TURKMENISTAN www.haynesboone.com. INTERNATIONAL PETROLEUM TRANSACTIONS IN TURKMENISTAN. 2008 Sergei A. Lomako Partner Haynes and Boone, LLP Sergei.Lomako@haynesboone.com. TURKMENISTAN. Permanent Neutrality International Cooperation Regional Stability Transition Towards Market Economy .
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INTERNATIONAL PETROLEUM TRANSACTIONS IN TURKMENISTAN
Sergei A. LomakoPartner
Haynes and Boone, LLP
Transition Towards Market Economy
“Strategy of Socio-Economic Transformations in Turkmenistan for the Period until 2030”
Laws of Turkmenistan
Laws of Foreign States
Multilateral treaties [for example:
- Membership in International Organizations
- Energy Charter Treaty
- Washington Convention (ICSID)]
ENERGY CHARTER TREATY
National Treatment or Most Favored Nation Treatment
Compensation in case of Expropriation
Repatriation of Capital and Profits in Hard Currency
Observance by Local Authorities
International Dispute Resolution
[Bilateral] Treaty Between Turkmenistan and Great Britain “On Protection of Investment” of 9 February 1995
Fair and equitable treatment; National Treatment; Most Favoured Nation Treatment
Expropriation and Nationalization is forbidden
Restitution or adequate compensation
Unrestricted Repatriation of Investment and Returns
International dispute resolution
SYSTEM OF TURKMENISTAN LAWS
Laws adopted by Referendum
Presidential Decrees, Decrees by Medjlis (Parliament)
Decrees of the Cabinet of Ministers
Acts by the Ministries and other Central Bodies of State Governance
Resolutions by Khyakims (Governons and Mayors)
Decisions by Gengesh’s
LAW OF TURKMENISTAN
Turkmenbashi Civil Code
Law on Subsoil
Law on Concessions
Petroleum Law (The Law on Hydrocarbons)
Petroleum Operations Rules (Rules for the Development of Hydrocarbon Fields)
Other Normative Acts
TURKMENBASHI CIVIL CODE
- Service Contract
- Contract security
Law on Foreign Economic Activities
Law on Investment Activities
Law on Foreign Investment
Law on Concessions
Law on Enterprises
INTERNATIONAL PRIVATE LAW
International Standards and Rules
- A direct reference in the contract is advisable
- Accounting: GAAP; International Accounting Standards;
- UCP 500 (ICC Uniform Customs and Practice for Documentary Credits);
- International petroleum industry standards (not defined in Turkmenistan laws)
Applicability criteria: should not contradict local rules.
COMPLIANCE WITH TURKMENISTAN LAW
- Activity in Turkmenistan should not contradict Turkmenistan Law
- Provisions of International Treaties prevail (or “may prevail”)
- Government agencies monitor compliance
Petroleum Law (Law on Hydrocarbon Resources)
Presidential Decree 3189 (Competent Body on Hydrocarbons, Model JVA, Model PSA.
The Statute No. 8421 of March 10, 2007 “Oon the State Agency for the Management and Use of Hydrocarbons Resources at the President of Turkmenistan”. (Petroleum Agency)
Turkmenbashi Civil Code (Service Contract)
Law on Subsoil, Law on Concessions, Petroleum operations rules, Licensing Rules, other regulation
Petroleum - “Crude oil and Natural Gas as well as all components derived therefrom or produced therewith.”
“Crude Oil – “any hydrocarbons, including distillates and condensates extracted from Natural Gas, which at Normal Atmospheric Pressure and Temperature, are in liquid state at the well head or oil/gas separator”.
“Natural Gas – “hydrocarbons, which are in the gaseous state at Normal Atmospheric Temperature and Pressure associated or non-associated with Crude Oil”.
Petroleum in its natural state in or upon the land in the territory of Turkmenistan is the exclusive property of Turkmenistan.
Title and quantity of entitlement share, including the place and time when title passes to Foreign Investor, are to be stipulated in the contract.
Petroleum rights are granted by the Petroleum Agency (before March 10, 2007 – by Competent Body on Hydrocarbons), on the basis of a Production Sharing Agreement or a Joint Venture Agreement, and a License.
The grantee may be a local juridical person or a foreign juridical or physical person.
Foreign juridical persons must register with the State Agency for Foreign Investments of the Ministry and Economy and Finance (SAFI) before entering into JVA or PSA.
A typical course of action:
PETROLEUM OPERATIONS defined in Petroleum Law:
“All Exploration and Production Operations and related operations for treating, metering, saving, storing, marketing, delivery and transportation of Petroleum and its derivatives as well as other operations connected to the implementation of a Contract.”
TYPES OF LICENSES
EXPLORATION OPERATIONS defined in Petroleum Law:
“Geological, geophysical, aerial and other surveys, the drilling of such shotholes, core holes, stratigraphic tests and other wells for the discovery of Petroleum and the purchase as well as the leasing of materials and equipment thereof.”
PRODUCTION OPERATIONS defined in Petroleum Law:
“All types of operations for recovery of Petroleum, its saving, treating, handling, storing, transporting, metering, delivery and marketing as well as operations connected with primary and secondary production and other kinds of activities connected with these operations.”
Combined Exploration and Production License
Suspension of License upon written notice from the Competent Body in the event that the License holder:
Revocation of License by the Competent Body in the event that the License holder:
Production Sharing Agreement
(Joint Venture Agreement is practically not used)
Combination of PSA, JVA, and other types of contract
CONTRACT: PSA and JVA
Petroleum Law, Model PSA and Model JVA were designed mainly for onshore oilfields
Specificity of onshore gas, offshore gas and offshore oil might justify substantial variations of the Model Form, which can be suggested by the Foreign Party
Gas clause is practically absent in the Model Form; requires substantial drafting
Pipeline clause requires drafting
Contractor is subject only to:
- using international accounting standards
- using hard currency as the monetary unit for the contract
Shares of the parties to PSA (and JVA) are determined by the contract, with due regard to existing practices.
(R=1; 1-1.5; 1.5-2; 2-2.5; parties’ shares sliding scale)
Petroleum Law (Art.56 – Resolution of Disputes) provides for international dispute resolution (international arbitration) based on an agreement between the parties
Model PSA provides that either party to the Agreement may refer a dispute to an international arbitration body
Institution and Place of Arbitration; nationality of Arbitrators; material and procedural law.
PIPELINE defined in the Petroleum Law
“The company which constructs the pipeline may set and charge a transportation tariff for its use”
- Foreign Party is entitled to maintain offshore bank accounts to hold only the proceeds of sale of Foreign Party’s entitlement share
- No restriction on borrowing of hard currency by Foreign Party
- Revenue from sale of Foreign Party’s entitlement share in petroleum is exempt from any future conversion requirement
“Contractor may assign to a third party all or part of its rights and obligations under the License and the Agreement upon the prior written consent of the Petroleum Agency [formerly, by the Competent Body] which shall not be unreasonably withheld”
In the event of a change in law affecting the balance of interests of the parties, the foreign investor may require that it be governed by the law that was in force at the time of its registration in Turkmenistan, for the period of 10 years.
The contract may contain such a provision, and the investor must declare its choice each time it wishes to invoke this right.