Maximizing Benefits From Mineral
Development Agreements
October 31-November 5
Addis Abeba, Ethiopia
Juba, South Sudan
Salli Anne Swartz
Artus Wise Paris
Partner
I. Pre Contract Analysis
 Tender Process
 Language and Place of Negotiations
 Choice and Type of Advisors
 Strength and Weaknesses of Position of the
Government and the Investor
 Identification of Infrastructure Needs
 Identification of Local Development Strategy
 Financial and Economic Analysis (valuation and
feasibility studies)
2
Tender Process
How to assure and open and transparent process
Assistance with drafting of the tender process: why,who, when and
timetable: the tender should only be issued after the internal Goverment
processes have been completed with regard to:
 Up to date Mining Code
 Complete and stable Fiscal Code
 Analysis of the financial needs of the State for 5, 10 and 25 year periods
 Strategy for local development has been agreed upon by the national,
regional and local authorities
 Local consultations with the civil society and populations affected by
the extractive industry development
3
Language and Place of Negotiations
 Insist that negotiations take place in a language which you speak
and read fluently; if this cannot be done, insist on a translator being
present and paid for by the investor
 Insist on negotiations in a place where you feel comfortable:
Negotiations in your country will put you at a certain psychological
advantage and should be insisted upon if at all possible
 If at all possible, prepare a model Mineral Development Agreement
based on the MMDA and explain that you wish to use this
agreement as a basis for negotiations; if this is not possible, insist on
receiving the draft prepared by the investor in sufficient time to
evaluate it with advisors before any face to face negotiations take
place
4
Strength and Weakness of Parties’
Negotiating Positions
 Negotiate from a place of strength requires knowledge: you have
something the other party wants (mineral/hydrocarbon resources)
and they want something you have; use your position of strength to
maintain the rythym and subject matter of the negotiations
 Knowledge requires advance study by the Government of its
requirements in terms of tax and royalty receipts, local and
infrastructure needs, training of nationals etc.
 Failure to be adaquately prepared will allow the investor to
establish its needs before the State can insist on its needs, which will
put the State and the Government negotiators in a defensive
position
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Choice and Type of Advisors
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Type of Advisors
Legal, financial/tax, economic, experts on infrastructure and local
development, geologists, sociologists, anthropologists etc.
Choice of Advisors
National and expatriate nationals who have the expertise and
knowledge
International specialists who are willing to work as a team with
national and expatriate nationals and who are willing to train
nationals
Use the tender process to entice expatriate nationals to come home
and work in country on the mining/extractive industry projects , if
possible
6
Identification of Infrastructure Needs
Resale price and profit will be driven by transportation costs
Three models:
 Obligation to build born by the investor/contractor and cost usually
borne by the investor/contractor: access will then usually be
controlled by the investor/contractor
 Obligation to build born by the investor/contracor but cost born by
Government funded by loans: access will then usually be controlled
by the Government
 Hybrid: cost born by both: emerging trend towards « resource for
infrastructure » deals: infrastructure is built by the
investor/contractor or the Government in return for rights to the
oil/gas/extracted minerals
7
Identification of Local Development Strategy
Local, Regional and National Consultations
 What do the local, regional communities want; how will
expropriations/relodged populations be compensated? How
will indigenous communities be represented in consultations?
Intra-Government Consultations
 Coordinating local and regional consultations with the setting of
national priorities and objectives: which projects for which
community which is affected by the extractive industry project
Payment for Local Development: Investor or Government
Oversight
 By which entities (local, regional, national government/entities
with community input
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Financial and Economic Analysis
Knowledge is Power
 Obtaining economic and finanical advice before
entering into negotiations with investors
 If required, obtain financing for independent
financial and economic advice
II. Contract Analysis
Key Clauses
Contracting parties: Who are they
 Who is contracting for the investor/contractor: individual
entities or a consortium
 Who is contracting for the State
A ministry? A government public or semi public
entity such as a company controlled
by the State?
Does the Production Sharing/Mineral Rights
Agreement have to be ratified/authorised by
Parliament?
 Financing Institutions: When are the loan agreements
negotiated? Before or after the Extractive Production/Mineral
Development Agreement?
Operations and Control
 How much control does the State wish to have over the
operations of the investor/contractor
Work Programs and Budgets
 In order to assure that the investor/contractor performs its
obligations, the Production Sharing /Mineral Development
Agreement should provide for very detailed work programs
and schedules and investment budgets
Sanctions for Non Respect
 Failure to respect the work programs and budgets should
give rise to sanctions (with certain exceptions such as events
of force majeur)
Commercial Discovery and Feasibility Studies
 Timing and ownership of data and information
contained in the feasibility studies (geological
information, maps, reporting, core studies and data)
 Requirement to inform the State, remit the
documentation producted by the feasibility study and
obtain approval before the oil/gas field or mine is
prepared for commercial production
 Requirement to remit a detailed investment budget at
the time the feasibility study is remitted to the State and
obtain approval from the State on phases and
investment amounts
Taxation/Royalties/Price of Commodity
 Rate and time line analyses is dependent upon existing
Fiscal Code (see use of stabilisation clauses) and
financial projections
 Essential to find an equitable and reasonable balance
between taxation, royalty payments, sale price of the
commodity
 Examine norms used in other countries with similar
experience
 Do financial analysis and projections before
negotiations of the Production Sharing /Mineral
Development Agreement
Stabilisation Clauses
Two types of typical stabilisation clauses
 New legislation does not apply to the Production
Sharing/Mineral Development Agreement; or
 New legislation does not apply to the Production
Sharing/Mineral Development Agreement but the
investor/contractor is entitled to compensation for the
prejudice incurred by it which is caused by the application
of the new legislative regime
 Issue of what happens if the investor/contractor benefits
from the change in the legislative regime
Certain States are now refusing the use of stabilisation clauses
New Idea to be used with (and possible without)
stabilisation clauses
 Require the parties to renegotiate key financial clauses and perhaps other
key provisions such as local development obligations at fixed periods to be
defined in the Production Sharing /Mineral Development Agreement
 This requirement would work with stabilisation clauses which would
stabilize the fiscal regime until the next phase of negotiaions
 Fixed negotiation periods would require the parties to examine new
circumstances at each major phase of the Production Sharing/Mining
Development Agreement
 Advantages of such a requirement would be to force the parties to take into
consideration changed circumstances in order to avoid disagreements
 Disadvantage is less foreseeable stability depending upon the periods
negotiated for each phase
Environmental Provisions
 An environmental impact assessment plan should be remitted by
the investor/contractor at the same time as the feasibility study
 The Production Sharing / Mineral Development Agreement
should contain the obligation to update the environmental
impact plan on a periodic basis and to remit to the Government
environmental studies done by the investor/contractor on a
periodic basis
 The Petroleum Sharing/Mineral Development Agreement
should obligate the investor/contractor to abide by all national
environmental legislation and international norms (which
should be identified in the Agreement and to clean up and
restore the affected area upon relinquishment or abandonment
Termination of the Mineral Development
Agreement
Reasons for termination
Abandonment
Relinquishment
Involvancy of investor/contractor
Interruption of production for a certain defined number of days
(exception of force majeure)
 Failure of the investor/contractor to respect its obligations
 Failure of the Government to respect its obligations
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Sanctions
 Fixed penalties or liquidated damage clauses :limiting amount of
damages payable for breach of the Production Sharing/Mineral
Development Agreement
 Automatic termination of financing(loan)agreements and
repayment of loaned amounts to financing institutions
Governing Law and Dispute Resolution
 Most States will insist on the application of national law
and national courts in the event of disputes
 Investors/contractors will look to see if the State has a
stable and equitable legislative regime and a stable,
functioning and equitable court system
 Often investors/contractors will favor third country
laws (English or French law, for example) and
international arbitration
 International arbitration is usually favored because
arbitral awards are definitive and can be enforced in all
jurisdictions which have ratified the New York
Convention