HOUSTON—Even in Texas, it’s rare to hear the theme song of the 1960-70s U.S. sitcom The Beverly Hillbillies at an oil and gas conference with audience members chiming in lyrics on cue.
Norman Nadorff, special counsel for the South Africa-based Centurion Law Group, and participants at NAPE Summit 2016 did just that on Feb. 10, using the Ballad of Jed Clampett to hear about oil and gas contracts—more specifically how they differ across the world.
Although the discovery of bubbling crude—oil that is, black gold, Texas tea—led to Jed becoming a millionaire and moving to Beverly Hills, that is not the case in other parts of the world where mineral rights don’t belong to property owners. Elsewhere the property owners might be paid to leave their land before establishing the value of oil found there, he said. Elsewhere, deals may be swept up by an undercurrent of bribes. And the enforceability of contracts can also be problematic.
The talk came during a time of mediocre A&D activity but during an event that brings deal makers together from the U.S. and abroad. Nadorff pointed out the difference between production-sharing contracts, tax and royalty systems and risk-service contracts, noting common features and places where each type of agreement is used.
But he warned looks can be deceiving. Many a greedy Milburn Drysdales lurk about the world.
“These agreements take many forms internationally. Very often they look like what you are used to in the United States,” he said. But “you can’t just assume that the way a JOA works in the United States will work that way elsewhere. Look before you leap.
“A lot of these agreements are hybrids. What’s really important in them is what it says not what it is called,” Nadorff said on the topic “Forget the Beverly Hillbillies: How Contracts Work (and Don’t) Outside the U.S.”
Making sure agreements comply with the law and knowing whether the law or the agreement takes precedence is a must, he said. In some countries the production-sharing contract becomes the law; in other places, it doesn’t, he said.
“In all cases don’t think that you can look for all of your obligations under the contract, and don’t think that the applicable laws will never change,” Nadorff warned. “They do, and there are ways to deal with that.”
While the ins and outs of production-sharing contracts, tax and royalty systems and risk-service contracts may be commonly known among industry insiders, Nadorff spoke about an agreement that some may not be as familiar with—international consulting agreements.
Imagine an oil and gas company entering unfamiliar territory: South Sudan, for example. The country has about 3.5 billion barrels of proved oil reserves, according to the U.S. Energy Information Administration. Having gained independence from Sudan only five years ago, Nadorff said the country does not conduct bid rounds; instead, the government negotiates directly.
Foreign investors may gravitate naturally toward hiring a foreign country consultant, or agent.
“As you can imagine, this can be fraught with problems,” Nadorff said. In many situations, an investor will pursue a deal in a country and a government official may refer the foreign investor to someone to help it conduct business to seal the deal.
“Alarm bells should be going off,” he said, noting the person may a conduit for the payment of bribes. “This has happened in some very famous cases: the Statoil case involving Iran.”
In 2002, Statoil entered what it called a “flawed consultancy agreement” with Horton Investments, which was backed by the son of a former Iranian president and also a director of the National Iranian Oil Co. (NIOC). The 2009 Statoil annual report, which included information about the so-called Horton Affair, said “Statoil agreed to pay this individual, regarded as a public official under the [U.S. Foreign Corrupt Practices Act], a total of US$15.2 million over a period of 10 years in order for him to influence NIOC to award Statoil an interest in South Pars.”
Stay On ‘Narrow Path’
Statoil reached settlements in 2006 with U.S. authorities, agreeing to pay $21 million in fines. The company was also fined $3 million by Norwegian authorities. U.S. investigators closed the case in 2009 after Statoil, which put in place vetting procedures for new business relationships as well as training for its employees and stronger anti-corruption and ethics practices, met the terms of the settlements.
“Although the Horton case now belongs in the past, it is still a very real reminder of the importance of staying on the narrow path,” Statoil said.
Many companies avoid international consulting agreements, and instead perhaps hire a law firm, Nadorff said. However some such agreements are legitimate and have benefited others in the past. “But be very, very careful when you go into this kind of environment.”
Such agreements, he said, should:
- Define the scope, responsibilities and activities of the consultant or agent, setting limitations on the consultant’s authorities;
- Establish exclusivity, determining whether the agent may work for another company such as a competitor;
- Include an anti-bribery and compliance act clause, setting clear expectations about ethical practices and
- Have strong termination clauses that allow for an immediate termination of the contract if there is evidence of wrongdoing on the agent’s part.
“These kinds of agreements can be a very effective way of helping a newcomer obtain oil and gas rights in a country, but they are a two-edged sword and they present significant risks,” Nadorff said. “Anti-corruption is a big concern. Exclusivity needs to be addressed. Compensation, to some extent, should be related to services.”
Velda Addison can be reached at email@example.com.
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