International Petroleum Transactions
Little Oil Ltd. (“LOL”), a small international exploration company based in Scotland, recently acquired Block 5 in the exclusive economic zone (EEZ) of the Democratic Republic of São Tomé and Príncipe. Big Tex Oil Company (“BTOC”) contacts LOL about farming into LOL’s position in Block 5. LOL is excited that BTOC is interested, since LOL will need financial help in drilling the exploration well required by the Petroleum Agreement with the Government of São Tomé and Príncipe. LOL has lots of data and information concerning Block 5, and Jim Hill, LOL’s chief geologist, wants to send a copy of such data to BTOC as soon as possible. Just before the package is to be sent to BTOC, the BTOC business development manager asks Jim Hill if LOL will require BTOC to sign a confidentiality agreement before BTOC receives the data. Jim Hill doesn’t know much about confidentiality agreements, and certainly doesn’t want to do anything that scares away BTOC, but he also doesn’t want to put LOL at risk. Since LOL has no in-house counsel, Jim Hill consults you regarding the following:
a. Why is a confidentiality agreement needed to show BTOC data regarding Block 5?
b. What risks does LOL have if there is no signed confidentiality agreement?
c. BTOC has suggested using the AIPN Model Form Confidentiality Agreement and you ?are concerned about Clauses 6.2 and 7 which provide as follows: ?“6.2 The Parties recognize that persons authorized to review the Confidential Information under Article 4.2 may form mental impressions (i.e., impressions not written or otherwise reduced to a record) regarding the Confidential Information. The use of these mental impressions by those persons shall not be a violation of the restriction contained in Article 6.1.” ?“7. The liability of the Parties to each other for breach of this Agreement shall be limited to direct actual damages only. Such direct actual damages shall be the sole and exclusive remedy, and all other remedies or damages at law or in equity are waived except such equitable relief as may be granted under Article 12. In no event shall the Parties be liable to each other for any other damages, including loss of profits or incidental, consequential, special, or punitive damages, regardless of negligence or fault.” ?Can you explain what these clauses are for and what risk they may present to LOL if they are included in the confidentiality agreement?
BTOC wants LOL to include a dispute resolution clause in the confidentiality agreement that provides for binding arbitration in London, England to resolve any disputes under the confidentiality agreement. Jim Hill, LOL’s Chief Geologist, doesn’t know anything about arbitration and consults you again. He wants to know:
d. Why should LOL agree to arbitration, especially in England, instead of just resolving any disputes in the courts of São Tomé and Príncipe?
e. What key elements should be included in the arbitration clause in the confidentiality agreement?
BTOC is definitely interested in acquiring a portion of LOL’s interest in Block 5, however BTOC needs some time to full evaluate all of the data regarding Block 5 and the Petroleum Agreement, a production sharing contract, for Block 5, and then obtain their parent company’s management approval for a Farmout Agreement. Jim Hill asks you:
f. Can a Memorandum of Understanding be legally binding?
g. What are the risks to LOL if they sign such a Memorandum of Understanding?
h. LOL’s parent company, Big Little Oil Company (“Big”) is currently in talks with another ?exploration company about a possible merger. Could the merger, if it happens, impact the Memorandum of Understanding?
BTOC has noticed that the Petroleum Agreement for Block 5 provides for settlement of disputes through binding arbitration under ICSID rules and that São Tomé and Príncipe is a signatory to the ICSID Convention. However BTOC also notices that the Petroleum Agreement does not contain a waiver of sovereign immunity clause. BTOC asks for an explanation and Jim Hill asks you:
i. What is sovereign immunity? Why is a sovereign immunity waiver needed?
j. The government of São Tomé and Príncipe contractually agreed to arbitration in the ?Petroleum Agreement, isn’t this good enough for a waiver?
k. Are there any other ways the São Tomé and Príncipe could waive sovereign immunity?
Jim Hill understands that LOL has a Petroleum Agreement for Block 5 in São Tomé and Príncipe that is a production sharing contract type of agreement but asks you to explain the conceptual, legal and commercial differences between a production sharing contract and a concession that São Tomé and Príncipe is considering for future Blocks.
He also wants you to explain which form of contract LOL might prefer in the current low oil price world.
BTOC notes that the Petroleum Agreement provides for joint and several liability of the contractor vis-à-vis the government of São Tomé and Príncipe. BTOC is concerned that its credit rating is much better than LOL’s credit rating, and that the government will always come to BTOC for any claim. How can BTOC be convinced that LOL will bear its share of costs under the Petroleum Agreement? In the Farmout Agreement or in another agreement?
BTOC negotiates and enters into a Farmout Agreement with LOL, using a form substantially the same as the AIPN Model Form Farmout Agreement. The Petroleum Agreement provides that the government’s approval is required for all transfers of interests under the Petroleum Agreement.
l. What is the risk to LOL if it fails to get such government approval?
m. LOL requests government approval and, after 90 days, the government responds that approval is conditioned on the payment of a $1,000,000. transfer fee to the government. ?Who should pay the transfer fee?
n. If both BTOC and LOL refuse to pay the transfer fee, what exposure does LOL have ?under the Farmout Agreement to BTOC? What exposure does BTOC have under the Farmout Agreement to LOL?
BTOC operates a high sulfur recovery facility just outside of Las Vegas, Nevada, U.S.A. Since the fields in São Tomé and Príncipe are anticipated to have natural gas with high sulfur, BTOC wants to take a delegation from the Office of the National Petroleum Agency of São Tomé and Príncipe (“ANP-STP”) to BTOC’s high sulfur recovery facility. BTOC would be responsible for the following costs for the members of the delegation:
o. Round trip Business class airfare from Sao Tome to Las Vegas;
p. Airport transfers in Las Vegas;
q. Hotel accommodations at Cesar’s Palace Hotel in Las Vegas;
r. Transportation from Las Vegas to/from the high sulfur recovery facility;
s. Three meals a day while in U.S.A.;
t. A sightseeing side trip to the Hoover Dam and the Grand Canyon;
u. A per diem of US$350 per day away from São Tomé and Príncipe, as per the written ?regulations of ANP-STP. ?Jim Hill has heard about the U.S. Foreign Corrupt Practices Act, but doesn’t really understand the law very well. He asks you to advise him whether BTOC’s planned actions would create any risk for LOL.
v. LOL is the Operator of Block 5 and enters into a Service Contract with Goofy Drilling Limited (“Goofy”) for the drilling of an exploration well in Block 5. Goofy insists on including a “knock-for-knock” indemnity in the Service Contract. Jim Hill wants to understand the differences between the following types of “knock-for-knock” indemnities and what they mean for LOL:
Contractor indemnifies Operator for harm to Contractor’s people and property, regardless of fault
Contractor indemnifies Operator for harm to Contractor Group’s people and property, regardless of fault
Contractor indemnifies Operator Group for harm to Contractor’s people and property, regardless of fault
Contractor indemnifies Operator Group for harm to Contractor Group’s people and property, regardless of fault
LOL and BTOC enter into a Joint Operating Agreement (“JOA”) based on the 2012 AIPN Model Form Operating Agreement. LOL is the Operator under the JOA. LOL is guilty of simple negligence under the JOA, resulting in US$10 million in damages.
w. Is LOL responsible for such damages? Why or why not?
x. Is the government likely responsible for such damages, as a general rule (you do not have ?a copy of the Petroleum Agreement to verify)??
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