Model Sri Lankan petro agreement copied from India?

By Dulip Jayawardene

The Model Petroleum Resources Agreement (MPRA) for the Mannar Basin Licensing Round (SL 2007-1) is identical with the Production Sharing Contract (PSC) of India for the seventh offer of blocks under the New Exploration Licensing Policy (NELP 7).

The Ministry of Petroleum and Natural Gas of India called for offers in December 2007 and the closing date is 11 April 2008. In both MPRA and PSC there are 37 Articles and 8 Appendices with identical numbers and texts with minor changes as appropriate. For PSC see websites www.dghindia.org, www.petroleum.nic.in, www.indianelpvii.com

It is unethical to copy a model PSC of another country and use it with minor changes. Under the Petroleum Resources Act No 26 of 2003 the PRDC is responsible for preparing the MPRA.

PSC of India has recognized the maritime boundaries in the Andaman Sea between India, Indonesia, Thailand and Myanmar and if an oil or gas deposit is contiguous with the boundaries, India will communicate with the appropriate government and seek to reach agreement as to the manner in which the deposits could be exploited for their mutual benefit. Such a clause is absent in MPRA as Blocks 1 2 3 and 4 are contiguous with the Indo Sri Lanka Maritime Boundary.

An attempt is made to compare the MPRA (Sri Lanka) with PSC (India). To this end the important articles that have the same numbers and basically the same text were studied.

Article 3 - Exploration License and Period
In MPRA there are 8 consecutive contract years .The first exploration period - 3 years, the second 2 years and the third 3 years. Each phase has a minimum work programme and the contractor has the option to proceed to the next phase or relinquish the entire contract area. If a discovery is made the relevant area will be retained for development. In the PSC the exploration is 7 years. The first phase is 4 years and the second is 3 years. However in deep water and frontier areas exploration is 8 years.

Article 4 - Relinquishment
In MPRA the contractor after the 3 Exploration Phases has to relinquish 30 percent of the area. In the PSC it is 40 per cent.

Article 5 - Work Programme
In MPRA during the 1st Exploration Phase 2D and 3D seismic surveys with exploratory drilling have to be carried out. During the 2nd and 3 rd Phases the contractor has to carry out the above more intensively. Minimum expenditure levels (Likely Money Spent -LMS) have to be indicated. These details shall be as per bid of company accepted by government. In the PSC the possibility of seismic option alone during the 1st exploration period for evaluation is provided.

Article 6 - Management Committee
In MPRA the Management Committee will consist of 6 persons – 3 by Government and 3 by Operator. However under the Petroleum Resources Act No.26 of 2003 there is no provision for a Management Committee. In the PSC the Committee consists of 2 members each from Government and company.

The functions are elaborated in clauses 6.5.1 to 6.5.6 for both PRA and PSC.
Articles 7 –9 Operator ship Rights and Obligations and Government Assistance
It’s the same for MPRA and PSC.

Article 10 - Oil Discovery Development and Production
Same for MPRA and PSC with different timing for reporting on discovery and appraisal. In MPRA a period of 2 years is provided for declaration of a commercial discovery whereas in PSC the period is 18 months. In the MPRA the period for submission of the Development Plan is 180 days and in PSC it is 200 days. The details to be submitted are identical in the MPRA and PSC. The contractor is given a period of 10 years to develop an oil or gas discovery.

Article 11- Development License
In MPRA the Development License (DL) is granted for an initial period of 20 years and the Cabinet of Ministers has the powers to amend or vary the conditions of the DL. In the PSC there are separate exploration licenses and mining lease for off shore and onshore areas. (PSC Article 11)

Article 12 - Unit Development
In the MPRA if an oil reservoir exists overlapping two contract areas the contractor should collaborate with the other party and set out a unit Development Plan. If the parties are unable to reach agreement the government can call for a joint development plan from an independent agency. It’s same for the PSC that has been copied by MPRA.

Article 14 - Protection of the Environment
In the MPRA there is provision for an Environmental Fund to “support the environmental research by the government. “The contributions are US$25,000 per contract year per exploration block US$50,000 per contract year during development phase US$100,000 per development area per contract year during production phase.

In PSC there is a Site Restoration Fund Scheme (Escrow Account) in an Indian Bank and funds deposited for restoration. Environmental clearance (EIA) required in both PRA and PSC.

Some clauses copied in the MPRA from the PSC are irrelevant as the PSC covers both on land and off shore exploration, development and production. In the MPRA there is no mention of the relevant National Environment Act No. 47 of 1980, Coast Conservation Act No 57 of 1981 and the Marine Pollution Prevention Act. There is no provision for removal of abandoned oil platforms under international guidelines with cost sharing in both MPRA and PSC.

Article 15 -Recovery of Cost Petroleum
In both MPRA and PSC the contractor is entitled to recover costs out of a percentage of the total value of petroleum produced. All exploration costs related to original block at the rate of 100 per cent is allowed. (Non-ring fencing)
However when the exploration leads to demarcation of a development area the cost of additional exploration and development costs only in one block will be allowed. (Ring fencing). Full recovery of costs will include royalty payments, production cost and bonus, development costs, exploration costs and signature bonus in order of priority.

In the MPRA the maximum amount of Cost Petroleum to which the contractor is entitled shall be 70 percent of the total value of petroleum produced and saved from the contract area.

In the MPRA the un-recovered portion can be carried forward for subsequent years until all costs are recovered keeping a cap of 70 percent. In the PSC the maximum amount of cost petroleum to which the contractor is entitled will be taken from the accepted bid. There is option to amortize exploration and drilling expenditures for a period of 10 years from commercial production.

Article 16 - Production Sharing of Petroleum
In both the MPRA and the PSC the profit petroleum (PP) in any financial year is based on Pre Tax Investment Multiple (PTIM) calculated as the ratio between the accumulated net cash income and the investment by the contractor during the year. If PTIM is less than 1.5, 1.5 to 2, 2 to 2.5, 2.5 to 3, 3 to 3.5 and more than 3.5 the PP percentage split between the government and the contractor shall be as per bid accepted by the government. The corporate tax is 35 per cent.

In the PSC if the PTIM is less than and equal to 1.5, 1.5 to 3.5 and over 3.5 the split of PP between government and the contractor shall be as per bid of the contractor accepted by the government.

In the 1990s the contractor share of PP varied from 100 per cent to 60 percent when the PTIM was between 0 to over 3.5. The tax was 50 percent. In the PSC there is an income tax holiday for 7 years from the start of commercial production. The tax is 30 percent.

Article 17 - Taxes, Royalties, Rentals, Duties, etc
In the MPRA all exploration and development expenditure other than drilling and production operations are deducted at the rate of 100 percent under the provisions of the Income Tax Act of 2006. Unsuccessful exploration costs within the entire block are deducted but the development costs will relate to only one area. (Ring fencing)

In PSC the exploration expenditure could be amortized for 10 years after commercial production.

In MPRA and PSC plant and equipment for exploration development and production will be imported duty free and re exported. However if sold locally duties will apply.

In MPRA company (ies) will pay royalty to the State at the rate of 10 percent of the value of crude oil and natural gas. In PSC payment of royalty for off shore areas is 10 percent and for areas over 400 meters depth it is 5 percent. For on shore areas the royalty is 12.5 percent

In MPRA the government through its wholly owned subsidiary (NOC) has an option to hold a percentage of equity from the elected date from the development stage eliminating the exploration risk. The NOC will have a carried interest with subsequent payment of equity costs. The company will have to indicate the percentage of equity at the submission of bids.

In the PSC there is no such carried interest by NOCs or mandatory state participation and 100 percent participation of foreign companies is allowed. In the MPRA there is provision of payment of a signature bonus by the contractor to cover up PRDC s extensive preparatory expenditure.

Within 20 days of commencement of commercial production the contractor has to pay a production bonus.
The expenses of the PRDC for preparation of the PRA and other relevant documents were covered by a grant from USTDA and ADB. In the PSC there is no signature discovery or production bonus.

Article 18 - Domestic Supply, Sale Disposal and Export of Crude Oil and Condensate
The provisions in MPRA and PSC are the same with lift of PP only after meeting domestic demand. The governments are committed to purchase crude at international market price.

Article 21 - Natural Gas Discovery Development and Production
The provisions contained in MPRA and PSC are identical. There is a distinction between Associated Natural Gas (ANG) and Non Associated Natural Gas (NANG) and in ANG separation of natural gas with associate crude is technically complicated.
In the PRA it is mandatory to sell the natural gas to the PRDS.
In the PSC too it is mandatory for the contractor to sell in the domestic market.

Article 22 - Employment Training and transfer of Technology
In MPRA and PSC there are provisions for employment of nationals in technical, executive and management grades. Technical Assistance Agreements are provided but the payment for such assistance is not stated.
Article 23 Local Goods and Services
In MPRA and PSC priority should be given to local goods and services.

Articles 24 to 36
Identical in MPRA and PSC.
It is also noted that the Accounting Procedure to the Contract in MPRA is identical to the PSC (Appendix C)
Functions of PRDC and PRDS.
MPRA has provided for the collection of royalties fees, bonus, etc under the relevant Articles. However under the Petroleum Resources Act No. 26 of 2003 (Part 5 Fiscal Provisions), the PRDS under the PRDC is not entitled to collection of such funds.
Under the MPRA the PRDS and the PRDC have to perform many statutory and regulatory functions. However regulations have not been framed.

It is advisable to reconstitute the PRDC which has only administrators without any experience in upstream development and regulation of off shore oil and gas..

Further the PRDS should be strengthened by recruiting geologists, geophysicists, economists and lawyers, etc and give them a sound training to carry out its functions.

The consultants who have obviously copied the Indian PSC to the Sri Lankan MPRA should have realized that the Mannar Basin is a frontier area without much data and provide the same or more incentives to attract high risk exploration dollars.

To this end PRDS should contact the other oil companies that showed interest in the Mannar Basin get their feed back on the competitiveness of the MPRA and refine it for other bidding round.

(The author is a retired Economic Affairs Officer United Nations ESCAP and can be contacted at fasttrack@eol.lk )