PSA Structure and Terms Ilgar Mehti, Managing Partner, EKVITA LLC 12 February 2014 GOVERNMENT REGULATION Types of Government Regulation • Tax & Royalty System • PSA • Service Contracts (including hybrid forms) Executive Education WHY PSA IN AZERBAIJAN? • Lack of proper legal foundation • Flexibility in setting desirable terms • Prevailing industry model for developing countries • Demonstrates State‘s commitment to foreign investment • Relatively quick to establish once the model (ACG) is set • Geopolitical aspects Executive Education CURRENT STATUS • Around 30 PSAs have been signed and ratified • Proved efficient for a long period of time • Most have implementing laws • Only few are made public • Non-oil sector quickly adapted the PSA practice Executive Education KEY CHALLENGES • Lack of consistency in both format and content • Some unusual provisions (e.g. governing law) • Concepts unknown to local market (e.g. self-insurance) • Legal status is still debated • Misalignment with some laws • Definition and the role of regulating authority Executive Education KEY TERMS: ‘10 PILLARS’ Exclusive Right to Subsoil Usage No VAT & Flat Profit Tax Rate Economic Stabilisation Government Guarantee Legal Superiority No Customs Tariffs & Duties PSA Waiver of Sovereign Immunity Permits & Licenses Cost Recovery Subcontractors’ Umbrella PERMITS & LICENSES • Exemption or simplified permitting and licensing policy covering: • Licenses to conduct Petroleum Operations • Shipment of goods in and out • Simplified foreign exchange controls • Ownership and free transit of petroleum • Repatriation of profits • Priority right of use and access to critical resources and facilities • Priority in time extension and acquisitions Executive Education TAX & CUSTOMS BENEFITS • Zero rate of VAT • Flat Profit Tax Rate for FOC • Simplified WHT procedure for Subcontractors • Simplified Reporting Requirements • Flexible Accounting Procedures • No Import or Export Duties Executive Education ECONOMIC STABILISATION • Purpose: to reinstate pre-existing economic equilibrium • • • The rights and interests accruing to [FOC] … under this Contract … shall not be amended…without the prior consent of [FOC]. In the event that the Government … invokes any … law, treaty, intergovernmental agreement… which contravenes the provisions of this Contract or adversely or positively affects the rights or interests of [FOC] …, including …any changes in tax legislation, regulations, administrative practice, or jurisdictional changes … the terms of this Contract shall be adjusted to reestablish the economic equilibrium of the Parties, and if the rights or interests of [FOC] have been adversely affected, then SOCAR shall indemnify the [FOC] … for any disbenefit, deterioration in economic circumstances, loss or damages... (ACG PSA, Art 23.2) …SOCAR shall coordinate its activities … with respect to the use of the Chirag-1 platform and production of Petroleum …to ensure … that [FOC]’s economic integrity under this Contract is preserved… The economic integrity of [FOC] shall be maintained by SOCAR providing full and prompt compensation (ACG PSA, Art 10.3) Executive Education Example: all foreigners earning taxable income from the sources in Azerbaijan are required to pay mandatory social security contributions (except foreigners working for [FOC] and their subcontractors under for the ACG and ShahDeniz PSAs) - Art 12 of the Law On Social Security, 1997 Executive Education • Stabilization in cross-border transactions: BTC example • Natural limits to stabilization: what’s not included • Risks to the Host State • Risks to FOCs • Creeping and Indirect Expropriation Executive Education LAW & DISPUTE RESOLUTION • Dispute resolution in oil & gas context: general issues • Selecting the Governing Law • Finding the Right Dispute Resolution Forum • Enforcing the Awards • Waiver of Sovereign Immunity • ‘Comradery’ Executive Education GOVERNING LAW This Contract shall be governed and interpreted in accordance with principles of law common to the law of the Azerbaijan Republic and English law, and to the extent that no common principles exist in relation to any matter then in accordance with the principles of the common law of Alberta, Canada (except for laws regarding conflicts of laws). This Agreement shall also be subject to the international legal principle of pacta sunt servanda (agreements must be observed)… ACG PSA, Article 23.1 Executive Education COST RECOVERY & PROFIT SHARING Usually Recoverable Usually Not Recoverable • All OpEx & CapEx • Finance costs & Interests • Insurance Premiums (including, surprisingly, deemed premiums for selfinsurance) • Emergency Works even if not included in AWPB • Signature bonus • Exploration costs (if dry hole) • Insurance premiums for Transit Losses • Non-consented operations • Expenses incurred due to negligence and / or wilful misconduct CAPEX Recovery Normally 50% State % Share State Take Profit Tax / Royalty Profit Oil FOC % Share Pre-Agreed Split Methodology Residual Funds OPEX Recovery Normally 100% Cost Oil – up to % Ceiling Gross Revenues Thank you! 10/189 Hasan Aliyev Str Falez Plaza, Sixth Floor AZ 1078, Baku Azerbaijan Tel: +994 12 596 01 09 Email: [email protected] Web: www.ekvita.com
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