conditions require the drilling of at least 6 exploration

wells.

Development drilling will continue in the.Iagifur'Hedinla and Agogo oil fields in

PDL-2. Appraisal drilling will be conducted in POL-I, on the Hides Gas Field to

[26]

establish or otherwise ascertain the down dip potential of the Hides structure, and

on the SE Mananda and Gobe/SE Gobe oil and gas fields in PDL-2 and PPL 100

respecti vely.

Important future oil and gas developments include the possible development of

the Gobe/SE Gobe oil and gas field, the Mananda oil and gas field, and feasibility

studies on the possibility of a LNG project. A feasibility study on the possibility

of a Refinery with 30,000 to 40,000 BOPD was recently commissioned. Currently,

a Mini-Refinery is in operation at the Kutubu Petroleum Project area, producing

about 1,500 BOPD for the project operations.


STATE OF HYDROCARBON

EXPLORATION IN TONGA

by

Mr Saimone Helu* andMr Sione Tongilava*

Date: 10 July 1992

*Ministry of Lands, Survey and Natural ResourcesP.O. Box 5Nuku'alofaTONGA

[281

Introduction

As most of you may have known, the first exploration licence was issued in 1970n to a consortium of six

oil companies with Shell as the operator. Two wells were drilled on land based on interpretation from

gravity and magnetic surveys. This agreement was terminated in 1974. In 1976, a second phase of

exploration was started when Webb Resources was given a licence.

Additional work was done and followed by three wells drilled also on land. In due course, the licence

agreement was obtained by Samuel Gary Oil Producer until 1984 when it was relinquished.

Following the above, the Tripartite cruises (Australia, New Zealand and the United States of America) I

and 2, and the Natsushima cruise, provided a regional multichannel seismic coverage to the south and

north of Tongatapu.

Recent Work and their Result

In the past few years, selected lines from Tongatapu land vibroseis data; 'Eua channel survey; and the

Tripartite cruises were processed.

Reinterpretation and publication of the result was followed by the staff of SOPAC and the Ministry of

Lands, Survey and Natural Resources.

[29]

As a result of this, numerous requests were made by different oil companies for the data that was

produced.

A poster display was also made based on this recent preprocessing and reinterpretation.

Most Recent Development

The Tonga ridge has been subdivided into six major block with 119 sub-blocks divided unevenly amongst

them. Two of these major blocks are taken by oil companies from Japan and United States of America.

One major block is being negotiated for by another Japanese company. The Ministry of Lands, Survey

and Natural Resources and the Commonwealth Fund for Technical Cooperation have just completed two

tasks on Tonga's hydrocarbon development:

(a) Publication on the hydrocabron prospectivity in Tonga entitled Paradise in the Pacific offers

Petroleum Exploration Opportunities - "Petroleum Prospects of the Kingdom of Tonga" was sent

to the Oil and Gas Journal magazine.

(b) Production of a promotional video, about 18020 minutes is in process and the final product

should be out by the end of the year.

[31 J

1.2 HYDROCARBON POTENTIAL OF THE SOUTHWEST PACIFIC REGION

Jon Rodd

Throughout the world the occurrence of oil and gas is limited to, and controlled by, a number ofdistinct geological provinces. In the South West Pacific there are two such provinces:continental fold belts (e.g. onshore PNG and New Caledonia), and island arc basins (e.g. Fiji,Solomon Islands, Tonga and Vanuatu). The petroleum potential of the continental fold beltprovince has been proven with the recent development of the Kutubu Field in PNG.

However, Fiji, Solomon Islands, Tonga and Vanuatu fall into the more geologically tantalisingisland arc province. Historically, the oil industry has paid very little attention to exploring theseprovinces, being attracted to areas of the world with more prolific oil reserves, and being drivenby the dogma that the petroleum potential of island arc provinces is unknown and therefore,assumed to be limited. Geological provinces with unknown hydrocarbon potential are termed"Frontier Regions" in the oil industry. In the SW Pacific island arc province, following thediscovery of oil seeps in Tonga in 1968, preliminary exploration was carried out by oilcompanies in the 1970's and 1980's in Fiji, Solomon Islands, Tonga and Vanuatu. Thoughwithout success.

The major oil exporting countries of the world are characterised by political instability. Theevents of the last twenty years in the Middle East, the worlds most prolific exporting region,have shown time and again that it is not possible for the rest of the world to rely on suchcountries for an assured supply of oil. Since the late 1980's, this has provided an impetus foroil companies to explore elsewhere, to establish reserves in more politically stable countries, i.e.in the world's Frontier Regions.

In exploring for hydrocarbons, the oil industry uses a cook-book approach - looking for a numberof essential geological ingredients:

* A source rock to generate the oil/gas* An area where the source has been, or still is generating oil/gas (called the "kitchen area")* A reservoir rock which can contain the oil/gas* A sealing rock that can retain the oil/gas in the reservoir rock* A special geological structure in the subsurface which can trap the oil/gas* The correct spatial relationship of source rock, reservoir rock and seal rock* The correct timing of events: deposition of source rock, reservoir rock and seal rock;

formation of a trap; generation and migration of the oil/gas into the trap.

Other important factors considered are technical constraints such as the water depth inoffshore areas (production technology is limited to a maximum depth of 1000 rn, and is usuallyless than 600 m); and the scope or number and size of possible traps.

In the SW Pacific region the table overleaf summarises our knowledge of the essentialingredients for oil and gas.

From this very simple summary it is evident that, in addition to onshore PNG which has provencommercial oil, Fiji and Tonga have the best potential for hydrocarbons in the region. Inevaluating the potential commercial value of any country, oil companies assess the risks ofassociated with these factors against the potential reward represented by the size and numberof identifiable traps.


Petroleum prospects of Fiji

Most petroleum exploration in Fiji has been directed towards the shallow-water sedimentarybasins around and extending onto Viti Levu, the Bligh Water and Bau Waters Basin. A largeamount of commercial multi-channel seismic-reflection data has been acquired across thesebasins since 1971. Commercial and non-commercial reconnaissance geophysical surveys havealso been conducted across other sedimentary basins in Fiji, including the deep-water Suva andBaravi Basins and basins around Vanua Levu and on the Lau Ridge. Five deep wells were drilledoffshore and on Viti Levu from 1980 to 1982. All the wells were dry, although some had minorshows of gas and oil fluorescence. The Lower to Middle Miocene shallow-water limestones,which were the primary targets, were not encountered.

Up to about 4 km and 2 km of Late Miocene and younger strata are present in the Bligh Waterand Bau Waters Basins, respectively. The sedimentary sequences off Viti Levu are cut by largefaults, and pre-Pliocene rocks are affected by folding which is locally quite intense.

Source rocks have been identified in the deep wells and in tests of outcrop and stratigraphicborehole material from Viti Levu and Vanua Levu. Anomalous amounts of pentane in seabedsediments off northern Viti Levu suggest that some thermogenic hydrocarbons have beengenerated. Information on subsurface reservoirs is sparse, but limestones are generallyconsidered to have better reservoir potential than coarse volcaniclastics and are the moredesirable targets.

Late Miocene and younger sequences contain numerous structurally formed potential traps, andseveral Pliocene reef-like seismic mounds also occur in the western Bligh Basin and formpotential traps.


[33J

Petroleum prospects of Papua New Guinea

Papua New Guinea is a Western Pacific nation with a large combined population of 3,200,000.Total land area is 462,240 sq km of which the mainland forms over an estimated 80%. Thewaters covering the EEZ comprise 3,120,000 sq km.

PNG can be conveniently described as forming two tectonic units, the SW mainland which isthe leading edge of Indo-Australian plate, this being sutured to a complex combined mobile beltand several island arcs which are still tectonically active.

There are six large sedimentary basins. Intensive exploration and production developmentcontinues in the continental mainland Papuan basin where oil seeps were discovered in 1911.The first oil production commences in late 1992 with export of up to 125,000 barrels per dayfrom the Kutubu Field. Proven reserves are estimated to be 200 million barrels.

There are five sedimentary basins: of North Guinea, Manus, New Ireland, Bougainville and CapeVogel are relatively unexplored, with thick sedimentary sequences, much of which is in deepwater. However the shallow water margins of these basins could contain substantial reserves.Petroleum exploration and productivity in PNG is covered by comprehensive legislation beingwith all currently unlicensed areas being open for application. Extensive reports includingseismic survey data are available for inspection or purchase whether from the Government or itsagent, the SOPAC Petroleum Data Bank in Canberra, Australia.

Petroleum prospects of Tonga

The Kingdom of Tonga is a small South Pacific nation comprising 171 islands of which about37 are inhabited. The total land area is about 700 square kilometres, but the territorial waterscover about 700,000 square kilometres. Although much of this area is part of the PacificOcean, the main islands are the surface expression of a large NNE-trending ridge immediately tothe west of the Tonga Trench, that marks the boundary between the Pacific and Australia-IndiaPlates.

The Tonga Ridge is a large (60,000 square kilometres) sedimentary basin with significantpotential for hydrocarbon discoveries. Seismic data indicate a thick sedimentary sequence withpotential for mature source. Oil seeps on Tongatapu and seismic flat-spots are direct indicationsof hydrocarbons within the basin. Several reef structures are recognised which form untested"plays".

In the Tongatapu-'Eua area there is a close grid of currently reprocessed seismic data, with anuntested Eocene reef "play" located in the 'Eua Channel between the two islands. Drillingtargets can be located without the need for additional seismic data.

Elsewhere in the basin, a regional grid of seismic lines indicates potential for similar reefstructures and many fault blocks. Several large structures and many fault blocks. Several largeprospects are recognised, which require more detailed seismic coverage.

All reports and data, including a complete set of seismic tapes, are available at the Ministry ofLands, Survey and Natural Resources for inspection or copying.

Petroleum exploration in Tonga is covered by comprehensive legislation, which was amendedand brought up to date in 1985. There are two license holders at present. All other areas areopen for license; the Government of Tonga is keen to see a further phase of exploration.


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Petroleum prospects of the Solomon Islands

The total land area is about 24,000 sq km; New Georgia Sound, the great internal waterway,occupies about 39,000 sq km. Because of the country's dispersed nature, the adjacent seaareas covered by the Exclusive Economic Zone run to 1,290,000 square kilometres. The troughis divisible into three major basins - Shortland, Russell and Iron Bottom. There are three otherperipheral basins - Indispensable, Mbokokimbo/Nudha and Mborokua Basins. The maximumsediment thickness is over five kilometres thick, and ranges in probable age from Late Oligocenethrough Holocene.

The dominant sedimentary rocks are volcaniclastic. But carbonates are also present, especiallyalgal reefal carbonates. These bulk large in the stratigraphic column at times of relative tectoniccalm -Iatest Oligocene/earliest Miocene, late Early Miocene, Late Miocene, LatePliocene/Holocene. Along with antiforms, reef structures around the edges of the central basins,in water depths to 250 m, offer the best chances of petroleum discovery. This area of promiseis more than 20,000 sq km. As well, large areas of deeper water, to 800 m, contain anticlinalstructures, and very likely, more buried reefs.

About 25,000 km of marine survey have been traversed in Solomon territory, of which half iffair to excellent quality. The Tripartite multichannel surveys of 1982 and 1984 are especiallygood. Their results have been analysed and published and the survey tapes are available forfurther study and reprocessing.

The most prospective shallow water areas are:1. Mbokokimbo Basin and marine extensions, eastern Guadalcanal;2. flanks of Iron Bottom Basin, north of Honiara and between Guadalcanal and Florida;3. southwestern flank of the high between Florida and San Jorge Island (Santa lsobel) and,

possibly, the northeastern flank also;4. Manning Strait area between Santa Isabel and Choiseul; and5. parts of the shelf and upper slope area, Choiseul to Shortland Islands.

All these areas require additional seismic reflection surveying, before a full evaluation of theirpetroleum potential can be made. For some areas the work required is minimal.

Petroleum prospects of Vanuatu

The Republic of Vanuatu in the Southwest Pacific includes most of the New HebridesArchipelago, but not the northernmost islands (the Santa Cruz Group) which are politically partof Solomon Islands. The archipelago is the physical expression of the Cainozoic New Hebridesisland arc. The arc massif includes several large, axial intra-arc basins with large volumes ofsediment - Vanikolo, North Aoba and South Aoba basins. The margins of the intra-arc basins, inparticular the adjacent flanking sub-basins - Malakula, East Santo, and Big Bay have realprospects for petroleum. The geological and tectonic history of the arc suggests that thesesmaller basins are at least as old as the Neogene; they contain several thousands of metres ofsediment including reefal limestones. The persistent presence of such limestones in thesequences of the Western Belt gives rise to an attractive marginal reef limestone play. This playis associated with the margins of the basins where reef build-ups accumulated on horst blocksthat were part of an actively-faulted basement. Times of maximum reef growth were LateOligocene, Early and mid-Miocene and Pliocene.

The most prospective areas are along the western margins of the Malakula, East Santo, and BigBay basins. The southeastern flank of the Torres High is also prospective. A moderate high


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resolution seismic programme in shallow water areas could show the presence of economicallyviable exploration targets, especially reefs.

Vanuatu is a young, developing country. The government is concerned with exploiting andmanaging Vanuatu's natural resources for the benefit of its people. Vanuatu has a liberal taxsystem and can offer many inducements to a company with serious exploration intentions.

[MR143 - Rodd and Elaisil

[36]

1.3 EVALUATION OF OIL AND GAS PROPERTIES

W. Barclay

Oil and gas exploration and production is an investment situation similar to more normalinvestments such as starting a copra plantation, opening a fish packing plant or building atourist development. There is a basic equation for each of these involving the initial capitalinvestment, predicting operating costs, and determining a suitable rate of return for theinvestor. If there is any difference in the economic evaluation of these we shall see that it ispurely in the assessment of the generally higher risks involved, particularly in initial exploration.To advise management of the profitability of investments providing cash flow over a period ofyears, the exploration and production team consisting of petroleum geologists, geophysicists,engineers and economists conduct a series of evaluation exercises to:

1. Determine the area and volumetric extent of the oil and gas reserves as they are morecommonly known,

2. Determine the rate of production with reference to the size of the reserves, productioncapabilities, and any regulatory controls on such production,

3. Develop a cash flow, both before and after taxes, including the negative impact ofcapital and operating costs,

4. Assess the probabilities of the risks or possible failure, or put in another way, thechance of success,

5. Weight the economic analysis to take the risks into account,

6. Develop an expected risked monetary value, and

7. Find if the profit parameters fit in with the expected investment returns of the long-termbusiness plan of the company.

Area Evaluation

Exploration starts with an evaluation of a basin, determining first of all the chances of organic-rich source rocks being present in a "kitchen" which will convert these deposits to recoverableoil and gas, all of which requires a sufficient thickness of sediments and therefore a minimumdepth of burial (Table 1). It also requires the identification of suitable reservoir rocks which maybe generally classified into two types, sandstone or carbonates; whether these rocks havesufficient porosity ie. pore spaces between the grains, and permeability ie the continuity ofthese pores and therefore the ability of the fluid to flow laterally into a borehole drilled intothem. Lastly, traps containing reservoirs sealed over by impermeable rocks need to beidentified.

Prospect Evaluation

In the offshore, exploration initially consists of shooting a grid of regional seismic, gravity, andmagnetic lines to determine sedimentary basin outlines and depths. Where possible, onshorerocks believed to correspond to rocks offshore are collected and analysed for their suitabilityeither as reservoirs or as source rocks; the regional geophysical surveys will not identify any ofthese two important factors immediately but they will determine thickness of sediments and


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therefore whether oil and gas could be generated deeper than the oil and gas type of'windows', and they will also identify "play concepts", in other words the types of plays thatare likely to be uncovered by more detailed seismic. Generally the grid spacing of regionalsurveys is 10-20 km. Once interest is generated in a particular basin or sub-basin reconnaisancesurveys are undertaken with lines anywhere from 1-10 km apart. Once trap leads are identified,prospect-detailing grids of 1-5 km may be surveyed.

Field Evaluation

Once a discovery has been drilled, appraisal wells are drilled to determine the areal extent of thefields. In the most mature oil producing areas of the world 3D seismic is a common placereservoir evaluation tool. Although the costs are high, when compared with the very fargedrilling and production platform costs, these 3D survey costs are very reasonable. With suchsurveys and with a suitable number of appraisal wells on a new field, a three dimensional matrixof geological data can be determined equivalent to having the whole field encased in a cube andvolumetric calculations can easily be determined through computer models.

In other simpler situations, reservoir isopach maps are generated from 20 seismic maps, andvolcumes are calculated by multiplying the isopach intervals with planimetred cotons and addingall of these intervals together.

Reserves Evaluation

There are three basic methods for estimating oil and gas reserves. These are volumetric,material balance and production decline. In the early stages of exploration we are restricted tothe volumetric calculations, as the material balance and production decline reservedeterminations are based on actual production monitoring and continuous revision of ultimaterecoverable reserves. Volumetric reserves are simply calculations of the actual rock volumes,multiplied by the porosity ratio, reduced by the amount of calculated water content in the oiland gas, and the formation volume (shrinkage) and the recovery factors. The formula for gashas an additional corrective factor for compressibility of the variation of volum with pressurebetween surface reservoir.

Cash Flow, Profitability and Present Worth

The objective in determining the reserves is to be able to put them into economic forecasts ofproduction rates and revenue, applying all royalties and taxes, and discounting this future cashflow to give a total value backdated to either the year of production of initial investment.

Probabilities, Risk and Chance of Success

After performing all these calculations the geological, economic, and engineering team considerone further factor and that is the chance of success. In a development an assessment has to bemade of the individual chances of success of the presence of hydrocarbon, reservoir and traps.

One method of classifying the drilling risks has been developed by the American Association ofPetroleum Geologists, in the "Lahee System". When a well is licensed, it is fitted in one of fourexploration or two development categories giving a risk assessment of the type of drilling targetenvisaged.


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Engineers and Economists already risk-classify reserves by the quality and quantity of theinformation available on them, ranging from the lowest risk proven developed producing to"possible", and it is into this category that all frontier basin reserves should be placed.

As was seen in Table I, some of the things to be considered in each of these are whethersource rocks exist, whether the depth of burial is suitable enough to have a " kitchen" andwhether hydrocarbons generated there had migrated to the trap target area. The probability ofthe presence of a reservoir needs to be calculated and considerations here are not only suitablerocks, but whether suitable porosities or permeabilities prevail; in general geologists use aminimum cut-off value of 8% for sandstone because of lesser permeability, and 4% forcarbonates with greater permeability.

Lastly a target must have a trap and a seal. This may be simply the presence of a surfacestructure; failing that subsurface geological or seismic mapping will have to determine the typeof trap; structural or stratigraphic, if stratigraphic, clastic or reefal, or the trap may be acombination of structural and stratigraphic. Individual probabilities contribute to a final overallprobability in a commutative sense, that is they have to be multiplied together.

What must also be taken into account are the chances of the engineering side of the operationmeeting the investment specification, ie whether it will be on budget or over budget and intothis equation goes the quality of the equipment, the quality and quantity of labour, the qualityand quantity of material. The engineering probabilities are then multiplied with the geologicalprobability to give a final probability.

In Table II we give a generalised table of examples of three types of classifications of wells. Thehighest probability is obviously for a development well where hydrocarbons and reservoirs areknown in the area and the type of traps are already known. The chance of success therefore is58%, meaning that three wells in five will be successful and two dry. When we take intoaccount the mature operational capabilities of the area there is a 95 % probability that the wellwill be drilled on budget and the net chance of success of the development well is the 55%.

Even in a mature basin obviously the chances of finding a reservoir from an exploration welldiminish and that reduces the chance of success down to 32% or 1 in 3; with different depthsand types of rigs, the engineering chance of success is lowered slightly and it is estimated thatthis chance of success will be 28%.

For offshore exploration in a brand new area obviously there is a diminishing chance whetherthere will be hydrocarbons present. There may be an even lesser chance, that good reservoirswill be there. The chance of traps still remains fairly high because few targets will be drilledwithout seismic. Overall however, the chance of success in this case drops to 10% or 1 in 10and again with less certain engineering capabilities the risk is greater and therefore the chanceof success drops to 8%.

Tables III and IV illustrate a typical use of such probabilities to determine the best riskedexpected monetary value of a range of investment options. It should be recognised that cashflow, propability and risked monetary evaluations are still subjective and are only as good as thequality and quantity of input data.

In summary, oil and gas exploration and production are investment situations where the risksare generally much higher than those of routine investments which may be limited to suchsimple matters as market analysis and operating problem probabilities. The uncertainties aregreater, but with adequate data input to the equations involving actual reserves determinationsand prices, and information on the risk situation, there is no reason why oil and gas investmentscannot be attracted and cannot succeed.


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1.4 OVERVIEW OF ECONOMICS OF THE WORLD PETROLEUM INDUSTRY

Pedro van Meurs

The purpose of this presentation is to present an economic overview, particularly oriented tothe future and worldwide views. First, however, one needs to refer back to the oil crisis of1974. At that time, oil prices went up and there were predictions that the world would run outof oil and gas (Attachment 1). What actually happened was, in fact, that there was practicallyno growth in oil production and a large increase in oil reserves. People did not recognise thestrength of economic principles, such that when the price went up, the demand went down.Thus, despite the predictions of falling oil reserves, the world is actually in a better positionthan it was in 1974.

There are several main reason why oil demand was lower than expected (Attachment 2). Onthe basis of these reasons, one could predict that the trend of a low energy produced to GNPratio will continue in the next few years.

What are the energy expectations for the 1990s? (Attachment 3). Many of the centralisedplanned economies were traditionally great energy wasters. With the move away from acentrally planned economies in countries such as Russia and East Germany, there is greatpotential for energy saving. One could therefore predict that energy demands in those areas willdecline significantly and quickly during the next few years (Attachment 4). Strong increases ingas consumption will continue, as will the development of world gas markets Attachment 5.illustrates the main energy supply and demand trends. Energy supplies are coming fromeverywhere and there is an increase in gas production. One can therefore predict that oil priceswill not rise significantly in the next 10 years. In terms of what this means for oil, seeAttachments 6 and 7. As seen in Attachment 7, an increase in the capacity of OPEC is requiredto meet the predicted growth in oil demand. This will be difficult, given the uncertaintysurrounding Iraq.

There are major possibilities for different forecasts because there are a number of importantuncertainties (Attachment 8). For example, in answer to worries about global warming and theenvironment there are moves towards introducing fiscal measures such as a severe tax on anyuse of carbon. If introduced, this would significantly reduce the demand for all fossil fuels andcould result in a crash in oil prices. Other uncertainties include the embargo on Iraqi oil, increasein environmental regulation and increase in new technology. Some spectacular new technologymay make it more economical for countries to recover reserves which were previously tooexpensive or difficult to recover, such as deep sea reserves.

In terms of countries' negotiating positions with regard to their concessions, there has been aworld-wide increase in acreage availability (Attachment 9). Countries in which foreign oildevelopment was previous unwelcome, such as the Soviet Union, Eastern Europe, LatinAmerica, India and Burma have become much more accessible and available acreage haseffectively doubled in the last 10 years.

What does this mean? It means that the government "takes" are coming down (Attachment10). There is now a general trend to make fiscal packages more attractive to investment.Countries with a lesser government take become more attractive to oil companies.

It is clear that attracting investment in petroleum activities is now quite difficult and PacificIsland countries must compete in this difficult environment.

[MR 143 - Rodd and Elaisil

1 .4 Attachment 7 [50]

CONOCO FORECAST

OIL DEMAND 68 80 MILLION BOPD

OPEC 24 33 MILLION BOPD

* INCREASE IN CAPACITY IN OPEC REQUIRED

* SLIGHTLY HIGHER PRICES IN REAL TERMS


MAIN UNCERTAINTIES

* RUSSIAN SUPPLY

* FORMER CPE DEMAND

* CARBON - TAX

* IRAQ

* ENVIRONMENT

* WORLD ECONOMY

* TECHNOLOGY

- DEEP SEA

- HORIZONTAL DRILLING

- SEISMIC SURVEYS


SHARP INCREASE IN ACREAGE AVAILABILITY

-- EASTERN EUROPE, SOVIET UNION

-- VENEZUELA AND MEXICO ??

-- ONSHORE CHINA

-- PERU, CAMBODIA, BURMA, SUDAN, IRAN

-- DEEPER WATERS


GOVERNMENT TAKE WILL COME DOWN

-- SINCE MID 1980's THERE HAS BEEN A TREND TOWARDS A LOWERGOVERNMENT TAKE

** CANADA** UK** THAILAND** MALAYSIA** CHINA** COLOMBIA* * PHILIPPINES

-- TREND WILL CONTINUE AS A RESULT OF:

* * INCREASE IN ACR'EAGE AVAILABILITY* * SHORTAGE OF CAPITAL

-- PROFITS PER BARREL MAY INCREASE 50 - 100%IN A NUMBER OF COUNTRIES DURING THE 1990's

-- PARTICULARLY "SMALL" FIELDS AND DEEPER WATER MAYBECOME MUCH MORE ATTRACTIVE

-- CONSTANT MONITORING OF INTERNATIONAL PROFITABILITYIS IMPORTANT

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1.5 DEVELOPING LEGISLATION AND POLICIESFOR HYDROCARBON EXPLORATION

Rowland Harrison

This presentation will provide an overview of the process of policy development and theenactment of legislation for hydrocarbon exploration and production. It will set the context andidentify the forces at play.

It must be emphasised that development of petroleum licensing policy is and exercise injudgement and compromise. A government cannot impose terms on oil companies and mustusually compromise on its objectives. There is also no correct system of petroleum licensing.Some systems are more appropriate at different times in the evolution of a country's petroleumindustry.

The objectives of the host country (HC) and the international oil companies (IOC) are not thesame. They are fundamentally different and are often opposed to one another. The governmentof the HC must balance these objectives.

Attachment 1 is a list of some of the most common HC objectives. They include:

1. An assessment of Resource potential - is there lots of petroleum potential or is itunknown?

,

2. Maximisation of ultimate total recovery - this HC objective often suffers in negotiationswith IOCs, with the HC settling for short term benefits.

3. Reduction of reliance on oil imports - this has an impact on the HC's balance ofpayments.

4. Maximising revenue.

5. Developing national capability - at the beginning of exploration, the HC is almost entirelydependant on large IOCs, with their skill and expertise. Therefore, the objective is toregain control of their domestic industry over time.

6. Transfer of technology and expertise

7. Protection of the Environment

8. Balancing competing resource interests - this objective is particularly apparent in theoffshore, with the resource uses of oil and gas on one hand and fisheries on the other.

IOC objectives are, generally, much more straight forward (Attachment 2). The overallobjectives of the industry as a whole are primarily:

1. Profit

2. Access to supplies of crude oil

It should also be noted that individual oil company objectives will vary from time to time. Eachcompany has specific requirements as to the required rate of return and discount rate.They also have different risk thresholds. Some are more willing to take risks than others. Inaddition, the situation of the company is likely to be measured globally. A company will rank


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opportunities available to it on a global basis, particularly now, with the increase inopportunities world-wide.

As you can see, there is much concern with sharing the risk between the HC and laCs. Oilexploration is a risky business and therefore the government of the HC must seek anappropriate sharing of the risk. There are a variety of fiscal instruments for this purpose(Attachment 3). The principal fiscal instruments are feared to in Attachment 4.

Governments not only take money from the industry, but they also contribute to it in a numberof different ways. These include:

1. "tax expenditures" - where the government forgoes taxes payable by the laCs

2. direct financial contributions, such as grants.

All systems employ elements of more than one fiscal instrument (Attachment 5).

There is also the question of the "sovereignty:certainty spectrum". Governments of HCs wantto maintain their sovereignty. The industry wants to reduce uncertainty and limit its risk tomarket and geological factors. The more guarantees are given by government, the more itssovereignty is undermined.

Agreement must be reached somewhere between these two extremes, resulting in some sort ofbalance of objectives. Where the agreement is reached along the spectrum will depend on thematurity of the HC in exploration, the other opportunities available to the industry etc.

The point of agreement arises out of a negotiation process. It may be a structured series ofmeetings with the lac and/or it may be a less structured process where the industry at largenegotiates with the government at large. An example of this would be where the industry didnot take up any licenses, forcing government to review its policies. Aspects of this approachwill be covered in later presentations.


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Section 2

MINERAL RIGHTS OWNERSHIPAND JURISDICTION

[MR143 - Rodd and Elaisi)

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2.1 OFFSHORE HYDROCARBON RIGHTS ANDBOUNDARY ISSUES

Ian Townsend-Gault

International law sets out the basic rights of states over the territorial sea, archipelagic waters,the exclusive economic zone and the continental shelf. These rights are balanced by duties,such as conservation and the protection of the marine environment. The rights inhere in statesand do not depend on express claims or proclamations.

Offshore boundary-making is an important aspect of the creation of a regime for petroleumdevelopment. While most states have little problem in identifying areas over which theyexercise jurisdiction, most will also experience some problems in determining precise limits withopposite and adjacent neighbours. The problem is complicated by knowledge of the resourcepotential of an area, and by the fact that offshore boundaries may apply to fishing zones as wellas the shelf. The Convention on the Continental Shelf of 1958 suggests that in the absence ofagreement, the median line is the appropriate boundary between opposite states, and theequidistance line between adjacent neighbours, always bearing in mind special circumstances.There area number of other considerations, including natural prolongation (configuration of theseabed), equity, proportionality, and historic claims, which are relied on variously by states.However, state practice and recent third-party settlements suggest that equity andproportionality are dominant considerations; the United Nations Convention on the Law of theSea emphasises the need to achieve an equitable result.

There has been increased recourse to judicial settlement in recent years, but care should betaken in framing the question that the court or arbitral commission is asked to answer. It shouldnot be forgotten that the issue is not simply one of law: a boundary must serve a functionalpurpose.

The Law of the Sea Convention suggests that pending the resolution of a boundary dispute,states have the option of entering into provisional arrangements without prejudice to the finalresult. This may permit activities to continue in a disputed area. Finally, alternatives such asjoint development (such as between Malaysia and Thailand in the Gulf of Thailand) andAustralia and Indonesia in the Timor Gap) might be considered, as well as other regionalcooperation arrangements.


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2.2 CUSTOMARY RIGHTS ANDLAND OWNERSHIP ISSUES IN FIJI

Alipate Qetaki

Background

Fiji is comprised of 320 islands of which about 150 are uninhabited. The islands are scatteredover 90,000 square miles of ocean, but the total land area is only about 7000 square miles ofwhich the largest island Viti Levu with about 2137 square miles. The other islands are smallerwith most volcanic but some also of coral formation. Over 80% of Fiji's total land area areowned by native owners, but a good proportion of such land are under native leases while afraction of which has been acquired over the years by the state for public purposes.

Fiji is a multi-racial, multi-ethinic and multi-religious society with a total population of a little inexcess of three quarters of a million people. The majority of the population are Fijians (46%).

Fiji was a British colony following the Deed of Cession on 10th October 1874 when the highchiefs gave the Fiji Islands to Queen Victoria of Great Britain giving to the Crown all of thechief's subjects and lands conferring to the Crown Dominion, possession and sovereignty overthe lands and waters adjacent thereto and other waters including all reefs and foreshores.

As such Fiji was administered by the British Government as its colony and with it theintroduction of British law and its legal system. Fiji acquired full independent status within theCommonwealth of Nations in 1970, but prior to independence there were various stages of thedevolution of legislative powers to the colony by the United Kingdom Parliament, each wasgeared to developing the legislative and executive structure of Fiji in preparation for fullindependent status.

Fiji became a Republic on 7 October 1987 and has a written Consitution which waspromulgated on 25 July 1990.

Customary rights to land and fisheries

Issues of ownership of land and fisheries are important issues to native Fijians and I am sure toother indegenous peoples of the region and other parts of the world. Ownership of suchresources are regarded as a birthright. Discussions on such issues bring into focus the wholerange of emotional, cultural, spiritual and religious considerations. When one talks aboutcustomary rights one is referring to rights which have accrued over the years in accordancewith customs and habitual use. To a larger extent these rights have been recognised andexercised as a result of occupation, usage, practice and tradition. These rights reflect the longestablished habits or tradition of a society collectively. These rights are jealously guarded andprotected.

There are many different kinds of rights to land. the right to plant; to harvest; to gather wilddproducts; to cut timber; to fish in streams or lagoons or reefs and the right to imposerestrictions on the use of particular products or areas, to lease; to receive rental and the right toconfer benefits upon others.

In relation to native lands, the distribution of these rights within a land owning unit is governedby tradition, practice, custom and usage. But the determination of ownership of native lands ismade in accordance with statutory provisions under the Native Lands Act.


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The Act requires that native lands shall be held by native Fijians" according to native custom asevidenced by usage and tradition", and that -

..... "such lands may be cultivated, allotted and dealth with by native Fijians asamongst themselves according to their native customs and subject to anyregulations made by the Fijian Affairs Board, and in the event of any disputearising for legal decision on which the question of the tenure of land amongstnative Fijians is relevant all Courts of Law shall decide such disputes accordingto such regulations or native custom and usage which shall be ascertained as amatter of fact .... " (Section 3 - Native Lands Act)

Native customs and usage are ascertained by examination of witnesses capable of throwinglight on them. These are also decided on the basis of knowledge acquired from all areas of Fijiover many years as well as from the Council of Chiefs and other sources.

Ownership of native lands is not on an individual basis, but vests with the "native owners", thatis the mataqali or other division or subdivision of the natives having the customary right tooccupy and use any native lands. The determination of which piece of land belongs to whichsocial group is the responsibility of the office of the Native Land Commissioner who isempowered to do so after investigation in accordance with this statutory duties andresponsibilities under the Native Lands Act - (see Section 4). The Commissioner also keeps aregister of native land owners - Vola Ni Kawa Bula.

It is important to point out at this stage that there are three types of land in Fiji, namely,"Native Lands", that this lands which are neither State lands nor the subject of a State grant -(Section 2 Native Land Trust Act); "State Land" that is, all lands in Fiji, including foreshore andthe soil uner the waters of Fiji, which are for the time being subject to the control of the stateby virtue of any treaty, cession or agreement, and all lands which have been or maybethereafter acquired by or on behalf of the state for any public purpose - (Section 2 State LandsAct); and freehold land, and freehold land, and freehold land, that is land held in fee simple.

There are two institutions that are associated with native lands. The first is the Native LandsCommission which is established under the Native Lands Act whose role I have briefly describedabove.

Native Lands Trust Board and Native Lands Trust Act

Native lands are controlled and administered by a statutory board (The Native Land Trust Board)established under the Native Land trust Act to control and administer all native alnds for thebenefit of the Fijian people - (Section 4(1)), The Board is trustee for "the interest of all membersof every land owning mataqali from new born infants to the old and infirm and the interests ofunborn generations" - See Serupepeli Dakai and others vs Native Land DevelopmentCooperation and others (Supreme Court No. 543 of 1979).

The individual member of a land owning unit does not in law "own" any land in the sense thatthe word "own" and "ownership" normally convey. Individual members only have thecustomary right to use and occupy native lands. In law it is the Board which owns the land intrust for the native owners. Individuals who may have grievances against the Board cannotinstitute legal proceedings on their own, they can only do so under a class or representativeaction as they do not have any legal standing as individual members - See Dakai's case; Smithv Cardiff Corporation (1954) 1 or 210.

There is a general prohibition on the alienation of native land by its owners, whether by sale,


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grant, transfer or exchange except to the State. So native land may only be transferred to theState - Section 5(1). Any instrument purporting to transfer, charge of encumber any native landor any estate or interest on that land to which the consent of the Board has not been first givenis in law null and void or ineffective.

The Act is subject to the provisions of the State Acquisition of Lands Act, the Forest Act, thePetroleum (Exploration and Exploitation) Act and the Mining Act.

The Board is however emo grand leases or licences of portions of native land not included in anative reserve for such purposes and for such conditions as to renewals or otherwise as may becetermined from time to time. Leases or licences are issued by the Board in the name of theBoard and executed under the seal of the Board.

Any native land which is subject of a lease or licence cannot be validly transferred oremcumbered without the prior consent of the Board to any such dealing (Section 12).

Native owners receive rents and premiums and in cases of Forest licences, etc royalties inreturn for the alienation of their land. Such monies are distributed in accordance with a formulaprescribed under the Native Land Trust Regulations. But all income received on behalf of theowners are subject to a deduction of (25 %) twenty five percent as administration andmanagement costs to the Board. The balance are distributed in accordance with the prescribedformula.

There are two categories or classes of native lands namely; native reserve and native landoutside native reserve. The distinction is significant because the Board as trustee possessesdifferent powers over these lands depending on the class or category.

Native reserve lands are lands which had been set aside by Proclamation (Section 15) for thebenefit, use and maintenance of the native owners.

The Act generally prohibits the leasing or disposition of any native reserve land. But there areexceptions to this general rule. Firstly, this prohibition is subject to the provisions of the CrownAcquisition of Lands Act, the Petroleum (Exploration and Exploitation) Act, the Mining Act andthe Forest Act.

Secondly, native reserve lands may be alienated by way of a lease or licence by the Board tonative Fijians alone with the consent of the native owners. There are two major distinguishingfeatures between reserve and non-reserve native lands. Lands outside reserve, may be alienatedby way of lease or licence to any person without the necessity of obtaining the consent of thenative owners. Native-reserve land may only be leased to Fijians. As an exception such landsmay also be leased to the Land Development Authority "as if it were Fijian" (Section 16(3)).This is in recognition of the role of that authority in developing native lands and in assistingFijian developments generally.

Native reserve land may be de-reserved, that is, it could be converted to take it outside of thereserve category if good cause is shown and if the native owners consent to de-reservation.Dereservation could be for a specified period only or permanently. Such exclusion from reservehas to be published in the gazette. If the de-reservation is for a specified period, the landaffected resume its character and incigents as reserve land on the expiry of the period of de-reservation - (Section 17).

Native lands not in reserve and State lands may also be set aside as native reserve. This is donein situations where the President is satisfied that land belonging to a unit (mataqali etc) isinsufficient for the use, maintenance and support of its members. This is done by proclamation


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in the gazette. Land acquired for or on behalf of Fijians by purchase may also be set aside asnative reserve for similar reasons (Section 18).

The Board and any person acting under its directions or any servant of the Government may,for the purpose of the Act, have power at all times to enter upon any native land or to enterany premises or place on such land to carry out inspection.

Unlawful occupation of any native land is an offence and any person doing so is liable toimmediate eviction and to a fine of ($100) one hundred dollars or to both such fine andimprisonment.

Section 33 empowers the Minister for Fijian Affairs to make regulations not inconsistent withthe Act prescribing all matters which are required or are permitted to be prescribed for carryingout or giving effect to the legislation, and for prescribing the fees to be paid etc.

State Land and State Lands Act

State lands are controlled and administered in accordance with the provisions of the StateLands Act. Alienation by way of sale, lease or licence are made only in accordance with theAct. However, the President may set aside state land as native reserve (Section 18 Native LandTrust Act).

The Minister may after consultation with the Cabinet, sell portions of State land and make andexecute under the Public Seal of Fiji grants in fee simple of such lands - (Section 6(1).

A grant executed by the Minister does not confer any right to any precious metals, coals andminerals of any description including crude oil as defined in the Petroleum (Exploration andExploitation) Act - (Section 7).

All lands acquired or leased by the State are required to be in the name of the Director of Landsfor Fiji on behalf of the State.

There is reserved to the State the right to enter upon any land granted under the Act and at alltimes to search, dig for and carry away any such metals, coals or minerals.

The Director may, grant leases or licences of portions of State land for such purposes andsubject to such conditions as to forfeiture, renewals or otherwise as may be specified orprescribed - (Section 10). This power is exerciseable subject to the general or specific directionsof the Minister of Lands. The power is also subject to the restrictions imposed by the Act onthe leasing of the foreshore which is to have the approval of the Minister for Lands (Section21); and other restrictions or special condition sas to the purpose fo the foreshore lease.

A further restriction on the power of the Director of Lands to alienate State land by way ofleases or licenses is contained in Section 25 of the Act which require that the issue of certainlicences are to be subject to Ministerial approval. No such licence are to be granted without theexpress approval of the Minister.

Mining Act (CAP. 146)

The Mining Act is an Act to make better provisions relating to prospecting for and miningprecious metals and other minerals


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The term "minerals" is defined in Section 2 of the Act to include "precious metals", "preciousstones"; "earthy minerals"; radioactive minerals"; "coal" and" metalliferrous minerals" whichterms are also defined in the legislation.

In Fiji, all minerals of every description are reserved to the State. That is, all minerals in or underany land, whether the land is owned by the State, freehold or customary land held by theNative Land Trust Board for and on behalf of the native owners, are reserved to the State. Thetenure of the land does not alter the position, as this principal holds whether the land isleasehold, freehold or under a licence or unalienated. The reservation of mineral rights to theState cannot be alienated - Section 3(1).

The State has exclusive rights at all times "to search, dig for and carry away all such mineralsof every description", and for that purpose has the right to enter upon all lands throughout Fiji.The State's right of search and exploitation may be exerciseable by the State alone, or inconjunction with any other person - Section 3(2). Such rights of the State are exercise able bythe Director, an inspector or any authorised officer.

The Director is empowered to declare Government protection areas. Prospecting or mining in aGovernment protection area may be done only with the consent of the Director. The Directormay call for tenders for the right to prospect or mine in a Government protection area withconditions.

Wide powers of policing the compliance of the Act are given to the Director and inspectors (SeeSections 8 and 9).

Certain classes of land are closed to prospecting or mining or entry upon or occupation underany prospector's right or mining tenement. For example, any Fijian village, land used as burialground or set aside for any public purpose etc - (Section 11(1). The Director may still grant,subject to the approval of the Minister, a mining tenament in a closed area on terms andconditions to be stipulated and including conditions relating to prospective damage andcompensation.

When the grant of a mining tenament by the Director is dependent on the consent of owners ofsurface rights etc (See 11(a) to (i)) and consent is refused, that refusal may be appealed againstto the Mining Appeals Board whose decision shall be final.

The Director is empowered (Section 18) under the Act and subject to any general or specialdirections of the Minister to grant -

(a) prospector's rights;(b) prospecting licences;(c) special prospecting licences;(d) permit to mine;(e) mining leases;(f) special mining leases(g) special site rights and(h) road access licences

The rights granted under these instruments differ and so are their terms and conditions.

It is to be emphasised that the exclusive right of the State to search and to exploit minerals issubject to provisions relating to payment of compensation for damages to the surface of theland and improvements thereon.


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Petroleum (Exploration and Exploitation) Act

This Act makes provisions relating to the exploration for and exploitation of Petroleumresources and for purposes connected therewith.

All Petroleum resources in or under all lands within any designated area are deemed to alwayshave been the property of the State. That applies whatever the ownership of the land whetherit be State, freehold or Customary land under the trust of the Native Land Trust Board andwhatever the tenure attached to the land, leasehold, licence or fee simple - (Section 3).

The State has the full rights at all times to explore for or to carry out any operations for therecovery or conveyance of petroleum on or under any lands within a designated area which arenot subject of an exploration licence or production licence. This right can be exercised by theState alone or in conjunction with any other persn - (Section 4(i). This right is exerciseablesubject to adequate provision for compensation for any damages that may be caused to theland - see Part V of the Act.

Additionally the State has the full right at all times either alone or in association with or throughan agent to carry out petroleum exploration operations in the course of any scientificinvestigation and for that purpose to enter upon any lands within a designated area whethersuch lands are subject of any licence granted under the provisions of the Act or not. However,such operations lawfully carried out for the purpose of scientific investigation or for recovery orconveyance of any mineral, whether petroleum or not, or by way of contruction or operation ofa pipeline.

The State's rights above-described may only be exercised by the Minister or any person dulyauthorised by him.

What is a designated area? A designated area is an area which is covered by an order of theMinister given under subsection (2) of Section 3 of the Continental Shelf Act (Cap. 149). It isan area of a continental shelf designated under the order, the effect of which is that the Stateis exclusively empowered to exercise all rights pertaining to the exploration and exploitations ofthe natural resources with respect to that area of the Continental shelf - Section 3( 1) and (2).

The Continental Shelf Act is an Act to make provisions for the protection, exploration andexploitation of the natural resources of the Continental Shelf of Fiji and of areas within theterritorial limits of Fiji and for matters connected with that purpose.

Customary Fishing Rights and Fisheries Act

In 1874 when Fiji was ceeded to Great Britain both land and fishing rights were surrendered tothe Crown. But measures were subsequently taken for securing for each mataqali the reef thatproperly belong to it, in the same way as the rest of their land.

Protection of customary fishing rights had developed over the years and refined in response tochanging political social and institutional circumstances.

The Fisheries Act accords protection of native customary rights to "any area in which the rightsof any matagali or other division or sub-division of the Fijian people have been registered by theNative Fisheries Commission in the register of Native Customary Fishing Rights. The rightsprotected are the right to fish on any reef or on any kai (cockle) or other shellfish bed - (Section13).


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Fiji has its coastal waters or foreshore shared under a dual ownership system. The State ownsland beneath the sea (seabed) but the native owning units own the customary fishing rights.

Customary fishing rights ownership were mostly claimed by the "Vanua", a larger unit then themataqali or tokatoka. Such rights are required to be registered and kept in proper custody -(Sections 19 and 20).

Owners of fishing rights may claim for compensation (damages) for loss or dimunition of theright as a consequence of developments on the foreshore.


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2.3 MINERAL AND PETROLEUM RESOURCESOWNERSHIP ISSUESIN PAPUA NEW GUINEA

Melvin Ambudemi Yalapan

Introduction

Mineral and Petroleum resources in or under the ground are either privately owned by privateindividuals or publicly owned by the States. Whether the resource is privately owned or publiclyowned depends on the legal system and specific laws of the particular State.

Mineral and Petroleum resources in Papua New Guinea (PNG) are owned by the State as amatter of law. This however has been legally challenged by some private citizens andlandowners in whose land the resources are to be found. This Paper will not canvass the legalissues in this debate but will discuss the traditional land tenure and the law and policy issuesrelating to the ownership of Mineral and Petroleum resources to demonstrate that publicownership of the Mineral and Petroleum resources by the State is necessary to allow for theresource to be conserved and used for the collective maximum benefit of the people of thecountry and for the future generations.

It must however be said at the outset that the discussion on the issue of Mineral and Petroleumownership in this Paper is not concerned with the ownership of the resource emanating from acontractual disposition during negotiation. The isse in question here is the ownership of theMineral and Petroleum resources as they exist in the ground of the host country beforecontract.

State's ownership of Mineral and Petroleum Resourceas a matter of Law

All Mineral and Petroleum resources in PNG are, as a matter of law, owned by the State.

Section 7 of the Mining Act, Chapter 195 of the laws of PNG which provide that all Mineralresources belong to the State reads:

"7. Gold and Minerals Property of the StateAll gold and minerals in or on any land in the country are the property of the State. "

The Mining Act, Chapter 195 will be repeal and replaced with the new Mining Act, passed bythe National Parliament this year when the new Mining Act comes into force. But the legalposition in relation to the ownership of the Mineral resources, under the new Act will remainunchanged because the provisions of Section 7 of the Mining Act, Chapter 195 wassubstantially adopted in the relevant section of the new Act.

Section 5 of the Petroleum Act, Chapter 198 of the laws of PNG which vests the ownership ofthe Petroleum resources of the State reads:-

"5. Petroleum the Property of the State(1) Subject to this Act, but notwithstanding any thing contained in any other law or in anygrant, instrument of title or other document, all petroleum and helium at or below thesurface of any land is, and shall be deemed at all times to have been, the property of theState. "


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The legal position that all the Mineral and Petroleum resources are owned by the State isabundantly clear.

English Common Law

It may be appropriate, at this juncture, to cast the issue in its historic perspective.

The basic legal concept from Roman times is that, he who owns the land owns everything up tothe sky and down to the core of the earth.

The Common Law of Enqland'", subscribes to this EuropeanConcept that mines, quarries andminerals in their original position are part and parcel of the land. Consequently the owner of apiece of land is entitled to all that lies above the land right up to the sky and below the surfaceof the land right down to the center of the earth!". But the common law also allows certainexceptions to this general rule, thus mines of gold and silver belong to the crown. This wassettled as far back as 1567 by the Case of Mines'",

On the other hand, the ownership of Petroleum that exist in strata in England is vested, bystatute, in the crown'", This was done by the Petroleum (Production) A ct of 1934. The legalposition at common law which vested the ownership of gold and other precious metals in thecrown does not exist in relation to petroleum.

The State's ownership of the Mining and Petroleum resources in PNG exists independently ofthe common law position, by being entrenched as law under the provisions of the Mining andPetroleum Legislations.

Private Ownership of Minerals and Petroleum Resources

The concept of private ownership of Mineral and Petroleum resources in or under the land is theopposite of public ownership of these resources. It leads to the assertion of private ownershipof Mineral and Petroleum resources by individuals and allows for private development of theseresources for profit. This is particularly so with the United States and some other countries,although, even in the United States, ownership in the offshore petroleum resources is stillvested in the State.

The concept of private ownership to the Mineral and Petroleum resources had been canvassedand pursued in PNG both legally, by way of legal challenges to the State's ownership of theseresources and politically through public debate right up to the precincts of the NationalParliament. The proponents of this concept argue that customary land tenure recognises theprinciple that; he who owns the plot of land owns everything up to the sky and everythingdown to the core of the earth. Therefore Mineral and Petroleum resources in or under theground are owned by the customary landowners.

The argument was formally initiated in 1990 by Peter Doniqi'" in his personal case; PeterDickson Donigi -vs- The State (aS 267 of 1990). In the later part of the year, this was furtherpursued in the case Wapula Akipe, Simon Kambe and Others -vs- The State and Others (WS1067 of 1990) (the Mt Kare Case)

The State's ownership to the Mining and Petroleum resources was attacked legally, in thesecases, from various legal angles, mainly from the constitutional stand point; blended witharguments on the application of the adopted common law and customary laws, which are partof the underlying laws of PNG. The argument basically was, that Mineral and Petroleum


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resources are owned by the traditional customary landowners according to their customarylaws and traditional land tenure. They argued that, the Constitution never properly and legallydivested the ownership in these resources from the customary landowners, and accordingly, theprovisions of the Mining and the Petroleum Acts which vest the ownership in these resources inthe State are unconstitutional.

However, the cases were struck out on technical legal grounds. The substantive issue ofownership was therefore neither argued nor decided on and hence may re-emergy in some othercases in future.

Discussions of the issues involved in the cases are not within the scope of this Paper. It musthowever be said that the argument that Mineral and Petroleum resources are owned by thecustomary landowners according to custom is complex.

The Complexity of the Traditional Land Ownership Structure

Perhaps the threshold concept which is a pre-requisite to the appreciation of issues, as theyrelate to the traditional landowners, in the debate on the ownership to Mineral and Petroleumresources in PNG, it is submitted, is the appreciation of the complex traditional land tenure.

Over 97% of the land in PNG is customary owned by the traditional landowners whilst theState owns about 3%(6). The traditional customary land are owned mainly by different clans asopposed to individual ownership, and most, if not all of the mineral and petroleum prospectingand development activities currently taking place are on customarily-owned traditional land.

Customary land are held or owned by lineage, clans, and other landholding groups. In thisrespect, title to land is vested in the landowning group collectively as a unit and not in anyparticular member or members of the clan or landowning groupl7l.

Further in most cases, the traditional system of land tenure did not, before colonisation, providea clear cut, well defined land boundaries. The extent to which boundaries changed depended,inter alia, on tribal warfare and the need for access to land, depending on the changing size ofthe landowning clans.

Some land had seasonal land use, like the Mt Kare Alluvial Gold Mining, Special Mining Leasearea. People moved in and out of the area seasonally to collect pandanus nuts or for thepurpose of hunting possums, tree kangaroos and other animals. The seasonal land usedetermined the customary land tenure. This appears to be one of the cause of the problemsassociated with the development of the Mt Kare Alluvial Gold Mining Project'",

The pattern or incidence of traditional land use can prima facie, appear confusing. A piece ofland may be owned by a landowning group, but the usage thereof may be exclusivelyundertaken by individuals within the landowning group or by other groups. Such activities mayinclude gardening or seasonal hunting. Where the person or group of persons have plantedgarden or trees on the land, that person or group of persons may own the garden, the trees orother attachments which are created by his labour. Therefore, he who is responsible forimprovement or attachment on the land retains ownership of the improvement or attachment,as the case maybe.

The detailed incidence of customary land tenure vary from society to society, from onelandowning group to another in a zigzag manner like a cross word puzzle.

Mr Justice Brown in the case; Peter Dickson Donigi -vs- The State (OS 208 of 1990) expressed


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the complexity of the customary land tenure at page 3 of his judgement in the followingwords:-

"Land tenure of customary land in Papua New Guinea is like a many faceted jewel, giving adifferent face from every angle. The variances are multiplied for each clan may argue thattheir customary land holding relationships differ ever so slightly to those of their neighbours,(giving such custom its peculiar many faceted effect) while clans at opposite ends of thecountry may not have any similarities at all. But the thread in this diversity is the emphasison the interacting social relationship ".

In support of this statement, His Honour quoted substantially from anthropological materials assummarised in the Encyclopedia of Papua New Guinea, Melbourne University Press 1972 Ed, atpage 606 which advocates that the social and the economic process is embedded in the socialrelationship and property relations in general, and those involving land in particular are attributesof these social relationship. The general thesis drawn from these observations was that; socialrelationship determines land tenure and/or land tenure grow out of social relationship.

The decision in this case has been appealed against by the plaintiff, accordingly the Judge'sfindings in the case may be wrong, but the point I wish to make here is that customary landtenure is complex and vary from society to society. Given its variance and complexity,ownership to the Mineral and Petroleum resources according customary laws and customaryland tenure of a particular society is not, it is submitted, appropriate to the circumstances ofPNG.

Ownership of Resources under the Constitution

The issue whether the provisions of the Mining and Petroleum Legislations are unconstitutionalis, as stated, not under consideration in this Paper. But the Constitution does make specificdeclarations in the National Goals and Directive Principles in relation to the exploitation of theresources of the country,

The National Goal No. 3(6) of the National Goals and Directive Principles of the Constitution callon the State to take active measures, to control the activities of the major enterprises engaed inthe exploitation of the country's natural resources. National Goal No. 3(6) reads:

"3. NATIONAL SOVEREIGNTY AND SELF-RELIANCEWe declare our third goal to be for Papua New Guinea to be politically and economicallyindependent, and our economy basically self-reliant.

WEA CCORDINGLY CALL FOR"(6), the State to take effective measures to control and actively participate in the nationaleconomy, and in particular to control major enterprises engaged in the exploitation ofnatural resources ":

National Goal No, 4(1) which calls for wise use to be made of the country's natural resourcesand environment in the interest of the country's development reads:

"We declare our fourth goal to be for Papua New Guinea's natural resources andenvironment to be conserved and used for the collective benefits of us all, and bereplenished for the benefit of future generations ".

"WE ACCORDINGLY CALL FOR -(1) Wise use to be made of our natural resources and environment in and on land or

[MR 143- Rodd and Elaisi]

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seabed, in the sea, under the land, and in the air, in the interest of our development and intrust for future generations ",

The National Goals and Directives Principles are non-justiciable'", but they do as a matter ofgeneral principles call for the resources to be conserved and used for the collective benefit ofthe people of PNG and for the future generations. It is submitted that this principles andobjectives can be best achieved through publid ownership of these resources by the State.

Policy issues Relating to the Ownership of Mineral and Petroleum Resources

From the policy stand point, the concept of State ownership of the Mineral and Petroleumresources is of recent origin. It stems from the concept that Mineral and Petroleum resourcesare the country's natural resources and are national wealth and as such, the State must developand execute policies that will ensure that wise use is made of the natural resources andmaximum benefits accrue to the economy.

Further, gold and other minerals, and particularly so with oil, are strategic commodities. It cantherefore be argued that the State is the only authority that can properly manage thedevelopment and distribution of these resources for the collectie benefit of the people of thecountry.

The principal objectives of the State at a broader perspective, in involving itself with thepetroleum resources development are:

"... to secure an investment of risk capital and the technical and managerial skills ofmultinationals to carry out as thorough and as rapid an exploration of its prospective area asis reasonably possible, and upon any discovery being made to secure the necessaryinvestment and the necessary skills to develop the reservoirs discovered in a manner whichwill ensure maximum benefits to the national economy(11J".

The State, apart from ensuring that maximum benefits accrue to the economy from mineral andpetroleum operations is also the Licensor and Regulator of petroleum and mining operations inaccordance with the Mining and Petroleum Legislations. In this respect, it develops andexecutes policies for conserving the use and fair and equal distribution of, the natural resources.

Mining and petroleum operations are complex and require substantial high risk capital. Thecompanies operating in these industries are big multinational companies who in their desire togenerate and maximise profitability respect no national boundaries. The State with all theresources at its disposal still encounters many problems in regulating the controlling theactivities of these multinational companies. It is therefore questionable as to how thelandowners, if vested with the title to these resources, can properly and effectively police theactivities of these multinational companies. Indeed one can argue that the last thing nationStates, particularly third world developing countries would want to do is to vest the ownershipof the Mining and Petroleum resources in private citizens, particularly traditional landowners, asin PNG's case, who may not be in any position to control and regulate the exploitation of theseresources. The wisdom behind private ownership and control of the exploitation of Mineral andPetroleum resources, particularly in PNG, in therefore questionable from the policy perspective.

The foregoing translates into an important policy consideration namely; oil and minerals arestrategic resources with economic significance and as such form part of the national wealth.They must be exploited wisely for the collective benefit and welfare of the people. Only theState can effectively manage these resources for the maximum benefit of the country.


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Concluding Remarks

The debate on the question whether Mineral and Petroleum resources are owned by the Stateor the landowners that is debated in the press and pursued in the courts in PNG is a question oflaw. Accordingly the detailed legal arguments in support for or against the position was notdiscussed. But the policy issues entailed in the challenge to the State's ownership of theseresources are worth noting.

Oil and minerals are strategic commodities with economic significance and as such are part andparcel of the national wealth of the country. The only organisation that can properly andeffectively manage the resources for the maximum collective benefit of the whole country is theState. This is particularly so with Papua New Guinea.

Note:The content of this paper reflects the Writer's views and do not necessarilyrepresent the views of the Office of the State Solicitor.

FOOTNOTESThe Writer is a Senior Legal Officer in the Mining and Petroleum Section of the State Solicitor's.Office, Attorney-General's Department, Papua New Guinea.

1. The Common Law and Equity has been adopted as part of the underlying laws of PNG underSchedule 2.1 of the Constitution of the Independent State of PNG.

2. Halsbury's Laws of England; Volume 13, 4th Edition at page 17, para's 16 and 17.

3. Ibid, paragraph 17. The legal position originates from the old English case; the Case ofMines which has been referred to in Halsbury's Laws of England.

4. Halbury's Laws of England; Volume 35, page 660, paragraphs 1204 and 1208.

5. Mr Peter Donigi a prominent National Lawyer in PNG. He is currently PNG's Ambassador tothe EECbased in Brussels. In 1989 and 1990 he published a series of articles in the pressadvocating customary ownership of the mineral and petroleum resources in PNG. He alsopersonally instituted legal action in the National Court of Justice of PNG claiming that theMining and Petroleum legislations were unconstitutional. His legal action was dismissed onlegal technicalities.

6. R.W. James, Landownership in Papua New Guinea, University Press, 1983; page 20.

7. P. Eaton; Customary Dispute Settlement, Should Lawyers Be Kept Out; Melanesian LawJournal, Volume 11 page 47.

N.D. Oram "Land and Race in Port Moresby" (1970); 4(1) Journal of Papua New GuineaSociety - 5, 7-13; The Article deals with Motu Koita Land Tenure.

The statement is also true in the Writer's own society and also can be said to be generallysame in most societies in PNG. There are abundances of anthropological materials availableto support the statement.

8. The landowner problems at the Mt Kare Alluvial Gold Mining Project in PNG is created bythe complex landownership issue. Before the discovery of gold in the area people in and


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around the area moved in and out of the area seasonally to harvest pandanus nuts and forhunting possums, tree kangaroos and other wild animals. The discovery of gold in the areasparked off serious landownership issues which is fought politically and legally through theMt Kare Case. This clearly demonstrated by the fact that the Plaintiffs in the case weremembers of the Board of Directors of the very landowner company which was one of theDefendants in the case. The non-resolution of the landownership issues legally andpolitically has lead to the destruction of the mine by armed gunmen. The issues are stillunresolved.

9. The National Goals and Directive Principles in the Constitution of PNG are statements ofprinciples and are accordingly non-justiciable. They can only be used as and to interpret thesubstantive provisions of the Constitution and other laws but can not be used as a basis fora legal action.

12. Kamal Hossain, Law and Policy in Petroleum Development, Frances Printer (Publishers) Ltd.London; page 43.


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2.3 Addendum CUSTOMARY RIGHTS AND OFFSHORE DEVELOPMENTIN PAPUA NEW GUINEA

Melvin Ambudemi Yalapan

The government has done a number of things to give a fair shore of the revenue to thelandowners. Early in 1990, the government introduced the Development Package concept. Thisrecognised the wishes of the traditional landowners to actively participate in developmentactivities.

Before any major mineral or petroleum activity license is issued, traditional landowners, localpoliticians etc. consult with one another to discuss the infrastructural developments which willbe needed, such as schools, hospitals etc.

After negotiations, the parties enter in 2 agreements. One agreement is between the Nationalgovernment and the traditional landowners. The other agreement is between the Nationalgovernment and the provincial government where the minerals of petroleum is located. TheNational government relinquishes all rights to royalties. All royalties go to the provincialgovernment and the traditional landowners, with the traditional landowners usually receivingbetween 25-30 %. The National government collects its revenue from income tax.

There is also direct financial benefit from the National government to the provincial government,in the form of a special support grant. This grant is based on the output of the project in anyparticular year and is usually in the region of 1.25 %. Surface rentals and compensation for landdegradation go to the landowners.


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2.4 NATIONAL PERSPECTIVES:VARIOUS COUNTRY PAPERSAND GENERALDISCUSSION

National Representatives

Tonga

All land in Tonga is vested in the Crown. There are no customary land ownership rights. Tongahas a Minerals Act, Petroleum Act and a Petroleum Mining Act. The Minerals Act reserves tothe Crown all minerals.

Regulations under the Petroleum Mining Act have been enacted covering matters such as:• financial provisions, such as royalties• records, sampling, reporting by the company• rights reserved to the Government• reticulation of earth's surfaces• model exploration licenses• model petrol agreement covering such things as:

* the grant* royalties* pollution* rights of the government

Solomon Islands

90% of land in the Solomon Islands is customarily owned and therefore, any mining that takesplace is likely to take place on customarily owned land. Royalties are paid into a ConsolidatedFund, which is administered by the Minister of Finance and distributed to the landowners. TheMinister of Finance sets the level of payment to the landowners.

New Caledonia

See Attachment 1.

Cook Islands

See Attachment 2.

Vanuatu

Since independence, all rights in land are reserved to the indigenous customary owners. Landsextend to the bridging reefs and the waters beyond that are vested in the State. Land inVanuatu is not registered, so the concept of "landowner" is difficult to resolve. In terms ofpercentages of royalties, 40% goes to the National government, 40% to the landowners and20% to the Provincial council (see Attachment 3).


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2.4 Attachment 1 MINING LAWS IN NEW CALEDONIA

In New Caledonia, the hydrocarbon legislation comes under the jurisdiction of the Ministry ofIndustry in Paris. There is however significant differences in accordance with the exclusiveeconomic zone (EEl) and with the emergent islands and the bordering sea (12 nautical miles).The differences concern legislation and taxes.

Authority

DefinitionsThe influence zone of New Caledonia, on both the sea and the ocean which fringe the emergentlands that constitute the Territory, can be divided in three parts:

inland sea,territorial seaexclusive economic zone.

The limit between inland sea and territorial sea is made of "basal straight lines". This lines jointhe main headland of the territory. On the landing side is the inland sea (bights, gulfs, outh ofrivers ... ) and beyond lines is the territorial sea for 12 nautical miles. Offshore the territoral sealies the EEl for 188 nautical miles.

In New Caledonia, the "basal straight line" will be legalised by a decree.

AuthorityIn the whole New Caledonia's influence zone, Government keeps the authority to choose miningoperators whom the developing of hydrocarbon deposits will be entrusted.

To be recognised, this operators have to present technical and financial abilities and moralqualities.

Proceedings are quite different if rights are asked on the 118 miles of the EEl or on the NewCaledonia including emergent lands, inland sea and territorial sea:

• EEl: metropolitan (French) mining and taxes regulations are available;• emergent lands inland sea and territorial sea: a particular regulation for New Caledonia and a

local tax regulation are available.

In all cases, a company that asks to mine in New Caledonia must be incorporated under theFrench laws or under laws of a member of the EC.The law dictates rules on the nationality'sregulation of the managers and administrators of the company (members of the EC).

The EEZ regulations

Main dispositions of lawsThe first researches for hyrocarbon can be made under the" authorisation de propsectionprealable" (a preliminary research authorisation) that is a non exclusive right to research in alimited district. In this case, drillings cannot be more than 300 metres deep. An other operatorcan ask for an exclusive research permit and the "autorisation de prospection prealable" (APP)can be lapsed by that. However this authorisation has the advantage to be delivered morequickly.


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The other possibility consists in asking for an exclusive research permit which is called "permisH" that gives the exclusivity for research and allows to benefit from the production. If a depositis found, the "permis H" can be transformed into either a production permit ("permisd'exploitation") or a concession.

The "permis d'exploitation" is available for five years and can be renewed twice for amaximum of five years for each period. It gives a specific right for production.

Concession is available for a fifty years time period. At the end, the equipments are given to thegovernment.

TaxesThe grant for APP, exclusive research permit, exploiting permit and concession if free of charge.

Communal tax and departmental tax are fixed according to the production of hydrocarbons.

In New Caledonia those taxes are collected for the Territory.

Income taxes are levied on the industrial and trading benefit.

The Emergent lands, Inland Sea and Territorial Sea Legislation

Main disposition of lawsTo mine in New Caledonia, it is necessary to obtain beforehand a personal mining authorisation(APM) that fix the limits in which the operator can work.

When the company has obtained an APM, it can ask first for "permis de recherche A"(exclusive research permit) and then for production permits and concessions. It can also eitherbuy research permits owned by an other operator or lease production permits or concessions.

The "permis de recherche A" is available for a maximum of three years and it is possible torenew it twice maximum. This permit is attributed on the basis of working and financialprogram and its request competes with others.

The production permit is available for five years and it is possible to renew it four times (twentyyears maximum).

The concessions last maximum fifty years and can be renewed for a twenty-five year timeperiod.

TaxesTo obtain a "permis de recherche A", the petitioner has to pay a proportional tax according tothe surface: 60 XPF by hectare, more 2.000 XPF for the request.

For the other authorisations and permits, he has to pay the following taxes:• grant and renew of APM: 10.000 XPF• grant and renew of production permit: 8.000 XPF• grant and renew of concession: 6.000 XPF

Annually, two surface taxes are levied:• ordinary tax, the rate of which according to the surface, increases with the mining surface

owned,


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• the supplementary tax, proportional to the owned surface, decreases with the year byproduction of the petitioner.

Income taxes are also levied on the industrial and trading benefits. The rate is 35 %.

Environment

Before beginning of works (exploration and exploitation), miners will have to conduct anEnvironmental Impact Study (EIS). Today, Service of Mines and Energy supervises the miningactivity to prevent pollution. Strict working rules are enacted to protect the environment.Inland, protected zones either forbid mining activity or regulate it.


[85]

2.4 Attachment 2 MINERAL RIGHTS IN THE COOK ISLANDS

There are no specific mining or mineral rights legislations in the Cook Islands up to now. Therehad been no requirement to enact such legislations for "on land mineral deposits". The 15islands in the Cook Islands are small oceanic islands comprising of six "high" volcanic islands,two sand cays and seven low lying coral atolls. Their total land area is only 240 squarekilometres. There was some interest a few years ago in phosphate deposits and the governmentof the day was interested in issuing prospecting licences to a foreign company. Also someinterest were shown in buried (guano) phosphate deposits in atoll lagoons, and in "mud"volcanoes in deep offshore areas 20 nautical miles north west of Rakahanga Atoll in thenorthern Cooks on the Manihiki Plateau. These mud volcanoes turned out to be a field of extinctvolcanoes millions of years old and not the thermal mud volcanoes as envisaged; (ashydrocarbon potential). The large field of manganese nodules surveyed in the Cook Islands EEZhold the biggest potential for mineral resources in the country and exploitation of these deepsea minerals will be the focus of mining legislation in the Cook Islands in the future.

Cook Islands Legislation

The Cook Islands Act 1915 Section 419 limited the title to any land in the Cook Islands to bebounded by the mean high water mark (MHWM). All lands below MHWM are deemed to belongto the crown (state).

By virtue of Section 3 of Cook Islands Territorial Sea and Exclusive Economic Zone Act 1977the territorial boundaries of each islands in the Cook Islands extend to 12 nautical miles fromthe baseline around each island. This baseline is measured from the mean low water mark alongthe outer edge of the coral reef around each island, and all 15 islands in the Cook group arebounded by coral reefs.

Section 6 vests in the Crown (State) the seabed and subsoil of submarine areas bounded on thelandward side by the low water mark along the coast of all the islands and on the seaward sideby the outer limits of the territorial sea.

In essence therefore all mineral deposits on the seabed (e.g. manganese nodule deposits) and inthe subsoil of the inland waters and territorial seas are claimed or vests in the Crown (State).

Section 8 of the above Act sets out the boundaries of the Cook Islands EEZ as claimed by thecountry comprising all those areas of the sea, seabed, and subsoil that are beyond and adjacentto the territorial sea having their outer limits every point 200 nautical miles measured seawardfrom the base line desccribed in Section 5, and any part of the median line between the CookIslands and any other country is less than 200 nautical miles then that median line shall be theouter limit of the EEZ and not to be inconsistent with International Law.

So far the Cook islands had signed treaties with the government of the United States ofAmerica establishing the EEZ boundaries between the Cook Islands and American Samoa(1972) and with the French Government establishing the EEZ boundaries with French Polynesia(1984). The Cook Islands is at present negotiating with the governments of Niue; the Republicof Kiribati; and New Zealand on behalf of the Tokelau islands, treaties to establish our EEZboundaries with these countries.

Article 56 of the Law of the Sea Convention grants sovereign rights to coastal states in theirEEZ for the purposes of exploring and exploiting, conserving and managing natural resources,


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whether living or non-living of the waters superjacent to the seabed and of the seabed and itssubsoil etc.

Therefore, all mineral deposits on the seabed (e.g. manganese nodules deposits) and in thesubsoil in our EEZare claimed or vests in the Crown (State).

The Cook Islands Development Investment Act 1977 and Investment Code encouragesinvestments into the Cook Islands economy by foreign individuals and companies. Companiesand or individuals intending to invest in the Cook Islands makes application, under the Act tothe Development Investment Council which will process such applications. Details forinvestments, tax concessions and protection of the investments are detailed in the Act and theInvestment Code.

[MR 143 - Rodd and Elaisil

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2.4 Attachment 3 CUSTOM RIGHTS AND JURISDICTION IN VANUATU

The traditional concept of customary rights and its jurisdiction in Vanuatu may be similar sinsome ways to most if not all other Pacific Island states.

The instance customary right to land ownership usually meant a person's right to the land itself,and does not necessarily include his right to all things affixed to the land which may wellperhaps be owned by other persons not being themselves owners of the land. How far belowthe surface of the soil a person would claim customary right of ownership is something that hasnever been customarily defined.

Similarly, Customary land rights as to the ownership of land covered by sea and extending fromthe foreshore to beyond offshore reefs is customarily undefined although in some areas mostemphasis in this area is attached to customary fishing rights rather than rights to the landbeneath the sea.

Such is the concept generally of customary land rights and its undefined jurisdiction intraditional Vanuatu.

Since Vanuatu's attainment of independence, customary rights are being constitutionallypreserved and protected, hence Article 73 of Vanuatu's National Constitution which plainlystates -

"All land in the Republic of Vanuatu belong to the indigenous custom owners and theirdescendants"

In one way, the introduced law as opposed to customary law, has not only preserved andprotected customary rights, but it has also assumed the role of defining the extent ofcustomary rights jurisdiction.

Thus the jurisdiction to customary rights to land ownership under the Land Reform Act isdefined to include:

"the right to improvements affixed to the land and the right to the land underwaterincluding land extending to the sea side of any offshore reef but no further"

The right to land beyond any offshore reef and extending beneath the waters of the exclusiveeconomic zone is outside the purview of customary rights jurisdiction, and is by virtue ofSection 3 of the Mines and Minerals Act within the jurisdiction of the state of Vanuatu.

Although the land as defined above under the Land Reform Act is within the customary rightsjurisdiction, any minerals located therein are by virtue of Section 2 of the Mines and MineralsAct vested in the State of Vanuatu. The rights to any minerals in Vanuatu is therefore legallyoutside customary rights jurisdiction. But in the event that a potential site for some mineralmining is located within land that is subject to customary rights such as traditional fishingrights, traditional hunting rights etc ... may have to be seriously considered as these customaryrights are protected under Article 74 of the National Constitution of Vanuatu.


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2.4 Attachment 4 GENERAL DISCUSSION

Tonga

We enjoyed an informative discussion yesterday about the land tenure systems in PNG and inFiji. We are concerned that what our legal representative said about the Tongan land tenuresystem could be misconstrued, so I would like to clarify. Tonga is the remaining kingdom in thePacific and many people think that this means that it has feudal land system. The definition ofCrown land in the other countries is the same in Tonga, just with a different monarch. The landdoes not actually belong to the King. The land tenure system in Tonga is different from otherPacific Island countries because there is no common law or customary rights, but ratherindividual land ownership rights. The land belongs to the people.

It is therefore my recommendation that oil legislation should be for the people. It should bebased on the land and the land belongs to the people.

Papua New Guinea

There are a lot of areas in this industry to utilise concepts and available knowledge. There arecourses whereby participants can utilise expertise in the areas of petroleum economics and Ithink that countries should try an attend these courses. There is a lot of scope in Canada toobserve and to learn and some of our neighbouring countries should perhaps go and see forthemselves. Canadian experts can give more of an overview of their own domestic situationand the Pacific Island countries can utilise the Canadian experience.

Also, the PNG experience, in attracting investors to develop oil and gas activity is that thePetroleum Resources Assessment Project was started to gather all the necessary informationand data. This was done with the assistance of the World Bank and OPEC. Once all the rawdata was in, it was examined and used as a basis to produce promotional data. After this, thepromotional data was presented at seminars held all over the world, to attract international oilcompanies to come to PNG.


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Section 3

FISCAL REGIME


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3.1 THE CONCEPT OF ECONOMIC RENT

Pedro van Meurs

The concept of economic rent takes all the gross revenues generated and subtracts all costsand investments. The value of what is remaining is the economic rent.

Why is economic rent important? Oil and gas belongs to the owners of the land. After theinvestor has got a reasonable return on its investment, the owner of the land should get somebenefit. It is important to know what that benefit will be beforehand.

Another important concept is that of government take. This is a percentage of the economicrent. The higher the percentage, the more successful the government is in obtaining a fairshare. An example of what happens when the government asks for a 10% take is set out inAttachment 2.

This percentage is not constant. It depends on whether the type of field is small, average orlarge, or more precisely, whether the field is marginal or profitable.

Royalties are defined as a percentage of gross revenues and therefore the percentage ofeconomic rent varies according to the type of field.

A fixed royalty creates a system where the government take becomes less and less as the fieldbecomes more profitable. A fixed royalty is therefore and inefficient system to collectingeconomic rent (Attachment 3). It is known as a RegressiveRent Collection system. A moreprogressive approach is favoured, where the government take increases as the field becomesmore profitable. Attachment 4 illustrates a system with a tax on profit or a corporate incometax system. This type of system, with a flat rate of income tax creates an economic rentcollection system with the same percentage of take no matter what that type of field. This isknown as a Neutral Rent Collection system (Attachment 5). This is also not particularlyefficient, since the government could have collected much more on the larger fields. It is,however, not as regressive as the first approach.

Lawyers and Economists look at petroleum agreements quite differently. Economists areconcerned only with the dollars and the figures which are put in. For example, in Attachment 6three different types of agreement are illustrated which are, at least economically, exactly thesame, in terms of the government take.

Some countries have introduced special taxes to collect the maximum amount of revenue on. the larger, more profitable fields (Attachment 7).

What is meant by "marginal" and "profitable" fields? A marginal field could be anything. It is aneconomic definition, not a physical definition. One cannot say that 5 million barrels is a marginalfield. Profitability indicators must be attached, such as rate of return, profitability ratio etc.After that, you prepare a cashflow projection and then decide if the field is marginal orprofitable. Oil companies use a number of benchmarks to decide this point. One suchbenchmark is the currency in which you are working. For example, if you are working in $USD,a 15 - 20% return is typically considered to be marginal. 25 - 30% would be reasonablyprofitable and 50% and above would be very profitable.

This will change, depending on the currency you are working in. Discounting also has an effecton this. Each company has its own discount rate. It is an individual corporate decision, in whichsome companies use high discount rates and others use lower discount rates. There is no such


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thing as a universal rate. However, the higher the discount rate, the more fields will fall into themarginal category. There is a direct relationship between the discount rate and the number ofmarginal fields.

Marginality depends on a number of factors, including well depth, costs, oil prices, availabilityof markets etc. It is not an absolute concept.

The economic concept of marginality is the ratio of revenues coming in to costs being paid out.these concepts are different in different places and at different times. It will change as theamount of infrastructure increases. For example, once a pipeline is in place, the incrementalcost of the next field goes down and the definition of what is marginal may go down from 100million barrels to 10 million barrels, it which point it will be necessary to change the fiscalsystem (see Attachment 8).

Some countries have opted for a changing system of royalties or a Sliding Scale of Royalties(Attachment 9). How does the sliding scale work in terms of the government take? (seeAttachment 10). The government take may, in fact, go down because the sliding scale may notcatch up with a field that becomes very profitable.

As Attachment 11 shows, sliding scale royalties are also liked to the rate of production, so theycan be progressive or regressive. This is a "Hybrid" system and the amount of the governmenttake will depend on the circumstances.

There is a wide difference in the way in which companies make economic decisions. Wheninviting companies to invest in a host country, the government must be aware that differentsized companies react differently to economic circumstances. It depends on the risk profiles ofthe investment.

The government take could be any of those listed on Attachment 12. Some typical fiscalfeatures are set out in Attachment 13. Most countries want to have some kind of mixture ofthese features. Attachment 14 illustrates the government take of a fiscal system, combiningroyalties and special taxes with corporate income tax. This provides a mixture of features butdoes not provide as clear a picture as the individual features.

Attachment 15 shows a typical graph of an ideal fiscal system. For fields that are economically"dicey", the government take is at its lowest, to encourage activity. The government take goesup on the more profitable fields.

Administrative capability is important in the selection of a fiscal system (Attachment 16).

Examples of government takes in different countries, for onshore fields, are set out inAttachment 17. Why is the take so much lower in the United Kingdom? There are differentattitudes to government takes in developed and developing countries. For example, stimulatingeconomic activity is more important to the United Kingdom than it would be to a developingcountry which is looking for revenue. In the negotiation balance between the host country andthe international oil company, the developing country's government concentrates on maximisingits take, while the industrialised country is more concerned with keeping the industry going.



CONCEPT OF ECONOMIC RENT

Gross Revenues 100

Investments (20)

Operating Costs (30)

-----------------------

Economic Rent 50

(Operating Revenues)

* undiscounted

* discounted


GOVERNMENT TAKE OF A 10% ROYALTY

Small Field Average Field Large Field

Total Field Gross Revenues $100 MM $300 MM $1000 MM

Operating Costs $40 MM $100 MM $200 MM

Investments $40 MM $100 MM $200 MM-------------- --------------- ---------------

Operating Revenues $20 MM $100 MM $600 MM

Royalties (10%) $10MM $30MM $100MM

GOVERNMENT TAKE 50 % 30 % 16.7 %


100% -- - - - - - - - - - - -- -- - -,

GT

marginalRegressive GT FIELD profitable


LEASE

40% CORPORATE INCOME TAX

100% WRITE OFFS

PSC

40% PROFIT OIL TO NOC

100% COST RECOVERY

JOINT VENTURE

40% CARRIED INTEREST AFTER PAYOFF


GT OF A SPECIAL TAX

REVENUES 100 300 1000

OPERATING COSTS 40 100 200

INVESTMENTS 40 100 200

----------- ------------- -------------20 100 600

SPECIAL TAX 0 30 400

GOVERNMENT TAKE 0% 30 66.7%



GT OF SLIDING SCALE ROYALTIES

o - 5000 BOPD 10%

5000 - 10000 BOPD 15%

AT $20 PER BARREL

INCOME PER MONTS

- AT 5000 BOPD

5000 X 20 X 30 = 3,000,000

- AT 10,000 BOPD = 6,000,000


EXAMPLE MONTHLY GT

5000 BOPD 10,000 BOPD--------------------- ----------------------

REVENUES 3,000,000 6,000,000

OPERATINGCOSTS 1,000,000 1,500,000

UOP INVESTMENT 1,000,000 1,500,000-------------------- ----------------------

1,000,000 3,000,000

ROYALTY 300,000 750,000

GT 30% 25%


GT OF SLIDING SCALE ROYALTIES


GOVERNMENT TAKE COULD BE: * * PROGRESSIVE

** NEUTRAL

* * REGRESSIVE

** HYBRID


TYPICAL FISCAL FEATURES

* * REGRESSIVE FEATURES

-- RENTALS

-- FIXED ROYALTIES

* * NEUTRAL FEATURES

-- CORPORATE INCOME TAX

-- FIXED RATE PRODUCTION SHARING

-- FIXED RATE JOINT VENTURES

* * PROGRESSIVE FEATURES

-- FORMULAE ROYALTIES

-- CORPORATE INCOME TAX WITH UPLIFTS OR CREDITS

-- SPECIAL TAXES: PRT

SRB

RRT

-- ROR BASED FEATURES

** HYBRID FEATURES

-- SLIDING SCALE ROYALTIES

-- SLIDING SCALE PRODUCTION SHARING

-- CARRIED INTEREST PROVISIONS

-- WPT


GOVERNMENT TAKE OF A FISCAL SYSTEM

small average large

REVENUES 100 300 1000

OPERATING COSTS 40 100 200

INVESTMENTS 40 100 200---------- ----------- -----------

20 100 600

ROYALTIES 10 30 100

SPECIAL TAX 0 10 200

40% TAX 4 24 120---------- ------------ ------------

PROFIT 6 36 180

GT 70% 64% 70%

3.1 Attachment 15 [106)


PREFERRED FISCAL STRUCTURES

STRONG ADMINISTRATION:

- PROGRESSIVE

WEAK ADMINISTRATION

- HYBRID - PROGRESSIVE


TABLE 2. EXAMPLE OF GOVERNMENT TAKES OF ONSHORE OIL FIELDS(in %) (0% discount rate) (stand alone)

Oil Price $10 $25 $40Well Depth 1 km 3 km 1 kmField Size (bbls) 10 MM 30 MM 300 MMWell Productivity low medium high

MALAYSIA 97 95 96

INDONESIA 93 87 86

EGYPT *** 83 83

BOLIVIA * * * 77 57

ECUADOR 59 73 80

COLOMBIA 88 83 81

TRINIDAD 76 76 77

THAILAND 56 57 84

CHINA 78 77 80

TANZANIA 67 66 74

FRANCE 60 56 50

UK 30 30 77

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3.2 OVERVIEW OF GOVERNMENT SHARE OF REVENUE:GOVERNMENT OBJECTIVES IN CHOOSING

REVENUE MECHANISMS

Savenaca Siwatibau

In the Pacific, countries must try to design elastic revenue bases which can grow along with,and faster than, the economy. This should be an important objective of all Pacific Islandcountries, since they are not financially independent and are very reliant on aid.

Pacific island countries traditionally have very narrow bases to their economies. They are openeconomies, which are very heavily dependant on their exports and imports. They also have afragile external sector, since they must earn enough foreign exchange to pay for imports(foreign exchange reserves). If there are no foreign exchange reserves, countries must borrowforeign exchange. As mentioned above, there is a heavy dependence on foreign aid andremittances and therefore, it is important to try and diversify economies so that they are lessexposed to factors which are beyond their control and less dependant on aid.


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3.3 GOVERNMENT SHARE OF REVENUE:ROYALTY, CARRIED INTEREST, WINDFALL PROFITS

AND PRODUCTION SHARING

Pedro van Meurs

How do you decide what government share of revenue is appropriate for a particular country.There are two methodologies which are appropriate for the Papua New Guinea/Pacific are.

The first is the Comparative Method. Countries may look at other areas, such as SoutheastAsia, where there are the same kind of market conditions, and try and compare possible fiscalterms (Attachment 1). There is a large difference between the geology of Malaysia and thePhilippines, which are the two extremes of government takes for the Southeast Asia region.PNG's government take is currently in the 65 - 70% range, which is comparable to Thailand.For this reason, PNG received a lot of interest from international oil companies and got the bestpossible terms that is could get with those particular conditions.

The rest of the Pacific is probably somewhere behind the Philippines. The Philippines do haveproven oil fields and its government take is probably a little higher than the rest of the Pacificcould get. The geology must match the terms which a country is asking.

How do you determine these ranges of government takes? A Sensitivity Analysis is required.The main variables for this type of analysis are set out in Attachment 2. An illustration of thefigures for the onshore, concentrating on the first 4 variables, is set out in Attachment 3. Thesefigures can be put into the computer to calculate every possible permutation and combinationyou might encounter. Attachment 4 sets the possible combinations of what the company mightget in its rate of returns and Attachment 5 sets out the government take possible combinations.These tables can be discounted to any factor desired and on the basis of these tables, acountry can compare itself with any other country in the world.

The second method for determining the government take is Maximum Sustainable Risk (MSR),an economic variable to tie in geology with fiscal terms (Attachment 6). It is the number ofexploratory wells that can be drilled against the amount that should be made from the well.Why is MSR so important? Geologists think in terms of risk and express this "risk factor" inprobability terms. An illustration of an MSR table is set out in Attachment 7.

To summarise the position in PNG and the rest of the Pacific, PNG's government take is in the60 - 70% range, with MSR in the 10 - 30 range. Thus, PNG may be in a position to re-think itsfiscal terms and increase its government take to the 70 - 80% range. The rest of the Pacific hasMSRs in the 50 - 100 range and possible government takes in the 40 - 50% range.

I



LEVEL OF GT FOR PROFITABLE FIELDS

COMPARATIVE METHOD:

• MALAYSIA 90 - 93%

• INDONESIA 85 - 90%

• THAILAND 54 - 84%

• PHILIPPINES 45 - 55%

* SENSITIVITY ANALYSIS


MAIN ECONOMIC VARIABLES FOR SENSITIVITY ANALYSIS

• FIELD SIZE

• OIL PRICE

• WELL PRODUCTIVITY

• WELL DEPTH

• WATER DEPTH

• LOGISTICS

• SERVICE INDUSTRIES


FIELD SIZES

1, 3, 10, 30, 100, 300 MM BBLS

OIL PRICES

$10 - $15 - $25 - $40 PER BARREL

WELL PRODUCTIVITY

DEPENDS ON FIELD SIZE90% RANGE

WELL DEPTH

1 - 3 - 5 km


ECONOMIC SENSITIVITY ANALYSISRate of Return in current $ (%) Thailand


ECONOMIC SENSITIVITY ANALYSIS. Government Take in current $ (%) Thailand.Discounted at 0.00%


MAXIMUM SUSTAINABLE RISK

REVENUES 300

OPERATING COSTS 100

INVESTMENTS 100------------

EC RENT 100

ROYALTIES 30------------

NET 70

ASSUME WELL COSTS : 5

70MSR = ------- + 1 = 15

5


ECONOMIC SENSITIVITY ANALYSIS. Maximum Sustainable Risk, Thailand.Discounted at 15.00%

[118]

3.4 AN OUTLINE OF THE FISCAL REGIME OF PETROLEUMEXPLORATION AND DEVELOPMENT IN

PAPUA NEW GUINEA

Robin B. Moaina

This paper only provides an introduction to the Petroleum Act and the standard PetroleumAgreement as these will be described in more detail by my colleague. My address today focuseson the fiscal regime of the industry.

Petroleum Act

The Petroleum Act sets out the framework for exploration and development. The administrativeprocedures - enshrined in legislation - give the industry and other investors the predictability andstability they require for sustained exploration and for formulating long term developmentstrategies.

The Act establishes:

1. the State as the owner of the resources;

2. provides an application and approval process for Petroleum Prospecting Licences (PPLs),Pipeline Licences and Petroleum Development Licences (POLs);

3. the size and term of PPLs, POLs and Pipeline Licences; and

4. fees for licence applications and rental payments.

With respect to applications for a PPL, the Act requires the State to review the applicant'sproposed work program, track record and financial capability to carry out the program.

There is no bidding system for licence allocation and no signature bonus. However there is asubstantial bond or bank guarantee required at signature which may be forfeited in the event ofa Licensee failing to meet substantial work program commitments.

Petroleum Agreement

The second key element in the reg61atory regime is the Petroleum Agreement which is availablein standard form, but which can be modified if agreeable to The State. The PetroleumAgreement sets out in more detail the licensee's rights and obligations, and when executed,constitutes a legally enforceable contract between The State and licensee.

Fiscal Regime

The last key policy element is the fiscal regime. PNG's fiscal regime recognizes the particularrisks the industry faces in PNG as well as the risk inherent in the oil industry generally. Thephilosophy behind the regime is that the investor should have confidence that the tax systemwill provide for a return that is commensurate with the risks. The Taxation Act, the PetroleumAct and contractual arrangements between The State and industry define the regime for sharing


[119]

the benefits of production of oil and gas. Contractual arrangements include The State taking upto 22.5 % equity participation in a project on a carried interest basis.

1. Tax SystemTaxation has two components.

a) Petroleum Income TaxThis is a basic income tax levied on taxable income from petroleum operations. Tax rate is50% of net income defined according to normal concepts and usages. Income derived fromproduction is assessed as if it was the only income of the developer. This means thatdeductions are only available for expenditure on the project itself (with one minorexception) .

There are various allowable deductions that are applied to income derived from production.Briefly these are:

(i) Interest DeductionsInterest is deductible from taxable income during development and is capitalized andwritten off as a deduction over the life of the field according to provisions of the Act. Itis not deductible during the exploration phase ie. interest is excluded from allowableexploration expenditure.

(ii) Exploration ExpenditureExploration expenditure are deductible against income derived from a developmentlicence. Exploration expenditure incurred in unsuccessful prospecting licences may bedeemed to be part of expenditure on another exploration licence, provided they areincurred less than 11 years before the licence is cancelled or expired.

They are not deductible if incurred more than 11 years prior to the date of issue of adevelopment licence.

(iii) Allowable Capital ExpenditureAllowable capital expenditure is expenditure of a capital nature incurred in carrying onpetroleum operations associated with the project.

(iv) Accelerated DepreciationAccelerated depreciation provides significant relief from taxation in the initial years inthe life of a producing field. This is termed the INVESTMENT RECOVERY PERIOD and ends atthe end of the year when total cumulative petroleum income exceeds the initial capitalinvestment. There is no additional profit tax during this investment recovery period.

b) Additional Profits Tax or APtAPT is levied on assessable income (as defined under the Income Tax Act) after the end ofthe investment recovery period. It is imposed on the basis of cash flow and is payable whenaccumulated net cash receipts become positive. Net cash receipts consists of assessableincome (less certain deductions), minus the sum of:

(i) allowable capital and exploration expenditure and the cost of plant; and(ii) income tax paid.

Hence payment of APT is a function of the profitability of the project to the investor. It islevied once the investor has recovered his initial investment plus a 27% return. Theadditional tax is 50% of assessable cash flow after basic income tax and allows The Stateto take a relatively larger share of very profitable developments.


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2. RoyaltyA very low royalty rate of 1.25 % of the well head value of petroleum is paid to the ProvincialGovernment in which the project is developed. There are usually separate agreements betweenprovincial governments and landowners in the project areas concerning their respective share ofroyalty receipts and how much the Provincial Government should spend of its share within theproject area, and even what projects it should spend it on.

3. State ParticipationThe State reserves the right to take a 22.5 % carried interest in any petroleum development.This is paid for out of proceeds from the sale of The State's share of production according to anagreed formula.

4. Tax rebate system for infrastructure developmentThis is a new initiative of the Government announced in the 1991 Budget. Major petroleum (andmining) developers operating in PNG were concerned that Provincial Governments were unableto carry out infrastructure development in their provinces due to a lack of construction,engineering and planning capacity. This has caused problems with people (other than theproject area landowners) living in those provinces who feel that there are no benefits or themfrom major projects.

Mining companies offered to use their construction resources free of cost to the provinces tobuild infrastructure projects such as schools, roads, bridges etc for the provincial governments,but subject to being allowed a tax rebate against income tax payable. This will effectivelyrecoup direct costs involved.

Government amended the Taxation Act so that companies will be allowed to spend up to0.75 % of gross revenue in any year to fund such construction activity. The cost will berecouped out of tax revenue. In effect, the companies will construct projects on an interest-freebasis and the government will not repay them until the following year.

For the Kutubu Project, the approximate amount involved, at a rate of 0.75 % of gross revenue,is K6.0 million per annum. The projects to be constructed are to be jointly decided between thedeveloper and the National Government.

Summary

PNG's fiscal regime offers an environment which:1. is based on actual profits earned by private sector participants;2. recognizes the high cost and risks involved in exploration for oil in PNG by establishing a

generous threshold rate and allowing accelerated depreciation;3. is flexible enough to make less/profitable but still economically desirable projects attractive

to the private investor without complex and ad hoc adjustments specific to each individualfield; and

4. gives a larger share of profits in excess of 27% rate of return on capital invested to TheState while at the same time allowing oil companies to get a significant share of the profitsfrom exceptionally profitable fields.

3 July 1992


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3.5 PETROLEUM POLICY IN PAPUA NEW GUINEA- entering the development phase -

Sydney Dobunaba

Introduction

The subject of this paper is Petroleum Policy in PNG. The subtitle "Entering the DevelopmentPhase" is warranted because recent developments have, for most people, removed the lastdoubts about whether PNG will become an oil producer. Exactly how big when details are yet tobe determined, but the important consideration is that we can now with confidence except,plan and prepare for the entry of PNG into the league of oil exporting countries.

It is a credit to the perseverance of industry people in PNG, and the high level of technology inthe oil industry, that exploration actually took place in areas of PNG such as the SouthernHighlands, and that commercial production can be realistically envisaged from such remote andgeographically inaccessible areas. There is just cause for the industry to feel pride in bringingPNG into league with producing nations. After more than 70 years of struggle PNG and theindustry can confidently look forward to a very bright future.

The implications of petroleum development in PNG are enormous. It is quite possible thatgovernment revenues from petroleum production will exceed current total National budget.

The purpose of this paper is to present an overview of petroleum policy in PNG in the light ofexpected development activities. The sequence of topics will be:

1. Petroleum Policy Objectives - an historical look at policy formulation.

2. Petroleum Policy Framework - an examination, from an international perspective, ofPNG's petroleum legislation and contracts.

3. Implications and Issues of Petroleum Development - survey of the important effects(direct and indirect) of, and issues arising from large scale petroleum development inPNG.

4. Agenda for Petroleum Policy - an outline of future policy activity.

Petroleum Policy Objectives

Petroleum Policy really began in 1if76 with the tabling of a Government Statement of PetroleumPolicy and Legislation ("White Paper") which presaged the Petroleum Act of 1977, PetroleumIncome Tax legislation and the Standard Petroleum Agreement.

This White Paper was very thoroughly researched, with substantial input from the industry,petroleum consultants and international financial institutions such as the World Bank. Great carewas taken to learn from the experience of other countries.

The White Paper identified the following goals stated in the Constitution which are relevant forPetroleum Policy.

FOR PAPUA NEW GUINEA TO BE POUTICALLY AND ECONOMICALLYINDEPENDENT, AND OUR ECONOMY BASICALLY SELF-RELIANT:


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ANDFOR PAPUA NEW GUINEA'S NATURAL RESOURCESAND ENVIRONMENT TO BECONSERVEDAND USED FOR THE COLLECTIVEBENEFITOF US ALL:

as the following Directive Principles (also from the Constitution):

1. citizens and governmental bodies to have control of the bulk of economic enterprise andproduction;

2. strict control of foreign investment capital and wise assessment of foreign ideas andvalue so that these will subordinate to the goal of national sovereignty and self-reliance,and in particular for the entry of foreign capital to be geared to internal social andeconomic policies and to the integrity of the Nation and the People;

3. the State to take effective measures to control and actively participate in the nationaleconomy and in particular to control major enterprises engaged in the exploitation of ourresources;

4. economic development to take place primarily by the use of skills and resourcesavailable in the country either from citizens or the State and not in dependence onimported skills and resources.

5. the constant recognition of our sovereignty, which must not be undermined bydependence on foreign assistance of any sort, and in particular for no investment,military or foreign-aid agreement or understanding to be entered into that imperils ourself-reliance and self-respect, or our commitment to these National Goals and DirectivePrinciples, or that may lead to substantial dependence upon or influence by any country,investor, lender or donor; and

6. wise use to be made of our natural resources and the environment in and on the landand seabed, in the sea, under the land, and in the air,in the interests of our developmentand in trust for future generations.

These excerpts illustrate clearly the desire of Papua New Guineans to take an activeparticipation part in the petroleum industry and to be "in the driver's seat" with regard to itsoverall management and development.

The White Paper translated these Constitutional statements into the following 3-part statementof Petroleum Policy objectives:

1. To ensure the maximum financial benefit to the State consistent with allowing areasonable return to the foreign company.

2. To provide for direct participation by the State in oil and gas operations.

3. To provide for access by the State to part of any oil production.

The next section describes how these objectives are implemented in legislation and contracts.

Petroleum Policy Framework

By reading articles in the local press about petroleum policy in PNG one might get theimpression that the current policy framework is medieval in origin and/or designed exclusively to


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serve the narrow interests of predatory foreign concerns. In fact, this framework is the productof a very careful, exhaustive effort in the immediate post-independence era which combined theprinciples laid down in the Constitution with the state of knowledge of petroleum policyinternationally. Many issues raised in criticism of the Petroleum Act can actually be mostefficiently accommodated without changes to the framework.

PNG has a "Petroleum Concession" type of regime consisting of a Petroleum Act, PetroleumIncome Tax legislation, Petroleum Agreement and Petroleum Regulations. These documents aremeant to define fairly comprehensively the relationship between an oil company and the State.Under petroleum concession, government revenue flow from income taxes on the oil companiesand royalties on production. Australia and Thailand are examples of countries with concessionarrangements.

The other type of arrangement commonly in use is the Production Sharing Contract (PSC) whichis used in many Southeast Asian countries such as Indonesia and Malaysia. Under a PSC, thecompany is given a specified share (usually 15%) of the "profit oil" produced as well as enough"cost oil" to cover exploration and development costs.

Of paramount importance in the policy framework is the financial deal which is struck betweenthe oil companies and the State. The objective for the State of course is to maximize its shareof revenues while leaving enough incentive so that a consistently adequate number of quality oilcompanies will explore and develop here in PNG. There is no question that the technical andfinancial resources of foreign oil companies will be needed for many decades to come. The factoil has been discovered in quantity here magnifies this need because of the size and complexityof development projects.

The crucial characteristic of any petroleum regime is the relationship between the governmentshare of profits and the profitability of the project (see Figure 1). Under PNG's regime, marginalprojects (through low royalties, a moderate basic tax and accelerated deductions) receivesympathetic treatment, thus providing encouragement for the development of projects that aremarginal and for those projects with a substantial amount of risk. At the other end of theprofitability scale, the State certainly gets the lion's share of the profits through the ResourceRent Tax.

The progress of PSC's is generally poor, with the effect of preventing the development ofmarginal projects. Also, the State will often be uncomfortable with the share of profits from a"bonanza". There are still some people who decry the RRTand claim that it is crucial to allowcompanies the occasional bonanza to make up for the many inevitable failed investments (iedrilling dry holes) in this very risky oil business. The counter argument is that the lowroyalty/RRT type regimes reduce the risk of a project having unsatisfactory returns, and in anycase a regime which is very generous on large, profitable projects would very likely be politicallyunsustainable in most countries. f

The merit of having government take being strongly progressive with respect to profitability isgaining increasing recognition and there is definite trend worldwide toward a PNG-type regime.As noted by an oil analyst (see credit Figure 1):

"Only Papua New Guinea and the Australian (RRT) regimes stand out as resembling mostclosely the 'ideal regime' from the point of view of tax take."

This leads to the other crucial feature of any tax regime - its believability and stability. There aresome regimes around the world which appear superficially to be more attractive than PNG's.


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In Africa there are 50% PSC's. Oil companies know however, that if they were to make a largediscovery and begin producing, the rules would suddenly change and they could easily end upwith terms less favourable than PNG's. Therefore the attractiveness of the country is pre-discounted.

The important point of this section is that the progressivity of PNG's take with profitabilityensures that despite major fluctuations in oil prices, despite the great variety of projectcharacteristics, the balance between incentives to industry and revenues to the government willbe maintained within a comfortable range for both parties. There are therefore few if anyconceivable circumstances under which modifications to the regime would have to becontemplated. In an industry with plenty of other sources of risk to contend with, a solid,dependable fiscal regime is an excellent foundation to build PNG's petroleum industry on.

The Minister for Minerals and Energy has previously rejected calls to increase petroleum royaltyrates. As will be discussed later, there are effective ways of addressing Provincial andLandowner concerns without making such regressive changes to the policy framework.

LicensingThe unusual feature about prospecting licences in PNG is the length of tenure. The 6 yearlicence can be almost automatically followed by a 5 year extension. So far as we are aware,only one other country, Tanzania, has such generous terms of tenure. With such long periods oftenure, there is a slight danger that companies will "sit on" commercial discoveries for variousreasons such as lack of financial resources or speculation on the price of oil. As with Ethiopiaand other countries, PNG has provisions in its Standard Petroleum Agreement which in the caseof a dispute, can establish an objective test of commerciality and oblige the company todevelop a commercial deposit or relinquish it.

PNG will need to examine whether a reduction in the length of tenure would help increase theintensity of exploration. Existing licence holders would, of course, not be affected by anychange.

Licensing of Developments is generally typical of that in other countries. Experience of the PNGmining industries has established many standards and procedures which will be useful inpetroleum development licensing, however, some petroleum-specific considerations of atechnical nature will be necessary.

State ParticipationThrough the Petroleum Agreement, the State has a right to take a participating interest in anypetroleum development up to a 22.5%.

The State gradually pays the oil companies for this interest by giving them its share ofproduction until the liability for its ~hare of exploration and development costs and interestcharqes is extinguished. An election to take a participating interest, of course reduces theState's tax take but provides some direct income from operations. In almost all circumstances,it is of net financial benefit for the State to take its full 22.5 % interest. Note that the stateparticipation scheme for petroleum is very different from that for mining.

The Petroleum Agreement also contains provisions for the State to assume responsibility forthose works and facilities built for a project which have public benefit (ie roads, clinics, etc).

Some Additions/Refinements NeededCertain aspects of development and production such as pipelines and unitization receive scanttreatment in the legislation. It may be beneficial for development of the industry here, forinstance, to establish a system of pipeline regulation whereby the unused capacity of a pipeline


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may be utilized by secondary developers at rates which are, by some standard, fair to thepipeline licensee and reasonable to the secondary developer, thus encouraging exploration anddevelopment in the vicinity of the pipeline.

Pipeline regulation, unitization etc. are sophisticated sciences in themselves and PNG will dowell to closely examine how these issues have been addressed in other countries.

Implications and Issues of Development

The International PerspectiveClaims have been made in the local press that PNGwill become the world's large exporter ofpetroleum. Such an idea is in the realm of pure fantasy. To put thing in perspective, the Kutubuarea project might produce about 100,000 - 200,000 BPD. Saudi Arabia regularly produces 4.5million BPD - 45 times as much.

Some analysts claim the Kutubu project will ultimately have recoverable reserves of 1 billion(where billion is a thousand million) barrels. The latest estimate for recoverable reserves inSaudi Arabia is 180 billion (more than 100 years supply). Countries like Saudi Arabia and otherGulf countries have advantages of huge reservoirs and low production costs which PNG cannotexpect to duplicate.

What can PNG realistically expect to be its status among the oil producing nations? With a fairamount of confidence, PNG can expect to eventually establish reserves totalling a few billionand a sustained production capacity of 100,000 to 200,000 barrels per day. Figure 2 showswhere this would place PNG among the OPECand Non-OPECCountries, respectively. PNG willrank with Ecuador among OPEC countries. Its situation will be most like that of North Yemen inthat it will become a significant Non-OPEC producer in a very short period of time.

No one should discount the possibility of further pleasant surprises from the exploration effortwhich would cause us to revise these expectations upward. Many draw parallels between thePapuan Fold belt and the Iranian Fold belt which has already produced more than 30 Billionbarrels of oil.

Managed Development?Some have proposed that PNG should manage its petroleum development by somehow staging(that is delaying) development either to take advantage of supposedly higher oil prices in thefuture or restrain the revenue generation and demand for skilled labour to manageable levels.This is a highly undesirable proposition.

First of all, there is certainly no assjJrance that oil prices will be higher in the future. Recently,the widely held belief that prices would rise rapidly in the mid-90's due to the decline in non-OPEC production has largely been discarded. The emergency of new non-OPEC producers suchas North Yemen, Norway and Papua New Guinea is expected to maintain non-OPEC productionclose to current levels. Large increases in prices are made further unlikely by Saudi Arabia'spolicy of moderation (which benefits its long term industrial, strategic and investment interests)backed up by its huge surplus production capacity.

Further down the road, there are possibilities that technological breakthroughs in competingenergy sources may depress the prospects for oil. Advancements in Natural Gas technologycould mean that gas (which, unlike oil, the world has in great abundance) replaces oil as theraw material of choice for liquid fuel and feedstock production.


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As for managing the large revenues, there are many cleverer way of handling the situation.Delaying production of the oil is like hiding in a pillow. It is better to produce the oil and put theproceeds in some productive investment, to be drawn down much later, if necessary.

Kuwait is an example of a country which has invested its oil revenues wisely (mainly overseas)and now earns more from these investments than from current oil production.

Finally, much of the skilled labour required in petroleum construction and operations is industry-specific. Inevitably, the first big project will initially require a large proportion of foreignpersonnel but with diligent training efforts, subsequent projects will have much higherproportions of local manpower.

The final argument against delaying petroleum developments is that there is no surer way todarnpen exploration and pre-development work than to introduce uncertainty about when adeveloper will be allowed to develop a commercial deposit.

Revenue Impact and ManagementFigure 3 has some facts and comparisons on the revenue generation from a 500 Million barrelSouthern Highlands development.

A problem/though quite a pleasant one) posed by the oil projects and mining projects in PNG isthe management of the accompanying vast increases in government revenues and other miningor petroleum related country income. This challenge will surely be a powerful test of characterfor PNG as a nation and critically important to PNG's development. Some countries have clearlybungled the job. Witness the classic example of Nigeria which allowed oil wealth to vastlymagnify the disparities in its dual economy and do mortal damage to its agriculturally-basedsociety.

There are, thankfully, examples of countries which have managed their revenues well andgreatly benefitted their countries. The example of Kuwait has been mentioned. The applicabilityof such an example to PNG is, however, limited since PNG must have much more capacity toabsorb improvements in infrastructure and services. Saudi Arabia conducted a comprehensiveprogram of removing bottlenecks from the economy before they even appeared. Large pre-investments were made in infrastructure and human resource development so that morerevenue could be efficiently employed in the domestic economy. Clearly, PNG is unique andmust find its own unique solution. PNG has an enormous advantage in coming late into theleague of oil producers in being able to learn from the mistakes and successes of others. Thegovernment should examine these cases in an organized fashion and devise its own strategy inthe light of these experiences.

Another issue of revenue management is revenue sharing between the National Government,Provincial Governments and Landowners.

A 'prominent subject of public discussion is the belief by landowners and Provinces that theywill not receive adequate benefit from developments in their areas.

The example of Bougainville Copper illustrates just how much can be done with the existingroyalty receipts by landowners and Provinces. If it is decided that a greater share of thebenefits should go to the Provinces and Landowners (and this is an entirely political decision),changes to the royalty rates would be highly inadvisable for reasons cited previously. There is,however, plenty of scope for income redistribution through National/Provincial "DevelopmentAgreements" which could specify revenue transfers, business development assistance andinfrastructure to benefit the provinces and landowners. The deal struck between the countryand the oil companies is clearly and appropriately under National jurisdiction and need not and


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and the oil companies is clearly and appropriately under National jurisdiction and need not andshould not be altered.

Training and LocalizationThe petroleum industry is capital intensive rather than labour intensive, even more so than themining industry. Nonetheless, it will be a significant employer in PNG and the jobs will be highquality jobs. The fact that these jobs are in an extremely important industry heightens theirprominence.

Over the years of exploration activity in PNG, industry and government have been able to traina number of Nationals in the disciplines related to exploration. There is a pressing need formany more. With the phase change of the industry into a development era, the variety of skillsand disciplines required by the industry will grow immensely. The industry will need reservoirengineers, production engineers, instruments technicians, process engineers, pipelinespecialists, terminal operators, petroleum marketing professionals, etc, etc. It should come asno surprise that there are very few PNG Nationals with any background in these disciplines.

It is inevitable, given the time frame for development, that the first instance of development andproduction must include many foreigners. In keeping with the principles laid down in theconstitution, however, it is incumbent upon government and industry to make vigorous effortsto as rapidly as possible, appropriately educate and train Nationals and bring them into theindustry.

In this regard, the DME has previously supported the concept of a PNG School of Mines andPetroleum which was originated by the Chamber of Mines and Petroleum.

Basically the School is an expansion of University of Technology at Lae to provide trainingpertinent to semi-professional and professional careers in the Minerals and Petroleum industries,which was previously unavailable in PNG. The School is designed to accommodate PNG-specificneeds.

All petroleum developers are, of course, compelled by legislation to undertake training andlocalization programs, which would be periodically reviewed by the government. Training andlocalization efforts in PNG will only be successful, however, if there is a deep and voluntarycommitment on the part of both government and industry toward this goal. PNG is a countrywhich already displays some dissatisfaction and frustration with the continuing prominence ofexpatriates and foreign businesses in the domestic economy. Surely it is in the best long terminterest of both industry and government to do (and be seen to do) a vigorous job on trainingNationals and bringing them into positions of responsibility in this extremely important industry.

Government Regulatory Capability .The government generally will facet new increased duties with the growth of petroleumdevelopment and production. It will be necessary to reappraise the facilities, staffing andtraining plans in the light of these developments.

Environmental and Socio-economic ImpactThrough PNG's experience with mining project, much has been learned about assessing theseimpacts.

Petroleum production projects generally pose less of a threat to the environment than miningprojects since the oil is completely contained from the reservoir to the ship, landscape impact isminor and there are no byproducts for waste-dumping. Since PNG crudes are apparently low insulfur, emissions from field stabilization of a mini-refinery should be minimal. Technology for theminimization of environmental impact from pipeline and facilities construction is very advanced


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and, shortly after construction, the installations should be inconspicuous or even invisiblefeatures of the landscape. The prevention and containment of any oil spills will be the mostprominent environmental issue. Sophisticated techniques have been developed in this area andthe resultant risk should be minimal.

Fortunately, many of the prospective developers have had great experience in developingcountries and have become very sensitive of environmental impact from pipeline and facilitiesconstruction is very advanced and, shortly after construction, the installations should beinconspicuous or even invisible features of the landscape. The prevention and containment ofany oil spills will be the most prominent environmental issue. Sophisticated techniques havebeen developed in this area and the resultant risk should be minimal.

Fortunately, many of the prospective developers have had great experience in developingcountries and have become very sensitive to, and experts in, environmental and socio-economicissues. With proper vigilance on the part of the government, environmental and socio-economicimpacts should not be a major problem area.

Agenda for Petroleum Policy

The following is an outline of planned petroleum policy activity:

1. Minor Framework Revisions - Additions and updates to the Act and Agreement with nochanges in fundamental principles; a more detailed interpretation of Petroleum Income Taxlegislation.

2. State and Citizen Participation - identification of an support for effective training andlocalization strategies in government and industry and analysis of the issues surrounding the"NOC", in keeping with the Constitutional principles.

3. Preparedness for Development - identifying organizational/staffing/training implications of agreatly increased regulatory role for government; helping address the issues like revenuemanagement, accessory industry development.

4. Petroleum Development Options - identification and study of particular developmentpossibilities of potential benefit to the country - Hides project and "Domestic Use ofHydrocarbons" study were instigated by DME.

5. Exploration and Policy - measures to increase the long term intensity of exploration effortand the area thereof; ways to attract the most effective potential developers.

The DME has raised the possibility of addressing the "State and Citizen Participation" and"Preparedness for Development" sets of issues under a singly, multi-department coordinatedeffort using assistance from the United Nations, Commonwealth Secretariat, World Bank andpossibly NOe's of other countries.

Summary

Papua New Guinea's petroleum sector has a number of powerful advantages going for it:

1. Substantial demonstrated reserves of high quality oil and gas; recognized potential fortruly large reserves.

2. A solid, well-conceived policy framework and fiscal regime.

[MR143 - Rodd and EIaisi]

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3. Quality companies as prospective developers.

4. As a latecomer to the league of oil producers, PNG will be able to benefit from theexperiences of other countries.

At the same time, rapid petroleum development in PNG will pose many challenges for a youngdeveloping country. Chief among these will be management of petroleum revenue, theincreased regulatory role for government and finding effective ways of establishing active Stateand Citizen participation in the industry. Experiences of other countries show that there aregood solutions to all of these issues - it will be PNG's challenge to find those that work forPNG.


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3.6 CORPORATE TAX, ROYALTY AND PRODUCTION SHARING

Pedro van Meurs

There are a number of types of fiscal instruments. The first type of instrument is a Signaturebonus (Attachment 1). These types of bonuses are not recommended in the Pacific region,since they have a negative impact on the Maximum Sustainable Risk and increases the cost ofexploration.

Another type is Production bonuses (Attachment 2). Typically, these instruments do notcontribute large amounts of income and are largely regressive.

Attachment 3 describes Rentals, which are recommended to protect the government fromnegative returns. These should generally be modest, to cover administration.

Fixed Royalties (Attachment 4) are good early revenue earners but, as noted earlier, areregressive. Also, the way in which royalties are applied may need some adjustment in thePacific region. At present, most countries have adopted the Canadian and Australian methodsof assessment of royalties at the wellhead. It is based on a lower price than the value at thepoint of export (Attachment 5). There are problems with this method particularly with gas,since it requires more processing.

Therefore, during the first 5-6 years, the processing costs may be so high that the wellheadvalue will be zero. It is therefore recommended that royalties be assessed at the MeasurementPoint, that is, where it leaves the tank farm or processing plant and becomes transportable andthus saleable.

Sliding Scale royalties are set out in Attachment 6. Some Royalty Formulae are set out inAttachment 7 and illustrate how some countries are trying to design formulae that becomemore progressive and, to this end, are more sensitive to factors such as production, wellproductivity, price, time etc.

Fixed Production Sharing (Attachment 8) is a concept which was established by Indonesia in1966 and is now quite prevalent in Asia. It has worked quite well and is now used in at least20 countries around the world.

Other instruments include Advanced production Sharing (Attachment 9), Joint Ventures(Attachment 10), and Special Taxes (Attachment 11).

Some of the different types of formulae are set out in Attachment 12. One of the problemswith all these formulae is "Gold Pla'ting", a situation where companies make investments simplyfor the purpose of altering the amount of tax payable.

How does the Rate of Return formula work? (See Attachment 13).

Incremental Investment systems are illustrated in Attachment 14.

What are the main impacts of Rate of Return based systems? They lead to uneconomicalinvestment, such as a rate of return on a dry hole. They lead to a reallocation of investments tohigh initial expenditures and could result in serious auditing problems.


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Corporate Income Tax and Calculation of Taxable Income are illustrated in Attachments 15 and16. and the difference between Stand Alone and Incremental and its impact on MSR are set outin Attachment 17.

Depreciation Systems (Attachment 18) are important, particularly in relation to where theystart. This is almost as important as the depreciation rate.



SIGNATURE BONUS

• LUMPSUM PAYMENT UPON SIGNING OF CONTRACT

* BIDDING - NORTH AMERICA

* NEGOTIATION - INDONESIA

* LEGISLATION - NETHERLANDS

DO NOT INCLUDE HIGH BONUS:

LOWERS MSR SUBSTANTIALLY


PRODUCTION BONUSES

• LUMPSUM PAYMENT IF YOU REACH CERTAIN PRODUCTION LEVELS:

EXAMPLE:

AT 10,000 BOPD $1 MILLION

AT 20,000 BOPD $3 MILLION

ETC.

REGRESSIVE


RENTALS

• REGULAR PAYMENT PER YEAR

• USUALLY RELATED TO ACREAGE

* PAY GOV ADMIN

* ENCOURAGE RELINQUISHMENT

* INDUCE WORK PROGRAM

REGRESSIVE


FIXED ROYALTIES

• FIXED % OF GROSS PRODUCTION

• USUALLY 5 - 25% RAGE

* DISCOURAGES MARGINAL FIELD DEVELOPMENT

* GOOD REVENUE EARNER

REGRESSIVE

3.6 Attachment 6 [140)

SLIDING SCALE ROYALTIES

• JUMPING

• SLIDING

o - 10,000 BOPD 10%

10,001 - 20,000 BOPD 15%

OVER 20,000 BOPD 20%

HYBRID


ADVANCED PRODUCTION SHARING

• SPLIT OF PROFIT OIL BASED ON ADVANCED FORMULAE

• PROFITABILITY INDICATORS

(INDIA, ECUADOR, MADAGASCAR)

USUALLY PROGRESSIVE


JOINT VENTURES

• CARRIED INTEREST AFTER COMMERCIAL DISCOVERY

• FINANCING PROBLEMS

• COULD NEGATIVELY AFFECTS MSR

NEUTRAL


SPECIAL TAXES

• TAXES AIMED AT TAXING UNDER HIGH PROFIT SCENARIOS

• PRT IN UK

PRT = RATE * (REV - OP COSTS - INVESTMENTS * UPLIFT -LOSSES - OIL ALLOWANCE)

OIL ALLOWANCE IS VALUE OF 1 MM TONS PERYEAR.MAX 10 MM TONS.


TYPES OF FORMULAE

• REVENUES(THAILAND)

M+K

• CUM REV(ECUADOR)

CUM COSTS

• ROR BASED (PNG)

* * GOLD PLATING MAIN PROBLEM

PROGRESSIVE


HOW DOES RATE OF RETURN (ROR) FORMULA WORK


INCREMENTAL INVESTMENT


CORPORATE INCOME TAX

* * LEVEL OF CONSOLIDATION

- different industries

- petroleum industry

- petroleum E & P

- per area

** RATES: 0%-73%

AVERAGE 35 - 50%


CALCULATION OF TAXABLE INCOME

* GROSS REVENUES LESS:

- operating costs

- depreciation

- interest payments

- losses

= TAXABLE INCOME


STAND ALONE vs INCREMENTAL


DEPRECIATION SYSTEMS

* EXPLORATION - 100%

* DEVELOPMENT

- straight line

- declining balance

- UOPusually ± 20%

* PIPELINES

- straight lines

- declining balance5-10%

* START DEPRECIATION

- when costs are incurred

- active use rule


INCENTIVES

* * ACCELERATED TAX DEPRECIATION

* * UPLIFTS IN TAXATION OR PSC

** LOWER TERMS FOR OFFSHORE (DEEP WATERS)

* * LOWER TERMS FOR MARGINAL FIELDS

* * SLIDING SCALES

* * DEEMED INTEREST PROVISIONS

* * SPECIAL PROVISIONS FOR HEAVY OILS

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Section 4

LICENSING AND PERMITTING


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4.1 a LEGAL METHODS USED IN PETROLEUM LICENSING

Ian Townsend-Gault

Basic concepts - all rights vest in the State, which can then lease or permit these rights tocompanies or individuals. The State, as guardian of the national interest, sets terms andconditions, and exercises regulatory control. Which system best serves the politico-economic objective of the state?

The traditional format - the concession contract - origin and contemporary development - use inwestern countries - relationship between holder and host country - financial return to thestate (tax/royalty) - nature and extent of control over the activities over the licensee.

Newer format - production sharing contract - origin and use in developing countries especially -nature of the relationship between state (or state oil company) and contractor - profitsharing - financial return to the state - nature and extent of control over the operations ofthe contractor.

Hybrids - regimes which combine elements of both systems through profit sharing androyalty ftax provisions.

Other forms - service contracts - geophysical contracts, etc.


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4.1 b LEGAL METHODS USED IN PETROLEUM LICENSING

Rowland Harrison

Traditional arrangements for petroleum exploration have been in the form of one-on-oneagreements between an international oil company and the sovereign of the host country. Thesewere referred to as "concessions" since they involved some degree of cession of sovereignty inrelation to the exploration area.

Attachment 1 sets out the elements of a traditional concession agreement.

This type of agreement was at the" certainty" extreme of the sovereignty:certainty spectrum,referred to in an earlier presentation. This one of the major reasons why it was abandoned infavour of a balance with a greater sovereignty element.

The current forms of petroleum licenses are set out in Attachment 2. and include modernconcession agreements, joint ventures, production sharing contracts and service contracts.Before considering each of these forms, there are two points which should be emphasised.First, in ECONOMIC terms, petroleum licensing agreements differ more in name than in substance.Second, there is nothing magical or watertight about the names given to these types ofagreements. Anyone agreement may have elements of more than one type of agreement.

The modern concession agreement describes the relationship whereby the government handsover rights to explore in and produce from an particular area under certain terms and conditionsset out in the agreement.

The conceptual differences between these different forms is set out in Attachment 3. Forexample, a Production Sharing contract is a reassertion of sovereignty, since the National OilCompany of the host country retains ownership. This form of agreement was a reaction to thetraditional oil concessions.

Other contract terms which must be addressed by any of the forms used are set out inAttachment 4 and comprise the main elements of modern petroleum agreements



ELEl\1ENTS OF TRADITIONALCONCESSION AGREEMENTS

e DEFINITION OF CONCESSIONAREA

• MINIMUM WORK COMl\1ITl\1ENTSOVER FIXED TIME BEFORECOM1VlERCIAI~ DISCOVERY

e LONG DURATION - 50 TO 60 YEARS

e LlJl\1P-SUM PAYMENT, ANNUALRENTALS, ROYALTIES

e LOCAL SUPPLY OF OIL

e INSTALLATION RIGHTS AND THEmGHTOFE~NTDOMAIN

e FREEDOM FROM TAXATION;FREEDOM FROM PRODUCTIONAND MARKETING CONTROLS


CURRENT FORMS

• CONCESSION AGREEMENTS

• JOINT VENTURES (JVs)

e PRODUCTION SHARINGCONTRACTS (PSCs)

• SERVICE CONTRACTS


QTHER CONTRACT TERMS

e AREA

e TENURE

e TERl\1 and PERIODS

- WORK PROGRAM

- RECONNAISSANCE- DRILLING- DEVELOP:MENT- PRODUCTION

..,

e RELINQUISHMENT

e TRAINING AND LOCALBENEFITS

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4.2 COMPARISON OF PETROLEUM LAWS AND REGULATIONSIN SOPAC MEMBER COUNTRIES

Kenneth Havard

Introduction

In November 1987 the author visited the offices of the Ministry of Natural Resources, SolomonIslands in Honiara. As a result of that visit, I was requested on behalf of the Ministry to examinethe hydrocarbon law, proposed hydrocarbon regulations, and model petroleum agreement whichhad been drafted by UNCTC (United Nations Centre on Transnational Corporations). Aconfidential report relating to specific comments was sent to Honiara in February 1988.

As a result of this study, it became obvious that most of the member countries would welcomea comparative review of their hydrocarbon terms. Therefore, this general non-confidential reporthas been prepared for the mutual benefit of those member countries with hydrocarbonpotential. Vanuatu and Solomon Islands are not included in the comparison as their hydrocarbonterms have not as yet been finalised.

Method

Each of the five CCOP/SOPAC member countries with existing hydrocarbon terms (Australia,Fiji, New Zealand, Papua New Guinea, and Tonga) were asked to provide the Secretariat withcopies of the relevant legislation and guidelines. Table 1, comparing the basic terms for eachcountry, was prepared. Each country was asked to verify that the information displayed wascorrect and not misleading, as can arise when simplified versions of the actual terms areprepared. The table presented here represents the final corrected version of hydrocarbon termsin effect at July 1st. 1988.

Discussion

A number of features of each of the hydrocarbon terms are compared in Table 1 and commenton these follows.

a. Area and SizeEach of the countries has divided the areas offered for exploration into graticular blocks rangingfrom 5 minutes of latitude by 5 minutes of longitude to 10 minutes by 10 minutes. The actualdivision in itself is mostly as a matter of administrative convenience. What is more important isthe actual size of the licence in relation to the work program and the terms of relinquishment.

As the exploration level in a petroleum province becomes more mature there is natural tendencyfor the size of blocks and licences to become smaller. In many countries partial blocks areawarded where prospects are considered best.

b. TermIn all countries the initial exploration phase is 8 to 16 years, subdivided into two or moreportions at which time part of the area must be relinquished and a new program undertaken.This appears to be fair to both the countries and the oil companies as it allows flexibility in thedirection and amount of exploration carried out while maintaining control over the whole area.


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Once a discovery is made, most countries have provisions to force development or surrender.Several of them spread this decision out over a 2 to 5 year appraisal period. Papua New Guineahas made provision for an independent arbitrator to decide if marginal fields are commercial.

The actual term of development and production is usually granted for 20-25 years with renewalpossibilities if the field is not fully depleted during this time.

c. FeesThe standard practice is to charge an application fee for each licence to cover administrativeoverhead costs. Production licence fees are usually 2 to 5 times higher then exploration licencefees.

In addition, a nominal rental is charged annually for each block. In some cases the rentalescalates with time to encourage early exploration and relinquishment. The rentals may be theonly cash payments received by many countries so there may be a tendency to increase themsubstantially. However, this has to be weighed against the total work program and the cost offinding a new company to take the licence if early relinquishment is precipitated. Most countriescharge a substantial increase in rental fees per block in the production stage.

d. RelinquishmentsAll countries require the relinquishment, usually 50%, of the exploration licence area in effect atthe end of each exploration phase. Some countries permit voluntary relinquishment at any time.Companies can take out an initial exploration licence over a very large area and throughrelinquishment retain only the prospective portion. Commonly companies include a lot of deepwater areas in their initial application so that all of the shallow water portion of the licence canbe retained for the second andlor third licence stage. These factors should be taken intoaccount when evaluating a work program. Some jurisdictions counter this practice by requiringrelinquishments that leave corridors between blocks of a pre-determined maximum size, and insome cases a checkerboard relinquishment pattern is used.

e. Confidential PeriodMost oil companies will favour keeping all data confidential for as long as possible in an area.This information is extremely valuable to competitors and in some cases is even sold by theoperating company to other companies.

It is in the best interest of the countries to disseminate the information as quickly as possible toincrease competition. Therefore, a compromise must be reached. It would seem reasonable forall well data to be released within a fixed period after drilling. A two-year period for exploratorywells and one year for development wells is not unreasonable. Seismic data however are usuallykept confidential until the land is relinquished or for a longer fixed time period such as five orten years. ,One of the problems which must also be addressed in hydrocarbon regulations is the

. requirement that all data acquired must be furnished to government in a timely fashion. Thesedata must be kept confidential until the appropriate time period has elapsed. If companies claimthat certain tests or procedures are proprietary and cannot be supplied, then the relevant costshould not be allowed as a deduction against their work commitment. A good way of verifyingthis is to check whether or not partners are supplied with these data. If necessary, specialguarantees can be given to ensure that these data are kept confidential.

Regulations which require that all data are only to be supplied after relinquishment should beredrafted. If a company has spent its money and left a country it may feel very littlecompunction or obligation to furnish data at a later date. Problems with later change ofownership andlor bankruptcy can also be avoided if the data are supplied in timely fashion.


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f. Security DepositThe concept of a security deposit is two-fold. One is to ensure that the work program originallyagreed to is completed. The second is to provide a fund for unforeseen environmental damagesuch as oil an oil spill or blowout.

The deposit may be in the form of cash or negotiable government securities or it may be a bankguarantee. Usually it is reduced as work program are completed. Most countries make thedeposit a fixed amount at a reasonable level to ensure compliance with contract terms. It seemsthat it would be a good idea to require the company to carry blowout and environmentalinsurance as Papua New Guinea has done.

If bank guarantees are too large, they may restrict the ability of the company to carry out itsbusiness activities by tying up capital. The company may therefore be reluctant to commit itselfto a work program that it may otherwise have considered, or it may at least reduce itsobligation. All countries, of course, must ensure that the companies they are dealing with havethe financial resources to conduct their agreed work programs.

g. Financial ConditionsThe methods by which revenue from produced hydrocarbon is distributed very widely. Allcountries take a royalty which ranges from 1.25% to 15%. Royalty revenue is not subject toany deductions other than cost of actual production and processing. This means that revenue isreceived from the onset of production and is independent of the profitability of the operation. Insome cases a lower royalty is charged against gas production or marginal fields.

The rate of income tax ranges from 28% to 50% and may also be supplemented by withholdingtax on dividends sent out of the country. The tax rate may be changed by legislation but thesame tax rate is charged to all industries within the country. When oil prices made a rapidincrease in 1979 several countries adopted an excess profits tax or windfall profits tax. Onemust remember that oil companies are in business to ensure that they are profitable for theirshareholders. If taxes are too excessive companies will not be interested in taking out aconcession. The best method of taxation is to tie the tax rate to the rate of return oninvestment as Papua New Guinea has done. This allows greater flexibility in the fluctuations ofoil pricing and in many cases may determine whether or not marginal fields will be produced.

However, an area which tends to be overlooked initially is that of accounting procedure. Themethod of writing off expenditures against production and the time period they can be carriedforward greatly affects the profitability of an operation. Also, the verification of actualexpenditures and reasonable charges for out of country services must be addressed. Manycountries have also instituted mechanisms for controlling the selling price of the produced oil toensure fair returns. The UNCTC has an excellent publication "Alternative Arrangements forPetroleum Development (UNCTC, 1982)" which goes into all aspects of petroleum problems infar more detail. I

.Some countries insist that a percentage of any discovery is to be given to a state oil company.This may be reflected as a carried working interest whereby the state's share is paid for out ofproduction. This may give the state a bigger voice in the exploration and production process,but can be very expensive to set up. It may require hiring an expatriate staff to run the state oilcompany initially if no local expertise is available. Once again, the net profit potential left to theoil company will be the key deciding factor in whether or not they seek a licence in the firstplace.

h. Regulatory BodyEach country must realise that there will be a requirement for a regulatory body to oversee allaspects of hydrocarbon exploration and development. In the event of a discovery, this can place


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a sudden burden on a country. One must remember that it takes several years of lead time tohave qualified personnel trained in all fields of hydrocarbon skills. Some of this training may beincluded as pre-requisite in the terms of the hydrocarbon licences.

i. Work ProgramNo mention of the work program requirements has been made in Table 1. This is for tworeasons: they are highly confidential; and they usually vary with each separate licenceapplication. In more developed exploration areas licences may be offered for cash bids in lieu ofwork program but that has not been considered in this study.

The work program usually involves the acquisition of new seismic data or reprocessing of oldseismic data or reprocessing of old seismic data and the drilling of wells. In the case of seismic,one must ensure that the amount of shooting is reasonable for the size of structure expected orsufficient to follow up on previously defined leads. If reprocessing is proposed, one mustascertain if an actual improvement in data quality is justified and can be obtained. It may benecessary to ask for assistance in determining these factors.

As far as wells are concerned, one must make sure that minimum age, depth, and/or costs arepart of the proposal. If a small land area or a greatly differing water depth occurs on the licencearea, then some consideration may be required for the location of the well. Also one may wantto differentiate between appraisal wells and new wildcat wells in regards to fulfilment of licenceobligations.

As stated previously, the timely dispersal of all data obtained should be part of the licenceholder's obligation.

Recommendations

1. Member countries should periodically review their hydrocarbon terms to make sure they arecompetitive and reflect the wishes of the government. Terms cannot be changed once anagreement is entered into with a company. If a country is unsure if its terms are reasonable,then outside assistance should be requested.

2. Solomon Islands and Vanuatu should legislate hydrocarbon terms and regulations as soon aspossible if they wish to attract exploration. No oil company will consider conducting anexploration program until it knows the terms and conditions of the agreement into which itmust enter.

3. A seminar of all the member countries with hydrocarbon potential should be held to co-ordinate and discuss hydrocarbon policy in the South Pacific area. Such a seminar shouldaddress the specific problems of the region in relation to those of the global petroleumindustry. This seminar would require participation of senior advisors and governmentministers responsible for formulating hydrocarbon policy.

Reference

UNCTC, 1982: Alternative Arrangements for Petroleum Development. New York, UnitedNations. 70 pages.


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4.3 LEGAL ASPECTS OF MODEL PETROLEUM AGREEMENTS:EXAMPLE OF MODEL AGREEMENT

Rowland Harrison and Ian Townsend-Gault

The title of this presentation is somewhat misleading, since there is no such thing as a "model"agreement. There are many different types of agreements from all over the world. The formthat these agreements take is very much a function of the general legal system in the hostcountry and the detail in which the legislation addresses the relationship between the hostcountry and the international oil company.

The document, which may be called a lease, license or agreement, reflects this relationship andwill be more or less detailed, depending on the detail in legislation. Thus, documents can vary inlength, anywhere from one page to 100 pages. Therefore, we should not focus solely on onedocument called the "model agreement". Rather, it would be more useful to look at all thequestions to which an oil company considering development would want answers.

The following is therefore an informal list of the sorts of questions that oil companies will wantanswers to. Please note that it is not prioritised in any way.

1. What language is the agreement to be in?

2. What law will govern the agreement?

3. Who will finance the exploration and development and who will bear the risk?

4. What are the work program requirements?

5. Length of agreement, extensions and work required during particular periods?

6. Will the Host Country be represented on the operating committee of the project or haveany other participation in operating decisions?

7. Is there any relinquishment and if so, what system should be used?

8. Who owns the information derived from the exploration program and what rights will thecompany have to trade in this information?

9. Who is to determine the "commerciality" of any discovery made?

1O. How will production be valued/for the purposes of assessing royalties, etc.?

. 11. What is the position of the International Oil Company coming into the Host Country, withregard to the status and employment of persons coming into the country, immigrationrequirements, tax status etc.?

12. Is there any requirement to purchase local goods and services and, if so, how is thecompany's use of these goods and services to be monitored?

13. What are the restrictions on the oil company marketing outside the host country? Arethere any export restrictions/controls?

14. Who has title to the assets/infrastructure developed by the oil company? Does title revert


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to the host country at the end of the agreement and, if so, is there any compensation forthe oil company?

15. Is the host country prepared to give any guarantees with regard to the investment?(specific guarantees with regard to specific aspects of the project)

16. What is the situation with regard to the payment of Income Tax, particularly in the case ofproduction sharing agreements?

17. Does the host country have "value added" or other additional taxes?

18. What are the restrictions on repatriation of profits to the home country of the oil company?

19. Are there any provisions for determining exchange rates for investments in foreigncurrencies?

20. What operating standards are expected of the oil company? Good oilfield practice or somehigher standard?

21. Will the host country provide any assistance to the oil company?

22. Will the host country give guarantees as to the title of the area in the agreement and willthe host country compensate the oil company if the area is actually outside its jurisdiction?

23. What are the restrictions on assigning rights of exploration and production?

24. Requirements with regard to accounting procedures?

25. Reporting requirements, with regard to geology, production etc.?

I


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4.4 WORK COMMITMENTS

Ian Townsend-Gault

Work obligations are a typical requirement of modern petroleum regimes. In areas of highprospectivity, they can be used as one element in a bidding system, possibly in combinationwith other factors.

The obligation can be specified in a number of ways. A minimum financial commitment can bespecified, but it is unwise to rely on this alone. The usual practice is to specify that seismic willbe shot to a minimum length specified in the contract, and/or a given number of wells drilled,perhaps to a specified depth. Obligations may be specified for each year of the explorationperiod.

Information gathered must be shared with the host country.

Typically, a financial guarantee is required from the contractor, which will be forfeit in the eventof a failure to complete the program. The guarantee should be returned only when theinformation is formally submitted to the host government.


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4.5 SAFEGUARDING EXPLORATION COMMITMENTSAND ASSIGNMENTS

Rowland Harrison

It is not necessary to extract exploration commitments from an oil company if the tenuresystem provides that the oil company loses the license after a particular period if no discoveryhas been made. Thus, a regime can have its own built-in incentives to the oil company.

Licenses are usually issued in the first instance by a bidding or negotiation process, on the basisof a work program submitted by the oil company. Therefore, it is necessary that the work isactually undertaken, since the license was issued to that particular company because itpromised to carry out the work program. In this situation, a guarantee may be required.A common form of guarantee is a security deposit, which will be forfeited if the company doesnot carry out the promised work program. Promissory notes are a particular form of securitydeposit but cost the industry money which must therefore be taken into account when settingthe amount of the security deposit.

The risk of environmental damage is often high and the government may require some sort ofdeposit against this risk. Some governments accept insurance against this risk, although thefunds from an insurance policy are not a accessible to government in the event of an accident.

With regard to assignments, the government must assess its role in terms of whether itsconsent should be required for an assignment of a license and, if so, what criteria should beused in deciding whether or not to give that consent? Assignment of licenses is notautomatically bad for the host country. Trading in licenses within the industry can have positiveconsequences and effects, in terms of turnover of land, different perspectives etc. The key isfor the government to satisfy itself that there is a guarantee that the work will be done and tokeep the exploration term relatively short.


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4.6 ASSESSMENT OF PROSPECTIVE LICENSEES:HOW DOES ONE SELECT THE RIGHT COMPANY?

Rowland Harrison

When a government has a choice in respect of prospective licensees, it is advisable to rely onmarket forces and competition to make the selection for you.

There are a two conceptually different approaches to allocation systems (Attachment 1.) Acompetitive bidding system of allocation allows the market to make the decision for you,whereas a discretionary system allows the country to make its own best judgement onallocation.

A bidding system of allocation can involve one or a number of the different bidding subjects setout in Attachment 2. A cash bonus system is the simplest system to use and is widelyemployed in North America. It can, however, have a negative impact on an oil company'sdecision to go into exploration and is therefore not popular in frontier areas. It is also not veryefficient at collecting unanticipated rents. It is not widely employed outside of North America.

A work commitment system is much more common outside of North America. It may involvegovernment consideration of a specific work system, although the government's judgement asto what is the "better work program" may not necessarily produce the best explorationprogram. Therefore, a work commitment system could involve a commitment by the oilcompany to spend a specific amount on a work program, leaving the specific details of thework program to the company. This, too, has its problems, since the government must set outcriteria and definitions as to what money is to be credited to the work program. This has thepotential to become very complicated. Despite these problems, this is probably the most widelyused allocation system in the world.

Combinations of these systems are possible, but it will require some sort of "weighting"system, otherwise the government is left with a purely discretionary system.

There are certain fundamental rights allocations questions which must be answered(Attachment 3). How best do you arrive at the optimal rate of offering and what is the optimalgeographical distribution? With regard to the latter question, it is usual in the first round ofallocation to focus on the best areas for exploration. But countries should try and resist what isoften the next step, which is to give out large areas of land for long periods of time. It mustensure that it has room to respond to new information which becomes available from theexploration program.

[MR143 - Rodd and Elaisi1

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4.7 ACCOUNTING AND COST CONTROL

Pedro van Meurs

All the information that is received in relation to the government take is virtually useless if thegovernment does not have the administration to collect its take. It is therefore important tomake sure that the proper fiscal and accounting rules are in place.

What kinds of rules are there around the world? There are three possible phases in which onewould come across accounting rules.

1. Prior to the start of the project, there is the Budgetary Phase.

2. When the project has begun, there is the phase for the Approval For Expenditures Phase.

3. Once oil is actually being produced, there is the Audit Phase (see Attachment 1).

How do these phases stack up with petroleum arrangements? Unlike the economic perspective,there are major differences between the different types of agreement (Attachment 2).

How easy is it to cost control? (Attachment 3).

The Budget Procedure, in a production sharing situation, involves consideration of the followingpoints:

* recoverable costs

* non-recoverable costs• costs incurred before start• not backed up by information• not justified• costs after measurement point• penalties, arbitration costs.

* bidding procedures over certain amounts - this gives a better indication of the real marketvalue

* data presentation - this must be in an orderly form and requires:• cost and revenue classification• chart of accounts (how are costs to be classified? There must be agreement on

definitions and on how the/accounts are to be presented)

In' a joint venture situation (carried interest) the following issues are important:

* the operating agreement must be very detailed as to rights* AFE - the government should have the right to approve or reject any individual expenditure

and the right to receive all information.* bidding procedures* accounting procedures* audit provisions

Most of things can be carried out most efficiently using a corporate structure of some sort.


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It is important that if the government does not have a sophisticated administrative structure, itis necessary to choose a more simple fiscal instrument, so that the accounting proceduresremain simple. This is particularly important for developing countries.

The joint venture scenario involves the state in two different capacities - that of regulator andinvestor/operator. This is one of the reasons why a corporate structure, such as a National OilCompany is used to avoid conflict of interest.

The main accounting interests which arise are:

" valuation of the oil and gas" headquarter costs" transfer pricing in expenditures" production accounting" interest deductible" allocation of costs

Audit procedures are the "battle of the computers" and therefore proper software is a priority.Audit procedures involve:

" transfer of all data from the oil companies" building own software" an audit plan" spot checks of documents" cost data databanks" fast turnaround

How do you organise your accounting systems? It will require consideration of the followingissues:

" cooperation among departments" secrecy" staff, computers and software" time delay

How do you find the appropriate auditing experts? There are about 10 very large andprestigious audit firms and the world. They are very reputable and it would be advisable to useone of these.



ACCOUNTING AND COST CONTROL

* BUDGET PREPARATION & APPROVAL

* IMPLEMENTATION - AFE's

* AUDITS


ACCOUNTING & FISCAL SYSTEMS

Budget AFE Audit

ROYALTIES - - +

CORP. INC. TAX - - +

PSC's + - +

CARRIED INTEREST - + +

SPECIAL TAX - - +


COMPLEXITY vs STRUCTURE

FISCAL SYSTEM

Easy Average Complex

ROYALTIES R - -

ROYALTY FORMULAE P - -

TAX - N -

PSC"s (FIXED) - N -

JOINT VENTURES - N -

ADVANCED PSC's - - P

SPECIAL TAXES - - P


TAXES USUALLY BASED ON LOCAL CURRENCY

* (LOCAl) INFLATION INCREASES REAL TAX RATE

* EXAMPLE OF TAXABLE INCOME UNDER HYPER INFLATION:

Normal Hyper Inflation

REVENUE 100 100

OPERATING COSTS 30 30

DEPRECIATION 20 0

INTEREST 10 0--------------- ---------------

TAXABLE INCOME 40 70

TAX RATE 40% 16 28

REAL TAX RATE 40% 70%

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Section 5

RESOURCE MANAGEMENT


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5.1.1 DATA MANAGEMENT AND OWNERSHIP

Kenneth Havard

In order to attract petroleum companies, all the existing data relevant to petroleum explorationmust be made available. The more complete, accessible and reproducible the data are, the morelikely the country will be examined for hydrocarbon prospectivity. As many of the membercountries do not have climate controlled storage facilities and large volume reproduction andtape copying capabilities, SOPAC has made arrangements with the BMR in Canberra to act as adata manager.

In most countries, the regulatory body overseeing petroleum exploration receives copies of alldata obtained from petroleum exploration and development. Usually these data are keptconfidential for a fixed period of time or until the relinquishment of the licence and then put onopen file. It is important that these data be received in a timely fashion and that third partiesalso be required to furnish the data in the case of farmouts. These data usually represent thefulfilment of work commitments and companies should not be allowed tax credits and/or thereturn of deposits or guarantees until they are received. As the petroleum industry becomesestablished within a country, more effort must be devoted to ensure the proper storage andrecording of all data. Outside assistance should be obtained to examine possible alternativeswhen this level of development is reached.

Companies will usually argue most strenuously that all data obtained should be kept confidentialand is owned by them. Therefore it is important to assure the company that the data will beheld confidential for specified periods of time. In only a few cases of new techniques which arespecific for unusual problems should these data be held as proprietary by the company. A goodtest of proprietary justification may be the application of whether or not the company wants touse the expense for tax and/or guarantee credits.


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5.1.2 PROMOTION TO THE OIL INDUSTRY

Jon Rodd

The exploration for hydrocarbons in the region hinges on investment from the oil industry. Theaim of promotion is to attract industry investment. Without this it will not be possible todevelop the region's potential hydrocarbon resources. Promotion to the oil industry involves theproduction of glossy brochures, mailing promotional literature to oil companies, presenting talksand displays at international oil industry conferences, participating in promotional tours to oilcompanies, writing papers for publication in oil industry journals and distributing information viaoil industry "scouting" services.

There is no single recipe for success in courting oil companies. It is often better to try severalapproaches targeting as many levels in the industry as funds permit.

Promotional Brochures

These are aimed at oil industry management and technical staff. They are normally produced ona country-by-country basis since oil companies ultimately negotiate for exploration andproduction rights with individual governments. The brochures summarise, in an glossy, easilydigestible form, the petroleum geology and hydrocarbon potential; the legal/fiscal legislation andregulations; and from where further information can be obtained.

Data Availability

In order to make their own technical evaluations, oil companies require all relevant geologicaland seismic data available. In the case of the SOPAC member countries this involves masses ofseismic data, geological reports and maps. This data should be stored, maintained and updatedso that good quality copies can be quickly made when ordered by interested oil companies.SOPAC's strategy is to set-up Petroleum Data Packages for each member country withhydrocarbon potential which contain all the relevant data. These are/will be stored at theSOPAC Data Bank in Canberra. Catalogues are/will be available for each country's DataPackage.

Mailing Rounds to the Oil Industry

The aim mailing rounds is to target the oil industry at several levels in order to gain a highprofile for individual countries and the region within the industry. Promotional literature,including brochures and data catalogues can be mailed to individual oil companies, oil industry

.consultants and contractors, and to their major financing banks.

Promotion at International Oil Industry Conferences

Industry conferences provide an excellent opportunity for promotion. Several the internationalconferences are held each year and are attended by many international oil companies, andindustry contractors and consultants. Talks may be presented and displays given at booths.They are venues where new regions for exploration are presented to a wide audience of oilindustry technical staff and management. They generate a tremendous atmosphere of progressand excitement where new exploration concepts and technology is discussed.


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Promotional Tours to Major Oil Companies

This is probably one of the most effective methods of promotion and is commonly done byconsultants or independent organisations on behalf of governments. A team of technicalexperts, including a geologist, and senior government experts in tax/finance and legal experts,go on tour to selected major oil companies (defined here as any oil company which hassufficient financial resources to undertake or contribute financially to an effective explorationprogram), their financial advisors and banks. Typically, tours would include the major oilcompanies in Australia, Europe and the USA. The Team give presentations to both managementand technical staff covering the hydrocarbon potential and the legal and fiscal frameworks ofthe country.

Promotion in Oil Industry Publications

This includes technical articles published in oil industry journals (e.g. Oil and Gas Journal,Bulletin of the AAPG, etc.) and information distributed by oil industry 'scouting' services (e.g.Petroconsultants). The latter sell information on exploration activities to the industry worldwideon a weekly, monthly and annual basis. This is usually done without any cost to thegovernment/organisation supplying the data. This media can also be used for announcinglicensing rounds, current exploration activity changes in licensing terms and petroleumlegislation.


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5.2 NATIONAL Oil COMPANIES: PROS AND CONS

Ian Townsend-Gault

While some countries do have interests in oil companies (such as the British government's stakein British Petroleum), a national oil company is one which is 100% owned by the government.There are many different forms, so generalisation can be dangerous. The national oil companyshould be established in law, and its mandate, powers, responsibilities, governance, budget,and status are usually set out by Act or Decree.

In countries adopting the concession system, petroleum laws may require licence holders toinclude the national oil company in a consortium, with the minimum percentage share fixed bythat law. In states using the production sharing system, petroleum rights are allocated to thenational oil company, which then subcontracts private companies to carry out operations.

The reasons for establishing a national corporation vary. It may be thought desirable to manifeststate participation and control in this way. The state, through its company, will participate inmanagement decisions affecting each field. Where there is no domestic industry, the state-owned company may be the nucleus of such a development. The state-owned company cangenerate revenues through participation. Finally, the national company can develop expertise inthe industry necessary to advise the government on the development of law and policy.

On the negative side, some state-owned companies have become massive bureaucracies, whichabsorb large sums and make little contribution to the state. There are examples of othercompanies which operate increasingly in their own corporate interest, and not as an arm ofgovernment.

Some companies are subject to undue political pressures, and unrealistic expectations. Thecompany is then blamed when it fails to live up to these demands.

The current trend is in favour of privatisation (UK, Canada, Peru, Argentina). But well-run andefficient companies (Petronas of Malaysia provides an excellent example) can and do make animportant contribution to a country, but the purpose of establishing such a company must beclear. Another possibility to be considered is establishing a state-owned company which canparticipate in all non-living resource activities.


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5.3 TRAINING AND TRANSFER OF TECHNOLOGY

Pedro van Meurs

There are two main instruments for ensuring training of nationals. These are:

* fiscal provisions for exploration and development - it is often a good idea to specificfinancial provisions for the companies to provide training. Money is an important part ofthis training package and governments should specify an amount to be spent on training.Governments should also seek a hard currency commitment for payment of training abroad.

* quota systems and work permits for expatriates - the government could require a programof training to develop qualified nationals as a pre-condition of issuing work permits toexpatriates.

The different types of training include:

* conversion training - taking existing professionals and advancing their skills.* basic training* short courses* levels of training

• labour force• technicians• professionals

* on the job training• national• abroad

Training and transfer of technology go hand in hand and training is an important part in anytransfer of technology provisions.

Transfer of technology can be achieved by:

* transfer of technology provisions* transfer of technology contracts between the National Oil Company and oil companies* as part of nationalisation agreements

[MR143 - Rodd and Elaisi}

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5.4 COMMERCIAL DEVELOPMENT

Rowland Harrison

To date no distinction has been made between the production phase and the exploration phase.There are many phases in the industry which the government must be aware of.

In Attachment 1 the steps from the discovery to production are set out. Once a field has beendiscovered, there must be delineation drilling and a decision has to be made as to commercialityof the discovery. Once this is done and the decision has been made to go on, a developmentplan must be formulated. This plan would set out how the development is to proceed. Once thisstep is taken, development drilling and the installation of production facilities must take place.Only once all these steps have been taken can commercial production begin. All of these stepscan take many years and it is not uncommon for them to take up to a decade.

Along the way, there are opportunities for the government to maximise the benefits to thecountry both directly, in terms of financial gains and indirectly, in terms of growth in the localeconomy.


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5.5 PIPELINES OWNERSHIP

Pedro van Meurs

Pipelines are not likely to be major issue for most countries in the Pacific, because anypetroleum production is likely to come from offshore platforms. It may, however, have someimpact in relation to gas production and has some relevance to the situation in Papua NewGuinea.

How are pipelines owned?

* ownership• separate private company• National oil company• producers

There are several different systems of compensation for land owners which may be more orless complex depending on the land tenure system in the host country.

What kinds of pipeline regulatory structures are there?

* regulatory regime• non-regulated• common carrier regulated

How is the tariff determined?Take the costs of the pipeline and divide by the volume. The remaining figure is the tariff.These figures may be based on:

* past actuals* forecast and adjustments

The easiest tariff determination involves a calculation of the return on capital plus operatingcosts divided by the yearly volume. This calculation is used in a most commonly in a non-regulated system.

In a regulated system, the tariff calculation will consider a return on equity, interest payments,depreciation, operating costs and adjustments necessary to balance accounts. The total ofthese figures is divided by the yearly volume in order to arrive at the tariff. The return on equityis based on the undepreciated balance of the outstanding investment.

[M R143 - Rodd and Elaisil

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5.6 SAFETY REGULATIONS

Rowland Harrison

How does one allocate the responsibility for the safety of operations between the oil industryand the government. Industry has to be primarily responsibly for ensuring safety of operations.Any scheme which attempts to shift this responsibility away from the industry and on to thegovernment is inviting disaster. This does not answer the question of the extent ofgovernment's responsibility.

Why do you need to address this issue? Because oil and gas operations are dangerous andinvolve considerable risk, particularly in the offshore. Not only are the operations dangerous, butthe environment in which they are being carried out is also dangerous.

It is therefore not surprising that there have been serious disasters in the offshore and there aremany examples such as the Alexander Kielland, Ocean Ranger and, more recently, the PiperAlpha platform.

In many of these disasters, the immediate causes have been readily identifiable after the eventand, sadly, could have been prevented.

What the subsequent inquiries go on to point out, is that the immediate cause is only thebeginning of the story. The real question is how did these immediate causes come about in thefirst place? This usually involves the pointing of many fingers at industry, the employeesthemselves and often the government. Inquiries generally conclude that the government's role isto supervise the industry and to ensure that the industry has directed its mind to the safety ofoperations in detailed terms. The Cullen Inquiry recommended that the industry be required toproduce a "safety case", which is a detailed description of the way in which the company hasaddressed safety in terms of the whole integrated system. This recommendation clearly placesthe primary responsibility for safety on the industry.

How does the operator do this? It may not have the particular expertise to do this. In the past,operators have relied on the Classification Societies, such as l.lovds to prepare detailed reportsand give certifications. While these organisations have an important role, the operator cannotrely on them entirely and must retain responsibility. They may also be in a conflict of interestsituation. They are paid a fee for their services and it may not be in their best interests to be asrigorous as they should be. Classifications also have in interest in promoting their ownspecifications, which may not be appropriate in certain situations.

Another issue relates to government standards - should they be detailed prescriptive standardsor more general performance standards? There are dangers involved in government regulation ofsafety. The industry may get into the mind set that compliance with the standards set by

.government is all that is required to meet their responsibility. Government may also impairsafety because a regulatory requirement has become outdated, but the operator must stillcomply with it. this may also discourage technological advances in relation to safety.Therefore, the government role is one of supervision of the industry and ensuring compliancewith the safety case.

What department within government is to take the government responsibility in this regard?There has traditionally been considerable tension between different departments, such theEnergy Department, Transport, Occupational Health etc. There may be overlap and indeedconflict if this relationship is not clear. There is no correct solution to this point but the


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recommendation appears to be that government has to be aware of this situation and should tryif possible, to vest these powers in a single body.

A further problem is who is in charge of an offshore platform? A Master is in charge of shippingoperations, where as the drilling superintendent is in charge of drilling operations. This cancreate problems with regard to conflicts between the marine operations and the industrialoperations and as to who is in charge in an emergency situation.

The government needs to be aware of this and it has been suggested that appointment of anOffshore Installation Manager may be one solution. This individual would have some directstatutory responsibilities and powers.

Which government department is to be responsibility? Within each department, there may bepotential for conflict of interest. For example, an Energy department is responsible forpromoting the industry and maximising returns to the government. This can involve trade-offs inrespect of issues such as safety, to the extent that these issues are not dealt withappropriately.


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Session 5.7 WORK COMMITMENTS AND ASSIGNMENTSUNDER A PETROLEUM LICENCE OR AGREEMENT

Carl Dundas

Introduction

The work commitments constitute one of the centre-pieces of a petroleum licence oragreement. The level of commitment will be influenced by several factors, including the generalstate of the oil industry, and particularly the price of oil. A non-producing host country usuallyseeks to secure a large obligatory work commitment in the early stages of an explorationprogramme in order to accumulate data over as wide an area, and as quickly, as possible. Forman oil company's viewpoint, the exploration risk is highest in areas whose hydrocarbon potentialis unknown, and so initial work commitments are likely to be limited in scope and low in cost.There is therefore a considerable difference in approach to work commitments, and indeedexploration goals, in the earlier stages of exploration in a frontier area between the host countryand the oil company. This general picture may very in a particular circumstance because an oilcompany itself wishes to go for an accelerated exploration programme in a frontier area and sotakes on a larger work commitment than usual.'

A work programme which has been agreed is expected to be implemented in accordance withits terms and conditions. However, the practice of the industry tolerates companies sharing theexploration risks assumed by assigning a part of the specific work commitment. This is usuallydone by a farm-out arrangement to a third party, who is usually another oil company, with theapproval of the host country.

Structure and Scope

The structure and scope of an exploration work programme will be influenced largely by thestage of the exploration activity (if any) in the area. If the requirement is for the acquisition ofdata of a primary nature, that is seismic and well log data, the commitment will be spread overa number of exploration phases - possibly two or three, and totalling about four to six years.Where the exploration operations result in a discovery, the work commitment will include a longlist of technical tests which the company will have to undertake." Although companies oftencarry out a larger programme than their commitment .requires, host countries, understandably,are interested in the minimum obligatory work programme for which the company is legallyliable. A breach of this liability will result in the company paying damages. Mechanisms areincluded in the licence/agreement to deal with this contingency. Work commitments are usuallyrequired to be performed within a Stipulated period and any failure to meet the schedule agreedwill attract sanctions under the licence/agreement. On the other hand, any excess work done in

. one phase may be credited in a subsequent phase provided the work done is of a similar natureas that required in the subsequent phase.

A well-designed work programme will quickly reveal a relationship between it and the size ofthe initial acreage covered by the licence/agreement, the relinquishment - scheme, theconfidentiality of information, assignments, and force majeure events. These factors all help toshape the framework within which the commitments were conceived and the manner in whichthey are implemented.


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Size of Area3

The host country usually starts from the viewpoint that the work commitment ought to becommensurate with the size of the acreage being asked for by the company. The problem isthat there are no firm guidelines here, particularly when the acreage is in a frontier area. Thegoal of the host country is to ensure that some data is acquired over the acreage as a whole sothat some thing becomes known about it generally. It is in this context that the matter of therelinquishment scheme becomes relevant, because companies are known to take on large areasinitially and then give up areas over which little or no work was under the licence/agreement,for example, deep water acreage in offshore areas.

The Relinquishment Scheme

The relinquishment scheme usually comes into play at the end of an exploration phase whenthe company is desirous to move to the next phase. The purpose of the relinquishment is torelease acreage to the host country who may re-Iicense or otherwise re-allocate it under a newagreement to another oil company. It is believed that the host country should have moreinformation and data about the acreage this second time round, and that such data should beprovided by the relinquishing company. If this is to be achieved, then the work commitmentshould ensure that all areas which may be relinquished attract some work beforerelinquishment.

Confidentiality of Information

The purpose of having a confidentiality requirement with respect to data is to preventpremature disclosure to the public of data over an area under licence or agreement. Data costsmoney and third parties should not have freedom of access without paying for it. It is thepractice, though not universal, in the industry for the host country to use data, as it sees fit,over acreage that has been surrendered. This issue should be in the contemplation of the partieswhom the work commitment is discussed.

Assignments

A partial or an outright assignment of exploration interest has a direct impact on a company'swork commitment. It is necessary for a host country to satisfy itself that the oil company withwhich it is dealing is of good financial standing and sound technological capability, and so anythird party which is to enter into the arrangement must have similar credentials. It follows thatany assignbment should, in principle, be subject to the approval of the host country. In a partialassignment of interest in the work 'Commitment, for example a farm-out agreement, theassignee is usually responsible directly to undertake a part or parts of the work commitmententered into by the oil company under the original contract. The host country should ensurethat in such a case, if the assignee fails to do the work properly or at all, the assignor remainsliable to execute it properly. A similar approach could be taken if an outright assignment tookplace. When an assignment is made to an affiliate, the terms and conditions may be softer thanin the case of a third party and so the company may argue for a waiver of the hostgovernment's approval. There is no reason why the host country's approval should be waivedtotally, for an affiliate may still need a parent company guarantee, and may not even beacceptable on grounds of national interest or policy."


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Force Majeure

Force Majeure events have the ability to delay or even frustrate a work commitment withouteither party incurring any liability due to the force majeure event. Force majeure may be definedas any unforeseen event or circumstance beyond the control of the parties, and usually includesacts of God, such as earthquakes, hurricanes, storms, cyclones typhoons, floods, fires causedby lightning and epidemics. Other events such as wars, revolutions, civil disturbances,insurrections, strikes and acts by the Government or Government agencies may also constituteforce majeure.

Contents

Because the work commitment is intended to be legally binding on the oil company, it should beclearly stated and be exhaustive in its requirements. The minimum commitment should state theprecise amount of work, for example, airborne magnetic data, gravity data, reflection seismicetc., as the case may be, to be done. The time within which the acquisition, processing,interpretation, evaluation and presentation of the results should be achieved, ought to be statedin the agreement. Every activity involved in the process should constitute a legal commitment.Sometimes a minimum expenditure sum is agreed and forms part of the commitment. Views donot always coincide as to whether a minimum expenditure sum is necessarily in the bestinterest of a host country. For it to be meaningful, where a sum is agreed it should be indexedagainst erosion by inflation, and should be calculated according to realistic industry rates. Thestipulation of a minimum expenditure could lead to inefficiencies in excessive start-up costs andby over-looking cost-saving devices that may be available, for example, participation in a groupshoot for seismic rather than going it alone. Where a minimum expenditure sum is agreed, anyfailure to use the entire amount should result in it being paid over to the host country. A failureto carry out any part of the work commitment should attract sanctions which should be statedin clear language, using a formula which relates to prevailing industry rates for the acquisitionof similar data.

Well commitment should be legally binding and not subject to any condition such as availabilityof a rig or subject to weather conditions. Where possible, the timing of the drilling should beprovided for and its depth stipulated. The drilling of a well may properly be subject to certainconditions according to industry practice. The licence or agreement may therefore stipulate thedepth to which a weHis to be drilled but subject to the following factors being encountered at alesser depth: (a) economic basement, (b) insurmountable technical problems which make furtherdrilling impractical; or (c) a commercially productive reservoir of hydrocarbons is discovered.Where a minimum sum was agreed for the drilling of a well, that may also be reflected as acondition and the licence/agreement may state that drilling should be continued if none of theabove-mentioned factors is encountered until the company has expended the stipulated sumwhich may include the mobilisatiorf and de-mobilisation costs. Sometimes the licence/agreementmay provide that if any of the first three factors above-mentioned is encountered at an earlystage of the drilling, a substitute well should be drilled, but generally companies do not like tonegotiate a substituted well provision. A failure to drill a well to a stipulated depth in theabsence of any condition which would render the continued obligation discharged, triggers thesanctions provisions.

Supply of Information

It is an important aspect of the work commitment for the company to provide the host countrywith current information required pursuant to the licence/agreement. The information, whichinclude the reports of data processed, interpreted and evaluated and all environmental impact


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studies, becomes the property of the host country. Some of the data may be required to bekept confidential by the parties for a stipulated period or until the relinquishment of the acreageconcerned. Certain exceptions to confidentiality may exist in favour of both parties - the hostcountry may use the data for its planning purposes and may make it available to its advisers,while the company is usually allowed to make it available to its financial backers and to trade itfor other data with oil companies. The point of interest here is that all relevant data rangingfrom seismic tapes, geological and structural maps, logs samples, cores and studies are to bemade available to the host country. Through the data supplied, the host country can takemeasures to assess whether or not the work commitments are being pursued diligently, but it isadvisable that the host country takes a more dynamic role in the monitoring and supervision ofthe implementation of the work commitments. With this in mind some licences/agreementsprovide for a management committee system which enables the host country to participate inthe decision-making process along with the company. This approach is frequently met with inproduction-sharing agreements but may be less relevant in the modern concessional form ofarranqement."

Sanctions for Breach of Work Commitments

Several events may have an impact on the execution of work commitments. A host countryexpects work commitments entered into by an oil company to be executed in good faith. But itis also well known that many exploration companies are affiliates without independent financialmeans and so if they default on their work commitments, without a valid guarantee from a bankor their parent company, the host country would not be able to recover any resultant damagessuffered through the breach. A host country is primarily interested in having the explorationwork done and so its principal means of sanctions is obtaining the work performance by someother means if the exploration company defaults. This objective can be achieved by a guaranteefrom the parent company which undertakes to perform any work which its subsidiary or affiliatecompany was unable to do, or to pay a sum of money equivalent to the cost of the outstandingwork to the host country to do the work itself or to contract it out to a third partv." The hostcountry may, instead of a parent company guarantee opt for a bank guarantee by way of letterof credit or even a bank deposit. (The various forms of guarantees have been discussed inanother paper and so it is not necessary to give further details here).

Conclusion?

Work commitments may be adversely affected by a variety of circumstances, including theassignment of a part or the whole of the company's exploration interest under a licence oragreement. There are however a wide range of avenues open to a host country to secure itsinterests under any licence or agreement. Care must be taken to ensure that commitmentsentered into are legally binding and"capable of implementation. In practical terms, it should beremembered that the size and structure of an exploration work programme will be influenced byhow much is known about the area. Unproven hydrocarbon areas carry very high risks andcontractual work commitment terms in such areas are likely to be less favourable to a hostcountry than terms with respect to an area of known potential.

The attached sketch of a take-over case study demonstrates the threat to work commitmentfrom unforeseen events.


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Notes

1. This happens where a company sets up a special exploration unit to find giant deposits -e.g. Texaco recently.

2. See Kassler, P. "Petroleum Exploration Methods, Techniques and Costs", in PetroleumExploration Strategies in Deve/oping Countries, UNDTCD. Graham and Trotman, 1982 (pp.103-11 7 - at 111).

3. For some examples of size of acreage in unproven areas see. Cameron, P. "The Structureof Petroleum Agreements" in Petroleum Investment Policies in Developing Countries ed.Beredjick, N and Walde, T. Graham and Trotman, 1988 (pp. 29-46 - et p.30).

4. An affiliate may be a known UN sanction buster which violates the host country's nationalpolicy.

5. For an account of management committee see Date-Bah, S.K. and Rahim, M, "PromotingPetroleum Exploration and Development: Issues for Government Action in PetroleumResources and Development" ed. K.1. Khan, Belhaven Press 1987, (pp. 93-109 at 104-106).

6. Cameron, P. "The Structure of Petroleum Agreement" - op. cit. p.36.

7. Some other reference materials used include:• Bandien, E.H., "Petroleum Exploration Promotion in Developing Countries" in Policy and

Management of Petroleum Resources - ed. E. Band/iem 1990. (pp. 109-122).

• DUNDAS, C.W., "Model Agreements and Exploration Promotion" in Oil and GasExploration in the SADCC Region - ed. by SADCC Energy Sector. 1986. (pp. 425-439).

• Barrows - International Petroleum Exploration and Exploitation agreements - NY10021 - (pp. 121-130).

• Dundas, CW, "Some Legal Aspects of Petroleum Governments in a DevelopingCountry" in Proceedings of the Indian Ocean - First Regional Seminar on PetroleumExploration - ed. Plumer, P. 1990 (pp. 509-518).

Sketch of case study on take-over

1. Host country negotiated a contract in 1990 with company X. Work commitment for 1stphase amounted to approx. 2000 kilometre lines seismic.

·2.' Company X acquired approx. 2/3 of seismic data, processed and evaluated it and thenconcluded that data was poor and acreage unattractive.

3. Company X was taken over by company Y in early 1992. 1/3 of the work programme wasstill outstanding. Company Y did further work on data acquired by Co. X and purportedlycame to similar view of data and the acreage as the latter.

4. The host country's national oil company did random evaluation of data acquired bycompany X and took a more optimistic view of acreage than both companies.

[MR 143 - Rodd and E/aisi]

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5. Company Y presented the findings of both companies in April 1993 to the host countryand contended that:

(a) Data was of poor quality.(b) It was less enthusiastic about acreage than company X;(c) The outstanding data for acquisition would not add anything significant to what was

known and should not be acquired;(d) The acquired data was carried out under a group shoot with two other companies and

the cost was split in three, thus costing company X approx. US$1m;(e) On the basis of cost incurred for the acquisition of 2/3, and the fact that no useful

purpose would be served by acquisition of the outstanding 1/3, their obligation was nomore than $250,000 which they would either pay in cash and surrender the acreage orin the aternative stay on for a year's extension and undertake further data processing,but no acquisition, to the value of $250,000.

The NOC rebuffed the arguments of company Y on the following grounds:

(a) it had not agreed that the acreage was unattractive;(b) it had in its possession a work programme, submitted by company X, for acquiring and

processing the remaining 1/3 data at US$1.8m (including mobilisation anddemobilisation fees);

(c) that this estimate of $1 .8m was in line with the average seismic acquisition costs by oilcompanies over a period of 10 years in host country's waters;

(d) that the company Y was liable for not only acquisition costs but also for processing,interpretation and evaluation costs; and

(d) that the commitment of company Y was to undertake the outstanding work programmeon its own if there was no one else with whom the costs could be shared by way of agroup shoot.

The arguments went on, but an agreement was reached at US$1 m with company Y. Thelessons learnt are that a host country may be powerless to prevent the takeover of the oilcompany with which it deals; after a takeover the new company may be less enthusiasticto carryon exploration, and may seek to rely on any legal loophole to avoid honouring, orto mitigate, its inherited obligation.


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Session 5.8 SAFEGUARDING PETROLEUM EXPLORATIONCOMMITMENTS

Carl Dundas

Introduction

Petroleum exploration commitments are usually entered into pursuant to a licence or anagreement resulting from negotiations between an oil company and a host country or itsnational oil company. The provisions of the licence or agreement as a whole, as the case maybe, normally reflect the prevailing atmosphere in the petroleum industry. Explorationcommitment should therefore reflect the normal industry practice with acceptable safeguards.built into the instrument embodying the terms and conditions of the exploration programme. Atypical exploration programme under a petroleum licence or agreement is divided into phases ofa stipulated period (usually of 2 years duration) during which time an agreed minimum amountof work is required to be undertaken. The oil company is usually permitted to surrender a partor the whole of the acreage at the end of each exploration phase if the minimum workprogramme is met. Invariably, oil companies carry out more than the minimum work required ina particular phase and getw credit for the excess work in the work programme of thesubsequent phase, if the work required is of a similar nature. Where the work for a particularphase or indeed for the entire exploration period is not completed to the satisfaction of the hostcountry, the safeguard mechanisms in the licence or agreement may have to be invoked. Butbefore these mechanisms are examined, it may be helpful to outline the essentials of anexploration programme and its operational modalities.

Exploration Regime

An exploration regime may be influenced by many factors such as the prevailing trend of oilprices, the perceived political risk of the host country and the geological nature of the acreage(if any data is available). Host countries are usually interested in an accelerated explorationwork programme to gain as full a knowledge as possible of its hydrocarbon potential, while oilcompanies are often keen to fit any new exploration undertaking into their overall explorationand budgetary programme. The interests of the parties do not always coincide.

The content of the exploration work programme may vary according to whether previous dataexisted over the acreage and whether the acreage is on shore or offshore. A typical workprogramme may include an aeromagnetic survey, aerial seepage survey (offshore), seismicacquisition and/or drilling of exploratory wells. In addition to these activities, the programmeincludes the processing, interpretation and evaluation of all the data acquired over the acreage.If the data acquired is considered t6 be interesting geologically, the company concerned wouldnormally elect to go on to the next exploration phase. In doing so it may be required to

. surrender a part of the acreage pursuant to the licence or agreement, as the case may be. If thecompany elects to surrender the entire acreage at the end of a given exploration phase it shouldbe required to meet all the obligation assumed in respect of that phase or pay compensation forany shortfall in its work obligation.

From a host country's view-point, the treatment of all data and information acquired under theexploration programme should be the property of the host country and should be submitted tothe authorities for their information and use subject to proper confidential safeguards for astipulated period.


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Nature of Exploration Commitments

A typical range of exploration commitments includes acquisition of some or all of the followingdata, aerial photographs; airborne magnetometer data; field geological observations of:hydrocarbon shows, macrofossils, microfossils, rock descriptions, rock sequences structuralinformation and unconformities; gravity data; reflection seismic data; satelite images; wellinformation such as hydrocarbon shows, palaeontology, petrohysical logs, sample and corelithology description, structural information, test results and velocity survey'. Othercommitments include the processing, interpretation, evaluation and presentation of such data tothe host country.

Exploration commitments should be legally binding. Provisions which are couched in a mannerwhich makes any commitment conditional on some event, for example, seismic survey subjectto a group shoot arrangement or the drilling of an exploration well subject to rig availabilityshould be avoided. A commitment to drill a well to a stipulated depth may be subject to theeconomic basement, or insurmountable technical problems, or a commercially productivereservoir of hydrocarbons being encountered at a lesser depth; and if any of these conditionsoccurs, the oil company is deemed to have completed the well. Sometimes it is provided that ifany of the first two conditions occur early in the course of drilling a well to a stipulated depth, asubstitute well has to be drilled",

Issues Impacting on Exploration Commitments

The main issues which are likely to affect a host country's ability to enjoy the benefits of thefull discharge of an oil company's exploration commitments are farm-outs, assignments, take-overs, force majeure events or defaults.

Farm-out Arrangements

Farm-out arrangements constitute an assignment of some, usually partial, exploration interestand so introduce a third party to the original agreement between the host country and the oilcompany. For the purposes of this presentation, however, assignments generally will bediscussed briefly and separately below. When the farm-out approach is applied to an explorationprogramme, it may take the form of assigning specific obligations to the assignee of farmee(another oil company) to acquire a stipulated amount of seismic data or to drill one or moreexploration wells. A farm-out arrangement should be subject to the approval of the host countryand should be consistent with the petroleum licence of agreement. Since the farm-outarrangement is a mechanism for spreading the exploration risk assumed by the oil company, itmay enable a company to continue exploration where it would otherwise surrender the acreage.Thus the farm-out approach could 6enefit the host country. However, it the farm-out agreementpurports to be inconsistent with the petroleum licence or agreement legal difficulties could arise.

. It 'should also be noted that a farm-out arrangement should not be used to win a renegotiationof the terms of the licence or agreement. In order to protect its interest, the host countryshould require the oil company (assignor) to provide in the farm-out instrument that, if theassignee does not properly discharge his obligations under that instrument, the interest shouldrevert to the assignor who will then discharge those obligations. Current practice has seen a lotof farm-out attempts by oil companies in order to spread the risk and cost of explorationbecause of low oil prices."


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Assignments

An assignment of the whole or even a part of an oil company's interest in a licence or under apetroluem agreement brings a third party into the scheme of the exploration operation. In afarm-out situation, it has been shown above that there are practical ways for a host country toprotect its interest. In the case of an outright assignment of interest, the first line of protectionis to make any such assignment subject to the terms and conditions approved by the hostcountry. In any event the assignee should have up-to-date technological capability and befinancially sound to undertake the exploration programme, and any failure on its part shouldrender the assignor liable under the original agreement or licence. Although some allowancesare often made in favour of an affiliate company if an assignment is being made to it, the hostcountry should still retain some control over the assignment, since the requirement that theassignee should be in good financial standing and be technologically capable to undertake theobligations pursuant to the licence or agreement. In such a case, there may, for example, be theneed for a new parent company performance guarantee in favour of the assignee.

Take-over

In theory although a host country may not be able to prevent the take-over of an oil companywith which it is dealing, it is able to insist that the obligation of the former company behonoured. At lease that's the legal position; but in practice a take-over may substantiallychange the rules of the game. The nature of most take-over battles is such that the "victim"company's priorities are often modified drastically and the "victor" company's emphasis isusually different. The latter's enthusiasm for the newly gained acreage may be flat and it mayseek to get out of its commitment at the lowest possible cost. In short, the host country willsoon find many of its erstwhile understandings with the original company being challenged onevery conceivable grounds, including legal ones. The surest way for a host country to havereliable safeguards is to negotiate an agreement or grant a licence with proper and clear legalcommitments initially.

Force Majeure Events4

Force majeure events may disrupt or even put an end to a company's exploration commitments.These events may be brought about by unforeseen circumstances beyond the control of eitherof the parties to the agreement or licence, and may include occurrences such as acts of God,that is to say earthquakes, hurricanes, tornadoes, cyclones, volcanic eruptions, fires andlightning. Strikes, war, civil unrest, revolutions and acts of the Government or Governmentagents may also constitute force majeure events. The host country should be sure that where aforce majeure event is alleged to interfere with the implementation of the work programme,satisfactory evidence is adduced td prove the nexus between the event and its impact on thework programme and that the duration of the force majeure event or its direct consequence be

.demonstrated in clear terms. There may even be a stipulation in the licence or agreement that ifthe duration of the event exceeds a stated period the contract should be considered to havebeen frustrated by the event, in which case the licence or agreement would expire at the end ofthat period.

Default

The more familiar safeguards than those referred to above are usually triggered when thecompany defaults in carrying out the exploration commitments in whole or at all. Safeguardsagainst default should aim to secure the completion of the outstanding work programme, and if


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that is not possible to compensate the host country for the damages suffered. It is helpful in adefault circumstance if the outstanding work can be readily costed, or the damages sufferedcan be assessed realistically so as to avoid imposing a penalty on the defaulting company, sincecommon law courts will not enforce a penalty in such circumstances. Sometimes companiesdefault intentionally if the cost of default would not be unacceptably high, and this can happenat any stage whether acquiring seismic data or drilling on exploration well.

Instruments for Achieving Safeguards

The instruments for achieving safeguards for exploration commitments in situations of a breachof the licence or agreement, or a default occurrence are a parent company guarantee, a letter ofcredit, an unconditional bank guarantee or a bank deposit.

Parent Company Guarantee

The concept of a parent company guarantee is well known to the upstream petroleum upstreamindustry. The reason for this is the most exploration companies are newly establishedsubsidiaries with little financial means of their own. If therefore they fail to honour theirexploration commitments under a petroleum licence or agreement, there may be no assetsowned by them which could be impounded to cover the resultant damages caused by thefailure to perform their contractual obligations. Hence the reason for some kind of guarantee.5

Despite the fact that a parent company guarantee may entail a resort to court action orarbitration to enforce it, it has found popular favour with host countries, perhaps because manyparent companies have a credible record of performance. Several countries have opted for aparent company guarantee rather than a bank quarantee."

The scope of a parent company guarantee is important and may itself be the subject ofnegotiation. Sometimes the parent company guarantee extends to the entire life of theoperations while the agreement is in torce.? In some cases, the parent company guaranteecovers only a limited part of the obligation, for example, the minimum work programme (seismicand drilling) during the exploration period. 8

Because the parent company guarantee imposes a liability on the parent company, it couldaffect that company's financial rating where its shares are quoted publicly on the stockmarket - particularly in the city of London, and so attempts are often made to use othercompanies in the group to give the guarantee. Of course, the other company would be nothingmore than an affiliate or subsidiary of the parent cornpanv." It is not easy for a host country tounravel the structure of any group of oil companies and so the company should be requested todemonstrate to satisfy its parent company.

r

The petroleum licence or agreement should provide for the various ways in which the host.country may enforce a parent company guarantee, if the subsidiary defaults. Such options mayinclude the performance of outstanding obligations by the parent company itself or payment ofa sum of money, calculated at oil industry rates, to the host country or its agent to undertakethe completion of the work either by itself or by a third party. Where a third part is recruited itmay be prudent for the host country to proceed by way of tender in awarding the contract. Theprovision of the licence or agreement may also provide for a reduction in the scope of theperformance guarantee in accordance with the ratio that the work done bears to the totalobligation undertaken.


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Letter of Credit

Some host countries prefer a letter of credit issued by an international bank of good standingacceptable to both parties, because it is payable, in case of default, without the need to resortto court action. The cost of this form of guarantee to the company is significantly moreexpensive than a parent company guarantee and could cost between 1/20 and 118 of one percent per annum on the amount being guaranteed. This make the cost of exploration moreexpensive and takes away funds which would otherwise be available for the explorationoperation.

Guarantee Through a Local Bank

Sometimes the oil company is required to provide its bank guarantee through a local bankowned by the host country. This restrictive approach could significantly increase the cost of theguarantee - perhaps up to 114 of one percent per annum on the amount guaranteed.

Bank Deposit

Host countries are still to be found who propose that the company should make a deposit witha bank acceptable to the former as a guarantee of its performance.

Companies are unwilling to do this because of the cost involved. It means that valuableresources that could be used for exploration would have to be diverted to service a loan for thispurpose.

Other Measures

A host country has other measures open to it to ensure that exploration commitments arecarried out. Where a minimum sum to be expended on the exploration programme is not fullyspent, the host country can require the unspent sum to be paid over to it. An efficiently runpetroleum unit or department usually keeps oil companies in line, particularly in meeting theirrequirement to supply data and information to the host country on a timely basis.

Conclusion

There is no single way of safeguarding exploration commitments. Perhaps the best way is tonegotiate and draft clear provisions in the petroleum licence or agreement, so that allobligations are binding and enforceable. Proper and timely monitoring of a petroleum licence oragreement does help to encourage responsible corporate citizenship in oil companies.

Notes

1. See P. Kassler, "Petroleum Exploration Methods, Techniques and Costs" in PetroleumExploration Strategies in Developing Countries - UN. Dept. of Technical Co-operation forDevelopment. PP103-117- Pub. by Graham & Trotman Ltd. U.K. 1982. See also MartinForrer, "The Formulation and Design of Appropriate Petroleum Exploration Programmes".Ibid., p.165.


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2. See International Petroleum Exploration & Exploitation Agreements - pp. 126-127, BarrowsN.Y. 10021 - U.S.A.

3. Ibid. See pp. 204-209.

4. Ibid. pp. 288. See also C.W. Dundas, "Some Legal Aspects of Petroleum Agreements in aDeveloping Country" in Proceedings - Indian Ocean - First Regional Seminar, pp515 -UNDTCD ed. P. Plummer 1991.

5. Dundas, C.W., "Parent Company Guarantee" in Proceedings - Indian Ocean, First RegionalSeminar, opit. cit. pp 514.

6. Gabon, Ghana, Guyana, Seychelles and Zimbabwe to name a few.

7. Gabon and Seychelles.

8. Ghana, Guyana and Zimbabwe.

9. One major oil company proposed its group insurance subsidiary, another company recentlyoffered the parent company of the group taken over by it.


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Section 6

NEGOTIATING WITH OIL COMPANIES

[M R143 - Rodd and Elaisil

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Session 6.1 NEGOTIATING WITH OIL COMPANIES

Carl Dundas

Introduction

A working definition of negotiation with oil companies could be described as a communicationof ideas between the host country and an oil company or group of oil companies (consortium)on matters of mutual interest to achieve a position acceptable to both sides on issues ofdisagreement.' An acceptable position to both sides will be informaed by the oil industrypractice and particularly the prevailing circumstances, for example, oil prices, at the time." Theoil industry is a comparatively old one with many experienced players, and the immediateinterest of a host country may not coincide in all respects with that of an interested oilcornpanv." At the exploration stage the main areas of divergence of interest are the size andpace of the work programme, while the question of the commercial viability of a discovery hasthe potential for strong differences of view. In a similar vein, the important issue of thecompany's take vis-a-vis the host-country's take, that is to say, the whole matter of the shapeof the fiscal package is always the subject of vigorous negotiation. Some other factors whichwill impact on the negotiations include the nature of the area - if it has no petroleum discoveriesand very little geological data, the host country's negotiating position will be weak. If data isavailable and the geology is considered attractive, the host country's position will be relativelystrong and it can secure reasonably good terms. 4 The company's overall perception of the localpolitical risk will also impact on the negotiation, albeit somewhat imperceptibly.

Planning Negotiations

There must be careful preparation for petroleum negotiations. It should be observed that fornegotiations to achieve optimal success, there must exist a proper legal framework based on amodern petroleum legislative scheme. The preparation exercises should focus on the followingissues:" a negotiating team, the negotiating mandate, access to information and the negotiatingbrief.

Negotiating Team

As soon as it is decided to interest oil companies in exploring for petroleum, a negotiating teamshould be put together. Its members should be drawn from the relevant ministries anddepartments of government, for example, Ministry of Finance, Attorney-General's Department,Geological Department and the primary ministry responsible (if any). If there is a national oilcompany, the tasks may be split between it and the Ministry responsible for petroleum (if any).

,The negotiating team should be responsible for the preparation for the negotiation. There shouldbe a leader of the team and or a chief spokesperson. Every team member should be kept fullyinformed about the state of preparedness and should be assigned a particular role in thepreparation efforts. The team leader should ensure that strict discipline is enforced during thenegotiations to avoid any team member speaking out of turn and giving the impression that theteam is not at one on any issue. Oil companies are fond of eavesdropping during negotiations.Team members should guard against loose corridor or social chats with individual members ofthe oil company's negotiating team, since valuable negotiating clues could be unwittinglyyielded in this manner. If it can be avoided, Ministers of Government should not be activemembers of the negotiating team as this may lead to emphasis being shifted from the technicaland strategic to political treatment of issues.


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Negotiating Mandate

The negotiating mandate should be clear to the negotiating team. The question of whether thenegotiating team's full mandate should be disclosed in clear terms at the outset may be amatter of judgement and should be carefully considered by the team as a whole beforenegotiation commences. This is because if the host country's team has only a narrow andlimited mandata and the company's team was told this, the latter may adopt a similar positioneven though it in fact had a full mandate to conclude an agreement. On the other hand, if thehost country's team announce that they have a full mandate at the commencement of thetalks, then they deny themselves the well-known negotiating ruse of adjourning to consulthigher authorities. At the same time it would be poor tactic for the team to put its case in sucha manner as to misrepresent its position, and to be found to have so done! Experience will soonshow the team, that there is really no dilemma here, it only calls for a bit of tact and diplomacy.In their interpretation of the mandate given them, the team members should bear in mind thelegislative framework within which they are negotiating, since their mandate would not extendto negotiating away any position shaped by the petroleum law (including the regulations).

Access to Information

The art of negotiating involves using relevant information to sustain a continuous credibledialogue on the issue in question. In this connection, access to information thus forms thesubstratum of every successful negotiation. Becausepetroleum is a relatively old industry itmay not be difficult to get at large volumes of information on the subject, it is therefore theability to select and use relevant information to one's situation that will be decisive innegotiations. Relevant information here concerns not only the oil industry and the 01 companywith whom the host country is dealing but information about the host country itself, and inparticular about the acreage which the company has in contemplation.

Negotiating Brief

Preparations for petroleum negotiations often entail working from a model contract togetherwith various modelling assumptions or several variations of the fiscal package and workprogramme. The brief should be thoroughly prepared and well understood by the spokespersonwho is responsible for its primary presentation. The specialised sections of the brief shouldreceive the attention of a competent professional in the respective areas, and where possiblethe issues should be elaborated upon by the professionals concerned during the negotiations.Where the team is not well served by local professionals, attempts should be made tocomplement it with outside consultants."

The negotiating brief serves several functions. It helps to focus the team on the issues so thatthe principal ones can be readily identified. It forces the team to collect relevant information and

.study them well in advance of the negotiation. It has the ability to reveal gaps in policy whichcan be remedied before the negotiation commence.

Strategies or tactics in Petroleum Negotiations

There are several tactics which may be used in achieving an overall negotiating goal, be itaccelerated exploration, high government take or a stable contractual relationship with thecompany, or all of these things. Even an excellent negotiating brief may yield poor results if anegotiating team's tactics are defective! Two factors are likely to prove endurable in actualnegotiations - good judgement, knowing when to concede a point and when to playa deadlock


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or brinkmanship role, and good timing, appreciating or indeed seizing the initiative when thetime is right to put the really important issues on the table. Knowledge of the subject matterand experience in negotiation are the two most reliable qualities on which the team can draw.Some of the vital tactics which a host country should pay close attention to when negotiatingwith oil companies are dealt with below.

Initial Contact

Unlike other negotiations, it is not always certain when and how the first contact with an oilcompany will come about. Frequently first contacts are made at or through a petroleum seminarwhich is controlled by the host country. Another avenue for initial contacts is to select a limitednumber of oil companies and target them for promotion of the host country's interests. Thepoint here is that unlike most other negotiations, those with oil companies ususally experience afair amount of contact before negotiation begins in earnest. Initial contact in this context onlybecomes significant when negotiations are considered imminent. But this is precisely theproblem. For oil companies are adept at gathering information about a country and its potentialacreage as a matter of course, negotiable. Nevertheless, that opening position may be taken tobe he maximum terms which are being sought. The opening terms should be realistic accordingto industry practice and hold out a fair opportunity for the parties to come to any agreement. Itshould also be remembered that the proposals by the host country will trigger a negotiableresponse by the company which is likely to be correspondingly opposite in terms with thesimilar intent of holding out a possibility of concluding an agreement.

Many host countries are unable to open negotiation with a model licence or agreement and relyon the other side to propose a draft. This is bad strategy. It is a sure way of losing the initialadvantage; for working with someone else's draft which was tailored to suit their needs is apoor substitute for one's own document. If the negotiating team lacks the expertise to put adraft licence or agreement together, it should secure the assistance of consultants eitherthrough technical assistance or on a commercial basis, if local funds are available.

Treatment of Issues

Eventhe simplest modern petroleum agreements embody some 40 major and several moreminor negotiating issues. This is far removed from one page early petroleum agreements whichexisted in the United States. The treatment of the major issues is informed bygeological/geophysical, legal and fiscal inputs, while the overall negotiating direction is managedby the team leader. It is important to bear in mind that at the end of the day the resultantagreement will be an integrated instrument and that all the provisions will be subject to legalinterpretation. In particular, those areas of the agreement that have an "autonomous regime",as it were, for example, the work proqrarnrne, the relinquishment scheme, the fiscal clauses,the information and confidential, the force majeure and environmental clauses, should by

.properly drafted to reflect legal commitments where that is the case. Although there are severalissues to deal with, they are relatively straightforward and a negotiating team should have nodifficulty identifying each major issue for definitive treatment.

Application of Negotiating Tactics

Negotiating tactics consist of the step by step method and techniques chosen to implement thestrategy. Some are well known to petroleum negotiators and may be employed at any stage ofthe proceedings, others may be involved only when the negotiations are going badly. Among


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the frequently used tactics in petroleum negotiations are - fait accompli, deadline, impasse,deadlock, higher authority, ultimatum, threat, feinting, blanketing and salami.

Fait Accompli

The basic rationale of the fait accompli tactic is that one party makes a proposal to the otherwhich the latter can hardly refuse. This usually occurs when during the course of negotiationsdifficult issues are put off for decision until all other issues are settled. One party may then findthat it may have to accept the others proposal on that issue in order to save the rest of theagreement which may be quite favourable. Fait accompli is usually used by oil companies infarm-out arrangements where the choice may be for the host to agree to a previously arrangedpackage between the oil company (farmor) and the assignee (farmee) or not only lose the dealbut also the original company. A fait accompli gambit by a party to the negotiations implicitlyassumes that the other party will find some attraction in the proposal. A host country does notoften find itself in a strong position to present a fait accompli gambit to an oil company, but cando so when there is keen competition for the allocation of acreage.

Deadline

Deadlines are easier tactics to handle and are more frequently met with than fait accomplisituations. In deed petroleum negotiators do like to set deadlines on both sides. Some companynegotiators usually have a set number of agreements/licences to conclude in a year. Sometimesan agreement may be required to be concluded by a specific date in order to receive budgetaryattention. In the host country's case, the negotiators may have to take account of the wetseason or the hurricane/cyclone season, when drilling may be difficult. Using a deadline as anegotiating tactic, however, may not necessarily rest on a factual promise, for it is designed toput pressure on the other side to come to a decision on a given issue. Deadlines may serve thegeneral purpose of enhancing the efficiency of the negotiations and may well be less effectivein gaining any advantage for those invoking them than is frequently believed.

Impasse

An impasse in a petroleum negotiation may be instigated by either side to play for more time orto secure further instructions. It requires some fine judgement on the part of the party whotriggers the impasse, since it could be misinterpreted and lead to a deadlock of the talks. Sincean impasse usually arises with respect to a specific issue, it may be dealt with by moving on toanother issue (in any). If the impasse is over a major issue an adjournment may be appropriatefor further reflection and or to receive new instructions. An impasse can usually be solved bythe other side making acceptable concesslons.

Deadlock

A deadlock may be triggered by unreasonable demands by one party. It usually goes to the rootof what the negotiations are about and this makes it difficult for either side to make quickconcessions. Either side should seek to ensure that the deadlock is genuine and not a mere ployto extract concessions from the other. If the deadlock is evidence that there is an unbridgeablegap between the parties then an adjournment is appropriate and both sides may reconsider theproblem with a view to finding a solution.


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Higher Authority

The ability on the part of a negotiator to invoke an appeal to a higher authority, that is, to hismanagement or political directorate, as the case may be, will depend on his mandate. There is abelief among negotiators that the otherside will make less extravagant demands if his opponenthas only a limited mandate. It is submitted that instead of ministers of Governments activelyparticipating in negotiations, they should play the role of higher authority, and could be veryeffective in doing so.

Ultimatum

This is a helpful tactic in any negotiation, and it does find itself being used frequently inpetroleum negotiations. It has its greatest effect when used against a party who has spent agreat deal of resources on a venture and would not lightly walk away. It is also effective whenapplied to relatively important issues after the major issues have settled. An ultimatum shouldnot be given if there is no intention to carry it out, because if the bluff is called, the party givingthe ultimatum may loose face.

Threat

A threat, when suitably applied in a negotiation, can be an effective tactic. A threat may bepresented in such a manner as to persuade the opponent that a failure to reach an agreement ata particular time will result in some detriment. For a threat to be an effective tactic, theotherside must be convinced that the party making the threat intends to carry it out and has theability to do so. A host country is given situations may be in a position to offer the acreageunder consideration to a competitor company and can thus effectively resort to threats ofawarding the acreage to others in order to imporve the terms under negotiation.

Feinting

The tactic of diverting the attention of an opponent from the real issue is well known topetroleum negotiators. This tactic is sometimes called feinting, decoy, or red-herring. A hostcountry may have less scope to employ this tactic than the oil company who can and often playdown the attractiveness of the data and hence the acreage.

Blanketing

This tactic is a favourite of skilled negotiators in any field. It consists essentially of the, n~gotiator's ability to conceal weak points in his negotiating plan. In appropriate cases, usingthis tactic, the negotiator will protect his position by offering his opponent information designedto hide a weakness. Blanketing, as it is called, may also be employed to put several issues onthe table at the same time in the hope that some concessions will be gained by way of a trade-off, notwithstanding the weakness of the negotiator's position.

Salami

This a favourite negotiating tactic used by American and French negotiators. It consists ofextracting concessions little by little from an opponent until the negotiator's goal is achieved.


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This tactic is at its most effective when the concessions are extracted in such a manner thatthe opponent is unaware that he has given away all that the other side wanted.

Conclusion

The art and skill in petroleum negotiations take time to be developed. Familiarisation with thesubstantive issues is one important dimension, but many other attributes of a skilled negotiatorcan only be acquired through long experience. A good negotiator must be a keen listener andpossess a flair for innovation in development of new techniques in negotiation. The role orhumour and the use of questions should be well understood and skillfully applied duringnegotiation. Close attention should be paid to the instrument which embodies the negotiatedterms. All the understandings reached should be properly and accurately documented.

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APPENDIX

List of Participants


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COOK ISLANDS SOLOMON ISLANDSAnthony T Utanga Mostyn HabuDirector Permanent SecretaryScientific Research & Marine Energy Ministry of Natural ResourcesMinistry of Marine Resources PO Box G24PO Box 85 HoniaraAvarua, Aarotonga Tel: 16771 22-944Tel: (685) 28721 Fax: 16771 21-245Fax: 16851 29721

Donn ToliaFIJI Deputy Director· GeologyMosese Volavola Ministry of Natural ResourcesPermanent Secretary PO Box G24Ministry of Lands and Mineral Resources HoniaraPO Box 2222 Tel: (677) 21-521

Government Buildings Fax: (675121-245SuvaTel: 16791 211-515 John HauiraeFax: 16791 304-037 Senior Legal Officer

Attorney-General's ChambersAlipate Qetaki Ministry of Police and JusticeFirst Parliamentary Counsel PO Box 11Attorney-General's Department HoniaraGovernment Buildings Tel: (677) 21-616Suva Fax: (6771Tel: (679) 211-332Fax: (6791 302-404 TONGA

Sione TongilavaPeter Walker Permanent SecretaryPrincipal Engineer - Mining Ministry of Lands, Survey and Natural ResourcesDepartment of Mineral Resources PO Box 5Private Bag Nukua'lofaSuva Tel: 16761 23210/23611Tel: 16791381611 Fax: 16761 23216Fax: (679) 370039

Saimone HeluNEW CALEDONIA Senior Govt GeologistPierre Jegat Ministry of Lands, Survey and Natural ResourcesSenior Advisor (as above)Hydrocarbon & Mineral DeptMining & Energy Agency Alisi TaumoepeauBP 465 Asst Senior Crown CounselNoumea Crown Law OfficeTel: (6871 273944 PO Box 85Fax: (687) 272345 Nuku'alofa

Tel: 16761 24055PAPUA NEW GUINEA Fax: (676)Robin MoainaChief Government Geoiogist VANUATUGeological Survey Division Cedric MonimerDept of Minerals & Energy DirectorPO Box 778 Dept of Geology, Mines and Water ResourcesPort Moresby Private Mail Bag 1Tel: (675) 212422 Port VilaFax: (6751 211360 Tel: 16781 22423

Fax: 16781 22213Sidney DobunabaPetroleum Policy Officer, Stanley TemakonDept of Minerals & Energy Deputy DirectorPolicy Branch Dept of Geology, Mines and Rural Water SupplyPO Box 352 las above)Konedobu (-Tel: (675) 227-685 Serah DouglasFax: (6751 213701 Secretary

Dept of Geology, Mines and Rural Water SupplyJack Sari (as above)Senior Petroleum GeologistPetroleum Branch Stan CombsDept of Minerals & Energy Regional Development Planning AdviserPO Box 778 National Planning & Statistics OfficePort Moresby Private Mail Bag 007Tel: (6751 224-200 Port VilaFax: (675) 224-222 Tel: (678) 24945

Fex: 16781 23087Melvin YalapanSenior legal Officer (Mining & Petroleum I Jack KiluState Solicitor's Office legal OfficerAttorney-General's Dept Attorney General's ChambersPO Wards trip Private Mail Bag 042Waigani, NCO Port VilaTel: (675) 271-230 Tel: 16781 22362Fax: (675) 255-399 Fax:


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Morris Tahgarasi #1500, 717-7th Avenue S.W.Secretary Calgary, AlbertaMinistry of Natural Resources CANADA T2P OZ3Port Vila Tel: (403) 237-B77BTel: (67B) 23105 Fax: 14031 265- 1B70

Fax: 167BISavenaca Siwatibau

Allan Kitchener DirectorSenior Development Accountant ESCAP Pacific Operations Centre (EPOC)Department of Finance PO Box 503Private Mail Bag 031 Port VilaPort Vila VANUATUTel: (67B) 24543 Tel: (67BI 2345BFax: (67B) Fax: 167B) 22910

Sumbue AntasDeputy Director OBSERVERSCustoms & Taxes Department Peter HantonMinistry of Finance, Commerce, Tourism & Industries Senior Financial AnalystPrivate Mail Bag 012 South Pacific Regional OfficePort Vila Asian Development BankTel: 167B} 24544 PO Box 127Fax: 167B) 22597 Port Vila

VANUATUBob Bagley Tel: (67BI 23300Customs Adviser Fax: (678) 23182Department of Works & TaxesPrivate Mail Bag 012 Moiffak HassanPort Vila Petroleum SpecialistTel: (678) 24544 World BankFax: (678) 22597 East Asia & Pacific Region

1818 H Str. N.W.Washington DC 20433

MAIN SPEAKERS & CONSULTANTS UNITED STATES OF AMERICAIan Townsend-Gault Tel: (202)458-1128Professor & Director Fax: (202) 477-2968Pacific OfficeOceans Institute of Canada Marguerite ChurchCentre for Asian Legal Studies Research AssociateFaculty of law Centre for Asian legal Studies1822 East Mall Faculty of LawVancouver Be University of British ColumbiaCANADA V6T 1Z1 1822 East Mall, VancouverTel: (604) 822-9353 CANADA V6T 122Fax: (604) 822-9317 Tel: (604) 822-9319

Fax: 1604} 822-9317Rowland Harrison(Consultant for CIDA)Partner SOPAC STAFFStikeman Elliott Jim Eade#91450 O'Connor Street Deputy DirectorOttawa SOPAC Technical SecretariatCANADA (as above)Tel: (613) 234-4555Fax: (613) 230-8877 Jon Rodd

Petroleum Co-ordinatorPedro van Meurs SO PAC Technical Secretariat(Consultant for UNCTC) Tel: (679) 381-377Van Meurs & Associates Ltd Fax: (679) 370-040Suite 650, Southland Plaza10201, Southport Road SW Bill BarclayCalgary Alberta Petroleum GeophysicistCANADA T2W 4X9 ," SOPAC Technical SecretariatTel: (403) 253-1161 las above}

. Fa~:. (403) 255 2544Anna Nata

Kenneth Havard Technical SecretaryIConsultant for OIC} SOPAC Technical Secretariat

(as above)


Documents

Papers and materials presented at the SOPAC-OIC