Strategic Foundations for Upstream Success

For countries at the threshold of their petroleum sectors, the most consequential decisions come before the first barrel is produced: how to design a credible licensing process that attracts serious investment, how to structure contracts that balance fiscal ambition with commercial reality, and how to define the institutional roles that will govern the sector for decades. Getting these foundations right is transformative. Getting them wrong is a setback that is difficult — and expensive — to reverse.

Friday, 15 May, the New Producers for Sustainable Energy hosted senior government and NOC representatives to a focused, practical seminar, with presentations by Juan Carlos Boue, Curtis, Mallet-Prevost, Colt & Mosle LLP, and Graeme Bagley, Westwood Energy Group.

Key highlights from the discussion:

• Taxation and Royalties: An interesting point was made that corporate taxes are general taxes (which companies can often avoid paying) and do not actually pay for the resource itself; it is the royalties that serve as payment for the resource.
• Bidding Rounds: Competitive bidding rounds force competition between companies and help overcome knowledge asymmetry regarding the value of the resource. However,  these can be challenging in frontier settings or anywhere the level of interest isn’t high enough to create competition.

• Negotiations and Relinquishment: In direct negotiations and beyond, relinquishment provisions “with teeth” are essential instruments. They allow the state to bring acreage back to the market under new terms that are updated when capacity is higher and with more information about the resource.
• Production Sharing Contracts: PSCs require micromanagement of cost recovery. Imposing a cap on the percentage of project revenues used for cost recovery can help reduce this administrative burden. Regardless of the structure, it is critical to involve lawyers at the beginning to clearly define what is cost-recoverable and the parameters of a cost recovery audit.
• Exploration in Africa: While there is high exploration interest in Africa, 41% of African acreage is awarded to oil majors through MOUs and similar arrangements where companies have no obligations to spend or drill. These deals often crowd out independents, carry high legal risks when governments attempt to sever agreements, and lead to “camping out” on acreage.