The following are the main terms and conditions of the contractual arrangements negotiated with exploration companies for licenses for offshore blocks.

General Overview

The Production Sharing Agreements (PSA) have been influenced substantially by the legal regime in Jamaica governing petroleum exploration. The legal regime consists of a Petroleum Act which does two primary things; namely vest petroleum resources in the Government and secondly grant exclusive exploration rights to Petroleum Corporation of Jamaica (PCJ). PCJ is expressly allowed to enter into agreements with third party contractors to carry out petroleum exploration and production activities.

Grant of Rights

The PSA grants to the Contractor the right to conduct exploration operations during an initial 5-year period which is divided into two (2) Phases. During Phase 1 the Contractor will, among other things, process existing seismic data and acquire new seismic or undertake airborne gravity tests. At the end of Phase 1, if the results are not encouraging, the Contractor is allowed to surrender the Block and terminate the contract. If it proceeds to Phase 2, then that would involve further studies and a commitment to drill at least one well.

If the Contractor has complied with the terms of the PSA, it will have a right to renew its exploration rights for a further 5-year term but must relinquish, at that time, one-half of the Block. In order to exercise this right, it would have to submit a detailed work programme itemizing the work to be done.

Contractor Default

The Contractor will be required to provide a Performance Bond to protect PCJ against its non-performance under the PSA. During Phase 1, the Bond will be for US$25,000.00 per block. If it goes on to drill a Well in Phase 2, the amount of the Bond will be increased to a higher negotiated sum.

Technical Advisory Committee

Certain technical aspects of the Contract will be administered by a Technical Advisory Committee (“TAC”). The TAC will comprise five (5) members – three (3) of whom, including the Chairman, will be appointed by PCJ and two (2) by the Contractor. The TAC will, among other things, (a) oversee and monitor exploration and production operations; (b) review and approve the Contractor’s exploration work programmes and budget; (c) review appraisal reports on discoveries; and (d) ensure proper accounting of recoverable expenses and appropriate book-keeping.

Environmental Protection

The Contractor is required generally to undertake petroleum operations in an environmentally safe manner. If PCJ believes that the Contractor’s activities are endangering the environment then it may require the Contractor to suspend operations. During the course of acquiring seismic, the Contractor will permit a NEPA observer on board its vessel. Before drilling a well, it must undertake a 2-part environmental impact assessment study. The first part shall be a baseline study and the second, an assessment of the effects of drilling.

The PSA also includes a comprehensive regime for site restoration and the abandonment of a well including the dismantling and removal of offshore structures which must be carried out in accordance with standards prescribed by the Maritime Safety Commission of the IMO. At the end of each year, the Contractor is required to undertake an internal environmental audit of its operations and to make a full report to PCJ and NEPA. PCJ has the right to initiate a post-audit review meeting with the Contractor to discuss the report and to agree on any changes to the Contractor’s environmental plan.

Discovery

The PSA includes a comprehensive regime for the reporting and appraisal of a discovery. In essence, if a discovery is made, it must be reported to the Minister and thereafter to PCJ. The Contractor will then undertake an appraisal to determine whether the discovery can be commercially exploited. If the Contractor decides that the discovery is not commercially viable, PCJ can undertake its own appraisal and if (PCJ) concludes that the discovery is indeed commercially workable, then it can take over and develop the discovery for its own benefit. However, before doing so, PCJ must submit its appraisal report to the Contractor and, within a 3-month period, the Contractor can elect to continue with the venture and develop the discovery subject to paying to PCJ its (i.e. PCJ’s) appraisal cost plus an additional 500% of such costs. If the Contractor elects not to develop the discovery, then the contract will be terminated and PCJ would be at liberty to develop the discovery either on its own or with another contractor. During the course of drilling, PCJ can request the Contractor to drill beyond the Target Depth or to drill-test additional horizons outside the Contractor’s work programme. Any such additional work would be at PCJ’s costs and if a discovery is made during such work, that discovery could be exploited solely by PCJ. However, prior to the appraisal of the discovery, the Contractor could take it over by reimbursing PCJ for its costs and paying an additional sum being 200% of such costs.

Work Practices and Carrying out of Operations

The Contractor is required, among other things, to carry out petroleum operations diligently and in accordance with Good Oil Field Practices. In order to control recoverable costs, all services and materials purchased for petroleum operations in the Block which cost in excess of US$250,000 or its equivalent in any other currency, shall be the subject of competitive quotation unless PCJ agrees otherwise. The Contractor is also required to indemnify PCJ for claims arising out of deaths or personal injury or loss or damage to property arising out of the Contractor’s petroleum operations.

Royalty & Production Sharing

Petroleum recovered from a producing field will be shared in the following order of priority:

• (a) First, royalty of 12½ % (royalty petroleum) to the Government, which is an item that is negotiable. That is, there may or may not be a royalty provision in the Production Sharing Contract.
• (b) Second, the Contractor’s recoverable cost (cost petroleum) - this is designed to cover the Contractor’s exploration and production costs.
• (c) The balance shall be split between PCJ and the Contractor (split petroleum) in accordance with a sharing scale ranging from 30% to 60% (in favour of PCJ) depending on the quantity of barrels of oil or oil equivalent (in the case of natural gas). The PCJ production share will be adjusted downwards (according to a water depth adjustment factor) recognizing the increased costs of operations in deep waters. For example, it the discovery yields say 10,000 barrels per day, PCJ’s production share will be 30% if the discovery is in waters of 200m or less but in waters between 201m and 500m, PCJ’s production share will be 27% (adjusted to 90% of the base share).

In the case of natural gas, there is recognition of the increased costs of exploitation as well as market limitation which will affect commerciality. Accordingly, PCJ’s production share will be further reduced by a gas adjustment factor. It is intended that the Contractor would pay the royalty and production share in cash but provision exists for the Government and PCJ to elect to take both royalty and production share in kind.

The production period is expected to be 20 years.

Taxation

The Contractor and other contractors have been offered the following tax incentives, some of which already exists under the Petroleum (Prescribed Articles) Regulations, 1988:

• (a) income tax holiday for 15 years;
• (b) duty free entry and zero rating for GCT of exploration and drilling equipment, plant, spares and production platform and other equipment;
• (c) remission of income tax on dividend remitted by Contractor for 15 years.

During the early years of production, the Contractor is unlikely to show a profit due to un-recovered exploration and production costs.

The PSA includes a tax stablisation clause which in effect provides that if there is any change in the tax regime which increases the Contractor’s tax burden then a commensurate adjustment will be made to the production sharing ratio.

Valuation & Measurement of Petroleum

The PSA provides a framework whereby petroleum produced from the Block will be valued at competitive international market rates. For royalty and production purposes, petroleum will be accurately measured in accordance with Good Oil Field Practices approved by PCJ. PCJ has the power to test measuring devices from time to time and any inaccuracy will be deemed to have existed from the date of the last testing and adjustments will be made accordingly.

Recoverable Expenses

The Contractor’s exploration and production costs are taken out before the production share and it is therefore important for PCJ to control and monitor such recoverable expenses. There are extensive provisions dealing with accounting and record keeping and the treatment of various items of recoverable expenses for accounting purposes. Provisions exist to preclude double counting and expenses incurred due to the Contractor’s negligence such as clean-up costs where the spill was caused by the Contractor’s negligence. The definitive accounts have to be kept in Jamaica and PCJ has the right to appoint an auditor to audit the Contractor’s books.

Employment and Training

Where possible, the Contractor should employ Jamaican personnel provided that they have comparable qualification and experience. Where qualified non-Jamaicans are employed, PCJ shall render reasonable assistance in obtaining work permits.

In the production phase the Contractor is required to contribute US$100,000.00 to the Petroleum Training and Education Fund. ("Petrofund"). The intent is that Petrofund shall be used primarily for promoting science and technology in high schools.

Jamaican Goods and Services

The Contractor is obliged to give preference to Jamaican goods and services provided that such goods and services are priced competitively in international terms and are comparable in quality. The contract also encourages the Contractor to make maximum use of Jamaican sub-contractors where such sub-contractors can provide services of comparable standard at competitive rates.

Unit Production

It is possible that part of an oil field discovered by the Contractor may lie in another Block over which the Contractor has no exploitation rights. The adjoining Block could be licensed to another contractor or may still be available to PCJ. In such a case, it would be unproductive for the Contractor and the party in control of the adjoining Block to be racing to extract as much oil as possible from the field and accordingly, PCJ has the right to require that if an oil field is under the control of more than one party, that they shall undertake a unitization scheme for the working of the field as a single unit.

Insurance

The Contractor will be required to effect and maintain with financially sound underwriters insurances covering the following risks, namely: (a) pollution liability; (b) public liability, i.e. the death or bodily injury to third parties or loss or damage to third party property; (c) wreck removal and cost of quelling blow-outs and clean up operations following accidents; (d) employers’ liability i.e. death or bodily injury to employees; (e) contractor’s all risk covering loss or damage to plant and equipment on site; and (f) such other risks as may be customary to insure against in accordance with Good Oil Field Practices. In the case of liability insurances, (i.e. pollution liability, public liability and employer’s liability) such insurances shall name PCJ and the Government as additional insured.

Assets

Immovable assets (i.e. fixtures) may not be removed from the Block without PCJ’s consent. Well casings, pipelines and pumps are treated as immovable assets for this purpose. Movable assets such as drilling equipment may be purchased by PCJ on termination of the contract.

Petroleum Data

All petroleum data including core samples, seismic data and the like gathered by the Contractor are treated as the property of PCJ and copies must be delivered to PCJ. However, the Contractor is permitted to license the use of such data to third parties and to retain the license fees until the amount recovered is equal to the Contractor’s cost of acquiring the data. After full recovery of such costs by the Contractor, further license fees shall be shared equally between the Contractor and PCJ.

Termination

PCJ may terminate the contract in certain circumstances including the Contractor’s insolvency or material breach of the PSA which is not remedied within 45 days.

Arbitration

Disputes under the PSA will be settled by arbitration outside of Jamaica and for example, in London in accordance with the arbitration rule of the United Nations Commission on International Trade Law.

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