Submission from La’o Hamutuk

regarding the draft Petroleum Regime for Timor-Leste

Annex 2: Annotated Model Production Sharing Contract
under the Timor-Leste Petroleum Act

29 September 2004

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Table of Contents

Article 1 Interpretation

1.1 Definitions

1.2 Headings

1.3 Further Interpretation

1.4 Annexes

1.5 Joint and Several Liability

1.6 Operator

Article 2 Scope and Term

2.1 Scope

2.2 Conditions Precedent

2.3 Effective Date and Term

2.4 Grounds for Termination

2.5 Surviving Obligations

Article 3 Relinquishment of Blocks

3.1 Periodic Relinquishment of Exploration Area

Article 4 Work Programmes and Budget

4.1 Commitment in Initial Period

4.2 Commitment in Second Period

4.3 Commitment in Third Period

4.4 Performance of Exploration Work Programme and Budget

4.5 Consequences of Non-Performance

4.6 Work Programmes and Budgets

4.7 Emergency and Other Expenditures Outside Work Programmes and Budgets

4.8 Exploration

4.9 Discovery and Appraisal

4.10 Commercial Discovery

4.11 Development Plan

4.12 Development Work Programmes and Budgets

4.13 Approved Contracts

4.14 Decommissioning

4.15 Decommissioning Security

Article 5 Conduct of Work

5.1 Proper and Workmanlike Manner

5.2 Access to Contract Area

5.3 Health, Safety and the Environment

5.4 Goods, Services, Training and Employment

5.5 Flaring

5.6 Operator and its Sub-Contractors

Article 6 Recoverable Costs

6.1 Generally

6.2 Recoverable Costs

Article 7 Sharing Of Petroleum

7.1 Determination of Shares

7.2 Option of Ministry

7.3 Lifting

7.4 Title and Risk

7.5 Payment on Account

Article 8 Valuation of Petroleum

8.1 Place of Valuation

8.2 Crude Oil

8.3 Natural Gas

8.4 Price Payable

Article 9 Payments

9.1 Fees

9.2 Payment Mechanism

9.3 Late Payment

9.4 Minimum Payment

Article 10 Provision of Goods and Services

10.1 Notice

10.2 Contracts Not Requiring the Ministry's Approval

10.3 Tender Invitations Requiring Ministry's Approval

10.4 Emergencies

10.5 Other Information to be Provided

Article 11 Title to Equipment

11.1 Property

11.2 Retention

Article 12 Third Party Access

12.1 Third Party Access

Article 13 Consultation and Arbitration

13.1 Arbitration

13.2 Obligations Continue During Arbitration

Article 13½   [proposed new article] Public Register

Article 14 Financial and Technical Data, Records and Reports

14.1 Ownership

14.2 Records, Storage, Retrieval and Submission

14.3 Reports

14.4 Export of Data and Information

14.5 Use of Data and Information

14.6 Confidentiality of Data and Information

14.7 Trade Secrets

14.8 Public Announcement

Article 15 Management of Operations

15.1 Constitution of Committee

15.2 Meetings

Article 16 Audit

16.1 Independent Audit

16.2 Ministry Audit

16.3 Exceptions

16.4 Contractor to Assist

16.5 Affiliates

Article 17 Indemnity and Insurance

17.1 Indemnity

17.2 Insurance

Article 18 Force Majeure

18.1 Force Majeure Relief

18.2 Procedure

18.3 Consultation

18.4 Third Parties

18.5 Extension of Time

Article 19 Restrictions on Assignment and Change in Control

19.1 Assignment

19.2 Change in Control

Article 20 Other Provisions

20.1 Notices

20.2 Language

20.3 Applicable Law

20.4 Third Party Rights

20.5 Amendments/Modification

20.6 Entire Agreement

Annex A – Contract Area Description

Annex B – Map of The Contract Area

Annex C – Accounting Procedure

Clause 1 – General Provisions

Clause 2 – Classification and Allocation

Clause 3 – Costs, Expenses and Credits

Clause 4 – Inventories

Clause 5 – Production Statement

Clause 6 – Value of Production And Pricing Statement

Clause 7 – Cost Recovery Statement

Clause 8 – Statements Of Expenditure And Receipt

PRODUCTION SHARING CONTRACT	Comments From La’o Hamutuk
[Dated]
This Agreement, which has been approved by the Ministry, is a Production Sharing Contract made under the Timor-Leste Petroleum Act
BETWEEN
the [Ministry];
AND
· and · (collectively, the “Contractor”)
(both referred to individually as a “Party” or collectively as the “Parties”).
Whereas:
A. Petroleum existing within the Democratic Republic of Timor-Leste is a resource to be exploited jointly by Timor-Leste and Contractor;	add “territory and Exclusive Economic Zone of the” before DRTL. Change “to” to “which may”
B. the Ministry has the power to enter into Petroleum Contracts;
C. the Ministry wishes to promote Petroleum Operations in the Contract Area and the Contractor desires to join and assist the Ministry in exploring for, developing and exploiting Petroleum in the Contract Area; and	add “for the benefit of the people of Timor-Leste”
D. the Contractor has the financial capability, and the technical knowledge and technical ability, to carry on the Petroleum Operations in a manner wholly consistent with the Act, the regulations and this Agreement.	change “regulations” to “laws and regulations of RDTL”
NOW, THEREFORE, it is agreed:
Article 1 Interpretation
1.1 Definitions
In this Agreement:
“Accounting Records” has the meaning given in Clause 1.2 of Annex C;
“Act” means the Timor-Leste Petroleum Act of 2004 as amended, varied, modified or replaced from time to time, and regulations made and directions given under it;
“Affiliate” means, in respect of a person, a person that Controls, is Controlled by, or is under common Control with, that person;
“Agreement” means this Production Sharing Contract;
“Appraisal” means any appraisal activities, including appraisal wells, the purpose of which at the time such activity is commenced is to appraise and evaluate the extent or the volume of Petroleum reserves contained in a Discovery (including the commerciality of them), and all related activities;
“Appraisal Costs” has the meaning given in Clause 2.2 of Annex C;
“Approved Contract” means a contract made by the Contractor and approved by the Ministry as a part of a Development Plan;
“Associated Gas” means Natural Gas, commonly known as gas-cap gas, which overlies and is in contact with significant quantities of Crude Oil in a Reservoir, and solution gas dissolved in Crude Oil in a Reservoir;
“Calendar Year” means a period of twelve (12) months commencing with January 1 and ending on the following December 31 according to the Gregorian calendar;
“Capital Costs” has the meaning given in Clause 2.3 of Annex C;
“Commercial Discovery” means any discovery of Petroleum that is sufficient to entitle the Contractor to apply for authorization from the Ministry to commence exploitation;	“to entitle” is unclear. In whose determination? Or does this mean only that the Contractor is interested in applying for a PSC?
“Commercial Production” starts when commissioning of the major production facilities has been concluded and, in the case of Crude Oil, the first regular cargo is shipped to a buyer or storage, and/or in the case of Natural Gas, regular deliveries to the buyer or storage are effected.  The exact date is as approved by the Ministry as part of a Development Plan;
“Contract Area” means the area specified in Annexes A and B, but not any part of it which has been relinquished under Article 3;
“Contract Year” means a period commencing on the Effective Date, or on any anniversary of it, and ending immediately before the next anniversary of it;
“Control” means, in relation to a person, the power of another person to secure:
(a)   by means of the holding of shares or the possession of voting power in or in relation to the first person or any other person; or
(b)   by virtue of any power conferred by the articles of association of, or any other document regulating, the first person or any other person,
that the affairs of the first person are conducted in accordance with the wishes or directions of that other person;
“Cost Recovery Statement” has the meaning given in Clause 7 of Annex C;
“Crude Oil” means crude mineral oil and all liquid hydrocarbons in their natural state or obtained from Natural Gas by condensation or extraction;
“Crude Oil Field” means:
(a)   a single Reservoir; or
(b)   multiple Reservoirs all grouped on, or related to, the same geographical structure, or stratigraphic conditions;
from which Crude Oil and Associated Gas may be produced;
“Decommission” means, in respect of the Contract Area or a part of it, as the case may be, to abandon, decommission, remove and dispose of structures, facilities, installations, equipment and other property, and other works, used in Petroleum Operations in the area, to clean up the area and make it good and safe, and to protect the environment;	change “remove and dispose” to “transfer, remove, and/or dispose” add “restore” after “protect”
“Decommissioning Plan” means a plan of works, and an estimate of expenditures therefor, for Decommissioning, including environmental, engineering and feasibility studies in support of the plan;
“Decommissioning Cost” has the meaning given in sub-paragraph 14.4(d)(i).
“Decommissioning Costs Reserve” has the meaning given in sub-paragraph 4.14(d)(v);
“Decommissioning Security Agreement” means an agreement between the Ministry and the Contractor as mentioned in Section 4.13;	4.15 (many other wrong cross-references are not noted here)
“Development” means any development and subsequent production, including design, construction, installation, drilling, operations and all related activities;
“Development Work Programme and Budget” has the meaning in Section 4.10;
“Development Area” has the meaning given in Section 4.8;
“Development Plan” means a development plan for a Development Area, as referred to in Section 4.9;
“Discovery” means a discovery of Petroleum in a Reservoir in which Petroleum has not previously been found that is recoverable at the surface in a flow measurable by conventional petroleum industry testing methods;
“Effective Date” has the meaning given in Section 2.3;
“Exploration” means, subject to paragraph 4.3(c), any exploration activities, including geological, geophysical, geochemical and other surveys, investigations and tests, and the drilling of shot holes, core holes, stratigraphic tests, exploration wells and other drilling and testing operations for the purpose of making a Discovery, and all related activities;	including seismic
“Exploration Costs” has the meaning given in Clause 2.1 of Annex C;
“Exploration Work Programme and Budget” has the meaning in Sections 4.1 and 4.2;
“Field” means a Gas Field or a Crude Oil Field from which Petroleum may be produced;
“Field Export Point” means the point at which Petroleum from the Contract Area leaves the Contract Area, or such earlier point at which it is loaded onto or enters a vessel, pipeline or other means of transportation to be transported from the Contract Area;
“Force Majeure” has the meaning given in Article 17;
“Gas Field” means:
(a)   a single Reservoir; or
(b)   multiple Reservoirs grouped on, or related to, the same geographical structure, or stratigraphic conditions;
from which Non-Associated Gas may be produced;
“Gas Retention Area” has the meaning given in Section 3.5;
new  definition	“Good Oil Field Practice” means the best industry practice as well as the best practice required by applicable international standards, including: · American Petroleum Institute (API) http://api-ec.api.org/  over 550 de-facto international engineering and safety standards. · International Organization for Standardization (ISO)  - http://www.iso.ch/iso/en/ · Det Norske Veritas (DNV) standards for offshore facilities http://exchange.dnv.com/
“Ineligible Costs” has the meaning given in Clause 2.8 of Annex C;
“Initially Processed” means, in relation to Petroleum, processed to a point where it is ready for off-take from the production facility and may include such processes as the removal of water, volatiles and other impurities;
“Joint Operating Agreement” means an agreement of the type described at Section 16.1 of the Act;
“Loan Facility” means any overdraft, loan or other financial facility or accommodation (including any acceptance credit, bond, note, bill of exchange or commercial paper, finance lease, hire purchase agreement, trade bill, forward sale or purchase agreement, or conditional sale agreement, or other transaction having the commercial effect of a borrowing);
“Ministry” means the ministry for the time being responsible for Petroleum matters;	Ministry of the government of RDTL. This should be more specific, as there should also be references in this PSC to ministries responsible for environmental protection, human rights and local communities. It would be best to say “Petroleum Ministry” throughout the PSC when that is what is meant.
“Miscellaneous Receipts” has the meaning given in Clause 2.7 of Annex C;
“Natural Gas” means all gaseous hydrocarbons, including wet mineral gas, dry mineral gas, casing head gas and residue gas remaining after the extraction of liquid hydrocarbons from wet gas, but not Crude Oil;
“Non-Associated Gas” means Natural Gas which is not Associated Gas;
“Operating Costs” has the meaning given in Clause 2.4 of Annex C;
“Operator” means the person appointed from time to time to organize and supervise Petroleum Operations;
“Petroleum” means:
(a)   any naturally occurring hydrocarbon, whether in a gaseous, liquid, or solid state;
(b)   any mixture of naturally occurring hydrocarbons, whether in a gaseous, liquid or solid state; or
(c)   any mixture of one or more naturally occurring hydrocarbons, whether in a gaseous, liquid or solid state, as well as other substances produced in association with such hydrocarbons;
and includes any petroleum as defined by paragraphs (a), (b) or (c) that has been returned to a natural Reservoir;
“Production Statement” has the meaning given in Clause 5.1 of Annex C;
“Petroleum Operations” means any activity authorised by the Ministry hereunder, and includes:
(a)   the exploration for, development and exploitation of Petroleum in the Contract Area, and the export of that Petroleum from the Contract Area;
(b)   the construction, installation and operation of structures, facilities, installations, equipment and other property, and the carrying out of other works, necessary for the purposes mentioned in paragraph (a) above;	including downstream facilities, such as pipelines and LNG plants?
(c)   Decommissioning;	Should also include refining, liquefaction, and transport
(d)   the marketing of that Petroleum; and
(e)   planning and preparation for the activities mentioned in paragraphs (a), (b), (c) and (d) above;
“Production” means any exploitation or export activities, but not Development;
“Quarter” means a period of three months beginning on January 1, April 1, July 1 or October 1 of each Calendar Year;
“Recoverable Costs” has the meaning given in Article 6;
“Reservoir” means a discrete accumulation of Petroleum in a geological feature located in whole or in part in the Contract Area limited by
(a) lithological boundaries; or
(b) structural boundaries
so that the entire accumulation of Petroleum is in pressure, fluid or gas communication;
“Security” means:
(a)   a standby letter of credit issued by a bank;
(b)   an on-demand bond issued by a surety corporation;
(c)   a corporate guarantee; or
(d)   any other financial security acceptable to the Ministry;
and issued by a bank, surety or corporation acceptable to the Ministry and having a credit rating indicating that it has sufficient worth to pay its obligations in all reasonably foreseeable circumstances;
“Territory of Timor-Leste” consists of the territory of Timor-Leste, including its territorial sea, together with its exclusive economic zone and continental shelf where, by international law, Timor-Leste has sovereign rights for the purposes of exploring for and exploiting its natural resources.	refer to Maritime Boundaries Act, RDTL Law no. 7/2002
“Timor-Leste” means the Democratic Republic of Timor-Leste.
“United States Dollars” means the lawful currency of the United States of America;
“Uplift” has the meaning given in Clause 2.6 of Annex C.
“Value of Production and Pricing Statement” has the meaning given in Clause 6 of Annex C; and
“Work Programme and Budget” means a work programme for Petroleum Operations and budget therefor approved in accordance with this Agreement.
1.2 Headings
As used herein, headings are for convenience and do not form a part of, and shall not affect the interpretation of, this Agreement.
1.3 Further Interpretation
In this Agreement, unless the context otherwise requires:
(a)   the words “including” and “in particular” shall be construed as being by way of illustration or emphasis only, and shall not be construed as, nor shall they take effect as, limiting the generality of any preceding words;
(b)   a reference to an Article, Section, paragraph, sub-paragraph or to an Annex, is to an Article, Section, paragraph, sub-paragraph of or to an Annex to, this Agreement;
(c)   a reference to an agreement (including this Agreement) or instrument, is to the same as amended, varied, novated, modified or replaced from time to time;
(d)   “person” includes a corporation or other legal entity;
(e)   the singular includes the plural, and vice versa;
(f)   any gender includes the other;
(g)   an agreement includes an arrangement, whether or not having the force of law;
(h)   a reference to the consent or approval of the Ministry means the consent or approval, in writing, of the Ministry and in accordance with the conditions of that consent or approval;
(i)    a reference to a consent, approval or agreement not to be unreasonably withheld includes a reference to its not being unreasonably delayed;
(j)    “law” includes the Act and any other applicable legislation;
(k)   “contiguous area” means a block, or a number of blocks each having a point in common with another such block; and
(l)    where a word or expression is defined, cognate words and expressions shall be construed accordingly;
and this Agreement shall inure to the benefit and burden of the Parties, their respective successors and permitted assigns.
1.4 Annexes
If there is a conflict, the main body of this Agreement prevails over an Annex.
1.5 Joint and Several Liability
If the Contractor is more than one person, the obligations and liabilities of the Contractor under this Agreement are the obligations and liabilities of them all, jointly and severally.
1.6 Operator
(a)   The appointment of an Operator by the Contractor shall be subject to prior approval by the Ministry where:	Is there only one operator per contract? This should be clarified since 1.3(e) could allow more than one.
(i) there is more than one Authorised Person in respect of a particular Authorisation and the person appointed as Operator is one of those Authorised Persons, and
(ii) the person appointed as Operator is not an Authorised Person.
(b)   Except with the prior approval of the Ministry as required under paragraph 1.6(a), the Contractor shall not permit any person to exercise any function of an Operator.
(c)   For all purposes of this Agreement, the Operator shall represent the Contractor, and the Ministry may deal with, and rely on, the Operator. The obligations, liabilities, acts and omissions of the Operator are, additionally, the obligations, liabilities, acts and omissions of the Contractor.
(d)   The Operator shall conduct its operations under this Agreement from an office located in Timor-Leste.
(e)   Any change in Operator shall be subject to the prior approval of the Ministry.
(f)   Where the Ministry determines that an Operator is no longer competent to be an Operator, the Ministry may, by written notice to the Operator and to the Contractor, revoke its approval.
Article 2 Scope and Term
2.1 Scope
(a)   This Agreement, and the rights, interests and benefits of the Contractor, and the obligations and liabilities of the Ministry, under it, are subject to the Act. The Contractor shall, at all times and in regard to all things, comply with its obligations under the Act. No provision of this Agreement shall excuse the Contractor from so complying, nor derogate from any right or privilege of the Ministry thereunder.
(b)   Subject to this Agreement, the Contractor:
(i) shall, and has the exclusive right to, carry on Petroleum Operations at its sole cost, risk and expense; and
(ii) shall provide all human, financial and technical resources therefor; and