Frank L. Cascio, Jr. Jackson Walker L.L.P. Senior Counsel

Transcription

1 Frank L. Cascio, Jr. Jackson Walker L.L.P. Senior Counsel Biography Frank Cascio is Senior Counsel in the Energy section of Jackson Walker. Mr. Cascio has spent over 27 years representing clients in oil and gas and other energy related matters. During the last seventeen years, he has specialized in international business development projects and negotiating international petroleum transactions around the world, but also represents a wide variety of clients in domestic energy projects, principally in the acquisition and divestiture areas. Prior to entering private practice, Mr. Cascio was Vice President and General Counsel of Energy Development Corporation in Houston, Texas until it was sold in mid While at EDC, besides being responsible for the legal affairs of a rapidly expanding company which grew to nearly a billion dollars in five years, he expanded his interest in international negotiations by working on projects in Argentina, China, Peru, Ecuador, Britain, France, Tunisia, Senegal, and the Ivory Coast. He began his career in the oil business with Exxon Company, USA in 1973 and later joined Primary Fuels, Inc. as Vice President, Legal and Land, where he first became active in international petroleum transactions, working on projects in Ghana, Angola, Cameroon, Pakistan, Oman, Indonesia, Greece, Canada, and Argentina. Recent projects include the successful negotiation of a variety of projects in China on behalf of Enron Oil & Gas Company; represented Enron Oil & Gas Company in India and Mozambique on major upstream natural gas projects; represented Hall-Houston

2 The Challenge of Natural Gas Development in China Basic Concepts in Natural Gas Purchase and Sales Agreements Frank L. Cascio Jackson Walker L.L.P. Houston, Texas, U.S.A. 3 rd Oil and Gas Industry Forum Beijing, China September 12, 2001

3 The Oil & Gas Business in China All minerals are owned by the State subject to development by various State-owned entities, such as Sinopec, PetroChina and CNOOC Foreign investors enter into Petroleum Contracts with these State-owned entities All hydrocarbons allocated to foreign producers by Petroleum Contracts must be sold to a Chinese entity or exported 2

4 The Oil & Gas Business in China To date almost all crude oil and natural gas production allocated to a foreign producer has been exported The State, recognizing the superiority of natural gas as a fuel source, has implemented a policy favoring natural gas development since 1998 China has not yet developed its full strategy for assimilating natural gas production from foreign producers 3

5 Differences Between Crude Oil... Crude oil is able to be priced according to international market prices If a foreign producer cannot agree to terms with a Chinese purchaser, export is an option Almost all Petroleum Contracts contain provisions to facilitate export of crude oil 4

6 and Natural Gas Natural gas cannot easily be stored Natural gas must be sold to a Chinese purchaser, such as PetroChina, Sinopec, or CNOOC Price of natural gas is controlled by the State and is historically low compared to other hydrocarbon products Due to lack of market flexibility, foreign producers have a hard time penetrating local markets 5

7 Anatomy of a Typical Gas Sales Contract Dedication of Supply Deliverability Daily Contract Quantity Annual Contract Quantity Take or Pay Make-Up Rights 6

8 Anatomy of a Typical Gas Sales Contract Price Taxes Payment Terms Delivery Sales Points Quality Measurements Quantity Measurements 7

9 Anatomy of a Typical Gas Sales Contract Applicable Laws Dispute Resolution Sovereign Immunity Economic Stabilization 8

10 Dedication of Supply Seller agrees to sell a certain portion of its production and Buyer agrees to buy same amount Seller wants certainty that the gas it produces will be purchased by Buyer for the contract term If a Seller is not satisfied with the sales terms, then it may be unwilling to make the capital investment 9

11 Deliverability Deliverability is the total volume of gas the wells can produce on a regular basis Established by well testing under supervision Will fluctuate over the life of the gas well Used to determine the minimum required takes each day 10

12 Daily Contract Quantity Minimum volume that Buyer must purchase each day to fulfill contract Expressed as a percentage of the deliverability For instance, a 90% DCQ means that 90% of the Deliverability should be purchased each day The DCQ percentage is negotiable 11

13 Annual Contract Quantity ACQ is the arithmetic sum of the DCQs for the whole year Yearly reconciliation is preferable because it allows for seasonal fluctuation of takes For instance, with a 90% DCQ, if a Buyer purchases only 80% of Deliverability for a week, then it can purchase 100% for a week and still be in compliance on an annual basis Fulfillment of ACQ determines if a Take or Pay payment is owed 12

14 Take or Pay Take or Pay is determined at the end of each calendar year It is a volumetric reconciliation to determine if Buyer has taken and purchased at least the ACQ If Buyer has not purchased the ACQ, Buyer is obligated to make a cash payment to Seller equivalent to the difference in value between what was purchased and what should have been purchased 13

15 Make-up Rights If a Take or Pay payment is made, then Buyer is entitled to make-up Rights Buyer is entitled to take additional gas volumes over and above the DCQ No payment is necessary as gas has already been paid for There might be certain limitations on when and how much make-up gas is allowed 14

16 Price Many possible different price scenarios In countries with mature markets and multiple buyers, natural gas is sold on contracts as short as a day to multi-year contracts In Europe, most natural gas is sold on long term contracts In less developed regions, most natural gas is sold on long term contracts to dedicated projects or LNG exports 15

17 Price Difficult pricing issues in China: What is the market price and how is it determined? Is an economic price for project gas sustainable in the local market? If price for local gas is regulated, is project gas price required to be regulated? Can project gas compete with alternative fuels on price alone? 16

18 Taxes Generally, the taxing structure in China is predictable But, foreign producers are allowed a VAT preference of 5% on production, instead of the usual 13% This creates a problem because the Chinese end users are used to paying a regulated price inclusive of 13% VAT This creates an imbalance in payments which must be solved 17

19 Payment Terms Sellers require that payment be made in US Dollars Foreign exchange issues Regulatory limitations Repatriation risks and limitations Sellers require that payment be made promptly Sellers require some form of security May require Buyer to post letters of credit, etc. Penalty for late payment; interest 18

20 Delivery Sales Points Lack of comprehensive infrastructure will delay development Limited points of delivery puts strain on Buyer Construction costs must be allocated 19

21 Quality Measurements Most Chinese gas is sold by volume Most international gas is sold by heat content 20

22 Quantity Measurements Very complex and technical provisions Conforming of Chinese standards and international standards 21

23 Applicable Laws Comprehensive and dependable legal regime is critical element to attract foreign investors Foreign investors frequently have a difficult time deciding where to go when problems arise Chinese hydrocarbons law needs updating Foreign investors are looking for predictable enforcement of contractual terms 22

24 Dispute Resolution Chinese have a system for local ad hoc arbitration but court access is limited All Petroleum Contracts provide for international arbitration China has a history of solving problems before resorting to litigation or arbitration 23

25 Sovereign Immunity Because State-owned entities act as owner, producer, buyer and caretaker of Chinese natural resources, there is a high likelihood of conflict of interest Foreign investors must be satisfied that when the State-owned entities act as a contractual party, they are treated as an equal party, not as the State Gas sales contracts must recognize this exclusion of sovereign immunity 24

26 Economic Stabilization These clauses protect the foreign investment from material changes in economic terms due to government action Only protects from the result; cannot limit government from action Assists collaboration of PetroChina and foreign investor to an equitable solution 25

27 Conclusions China s demand for domestic natural gas will increase dramatically in the near term The development of reserves must keep pace with the construction of transportation facilities As foreign investment is attracted to China, the need for certainty of contract terms is critical China will adapt its domestic laws and policies to meet its long-term energy goals 26

28 Oil and Gas Company in a major gas project in Malaysia; represented Pioneer Natural Resources Company in negotiations with China National Petroleum Company on a major oil and gas project in northern China; represented Enron in negotiating an offshore gas development project in South Korea, representing Devon International in its operations in China; and representing Burlington Resources International in building its energy portfolio in China. Memberships Education Practice Areas Mr. Cascio is a member of the Louisiana and Texas State Bar Associations and is active in the Association of International Petroleum Negotiators. He is also a member of the American Association of Petroleum Landmen, the American Association of Petroleum Geologists and several other professional organizations. He has recently become active as a judge in the International Moot Court competition sponsored through South Texas College of Law. Mr. Cascio received his B.A. and J.D. from Louisiana State University. Energy, International, Transactions Publications/ Speaking Engagements In July 1997 he presented a paper at the Rocky Mountain Mineral Law Foundation 43rd Institute on International Exploration Contracts. In December 1999 he conducted a seminar for senior managers of the China National Petroleum Corporation in Chengdu and Beijing China on international petroleum contracts. In September 2000 he made a presentation to the national conference of NALTA. In February 2001 he published an article in the Houston Business Journal on international energy practices.