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Client Update: Changes to Vietnamese production sharing contract

17 May 2013

In brief: A new standard form of production sharing contract containing significant changes has been issued by the Government of Vietnam for use in Vietnam's upstream oil and gas sector. Partner Marae Ciantar (view CV), Senior Associate Theresa Tayabali and Associate Ngoc Anh Tran report.

Background

Under Vietnam's Law on Petroleum, various forms of contracts relating to upstream oil and gas operations may be entered into with PetroVietnam. The most commonly used form of contract for exploration and production is a production sharing contract (PSC).

All PSCs must comply with the model form of contract issued by the Government of Vietnam, except in certain limited cases. A standard-form of PSC was first prescribed by the Government in 2005, by Decree No.139/2005/ND-CP (Decree 139). On 22 April 2013, the Government issued a new standard-form of PSC (New Model PSC), by Decree No.33/2013-ND-CP (Decree 33).

Decree 33 replaces Decree 139, and comes into effect on 8 June 2013. It will apply to all PSCs signed after 8 June 2013, except where the Prime Minister has approved basic economic, technical and commercial terms (bid terms) for the applicable block before that date.


Key changes

The New Model PSC contains a number of important changes from the previous model PSC. Some of these changes reflect regulatory developments that have occurred in Vietnam since Decree 139 was promulgated in 2005, including an amendment to the Law on Petroleum in 2008, and the issuance of new laws and regulations relating to royalties, corporate income tax and other taxes and charges.

Fiscal terms: A number of revisions have been made to the fiscal terms under the New Model PSC, including new obligations to pay a signature bonus, incremental production bonuses, an environmental tax and a profit oil surcharge. Further, certain taxes, fees and expenditure are no longer tax deductible. The New Model PSC also increases the number of fiscal terms that may be negotiated by the parties, subject to compliance with the bid terms approved by the Prime Minister.

PVN participation: There have been several amendments to the provisions relating to PetroVietnam's participation as a contractor party. These include a new obligation to 'carry' PetroVietnam from the commencement of the PSC if it participates as a contractor party from that date, and a change to the contractor's entitlement to recover carried costs where PetroVietnam elects to participate as a contractor party following a commercial discovery.

PVN pre-emptive rights: If a contractor party proposes to assign a participating interest to a third party, PetroVietnam must now exercise its statutory pre-emptive rights in accordance with a prescribed process. Previously, there was no prescribed process or timetable, which created considerable uncertainty for contractor parties seeking to assign interests. A 'change of ownership structure' of a contractor party is also now deemed to be an assignment, triggering PetroVietnam's pre-emptive rights and the requirement for Government approval.

Domestic supply: The New Model PSC increases the domestic supply obligations of a contractor, including a requirement to prioritise the sale of all crude oil (not just in emergency cases, as under the previous model PSC), and sell a portion of natural gas, within the Vietnam market on prescribed terms at the Government's request.

Contractor liability: The potential liability of contractors has been increased under the New Model PSC, due to an expanded concept of 'Wilful Misconduct' and an extension of liability to include environmental pollution and other damage arising from a contractor's omission or negligence.

Termination: The New Model PSC introduces additional termination rights for PetroVietnam, including where a contractor fails to commence development operations or production within prescribed periods. The New Model PSC also elaborates on what constitutes a 'serious breach' entitling PetroVietnam to terminate the PSC.

Stabilisation of rights: The stabilisation provisions have been narrowed, now applying only to adverse changes of law relating to certain taxes. This is a particularly significant change, given the importance of stabilisation of rights to contractors, the relative frequency with which regulatory change can occur in Vietnam, and the narrow interpretation of stabilisation rights which PetroVietnam has applied in the past.


Other changes

Other material amendments include extension of the scope of the PSC to cover coal gas, and revision of provisions on permitted extensions of the exploration period, procurement and tendering, abandonment, the management committee and employment.


Conclusion

Vietnam has one of the more transparent contractual regimes for oil and gas operations in Asia, with a prescribed form of model PSC, which is publicly available, and statutory obligations to comply with its terms subject to limited exceptions.

The New Model PSC has introduced a number of important amendments and new provisions. Some of the amendments clarify the operation of provisions, or align the PSC with the current statutory and regulatory framework for petroleum operations, which is a generally favourable development for all parties. However, a number of the amendments reduce the rights or increase the potential legal and commercial obligations of contractors, and, accordingly, will need to be considered carefully when investing in Vietnam's oil and gas sector.


For further information, please contact:

Marae Ciantar
Singapore,
Bangkok
Ph: +65 6535 6622
Marae.Ciantar@allens.com.au

 

Bill Magennis
Managing Partner - Vietnam,
Hanoi
Ph: +84 4 3936 0990
Bill.Magennis@allens.com.au

 

Anthony Patten
Partner, Sector Leader - Oil & Gas
Perth
Ph: +61 8 9488 3772
Anthony.Patten@allens.com.au

 

Kate Axup
Partner,
Beijing
Ph: +86 10 8515 0250
Kate.Axup@allens.com.au

 

Widyawan
Managing Partner - Indonesia,
Jakarta
Ph: +62 21 2995 1500
widyawan@widyawanpartners.com

 

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