Maximizing Benefits From Mineral Development Agreements October 31-November 5 Addis Abeba, Ethiopia Juba, South Sudan Salli Anne Swartz Artus Wise Paris Partner

I. Pre Contract Analysis  Tender Process  Language and Place of Negotiations  Choice and Type of Advisors  Strength and Weaknesses of Position of the Government and the Investor  Identification of Infrastructure Needs  Identification of Local Development Strategy  Financial and Economic Analysis (valuation and feasibility studies) 2

Tender Process How to assure and open and transparent process Assistance with drafting of the tender process: why,who, when and timetable: the tender should only be issued after the internal Goverment processes have been completed with regard to:  Up to date Mining Code  Complete and stable Fiscal Code  Analysis of the financial needs of the State for 5, 10 and 25 year periods  Strategy for local development has been agreed upon by the national, regional and local authorities  Local consultations with the civil society and populations affected by the extractive industry development 3

Language and Place of Negotiations  Insist that negotiations take place in a language which you speak and read fluently; if this cannot be done, insist on a translator being present and paid for by the investor  Insist on negotiations in a place where you feel comfortable: Negotiations in your country will put you at a certain psychological advantage and should be insisted upon if at all possible  If at all possible, prepare a model Mineral Development Agreement based on the MMDA and explain that you wish to use this agreement as a basis for negotiations; if this is not possible, insist on receiving the draft prepared by the investor in sufficient time to evaluate it with advisors before any face to face negotiations take place 4

Strength and Weakness of Parties’ Negotiating Positions  Negotiate from a place of strength requires knowledge: you have something the other party wants (mineral/hydrocarbon resources) and they want something you have; use your position of strength to maintain the rythym and subject matter of the negotiations  Knowledge requires advance study by the Government of its requirements in terms of tax and royalty receipts, local and infrastructure needs, training of nationals etc.  Failure to be adaquately prepared will allow the investor to establish its needs before the State can insist on its needs, which will put the State and the Government negotiators in a defensive position 5

Choice and Type of Advisors Type of Advisors  Legal, financial/tax, economic, experts on infrastructure and local development, geologists, sociologists, anthropologists etc. Choice of Advisors  National and expatriate nationals who have the expertise and knowledge  International specialists who are willing to work as a team with national and expatriate nationals and who are willing to train nationals  Use the tender process to entice expatriate nationals to come home and work in country on the mining/extractive industry projects, if possible 6

Identification of Infrastructure Needs Resale price and profit will be driven by transportation costs Three models:  Obligation to build born by the investor/contractor and cost usually borne by the investor/contractor: access will then usually be controlled by the investor/contractor  Obligation to build born by the investor/contracor but cost born by Government funded by loans: access will then usually be controlled by the Government  Hybrid: cost born by both: emerging trend towards « resource for infrastructure » deals: infrastructure is built by the investor/contractor or the Government in return for rights to the oil/gas/extracted minerals 7

Identification of Local Development Strategy Local, Regional and National Consultations  What do the local, regional communities want; how will expropriations/relodged populations be compensated? How will indigenous communities be represented in consultations? Intra-Government Consultations  Coordinating local and regional consultations with the setting of national priorities and objectives: which projects for which community which is affected by the extractive industry project Payment for Local Development: Investor or Government Oversight  By which entities (local, regional, national government/entities with community input 8

Financial and Economic Analysis Knowledge is Power  Obtaining economic and finanical advice before entering into negotiations with investors  If required, obtain financing for independent financial and economic advice

II. Contract Analysis Key Clauses Contracting parties: Who are they  Who is contracting for the investor/contractor: individual entities or a consortium  Who is contracting for the State A ministry? A government public or semi public entity such as a company controlled by the State? Does the Production Sharing/Mineral Rights Agreement have to be ratified/authorised by Parliament?  Financing Institutions: When are the loan agreements negotiated? Before or after the Extractive Production/Mineral Development Agreement ?

Operations and Control  How much control does the State wish to have over the operations of the investor/contractor Work Programs and Budgets  In order to assure that the investor/contractor performs its obligations, the Production Sharing /Mineral Development Agreement should provide for very detailed work programs and schedules and investment budgets Sanctions for Non Respect  Failure to respect the work programs and budgets should give rise to sanctions (with certain exceptions such as events of force majeur)

Commercial Discovery and Feasibility Studies  Timing and ownership of data and information contained in the feasibility studies (geological information, maps, reporting, core studies and data)  Requirement to inform the State, remit the documentation producted by the feasibility study and obtain approval before the oil/gas field or mine is prepared for commercial production  Requirement to remit a detailed investment budget at the time the feasibility study is remitted to the State and obtain approval from the State on phases and investment amounts

Taxation/Royalties/Price of Commodity  Rate and time line analyses is dependent upon existing Fiscal Code (see use of stabilisation clauses) and financial projections  Essential to find an equitable and reasonable balance between taxation, royalty payments, sale price of the commodity  Examine norms used in other countries with similar experience  Do financial analysis and projections before negotiations of the Production Sharing /Mineral Development Agreement

Stabilisation Clauses Two types of typical stabilisation clauses  New legislation does not apply to the Production Sharing/Mineral Development Agreement; or  New legislation does not apply to the Production Sharing/Mineral Development Agreement but the investor/contractor is entitled to compensation for the prejudice incurred by it which is caused by the application of the new legislative regime  Issue of what happens if the investor/contractor benefits from the change in the legislative regime Certain States are now refusing the use of stabilisation clauses

New Idea to be used with (and possible without) stabilisation clauses  Require the parties to renegotiate key financial clauses and perhaps other key provisions such as local development obligations at fixed periods to be defined in the Production Sharing /Mineral Development Agreement  This requirement would work with stabilisation clauses which would stabilize the fiscal regime until the next phase of negotiaions  Fixed negotiation periods would require the parties to examine new circumstances at each major phase of the Production Sharing/Mining Development Agreement  Advantages of such a requirement would be to force the parties to take into consideration changed circumstances in order to avoid disagreements  Disadvantage is less foreseeable stability depending upon the periods negotiated for each phase

Environmental Provisions  An environmental impact assessment plan should be remitted by the investor/contractor at the same time as the feasibility study  The Production Sharing / Mineral Development Agreement should contain the obligation to update the environmental impact plan on a periodic basis and to remit to the Government environmental studies done by the investor/contractor on a periodic basis  The Petroleum Sharing/Mineral Development Agreement should obligate the investor/contractor to abide by all national environmental legislation and international norms (which should be identified in the Agreement and to clean up and restore the affected area upon relinquishment or abandonment

Termination of the Mineral Development Agreement Reasons for termination  Abandonment  Relinquishment  Involvancy of investor/contractor  Interruption of production for a certain defined number of days (exception of force majeure)  Failure of the investor/contractor to respect its obligations  Failure of the Government to respect its obligations Sanctions  Fixed penalties or liquidated damage clauses :limiting amount of damages payable for breach of the Production Sharing/Mineral Development Agreement  Automatic termination of financing(loan)agreements and repayment of loaned amounts to financing institutions

Governing Law and Dispute Resolution  Most States will insist on the application of national law and national courts in the event of disputes  Investors/contractors will look to see if the State has a stable and equitable legislative regime and a stable, functioning and equitable court system  Often investors/contractors will favor third country laws (English or French law, for example) and international arbitration  International arbitration is usually favored because arbitral awards are definitive and can be enforced in all jurisdictions which have ratified the New York Convention