The effect of non-fiscal clauses in Host Government Instruments on the Fair Market Value of upstream opportunities

We identify nine categories of clauses in Host Government Instruments (HGIs, ie licences, concessions, production sharing contracts (PSCs), etc.) that potentially affect the Fair Market Value of petroleum exploration and production rights, in addition to the clauses quantifying the fiscal terms. The categories comprise state participation, performance bonds and penalties for failing to perform minimum work programmes, local content, decommissioning, natural gas terms, stabilization, assignment and change of control, renewals and extensions and governance issues. For each category, we review and summarize global practice in the top 50 oil-producing countries. We quantify our analysis using statistics from a data set of 55 representative HGIs, including contemporary alternative types for five countries. The age of each HGI used varies, guided by the history of oil production in each country. Texts are available for 53 HGIs and published summaries are available for the other two. The discussion provides a checklist for use in negotiating new HGIs or performing due diligence for transactions involving existing HGIs. Our choice of representative HGIs and our characterizations of some clauses are both in part subjective. Nevertheless, we suggest the statistics provide a useful guide to trends in global practice.