Grenada is at a disadvantage in oil deal with the Russians

A Texas-based oil consultancy and advisory group had impressed upon the former Tillman Thomas-led National Democratic Congress (NDC) government that it should seek to terminate an oil and gas agreement that was signed by the former Keith Mitchell regime with a Russian outfit.

The former Energy Minister and now Minister of Communications & Works, Gregory Bowen had signed the deal in March 2008 with Global Petroleum Group Ltd (GPG) headed by Eduard Vasiliev.

A report done on the agreement by Dynamic Global Advisory Company of Houston, Texas was obtained by THE NEW TODAY newspaper.

The report pointed to “an uncommon approach” that was followed by the Mitchell then-ruling New National Party of 2003 to 2008 in arriving at the agreement with the group of Russians to look for oil in Grenadian waters.

It said among other things that the government was prepared to take too many legal risks in order to satisfy the demands of GPG to start the exploration process on the island.

According to Dynamic Global, the Mitchell regime might have been making decisions “under duress” as a result of the persistent demands being made by the Russians.

In this regard, it made mention of the $2.5 million that was advanced by GPG to the Grenada government to cover the cost of its Arbitration Tribunal hearings in London, England against American oil investor, Jack Grynberg of the State of Colorado.

As a public service, THE NEW TODAY would give details of the report as prepared by the Texas group on the Russian/Mitchell/Bowen oil agreement.

Introduction

On March 31, 2008, the GOG 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.

This report contains information pertaining to the analytical review and evaluation of eleven (11) documents that the GOG provided DGA at the start of the project.

Evaluation of the Production Sharing Agreement and the Exploration License from a Legal Perspective

Analytic review of the documents

In connection with its request that DGA prepared this evaluation report, the GOG provided DGA with copies of 11 documents, including the PSA and the Exploration License.

DGA received copies of six preliminary agreements (the “Preliminary Agreements”) that appear to have created the framework for the contractual relationship between the GOG and GPG. Also included among the documents were copies of the Petroleum and Natural Gas Deposits Act of 1991 (the “Petroleum Act”), the Petroleum and Natural Gas Deposits Regulations of 2007 (the “Petroleum Regulations”), and the Minutes of the first meeting of the Advisory Committee on April 17, 2008 (the “Advisory Committee Minutes”).

DGA asked the GOG if there were any other relevant documents available, but no other documents have been submitted to DGA by the GOG.

The Preliminary Agreements referred to above reveal an uncommon approach that was followed by the GOG and GPG leading up to the execution of the PSA.

A short summary of each of the Preliminary Agreements is set forth below.

Under a so-called Funding Agreement, dated September 28, 2005, GPG agreed to indemnify the GOG for all costs incurred in connection with the GOG’s defense of the ICSID arbitration claim brought by RSM Production Corporation (“RSM”) arising out of a 1996 agreement between the GOG and RSM.

GPG agreed to deposit US $2.5 million in the account of the GOG in St. George, Grenada to fund the defense of the RSM arbitration claim. In return, regardless of the outcome of the arbitration proceedings, the GOG agreed to enter into a contract with GPG that was supposed to be attached to the Funding Agreement. The copy of the Funding Agreement that was submitted to DGA, however, did not include any Annexes, and, therefore, we can only assume that Annex 3 was a draft of the PSA.

On September 28, 2005, GPG also entered into a Contract of Agency with Mr. Lev Model, whose address was listed as St. Andrew, Seamoon Industrial Park, Grenada. This principal/agent arrangement provided that Mr. Model, the agent, would fulfill GPG’s obligation to the GOG to deposit the amount of US $2.5 million into the same bank account of the GOG that was referenced in the Funding Agreement.

GPG, the principal, was obligated to reimburse Mr. Model in full by making four incremental payments of between US $600,000 and US $650,000 within three weeks thereafter to Mr. Model’s own account in Grenada. This Contract of Agency raises questions with respect to GPG’s financial ability and the nature of the relationship with its partners and/or representatives.

The Memorandum of Understanding between the GOG and GPG, dated October 18, 2006 (the “MOU”), provided that, despite the ongoing ICSID arbitration claim by RSM, the GOG would permit GPG to begin the analysis and interpretation of confidential offshore technical data through a working group comprised of representatives of both parties.

Under the MOU, the expenses incurred by GPG in such analysis and interpretation activities were deemed to be cost-recoverable exploration expense – a significant departure from industry norms since no PSA was in existence on the date of the MOU.

The MOU also contains a reminder of the parties’ obligation to sign the agreement set out in Annex 3 of the Funding Agreement within 15 days after an award was made in the RSM arbitration proceeding. These elements of the MOU suggest that the GOG may have been willing to expose itself to a potential breach of contract claim by RSM with respect to the confidential information the GOG was prematurely sharing with GPG.

On December 22, 2006, the GOG and GPG entered into an Indemnity Agreement, which was related to a permit the GOG had granted to GPG on the same date (DGA was not provided with a copy of such permit).

According to the Indemnity Agreement, the permit gave GPG “permission to carry out investigation in, on or in relation to land, which in the Minister’s opinion are relevant for the identification of Petroleum exploitation or development.”

The Indemnity Agreement included the admission that the “permit could have a negative impact” on the GOG in the RSM arbitration proceedings. GPG agreed to indemnify the GOG against all losses it may incur as a result of granting the permit.

Again, the GOG showed its willingness to take legal risks in order to satisfy GPG’s apparent demands to undertake activities for which it did not possess express rights.

An Undertaking was entered into by the GOG and GPG on July 12, 2007, which recited GPG’s desire to obtain an Exploration License before the conclusion of the RSM arbitration proceedings, as well as the GOG’s reluctance to issue such an Exploration License. Nevertheless, the GOG did agree to issue the Exploration License as soon as the arbitration proceedings ended.

A Memorandum of Commitment (“MOC”) between the GOG and GPG was executed on September 11, 2007. The MOC includes an unusual statement to the effect that GPG was “in urgent need of a definitive commitment” from the GOG “to grant an exploration and development license so as to enable GPG to engage the services of Seismic Shipping Services to carry out the exploration process.”

The GOG agreed to a time table under which it would promulgate regulations to enable GPG to make application for an Exploration License and to grant an Exploration License and execute a PSA in the form of Exhibit A to the MOC (DGA was not provided with a copy of Exhibit A).




The GOG succeeded in negotiating a delay clause in the MOC that would allow the GOG to avoid prejudice against Grenada’s position before the RSM-ICSID arbitration tribunal.

The contents of the MOC lead us to believe that the GOG may have been making decisions under duress as a result of the persistent demands being made by GPG.

 

General Comments

The PSA and Exploration License. Although we do not have a copy of the draft, it is likely that the PSA existed in draft form when the Funding Agreement was signed on September 28, 2005.

While the basic form and outline of the Exploration License appears to follow the requirements for Exploration Licenses as set forth in the Petroleum Act and the Petroleum Regulations, its inclusion of certain extraneous matters seems unnecessary, and the description of the elements of the work program seems to be too general.

There are also a few gaps and omissions in the Petroleum Act and the Petroleum Regulations, some of which will be discussed in the Detailed Comments section below in connection with the PSA and the Exploration License.

Detailed Comments

The comments set forth in this section are intended to highlight the more significant and relevant problems that have been identified as a result of our review of the PSA and the Exploration License.

 

The PSA

In Article 1.1(f) of the PSA, the definition of the term “Best Oilfield Practices” utilizes a reference to the same term in the Petroleum Regulations, but the actual term defined in the Petroleum Regulations is “good oilfield practices.”

Therein, the term “good oilfield practices” is defined as follows: “means all those things that are generally accepted internationally as good, safe and efficient in the carrying on of exploration of petroleum or development operations in the field.”

In order to provide more guidance, this definition should be expanded by adding the following words: “and includes standards and practices that are consistent with those generally accepted for comparable petroleum operations elsewhere in the world where there are similar operating and environmental conditions,” and the expanded definition should be included in the definitions section of the GOG’s form production sharing agreement.

The term “Production Sharing” in Article 1.1(ah) refers to the mechanism described in Annex 4, the “Accounting Procedure and Profit Sharing Mechanism.”

The mechanism outlined in Annex 4 is actually a profit sharing scheme that is not necessarily associated with the concept of production sharing. In all other production sharing contracts we have dealt with, the separate clause on production sharing that is included in the text of the contract provides a comprehensive description of the elements of production sharing, whereas the accounting procedure merely deals with the cost recovery mechanism and accounting issues that are associated with the production sharing concept.

The right of the GOG to participate in the PSA as a “co-investor” is described in Article 3.3 on Government Participation. This clause is unusual because it requires the GOG to purchase the interest (up to 20%) from GPG for a sum to be agreed or in accordance with the formula provided.

Normally, the government’s exercise of an option to participate is not related to a purchase requirement. A government’s participation interest is usually “carried” until it exercises the option, after which the government begins paying its proportionate share of the operating costs.

The last sentence of Article 3.3 prohibits the GOG from reselling the “equity participation” interest without GPG’s prior written consent, which is an unprecedented provision in our experience.

Typically, the government is the party that dictates the terms and conditions of its acquisition of a participation interest, and, thereafter, there are no limitations on how it deals with it.

This last sentence of Article 3.3 serves to demonstrate that GPG was taking unreasonable positions and that the GOG must not have been aware of, or chose to ignore, the irregular nature of such a prohibition.

The decisions of the Advisory Committee established under Article 5 are only supposed to be “of an advisory nature,” which is not uncommon, but a tie-breaking vote mechanism was not included. This is important because all decisions are to be made by majority vote and each party has an equal amount of representatives on the Advisory Committee.

Gridlock occurs if the parties don’t agree to accept an independent expert’s advice and then arbitration is required. Although it should, the PSA does not include any details on the appointment of an independent expert.

In addition, the list of functions of the Advisory Committee contained in Article 5.3 are much more limited than in the production sharing contracts with which we are familiar. Nevertheless, as revealed in one of the Resolutions contained in the Advisory Committee Minutes, the Advisory Committee agreed unanimously to make certain “variations” in the work program attached to the Exploration License, thereby far exceeding its advisory authority and effectively amending the terms of the Exploration License directly and the PSA indirectly.

Article 6.3 provides that GPG’s minimum exploration expenditure for the Initial Exploration Period would be US $10 million. GPG had the option to deposit that amount in its bank account in Grenada or such deposit could “be replaced by a bond or any other financial guarantee.”

According to the Advisory Committee Minutes, it was agreed unanimously that it would be sufficient for GPG to obtain a certificate issued by GPG’s bank stating that GPG and its affiliates have enough funds to cover the minimum financial obligation.

The Committee’s Resolution referred to the certificate as a “comfort letter” and stated that it would be “accepted as a good and valid financial guarantee under section 6.3 of the PSA” because “a similar comfort letter has been accepted by the Government before for similar purposes.”

To the contrary, such a “comfort letter” is not regarded as being an acceptable financial guarantee in most countries that deal with production sharing contracts.

Article 7 on Relinquishment simply states that issues related to “relinquishment of all or part of the Exploration Licensed Area shall be governed by the relevant provisions of the Petroleum Regulations.”

Sections 17 and 34 of the Petroleum Regulations only refer to the relinquishment of a block, not a part of a block. Section 34(1) is written in such a way as to make a relinquishment an option of the holder of an Exploration License for a block, rather than as any kind of requirement.

In contrast, the standard relinquishment clause in an international production sharing contract contains a great deal of detail relating to the timing of the required relinquishments and the amounts of the area to be relinquished at such times.

For example, a contractor would normally be required to relinquish 25% of a block at the end of the initial exploration period, and the entire portion of a block that is not covered by development areas or Development Licenses at the end of the full term of the exploration period.

The approach taken by the Petroleum Regulations is, therefore, quite disadvantageous to the GOG because portions of blocks that are not being explored in a timely manner by a contractor should be relinquished to the GOG so they can be reconstituted as new blocks and made available for bid to third parties.

 

(Look for Part 111 in next week’s issue of THE NEW TODAY)

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