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Industry contracts are becoming mainstream, here’s how to deal with them

Richard Dion
By Richard Dion

Senior Advisor at the CONNEX Support Unit, based in Germany.

Posted on Friday, 9 July 2021 13:37

Abdelmoumen Ould Kaddour, Chief Executive of Algerian state energy firm Sonatrach, and Evan Fuery, Statoil Senior Vice president, sign a Memorandum of Understanding contract in Algiers, Algeria February 26, 2018. REUTERS/Lamine Chikhi

With the launch of the CONNEX-financed Massive Open Online Course (MOOC) on 'Contract Negotiation, Getting a Good Deal: Negotiating Extractive Industry Contracts', those in resource-rich countries and indeed around the world are given an opportunity to educate and enrich themselves in a leading development topic.

Curated by the Columbia Center for Sustainable Investment (CCSI) and the Natural Resource Governance Institute (NRGI), the course brings together leading academic experts and former government officials to share their learnings and experience.

Industry contracts

Long the stomping ground of geeks, nerds and legions of lawyers, these contracts are going mainstream, as they should be. This interest has led to a publicly available database of resource contracts on a global scale. Legal aspects aside, these contracts confront and should provoke strong views about the direction of a country. Some of the major questions involved include:

  • What is the overall benefit a country is looking at? Does it go beyond the fiscal range and if not, where do the trade-offs lie (environmental, social, etc.)?
  • What is the revenue share during “boom” and “bust” years?
  • How long is the tax holiday, if any?
  • What, if any, requirements exist for procuring local goods and services? Or is it just “best efforts”, with no built-in penalties?
  • How is environmental monitoring carried out? Is a neutral third party involved?
  • Are international standards used, i.e. the IFC Performance Standards for environment and social aspects?
  • What does decommissioning look like in 30 years?
  • Which ministry signed on behalf of the government, and were other key ministries involved (justice, environment)?
  • How involved were local communities or the governor of the region? Were they consulted?
  • What are the impacts of technology on a nation’s labour market?

What is wrong with the contracts?

Many of the injustices that we see today can be linked to contracts signed decades ago. The outcome of contract negotiations is particularly important because but the impacts (both positive and negative) can be felt decades down the line. Yet, they are negotiated by governments that are likely in power for only a few years.

In our work, CONNEX has come across mining/energy contracts with the following characteristics:

  • A lease extending far beyond the average 20-30 year range, with local communities not being consulted;
  • Exploration for a mineral with local communities in close distance with no national legislation to handle the mineral’s distinct properties.

Both projects were already signed, leaving very little room for adjustment of the negotiation. Unfortunately, these stories are not anomalies.

The age of the poorly written and/or one-sided contracts has not left us. Despite large improvements, many contracts fall through the cracks and lock in long-term disadvantages for a country, and it is not necessarily the fault of the resource-rich government. On the other side of the table comes a crack team of negotiators, who have quite frankly seen it all. They have negotiated dozens of times, so why shouldn’t there be an imbalance?

Bottom line

The lesson is that when a country has the legal, financial and geological expertise, but is missing the environmental (or any other area of expertise), it should reach out to institutions such as CONNEX, which sources short-term, multidisciplinary confidential advice for requesting governments in emerging markets.

And the situation is not just for resources. It is for the litany of infrastructure and renewable energy projects which are being pitched, designed and negotiated on an ongoing basis.

Whether you believe if the demand is really so high for these natural resources in the coming years (The Role of Critical Minerals in Clean Energy Transitions – Analysis – IEA) or not, we have only one Earth and how we use its minerals should not only help to transition to a more sustainable planet, but those minerals need to bring immediate benefits to current as well as future generations. So, want to effect change? Do the MOOC thing and play an active role in your country’s future.

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