Detailed analysis of CPC/TGS-NOPEC agreement

In this comprehensive analysis, the writer, a retired UN official and specialist on oil issues, discusses the ramifications of the controversial CPC/TGS NOPEC petroleum agreement, how the country was taken for a ride and the need for an independent committee to review it and makes his own coments.

1. The agreement was entered into on May 21, 2001.

2. During June –July 2001, TGS-NOPEC had completed 1100 kilometers of 2D seismic lines (as recorded by the University of New South Wales)

3. The Non Exclusive Seismic Data Agreement and Annexure 1/2/3 and 4 between the parties was signed and executed on February 13, 2002 although it was finalized for signature in 2001.

4.The signatories were Mr. Paul Gillman of TGS-NOPEC and Mr. Daham Wimalasena, Chairman CPC. The authorized seal of CPC has to be affixed in the presence of two Board members of CPC after a Board resolution. Such a seal is not in this document, which leads to the question of its legality.

5.The agreement granted TGS-NOPEC Exclusive Rights to market for and on behalf of CPC, Non Exclusive Seismic Data within the territorial waters of Sri Lanka.

1. Definitions and Interpretation
1.1 Refer to new Laws including regulations-the new Law applicable is the Petroleum Resources Act No.26 of 2003.The regulations under this Law have not been drafted or legislated.
Survey data included 2D and 3 D multi channel digital reflection seismic geophysical data –3D survey was not carried out.

2. Appointment of TGS –NOPEC
2 (a) CPC appointed TGS -NOPEC as an Exclusive Agent to carry out 2 D and 3 D seismic surveys market and license the survey data to third parties TGS NOPEC accepts the appointment.

Comments – attention is drawn to clause 16 of the Petroleum Resources Act No 26 of 2003 where operational service contractors have to obtain licenses from PRDC.TGS –NOPEC has not done so and has violated the law.

2(b) Such an appointment precludes CPC from engaging others including those bidding for off shore blocks and carrying out their own surveys.

3. Authorizations
3.1 Phase Performance -TGS-NOPEC is authorized to perform the first two phases and was awarded in conjunction with the Heads of Agreement signed in May 2001 and described in Annexure 3 and 4 which relate to seismic data processing and interpretation. Annexure 3 contains notice on Phase 1 with the cost schedule and the area to be covered and notice of commitment. Annexure 4 also contains the same but the area overlaps with Annexure 3 Notice of commitment to Phase 11 in Annexure 4 has also been signed. The cost of Phase 1 is US $ 1,737, 330 but the cost of Phase 11 is not given.

CPC will not appoint any other person or Agent to perform Phase 1 and 11 (Gulf of Mannar and the southern extension).

3.2 Authority to Market and License
(a), (b) and (c) will prevent any other party to carry out seismic surveys in the designated areas under Phase 1 and 11. However TGS –NOPEC will be responsible for all costs.

3.3 Revenue Sharing
CPC agreed to share any revenue from carrying out Phase 1 and 11 as specified in Clause 11.

4. Scopes and Objective
4.1 The objectives are to provide International oil companies with 2 D and 3 D seismic data for co relation to assess the hydrocarbon accumulation. This clause also refers to new laws meaning the Petroleum Resources Act No 26 of 2003.TGS NOPEC will assist companies in making bids for off shore blocks tendered by CPC.

This clause clearly indicates a conflict of interest as TGS NOPEC operates on behalf of CPC. However TGS NOPEC will encourage as many oil companies as possible to purchase survey data.

Comment- the companies will be tied down to purchase TGS NOPEC data. TGS NOPEC could advise companies on bidding rounds and this would be a disadvantage to CPC.

4.2 Phase Determination
(a) Phase 1 and 11 determined by CPC and the notices of commitments signed with the Agreement (see Annexure 3 and 4).
(b) 1- CPC has to give notice to TGS NOPEC if it receives third party offers for PSC s (Production Sharing Contracts).
(b) 2 -TGS NOPEC has the option to carry out the above (marketing or collection of data) under 4.2 (b).
(c) CPC cannot accept any Third Party offer that would be in conflict with Phase 1 and 11. (Annexure 3 and 4).
Comment - CPC has no option other than to offer TGS NOPEC to market data. However some oil exploration companies will be reluctant to purchase data and would want to carry out its own seismic surveys.

4.3 Phase Performance
Each phase will be performed on terms of this Agreement and the notice will be incorporated in this Agreement, and would also provide the insertion of additional terms and conditions in TGS NOPEC’s role as an agent of CPC.

4.4 Phase Sections
(a) There are 5 Sections for each Phase (Annexure 1). These are:
a. Planning and Pre Marketing
b. Seismic data acquisition
c. Seismic and data processing
d. Interpretation
e. Marketing
(b) If there is sufficient industry interest TGS NOPEC and CPC will agree that all sections of each Phase including marketing geophysical data acquisition processing and interpretation of the results over the Phase areas will be undertaken by TGS NOPEC.
(c) TGS NOPEC will inform CPC expressions of industry interest received and may commence section (b) above of each Phase (1and 11) by giving notice of commitment to the Phase at least 15 Days prior to commencing section of each Phase in the form set out in the Annexure.

Comment – The above stipulates that Section (b) above i.e. seismic data acquisition will commence if there is “sufficient” expression of interest by the industry. Has CPC received such information and has TGS NOPEC physically carried out all activities from (b) to (e) as outlined above and in Annexure?

5. Term and Termination
5.3 The agreement will terminate on 12 February 2012 (10 years). Provision for termination by mutual interest of the parties will be in accordance with Clause 5(b).

5.4 If one of the parties is in material breach of any of that party’s obligations, the aggrieved will be entitled to terminate the agreement with 30 days notice to the defaulting party.

Comment -- GOSL (Sri Lankan government) should have issued the notice of termination after ascertaining that there is a genuine material breach of Agreement by TGS NOPEC.

6. TGS NOPEC’s Obligations and Responsibilities
6.1 (a) Preparation of Survey: TGS NOPEC is responsible for data acquisition, data processing and interpretation for Phases 1 and 11 as described in Sections 11 111 and 1V of Annexure 1 and subsequent phases in accordance with the parameters determined by CPC in consultation with TGS NOPEC.

6.1 (b) all costs incurred including a survey vessel will be borne by TGS NOPEC.
6.1 (c) TGS NOPEC will provide necessary equipment, personnel and services to conduct each phase.
6.1(d) TGS NOPEC will comply with all conditions approved by CPC.
6.1 (e) Data acquisition processing and interpretation carried out by TGS NOPEC according to industry standards.
6.1 (f) TGS NOPEC will store all data in a secure environment in a tape storage facility that complies with CPC’s “reasonable” requirements.

Comment - The obligations exclude planning and pre marketing and marketing although the agreement provides for such activities. TGS NOPEC is responsible for storage of data and facility. If data is now stored in another company TGS NOPEC should take responsibility.

6.2 Reporting TGS NOPEC will;
(a) Report monthly to CPC the completion of the Survey Data and Derivative Products -Time to Time (TWT) -depth migration, depth processing and amplitude versus effect studies).

(b)Submit to CPC within 30 days for completion of processing of one set of deliverables (Seismic data processing Section 111 of Annexure 1).

(c)Provide CPC upon completion of each calendar month summary of all data licensing contracts during the preceding month in the Form set in Annexure 11.

(d)Provide CPC immediately following the conclusion of each calendar month copies of all data licensing invoices issued by TGS NOPEC during the previous month (including the percentage of survey data).

(e)Provide CPC a set of marketing material to be used by CPC for its internal use.

Comment - CPC should have records of all activities from (a) to (e) above. If not TGS NOPEC is in breach of this agreement. Further (e) states TGS NOPEC will provide marketing material for internal use. Was such material received and now used to call for international bids?

6.3 Transfer of Technology
TGS NOPEC will provide all opportunities for personnel nominated by CPC in the acquisition, processing and interpretation of data under Phase 1 and 11. All costs will be made by TGS NOPEC.

Comment - Ascertain from CPC whether persons underwent on the job training as above.

7. CPCs Obligations and Responsibilities 7.1 Preparation for Survey
CPC will provide TGS NOPEC with data in its possession and control that TGS NOPEC requires to carry out its obligations.
Comment - It is reported that seismic data covering 18 000 kilometers in the areas under Phase 1 and 11 was in possession of CPC from early 1970s to about the late 1980s (former USSR, Marathon, Cities Surveys, USA Canada and all stratigraphic drill hole information). No costing was done on this data provided to TGS NOPEC.

7.0 Bidding Round Subject to clause 7.5 (passage of New Laws)

(a) Within 4 months of commencement of Section 2 of all phases (seismic data acquisition) except Phase 1, CPC will publicly announce the commencement of a bidding round process that includes invitation to tender, submission of bids for the award of separate exclusive areas licenses, permits or blocks within each Phase area (Gulf of Mannar) for the purpose of hydrocarbon exploration and production.

(b)The location, size, and number of separate blocks to be offered in the bidding round announced under clause 7.2 (a) will be determined by CPC. This determination will be made following the presentation by TGS NOPEC of both the survey data and a recommendation on the number of configurations of blocks.

(c)The closing date for the return of tender submissions or bids for blocks offered in the bidding round will be no later than 12 months from the date of completion of processing of data acquired by the survey.

Comment -- This clause ties down CPC (GOSL) to various conditionalities as laid down by TGS NOPEC. However the question remains whether TGS NOPEC has conveyed the date of completion of the processing of data acquired by the survey. The agreement itself has no time bar. The restrictions on even the timing for calling bids are not appropriate as GOSL represents a sovereign state. CPC should have never agreed to this clause.

7.3 Licensing
Any company wishing to submit a bid to the GOSL for any area covered by the survey data CPC is required to license at least 70 per cent of that data from TGS NOPEC (2D Seismic data). The percentage and marketing of data for 3 D Seismics prior to submission of bids for blocks by companies will be determined by TGS NOPEC (this condition is not included in the present Agreement).

Comment – Any prospective client will be interested in 3 D seismic data as well as 2D but the clause stipulates that prior to submission of a bid TGS NOPEC is mandated to license for 70 per cent of the data. For 3 D seismic data the determination will be made later.

CPC should never have agreed to this clause as it legally provides for TGS NOPEC to be completely entrenched in licensing of all seismic data (2D and 3D) for all clients and for all determined blocks

7.4 Survey Costs Accepted within the Work Programme
7.4 (a) and 7.4(b) CPC is mandated to accept costs of data acquisition as eligible to be included in the total costs of the work programme. Such costs could be included under costs recoverable under a PSC Agreement by the GOSL. However costs are determined by TGS NOPEC and CPC has no hand.

7.5 Passage of Laws
TGS NOPEC pre empted the legislation of the Petroleum Resources Act No 26 of 2003 which was certified on 9 September 2003.The CPC TGS NOPEC agreement was signed on February 13, 2002 .CPC had committed the Licensing Agreement for all the blocks to TGS NOPEC under the new Act even prior to the legislation and entering into force.

Comment -- CPC should have never agreed for such exclusive rights with TGS NOPEC on licensing of seismic data.

8.Access Authority No comments 9.Survey Data Ownership and Control
9.1Property of CPC
All data including field tapes in the possession of TGS NOPEC will be returned to CPC after 10 years after submitting deliverables (Section 111 of Annex 1 seismic data processing or upon termination of this agreement whichever is earlier.

Comment -- Since GOSL has now decided to terminate the agreement all data should be carefully scrutinized by a competent Geophysicist (Data cover Phase1 and 11 Section 111 in Annex 1) This implies that TGS NOPEC will not provide details and relevant reports covering Section 1 11 1V and V. The question to be raised is whether GOSL could justify payment of US$ 10.5 million without information and data acquired by TGS NOPEC under the Sections mentioned above. Specific reference is made to Section 1V where TGS NOPEC was committed to give a detailed report on the geological prospectivity for oil and gas in the Gulf of Mannar.

9.2 Derivative Products
Such products namely time-to-time depth migration (TWT) depth processing and amplitude versus offset studies will be the property of CPC. Such products are essential to determine stratigraphic sequences and reflectors from the basement etc.
Comment-- the cost of producing the above will be the additional survey data and will be included in cost recovery (clause 11).

10. Survey Data Licensing
10(a) all contracts entered into by TGS NOPEC on behalf of CPC will be in writing and include strict confidentiality clauses. (See annexure 11)

10(b) TGS NOPEC will be solely responsible for negotiating contracts referred to in 10(a) including setting of all prices and final wording for all contracts. (See annexure 2 Model Contract)

10(c) Prices for survey data will be based on financial study evaluation by TGS NOPEC. TGS NOPEC will have the right to market the survey data at prices set by TGS NOPEC in consultation with CPC.

10(d) (1) all contracts will have a WARNING with emphasis on ownership of data by CPC.

10(d) (2) Client can inspect data and accepts on “where is –as –is” basis.

There is a disclaimer by TGS NOPEC and CPC. It raises the issue of the authenticity of the data be ascertained accurately.
10(e) TGS NOPEC will provide information to CPC in relation to clauses 10 (a) to 10 (c). This is not relevant as CPC is not involved in pricing or negotiating such agreements with clients.

11. Revenue Sharing

11.1 2D Seismic Data
TGS NOPEC will receive a commission from the revenue received from the licensing of the 2D seismic data within 10 years of execution of this agreement. (Full term of Agreement) The following is the table:

11.2 3 D Seismic Data
A separate revenue sharing agreement as above will be given when notice of commencement is given (clause 3.1 (a) for Third Phase.

Comment -- The above commission for TGS NOPEC depends upon cost recovery which has to be closely monitored and audited by CPC. If not there is every likelihood of TGS NOPEC giving low cost recoveries and extends the time of payment of only 5 per cent to CPC.

11.3 No Comments
12. Force Majoure - No Comments
13. Confidentiality

(a) The information and data provided by CPC will be kept confidential.

(b) TGS NOPEC will keep confidential information and material provided by CPC as proprietary information.

Comments -- It has been reported that 18,000 kilometers of seismic data from the area both off shore and on shore were available at CPC. This data together with data from stragriphic wells were also provided by CPC. TGS NOPEC has used the data without any payment to CPC to compile the 2D or most probably even portions of 3 D Data Base that they will license and earn revenue. The confidentiality clause does not prevent use of such data.

Clauses 14 to 17 are Standard Clauses. However under 17.5 (b) on the date this agreement was executed by TGS NOPEC and CPC the Heads of Agreement signed on 21 May 2001 will terminate.

Accordingly CPC should have negotiated even the main Agreement by adding more clauses such as default clauses based on a time bar etc.

General Comments:
It is unusual for the oil industry to sign an agreement giving Exclusive Rights to a company for licensing of seismic data. If at all the licensing agreement should have been for a more restricted and a specific area.

However CPC by signing the agreement with TGS NOPEC has committed itself by granting Exclusive Rights for such data which is the first step in evaluating off shore oil and gas reserves. Most of the companies interested in bidding for off shore blocks will carry out its own surveys and will be more confident on the reliability of its own data. Moreover the term of the CPC NOPEC Agreement is 10 years whereas the Licensing Agreement signed by clients with TGS NOPEC will be valid for 20 years.

This would imply that even after the main agreement is terminated by CPC, TGS NOPEC could carry out the sale of such data collected including CPC data provided free of charge for another 10 years.

In conclusion the Agreement is very much in favour of TGS NOPEC. The CPC should study the agreement and ascertain that all TGS NOPEC obligations and responsibilities covering Phase 1 and Phase 11 have been satisfactorily discharged. If not TGS NOPEC has violated the agreement and GOSL should go for arbitration.

It is very evident that the TGS NOPEC agreement is highly detrimental to GOSL in its attempts to call for international bids for off shore oil and gas exploration in the Gulf of Mannar and the off shore region south of it.

It has been publicly announced that GOSL has paid US $ 10 Million to TGS NOPEC and cancelled the Agreement. However as a matter of transparency and public accountability the conditions for such cancellation has to be in the public domain.

The Minister for Petroleum Resources had announced recently that the question of calling for bids and acquisition of 3D Seismic data will be decided by the President.

There is a provision in the TGS NOPEC Agreement to undertake Phase 111 for acquisition of 3 D seismic data and the possibility of TGS NOPEC getting involved cannot be ruled out at this stage.

The other pivotal factor in the termination of this agreement is how to clearly ascertain the quantum of data collected by TGS NOPEC and how to eliminate in this quantum the data provided by CPC without any charge. In this regard there are records that CPC provided 18000 kilometers of 2 D seismic data to TGS NOPEC and what TGS NOPEC collected on its own was only 1800 kilometers. There are no records kept at CPC regarding this issue. In any case the payment of US $ 10 million from public funds to TGS NOPEC is not justified at all and GOSL should institute legal action against TGS NOPEC if the payment has not been made as yet. Further the GOSL should appoint an independent committee to look into this agreement with advice from an experienced petroleum-industry lawyer.

(The author is a retired Economic Affairs Officer from United Nations ESCAP and professionally an economic Geologist with 42 years of experience. He was the Director of the Geological Survey Department (Presently Geological Survey and Mines Bureau) -GSMB) from 1985 to 1987.His last assignment for the UN was on a Project in Timor Leste on mineral resources assessment evaluation and formulation of a regulatory framework for mining and off shore oil and gas exploration. He could be reached at fasttrack@eol.lk).