1. Contracts – Analysis and Allocation 11 June 2014 Amir Shafaie

2. Presentation Outline 1.ResourceContracts.org - A tool for extractive contract analysis 2.Contract Allocation Process: Transparent and effective contracting

3. ResourceContracts.org Collection of contracts and licensing documents Summaries of key points Searchable and downloadable Unique links for sharing via email/social media Easy to read (no PDF/Acrobat needed) A growing repository (with your help!)

4. ResourceContracts.org

5. A growing database 199 documents (19 countries) and expanding! Categorized by: -Country -Year of signature -Type of agreement (concession, license, PSA, etc.) -Resource (Gold, coal, oil)

6. Ability to view by categories, search

8. Summary page

9. Contract view

10. Annotation links

11. Annotation in contract view

12. 2. Contract Allocation Process: Transparent and effective contracting Key goals in allocation system design: Pick the “right” company Get the best terms for the State Limit / eliminate corruption Reflect broader sector goals …important for system to be consistent with legal framework.

13. Types of allocation procedures Competitive bidding (Auctions/ Tenders) what can be bid / negotiated? Fixed vs. variable term who can bid? Open vs. restricted (after pre- qualification) Direct negotiation (“open door”)

14. Participant Question Which procedure (open bidding or closed bilateral negotiations) is likely to lead to the best outcome for the country? Why?

15. Competitive bidding - Advantages Generally, allows country to: -choose best among pool of bidders -have a stronger negotiating position to get best terms -increase transparency and minimize discretion / discrimination(particularly auctions) But, competitive bidding is not without challenges and effective allocation also depends on context of field and market.

16. Competitive bidding challenges Need to have competition – where geology not known, risk of few companies being involved “Winner’s curse” – risk of overbidding -> renegotiation Capacity / political will – government needs to have (or acquire) capacity to carry out process and political will to implement

17. Competitive bidding in Iraq $2.80 p/b The difference between the remuneration fee bid by Exxon & the winning bid of CNPC & BP for the Rumaila oil field. $750m The extra accruing to Iraq per year from 1m barrels per day (bpd) production of the Rumaila field. But, need to look at details of deal and factor for risk of negotiations / renegotiations…

18. Risk of post-bid negotiation Risk allocation in signed contract different from model contract: In signed contract, Iraq takes risk for lower production caused by infrastructure bottlenecks, OPEC quotas or force majeure. In the original model contract used in bids this risk was to be shared between Iraq and the companies. Source: Guardian and Platform London

19. Typical restricted bid / auction process Negotiation or non- negotiable?

20. Pre-qualification – balance quality (ability to deliver) vs. importance of competition  Technical qualifications years of experience, deepwater operations, current production, qualified staff, etc.  Financial qualifications Financial ratios, assets, access to financing, financial guarantees, etc. Choosing the right partners

21. Competitive bidding success factors Appropriate legal framework / institutional structure Transparent process; implemented as designed Objective qualification and assessment criteria Competitive but realistic fiscal conditions Disclosure of company ownership and of agents helping win contract Conflict of interest regulations Independent authority in charge of allocations

22. Assessment criteria – a few examples # of criteria UK/ NOR 1 BRZ 3 NIG 1- 4 ANG 3 - 2 MOZ 6 EGY 8 T-L 2 Work Program 100% 40% 0(20%) 60 % (0) XX 90% Signature Bonus 40% 100 (40%) 20% (80) XX Local content plans 20% 0 (20%) 10% % participation XX Refund rate Cost oil ceiling 0 ( 2%) XX Other (20) XX Courtesy of G.Pastré

23. Better to aim for fewer variables (up to 4) Set all other terms (law, model contract)  limit / define negotiation Make variables ranking/ relative weight clear Build (or contract) sufficient expertise to run process Good practices

24. Thank you / Questions? ashafaie@resourcegovernance.org