The United States has banned former Panamanian President Juan Carlos Varela Rodriguez from entering the country because of his “involvement in significant corruption”. According to Secretary of State Antony Blinken, while serving as Vice President and then President, Varela accepted bribes in exchange for the award of government contracts. Along with former President Ricardo Martinelli and several other high-profile officials, Varela is due for trial in Panama later this year on money laundering charges relating to the Odebrecht bribery probe. Varela served as President from 2014 to 2019. Both Varela and Martinelli were banned from leaving Panama in 2020 when the investigations began. See
Odebrecht is a Brazilian company that has been operating in Latin America and other countries for the past 30 years, offering bribes to government officials in exchange for the grant of large construction contracts. It is one of the largest documented corruption cases in recent Latin American history spanning ten countries, including Argentina, Brazil, Columbia, Ecuador and Venezuela. In Panama, the company paid bribes of more than US$59 million between 2010 and 2014. The Panamanian government announced that it will take the necessary actions to cancel a US$1 billion contract awarded in 2014 to Odebrecht for the construction and operation of a hydroelectric plant after the company pleaded guilty in a United States court to handing out bribes in several countries in the region.
This is our third article on the Petroleum Activities Bill 2023 that was released to the public, with a 14-day deadline for the receipt of comments. That deadline has since passed, and it is not clear whether an extension has been granted, considering the importance of the Bill that will replace the Petroleum (Exploration and Production) Act. The Bill contains eleven parts. So far, we have covered the first four parts, namely, Part I – Preliminary; Part II – Administration and Authority; Part III – Exploration; and Part IV – Development and Production.
In today’s article, we continue our discission on the other parts of the Bill.
Part V – Cancellation and Force Majeure
Where a licensee is in default, the Minister may cancel the licence, giving not less than 30 days’ notice of his/her intention to do so and specifying a reasonable date before which the licensee may submit any representation. In deciding whether or not to cancel the licence, the Minister must take into account: (i) any action by the licensee to remedy the default, or where the default cannot be remedied, any offer of adequate compensation and any action by the licensee to prevent the recurrence on similar grounds; and (ii) any representation by the licensee.
The Minister may also cancel a licence if an order is made, or a resolution is passed, winding up the affairs of the body corporate, unless the winding up is for the purpose of a merger and the Minister has consented to the merger, or is for the purpose of restructuring and the Minister has been given notice of the proposed restructuring. Additionally, upon application by a licensee, the Minister shall cancel a petroleum production licence either wholly or in relation to any block or blocks on such conditions as the Minister may specify.
Where two or more persons, associated together in any form of joint arrangement, constitute a licensee, the Minister cannot cancel the licence on the ground that one or some of the persons constituting the licensee meet(s) the requirement for cancellation, if any other person or persons is/are willing and would be able to carry out the duties and obligations of the licensee.
Upon cancellation of a licence, the rights of the licensee cease. However, the cancellation will not affect any liability incurred by the licensee before the cancellation and any legal proceedings that might have been commenced or continued against the licensee, or may be commenced against the licensee.
Force majeure relates to unforeseeable circumstances that prevent a person from fulfilling a contract. According to Investopedia, it is a clause in a contract to remove liability for unforeseeable and unavoidable catastrophes that interrupt the expected course of events and prevent participants from fulfilling their obligations. These clauses generally cover natural disasters, such as hurricanes, tornadoes, and earthquakes, as well as human actions, such as armed conflict and man-made diseases. The Bill provides for any failure of a licensee to fulfil any condition of his/her licence not to be considered a breach of the licence if the failure results from ‘an act of war, hostility, insurrection, global health pandemic or an exceptional, inevitable and irresistible natural phenomenon, or from any other cause prescribed in the licence or petroleum agreement as constituting force majeure’. However, the licensee must immediately inform the Minister who is required to extend the term of the licensee to cover the period affected. Force majeure does not affect the licensee’s obligation to the payment of royalty, annual charges or fees.
The Minister may refuse to agree to the addition of any period to the term of the licence if the licensee could, by taking any reasonable steps which were open to him, have exercised those rights during that period, notwithstanding any such occurrence.
Part VI – Unitisation
Where a petroleum reservoir extends beyond the boundaries of an exploration license area into the area of one or more exploration licences held by other licensees, the Minister may direct the holders of the respective licences that overlay the petroleum reservoir to enter into a unitization agreement to coordinate development and production of the reservoir as a single unit. This is to ensure optimum recovery of petroleum and protection of the economic interests of the State.
The licensee must notify the Minister of the existence of such reservoir within a timeframe to be prescribed by regulation and submit a technical report of the geological characteristics of the reservoir and any studies, interpretations and data that may help to determine the boundaries of the reservoir. The Minister must then notify the holders of the adjacent licence or licences that overlay the reservoir, of the existence of a reservoir that crosses the boundaries of their respective licence or licences. The notice shall provide for a reasonable time for the licence holders to reach a mutually acceptable agreement for development of the reservoir as a single unit which must be approved by the Minister if he/she considers such agreement is consistent with the provisions of the Act, regulations prescribed under the Act, and the provisions of the respective petroleum agreements. The failure to submit a unit development agreement may result in the Minister establishing the terms and conditions under which unitization must be conducted.
Where the holder of a petroleum licence identifies a reservoir that extends beyond the boundaries of the licence area into an unlicensed area within the national territory, the licensee must submit an application to the Minister to incorporate the unlicensed area that contains part of the reservoir identified by the licensee.
Where a petroleum reservoir extends into the territory of a neighbouring country, the Minister of Foreign Affairs must seek to reach an agreement with that country for the unitization of the cross-border reservoir. The licensee is required to submit to the Minister technical studies supporting the cross-border reservoir tract determination process. No unitization agreement can be entered between the licensee and holders of rights to the cross-border petroleum reservoir in the neighboring country until a unitization treaty or agreement is entered between the Government and that country where part of the petroleum reservoir extends.
Part VII – Revenues and Financial Guarantees
The holder of a petroleum exploration licence is required to pay the Government an annual rental in respect of exploration or appraisal period specified in the petroleum agreement. The Minister may also require a signature bonus to be paid as a condition for the grant of a petroleum exploration licence. Where a petroleum exploration licence is granted through competitive tender the minimum value of the signature bonus shall be established in the notice inviting applications.
Where an exploration licence is granted through direct negotiation, the value of the bonus is the amount resulting from the negotiation process.
Where the Minister approves an application for retention of a discovery in the event the discovery is not considered of commercial interest but is likely to be so in five years’ time, the applicant must pay the Government a retention fee for the duration of the retention rights. The fee is to be paid annually effective from the date of the Minister’s approval.
The holder of a petroleum production licence is required to pay the Government royalty in respect of petroleum obtained by the licensee in the development and production area to which the licence relates. The amount has, however, not been specified in the Bill. One recalls the royalty payable by ExxonMobil’s subsidiaries under the 2016 Production Sharing Agreement (PSA) was a mere two percent which is perhaps the lowest among oil-producing nations.
In order to avoid a repetition of such a desirable situation, it would be necessary for a minimum percentage of royalty payable to the Government to be set out clearly in the legislation, with provision for negotiation for a higher percentage. The minimum percentage should be arrived at having regard to the royalties payable to other oil-producing nations. It will be recalled that the International Monetary Fund (IMF) had identified several deficiencies in the Petroleum (Exploration on and Production) 1986 Act, including the discretional nature of the fiscal provisions, such as royalty payments, profit sharing and taxation, leaving the specifics to be dealt within the PSAs entered into with the oil exploration companies.
If the royalty is not paid on or before the due date, or any further time allowed, the Minister may prohibit the removal of, or any dealings in, or with, any petroleum from the development and production area concerned, or from any other development and production area subject to a licence held by that holder, or from both, until all outstanding royalty is paid or until an arrangement is made, and accepted by the Minister, for the payment of the royalty in arrears.
On application by a licensee and after consultation with the Minister of Finance, the Minister may remit, in whole or in part, any royalty payable by the applicant; or defer payment of any royalty, on such conditions (if any) as he/she may specify. The Minister’s discretionary power in this regard is also one of the deficiencies that the IMF had identified as regards the 1986 Act and repeated in the Bill. It would therefore be desirable for the conditions under which royalty may be remitted partially or wholly to be set out in the legislation in order to protect the revenues of the State.
Petroleum exploration and production licences may provide for the payment of a training fee payable annually throughout the validity of the petroleum agreement. Additionally, licensees may be required to establish and fund a programme of financial support for environmental and social projects. Considering the importance of protecting the environment from the adverse effects arising from the exploration and production of petroleum, such a programme of financial support, quantified as far as possible, should be made mandatory and embedded in the legislation rather than in the petroleum agreement.
The Minister may make such arrangements from time to time as appear appropriate to him/her to ensure that the holder of a licence complies with the requirements of the Act and the licence. The Minister may also accept guarantees of compliance from any person including from shareholders in a body corporate, whether or not the body corporate is, or is to be, the holder of a licence.
Additionally, the Minister may require an applicant for the grant or renewal of a licence to execute a bond satisfactory to the Minister, for the performance and the observance by the applicant of the conditions of the licence upon grant or renewal of the license, or to make arrangements, satisfactory to the Minister, for the execution of such a bond. The use of the word “may” would suggest that the Minister has wide discretion as to decide whether or not licensees should be required to provide such guarantees and execute performance bonds. These should be made mandatory on the part of licensees.
To be continued –
