TURKMENISTAN www.haynesboone.com

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TURKMENISTANwww.haynesboone.com
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INTERNATIONAL PETROLEUM TRANSACTIONS IN
TURKMENISTAN

• 2008
• Sergei A. LomakoPartner
• Haynes and Boone, LLP
• Sergei.Lomako_at_haynesboone.com

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TURKMENISTAN

• Permanent Neutrality
• International Cooperation
• Regional Stability
• Transition Towards Market Economy

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TURKMENISTAN

• Strategy of Socio-Economic Transformations in
  Turkmenistan for the Period until 2030

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APPLICABLE LAW

• International Treaties
• Laws of Turkmenistan
• Contracts
• Laws of Foreign States

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INTERNATIONAL TREATIES

• Multilateral treaties for example
• - Membership in International Organizations
• - Energy Charter Treaty
• - Washington Convention (ICSID)
• Bilateral treaties

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• 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

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• Bilateral Treaty Between
  Turkmenistan and Great Britain On Protection of
  Investment of 9 February 1995
• Investment defined
• 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

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SYSTEM OF TURKMENISTAN LAWS

• Constitution
• Laws adopted by Referendum
• Laws
• 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 Gengeshs

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LAW OF TURKMENISTAN

• Constitution
• Turkmenbashi Civil Code
• Investment Laws
• 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

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TURKMENBASHI CIVIL CODE

• - Service Contract
• - Contract security

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CONTRACT SECURITY

• Immovable property
• Movable property (including goods in circulation,
  such as hydrocarbons)
• Shares
• Subsoil and land use rights
• Licenses
• Agreements
• Offshore bank accounts

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INVESTMENT LAWS

• Law on Foreign Economic Activities
• Law on Investment Activities
• Law on Foreign Investment
• Law on Concessions
• Law on Enterprises

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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.

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COMPLIANCE WITH TURKMENISTAN LAW

• - Activity in Turkmenistan should not
  contradict Turkmenistan Law
• - Provisions of International Treaties prevail
  (or may prevail)
• - Government agencies monitor compliance

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• PETROLEUM LAW
• 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

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PETROLEUM DEFINED in the Petroleum Law

• 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.

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TITLE TO PETROLEUM

• 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.

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GRANTING OF PETROLEUM RIGHTS

• 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.

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ACQUISITION OF PETROLEUM RIGHTS

• A typical course of action
• Preliminary application by a foreign company
• Preliminary negotiations
• Registration of the Foreign Investor with the
  State Agency for Foreign Investments (SAFI)
• Negotiations and execution of PSA or JVA
  simultaneously, issuance of a License based on
  the executed PSA or JVA
• Registration of the PSA or JVA with the State
  Agency for Foreign Investments (SAFI)
• Commencement of Petroleum Operations.

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PETROLEUM RIGHTS

• LICENSE
• Revocable administrative act
• Contingent upon execution of a JVA or PSA
• Not available to contractors under the Service
  Contract
• Limited term, can be suspended or revoked
• Revocation of License automatically terminates
  the Contract
• Licensing Authority is the Petroleum Agency
• One License Holder only.

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• 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.

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PETROLEUM RIGHTS

• TYPES OF LICENSES
• Exploration License
• Production License
• Combined Exploration and Production License

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• 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.

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PETROLEUM RIGHTS

• Exploration License
• exclusive right to carry out Exploration
  Operations, valid for up to 10 years (six years
  initially, with the option to extend twice for
  two-year periods (622 formula)).
• 622 formula law does not provide for
  changing the 10-year formula to other
  combination, e.g. 325 years
• a commercial discovery in a particular area gives
  raise to priority right to obtain a Production
  License in that area.
• does not prohibit small-scale production and sale
  (contract may provide for such a pilot-scale
  production and sale).

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• 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.

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PETROLEUM RIGHTS

• Production License
• exclusive right to carry out Production
  Operations in a specified area, sell or dispose
  of petroleum.
• valid for up to 25 years (20 years initially,
  with the option to extend once for five years
  (205 formula)).
• Does not prohibit exploitational exploration (
  advanced exploration during the production
  operations, which can be granted under the
  contract)

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PETROLEUM RIGHTS

• Combined Exploration and Production License
• Exclusive right to carry our Exploration
  Operations and Production Operations.
• Valid for up to 35 years (26 years initially,
  with the option to extend for nine years, subject
  to certain requirements)
• Normally, the Combined License term is considered
  as the succession of Exploration License and
  Production License the granting authority would
  be reluctant to deviate from the term-extension
  formula, keeping it as follows 622
  (Exploration), then 205 (phase) the form of
  the Combined License, and the form Instrument of
  Extension can be suggested by the Foreign Party
  based on the model form licenses.

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SUSPENSION OF LICENSE

• Suspension of License upon written notice from
  the Competent Body in the event that the License
  holder
• conducts Petroleum Operations not provided for in
  the License
• carries out activities within the framework of
  the License, but not under the program provided
  for in the Agreement
• systematically violates Turkmen Law with respect
  to the protection of underground resources or
  environmental and safety regulations
• Reinstatement of License upon rectification
• Adjudication

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REVOCATION OF LICENSE

• Revocation of License by the Competent Body in
  the event that the License holder
• fails to remedy the causes of any suspension
  within the fixed deadline
• is found to have deliberately submitted false
  information to the Competent Body which
  materially affected the Competent Bodys decision
  to issue the License
• deliberately delays signing and registering the
  Agreement or commencing Petroleum Operations
• Revocation of license renders the Contract (PSA,
  JVA)null and void
• No reinstatement of License
• Adjudication

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CONTRACT

• Production Sharing Agreement
• (Joint Venture Agreement is practically not used)
• Combination of PSA, JVA, and other types of
  contract
• Service Contract

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CONTRACT

• Service Contract
• No model form under Turkmenistan law, although
  quite a lot of precedent forms exist
• Turkmenbashi Civil Code
• Industry regulations
• Local and international business practices

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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

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TAX

• Contractor is subject only to
• a profits tax
• at the rate established by Turkmen Law (20)
• Agreement will establish procedure for
  determining taxable profits
• - using international accounting standards
• - using hard currency as the monetary unit for
  the contract

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TAXATION PSA Contractors and Subcontractors

• Taxes applicable to the Contractor are limited to
  those set forth in the Petroleum Law
• No tax, duty, fee or other impost on profit
  derived from Petroleum Operations shall be levied
  on the Contractor or its shareholders beyond
  those anticipated in the Agreement
• Subcontractors under a PSA may enjoy the same tax
  regime as the PSA parties.

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ROYALTY AND BONUSES

• production royalty
• Agreement will determine rate (sliding scale,
  based on production, quarterly reports)
• bonus
• Signing bonus
• Production bonus

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CONTRACT PARTIES SHARES

• Shares of the parties to PSA (and JVA) are
  determined by the contract, with due regard to
  existing practices.
• Model PSA provides an option to use R-Factor to
  determine percentage shares of the parties.
• R-Factor (R All revenues / all recoverable
  costs)
• (R1 1-1.5 1.5-2 2-2.5 parties shares
  sliding scale)

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CONTRACT MAY PROVIDE FOR INTERNATIONAL DISPUTE
RESOLUTION

• 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.

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PIPELINE

• PIPELINE defined in the Petroleum Law
• Main Pipeline is defined as an engineering
  facility consisting of the main (linear) part of
  the pipeline systems and associated on-land
  facilities, communications and equipment
  designated for transportation of Petroleum from
  the place of production (treatment) to the place
  of transfer to other transportation, refining or
  consumption facilities

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• PIPELINE OWNERSHIP
• The Main Pipeline may be constructed, financed,
  operated, and maintained by a specially
  established company, the owners of which may be
  the Government, Contractors, private investors or
  a combination thereof.
• Pipelines other than the Main Pipeline (e.g.
  gathering systems) are part of immovable assets
  of the project.

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• Pipeline Tariffs
• The company which constructs the pipeline may
  set and charge a transportation tariff for its
  use

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FOREIGN CURRENCY

• - Foreign Party is entitled to maintain offshore
  bank accounts to hold only the proceeds of sale
  of Foreign Partys entitlement share
• - No restriction on borrowing of hard
  currency by Foreign Party
• - Revenue from sale of Foreign Partys
  entitlement share in petroleum is exempt from any
  future conversion requirement

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TRANSFERABILITY

• 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

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CONTRACT STABILITY

• 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.