metadata: authors: 0: author: Onorato,William Torrens
docna: 0: docna: Legislative frameworks used to foster
            petroleum development
docty: Policy Research Working Paper
subtopic: Macro-Fiscal Policy,Taxation & Subsidies,Economic Adjustment and Lending,Oil Refining & Gas Industry,Public Sector Economics,Energy Demand,Energy and Environment,Energy and Mining,Public Finance Decentralization and
            Poverty Reduction,Global Environment
teratopic: Energy
abstracts: cdata!: The main purpose of a legislative
            framework for petroleum development is to provide the basic
            context for, and the rules governing, petroleum operations
            in the host country; to regulate them, as they are carried
            out by domestic foreign, and international enterprises; and
            to define the principal administrative, economic and fiscal
            guidelines for investment activity in the sector. Experience
            shows that the cornerstone of effective petroleum
            legislative frameworks for exploration and production
            operations is a broad, generic, short but thorough petroleum
            law (not overdetailed), complemented by enabling regulations
            and one or several variants of a model contract. Such
            frameworks give both the host country and international oil
            company investors a clear legal and contractual context in
            which to negotiate mutually advantageous exploration and
            production arrangements that develop the host state's
            petroleum resources. The fiscal and tax aspects of the
            framework may be detailed in the petroleum law or in a
            separate petroleum revenue code, either of which would
            complete the legislative package. The author identifies and
            details the essential elements of such a framework --
            petroleum law, regulations, and model contracts -- and
            explains how these three components relate to one another.
repnme: repnme: Legislative frameworks used to foster
            petroleum development
display_title: Legislative frameworks used to
            foster petroleum development
listing_relative_url: /research/1995/02/697689/legislative-frameworks-used-foster-petroleum-development
topicv3: Energy and Extractives m1326595 507,Environment, Natural Resources and Blue
            Economy m1327391 566,Taxation m1327615 1121,Petroleum Industry m1583790 4710,Natural Gas m1583894 4712
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Energy
origu: Legal
no_of_pages: 72
author_keys: 0: author_key: 92426
model_extractions: POLICY RESEARCH WORKING **PAPER** 1420

# Summary findings

The main purpose of a legislative framework for petroleum development is to provide the basic context for, and the rules govcrning, petrolcum operations in the host country; to regulate them, as they are carried out by domestic, foreign, and international enterpriscs; and to define the principal adminisrrativ **e** , conomic, and fiscal guidelines for investment activity in the sector.

Experience shows that the cornerstone of effective petroleum legislative frameworks for exploration and production operations is a broad, generic, short but thorough petroleum law (not overdetailed), complemented by enabling regulations and one or several variants of a model contract. Such frameworks give both the host country and intcrnational oil company investors a clear legal and contractual context in which to negotiate mutually advantageous exploration and production arrangements that develop the host state's petroleum resources.

The fiscal and tax aspects of the framework may be detailed in the petroleum law or in a separate petroleum. revenue code, either of which would complete the legislative package.

Onorato identifies and details the essential elements of such a framework - petroleum law, regulations, and model contracts - and explains how these three components relate to one another.

- This paper a product of the Legal Department - is part of a larger effort to disseminate the Bank's experience in successful legal reform in the sectors in which it has been involved. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact William Onorato, principal counsel, energy and mining, room MC6-101, extension 81611 (62 pages). February 199S.

**_The_** _Policy_ **_Resarch_** _Workmg_ **_Paper Seris disserninates thc_** _rindings of_ **_worki_** _m progress to_ **_encourage the excange_** _of_ **_ideas about_** _developmen_ **_issues._** _An_ **_objective_** _of_ **_the series_** _is to_ **_get the_** _findings out_ **_quickly._** _even_ **_if the_** _presentations_ **_are_** _kss than_ **_fully_** _polished._ **_The papers carry the nams_** _of_ **_the authors_** _and_ **_should e used_** _and cited_ **_accordingly. The_** _findings, interpretations,_ **_and_** _conclusions_ **_are the_** _authors'_ **_own_** _and should not_ **_be attribted_** _to_ **_the World Ean&, its Fxuiv Boad_** _of_ **_Directors,_** _or_ **_an_** _of its_ **_member countries._**

Produced by the Policy Research Dissemination Center
Legal **Department** The World Bank g W ' .! S, 5,. **i:W** . **ve** ?ILi. **'LEGISLATIVE** s **RSiVsH WRs** ts.:: ... -{Eg.. -..... . ~ ~ ~ ~ ~ ......... ... ~ . . 4 * **ave successf.ly -t aUed direct fo** .. . **i'.lltO** the~. sector ~ ........... ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ **r."-**

**USED TOila FOTER POnoraoLEM**

# **Wifllm T. Onorato**

**Identifies and explains the** essetild **elements of legisatve frmwrswhich have successfully attracted irect foreign invesment into the sector and which** have, consequen, fostered development of petrolem **resources** in host States.
PREFACE In any productive sector, the presence of an enabling legal and fiscal framework is an important catalyst for new investmeit and especially for the inflow of foreign investment. This is particularly the case in the petroleum sector where investments are typically of a long-term and high risk naure. Consistent with its development mandate, the World Bank has over the years played an important role in assisting its borrowing members in introducing legislative reforms which the members felt were needed and for which they sought the Bank's help. This has included various legislative initiatives with direct relevance to oil and gas.

Mr. Onorato's paper identifies and explains the essential elements of legislative frameworks which have successfully fostered direct investment in the petroleum sector resulting in the development of petroleum resources in many countries. The paper is intended to be a useful tool for the Bank's country lawyers and task managers involved in petroleum sector projects with legal reform and technical assistance components. It deserves, however, to have a much broader audience in view of the practical and useful advice it contains.

As the Bank's lawyer most familiar with the Bank's experience in the field, Mr. Onorato is uniquely qualified to address this subject. His paper produces a concise overview of its topic. It draws on the considerable experience of Ban;k members and of the Bank itself in recent years in the field of legal reform in general and petroleum law in particular. Its conclusions must of course be adapted to the particular circumstances of each country and each project.

Other papers of this type may be usefully prepared by Bank lawyers to help disseminate the Bank's vast experience in successful legal reform in the sectors in which it has been involved.

Ibrahim F. I. Shihata Senior Vice President and General Counsel The World Bank
|APT|LIST OF ABBREVIATIONS<br>Additional Profits Tax|
|---|---|
|BOPD|Barrels of Oil Per Day|
|CA|Competent Authority|
|ESMAP|Energy Sector Management Assstance Program|
|E&P|Exploration and Production|
|FSU|Former Soviet Union|
|ICSID|International Center for the Settlement of Investment Disputes|
|II|Intertiol<br>Finance Institution|
|IOC|International Oil Company|
|JM[A]C|Joint Man<br>ent [Advisory] Committee|
|MC(s)|Model Contract(s)|
|MER|Maximum Efficient Rate [of Production]|
|MWO|Minimum Work ObLigation|
|NOC|National Oil Company|
|PA|Petroleum Agreement|
|PEPP|Petroleum Exploration Promotion Project|
|PL|Petroleum Law|
|PRC|Petroleum Revenue Code|
|PRT|Petroleum Revenue Tax|
|PSC|Production Sharing Contract|
|Regs|Regulations|
|TA|Technical Assistance|
|TOR|Terms of Reference|
. 1

# CONTENTS

I. Introduction and Summary ........................................

|II. Essenti|alEl|ements<br>ofa Petroleum<br>Law ......................<br>s|
|---|---|---|
|(1)|State|Property in Petroleum .....<br>*...................<br>S|
|(2)|<br>Com|<br>petent Authority . ...........................<br>. 6|
|(3)|Petro|leun Operations ...........................<br>.9<br>|
|(4)|Petro|leum Agreements ......................<br>**..**<br>10|
|_(5)_<br>(6)<br>(7)<br>(8)|Regu<br>Qual<br>Cont<br>Taxa<br>Othe|lations ...........................................<br>11<br>ifications, Duties and Rights of Rightsholder or<br>ractor ...............................................<br>12<br>tion of Profits . .........................<br>. 14<br>r Taxes, Duties and Exchange Controls ....<br>.........<br>18|
|(9)<br>(10)<br>|<br>Fisca<br>Envi<br>|<br>l Stabilization .......................................<br>. 20<br>ronmenta<br>Pro<br>ttion<br>and Safet<br>y ......<br>...............<br>21<br> <br>|
|(11)|Mis<br>|cellaneous<br>Provisions .........................<br>. 23<br> <br>|
||(a)|Defmitions .........................................<br>23|
||<br>(b)|NaturalGas<br>Development....................<br>23|
||(c)|<br>Unitization .........................................<br>24|
||(d)<br>|AccesstoLand for Petroleum Operations ..........<br>25<br> <br>|
||(e)|International Arbitration<br>........<br>..........<br>26|
||(f)|Affected Legislation;Reationshipto Other Laws**.....**<br>27|
|II.<br>Regulationst<br>|oa P<br>|etroleum Law........<br>...................<br>27<br> <br>|
|(1)<br>|Com<br>|petent Authority...................<br>**.....**<br>**. ..**<br>**. . . . . ..**<br>. 28<br><br>|
|(2)|Petro|leum Licensing<br>.<br>............................<br>. 29|
||(a)|Contract Area . ...................<br>.......<br>29|
||(b)|BidTenders ............................<br>30|
||(c)<br>|Direc Negotiations...<br>gene.................<br>33<br>|
|(3)|Petro|leun Operations ...........................<br>33|
|(4)|<br>Petro|<br>leumn Agreements ..........................<br>. 34|
||(a)|Contractphases;<br>terns ...................... 35|
||(b)|Mininuuwork oblgations ....................<br>36|
||(c)<br>|Relinquishmnents .................................<br>. 37<br>|
|_(5_<br>|<br>_)_Fica<br>|<br> andF inancil<br>Regime ......................<br>. 37<br>|
|(6)<br>|Assig<br>|<br>unent of Rights ......................................<br>. _40_<br>|
|7)<br>|Land<br>|Use<br>....<br>******<br>........<br>**...**<br>.......<br>........<br>41<br><br>|
|(8)|Envi|ronmental<br>Protection<br>...<br>g.........<br>..........<br>**n.e.**<br>41|
|(9)|Misc|ellaneous Provisions ................................<br>g.................<br>. 42|

_The author wishes to acknowledge the helpful comments made on initial drafts of this paper by Messrs. Ibrahim Shihata and Ian Newport. Their comments have been fidly incorporated ito the final version. The author also wishes to thank Mr. Mariadoss Paulraj for his excellent cooperation and assistance in the preparation of this paper._
|(a)|Dermidons .........................<br>..<br>43|
|---|---|
|Ob|Records<br>and Reports<br>..................<br>.<br>.43|
|(c)|Accounts ...........................<br>43|
|(d)|Producdon<br>Rates .......................<br>. 43|
|(e)|MeasurementofPetroleum<br>....................."4|
|Mt|Confidenthialt<br>.......................<br>..<br>44|
|(g)|indem ity<br>.................<br>a<br>4|
|<br>(h)|<br> Penaltie<br>...........................<br>44|
|(10) Mode|l Forms ............................<br>44|

|Tv.|Model Con|tract(s)<br>..............................<br>45|
|---|---|---|
||(1)|Scope,<br>Duration,<br>and Grant<br>of<br>Rghts...................<br>45|
|||(a)<br>Scope<br>*...................<br>46|
|||(b) Feriods,<br>Phaes and Terms ...............................<br>47|
|||(c) Grant<br>of Rights<br>......................................<br>47|
||(2)|MnWO, Work Program<br>and Guarantee ...........................<br>47|
||(3)|R0nuh*ls.........................4|
||<br>(4)|DedaratiDn<br>ofCommerdalDiscovery<br>...........................<br>49|
||(5)|Joint<br>[ngn<br>Advisory]Committe<br>........................<br>49|
||(6)|Cost<br>Reovery,Expenses<br>and Pirduction<br>Shars ....................<br>_SO_|
||(7)|Taxes<br>and Dudes ......................................<br>_SI_|
||(8|Feesand<br>Bonuses ........................................<br>_53_|
||9)|Proectonof<br>the Environment<br>.................................<br>53|
||*(10|) Supply<br>of Domestic<br>Market;<br>Emgncy<br>Ruisition<br>..................<br>54|
||iii)|1YoHTrainiPy<br>ofaHost State Personnel<br>................<br>55<br>90....|
||<br>(12)|<br>Other<br>Standard<br>Pvisions ...................................<br>55|
|V.|Condusion|..............................................<br>56|

|=-k I|<br>.ForeigInvestment<br>..................<br>2<br> <br> <br>|
|---|---|
|;ffi;Sti<{<Xb<br>{-<iSf>|5<br>-2.HostCounbtr's<br>Objwdves .................<br>... 5|
||3. IOC's<br>Objectives .....................<br>.8|
||4. ExplorationPeriod<br>...........<br>35|
||5. License<br>orConeson........<br>0<br>39|
||6. PA Variants...........<br>.<br>.<br>.<br>46|
||7. PSC<br>..<br>0<br>52|

ANNEX ... TABLE OF BANK GROULS ................................ 59 RELEVANT PEITROLEUM SECTOR LOANS, CREDITS, PAETSDMENTS AND LEGAL TA (EFE^CTIVE AND PROPOSED) 1980 - 1994
# **L-egislati-ve** Erameworks

# **Used to Foster Petroleum Development**

### By William T. Onorato

## **I.** Introduction and Summary

In the course of my ten years as the Bank's legal adviser on petroleum matters, I have had the opportunity to advise on the creation of appropriate legislative framewos aimed at fostering the development of petroleum resources in over forty member countries, worldwide'. This has been done principally through active participation in the legal reform and technical assistance (TA) components of petroleum exploration promotion projects (PEPPs), which, inter a, support the development of enabling legislation to help Bank members with petroleum potential attract foreign direct investment and risk-capital into this crifical sector of their economies. Most recently, under the Technical Cooperation Program for the former Soviet Union (FSU) and certain of its adhering Republics<sup>2</sup> , such expert legal TA was provided to both the Republics of Russia and Kazakhstan. Its objective was to aid them in the development of acceptable, international-standard, legal, contractual and fiscal frameworks to encourage a quickening of the pace of petroleum .BA, JD, Ph.D. (Cantab); Principal Coursel, Enrrgy & Mlning, The World Bank; Adjunct Prfoesor of Law, Georgetown Univerlty Law Cenbtr.

1. Prlncipaly In Sub-Saharan Africa, Eastem Europe, Latin America and the Caribbean and seveal Asian countries. In this regard, please see the Anmex to this paper detailing the Bank group's petroblum sector loans, credls, Investmnts and legal TA activitie between 1980 and 1994.

> 2.Tethnlcal Cooperation Agreement dated November S,1991, beteenthe Bank and the USSRtowhich the Republs of Russia, Kazakhstan, the Kyrgyz Repubfc and Belanu adhered, putsuant to the terms of the Agreement,
-2.-

Investment operations in their respective territories. This work is currently ongoing, as, also, is similar work In some of the other FSU Republics<sup>3</sup> under traditional Bank lending arrangements. Thus, since 1980, HIost Country Pmrpectlve the Bank has financed PEPPs , . Hot ,. --and other forms of petroleum Iupeuote of rore4l lnvumntheod putrokomaner: * Iuereue petroleui rurcn deelomei ad _mam_ sector legal reform and TA with * Jucitsee nto modn IWcolW * Improve mnmgnen's a and rolt ordntaon * Ins lnmaclal rcuru for dewdopmet the consstent objective of acting * xtbahb hu-tem rdaionap wit 10Cm * Embihb Il-term rdebiknl with globh ogad np mrket as a "catayst" to mobilize the inflow of foreign direct -_-_ -_ _______ 1. For-ign Investmn_ investment into the developing petroleum sectors of many of the Bank's borrowing members.<sup>4</sup> In view, then, of this extensive experience in advising on the drafting of international-standard legal, contractual and fiscal frameworks for petroleum exploration and production (E&P) operations in host countries, this paper seeks to draw together, discuss and critique the essential elements of such frameworks and to provide the author's recommendations on how best to structure them for the maximum attainment of their intended goals. The paper is intended to be a useful tool for the Bank's country lawyers and taslk managers involved in PEPPs or other petroleum sector projects with legal reform and TA componet. While it dcarifies and explains the principles and rationale for each essential element of such successful legislative frameworks, it must be emphasized that the 3 Thl knudtw AzbalIan, on Ukrwane, Uzbekistan and, potentlaly, Turkmenlstan. 4 Pumuant to ths Bank's "Guidmilnes for Potroloum Lending," OMS 3.82, November 28,1984; Section III, Paragraph 1C throf.
-3-

actual drafting of such regimes is both compUcated and highly specialized. In ev-ry case, thi mus be done by an experienced petroleum lawyer, thoroughly fadilar with petroleum E&P laws and contratual arrangements. For this reason, In part, this paper concentrA exclusively on providing an explanation of principles and elements of such model regimes, but, pointedly, offers no model laguage, clauses nor codes for their drafting. Indeed, Bank practice under both its projects and free-standing legal reform and TA in the petroleum sector requires that the actual drafting of laws and subsidiary instuments thereto - petroleum law (PL), regulations (Regs) and model contract (MC) - be done by exrely qualified petroleum lawyers (as such qualifications and requir may be set out in the applicable terms of reference [TOR]), under the supervision of and subject to the recommendations and comments of, the Bank's speciaized petroleum sector legal and technical staff experts.

Briefly, then, to summarize, the main purposes of a legislative framework is to provide the bsc context for and the rules governing petroleum operations in the host country; to regulate them, as they are carried out by both domestic, foreign and interonal enterprises; and to defne the principal administrative, economic and fiscal guidelines for investment activity in the sector. This paper identfies and details the essential elements of such a framework - PL, Regs and MC - and explains how these three components intel. Eerience shows that the cornerstone of effective petroleum legislave frameworks for E&P operations is a short but thorough, broad, generic PL, complemented by enabling Regs and one or several variant of a MC. Such frorks provide both host countr nd international oil company (IOC) investor with a clear legal
-4-

and contractual context within which to negotiate E&P arrangements which are both mutually advantageous snd developmental of the petroleum resources of the host State. In addition to the PL, Regs and MC(s), the fiscal and tax aspects of a complete petroleurm legislative framework may either be detailed in the PL itself or separately set out in a companion petroleum revenue code (PRC), either of which would complete the legislative package. The core rationale behind the preference for a brief but thorough PL is that it is meant to cover all essential concepts necessarily required in a modern, enabling PL while not "setting them in concrete" through unnecessary over-detail. In this legislative scheme, such detail is reserved for subsidiary instruments such as the Regs and MC, which should not be required to be submitted to the legislature for amendment or change.

In addition, in this author's view, the best approach, whenever possible, is to package the legal, contractual and fiscal regime for petroleum operations into a selfcontained, coherent legiative framework, consistent, however, with both the overall legal system of the host State and with any applicable principles of international law. This is a great incentive to attracting significant foreign investment into the sector. Where an IOC is studying potential E&P inveshnents in candidate countries, given relatively equal petroleum-prospectivity, it will normally opt for the State which has such a coherent regime in plce for petroleum operations. This, in preference to "piecing together" the legislative framework from provisions in both the PL and other necessarily related and relevant laws, such as those on foreign investment, taxation, land use, environment and the like.
+~~~m i '1X Ii uai ° hEi t110 .{g]i m 5 § .{g]i A;
- general practice<sup>5</sup> where land tenure systems are predominantly private sector biased, including private ownership of subsurface mineral rights, unsevered from the entire land parcel - these exceptions are a marked minority view which evolving international practice on the question has not chosen to assimilate or replicate. In any event, the entire rationale behind the preferred legislative framework is predicated on the fact that the State, exclusively, owns its petroleum resources.

- (2) Competent Authority - The PL should dearly identify a single goverment agency, or competent authority (CA), vested with the exclusive mandate to implement government policy in this area of petroleum development. The CA represents the State in negiating and contracting with foreign investors and in regulating and administering, from both a policy and technical compLiance viewpoint, the implementation of contracts once they have been signed. Ideally, the CA should be named in the PL, so that potential investors will know who will be their singe point of contact with the government'. Preferably, it should be a ministry or other body having considerable sectoral exptise and experience. In most countries this role is played by the local equivalent of a Ministry of Energy or Petroleum. This

Nobby the United Stats, excluding sbte lands, federal lands, the continental **shelf** under stabJurisditon and the outer continental shefn under federal Jurisdction. In fact, despite private land ownership as a system, the State b by far the largest owner of land In th USA.

The concept popubrly known In the Petroleum Indusy as a "one-stop shop'.
-7-

body usually has responsibility for petroleum exploration, development and production.

Often, however, the state of petroleum development in a given host country will produce variants of this basic approach. This is particularly true at the extreme ends of the scale, where the host country is either a developed petroleum province or a neophyte to the sector. In the former case, it is likely that the State has already created a national oil company (NOC), with varying degrees of experience and responsibilities. In addition, the State may also have vested the NOC with exclusive authority over the sector as the de facto CA, allowing it to: allocate acreage by direct negotation or tender, while, itself, retaining or competing for such acreage; contract on behalf of the State with the selected licensees or participate as State partner in joint ventures; and administer the petroleum contract and act as technical interface for the State withthe licensec<sup>7</sup> . All of the above together is not recommended. Rather, a separate CA should hold the State's patrimony in its petroleum resources, conduct competitive bidding and/or direct negoDiations and ultimately issue licenses to successful bidders. The CA should contract on behalf of the State, not the NOC. The NOC should not have authority both to aflocate acreage to potential licensees and to As wa hsolay the cae, far example, In India, wih ONOC; Romanla, with PEIKOM; and, most recently, Azbjn, with SOCAR. In ech cae, Bonk legal TA (ESMAP free-standIng TA to the **MIlnlsty** of Petbrum _&_ Natural Gas **wnd** ONGC) **and** prcts (Ln. No. 3723 RO; proposd Energy Sector TA Project, Azerbaijan) Included or will Include componet to nc or ralign the Insttml Inhbuctu ofthectr of thesector to move t away fro such exclusve **suftot** for te relevnt NOCn.
|_rA_3<br>aAd<sup>a</sup><br>i<br>co|Ed<br>......<br>.<br>.....<br>X g<br>|<br>3<br>i<br>1lgt<br>l<br>t<br>...<br>I<sup>i</sup><sup>_ZPM_</sup><br>P.|
|---|---|
|PoN|i|
-9-

need to create a CA with adequate expertise and authority. This will require institutional strengthening and consensus. Rather than a competition between interested ministries - e.g. Geology; Environment; Commerce and Trade; Finance; etc. - it is often expedient in such case, as an interim solution, to consfitute the CA as an inter-ministerial council or consultative group which has the full authority to license, contract and supervise petroleum operations?. Concurrently, expertise can be developed through experience, training and participation, ultimately leading to the creation of a true, separate CA with the requisite staff and mandate.

- (3) Petroleum Operations - This essential provision has a twofold purpose. Firs, it is meant to ensure that petroleum operations are conducted only under a duly issued permit or licnse from the CA, in such form and on such terms as are prescribed in the PL, the Regs and, where applicable, a petroleum agreement (PA), the terms of which must be consistent with the enumerated requiremelts thereof in both the PL and the Regs. Second, it is intended to give the State the maximum possible flexibility as regards its means of conducting petroleum operations. This may be through a State authority, such as an NOC, a private entity, such as an incorporated joint ven , or in any other manner which it may deem ap allit the bounds

As was proposed by ESIAP to Polish authori*ts under a PEPP conducted In paralll to Loan No. 3215 PL The ad hoc wInter-MIniterial Commssion" would be comprised of reprsentatives of the ministries of Indus"y, Finmnce and Environmental Proecion, Natural Resoures and Forstry, charged with full authority to consult supevis and award peobeum Ikanes.
-10-

of established international norms and standards to attract foreign investment to a known and conducive setting in the sector.

- (4) Petroleum Arements - Under this provision of the PL, the concept and outline contents of a MC(s) is introduced. It authorizes the CA to have prepared and make available MCs to potential applicants as the Stat's starting point for the negotiation of an E&P PA. In some PLs, a copy or copies of a MC(s) is appended to the law as an exhibit. This would enact the MC format as part of the PL. It is much better, however, not to follow this course. One must weigh the desirability of enacting a detailed, not easily changed or revised MC with the force of law against merely identifying its essential, mianimum provisions in the PL - thus establishing their legal basis - but leaving full details and negotiable points to the MC as a flexible instrument, subsidiary in position to the PL. The later course is recommended. The PL should be couched in terms of permissive, minimal contents of an MC - such as detailed in Section C. below - without legislating their provsions in detail. This is the "generic" aspect of such a PL, which provides only the legal underpinnigs and thereby leaves the State maximum negotiating options.

Also to be covered in this section of the PL are the CA's primary roles in: negotiating and concluding PAs; directly or indirectly supervising petroleum operations under PAs; revoking or suspending PAs for cause, after due notice to the rightsholder and a reasonable period for it to effect cure;
-11-

granting of non-exdusive prospecting permits for the purpose of obtaig infonnation on hydrocarbon endowment; and, depending on how the PL is meant to interface with the State's mining law, if any, the granting of mining permits for areas already subject of petroleum operations, provided, however that the former does not interfere with the latter.

(5) Regulations - As earlier said, Regs should be subsidiary instruments to the PL and should not themselves be enacted as law. Rather, this section of the PL should expressly authorize the CA to make Regs from time-to-time, consistent with the policy and objectives of the PL. This gives the great advantage of flexibility to the regime, allowing for changes to be made quicldy, in response to current developments, without the need for a protracted and often non-exprt legislative process'<sup>0</sup> . The safeguard, however, is that the Regs and any amendments thereto may never be iconsistent with the PL.

For greatest clarity, the PL should biring forward into its text for summary mention the general areas in which the CA may make Regs. These will be dealt with in greater detail in Section B., below. In addition, the PL should also give the CA broad authority to make any other Regs which it considers necessary to give effect to the provisions and policy objectives of the PL.

While this Is the profoned, majorty practce, a recent free.sbnding petroleum TA mission to Cyprus found that under lb prsent PL, Rags are to be made by the Council of Ministos, acting as the CA. In additon, the PL provides that such Rsp _vwill_ be enacted (or not opposedc by Cypriot parliament and, upon publicatin, become law. Thus the Rags and the PL together are law, rather than the desired, fexible subsidiary instruments under the _labr._
-12-

(6) Qualifications. Duties and Rights of Rightsholder or Contractor - First, it must be made clear in the PL that PAs shall only be concluded with applicants who have the requisite financial resources, technical competence and professional skills necessary to fulfill their obligations fully under such agreements. To this end the CA, as licensing authority, must have both the power and the duty to conduct "due diligence" inquiries on all applicants on such qualifications and to require of them satisfactory documentary evidence of same, as may be applicable. This due diligence by the CA also serves to avert the undesirable result of awarding a license or permit to a bidder which is not so fully qualified and which has bid primarily to acquire rights to prospective acreage for the purpose of assigning or promoting it _en_ at a profit, without undertaking itself any significant work program.

The principal duties of a rightsholder under a PA should be enumerated in the PL and then amplified in greater detail in the PA itself. In the PL, the rightsholder's duties to be specifically mentioned, and replicated as terms in all PAs, include: reporting the discovery of any petroleum to the CA; presenting the CA in timely fashion with a development plan for commercial petroleum discoveries and promptly takdng all reasonable steps to develop and produce the discovery; conducting all petroleum operations in accordance with good international petroleum industry practice, induding measures to promote conservation, safety and environmental protection; and indg the CA against all caim made
-13-

by third parties in respect of injury, damage or loss caused by or resultng from any operations carried out by the rightsholder or its subcontractors under a PA.

In return, the rightsholder under a PA should be accorded certain guaranteed rights in the PL, some of which are necessarily anplified in the PA itself. The fundamental right, however, is that the rightsholder be granted the exclusive right to carry out petroleum operations within the area covered by the PA, for the thne period(s) specified therein, subject to the provisions of the PA. As a corollary to the principle that an investor need only negotiate and condude its arrangement with a single governmental authority - the CA - the total arrangement between the parties should be induded in the PA in contract form. Separate procedures involving further governmenetal discretion - such as the granting of a license or the conversion of a "prospecting or exploration license" into a "production license", as is prevalent in civil law-based PLs - are inadvisable, unless they are mere formalities, the validity of which is dependant on the PAR. Any feasibility studies, expert evaluations or requisite governmental approvals of a proposed arrangement should, thus, be obtained internally by the CA prior to signature of the PA.

The most recent example being the Bank's comments to this effect - which were duly accepted -o o th daft Hydrocarbon Law of the Republic of the Congo. Enacbment of such a satisfactory law Is a condiUon of effecdtvene to the Economic Recovery Credit, prvided to the Congo In 1994 {Credit No. 2635 CG).
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Allowing for the prevalence of civil code systems in certain areas - principally francophone Africa, the Middle East, Eastern Europe and the new Republics of the FSU - the question of the precise legal nature of the license or permit should be clarifi'ed in the PL. In this regard, there is a clear divergence of views between IOCs and host States. The former always wish to have the license characterized and treated as a contract and, consequently, to have the ability of the State to change the license's terms through subsequent legislation appropriately restrained. On the other hand, host States tend to treat the license as an adminisve permit which will remain unchanged, except where made absolutely necessary by dictates of public purpose, and then, against the provision to the affected licensee of adequate and just compensation. This is especially true in civil code systems where the concept of the administrative contract is often applied to State licensing. To reconcile these divergent views, the PL should separately recognize the license as a permit and the PA as a contractual agreement, the terms and conditions of which are to be respected for its term, not to be changed without the concurrence of both parties'.

- (7) raxation of Profits - As earlier said, the taxlfsca aspects of a complete petroleum E&P legislative framework may either be detailed in the PL itself or separately set out in a companion PRC. The choice is often dictated by

Under the Petrolum LegisLaion Task for the Russian Federaton carried out under the Technical Coope_tlon Program. exhmlve dlscuslons were held with Russian minisbrial and ksiesatl counteparts rsultng in the agreed adoplon **of a** contractusl formatfor license to be granted under the Ucensing Stabtute Implementing the provisin ofthe Underground Resourc (Subsoil) Law.
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the depth and complexity with which the host State wishes to treat this topic. Normal practice, however, would be to establish the essential elements of the applicable regime in the PL in such a way that the potential investor may: easily gain a ful understanding of the applicable tax regime; compute, without excessive uncertainty, the amount of taxes to be paid under such fica package; and consider such a rwAl package - taking into account the contractual arrangements - as reasonably competitive with other, similar worldwide investment opportunities.

As an overview, an appropriate petroleum taxation framework should, in the view of this writer, have the following broad objectives:

- (a) reduce uncertainty on taxation to the maxmnum extent possible. The IOC should have a dear understanding of the taxation regine which is applicable to itself, its affiliates, personnel, sub-contractors and to its actual petroleum operations (imports, exports, turnover taxes, etc.);

- (b) limit negotiations on tax issues, which should be ideally defined in laws and regulations, rather than under a PA (except for specifc procedures and a number of negotiable issues);

- (c) provide for a fair and equal tax regime, regardless of the nationality of the investor (domestic or foreign), without any significant discrimination;
-16-

- (d) avoid double taxation for foreign companies or IOCs by ensuring that profit tax paid to the host country will qualify for foreign tax credits under the tax laws of the country of origin of the investor while, nevertheless, assuring full resource rent capture by the host country'3;

- (e) provide for tax stability for a reasonable time period. In non-OECD countries investors are accustomed to benefrting from such stability, even though the host country has the sovereign right to amend tax legislation regularly;

- (f) dmilarly, provide in PAs for reasonable "grandfathering" of tax regimes in existing PAs, unless otherwise mutually agreed; and

- (g) design a tax regime that can readily be applied to any type of PA which may be entered into (production sharing contract [PSC], concession, joint ventures, etc.).

Whatever complexity and detail the host State ultimately chooses to indude in its fiscal package for petroleum development, experience indicates that certain basic tax premises should be covered in the PL to establish the exact parameters or baselines of the operative fiscal regime excuding, 13 hi nb of particular revlance to MeC5 which pay taxes both tD the host State and to their national State. USbaed 0M are the prime example, while recent changs In UK tax laws have made this principle applicable to UK-based IOCs an wIL hI suh situtions, the host State should set its Income tax rate at bast as high as those generlly appicable In the coilthui oft ntoimft of relevant IOC Investors to be sure that the majot of the rent (tax) paid by the inveor for the exploton of the resource Is captured by the host Stat.
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otherwise, all other generally applicable taxes and payments not so expressly named therein. This should include that:

- (a) rightsholders under PAs will pay applicable taxes on profits (Ig revenues) from petroleum operations"'. This may be either a specific petroleum profits tax (including additional profits tax [APT], as applicable) or the generally applicable profits tax rate;

- (b) under a PA which is a PSC, the rightsholder may comply with its obligation in (a), above, by having its tax liability borne by the State partner on its behalf. This wil be reflected in the production splits available to each party'<sup>5</sup> ;

- (e) under a non-PSC PA, a royalty (ceiling and floor may be set in the PL) will be payable (as set from time-to-time by Regs, consitent with the PL, or as negodiated in the PA)<sup>1</sup> ';

- (d) other payments, such as annual rentals, contract adin on fees, sigature and/or production bonuses may also be payable (as may be negotiated in the PA), as well as any import and export taxes; and

In the new Stats of the FSU, this has been a prevalent problem from the outset, creting a signifcant disincntive to desired foreign investment In the sector. Under various tasks of the Technical Coopeton Program and the ensuing petrobum nding program, considerable progress has been made on this tax policy materin both Russia and K khstn.

is .The rightshoklers progressive production shars will be signiftcantly ower, being not of taxs to the host Stow. For the purposes dofthe forebn tax credit for US and UK-based rhtholders, It s equally importan **t** hat production **shares** received on a "deemed taxpaid basis" include a transparent mechanism by which the applicable tax incesent Is ackmlly and demonsably remiltd to the host State's tax authorities.

16 . Despite a minority "hybrid" practice to the contray (e.g. as was Iintialiy proposeld In Loan No. 2152 ZN), the majority practice Is not to have a royalty payable In a PSC PA armngeenL
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- (e) all other taxes and payments generally applicable to industrial undertakings and enterprises but which are not expressly made applicable to petroleum operations under the PL are exclud therefrom.

- (8) Other Taxes. Duties and Exchange Controls - While import and export taxes and duties are, as said in (7), above, part of the overall fiscal package, practice is quite clear as to their relationship and applicability to petroleum operations. Uniformly, PLs and PAs specify that rightsholders, and those contractors and subcontractors working for them, are free to inport and export supplies and equipment authorized under the PA for petroleum operations free of customs duties and taxes of any type. Expatriate employees of these parties receive the same treatment for their household goods and personal effects. To ensure that these exemptions do not become a mechanism for circumvention of the State's regular import controls, any item(s) so imported are made subject to the applicable duties and taxes if they are later sold within the host State for any purpose. Equally, these exemptions from taxes and duties do not automatically exempt the rightsholder from obtaining import and export licenses for the goods involved, if applicable. Such licenses permit the State both to consider the validity of the exemption on each item to which it applies and to enforce collections where a sale later occurs within its territory.
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As regards currency and exchange control matters, the PL must reflect the reality that to attract significant foreign investment into the sector, the host State should provide certain guarantees of convertability and remittability of funds to investors of risk-capital in petroleum operatons. Free movement and exchange of funds is of particular importance in the . international petroleum sector'<sup>7</sup> At the very least, IOCs are usually assured of the ability to convert and remit funds needed to meet current obligations and loan commitments. It is preferable, however, to ensure that such investors are able to convert their local currency profits from petroleum operations at non-discriminatory rates of exchange and to remit them to shareholders without restriction. Admittedly, while this is not always easy for countries with balance of payments problems, it is quite necessary to foster development of the sector. Provided that the foreign enterprise onducting petroleum operations is in ful compliance with ts obligatons under the PA, the PL should, thus, permit it to":

- (a) bring such foreign currency into the host country that is needed for petroleum operations;

17 This Is recgnie with some allowanco for prectcul exceptions, In the Guidelines on the Treatment of Foneign DirectInvsment(Guldelines), **Isued** by the Delopment CommitteeinSeptember, 1 2,published Inthe Legl Framewk for th Tretmnt of Foreign Invesbnont, World Bank, 1992 and In ? ICSID Rev. FILJ 295 (1992) **For** a dobiled analys of the Guoidllns, **see** Ibmhhm F.l Shlhatb, Legal Treatment of Foreign Investmnt _"The_ World Bank Guldelinecs (192). . While the above requirements are partcularly tallored to the special neds of forign direct Inves In the petroeum sector, thy ore conistent with the neral provisions of Artclb III, "Treatmen, Paragrphe 641) ond (2) of til Guldones, refrred to u In foobote _17._
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- (b) obtain local currency for local purposes from authorized dealers at the most favorable legal rate of exchange at the time of conversion; use local currency available from affiliated companies; and borrow funds in local currency from host country banks, in accordance with the law;

- (c) open interest-bearing bank accounts for foreign and local currency;

- (d) pay foreign contractors, sub-contractors and expatriate employees outside the host country, provided it assures that these parties maintain enough foreign currency in the host country to pay taxes and living expenses;

- (e) retain abroad all foreign currencies generated from sales outside the host country; and

- (g) export any foreign currency funds brought into the host countz'<sup>7</sup> ,Jr petroleum operations which prove to be surplus funds or which result from mandatory sales of petroleum to the State.

(9) EWscal Stabilization - After a PA has been concluded, as an additional element of the total fiscal package, the investor should be secured where possible from the adverse economic effects of certain new statutes, regulations and laws. One way that this may be achieved in both the PL and PA is by using certain limited stabilizon or renegotiation provisions. These provisions would mitigate the effects of any new enactments which either increase the burdens on rtsholders or reduce their original rights and economic benefits. As a
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further qualiflcation, they would not apply to new laws imposing safety, conservation or environmental restraints, upon which the State must be free to act to protect the public interest. In such cases, newly enacted legislation wil apply fully to the rightsholder, although this may be subject to a requiremnent in the PL for the CA, acting for the State, to negotiate in good faith amendments to the PA which would compeosate the rightsholder for the resulting increased economic burden.9 Alternatively, the same resut may be achieved without the use of express stabilization provisions. In host States where investment opportunities exist and the investment dimate is perceived to be reasonably stable, the State's assurances that all contracts will be scrupulously honored - subject only to possible limited, non-discrminatory changes enacted for a public purpose and subject to just compensation for their effect - may well suffice.

- (10) Environmental Protedion and Safety - For far too long, interational practice in the petroleum sector has lagged behind the pace of today's keen awareness worldwide of the need for diligent enviromental protection and preservaon. PLs often failed adequately to address the topic and there was no substantial backup position in comprehensive and modern laws on environmenal protection and conservation in most host countries. Most frequently, the

.The Presidential DUcTSe No. 2286 (December29, 1993) of the Riulan Fedeain enuitld Qutons of Producton Sharing Agrements when Using the Subsoir providn, in this rgrd, that Iff during te perWod of oprtion of la PA] norms are osbblished by legislative acts of the Ruisln Fedetion which woen the commercial ruls of the activfty of the Investor within the framework ofthe IPAI, changs shall be made theein which ensure tothe Invewor the commrcil resulb which would have bwn received when applying the norms of egIaion that prevailed at th moment of concuing the [PAr.
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topic was left to a broad and bland obligation in both the PL and MC that rightsholder or Contractor was typically required to 'conduct all petroleum operations in a diligent, conscientious and worknanlike manner in accordance with... generally accepted standards of international petroleum industry designed to achieve efficient and safe exploration and production of petroleum...' Some such provisions went further, so as to require that aU necessary measures also be taken for conservation, safety of life and property, crops, fishing and fisheries, navigation, protection of the environment, prevention of pollution and safety and health of persomel. While a reasonable begining, this was all, stil!, inadequate.

Establis.ed practice- today is to indude a more comprehensive obligation for environmental protection and safety in the PL and then to detail more specific actions and requirements in both the Regs and the MC/PA. This will, almost without exception, include a requirement for an environmental aessment or impact study to be carried out prior to the commencement of petroleum operations?A. There is, however, a possibility of thereby creating a significant short-term fmancial disincentive. Equally, in line with the premise that legislative regimes for petroleum development should be a self-contained, coherent legslative frameworks in and of 20In this regard, the Bank, In fln cing petroleum sector projects, now requims an environmental assessment and classificaton at or prior to appraisal c the projct. See the World Bank Operational Directive [ODJ 4.01, Evironmeftl Assessment, October 1991, and for specific application to peroleum projects, sm the Environmental Assesment Soucebook, Vol. 3, GuidelInes for Environmental Assessment of Energy and lndumtby Projects, World Bank Environment Department, 1991.
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themselves, it is not recommended to make petroleum operations subject generally to any broad, comprehensive, non-Petroleum specific environmental protection law, if extant, except to the extent that the principles therefrom are applicable to specific sector practices.

- (11) Miscellaneous Provisions - To round-out a generic, enabling PL, the following topics should be covered briefly but succinctly:

- (a) Def nitions - every law of a technical nature should have a reasonably extensive "Definitions' section, all of which such definitions are then used consistently in the law, for both drafting convenience and accuracy of reference. Ideally, the Definfion section should be at the bgning of the law, best to serve both purposes. In PLs in particular, accurate and precise definons are a crucial element of both clarity and brevity;

- (b) Natural Gas Development - particularly in host States which are known or expected to be gas-prone, it is advisable for the PL to provide for special incentives an.i priorities to encourage the development of natural gas (also a defined term)<sup>2</sup> '. Historically and for too long, natural gas was treated as the "poor relative" of crude oil. Only relatively recently has its real potential been reaHzed as an abundant, worldwide environmentally dean and economically efficient fuel. Recoging, however, that while natitral gas may be found and

This was done for gs-pron Bangladesh In the PL and MC prepared under a Bank-Financod PEPP (Credit No 1402 BP).
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produced in the same way as crude oil, it thereafter differs considerably from the latter in physical properties, characteriscs and, most importantly, in its development, transportation and the limited geographic radius from its source of its economic uses. It is not, then, "another form of crude oil", to be treated as such, mutatis mutandi. Rather, enlightened modern PLs have specially-tailored gas development and commercialization provisions to encourage positive action on gas discoveries. These include, inter alia, provisions to: appraise for the State (even if the rightsholdr does not wish itself to attempt commercial development); allow the rightsholder a longer development or retention period to conduct a market feasibility study; and optionally to develop jointly with the State in a negodated joint venture. In summary, practice today dictates that a PL being drafted for a known or likely gas-prone host country should include special sas development provisions such as those mentioned; (c) Unitization - when rightsholders on adjacent blocks know, prove or have reason to believe that they each have discovered petroleum from a common structure which extends across the boundary line of their respective blocks, the State has a paramount right to ensure that in the interests of economy, efficiency and conservation of the resource, the common deposit is developed as a single unit, on a non-compettive basis by the inted rightsholders. This is the procedure called
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"unitization". Unitization prevents wasteful competitive drilling by rightsholders to the prejudice of the State's interests as the resource owner. Common practice is to include a provision in the PL giving the CA the right to order the affected rightsholders to develop such an area jointly, or under a joint operating or unit plan, approved by the CA;

- (d) Access to Land for Petroleum Operations - remembering that legislative frameworks for petroleum E&P development should, to the greatest extent possible, be self-contained and coherent, issues of land use for petroleum operations should be both specifically addressed in the PL and harmonized therein with any broader-based land law in force. In particular, the PL should guarantee the rightsholder necessary access both to public and private lands for the purposes of carrying out procedures necessary and incident to its petroleum nperations. The conditions of such qualified rights of entry and use should be spelled-out in Regs made by the CA, which should indude a provision for payment of fees to the State as consideration and compensation to landowners and occupiers whose rights have been diturbed. Presumably, the State will already have the power temporarily to appropriate or burden private lands for public policy purposes - such as for petroleum development - against the payment of adequate compensation under the broader land law. If not, such
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# should be specifically provided in the PL for the purpose of facilitating

petroleum operations=; (e) International Aritration - certain disputes between parties to a PA - a foreign IOC and the CA - which cannot be settled by other means should be made referable under the PL, at the request of either party, to settlement by international arbitration under the rules and auspices of one of the recognized international arbitral fora. Not all disputes should be made subject to such international arbitration, however. Those to be arbitrated should be limited strictly to controversies involving the interpretaton, validity, execution or termination of a **_PA._** Assurances that such disputes will be decided by a knowledgeable and inpartial decision-maker is of particular importance in the internafional petroleum sector. Controversies involvig laws or regulations not directly related to the PL, however, remain within the jurisdiction of the courts of the host country. Reognized and suitable international arbitral fora include: ICSID, a Bank affliate; the Stockholm or London Courts of Arbitration; the court of arbitration of the Intational Chamber of Commerce in Paris; and the arbitration centers of the Afro-Asian Legal Consultative Committee in Cairo and Kuala Lumpur, as major exanmples. It would be necessary While thwe concepts ofcompusosy takinW or "eminent domaln" were alreadg known, their pmcedurs were not clearto several of the FSU Republics. This engendemd considerable discussion and explnation, for example, with Rudsian counterparts under the Petrolexn Legisaton Task of the Technical Cooperamon Progmam.
-27-

for both the host State and the State of the IOC's nationality to be a party to those fora established by international conventions, such as ICSID; and (f) Affected Iislation/Relationship to Other Laws -the PL must clearly state its relationship to other relevant legislation. Practice is that all matters concerning petroleum should, to the extent possible, be covered by the PL. If this is not possible, the PL should, at the time of its promulgation, be made specificaly to prevail over any conflicting requirements of other exsting laws or regulatons. Such conflicting laws and/or regulations should subsequently be amended to remove such conflicts, but the prindple of precedence of the PL should be dearly enunciated therein. As an intermediary step, however, the PL may specify certain transitory periods or delays to its full force and precedence, pending other necessary legislative action or the making of amendments to conflicting provisions of other laws. mI. Regulations to a Petroleum Law It is my view that the second essential component of succsf petroleum legislative frameworks for E&P development are the Regs to the PL. As discsed in paragraph (5) of Section A., above, the PL should authorize the CA. expressly to make Regs, from timeto-time, providing the detail and procedures by which to implement the policy and objectives of the PL, by reference to specific, enabling provisions thereof. As also earlier explained, the Regs are subsidiary instuments to the PL, not intended for legislative
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consideration or enactment. The benefit in this practice is that maximum flexibilty is maintained, allowing for timely response to any current developments which would require changes in the Regs. The safeguard, always, is that the Regs, and any such changes thereto, may never be inconsistent with the policy, objectives or letter of the PL.

Consistent with the types of legislative formats discussed here, the Regs to the type of PL detailed in Section A., above, wIll follow the PL's format, adding the detail necessary to effectuate the intent of its enabling provisions. This may be quite extensive or not, depending on many variable factors. Regardless of length or brevity, however, particular attention and elaboration in the Regs should always be given to the following core items:

- (1) Competent Authority - In the event that the PL does not itself identify the single governent entity or agency that will act as the CA, such entity or agency should be identified in the Regs. The policy advantage of such an approach is flexibility. The concept of the CA must be established by law, but its identity may be more readily changed by Regulation in response to evolving drcumstances and growing or shifting expertise within government. The caveat, however, from experience, is that frequent changes in the identity of the CA will prove a disincentive to foreign investment, due to perceived instability and lack of continuity of the entity.

To the extent that the exclusive mandate in the PL for the CA to implement State policy in the petroleum sector does not fuily enumerate all of the CA's specific powers and duties attendant thereto, the practice is to set them out in detail in the Regs. It is also possible to address in the Regs the
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structure and composition of the CA, but it would be better to do so in a separate constitutive document or decree, as this is more an administrative matter than one of sectoral substance.

- (2) Peoleum Licensinm - As the PL establishes both that the State exdusively owns all petroleum within its teritories and that it may conduct operations through any entity or in any manner to develop such petroleum, indluding the licensing of its exclusive right to qualified applicants under a PA, the Regs must detail the methods by which such licensing may be accomplished.

EstabLished practice is rst to deliit prospective petroleum acreage and then to offer it for licensing by officialy and publically advertised bid tenders. However, where acreage is not induded or planned to be induded in such a bid tender, the CA should also be permitted in the Regs to enter into direct neotiations for the licensing of same by an interested party, upon its valid application. In order to receive the most competitive offers, however, bid tender is preferred where petroleum industry interest is either anticipated or p ily evidentP.

- (a) Contract Area - Before licensing procedures can commence, the CA must first accurately identify the areas to be offered. Normal practice is to provide for the principle of "graticulation" (geographic demarcation) in the PL and then to deal more specifically with it in

. tansparency and broader spectrum of coxnpeon are th strents of the bd tendew prcess. The often sated fear of dirct negotaons stms fron th poslbility of both corrupton and sharp praclce by eoh t State or appliant partes.
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the Regs. In this regard, the Regs should specify a uniform shape for areas to be offered (Contract Area). This is generally that Contract Areas should be geometrically regular in shape - normally a 3:1 rectangle - oriented north/south or east/west. As to sizing of Contract Areas, the usual practice is to specify in the PL both minimum and maximum areas to be allowed (in square kilometers), leaving it for the CA to determine individual Contract Areas within these permitted limits.

- (b) Bid Tenders - The Regs should outline in detail the procedures by which bid tenders will be conducted. This is subject to numerous variations, but should always cover, inter alia:

- _C')_ issuance of a bid package by the CA which indudes - an accurate map of the area(s) open for bid; a brief description of the geology and topography of the offered area(s); a bid sheet listing the criteria for bid evaluation and providing a format for bidders to submit their proposals; a MC(s), to which bidders must identify any exceptions; the procedure for submittal and evaluation of bids and the subsequent negotiating process; and the amount of any bid guarantee to be submitted,
-31-

set in an amount both to encourage the widest competition and to discourage less than serious bidse; (ii) the requirement that the CA shall publish in the official govermnent journal or newspaper a brief description of the areas to be subject to the bid tender, the proposed petroleum operations to be conducted (e.g. new exploration; development; enhanced recovery; workover) and instuctions for obtaining bid packages. The CA should also be given discretion both to publish similar such notices in domestic and foreign business and trade publications and to send them directly to bidders whom the CA believes may be intereste&;

- (iii) discretion to the CA to require prospective bidders to purchae geological and geophysical data, well logs or other proprietary information owned by the State concerning the area(s) subject to the bid tender. In such case, the Regs should require that the description and price of such bid package shall be inlduded in the notice to prospective bidders, discussed in (b), above.

Tho eWil to be prevented here Is "proaotion" by an appikcant which doesn't have eithr the fInancial or technical capabilities to fiulil the pioposed MWO. Too often, States new to the setor will award lenes to such companbs, under questionable circumstances, which such campanies will, In turn, seek to sell, assign or'arnn-ou n or most of their rights to an IOC at a signIficant profit, having made no real monetary or work expenditures. Whilb the Bank will not comment directly to a host State on the merits of any such license or PA awarded, t will seek, if requsted, to demonwstrate to the host State best practce in the se-ctor, as a comparison or benchmark.

25 ,Under Bank-financed PEPPs, In addition to broad, International trade publcation of Intended Icensing rounds by host States, such projects include a component for one or several promotion seminars for interesbd Industry companbs in the host State's capital city, as well as In International oil centers such as London, louston, Shngpore, etc.
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Concerning the price to be charged for bid packages, the preferred practice is to limit it to an amount adequate to cover the cost of its production and/or the administrative costs of the bid tendeP; and

- (iv) as regards the processes and procedures of bid submission, evaluation, award and negotiation of a PA, the Regs should specify them in detail in dear, transparent fashion. In particular, provision should be made for: (i) the submission of sealed bids; (ii) their public opening; and (iii) procedures for their evaluation and a maximum time limit for the CA to conclude same and to negotiate a PA. The procedure is to rank in order of their merit all responsive and competitive bids

- factoring in as well an evaluation of the bidder's technical and rinancial competencies -and to notify the first several (e.g.- three) ranked applicants. Thereafter, the CA will begin negotiations, based on the MC, with the highest ranked bidder, mandated to conclude a PA therewith within a maximum time limit (e.g. 60 days), or to commence fresh negotiations with the next ranked bidder(s). Alternatively, the CA may reject all

The peferred prac0ee Is for the host Sbbt not to seek to make a signIficant profit on the sab of bid date packages. This can be a feal disinenrive to attracting InWntry InteresL The more difcult came is wher a State contmc with a private geophyslcal company to acquire and prepare a data packap fbr mIe at cost plum a poftmrgin to the Indepndent contractor.
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bids and either re-bid the area(s) or withdraw all or part of It

# from the bid tender.

(c) Direct Negogation - As earlier said, acreage which is not included or planned to be included in a bid tender should be permitted In the Rep to be licensed by the CA through direct negotiations. A party interested in entering into direct negotiations with the CA should be required to provide to the CA sufficient information fully to identify: itself, as a corporate or other entity; its area -nf interest, defined by geological coordinates; its technical competence and rfancal resources, fuUly described and documented; and complete terms and conditions it proposes for a PA. Thereafter, at the CA's discretion, it may enter into such direct negotiations with the applicant on such terms as it may deem appropriate, provided that they are consistent with both the PL and the Regs.

- (3) PIetroleum Operations -Under this heading, the Regs should address specific requirements to be met in the carrying out of petroleum operations under a PA. The most important of these normally include:

- (a) submission to the CA of the rightsholder's annual work program; timing and procedures for its approval;

- (b) prompt supply to the CA of quality copies of all greoogical, geophysical, well and other technical data developed for a contract area, subject of a PA, by the rightsholder;
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- (c) rightsholder's obligation to use only the best available machinery, equipment and supplies in petroleum operations, in accordance with international best practice;

- (d) rightsholder's guarantee of reasonable and timely access for CA personnel to all areas upon which petroleun operations are conducted under a PA;

- (e) rightsholder's obligations with regard both to advance notifcation to the CA of the drilling of any proposed wel and the former's duty to plug and abandon unsuccessful wells in an enviromnentally and safetyconscious manner; and

- (f) the requirement and procedures by which the rightsholder under a PA must meter and measure petroleum produced and transported from a Contract Area for the purpose of accounting for it to the CA.

-

- (4) Peroleum A _eements Some PLs have attempted to legislate the entire content, in detail, of what must be included in a PA27. Alternatively, some Regs go into such extensive detail, in lieu of legislating it in the PL. The former option is defsiitely not recommended; the latte, while less disfavored, is normally counterproductive. As earlier noted, it is better to have the PL enact the core concepts of the legislatve, contractual and fiscal regime - in broad outline but not in speciric detail - and for the Regs to elaborate such

Aswathe cm wittthe orginal draft PL, prepared by non-Bank-financed bpl consullants, forAzerbaljan. Under t proposed Enewrgy Sector Technical Assitance Project for this member, such an approach wfll bea bandoned and a PL, of the type discuLsed In this paper will be prepared.
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core concepts, as necessary. The actual contents of the proposed PA - consistent with the essential requirements set out in both the P1 and Regp - would, idealy, be contained in an MC(s), which, as a subsidiary, non-enacted instrument(s), would be the starting point for the State's negothiaons of PAs. Consistent with this legislative scheme, the Regs, amplifing the enabling provisions of the PL, should address the following essential PA points: <!-- Start of picture text --> SAMPEXLRTO<br>(a) Contract ***<br>FST PHAS- 3:YER'S<br>pha s e s: g<br>it inIaa4sk=umuc(sl<br>should be E,IS, SptIUUtfE dai<br>esablished<br>cearly in - SECOND.EASC.!iVEAUtS<br>the Regs * Cd<br>that EI&P blouapitm<br>PAs should = w or o<br>h a v e T2 l.g i<br>separate - :.twv<br>and distict . /<br>Eb~~~~Onr h havse s,lb** .1 kop4Imm asu 4 i 'S<br>ph ases, __ __ _ __ _ __ _ __ _ __ _ ...... ._ _<br>4. Explerchen Pencilt<br>being thexoi apprAisa Period<br><!-- End of picture text --> agloatio, apprais;il and exploitaion or development periods. The
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Regs should not specify mandatory terms for each such phase but, rather, set maximums periods for each of them, with provision for the possibility of a defined number of extensions of a maximum term each<sup>2</sup> '. The acual phase terms to be agreed with each rightsholder should then be negotiated, within the specified maxinums, and set out in the appropriate clause of the PA.

- (b) Minimum work obligations (MWO) - the Regs should mandate that PAs will provide for defined, minimum petroleum operations to be performed by the rightsbolder during each phase of the contract, or other periods of time win such phases. These MWOs must be expressed in quantitative terms (e.g. number of wels and/or meters to be drilled; kilometers of seismic Ines to be acquired) or in monetary terms (monetary value of each MWO committed). Preferred practice, however, is that the MWO be expressed in quantitative work obligations with line-item monetary values assigned to each such obligation, payable as a enalty in the event of their nonfulfillment.

In addition, the Regs should establish the principles that while the rightsholder may credit work undertaken in excess of the MWO for a given term to an ensuing term, its failure to perform the MWO for any given term will give rise to penalties, induding payment to the CA of the value of the MWO not completed, termination of the PA, or 23 .This **mWht be, for** exampb, **a** maximum of **l** ( ye for **expbration, with** up to **(3)** extonsionsfoe () year each; a maxdmum of twenty fte 126) years for dveIpmsnt, with up to two (2) extenskna of five (5) years each.
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both. To ensure that the CA will receive payment for the value of MWO items not completed, the Regs should specify that the rightsholder must secure either a bank guarantee or an irrevocable standby letter of credit in favor of the CA, on a line-item basis, against the total value of the applicable MWO, which such facility may be drawn down on demand by the CA in cases of non-performance or default.

- (c) Relinquishments - consistent with international practice, the Regs should require that PAs provide for periodic reUnquidmets of contracted acreage during the course of the exploration phase and any extensions thereto. This will be done within both the times and the percentages set forth as guidelines in the Regs and then negotated as fi-rm commitments, consistent with the Regs, in the PA<sup>3</sup> . The objectives of such periodic relinquishments are to ensure that by the end of the exploration phase of a PA, all acreage contracted but not to be commercially developed (the latter may be retained) is returned by the rightsholder to the CA in an orderly, geometric pattem, whiuch is suitable for re-offering under a subsequent PA.

- (5) Fiscal and Financial Regime - As earlier indicated, regardless of the complexity of the fnal fiscal regime chosen, its essential elements should be set out generically in the PL and then treaed with more speceifc detail in the Regs. The advantage, as mentioned, of such an approach is the flexibility of

29 A typical mandatoy relinquishment pattm fora seven (7) year maximumn explormUon pha might be: twnty five percent (25%) of the original Contact Area bwo (2) years; fity percent (50%) ofsf afbr tour **4 ye;** and ***U po.t of** the Contract Area at the end of the InWid exploation phase, other than those ares reained fbr comercial devukpmnlt or under an extension to the Inial term.
-38-

being able easily to change particular rates and percentages in response to evolving circumstances, consistent always, however, with the prindples and guidelines established for same in the PL and individually agreed in PAs. Thus, this section of the Regs may, from time-to-time:

- (a) set the flat rate or range of a sliding-scale, negotiable rnyalty, if one is to be payable under a non-PSC regime;

- (b) similarly, set the rates or ranges for land rental and/or contract administration fees, payable annually to the CA;

- (c) establish the points during petroleum operations whn bonuses may be payable (e.g. signature; commercial discovery; produtdon levels), normaily as quantitatively agreed in a PA;

- (d) under a PSC regime, indicate both the acceptable ranges of production splits for prorit oil, as between the State and the rightsholder (the latter on an income tax deemed-paid basis) at indicative levels of production, as well as the acceptable ranges or levels of cost recovery allowable to a rightsholder out of cost oil, all as may fialy be negotiated in a PAN; and

- (e) in a tax and royalty regime (i.e.-non-PSC), conflrm the application or limitation of the generally applicable profits tax to rigltsholders' petroleum operations profits and/or provide the rate of any petroleum

3sThe indicaive leels of producton will nornally be at steps from 25,000 to 50,000 to 100,000 to 150,000 to In exces of 200,000 BOPD for normal commercil fields. A 30% to 50% renp of cost rowmy Is quit nomnaL Abo 70% would be geroute , but a deflnit Incentive to Investnent where prospectB mey be fgough **t** o be mnrginl.
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revenue tax (PRT) in lieu, as well as set rate ranges for any APT, leaving its applicable thresholds to be negotiated in a PA.<sup>3</sup> ' The practice here is to specify in the Regs that, with regard to accounting for revenues and profits from petroleum operations, rightsholder will maintain dear and accurate records, in an agreed unit or currency of account, consistent with international petroleum industry standard accounting practice, and provide periodic (e.g.- monthly; quarterly) reports thereon to the CA, pursuant to the requirements and formats contained in an Accounting Proce<!-- Start of picture text --> A simplfied ample of te royay ud iax meodoly<br>dure mandatorily calcution for a Lcns Cod:W be as Iffows:-<br>appended to the -. G ba- - rod- - n 10 0<br>P-A. 2.Rylt aabet th Siate--s5 ISS UEOPD - -<br>Grs u R -Podudn 85,100 UOPD<br>Lastly, this<br>3. Cantrictos Operti Enpemn'- es:<br>secion of the Rep -,oer TaDeductl - MOuP -<br>should set forth -: T .I-- .p ;OF- 70<br>4. PRT -40% etNet<br>internationally- : hi---tue<br>f Cotracor's- S-re -trduts 4-10 IOPO''E'0<br>recognized d t''*-- -- :O. --<br>_~~~~~~~~~~~~~~~~~~~~~~ . ; . . . -- .. . . .. . .. . . . . . . . ...... .....:- ;-. .. , '-<br><!-- End of picture text --> method(s) to value _5. Lcense or Concession_ crude oil and natural gas produced from a Contract Area, ultimately to be agreed and confirmed in a PA.

. The purpose of APT Ic to catch tue "windfall profit" on very large dlMolds. Not to discouage deveopment of normal or maripnl ilMdm e, however, the th olds of cunubftve or grows producton at which APT abtches should be set quit high.
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- (6) Assignment of Rifhts - As it may often be the case that a rightsholder under a PA may subsequently wish to transfer or assign all or a portion of its rights thereunder, either to its own affliate; another member of its consortium (if applicable); or to a third party, the Regs must address such a process expressly. In this regard, the practice is to allow such assignments, as follows:

- (a) to an affliate<sup>12</sup> , on prior notice to the CA, but without the necessity of its prior consent, provided, however, that the assignor remains liable for the performance of the agreed MWO;

- (b) to other consortium members, on a minimum of 30 days prior notice to the CA, with consent therefrom, such consent not to be unreasonably withheld; and

- (c) to a third party, on a minimum of 60 days prior notice to the CA, Only with consent therefrom. Such notice must include all information concerning the proposed transferee which is required of an applicant for a license or permit, ab initio. The notice must also include an unconditional undertaking by the proposed transferee to be bound by all of the transferor's obligations under the PA<sup>33</sup> .

**32**

.An "aUiate" will be a defined term In the MC or PA. The operativ part of the deflnlon _vAIll_ be ta th Contractor owns. dictl or indirectly, a majorty of both the equty and voUng control of the affMilae. While best practice Is to allow an aslgnment to an affiliate on noUce to the CA but ithout the ned for It prior consent, this will ahlas be coupled with Contracttaassignor's ongoing liability under the PA on a joint and seeral basis with Its aMilate. 33 3 Where assigrnent Is to be to a third party, Contractorlassignor must also first show that It Is eithr curent on ts MWO or that Contractor Assignor and proposd assiane jointiy and severally guarantee is satisfactory compltion. In thb regardc It must be clearly demonstd to the CA In the assignment application that the proposed assigne. has the requise financlal and technical resources to cany out the petrlaemn operatons.
41Thus, any such transfer or attempted transfer or assignment, other than (a), above, without the express approval of the CA would be both null and void and would constitute valid grounds for termination of the PA.

- (7) Land Use - As previously noted, the PL must guarantee the rightsholder necessary access both to public and private lands for the carrying out of petroleum operations. In this regard, the practice is for the Regs to require the CA to deliver to the rightsholder, at the time of its siganig the PA, al licenses and permits of every nature required under existing legislation for the conduct of petroleum operations, induding those wich allow rightsholder reasonably to use public and private lands, roads, means of communication, water and minerals for suich purpose. Where privately-owned land is to be so encubered, the practice is for the Regs to require good faith negotiations by the rightsholder with the owner(s) thereof and payment of just compensaton thereto if voluntary agreement is reached. Failing voluntary greement, the legs should empower the CA to institute proceedig under

- the applicable Land Law for the State-tadng of such lands - either -

- temporarily or permanently on behalf of the rightsholder, subject to the rightsholder paying both the adjudicated just compensation to the landowner and the adminI e costs to the CA which it incurred by having

- undertaken and conducted such proceedings.

- (8) Environmental Protection - As noted in paragraph (10) of Part A., above, evolving practice today on this topic is to amplify the obligation for
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environmental protection in the PL with specific details and required actions in both the Regs and the MC. The Regs may be as detailed as may be deemed necessary, but in the process of establishing norms of conduct, they should focus on the broad principles of:

- (a) minimizing ecological damage;

- (b) avoidance of waste to petroleum and its production environment;

- (c) prevention of pollution and waste to land and structures, fresh water resources, crops, marine and animal life;

- (d) emergency dean-up obligations and procedures; and

- (e) restoration of the environment at the conclusion of petroleum operations.

- (9) Miscellaneous Provisions - As first said, Regs to a PL may be either quite extensive, or not, depending on many variable factors. The guiding factor always, however, is not their length or brevity but, rather, that they provide the necessary detail and procedures needed for the ful implementation of the policy and objectives of a generic-type PL. Within this overriding parameter, some items may be deemed more important than others for detailed treatment in the Regs. As this will vary considerably from State-to-State, depending on its legal system and sectoral or national priorities, this section condudes by briefly enumerating other important items which may require special consideration and elaboration in Regs to a PL, as follows:
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- (a) inhiRni - established practice is to incorporate by reference all definitions from the PL into the Regs and then to add, as necessary, any additional ones which may be required;

- (b) Records and Reports - the rightsholder is always required under the Regs and in its PA both to keep fuDl and accurate technical, geological and geophysical records of all petroleum operations conducted for review by the CA, on demand, and to report regularly and periodically to the CA on such operations at the intervals and in the format(s) required by the Regs;

- (c) Accounts - the rightsholder is also required under the Rep to maintain and to submit periodically to the CA, pursuant to the agreed schedule in the PA, full and accurate accounts of all quantities and qualities of petroleum produced from the Contract Area and the ultimate disposition of same3;

- (d) Production Rates - it is generaly discouraged for the CA to set or mandate production rates for reservoirs and Contract Areas. Rather, the international standard which the Regs should recognize instead is maximum efficient rate (MER), which is the rate of production from a reservoir which achieves the maxinum, ultimate economic recovery of petroleum;

That **is,** eter **sold** or refined, In the **cass** of **crude oil;** or, In the case of natural gas, **reinjected,** treated **(eg** removal of ntral **ga** liquki) or Baod, _Ifthe_ hiter I permitted by **the law** of th host Stats. In **additin,** a cetahi amount of paduction may be validly conaumed by Contractor In conducting petroleum opeations.
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- (e) Measurement of Petroleum - the Regs should require the rightsholder to measure, meter and weigh all petroleum produced by methods customarily used in good oilfield practice, as approved by the CA, and periodically to test and recalibrate, as necessary, all such equipment used in the processes;

- (f) Confidentiality - the Regs will mandate, and the PA will amplify, the obligations of both the rightsholder and the State mutualy to maintain confidentiality, for defmed periods, over information, documents, data and materials related to a Contract Area and acquired or exchanged between them in the course of petroleum operations<sup>35</sup> ;

- (g) lnud emf- **t** he Regs should require the rightsholder under a PA both to indemnify the State or the CA and to hold it harmless from all loss or damage to third parties or property caused by or occurring in the course of the conduct of petroleum operations; and

- (h) Penalties - the Regs will set out offenses in contravention of the PL and the Regs, along with a schedule of penalties for individuals or corporate entities found guilty of any such offenses.

- (10) Model Forms - To facilitate application for a license or permit to conduct petroleum operations under a PA, it is useful to append to the Regs as

35 Typially, do CA mW diucse dab obbined from th Contractor's conduct of petrlum opeations to prospective new appikants **fbr portons** of the Contract area already relinquished by the Contractor. Otherwise, both the Ca and the Contactor **r** boLmd to complete confidentIlty durin fthe ter of the PA (absent mutual consent otherwise), and the Conbuctor for **an*wher** from thre (3) to eight (U) years aftr the termiation of the PA, unless the data In queston earier becomes pat of the public **domain.**
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annexes model forms to be used by the applicant or prospective rightsholder in making such application either under a bid tender or for direct negotiations. These model forms will be keyed to specific requirements in the PL and Regs, covering such basic requirements/information as:

- (i) Basic Information on Applicant;

- (ii) Contract Area Application/Bid;

- (iu) Proposed Schedule of Bonuses; and

- (iv) Land Rentals and Administratve Service Fees.

# IV. Model Contract(s)

This author believes that the final essntiul component of successful petroleum leglve frameworks is one or several variants of a MC. Some may not consider this element quite as essential, but to repeat, in my experience, a State is best served by having its own, purpose-crafted contractual format from which to commence negotiation of PAs. The MC(s) should be included in the bid tender package, requiring applicants to identify any exceptions thereto as part of their bid.

As earlier observed, the contents of a MC will flow from the permissive, generic requirements of the PL, as elaborated more fully in the Regs. In this regard, this paper will focus on both the essential provisions of an MC and those which are also negotiable.

(1) Scope. Duration. and Grant of Rights - After a brief Preamble identifying parties (State or CA and rightsholder, hereinafter called the "Contractor"); reaffirming the State's exclusive ownership of all Petroleum in its territory; and expressing the State's satisfaction that the prospective Contractor has the
E<s im M -~~~~~~~~~~~~~~~~1 ilu . * I 1 1 .1 | 3i1: : S~~~~~~~~~~~~~~~~~~~~~~~~tA f i s l E ^ @ _e_ Po X X gX g N gg N ..=~~~~~~~~~~~~~;o _LI# .C_ ] ] " ffi ffi s _K_ X " } a X X s
47in square kilometers and by geographical coordinates - as described in a map to be annexed - and define the scope of the agreement between the parties, with the rights and obligations of each which flow therefrom; (b) Periods. Phases and Terms - the former being exploration, appraisal and production. The terms for such periods are negotiable, within the maximums, for each set in the Regs, with any permissible extensions thereto. It wil also be established here that the Contractor may relinquish and terminate at the end of the exploration or appraisal stage, provided it has satisfied the MWO for each; and

- (c) Grant of Rights - herein the CA, for the State, will grant the Contractor its rights over the entire agreed Contract Area for the duration of a PA. It will make such grant effective upon execution of a PA by both parties.

(2) MWO. Work Program and G_uarantees -which are essential, core provisions. The proposed MWO will have been submitted in the bid and subsequently will be negotiated. The MC will provide a format to insert the MWO agreed frr the exploration period, and any extensions thereto, by contract year. This will be defined obligations to carry out additional, agreed geological and geophysical work and to drill a minimum specified number of exploratory wells. The MWO will be carried out through an annual work program and
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budget which will require approval by the JMlA]C, discussed in section _5.,_ below.

To support the MWO and the annual work program, the MC should require the Contractor to provide an unconditional bank guarantee or standby letter of credit in favor of the CA, setting out the negotiated US dollar or other hard currency amount of such guarantee for each phase of the exploration period, by line iteme. Provision is then made for the scheduled reduction of the guarantee on certification by the CA to the issuing bank that the work in question has been completed. In addition, it is desirable to have a guarantee from the ultimate parent company of the Contractor that it wil provide all technical and rmandal resources as are required by its subsidiary to conduct petroleum operations'<sup>7</sup> . The approved form of guarantees will be appended to the MC as an annex.

(3) Relinquishments - covers mandatory relinquishments by the Contractor during the course of the exploration period. These will be negotiated and inserted as progressive percentages of the original total Contract Area. At the end of the exploration perind, the Contractor will have either relinquished the entire Contract Area - having fulriled its MWO - or all but For examplb, ConcWtoes EWO may require the drilling of at east two (2) exploraon web during the Initial exploraion tem. n the Contract Area were to be ofshore, In moderate water depth, such wells might awerage five millon equivabt US dolara (S,000.,0) each. The guarantee or standby btterof credit would, fus, carry each such eommiment well and ls value as a line iem, to be either reduced acordingly when completed, or drawn down, In case of default on such Itm by Contractor.

37 While such a guarante Is desirable and oftn obtainable, parent companis wil rarely go as far as providing a ftdl, uncondtlonal financil guararnte of the Contractor under a PA. In preference, te will _offer_ a comfrt ltter, affiiatb guanbe or bank guarantee Instead. Properly drawn, t latter two could prwide adequate surances to the host State.
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those portions in which it has made a c al discovery of petrolemn, which wil then go on to development.

(4) Declaration of Commercial Discovery - elaborates the process by which a discovery of petroleum may be deemed sufficient for commercial development. The key principle here, no matter how expressed in an MC, is that only the Contractor may decide if a discovery is commercial for the purposes of its subsequent development by the Contractor. After promptly reporting a discovery to the CA, the Contractor must first dect whether or not to appraise it. If it chooses not to do so, it must immediately reinquish the discovery area. If it does elect to appraise, it must do so witbin a specified time period, under a separate appraisal program, and then submit an evaluation of the appraised discovery to the CA. At such point, the Contractor alone decides whether or not the discovery is commercial, warrantng its development by it. The rrm principle is that the State or CA may not hipose greater obligations on the Contractor than it agreed to under its PA - i.e. to compel it to develop by deciding on commerili, against the Contractor's own judgment. The safeguard for the State is that if the Contractor decides that the appraised discovery is non-commercial, it must relinquish it fWly and rmaly to the CA.

- (5) Joint Management [Adisryl Commtee - The JM[AJC is the consutave forum and supervisory body for petroleum operations under PSCs or assoiaion contracts. It will be composed of equal number of represeatives
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of the State and the Contractor, with its chairman typically being appointed by the Contractor during the exploration period. Decisions of the JM[AJC are normally taken unanimously or by consensus, but in the event of a deadlock, the usual practice is that the Chairman has the casting vote. Although the JM[A]C's functions are supervisory in nature over certain matters under the PA, they are always without prejudice to the rights and obligations of the Contractor for the day-to-day management of petroleum operations. Thus, the scope of the JM[A]C's authority is normally quite limited, but will usually encompass:

- (a) all work programs, budgets and other reports and proposals required under the PA to be submitted to the CA;

- (b) progress of Contractor's work;

- (c) terms of contracts with subcontractors, and their performance; and

(d) any problem arising in the conduct of petroleum operations. The JM[AJC may also form technical subcommittees, which act as forums as well for both consultation and a conduit for transfer of technology and know how between the Contractor and the State or CA.

- (6) Cost Recovery. Expenses and Production Shares - Assuming that we are dealing with the majority-preferred, "state-of-the-art" MC variant - slidingscale production sharinge -<sup>3</sup> this section of the MC will: (a) subject to the

While, as waid, f1s analls Is basod on the ling-scab PSC MC variant, one may also vary the baic MC fonnat to produce otr sbndard arrangements, Including: Ucenm or Concession with tax and royalty; Risk-Servcke Contract or Servce Contract Much of the essential ciments of the MC discussed herein wvll be the same, with the prdncipb changs being In the WO **and fiscal** provslons.
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Accunting Procdure and the auditing provisions of the MC, provide for Contractor's cost recovery, which, as earlier explained, may be bid and negotiated within the acceptable ranges or levels of percentages of cost oil established in the Rep; (b) detail the manner in which operating, capital and pre-commercial production costs and expeses shall be allocated and recovered against cost oil; and (c) set out - in proportions to be bid and negotiated within the acceptable ranges established in the Regs - the shar of profit oil due to the State or CA and the Contractor, based on average daily production over a contract month from the Contract Area<sup>3</sup> '. Similar such provision will also be made for natural gas in a modern contractual framework"'.

(7) Taxes and Duties - Once again, under a sliding-scale PSC MC - where Contract-or's taxes are deemed-paid within its progressive (or regressive) production shares - the CA, on behalf of the State, will undertake to hold and keep Contractor harmless from all present and future host State taxes and duties otherwise generally applicable to petroleum operatione', except 3A. a provision wil **appear** In this arfcbtothe effctth prior to the commencementof cmmercliproductio, theCande CotC actorwillare on a Uingp pocedure fortheirrespective prmduction shares on a reular bab. Some MCwildebil the **sentW** pwixons ofsuch a lifing procedure white othes wIv go furthrand attach a hmf lNtig aWemennt n **an** appendbL 40As eabr nentioned In Sction A. above, In host States whch are known or expected to be paricularly gapons, bodh th PL and the MC wi contain a parate article providing for special inontve and priorile for Contractor to duvlop such retua gas. **Pleas** m footnots 21., above, for geter detail.

4t ib ntrng to note here that, aftr seerl year of uncertainty under an essentially unworkable licensing and tax systm, te Russian Federation, by a Psidential Decre of Dem ber 24, IMfi, **Intibtd** do **optin oda** PSC, under whih fe producton shaing aangemo nt neotiabd beten the patis wi1N be In Ibu of all axe oherwls payabe on Prn op.
_-52-_ <!-- Start of picture text --> for those<br>A slmplYled example of the medology culaton on a<br>specifical "CoatnGctor's Tax Paid" bais m4bt be:<br>ly named<br>1. CAl Ol egod to be 31l or Grua 4hoedlmnand<br>a2. NeitoOt will be Vp oan a "e poWah be bul aw dedm of Cad<br>excluded<br>in . this,hI PudclmmLee ( dren%hr)<br>artide of 3<br>5,116 - 110i,010 41.5 32.5<br>t h e - 100,00115,6763<br>12,M-2001 -u 7n. 257<br>MC. 4 2<br>3. -b- . acua wodLlhm *darl betem Stat Coae ;be<br>F o r - : a t- -<br>purposes<br>of the Cs s,i,ooe-iu 4,m 33750 7<br>* D)100,00645M 0 {7zOO) 3,<br>foreign 1500.<br>tax credit 4) ~~~~~- 7OAS 0,3 -mi m< ,1 mm:-::<br>f o r - --. ct 3-2'O) 7<br><!-- End of picture text --> certain _7. Psc_ IOC Contractors, it is desirable both to: (a) reaffim Contractor's liability to generally applicable laws of the host State which impose taxes on or measured by income or profits; and (b) confirm that the CA's share of petoleum from the Contract Area, taken prsuant to the applicable

**a.Those xclbonc wm nonly be:** tan Incom a subcontratom; Income tx on Conacmtos mployee and th of ft subcoftactor; duiles and axs an locally purchasd goods and commercial erices provkbdd by public authordlUn; and taes on tobacco and alcohol.
_-53-_ provisions of a PA, includes an amount equal in value to I11 of the income . and profit taxes due by Contractor under its PA'<sup>3</sup>

- (8) Fees and Bonuses -This article wil, consistent with requirements in the Regs, set out the times of payment and the amounts of any: land rentals or contract administration fees; signature bonus; declaration of commercial discovery bonus; initial and additional production bonuses - set at incremental, sustained production levels - all as may be bid and negotiated in the PA.

- (9) Protecon of the Environment - Complementary to Contractor's general obligation under the PL to carry out petroleum operations in accordance with good international oilfield practice - such having evolved today to being necessarily duly protective of the environment and safety - an up-to-de MC will now require Contractor to take, in particular, aU necessary steps to:

- (a) ensure that petroleum operations avoid, or if unavoidable, result in minimal ecological damage or destruction;

- (b) control the flow and prevent the escape or the avoidable waste of petroleum produced in the Contract Area;

- (c) prevent damage or waste to petroleum-bearing strata; and

- (d) prevent damage to land, fresh water suppliesJaquifers, trees, crops, other plant, marine or animal life, buildings or other structures. If Contractor falls to comply with any of the above require and

pollution results, the MC wfll require it, on an emergency basis, to control,

**43** Including a moclanham by whicti the CA win actualy pay and dicharge such taxes an behal of Co_traw, providing It with offcial receiptB a evidence.
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dcean up and repair all such damage to the maximum extent feasible, udng the best available technology for the purpose. If such pollution reIts from Contractor's negligence, established practice is to deny it the right to indude the costs of such remedial procedures in its cost recoverable expenses under the PA. In addition, the MC will require Contractor to take all steps at terminlation of the PA to ensure restoration of the enviro t where petroleum operations were carried out".

- (10) Supply of Domestic Market: Emergency Requisition - _Reaffrmig_ the premise that the State owns all of its petroleum resources, subject to the Contractor's rights to an agreed portion thereof under a PA, the MC should provide both for the CA's right to: (a) require Contractor to sell some portion of its production share to meet internal domestic demand; and (b) in case of grave national emergency, war or its imminent exp on, requisition all or part of petroleum production from the Contract Area, concurrently requiring Contractor to maximize same. This wil be qualfied in the case of (a), above, by a requirement of adequate advance notice to the Contractor' of both required quantities of petroleum and duration of supply - in recogniton of Contractor's likely eternal long-tern commitments otherwise to sel or utilze its production share - and for both (a) and (b),

It In but to ruqur Contrator to submlit to the CA, fbr ts considraton and approval an ouMn dim for ruetain o t opuring onvironmnt.

**_45_**

Nomal **prclcu** would b to give a minimum of two 2) quart' notice to Conbactor bef th CA *xeucl Its **purham** dgl urdur this **atcle.**
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above, by the obligadon of the CA to pay the Contractor for purbased or requisitioned petroleum in hard-currency, abroad and at the international price calculated pursuant to the applicable provisons in the PA.

- (11) Training of Host State Personnel - Where the State chooses to allocate the responsibilities of both contract admion of the PA and technical interface thereunder to its NOC, if extant, it is best to rquire in the PA that Contractor shall train, in a planned, systematic and phased manner, NOC personnel in all aspects of petroleum operations. Such trahig will be at Contractors cost and expense but wil be allowable as approved costs for the purpose of cost recovery under the PA.

- (12) Other Standard Pronvsions -Once again, crctancs will vary considerably from one MC or PA to another as to degree of detai and emphasis, but a complete MC will also always include artil addresig:

- (a) Valuation of Petroleum;

- (b) Title to Assets and Data;

- (c) Payment and Currency;

- (d) Accounts, Financial Reporting and Audit;

- (e) Records, Inspection and Confidentiality;

- (f) Force Majeure;

- (g) Termination and Events of Default;

- (h) Applicable Law and Stabilization;

- (i) International Arbitration and Ezpert Determ ion;
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# Uj) Notices; and

## (k) Effectiveness and Amendment.

Standard appendices to an MC, along with those already mentioned, will always include: a map and description of the Contract Area; and a standard form of Accounting Procedure, which incorporates prldples and procedures of accounting generally in use in the international petroleum sector.

V. Conclusion While the foregoing discussion on the essential elements of legislative frameworks used to foster developm of the potential indigenous petroleum resources of host countries is intended to be reasonably comprehensive, it is by no mean exhaustive. Within aU of the essential elements of each basic component disued above - PL, Regs & MC(s) - there is always considerable room for myriad variations and innovation, depending very greatly on the degree of actual or perceived hydrocabon endowment of the host State concerned. As always, this is the threshold detemnon which will necessarily dictate the choices then to be made on specific elemen, terms, aLbowes and incentives - all win the basic parameters of the legislive norms re mlnded In this paper. Although, as first said, this paper has sought both to clarify and explain the principles and rationale for each esotial eement of legal framworks used to foster petroleum development - as a useful tool for Bank staff involved in PEPPs or other
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petroleum sector projects with legl reform or TA components - it is rsemphtsized here that the actual drafting of such regimes Is highly specilied and, in every case, must be done by experienced petroleum lawyers who are thoroughly familiar with petroleum E&P laws and contractual arrangements.