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The faces of drilling contractors’ clients are changing, and we must learn to adapt to new cultures, business styles and risk management strategies, speakers said during a presentation at the IADC Contractors & Risk Management Conference on 29 October in Houston. Alex Cestero, deputy general counsel-business affairs for Pride International, kicked off the presentation, titled “The Advent of National Oil Companies: Risks, Opportunities, Idiosyncrasies & Practical Tips on Contract Negotiations & Contract Management.”

An increasing percentage of the world’s oil and gas production and reserves are controlled by national oil companies (NOCs). In fact, it’s estimated that by 2005, NOCs had about 50% of global oil production and over 70% of reserves, and “Top 10” lists measuring reserves/production don't include many – if any – independent oil companies (IOCs). “Fundamentally, who you’re dealing with has changed and will continue to change at an accelerated rate,” Mr Cestero said.

When considering operations in unfamiliar, foreign countries, one fundamental question that has to be asked early on is, “Do we want to work where the NOC is taking us?” Issues such as the political climate of the country and the relationship between that country and your home country must be considered. It’s also important to look at nationalizing/privatizing trends, local content requirements and Foreign Corrupt Practices Act compliance, he said.

National oil companies: the new face of drilling contractors

Understand the organization design of the NOC, Mr Cestero urged. For example, when is it the government and when is it not? What’s the board and upper management structure? Does your project need the approval of the national congress/president of the country or just the board of directors/CEO?

Once negotiations begin with the NOC, companies must be adaptable throughout the process, said Kinga Doris, Pride division counsel – Eastern Hemisphere. Although English is most commonly used and generally preferred if the parties don’t speak the same language, there must be sensitivity and flexibility towards the local language and client preference. Never assume the client doesn’t speak English just because they’re negotiating through a translator, she cautioned.

The recently formed IADC Ethics and Corporate Compliance Committee works to foster understanding and compliance with US and international laws, including issues such as corruption, bribery and import/export. At its September meeting, an anti-corruption expert discussed the Foreign Corrupt Practices Act and other anti-bribery regulations. The group will next meet on 16 December. For more information, visit the committee website.

Especially with NOCs, too, keep in mind that their goals and incentives are often different from those of IOCs.

Other practical tips she offered include:

  • • Location: Expect delays when meeting with the client. Understand that simply getting security clearance can be a time-consuming process.

  • • Your project team: Match skill sets and styles to clients’ and bring seasoned travelers when possible. A local “tour guide” can also be helpful.
  • • Relationships are important when making business negotiations, especially in the Eastern Hemisphere. “Ceremonial” meetings that might feel like a waste of time can be opportunities to build relationships, she suggested.

In the actual contracts, many issues must be considered as well, said Derek Anchondo, Pride division counsel – Western Hemisphere. Often, you and your client won’t agree on what the key issues are, but it’s important to take the time to lay them out clearly. “It makes the negotiations a lot easier once you clear the more difficult hurdles.”

You should set aside the fear of offending the client, Mr Anchondo advised. NOCs are smart and sophisticated negotiators who know what it takes to get a deal done. Areas of suggested focus in contracts include termination rights, governing language, payment mechanisms, foreign exchange, etc.

And once the contract is signed, make sure everyone within your company understand the key provisions and immediately begin establishing infrastructure in the country. The latter may encompass entity/branch formation and registration, personnel movement restrictions/requirements, tax issues and imports.

NOCs will continue to dominate our industry and client base, and therefore represent tremendous growth potential and opportunities. Just remember, he advised, when dealing with national oil companies, “you’re not in Kansas anymore.”

 

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