Russian Oil Deal Should Be Thrown Out The Window

An oil expert group based in Texas in the United States wants Grenada to renegotiate the oil and gas agreement signed in 2008 with a group of Russian investors since the deal was weighed too heavily in favour of the men from the former Soviet Union.

THE NEW TODAY has obtained the copy of a study that was done by Dynamic Global Advisory Company on the request of the former Tillman Thomas-led National Democratic Congress (NDC) government that ruled the island from July 2008 to February 19, 2013.

The Texan outfit, with more than 30 years experience in the oil industry was asked to do an evaluation of the Production Sharing Agreement (PSA) and Exploration License for the Exploration, Development and Production of Offshore Petroleum Resources of Grenada between the Government of Grenada and Global Petroleum Group Ltd., dated March 31, 2008

According to the report, if the exploration was successful, the Russians would be the main beneficiaries of the millions under the deal that was struck by former Energy Minister, Gregory Bowen and not the government and people of Grenada.

The report dated, February 18, 2012 described as “incredibly low” the royalty to be paid to government by GPG for the island’s oil and gas resources.

Dynamic also concluded that the split in gross profit for crude oil, if found, “are unusually high” in favour once again of the Russians.

It also baulked at the decision taken by the former Mitchell government to allow a company like Global Petroleum to export petroleum “free of export taxes” since this is unheard of in other countries.

The Texans dropped strong hints that someone was engaged in a deliberate “conscious manipulation of the terms of the agreement to obtain economic benefits in favour of GPG”.

As a public service, THE NEW TODAY would highlight some of the findings of Dynamics on the Russian oil deal with the NNP regime:

 

On March 31, 2008, the GOG (Government of Grenada) and GPG entered into a PSA for the Exploration, Development and Production of Offshore Petroleum Resources of Grenada.

On that same day the GOG also issued an Exploration License to GPG. The PSA was signed by Mr. Gregory Bowen, Grenada’s Minister responsible for Petroleum Affairs, and Mr. Eduard Vasiliev, Chairman of the Board, President and Chief Executive Officer of GPG. The Exploration License was issued under the signature of Mr. Bowen.

On January 5, 2012, the GOG retained the services of DGA to review the GOG-GPG PSA and Exploration License and determine whether they fall within the generally accepted norms of the international petroleum industry.

DGA was also requested to assist the GOG in developing a strategy to terminate the PSA if it was found not to conform to industry standards.

 

Executive Summary

 

Dynamic Global Advisors Company (“DGA”) has conducted an analytic review and evaluation of (1) a Production Sharing Agreement (“PSA”) for the Exploration, Development and Production of Offshore Petroleum Resources of Grenada between the Government of Grenada and Global Petroleum Group Ltd. and (2) an Exploration License issued by the Government of Grenada to Global Petroleum Group Ltd.

The PSA does not follow the general outline for production sharing agreements with which we are familiar, and it is not representative of the generally accepted and customary types of production sharing agreements that are used in the international petroleum industry.

There are several provisions in the PSA that address standard topics, but the text of many of those clauses are not sufficient to cover the topics correctly. In addition, there are several other topics that are normally covered in standard international production sharing contracts that have been omitted from the PSA in their entirety.

It appears, therefore, that the parties had a mutual lack of understanding of the production sharing contract concepts and no experience with the production sharing form of agreement.

The PSA is not well organised and appears to be cobbled together from multiple sources. The economic terms that are included in the PSA are inconsistent, often skewed in favour of the contractor, Global Petroleum Group Ltd. (“GPG”), and seldom in favour of the Government of Grenada (“GOG”).

As a result, the economic outcome is wholly favourable to GPG and unfavourable to the GOG as compared to other PSAs with which DGA is familiar.

An analysis of the economic terms and the results of economic modeling of the GOG-GPG PSA indicate certain deviations from best practices. The Government Take as a percentage of total revenue is one of the lowest in the world and ranges from 38%-52%.




This PSA has an ineffective provision for Relinquishment, and no provisions covering Windfall Profits, Ring_Fencing or Cost Oil, all of which are typical in industry best practice PSAs.

Overall, the agreement appears to be poorly thought out, incomplete, and to the extreme favour of GPG for all economic scenarios investigated.

Conclusions

DGA has conducted an analytic review and evaluation of eleven (11) documents including a PSA for the Exploration, Development and Production of Offshore Petroleum Resources of Grenada between the GOG and GPG and an Exploration License issued by the GOG to GPG.

Our findings reveal that the PSA and Exploration License do not conform to industry standards for agreements pertaining to the exploration and exploitation of oil and gas.

The manner and magnitude by which they deviate from industry standards are multifold and indicate poor or hasty work and perhaps inexperienced parties crafting the agreements.

Whatever the reason(s), for non-conformance, the economic/commercial terms of the PSA are wholly favourable to GPG and unfavourable to the GOG compared to other PSAs with which DGA is familiar.

The PSA diverges from industry norms to such an extent that GPG obtains economic benefits that exceed those that have been obtained in older and now out of favour Royalty/Tax Systems.

The absence of proper production sharing and cost recovery concepts and other types of provisions that are generally accepted in the international petroleum industry suggests that Mr. Gregory Bowen, the Minister responsible for Petroleum Affairs on March 31, 2008, and his negotiating team were unaware of these conventional structures, neglected to seek advice from individuals or organisations familiar with international petroleum agreements and/or chose to ignore them.

Recommendations

We believe that a contract such as the GOG-GPG PSA should not be used for any other transaction in Grenada. This PSA is so unfavourable to the GOG that it should not be used in any form, either as a template or for future agreements.

There are many robust and flexible PSAs which can be chosen as the base document for the creation of a PSA that is not only favourable to the GOG but which will also assist the government in attracting exploration investment.

We recommend that a new, conventional form Model PSA should be prepared by the GOG for use in future transactions. There are several examples of more standard forms of production sharing contracts that are used in the Caribbean area, such as Trinidad and Tobago’s Model PSA, which could be used as the basis for the preparation of a new model contract for the GOG.

We believe the GOG needs a PSA that is written in a framework that is more favourable to the government, utilizes proper production sharing and cost recovery concepts and includes the other types of provisions that are generally accepted in the international petroleum industry.

It should also be made clear that each PSA covers only one block and that the concept of ring-fencing for cost recovery, tax and accounting purposes applies to each such contract.

Specifically, future Grenada PSAs should be progressive and have terms and accounting procedures that properly address royalty, cost oil, cost recovery, cost recovery ceilings, taxes, relinquishment, ring-fencing and other significant terms that are inadequately addressed or absent from the GOG-GPG PSA.

Analysis of specific economic and fiscal terms such as royalty rates, profit splits and amortisation schedules should be conducted and proposed terms compared with those in best practice PSAs.

In addition, any proposed new PSAs should be modeled economically and sensitivity tests conducted against a wide array of factors to determine Government Take and certain contractor economic metrics prior to adopting any specific terms.

As far as the GOG-GPG PSA is concerned, we believe that the GOG has two primary options to consider.

First option: the GOG could immediately give notice to GPG of (i) cancellation of the Exploration License based on non-fulfillment of the conditions of the Exploration License as stipulated under section 10(1)(b) of the Petroleum Act, which is mentioned in paragraph (g) of the Exploration License, and (ii) the termination of the PSA pursuant to Article 27.1(a) of the PSA.

Second option (recommended): the GOG could wait until April 1, 2012 when the 4-year term under the Exploration License will have expired, and the Initial Exploration Period under the PSA will also have terminated, and notify GPG that both the Exploration License and the PSA have expired in accordance with their terms.

Regardless of whether GPG might make a last minute attempt to obtain an extension of the Exploration License and the Exploration Period, we believe the second option would be the safest and most effective.

 

 

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