CHAPTER 4 MAJOR ISSUES IN NATURAL RESOURCES AGREEMENTS UNDER DIVERSE LEGAL SYSTEMS IN SOUTH AMERICA, AFRICA, MIDDLE EAST, THE FORMER SOVIET UNION, AND SOUTHEAST ASIA

• Jurisdiction: United States

International Resources Law II: A Blueprint for Mineral Development
(Feb 1995)
CHAPTER 4
MAJOR ISSUES IN NATURAL RESOURCES AGREEMENTS UNDER DIVERSE LEGAL SYSTEMS IN SOUTH AMERICA, AFRICA, MIDDLE EAST, THE FORMER SOVIET UNION, AND SOUTHEAST ASIA
Bernard C. Duval
Total Exploration Production
Paris, France

SUMMARY

INTRODUCTION

1. ARGENTINA : maintening the rights of a company through a complete change of petroleum legislation

1.1 Beginning of operations and first period of renegotiations

1.2 Major political changes and second period of renegotiations

1.3 Results and perspectives

2. ALGERIA: innovations in a national and private company partnership

2.1 Project and principles of the agreement

2.2 Organisation and status

3. YEMEN: forging a proper alliance as a political advantage

3.1 Political background and partnership strategy

3.2 Contract terms and results

4. KAZAKHSTAN: managing a complex multi-partners venture towards a world-class target

4.1 Physical and political conditions

4.2 Consortium approach and general terms

5. INDONESIA: making a success story out of long term general stability

5.1 Historical background of Indonesia's production sharing contract

5.2 Evolution and adaptability of contract terms

5.3 Status and perspectives

CONCLUSION

ACKNOWLEDGMENTS

REFERENCES

TABLES AND FIGURES

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INTRODUCTION

It is very ambitious to present such a wide ranging topic as the major issues in natural resources agreements, under a diversity of legal systems in various parts of the world. Therefore, the discussion will be limited to:

— the oil and gas upstream business, i.e exploration-production,

— five case histories which will allow some regional specificities to be highlighted. The industrial challenges and results will be briefly described for each case.

Although we have to be cautions in generalizing on the basis of such a limited number of experiences, we hope to give some answers to the questions related to the major issues, and define some rules, some attitudes, which we think can be useful under a wide range of situations.

To accomplish this, we will travel to Argentina, North Africa, Yemen in the Middle-East, Kazakhstan, a new state from the former Soviet Union more and more frequently mentioned in our circles, and finally Indonesia, to get a flavour of an asiatic experience.

In each case we will discuss some of the following issues, which are well known to be of utmost importance in an oil company negotiating and drafting oil agreements:

— working commitments,

— management control,

— tax stability,

— free state equity,

— miscellaneous guarantees (market, price, disposal of product),

— "regionalization" (obligation to employ nationals).

A summary of major issues for the selected case histories can be referred to at the end of this paper (Table 1).

1. ARGENTINA: MAINTENING THE RIGHTS OF A COMPANY THROUGH A COMPLETE CHANGE OF PETROLEUM LEGISLATION

1.1 Beginning of operations and first period of renegotiations

In Argentina, TOTAL's activities began in 1978 with an exploration project offshore Tierra del Fuego (Figure 1). The Consortium consisted of TOTAL, Bridas, an Argentinian company, and another European company Deminex. At that time, apart for some established companies who were modestly active, the situation in Argentina with very high inflation, at times well over 1000% and the monopoly position of the State company YPF (Yacimentos Petroliferos Fiscalo) discouraged investment.

In a sense we found ourselves in a precursor's position, and subsequent events proved that we were right, with oil and gas discoveries made early, in 1980.

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According to the terms of the contract with YPF (called "service contract"):

— the production belonged to the State company,

— the contractor (that is the Consortium) received payment for oil in relation to a percentage of the average price of a basket of international crudes,

— YPF undertook to buy a minimum quantity of gas until the end of the contract duration at a price related to the oil price calculated as described above.

Returning to several of the issues mentioned in the introduction, the contractor had great freedom to act under the agreement. The operator, TOTAL, played its normal role and YPF had no direct role. In that direction all went well but access to crude was very uncertain (only possible in the case that YPF did not pay the Consortium in cash), the market was captive and the price "regulated".

It was with an easily understood sense of dissatisfaction that the Consortium, in the light of significant political changes in Argentina, began a process of renegotiation (Figure 2). This continued practically for the 10 years from 1981 to 1991 and produced many substantial improvements in the contract, including ones on the work programs and lengths of the exploration periods, the method of payment, the quantity of gas that YPF had to lift, the method of calculation of the price, the overall length of the contract and finally, last but not least, in 1991, the acceptance of the US dollar as the currency to be need for accounting purposes.

1.2 Major political changes and second period of renegotiations

During this period, between 1991 and 1994, President Carlos Menem implemented important changes for the future of the petroleum sector:

— the creation of a free market for hydrocarbons with rights to import and export crude and refined products,

— the creation by decree of a "deregulated" gas market. Subsidized prices were until then a source of heavy losses for YPF and Gas del Estado, the national transportation and marketing company for gas.

— the transformation of YPF into a privatized company (Gas del Estado was privatized in 1992).

Under a new Petroleum Law the Government also imposed on YPF the need to change the "service contracts" to concession based contracts.

These changes caused no problems with regard to oil production but with gas, which form the major part of TOTAL's hydrocarbon reserves in the Tierra del Fuego area, the situation was different. These gas reserves suffered from the double handicap of being located offshore and very far from the centres of consumption (Figure 1), while the old contracts were not primarily concerned with gas and in effect assured on outlet for the gas together with a defined price.

The loss of these guarantees posed considerable problems but these were solved by a new phase of negotiations which resulted in a global agreement which:

— confirmed the conversion of the old contract to a concession agreement,

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— assured, but for a period less than that of the initial contract, the distribution of TOTAL gas by way of a take or pay contract with YPF,

— and also recognized the economic problems posed for the Consortium by the changes. In compensation, the Consortium received certain petroleum industry shares, advantageous in view of the present and future competition gas market in the country, and most importantly, assets of the Neuquen Basin, located in a less remote province.

The Consortium had thus acquired interests in gas fields with significant commercial importance as they are or will be soon connected by pipeline to the Buenos Aires region (Figure 1).

1.3 Results and perspectives

This was therefore a complicated history of numerous changes in the laws and environment of the host country and of lengthy bilateral negotiations. However it is sufficient to stress that during a profound transformation of the political-economic environment of Argentina, the Consortium succeeded in maintaining a strategy for industrial and commercial development, in spite of the complexity and length of the negotiations. The conclusion finally satisfied the needs of the two sides, the Consortium on one hand and the State company on the other, providing commercial and economic parameters that assured a balance between the adjusted prices and the other commercial compensations.

The main considerations that arise from this case history is that of the strong relationship between the legal and commercial fields, and on the necessity to subtly steer such complex negotiations with a long term vision of the needs of all parties and with great perseverence.

The result, for our group, is a level of production that has now risen to more than 120,000 boe per day, reserves of 1.7 billion boe (Figure 1), and the potential that TOTAL will become the second producing company in Argentina in 1996 (behind YPF) and an assured involvement in the long term development of the gas of Tierra del Fuego.

In general, the evolution described above has been good for the Industry which has participated well in the process of privatisation and for the economic terms for Exploration and Production in Argentina, which are seen as the best in all of Latin America.

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2. ALGERIA: INNOVATIONS IN A NATIONAL AND PRIVATE COMPANY PARTNERSHIP

2.1 Project and

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