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INTERNATIONAL PETROLEUM TRANSACTIONS IN TURKMENISTAN 2008 Sergei A. Lomako Partner Haynes and Boone, LLP INTERNATIONAL PETROLEUM TRANSACTIONS IN TURKMENISTAN 2008 Sergei A. Lomako Partner Haynes and Boone, LLP Sergei. [email protected] com

TURKMENISTAN - Permanent Neutrality International Cooperation Regional Stability Transition Towards Market Economy TURKMENISTAN - Permanent Neutrality International Cooperation Regional Stability Transition Towards Market Economy

TURKMENISTAN “Strategy of Socio-Economic Transformations in Turkmenistan for the Period until 2030” TURKMENISTAN “Strategy of Socio-Economic Transformations in Turkmenistan for the Period until 2030”

APPLICABLE LAW - International Treaties - Laws of Turkmenistan - Contracts - Laws of APPLICABLE LAW - International Treaties - Laws of Turkmenistan - Contracts - Laws of Foreign States

INTERNATIONAL TREATIES Multilateral treaties [for example: - Membership in International Organizations - Energy Charter INTERNATIONAL TREATIES Multilateral treaties [for example: - Membership in International Organizations - Energy Charter Treaty - Washington Convention (ICSID)] Bilateral treaties

ENERGY CHARTER TREATY - National Treatment or Most Favored Nation - Treatment Compensation in 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

- [Bilateral] Treaty Between Turkmenistan and Great Britain “On Protection of Investment” of 9 - [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

SYSTEM OF TURKMENISTAN LAWS - Constitution - Laws adopted by Referendum - Laws - 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 Gengesh’s

LAW OF TURKMENISTAN Constitution Turkmenbashi Civil Code Investment Laws Law on Subsoil Law on 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

TURKMENBASHI CIVIL CODE - Service Contract - Contract security TURKMENBASHI CIVIL CODE - Service Contract - Contract security

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

INVESTMENT LAWS - Law on Foreign Economic Activities - Law on Investment Activities - INVESTMENT LAWS - Law on Foreign Economic Activities - Law on Investment Activities - Law on Foreign Investment - Law on Concessions - Law on Enterprises

INTERNATIONAL PRIVATE LAW International Standards and Rules - A direct reference in the contract 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.

COMPLIANCE WITH TURKMENISTAN LAW - Activity in Turkmenistan should not contradict Turkmenistan Law - COMPLIANCE WITH TURKMENISTAN LAW - Activity in Turkmenistan should not contradict Turkmenistan Law - Provisions of International Treaties prevail (or “may prevail”) - Government agencies monitor compliance

PETROLEUM LAW Petroleum Law (Law on Hydrocarbon Resources) Presidential Decree 3189 (Competent Body on 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

PETROLEUM DEFINED in the Petroleum Law Petroleum - “Crude oil and Natural Gas as 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”.

TITLE TO PETROLEUM Petroleum in its natural state in or upon the land in 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.

GRANTING OF PETROLEUM RIGHTS Petroleum rights are granted by the Petroleum Agency (before March 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.

ACQUISITION OF PETROLEUM RIGHTS A typical course of action: n Preliminary application by a ACQUISITION OF PETROLEUM RIGHTS A typical course of action: n Preliminary application by a foreign company; n Preliminary negotiations; n Registration of the Foreign Investor with the State Agency for Foreign Investments (SAFI) n Negotiations and execution of PSA or JVA; simultaneously, issuance of a License based on the executed PSA or JVA n Registration of the PSA or JVA with the State Agency for Foreign Investments

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

PETROLEUM OPERATIONS defined in Petroleum Law: “All Exploration and Production Operations and related operations 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. ”

PETROLEUM RIGHTS TYPES OF LICENSES n Exploration License n Production License n Combined Exploration PETROLEUM RIGHTS TYPES OF LICENSES n Exploration License n Production License n Combined Exploration and Production License

EXPLORATION OPERATIONS defined in Petroleum Law: “Geological, geophysical, aerial and other surveys, the drilling 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. ”

PETROLEUM RIGHTS Exploration License nexclusive right to carry out Exploration Operations, valid for up PETROLEUM RIGHTS Exploration License nexclusive 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 (“ 6+2+2” formula)). n“ 6+2+2” formula: law does not provide for changing the 10 -year formula to other combination, e. g. “ 3+2+5” years na commercial discovery in a particular area gives raise to priority right to obtain a Production License in that area.

PRODUCTION OPERATIONS defined in Petroleum Law: “All types of operations for recovery of Petroleum, 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. ”

PETROLEUM RIGHTS Production License nexclusive right to carry out Production Operations in a specified PETROLEUM RIGHTS Production License nexclusive right to carry out Production Operations in a specified area, sell or dispose of petroleum. nvalid for up to 25 years (20 years initially, with the option to extend once for five years (“ 20+5” formula)). n. Does not prohibit “exploitational exploration” (= advanced exploration during the production operations, which can be granted under the contract);

PETROLEUM RIGHTS Combined Exploration and Production License n Exclusive right to carry our Exploration PETROLEUM RIGHTS Combined Exploration and Production License n Exclusive right to carry our Exploration Operations and Production Operations. n Valid for up to 35 years (26 years initially, with the option to extend for nine years, subject to certain requirements) n 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: “ 6+2+2” (Exploration), then “ 20+5” (phase); the form of the Combined License, and the form Instrument of

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

REVOCATION OF LICENSE Revocation of License by the Competent Body in the event that REVOCATION OF LICENSE Revocation of License by the Competent Body in the event that the License holder: n fails to remedy the causes of any suspension within the fixed deadline n is found to have deliberately submitted false information to the Competent Body which materially affected the Competent Body’s decision to issue the License n deliberately delays signing and registering the Agreement or commencing Petroleum Operations n Revocation of license renders the Contract (PSA, JVA)null and void

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

CONTRACT Service Contract - No model form under Turkmenistan law, although quite a lot 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

CONTRACT: PSA and JVA - Petroleum Law, Model PSA and Model JVA were designed 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

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

TAXATION: PSA Contractors and Subcontractors n. Taxes applicable to the Contractor are limited to TAXATION: PSA Contractors and Subcontractors n. Taxes applicable to the Contractor are limited to those set forth in the Petroleum Law n. 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 n. Subcontractors under a PSA may enjoy the same tax regime as the

ROYALTY AND BONUSES nproduction royalty n. Agreement will determine rate (sliding scale, based on ROYALTY AND BONUSES nproduction royalty n. Agreement will determine rate (sliding scale, based on production, quarterly reports) nbonus n. Signing bonus n. Production bonus

CONTRACT: PARTIES’ SHARES Shares of the parties to PSA (and JVA) are determined by CONTRACT: PARTIES’ SHARES Shares of the parties to PSA (and JVA) are determined by the contract, with due regard to existing practices. n. Model PSA provides an option to use “RFactor” to determine percentage shares of the parties. n. R-Factor (R= All revenues / all recoverable

CONTRACT MAY PROVIDE FOR INTERNATIONAL DISPUTE RESOLUTION Petroleum Law (Art. 56 – Resolution of 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.

PIPELINE defined in the Petroleum Law n “Main Pipeline” is defined as an engineering PIPELINE defined in the Petroleum Law n “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

PIPELINE OWNERSHIP n The “Main Pipeline” may be constructed, financed, operated, and maintained by PIPELINE OWNERSHIP n 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. n Pipelines other than the “Main Pipeline” (e. g. gathering systems) are part of immovable assets of the project.

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

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

TRANSFERABILITY “Contractor may assign to a third party all or part of its rights 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

CONTRACT STABILITY In the event of a change in law affecting the balance of 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