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STATEMENT OF PRINCIPLES ON COMMERCIAL MATTERS. Statement of Principles on Commercial Matters Introduction During the last five years the industry has.

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Presentation on theme: "STATEMENT OF PRINCIPLES ON COMMERCIAL MATTERS. Statement of Principles on Commercial Matters Introduction During the last five years the industry has."— Presentation transcript:

1 STATEMENT OF PRINCIPLES ON COMMERCIAL MATTERS

2 Statement of Principles on Commercial Matters Introduction During the last five years the industry has seen a consolidation of both E & P companies and service providers This industry consolidation has led to a concentration of purchasing power on the part of E & P procurement departments There has been significant movement of risk towards geophysical contractors and service providers, coupled with overcapacity in a weak market,resulting in poor financial performance of the Geophysical Companies. Under the leadership of its commercial committee, IAGC has adopted a series of Statements of Principles that represents the consensus of the geophysical industry

3 Statement of Principles on Commercial Matters These Statements of Principles are offered to IAGC members to be used as appropriate, on a voluntary basis, company by company, in the contractual process

4 I-Contracting for Geophysical Data Acquisition Services Ethical Conduct in Negotiations (SOP 1) Issues Full disclosure of material information e.g survey area, government regulation, community issues, crew experience/qualifications, equipment capabilities etc Honest open and professional working relationship by both/all parties No negotiating tactics by either party that misstate that “all other parties” have accepted a particular term or condition

5 I-Contracting for Geophysical Data Acquisition Services Ethical Conduct in Negotiations (SOP 1) Principles Willingness by both parties to allocate risk to the party responsible for the creation of the risk Full material disclosure by E & P companies during request for bid process (updated as necessary) on climate/weather, government regulations, community opposition, marine mammal protections etc, backed by a warranty that such disclosure has been made Full material disclosure by geophysical contractors on availability and capability/skill/experience of vessels, equipment and personnel to be used on seismic crews

6 I-Contracting for Geophysical Data Acquisition Services Ethical Conduct in Negotiations (SOP 1) Principles cont. E & P negotiators must not knowingly make false/misleading statements that one or more of a contractor’s competitors have accepted a contractual term or condition A contractor may attempt to confirm the above: - orally or in writing from E & P company - request specific information from E & P company regarding existence, nature, extent of any concessions made with competitors - contact the competitor(s) solely to verify the factual information disclosed by the E & P company Note: Contractor and competitor may not agree to fix common positions to any particular contract provisions in connection with verification of factual information

7 Interference by Local Population (SOP 2) Issues Seismic operations in inhabited areas present opportunities for indigenous groups to perform theft, sabotage or physical/violent threats. Resultant effects to the seismic crew can be damage or HSE related Contract must clearly partition respective responsibilities between contractor and client ranging from good management of local community relations to financial consequences Organized action groups exist both locally and internationally. Conditions have seldom adequately accommodated the adverse impact to the geophysical contractor and the turnkey related contract has often been misused where risks have not been able to be quantified at the bid stage. Examples: Ecuador, Nigeria, Indonesia

8 Interference by Local Population (SOP 2) Principles Interference by local population is classified as exploration risk and the responsibility should be with the client. The contractor should be covered in the following areas: – costs of negotiation/compensation paid to local population – standby due to interference – Early termination/demob. – term component for payment vs turnkey – loss/damage to equipment

9 Force Majeure (SOP 3) Issues Defined as any unpredictable event beyond reasonable control of client and contractors which prevent/delay execution of contract Often delay occurs on force majeure declaration by the client exposing contractor to HSE risks and economic losses Essential that client fully cooperates and that contract terms clearly define force majeure declaration procedures Disruption by 3 rd party direct action groups does not constitute force majeure (i.e. predictable and manageable) Examples: Assam – armed separatist groups Peru – seismic drilling crew taken hostage

10 Force Majeure (SOP 3) Principles Fair compensation provided to contractor in 3 main areas in contractual terms: 1. Client cannot prevent a fair declaration of force majeure by the contractor 2. Observation period must be clearly defined and conditions clear for resumption of work 3. If contract cannot be resumed after observation phase, either party can terminate with contractor compensation for all costs, plus demobilization and early termination fees

11 Exclusion Zones/Exceptional Risk Operating Distances (SOP 4) Issues Geophysical contractors increasingly required to operate in 3 rd party or client operated production installations and other near obstruction areas Need for seismic operations near-obstruction/production facilities increases with repeat 3D or time lapse (4D) seismic Important that IAGC advise its membership regularly and E & P community on this issue since liabilities can be significantly greater than the value of the seismic contract (e.g. in-sea seismic equipment valued at US$30-45m; contractual value of marine seismic survey revenue US$1-18m)

12 Exclusion Zones/Exceptional Risk Operating Distances (SOP 4) Principles Principles already recognized by various authorities in the form of operational standards and safety zones: – IAGC advisory distances and procedures for land based seismic – UKOOA guidelines referencing offshore safety division of UK Health and Safety Executive, prohibiting vessels entering 500m zone around an installation without permission from authorities and permission and control of the Offshore Installation Manager (OIM) (NB: These UKOOA guidelines were designed for rig supply vessels, rig tenders etc, not seismic operations which carry far greater risk)

13 Indemnities – Exclusion Zones cont… (SOP4) Even under these principles, geophysical contractors should not enter into exclusion zones except after careful consideration of HSE and operational risks and ascertaining that pricing, terms, conditions and liabilities reflect an appropriate risk-reward ratio When operating outside of the defined exceptional risk zone, the IAGC SOP for indemnities (SOP 6) should govern allocation of liability: i.e. - Knock for knock principle between contractor and client - at law principles to 3 rd parties

14 Indemnities – Exclusion Zones cont… (SOP4) Where client specifies by contract that contractor should enter exceptional risk zone, client and contractor should mutually define exclusion zone taking into account all pertinent factors. Responsibility for correctly defining the exclusion zone and all associated costs shall remain with the client, including any liability associated with erroneous data regarding location of surface/subsurface facilities Once defined, if the client directs contractor to operate within the exclusion zone, client should bear risks for all liabilities to client’s, contractor’s and 3 rd party’s personnel and owned/operated equipment including negligence of indemnified party

15 Indemnities – Exclusion Zones cont… (SOP4) Once inclusion zone is defined, if contractor stays inside without specific instructions by the client, contractor assumes liability for contractor’s and third party personnel and equipment up to a maximum liability equivalent to contract value.

16 Insurance (SOP 5) Issues Recent past has resulted in attempted additional risk transfer from client to contractor, by the argument that insurance cost is included in the contract rates Many risks are immeasurable or uninsurable or under-insured, even though client states that contractor “will be indemnified, only to extent not covered by contractor’s insurance” Insurance can result in inappropriate allocation of risk since there is no guarantee that there is coverage for all aspects of a liability throughout the contract term Risk of loss between client and contractor should be allocated in the liability and indemnity sections of the contract. Insurance is only ONE mechanism of risk financing and should not be a criteria for accepting risk

17 Insurance (SOP 5) Principles Contract liability clauses and insurance clauses should be kept as two distinct and separate items Insurance objective is to ensure liability/indemnity provisions accepted by a party are fulfilled in the event that property damage or bodily injury occurs Liability/indemnity clauses should allocate exposure to risk in proportion to the parties relative risk/reward ratio, without regard to insurance Once allocation of risk is defined, insurance clauses should define minimum insurances required so that each party can cover assumed contract risks

18 Liabilities & Indemnities (SOP 6) Issues Geophysical operations have increased recently in more developed, dynamic and volatile environments where large potential liabilities can occur that are far greater than contractual rates reflect. Geophysical contractual liability policy based on mutual Hold Harmless in respect of contractor group and client group. Recent terms and conditions from E&P Companies, attempt to shift risk exposure to contractor for: a. Unlimited liability vs contract value b. Loss exposure for catastrophic risks (often unmeasurable or uninsurable) c. Increasing number of 3 rd parties outside of client indemnity obligations

19 Liabilities & Indemnities (SOP 6) d. Nullifying mutual Hold Harmless policy in event of gross negligence or willful misconduct 3 rd Party liability can be limited by making each party liable for its contractors/subcontractors, where control can be exerted. Clients hold Harmless Obligation should extend to its co- venturers’ and “other contractors’” property and personnel in the area of operations, where the client has ultimate control

20 Liabilities & Indemnities (SOP 6) Principles Contractor should assume responsibility for measured risks associated with its operations in line with risk/reward ratio over which it has control Contractor should not be liable for punitive indirect, consequential, pollution, reservoir related or other catastrophic risks that are outside of the contractor’s control 5 Major points 1.Liabilities/indemnities within normal areas of operations (not exclusion zones) should be based on knock-for-knock principles, i.e. Mutual Hold Harmless regime, without regard for cause

21 Liabilities & Indemnities (SOP 6) 2.Both contractor and client should accept liability claims made by 3 rd parties, to the extent of their negligence or fault (contractor liability fixed to a limit of contractual remuneration) 3.Client should indemnify contractor fully against loss/damage to reservoir or formation, damage or injury from pollution originating from a source other than contractor’s equipment 4.Neither party is liable to the other for punitive, incidental or indirect damages or loss of profits or business interruption 5.Any 3 rd party property in possession/control of the client should be covered by client’s indemnity Hold Harmless provision to contractor

22 Marine Mammals (SOP 7) Issues Growing concern about impact of acoustic emissions on marine mammals (general shipping, naval active sonar, scientific investigations using sound, hydrocarbon E & P activities) Marine seismic surveys are main target for scrutiny/regulation by all regulating bodies Compliance to restrictions/regulations have direct financial impact. Major importance for IAGC to provide context for extra costs required for marine mammal protection and equitable incorporation into contract 1996 Contractors conducting surveys in UKCS agreed to operate under Joint Nature Conservation Committee (JNCC) guidelines – Marine Mammals Observers (MMO) – “Soft start” ramp up operational procedures

23 Marine Mammals (SOP 7) Recently, more severe/expensive guidelines e.g. Australia – additional aerial surveys and stand off vessels, according to mammal behaviour (feeding, breeding, migrating etc). US – Mineral Management Services (MMS) pushed by environmental groups to restrict entire areas, shut down at night, limits to number of contractors in specific areas etc resulting in significant additional costs to survey

24 Marine Mammals (SOP 7) Principles Geophysical contractors should meet all Marine Mammal Protection (MMP) requirements specified by government agencies Client responsible for making contractor aware of MMP requirements (during tender process) Additional costs will be borne by client Additional operation time spent meeting MMP chargeable to client (including delays, suspension etc) at standby rates If suspension time exceeds agreed contract period, contractor’s vessel authorised to leave work site without liability to client

25 Rights of First Refusal – RFR (SOP 8) Issues Contractors, under certain circumstances, grant limited RFR to a client over seismic resources pending formal award During the RFR period the management process of work needs to be addressed on an equitable basis for both parties Issues that arise in this process when a client demands a project on competitive tender basis are: – Contractor must notify client that the seismic resources contained in the bid are already subject to an RFR – Any limited or restricted time periods of RFR would need to be clarified to other potential clients for the tender availability period (typically 90 days)

26 Rights of First Refusal – RFR (SOP 8) – Some clients demand an RFR as a condition of tender, in which case communication to other clients involved in a tender process would be necessary Granting an RFR could be especially restrictive in time concentrated seismic markets, license round awards, seasonal constraints (I.e. North Sea, Arctic etc) where generally a “first come first served” approach is used

27 Rights of First Refusal – RFR (SOP 8) Principles An RFR should not generally be accepted as a requirement/condition for tender submission An RFR should be applied in a post tender award process An RFR should reflect fairly and explicitly in compensation terms to the contractor the value that it affords to the client An RFR should be defined as a “first option” rather than a firm commitment The RFR should be on a strictly limited timeframe, precise terms for the RFR client are needed for a response deadline (typically 1-2 days)

28 Rights of First Refusal – RFR (SOP 8) RFR should be two-way i.e. client should not be able to award work to other contractors Contractor should, as an acceptable part of the bidding process, have the right to refuse work, within a reasonable time period following a firm offer

29 Termination (SOP 9) Issues Many clients believe they have rights to terminate seismic contracts “for any reason” and do not always recognise a contractor’s prior commitment or commercial exposure factors. These factors can include: – Withdrawal from other markets – Investment in equipment/materials, Mob costs, sub contracting – Demob costs – Opportunity cost of other surveys and idle resources

30 Termination (SOP 9) Termination is typically under two factors 1. With cause: - Contractor default e.g. failure to remedy within specific timeframe, late mob., equipment failure, insolvency, breach of law or contract terms, performance, HSE non compliance, suspension of work etc - Force majeure – applies to both parties - Client default – e.g. failure to meet payments, insolvency etc

31 Termination (SOP 9) 2. Without cause: - typified in North Sea Crine initiative (General Conditions of Contract for Offshore Services – June often restricted to payment for “services to date” plus under-specified “discretionary payment terms” e.g. where reasonable costs are agreed between the parties

32 Termination (SOP 9) Principles – With Cause Contractors default restricted to clearly specified material breaches Allowance to remedy breaches in reasonable time-frame Client not entitled to take possession of contractor’s resources in the event of material breach Contractor’s liability for material breach limited to additional cost to client of work performed by 3 rd party, with a cap based on original charges had contractor completed work No application of the imposition of “liquidated damages” following termination

33 Termination (SOP 9) Principles – With Cause Under force majeure, both contractor and client have rights to terminate (contractor compensated for time lost) Termination for late Mob excludes factors outside contractor’s control (e.g. weather, pre-communicated extensions of prior surveys etc) Contractor can terminate if client fails to meet payment terms or becomes insolvent Payments should be made up to termination and demob costs considered

34 Termination (SOP 9) Principles – Without Cause Termination without cause should generally be excluded from contracts due to commitment by contractor of significant resources If term without cause is insisted by client, contractor terms need to specify – Agreed notice period (or payment in lieu of) – Payment of outstanding sums for work to date of termination – Payment of termination fee equivalent to value of contract (or less revenue received to termination date) – Termination fee should also cover consequential costs to contractor – Consideration to variation of scope of work in termination process

35 3 rd Party Direct Action (SOP 10) Issues Increase in activities by 3 rd party direct action groups with disruption and potential hazard to safe conduct of seismic services Many clients assert these activities constitute an act of force majeure Contractors disagree, since activities are premeditated, potentially controllable, not indiscriminate directed at activities/interests of the E & P company client

36 3 rd Party Direct Action (SOP 10) Consequently, responsibility to determine legal/other steps to curtail activities lies with client with no liability for performance delay or HSE related impact to the contractor Examples 1997, 1998 – Greenpeace activities west of UK and Alaskan Beaufort Sea. Highly dangerous tactics with people placed in water in front of seismic vessel and mounting or removing in-sea seismic equipment Atlantic margin Joint Industry Group (AMJIG) in 1997 published “Principles for Interaction with 3 rd Party Pressure or Direct Action Groups During Geophysical Surveys” and contractors include HSE plans, guidelines to protect welfare of crew and equipment Most client geophysical contracts do not include specific provisions for disruption of services

37 3 rd Party Direct Action (SOP 10) Principles Contract should recognise that 3 rd party direct action group disruption is exploration on risk and contractor is fully indemnified Disruption of survey is not force majeure Contract should include: – No liability to contractor for performance delays – Contractor compensated for resultant standby – Provision for any associated cost recovery or extension time – For prolonged disruption, contractor has ultimate right of termination

38 3 rd Party Direct Action (SOP 10) In the event of activities, contractor notifies client in writing, as soon as practical, and both parties meet to discuss appropriate measures

39 Weather Induced Downtime (SOP 11) Issues In last years, 3D seismic is considered an essential component in exploration, development and production of hydrocarbon reservoirs With 3D, dramatic increases occurred in source receiver channels and position systems for both offshore and onshore systems (e.g. up to 16 streamers, up to 10,000 meters - marine, up to 20-30,000 Channels - land) Technical and stability performance of this increased seismic equipment is negatively impacted by adverse weather conditions (e.g. sea state, desert sand storms, high winds, rain, lightening etc)

40 Weather Induced Downtime (SOP 11) Safety related aspects or equipment deployment, retrieval and maintenance significantly impacted by adverse weather If contractual technical and HSE specification are not met, data acquired is rejected by client. In all instances, operations will be halted when weather conditions act to increase risk to safety of crew and equipment Many of these technical and safety weather issues are applicable to 2D as well as 3D surveys Main issue relates to financial impact and consequent payment of seismic crew costs when weather prevents acquisition in compliance with contract technical and HSE specifications

41 Weather Induced Downtime (SOP 11) Principles Contractors are responsible for contract technical and HSE specifications within their operational control Circumstances outside contractor operational control that prevent data acquisition to contract technical/HSE specifications are considered exploration risk and should be compensated by client – these include adverse weather conditions permitting, drilling, surveying, equipment layout, mobilisation and maintenance Weather downtime is defined as those periods where weather conditions (including atmospheric) result in a halt to operations due to impact on data quality and/or operational safety

42 Weather Induced Downtime (SOP 11) Weather downtime should start either when conditions cause disruption to essential activities and continue until those activities can be effectively resumed After the start of acquisition, weather downtime should start at the last accepted shot-point and continue until the next accepted shot-point including time required to repair weather related damage Weather downtime should be charged at contract operational standby rates


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