Negotiations


4. Negotiations

Where an investor is engaged on a ‘first come, first served’ basis, or has made an unsolicited bid, negotiation over the terms of the investment contract is usually required. At this stage, important contractual terms such as profit sharing, the level of taxes (if not already contained in legislation), and the breadth of stabilisation clauses may be negotiated and the rights and obligations of each of the contracting parties agreed.

The negotiation process in the extractives sector frequently involves complexity and uncertainty, due in part to the typically long lifespan of investments in the sector, and exacerbated by high rents in some cases (mostly oil) and the high impact nature of resource development. For this reason, negotiations also tend to be lengthy.

There are many phases to a typical negotiation. Most negotiations processes start with positioning, followed by argumentation, the emergence of consensus, final agreement, and monitoring and enforcing contracts. Routinely, contracts will address the sharing of economic rent between the investor and the host government and will dwell on provisions likely to have significant economic development, environmental and social impacts. Therefore, contract negotiations will require considerable expertise that cross disciplines, involving law, geology, engineering and economics skills.

The capacity to negotiate also requires negotiating experience and specialised knowledge of issues such as fiscal modelling. The public sector however may lack this capacity, particularly at the start of sector development and support can be sourced externally and developed in house. Prominent suppliers of support to developing countries are listed in the Negotiation Tools section of this topic overview.

In some instances, the national resource company can play an important role in training local personnel, including in ministries. Coordination between the state company and each relevant ministry of the host state is also important. Involvement of national assemblies in the contractual stage of negotiations through oversight and accountability measures can help increase transparency and create a barrier for corruption. ratification and adopting measures to hold governments responsible are key mechanisms to avoid such a scenario.

While the objective in oil, gas and mining development negotiations will be roughly the same, to achieve a balanced shared value through profitability, reciprocity, flexibility and enforceability, there are specific issues that would need to be assessed differently between petroleum and mining contracts. 

In negotiations, many government officials would like to be aware of the negotiation tactics that are allowed under the country’s constitution, procurement laws or specific environment and natural resources laws. For instance, some country constitutions require that extractives contracts are ratified by parliament. Other countries have procurement laws which require negotiations to be recorded and minuted in detail, and to be approved by a tender committee. This would make tactics like back-channel negotiations by individual team members questionable, even if not intended to be so.

4.1 Petroleum specifics

While each transaction in the petroleum sector is unique, there are many issues that occur frequently in petroleum sector development agreement negotiations, such as production sharing agreements (PSAs), farm-out agreements, concessions and joint venture agreements. Overall, these common issues can be separated into three categories:

  • Commercial terms (benefits, quantity, payment, cost recovery, contract term)
  • Liability-related issues (rights and obligations, governing law, dispute resolution)
  • Administrative matters (communications, accounting, billing, monitoring)

Within these three categories there may be a diverse pool of individual legal requirements, including for example public ownership, state participation, title, access to the site, contractors, transportation, processing, sales, to production, environmental protection, competition, taxation, income, enterprise structure, finance structure, and insurance.

A typical checklist of key Issues is described in this guide by Dennis Stickley as the following:

  • Selection Criteria (competitive bidding etc.)
  • Time period
  • Exploration work programme
  • Delivery of all geological data
  • Prospect size and relinquishment provisions
  • Sharing of real profits
  • Limitations of recovery rates
  • Royalty
  • Minimum cash payment
  • Payments for surface and water rights
  • Accounting Procedures
  • Tax Status
  • Bonuses
  • Employment preferences
  • Preference for local enterprises
  • Participation in basic decisions
  • Indemnification
  • Effective record keeping and reporting
  • Inspection and monitoring procedures
  • Assignment
  • Insurance, guarantees and performance bonds

With sustainable development and climate change goals, an additional issue that is becoming key is decommissioning and post-exploitation clean-up. This is even more the case since, based on lessons from the North Sea, decommissioning can prove very expensive and run into billions of dollars. Governments benefit from being clear about the investor’s financial commitments.

4.2 Mining specifics

In a typical mine development agreement, the issues that will be on the negotiation agenda will also be very diverse. However, mine development agreements frequently include clauses on property interest, management fees, assignment, confidentiality, litigation and dispute resolution, royalty, land and property acquisition, join venture relationships, accounting procedures, funding, currency, feasibility studies, insurance, termination, notice ad payment, liability, work programmes, mine closure, including land and environmental reclamation, financial assurance and the release of information and warranties.

As the local impact of mining is felt more strongly than in the petroleum sector, current practice is to encourage strong local engagement in negotiations and to give consideration to the feasibility of mineral proceeds being transformed (refined or processed) in the host country itself. Where appropriate, Community Development Agreements (CDAs) should be negotiated as a pre-requisite to finalising mining agreements. Some countries have legislated for CDAs, whilst some have not, but negotiating them has become a matter of routine practice.

An Australian body, the International Mining for Development Centre (IM4DC) provides specific advice for governments engaged in mining contract negotiations, to support governments in preparing for and conducting negotiations. The International Institute for Sustainable Development also provides guidance for mining contract negotiations which is designed for developing countries, basing its recommendations on active engagement with communities and the enhancement of a responsible approach to resource development.

The Southern Africa Resource has published Recommended principles and guidelines on the negotiation of contracts. These focus on contract transparency and the fair allocation of revenues from the extractives companies; their list of advice covers a broad range of key issues including the institutional and legislative framework, capacity for natural resource management, extractive companies, operational phase, operational principles regarding financing, operational principles regarding the environment, labour, working conditions, safety and health issues, artisanal and small-scale mining, gender and the extractive industries, corporate social responsibilities, revenue sharing, transparency and utilisation, human rights, communities and mining operations and the closure and completion phase. Further guides are included in the guides tab.