Damages to third parties
Damages to third parties considered as persons, properties etc, or any else that has nothing to do with the contract issue, must be paid by the contractor as they are the ones who have to be prepared and guarantee that the entire operation of extracting oil and gas , can cause damages to someone. The Model Production Sharing Agreement of Tanzania´s Republic does not consider the possible damages to third parties, and that fact could be a huge problem in the moment of paying some compensation to those who demonstrate any damage caused by any part of the extracting operation.
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It is good to say that the Model Production Sharing Agreement of Tanzania´s Republic does recognize third parties in the contract, but not as a damage matter; it does recognize them as other possible part of the business.
Why
Every action has consequences, some can be good ones, some other could not be such good as everybody expected them to be; this is why, every contract, specially those which tend about actions, must consider an article about possible damages to third parties (considering that third parties can be also people, public entities, private entities, properties etc, that has nothing to do with the contract or the deal).
So the contract must mention not only, who is going to pay for any damage caused to third parties, but also who is going to be in charge of prevention of damages to third parties.
Possible resolution
Add an article that includes responsibilities to all the parties, about who, when, where and how is an eventual damage to a third party, going to be paid.
Major No 2
Hiring and Salaries for employees
Article 21: talks about, employment, training and transfer of technology; it includes a topic about hiring employees for the different duties that the operation needs. Section 3 about costs, expenses, expenditures and credits of the contractor; talks in part, about the salaries and other costs that must be paid by the contractor.
I consider that it is important to include in a complete way an issue about salaries for all employees that the operation is going to have, making emphasis in details as contributions to social security of employees, according to the law of Mexico. It is well known that the party which has the obligation about this issue is the contractor, but it is good to include all the details in one of the articles, that for this case could be article 21.
Why
The main idea of a contract is to be enough clear about every issue, so each party can feel secure about what are their responsibilities and rights, so there is not going to be many differences between them. In a contract like this one, where the aim is to extract oil or other materials, and where there is needed many people as employees, it is good to write down all the details about hiring and salaries and other facts that may cause differences between the parties forward.
In almost all the countries, there are permitted the labor unions as groups of employees who claim for their rights. This is an issue that matters not only for employers, but also for government. This is why in an international contract like this one, is better to include all details about employees.
Possible resolution
Include in article 21 all details about hiring process, salaries, payment methods, contributions to social security, and other topics that may interest to employees. Also which party is going to take care about the fulfillment of this article; which party is going to pay to the employees, which party is going to take care about the social security of the employees etc.
Major No 3
Availability of petroleum for the Country
Article 31: third party access to petroleum facilities. It is nice to see that this type of contract is using a national company as a representative of the government interest. This article is fine considering that other parties could take part in the production of petroleum whenever they fulfill some requirements, but the article is not including, how could be the process when is the government it self by any of its ministers or entities, that may need part of the production.
For example: Article 33 of hydrocarbons Act in Ecuador tends to satisfy the needs of the country it self, by the uses of petroleum from companies that are exploring Wells in the country.
For sure it has to be regulated, with a detailed process that specify from the beginning, when and how can the government ask for part of the production; also it has to specify how much money is the government going to pay for that part, considering that even if the petroleum is being extracted from inside the country, it is being extracted by a foreign company that has the right to do it.
Why
Every country has needs of petroleum for many internal duties, this is why, in a contract of extraction of petroleum and/or gas, the government and the contractor must organize the topic, so the government will not be apart of the production of oil and gas that is going to result from the extraction that a foreign company is going to do.
Possible resolution
Include, or be clearer about the authorization of the use that the government can do on the oil or gas that is going to be extracted. Also include the amount of money that government must pay, but that can´t be higher than the cost of the material plus transportation inside the country.
Major No 4
Security facts
Talking about Mexico and its situation, we can´t ignore that now a days it is a country which don´t offers much security to foreigners; it has a high rate of crimes such as homicides, kidnappings, thefts etc. With such situation, parties must consider details about security issues like: costs of security, like transportation of important people, security of the contract area, and some other areas where the operation is not being developed directly, but that have something to do with it indirectly; how can insecurity facts affect terms and conditions, like for example about delivering, transporting, exporting or importing goods that could be attacked by criminals; who will be responsible about this issue, is it a responsibility for government who is the one that must ensure peace inside the country or is it the company´s matter etc.
Parties must consider that the operation of extracting oil or gas is going to take part in rural places, where security is less than in other places. Also it is important to say, that the operation of commercialize petroleum or gas, includes exportation and importation issues, that can be exploited by criminals who may want to export drugs or some other illegal things to other countries. For sure, a situation like this can affect terms and conditions of a business contract, much more if we realize that Mexico is a tough place about security issues.
Why
One of the parties in an international contract is the same government of the country where the object is going to be done; and nobody can forget that is the government it self that ensure peaceful inside the country. In this order of ideas, the government as one of the parties of the contract, is the one that must take care about security matters, including all the costs and risks that it is going to generate.
Possible resolution
Add an article about security, costs of security, risks of security and responsibilities about security matters.
Major No 5
Incidental findings
The model production sharing agreement of Tanzania is about a contract of exploration, extraction, and commercialization of petroleum, between a country and a petroleum company. It is well known that petroleum is extracted from subsoil which is part of the sovereignty of a nation, so we could conclude that it could be a contract of a permission that a country is giving to a company to explore and to extract some kind of material in exchange of royalties, taxes etc. (money) for several expenses of the country it self, for example: public issues like, health, education, social security etc.
But what if the company that has the permission to explore and to extract, finds something else besides petroleum? who will be the owner of that finding? The government as the one who protects the rights of the nation, or the company that has the concession of the contract area.
Why
As we mentioned before, a contract is a document which the main idea is to be enough clear about every issue, so each party can feel secure about what are their responsibilities and rights, so there is not going to be many differences between them. So it is important to establish in a clear way what is the main object of the contract, which for this special case is not other than extracting petroleum or gas. So when an incidental finding is going on, it is a nation matter, not a company´s finding. It will protect the wealth and the sovereignty of the country.
Possible resolution
Be clearer in the aim of the contract about its object.
If Mexico adopts a Tanzania style contract, would IOCs be required to provide Pemex with a copy of their Joint Operating Agreement?
Yes, they must provide to Pemex with a copy of their Joint Operating Agreement, which will allow them to explore, extract and do many other things included in the contract. This is a condition that a government puts to protect the nation interest, and to keep part of the business for the country, and to gain help with money, experience and technology from other foreign companies.
It is a Joint venture contract which both parties are risking investment to obtain utilities one from an other, getting sure, first of all, by a previous feasibility study.
What is the basis for your answer?
Article 3 responsibilities and grant of rights. In its literal d) which says?
“Where the Contractor is constituted by more than one party, the parties constituting the Contractor shall enter into a Contractor’s Joint Operating Agreement. The Minister and TPDC shall be entitled to attend the meetings of the committees pursuant to the Joint Operating Agreement as observers in a non-voting capacity. Government and TPDC shall be entitled to receive any information that is relevant for the activities under the Joint Operating Agreement. Members and observors attending a meeting pursuant to the Joint Operating Agreement may be accompanied by advisers and experts to the extent reasonably necessary to assist with the conduct of such meeting. Such advisers and experts shall not vote, but may contribute in a non-binding way to discussions and debates of the Advisory Committee.The Contractor shall provide the Minister with the Joint Operating Agreement for prior approval. The Minister may require alterations in the Joint Operating Agreement. Any amendments to the Joint Operating Agreement after the Effective Date are subject to the prior approval of the Minister”
Would providing a copy of the JOA be a concern for an IOC?
No it is not, a Joint Operating Agreement is not so bad for an investor, it can been taken as a good offer for the foreign company, which could get beneficiate by that agreement in many ways. First of all, it could mean less investment that means also less risk for the company, and more other advantages like, better security because conditions, better conditions for employees who will work in a better way and some other good facts.
Otherwise, if the contract is made without the Joint Operating Agreement, the foreign company will have to invest much money, taking all the risk about it. There is also an other fact that must be considered, it is about the nonconformity from people who prefer that a national company extracts the oil and gas from its own country, than a foreign company doing the same thing. So in this order of ideas, an agreement is perfect to maintain people happy which means betters profits for all the parties, even those who have nothing to do with the deal (third parties)
Why?
Even though it is a secure of the government about its interest, it is also good for the investor that will be protected by many articles in their interests, that’s why; we included some changes to the contract, like security facts, that must be taken by the government through the national company in charge.
People are often tempted to react in a bad way about getting agreements with some others, because they might think that is not worth it, but they just want to see that it means less money for them, instead of taking in account that it also means less investment, share of the risk, and much others good facts.
Should Mexico nonetheless insist on being given a copy?
Taking into account the situation of Mexico about oil exploration, even though it is a country that is highly known as a petroleum producer, but that is declining in the business; where the only company in charge is Pemex, and that Mexican people don´t want to see foreign investors in the issue. Adding that security in the country is not well good looking. The best option that the country has, is to get a deal of Joint Operating Agreement, between Pemex an other foreign petroleum companies, that will bring more money to the country, which means also more hiring of Mexican workers, more technology etc, without letting the entire business to others.
In this order of ideas and to conclude the essay, it is a good deal for both parties of the contract, and also for the government it self that is also a part of the contract.
REFERENCES
- Oil and Gas in Mexico (n.d) PowerPoint file.
- Model production sharing agreement between the government of the united republic of Tanzania and tanzania petroleum Development Corporation and ABC ltd for any area 2013. PDF file.
- I Assent J.K Nyerere (President), Tanzania Petroleum Law (Petroleum exploration and production) Act 1980. PDF file.
