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Lagostim concession: Copy of Oil and Gas Contract with REPSOL/PARTEX

If we were concerned about the contract for the Lagosta concession, for the Lagostim we are even more concerned. In this contract the fee paid per barrel is 0, 10c in the Euro, less 0, 15 c than for the Lagosta concession. We need to keep in mind that Lagostim is the concession closest to REPSOL's Poseidon gas fields in Spain, and the concession that REPSOL has really focused on.

This interpretation is a layman's interpretation and not legal opinion. The appropriate legal opinion should be obtained as soon as possible. The original copies of the contract and its addendum (in Portuguese) are in the attachment section below.

Article 17 - Contract stability (Translation from Portuguese)

Paragraph 1

in case of amendments or changes to prospection, exploration, development of hydrocarbon legislation or regulations, and these having been passed into law at a date later than the signing of this concession contract, and should such a legal dispensation significantly affect its current economic balance which could result in a loss for the concessionary (REPSOL/PARTEX), then the concessionary (REPSOL/PARTEX) shall notify the DGEG about the specific areas of impact as soon as possible.

Under such circumstances, the parties will negotiate possible changes to this contract, acknowledging that the existing economic terms and conditions written in this current contract shall be maintained and shall not be changed.

Paragraph 2

The parties will endeavor to make all the necessary changes and amendments to this contract within 90 days from date of notification.

Paragraph 3

Changes and amendments to this contract SHALL NOT UNDER ANY CIRCUMSTANCES reduce or increase the rights and obligations of the concessionary. The rights and obligations of the concessionary shall be the same that existed prior to any legal dispensation or rules being enacted or passed into law.

Paragraph 4

In the event that the parties fail to reach consensus during the 90 days period, the dispute may be submitted to arbitration under the terms of article 24 of this contract.

 

What does above mean for the Portuguese People? For all of us living in the Algarve?

In paragraph 1, we see that this contract between REPSOL/PARTEX and the Portuguese government can’t be changed if such change affects the BOTTOM LINE of the project. For example, the Portuguese government can’t demand changes to license fees, changes to royalty per barrel or any changes that REPSOL/PARTEX could allege would have a negative financial impact on their earnings.

This is vague and open to serious misuse. But when read together with paragraph 3, we see the extent that the Portuguese government representatives really betrayed the trust of the people.

 

Paragraph 3, clearly states that UNDER NO CIRCUNSTANCES shall the terms and condition reduce or increase the rights and obligations of REPSOL/PARTEX. ... Meaning THIS CONTRACT IS CAST IN STONE!

 

We have to ask, what obscure interests where behind these actions, as this contract clearly appears to have been signed in bad faith by the representatives of the Portuguese Government, which were and are mandated to represent each and every Portuguese citizen rights –  current and future.

We have to ask why the government representatives failed to look after the interests of current and future Portuguese generations when signing this agreement with REPSOL/PARTEX?

 

Article 16 – Surface rental fee (Offshore)

Paragraph 1

During the life of this concession agreement the concessionary (REPSOL/PARTEX) shall pay the state an annual surface rental fee per Km2 (square kilometer) of the concession area as follows:
a)    In the first three years of the initial phase: 15,00€ / Km2 per annum
b)    Balance of years during initial phase: 30,00€ / Km2 per annum
c)    During the 1st year of extension of initial phase: 60,00€ / Km2 per annum
d)    During the 2nd year of extension of initial phase: 80,00€ / Km2 per annum
e)    During the production phase: 240,00€ /Km2 per annum

Paragraph 2

The value of rental fee for the first period of the first year of license shall be based on the proportional payment of rents for remaining months until year end.

 

What does this translate into in real life? 

Using the total license allocated area as being 3207,2477 (we’ve rounded this up), this means that in:

a)    In the first three years of the initial phase Portugal receives: +- 48,000€ per annum
b)    Balance of years during initial phase: +-96,000€ per annum
c)    During the 1st year of extension of initial phase: +-192,000€ per annum
d)    During the 2nd year of extension of initial phase: +-256,00€ per annum
e)    During the production phase: +-769,000€ per annum

But there are a few caveats under Article 3 of the contract. Which states that REPSOL/PARTEX has to return to the state at least 50% of the concession area after 5 years. And after 8 years if they have requested an extension, they have to return to the state a further 50% of the balance.

This means that in fact the above rental fees are in fact much less than what it appears at first glance.
We estimate that the maximum revenue from rentals for this concession received by the Portuguese government is in the region of +-200,000€ (years 2011 – 2015)

Now let’s look at the Research and Exploration phase of the contract (Where we are right now)

 

Article 2 – Research and Exploration

Paragraph 1

Without prejudice to the waiver referred to in article 63 DL 109/94, REPSOL/PARTEX shall during the initial phase, do the following research and development:

  1. First year (balance of 20111/2012): Acquire 400 Km2 of 3D seismic surveys with an estimated value of 2.5 Million Euros.
  2. Second year (2013): Process and interpretation of 3D seismic surveys data. Conduct geological and geophysical studies. And conduct an economic-technical feasibility evaluation.
  3. Third year (2014): Conduct geological and geophysical studies. And conduct an economic-technical feasibility evaluation.
  4. Fourth year (2015): 1 exploration well to be drilled by REPSOL/PARTEX. Estimated value of 5.5 Million Euros
  5. Fifth year (2016): Reassessment of 3D seismic data, incorporating results of the 3rd and 4th year’s exploration wells. Need assessment if another 3D seismic survey needs to be conducted. Conduct geological and geophysical studies.
  6. Sixth year (2017): 1 exploration well to be drilled by REPSOL/PARTEX. Estimated value of 5.5 Million Euros
  7. Seventh year (2018): Need assessment if another 3D seismic survey needs to be conducted before drilling another exploration well in year 8. Conduct geological and geophysical studies.
  8. Eight year (2019): 1 exploration well to be drilled by REPSOL/PARTEX. Estimated value of 5.5 Million Euros

 

What does this means for the Algarve?

It means that from October 2015 until 2019 there will be offshore well drillings annually bringing with it various environmental risks and risks to the tourism industry as tourists became aware of what is happening. Thereafter we will have a full fossil fuels production in operation.

Great! Now much money will Portugal make once production starts?

 

Article 19 - Benefits for Portugal

Paragraph 1

During the life of the initial phase of the contract, REPSOL/PARTEX will make available annually 50,000€ in funding for:

a)    Technology transfer programs
b)    Acquisition or renewal of specialized technical equipment
c)    Preservation of technical data in digital and other formats.

Paragraph 2

REPSOL/PARTEX shall pay every three months a DGEG, an amount of 0, 10 € (ten Euro cents) for each barrel of oil produced quarterly. …

Paragraph 3

Conversion of 1 oil barrel = 6000 cubic feet of gas = 1 barrel crude oil

 

Now the real fun starts. So HOW much money will Portugal really make?

Well if our understanding of Article 19, paragraph 1 is correct. Then Portugal is ”borrowing” €400,000 from REPSOL/PARTEX for goods. Not sure what other terms governs that funding process, i.e. what interest is levied, years of repayment, or even the terms and conditions of that funding. On the other hand, REPSOL/PARTEX will be paying during the same 8 years about +- €500,000 in surface license rentals.

And if one looks at the fee of 0, 10 € (ten Euro cents) for each barrel of oil produced quarterly, then the issue really gets interesting.

Let’s see: currently the price of gas is per barrel +- 2, 8 $ which is at its lowest it has been in a very long time. So Portugal would get 0, 10c in the euro per barrel (+- 170 m3 /6000 cubic feet of gas). But full production is not expected to start before 2019. By that time, gas prices would have escalated, but Portugal would still only receive 0, 10 c in the euro per barrel and this price is FIXED for the duration of the production wells (15, 25 or more years) (read paragraph 17 again)

But let’s imagine that REPSOL/PARTEX finds oil as well as gas. Now the picture changes drastically. Currently oil is trading at +- 54$ per barrel, of which Portugal would receive the same 0, 10c in the euro per barrel.

 But that's not all, the industry standard conversion of oil to the gas equivalent is 1 barrel = 5,614 to 5,800 cubic feet of gas. Meaning that in this case Portugal is loosing between 200 and 386 cubic feet of gas per barrel. Now add-up a few billion barrels and that equates to more losses for the Portuguese.

 

Have we Portuguese been sold a rotten tomato?

After reading the contract, we are of the opinion that the Portuguese government representatives failed seriously to act responsibly and to protect the interests which they were elected to protect – these of the Portuguese populations, current and future. As a result we truly believe that this contract should be challenged in a court of law on the basis that the government representatives failed to act in the best interests of the country and its people.

What is your opinion?

 

 Other References:

  1. EU Council adopts directive on safety of offshore oil and gas operations
  2. Offshore oil and gas safety

Comments   

 
+5 # Alexandre Júlio 2015-08-21 22:03
http://www.loc.gov/law/help/crude-oil-royalty-rates/index.php

Procurar tb. relatórios da Ernst&Young
global oil and gas tax guide
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+7 # Paul Rees 2015-08-16 08:58
My opinion is not printable. the oil companies, when they have stopped laughing, can go into full production without any concern for the host country.

The deal can not be changed as this is part of the deal. Has any government in the history of oil exploration ever signed anything so stupid?

This deal must rank among the stupidest in the western world - just ask dos Santos in Angola what he gets, makes you weep.
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