Summer 2011
LNG FPSOs:
The opportunities and challenges ahead
Glen McAskill and Anthony Patten
Contingent consideration
and bridging the value gap
Renad Haj Yahya and Trinh Chubbock
Investment treaties:
The BITs you need to know
James Arrandale and Tom Cummins
Cotswold Geotechnical:
A new era in corporate liability in the UK
Peter Roberts
An overview Ashurst worldwide
of this issue
Abu Dhabi
Suite 101, Tower C2, Al Bateen Towers
Bainunah (34th) Street, Al Bateen
PO Box 93529, Abu Dhabi, United Arab Emirates
T: +971 (0)2 406 7200 F: +971 (0)2 406 7250
Brussels
In this edition of EnergySource we bring of our London office together consider Avenue Louise 489, 1050 Brussels, Belgium
you an illustration of the very width and the role that contingent consideration T: +32 (0)2 626 1900 F: +32 (0)2 626 1901
the depth of the energy world in which can play in the structuring of upstream
Dubai
we work, with a series of observations on asset acquisitions and divestments. This Level 5, Gate Precinct Building 3
developments in the UK, Europe and the is a complex and relatively unexplored Dubai International Financial Centre
wider world. technique, but one which can have a PO Box 119974, Dubai, United Arab Emirates
T: +971 (0)4 365 2000 F: +971 (0)4 365 2050
Recent events at Fukushima, following dramatic change on the way in which asset
the Japanese earthquake and tsunami, have sales are structured and which can even Frankfurt
caused many countries to reconsider their make saleable certain interests which might OpernTurm, Bockenheimer Landstraße 2-4
60306 Frankfurt am Main, Germany
commitment to nuclear power and many not otherwise be so.
T: +49 (0)69 97 11 26 F: +49 (0)69 97 20 52 20
commentators have predicted a resurgent Our guest author for this issue of
demand for natural gas as a safe, secure, EnergySource is Alan White of Lloyds Bank, Hong Kong
16/F ICBC Tower, Citibank Plaza,
alternative energy supply. In this issue, Glen who offers a fascinating insight into the
3 Garden Road, Central, Hong Kong
McAskill and Anthony Patten look at the current state of the UK power projects T: +852 2846 8989 F: +852 2868 0898
opportunities for floating LNG facilities and market, his views of the prospects for the
London
how they can enable countries hitherto UK Government’s suggested electricity
Broadwalk House, 5 Appold Street
denied access to become participants in the market reform (EMR) programme and what London EC2A 2HA, UK
world of the LNG supply chain. perspective lenders are likely to take on T: +44 (0)20 7638 1111 F: +44 (0)20 7638 1112
Joanna Kay also examines the prospects the market. We are grateful to Alan for his
Madrid
for onshore and offshore gas storage insights. Alcalá, 44, 4ºA, 28014 Madrid, Spain
projects in the UK, a topic of particular Finally, we close with two recent T: +34 91 364 9800 F: +34 91 364 9801/02
relevance given the UK’s continuing decline developments which, although very
Milan
in indigenous gas production and its different in their respective ambits, could Via Sant'Orsola, 3, 20123 Milan, Italy
imminent nuclear renaissance. have very far-reaching consequences. T: +39 02 85 42 31 F: +39 02 85 42 34 44
France is, of course, a country with a Nicholas Ross-McCall reviews the recent
Munich
significant commitment to nuclear power change to Incoterms and particularly Prinzregentenstraße 18, 80538 Munich, Germany
but, continuing the theme of diversification the death of the DES formulation, which T: +49 (0)89 24 44 21 100 F: +49 (0)89 24 44 21 101
into alternative energy forms, Michel will be of significance to lawyers and New York
Lequien of our Paris office looks into the commercial managers engaged in the Times Square Tower, 7 Times Square
new French regulatory regime for solar sale and shipment of maritime-delivered New York, NY 10036, USA
projects. commodities. Peter Roberts examines the T: +1 212 205 7000 F: +1 212 205 7020
Looking further afield, Vietnam is recent decision of the English court in the Paris
widely recognised as one of the great “tiger Cotswold Geotechnical case – this is the 18, square Edouard VII, 75009 Paris, France
economies” in Asia and the country also first time the new offence of corporate T: +33 (0)1 53 53 53 53 F: +33 (0)1 53 53 53 54
has great potential for new energy projects. manslaughter has been tried in the UK Rome
In an article written jointly with Ha Luu, a and the outcome will have consequences Via Boezio, 6, 00193 Rome, Italy
partner with the leading Vietnamese law for companies engaged in any potentially T: +39 06 32 80 34 30 F: +39 06 32 80 34 00
The energy sector is always changing, food for thought. As the American essayist Stockholm
and of late we have seen the signs of a Henry Thoreau put it: “it’s not what you look Jacobsgatan 6, PO Box 7124,
103 87 Stockholm, Sweden
return in merger and acquisition activity. at that matters, it’s what you see”.
T: +46 (0)8 407 24 00 F: +46 (0)8 407 24 40
Renad Haj Yahya and Trinh Chubbock
Tokyo
Shiroyama Trust Tower, 30th Floor, 4-3-1 Toranomon,
Minato-Ku, Tokyo 105-6030, Japan
T: +81 3 5405 6200 F: +81 3 5405 6222
Washington DC
Geoffrey Picton-Turbervill Peter Roberts
1875 K Street NW,
Head of Ashurst’s global energy team Head of energy for the UK, Europe and Africa Washington, DC 20006, USA
T: +44 (0)20 7859 1209 T: +44 (0)20 7859 1371 T: +1 202 912 8000 F: +1 202 912 8050
E: geoffrey.picton-turbervill@ashurst.com E: peter.roberts@ashurst.com
www.ashurst.com
In the particular context of developing a gas Working gas – gas which is injected into and re-delivered from the facility, and the
storage project, the PPP structure outlined working gas volume is the amount of space in the facility which is available for the
above could, for example, be overlaid with injection and re-delivery of gas.
the following embellishments:
• the designated public authority would capacity) the public authority could Conclusions
secure the licence, lease and other elect to sell the facility to the SPV
permits necessary to operate the gas (which might be the subject of option To quote the now Leader of the Opposition,
storage facility (but, critically, with rights either way) or by auction into the speaking in February 2009, “Do we need
recognition that the construction wider industry. more gas storage in the future? I would
and operation of the facility would be unequivocably say yes”.
undertaken by the SPV); Under this structure, the Government The UK is predicted to remain heavily
• the SPV would be reimbursed by the (through the public authority) would reliant on gas for the near future. As
public authority under the concession assume primary responsibility for the indigenous production continues its rapid
agreement on the basis of the number development and the operation of the decline we will need more gas storage
of gas storage services units which are facility, thus evidencing the Government’s capacity to insulate the UK from the
made available from the facility; support for gas storage projects and capricious nature of foreign imports and
• the SPV could sell storage services in the reducing the uncertainty which developers to balance the intermittency of renewable
facility to third party users in exchange and lenders might otherwise have about power generation.
for a tariff, which would provide a long-term project viability and the support The current Government’s view is that
return to the SPV. Some of these tariff of the Government for the gas/gas storage the private sector will be able to meet the
receipts might be directed to the public sector. But the costs of developing and UK’s gas storage needs without additional
authority (possibly as an offset to operating the facility are not entirely borne state support. However, despite the
the payments due to be made by the by the Government, and there is even confidence of the Pöyry reports and other
public authority under the concession the prospect of a modest return for the government statements, if the commercial
agreement), which essentially Government. In this case, an analogy can signals and/or the fiscal terms are not
represents a flow of funds ultimately to be drawn with waste-to-energy PPP-based sufficiently attractive to private sector
the Government; and deals which have a proportion of their participants then the Government may
• at the end of the concession overall project revenues coming from third have no alternative but to invest in strategic
agreement’s term, the public authority parties (such as waste suppliers and power gas storage.
assumes control of the gas storage and heat offtakers), supplementing the
This article was first published by Global Legal Group
facility (and also the associated unitary charge received from the public
Ltd in association with Ashurst LLP, London, 2010,
decommissioning liability in respect of authority. for inclusion in the International Comparative Legal
Guide to: Gas Regulation 2011.
the facility). At this point (assuming that
the facility still has residual operational
Natural gas
Vietnam National Oil & • Provided 20 per cent of Vietnam’s oil and half of its gas in 2010◊, active in upstream (PVEP), downstream
Gas Group (PetroVietnam) (PV Oil) and gas distribution (PV Gas) sectors.
• Key investments include: the Hac Long field in North Vietnam (55 per cent PetroVietnam, 45 per cent
Petronas) described as Vietnam’s “largest gas discovery to date”; and Vietsovpetro, a 50:50 joint venture
(“JV”) with Russia’s Zarubezhneft (the JV accounts for roughly one third of the country’s crude oil
production, and operates the Bach Ho field among others).
• Targeting investment of US$4.5bn annually on exploration and production (“E&P”) activities over the
next five years primarily on gas exploitation.
Petronas Vietnam • Significant upstream investor and substantial involvement in downstream fuels (especially
petrochemicals).
• Operates four blocks in partnership with PetroVietnam, with interests in a further nine, and operates
two LPG plants in Dong Nai and Thang Long.
• Significant gas discovery in the Hac Long field in 2009 with an estimated 50 bcm of gas and 45m bbl of
condensate.
Zarubezhneft • Russian state-owned company, operating through its JV with PetroVietnam, Vietsovpetro.
• Vietsovpetro accounts for 60 per cent of Vietnam’s total output and remains key to the country’s oil
supply, operating seven fields in the South China Sea.
ConocoPhillips • Largest US energy investor in the country with stakes in six blocks, the most successful being a 23.25 per
cent stake in Block 125-1 in the Cuu Long Basin.
Others Vietgazprom, Korea National Oil Corporation, Talisman Energy, Premier Oil, Total, Chevron, Idemitsu Kosan,
Nippon Oil and Soco International.
◊ Business Monitor International: Vietnam Oil & Gas Report (Q4 2010).
† http://www.tnk-bp.ru/en/center/releases/2011/04/7143/.
decrees, circulars or decisions promulgated Award of blocks • Bidders have 60 business days from
by the relevant government bodies) and (iii) Petroleum prospecting permits are awarded the last date of publication of a tender
a model form production-sharing contract on a bi-annual basis or as dictated by the invitation to submit offers and a
(“Model PSC”), (collectively, the “Petroleum Government, with the procedure for the commitment to satisfy the tender
Regulations”). Under the Petroleum award of permits set out in the Petroleum conditions.
Regulations, the Government exercises Regulations. The various stages are broadly • Bids are assessed within 20 business
the State’s right to oil and gas reserves as follows: days of their submission.
through state-owned PetroVietnam. The • The result is then evaluated by various
Vietnamese State is often represented Tender procedure government ministries within 25
in the production-sharing contract • Tender plans for the exploration of business days of their receipt of the bid
through PetroVietnam Exploration and various blocks prepared by PetroVietnam assessment result.
Production Corporation (“PVEP”), a wholly- and submitted first to the MoIT and then
owned affiliate of PetroVietnam. PVEP is to the Prime Minister for assessment. Appointment of contractor
increasing its portfolio and has entered • Following approval of the proposed • PetroVietnam proposes the successful
into various production-sharing contracts tender plans, tender invitation notices bidders to the MoIT which then
with PetroVietnam where PVEP is the sole are issued by PetroVietnam (in produces and submits an appraisal
contractor and operator. Vietnamese and English). report on the appointment of
Approval of contractor by
Tender invitation notices issued Issue of investment certificate
Prime Minister
contractors for the various blocks. and gas activities in Vietnam and enables accordance with the Model PSC, the
• The Prime Minister considers and the contractor to carry out general business level of royalties increases in line with
approves the appointment of the transactions in Vietnam (such as registering production in a royalty payment period.
contractors based upon the MoIT’s an office, opening a bank account and • Corporate income tax: rate of 32 to 50
appraisal reports. certifying documents). per cent decided by the Prime Minister
• PetroVietnam and the appointed The Law on Investment provides a on the suggestion of the Ministry of
contractors have 90 business days to number of investment guarantees for Finance on a case-by-case basis without
negotiate a petroleum contract based investors, including: exemption or reduction.
on the content of the winning bids, • Import/Export tax: The export tax
which is subsequently circulated to the • preventing lawful assets and invested for crude oil has increased from 4 per
MoIT and other ministries before it is capital of investors from being cent in 2007-2008 to its current rate
forwarded to the Prime Minister for nationalised or confiscated, unless it is of 10 per cent, while import tax has
approval. in the interests of national defence and decreased from 15 per cent to 0 per
• Once approved, PetroVietnam and security (in which case investors will be cent to accommodate the start-up of
the contractor(s) sign the petroleum compensated or paid damages based domestic refineries.
contract. on the market value of the assets); The amount of export tax payable is
• permitting legitimate money and assets calculated as follows:
Petroleum contracts of investors to be transferred abroad; Amount of export tax payable =
Local and foreign entities participate in oil and Amount of crude oil or natural gas
and gas E&P activities by partnering with • enabling investors to take advantage exported x Taxable price x Percentage of
PetroVietnam in a petroleum contract of benefits arising from any newly- export tax, where:
(either in the form of a joint venture promulgated law or policy from the
agreement or a production-sharing contract, date the new law or policy takes effect (i) “Amount of crude oil or natural
both of which follow the Model PSC) under (where the new law or policy puts the gas exported” means the amount
which key commercial terms are negotiated. investor in a better position than it of crude oil or natural gas actually
The framework for petroleum contracts is would have otherwise been). exported;
also contained in the Petroleum Law. (ii) “Taxable price” means the selling
It is also usual for (a) contractor(s) to Tax and royalties price of crude oil or natural gas
carry the State’s share of minimum work The State draws value from oil and gas pursuant to an arm’s length
obligations until the declaration of a projects through royalties (also known as a contract; and
commercial discovery. “natural resource tax”), corporate income (iii) “Percentage of export tax” means
The Law on Investment (effective as tax, import and export tax, and a share of 100% – Percentage of provisional
of 1 July 2006) offers some protection to petroleum production. royalties in the tax period x Export
contractors which have been issued with tax rate.
an “investment certificate” by the MoIT. The • Royalties: paid either in crude oil
investment certificate acts as a licence for or natural gas, in cash or part cash • Share of production: PetroVietnam (and
the contractor to work on its proposed oil and part crude oil/natural gas. In sometimes PVEP) is entitled to a share
Conclusion
Where a contingent consideration The estimation of unproduced petroleum resource quantities is based on a project-
mechanism is used in the context of based classification system which determines the likelihood of the petroleum resources
mergers or farm-ins (i.e. where the seller being technically and economically recoverable. Unproduced petroleum resources are
and the buyer become joint owners of categorised as follows, in order of increasing chance of being commercially recoverable:
an asset on completion), the seller and prospective resources, contingent resources and reserves. Prospective resources are those
the buyer may have conflicting interests potential resources with a chance of discovery based on trends but require further data in
as regards the assets which may have an order to determine and evaluate the prospect (e.g. seismic data). Upon a discovery being
impact on the management of the business. made, the relevant resources are re-categorised as “contingent resources”. The contingent
During the period in which any contingent resources will be appraised and a development plan for those resources may be created
consideration remains outstanding, the where the appraisal reveals an increasing chance that the resources are commercially
seller’s investment and management recoverable. Upon a decision to develop, the resources will be re-categorised as “reserves”
decisions would be aimed at reaching the and those resources will be developed in accordance with the relevant development plan.
pre-agreed targets in order to trigger the The next stage is production when, of course, the existence of the petroleum will be
payments of such contingent consideration known for certain.
(which aim may take priority over certain Within the categories of resources mentioned above, volumes of petroleum resources
market considerations). The buyer, on the are further classified according to the level of certainty of being commercially recoverable.
other hand, would be driven by market For example, in the case of “reserves”, one of the ways to classify volumes of reserves is
realities. For example, in a low oil and/or low as follows, in order of increasing certainty of being commercially recoverable: possible
gas price market, the buyer may take the (P3), probable (P2) and proven (P1). P3 means that there is at least a 10 per cent chance
view that it would rather delay investments that certain volumes of petroleum resources will be commercially recoverable; P2 means
in developing the relevant resources until at least a 50 per cent chance; and P1 means at least a 90 per cent chance. But increasing
the market conditions are more rewarding. probability of resources also means decreased absolute volumes of petroleum.
Also, there may be other internal competing The diagram below illustrates the classification system described above*.
investment priorities which the buyer
may favour over investments that would
potentially trigger contingent consideration PRODUCTION
payments.
Standard joint operating agreements Reserves
or shareholders’ agreements which deal
with, among other things, the management 1P 2P 3P
As a result of the “Grenelle de projects in France. The key incentive for new
l’Environnement” initiative, France has entrant energy producers consists of the
undertaken that by 2020, 23 per cent obligation for Electricité de France (“EDF”)
of its final energy consumption will be and local electricity distributors (“DNN”)
generated from renewable sources, an to purchase the electricity generated by
objective that is in line with that set production facilities using renewable energy
for France by the European Union1. The sources on the basis of a purchase contract2.
T: +33 (0)1 53 53 55 77 Grenelle de l’Environnement initiative, which The feed-in tariff at which EDF or a DNN
E: michel.lequien@ashurst.com was launched in May 2007, was a wide will be obliged to purchase the electricity
environmental consultation process which is, in most cases, set by government order.
subsequently led to the adoption of two In certain cases, however, where a tender
important laws dated 3 August 2009 and for the development of new capacity is
12 July 2010 (the so-called “Grenelle I” and organised by the State and implemented by
“Grenelle II” laws) for the implementation the Commission de régulation de l’énergie
of the environmental undertakings (“CRE”), the tariff is determined by the
(engagements) adopted in the initiative. bidders, in accordance with the terms and
Various incentive mechanisms have conditions of the tender.
been established in order to stimulate The additional costs incurred by the
the implementation of renewable energy purchaser resulting from the feed-in tariff
ar market
developers and operators rushed to 12 July 2010 in order to prevent any claim
file requests for an electricity purchase before the French courts.
contract with EDF in order to secure Then, at the end of August 2010, at a
the more favourable tariff provided by time when the solar industry and other
the government order of 2006 for their stakeholders were exploring different
project before the announced change. The options for a complete overhaul of the
number of applications soared to 26,200 in system, the Government decided on a
December 2009, for an aggregate capacity new general cut in the feed-in tariff of
of 3,167 MWc (against approximately 2,500 approximately 12 per cent6 . The order
are offset by a contribution paid by end- to 9,000 applications per month before the provided for another transitional system,
consumers of electricity (la contribution au announcement5), leading to a huge backlog similar to that provided for in the order of
service public de l’électricité). of projects and the fear, on the part of the March 2010.
In order to meet its 23 per cent goal, the Government and the regulator, that the Finally, in December 2010, and in
French Government has set an objective solar industry was facing a “speculative light of the fact that notwithstanding
of 5,400 MW of solar energy production bubble” that would rapidly become much the two successive tariff cuts of March
capacity3 to be developed by 31 December too costly for EDF and, ultimately, the and August 2010, the number of projects
2020. To achieve this, the Government electricity consumers. entering the “waiting list” (file d’attente)
intends to promote the development of a As announced, a new tariff regulation of projects awaiting a purchase contract
strong French solar industry covering the providing for a reduction in the feed-in tariff and connection to the electricity grid had
entire production, supply and maintenance was adopted by the Government in a series not decreased, the Government adopted
value chain. of orders of January 2010. The new regime a decree providing for a three-month
This article focuses on the regulatory also provided that the tariff applicable to a moratorium “suspending” the purchase
regime applicable to larger solar roof project would be determined by reference to obligation regime applicable to on-ground
installations and solar plants (i.e. on-ground the date on which the developer has applied solar facilities and larger roof installations
solar facilities and larger roof installations to Electricité Réseau Distribution de France with a capacity in excess of 3 kW7. This
with a capacity in excess of 100 kWp). We (“ERDF”) (or, as the case may be, to Réseau suspension applied to all projects that
will see that 2010 has seen significant de Transport d’Electricité (“RTE”)) for the had not reached a sufficient “degree of
regulatory changes which have created connection of its facility to the distribution maturity”, for a total aggregate capacity of
legal uncertainty and risks for developers (or transport) network. However, the order approximately 3,257 MW8.
of solar projects in France while in 2011 new did not provide details as to the date from A project that is insufficiently “mature”
regulations have been implemented, the which the new rules were to be applied,
long-term impact of which on the solar so developers who had filed a request for 6 Government order of 31 August 2010 setting
industry in France still remains unclear. out the terms applicable to the purchase of
electricity produced from facilities using solar
4 Government order of 10 July 2006 setting out the energy as mentioned in point 3 of article 2 of
terms applicable to the purchase of electricity decree no. 2000-1196 of 6 December 2000.
produced from facilities using solar energy as 7 Decree no. 2010-1510 of 9 December 2010
mentioned in point 3 of article 2 of decree no. suspending the electricity purchase obligation
2000-1196 of 6 December 2000. generated by certain facilities using solar energy.
5 Source: J.-M. Charpin, A. Siné, Ph. Helleisen, C. Tlili 8 Source: J.-M. Charpin and C. Trink, Rapport de la
and C. Trink, Mission relative à la régulation et concertation avec les acteurs concernés par le
3 Covering both solar photovoltaic and solar au développement de la filière photvoltaïque en développement de la filière photovoltaïque,
thermal systems. France, September 2010. 17 February 2011.
Energy partners
Douglas Bird (New York) Michel Lequien (Paris) Antony Skinner (London)
T: +1 212 205 7008 T: +33 (0)1 53 53 55 77 T: +44 (0)20 7859 1360
Joyce Gorman (Washington DC) Geoffrey Picton-Turbervill (London/Dubai) Nikolaus von Jacobs (Munich)
T: +1 202 349 1106 T: +44 (0)20 7859 1209 T: +49 (0)89 24 44 21 188
Matthew Hughes (London) Tim Reid (London) David Wadham (Abu Dhabi)
T: +44 (0)20 7859 1904 T: +44 (0)20 7859 1548 T: +971 (0)2 406 7201
Ashurst LLP and its affiliated undertakings operate under the name Ashurst. Ashurst LLP is a limited liability partnership registered in England and
Wales under number OC330252. It is regulated by the Solicitors Regulation Authority of England and Wales. The term “partner” is used to refer to
a member of Ashurst LLP or to an employee or consultant with equivalent standing and qualifications or to an individual with equivalent status in
one of Ashurst LLP’s affiliated undertakings. Further details about Ashurst LLP and its affiliated undertakings can be found at www.ashurst.com.
© Ashurst LLP 2011 Ref:D/Jul 11