Box 4.6 Contractual Provisions for Natural Gas Petroleum exploration and production contracts signed with governments will typically include some or all of the following specific gas-related provisions: 1. Definitional provisions. Natural gas operations typically are highly integrated but contain distinct segments: upstream, midstream, and downstream, each subject to a specific fiscal regime. Definitions are required to clarify the phase of operations to which the contract applies, the point of delivery, and the point of valuation, distinguishing upstream facilities from transportation pipelines and downstream facilities. Definitions will cover associated and nonassociated gas, condensate, and natural gas liquids. 2. Appraisal of discovery provisions. Relative to oil, a longer period is generally allowed for appraisal of a natural gas discovery. Assessment of commercial potential generally takes more time given limited domestic markets, the absence of competitive international markets, and the need to establish longterm sales agreements (based on a sufficient aggregation of gas reserves, before final commitments to development are made). A retention period mechanism may be included in the contract. 3. Joint development provisions. Contracts may include obligations for joint development of gas discoveries and for the use of common infrastructure where stand-alone development would be noncommercial. It is similar to schemes designed to develop a project as a single unit where the resource crosses a boundary. 4. Associated gas provisions. Natural gas is often found together with oil. The priority use of associated gas is
evident in Nigeria’s case. A large proportion of its associated gas is still flared, with significant environmental and social costs. The reasons are rooted in the absence of appropriate infrastructure for processing, transporting, or distributing gas or for generating electricity. Mining
Types of licenses and application procedures. The vehicle used to transfer a right to a company or other legal entity to explore for and extract minerals is usually called a license. The name can vary, however, with convention
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generally in support of oil operations to increase oil recovery through reinjection into the oil reservoir. Disposal of associated gas provisions may (1) prohibit or heavily fine gas flaring on environmental grounds, (2) allow the investor the right to commercialize associated gas if possible, or (3) set terms for the sale or delivery of associated gas to the state if so requested by government. 5. Gas market provisions. Contract provisions may require priority allocation of gas to the domestic market and/or set conditions for the authorization of export sales. 6. Gas pricing provisions. The typical absence of a competitive upstream market for price reference purposes and the integrated character of gas operations necessitate that contracts contain a detailed gas valuation clause (in addition to the oil valuation clause) setting out how wellhead prices are to be determined for sale of the gas. Often government approval of gas sales contracts, including pricing, is required; there can be tensions as a result between the imposition of a low price for domestic consumption and a price based on fair market value, with damaging effects on long-term investment. 7. Fiscal provisions. Gas operations are typically less profitable than oil operations. Fiscal terms in contracts are typically adjusted to reflect this distinction unless the fiscal regime is based on achieved profitability (in which case no adjustments are required). The past practice of leaving the negotiation of fiscal terms until discovery or setting fiscal terms for gas equivalent to those for oil has largely been abandoned (see chapter 6).
being common in civil law countries and development agreement sometime used in others. The idea is the same: it is a legal instrument that sets out rights and obligations of the investor and host state that are additional to the legislation relevant to mining activities. Sometimes the content is in a standard form, sometimes it is individually negotiated, and sometimes it is partly standardized and partly negotiated. More often than not there are between two and three kinds of licenses covering prospecting, exploration, and exploitation (the mining regimes of Ghana, Côte d’Ivoire, Tunisia, Turkey, and the Republic of Yemen are examples).
