A number of key terms are critical for conducting contract analysis. ResourceContracts.org provides a growing glossary that can help you navigate the language of the contracts.
Arbitration is a private form of binding dispute resolution conducted before an independent tribunal. An arbitration hearing typically involves the use of an individual arbitrator or a panel of three arbitrators, referred to as a tribunal. The tribunal is the equivalent of a judge in a court hearing. However, the arbitrators are selected by the parties, either directly or through a third party or institution. The tribunal’s powers and duties are fixed by the terms of the parties’ agreement (including any arbitration rules which have been adopted) and the national laws that apply to some of the procedural aspects in each case.
The most popular rules for ad hoc arbitrations are the (“UNCITRAL Rules”). UNCITRAL stands for the United Nations Commission on Trade Law. It should however be noted that it is possible to have an institutional arbitration center be the appointing institution when using any ad hoc arbitration rules such as the UNCITRAL Rules.
The process by which ore is refined to create a higher value product. This is done by separating the valuable material of an ore from the waste material using a range of techniques including crushing, grinding, magnetic separation, and flotation.
Community Development Agreement
A Community Development Agreement or CDA is an agreement between an investor and a community that provides a mechanism through which the benefits of an investment project can be shared directly with local communities and other project-affected stakeholders. CDAs are also sometimes known as benefit sharing agreements.
An agreement made between a host government and an investor, usually through a locally-incorporated entity, which allows for the construction, development and operation of a particular investment project.
A study conducted prior to the award of an investment to verify whether the proposed project is well-founded and is likely to meet the needs of its intended users/ beneficiaries. The study should take account of policy, technical, economic, financial, institutional, management, environmental, socio-cultural, and gender-related aspects.
Free, Prior and Informed Consent (FPIC)
The right of a group of people, usually an indigenous community, to be consulted with and to provide or withhold their consent, prior to the establishment of any project that stands to directly affect their access to lands, territories or resources that they have traditionally owned, occupied or used. Obtaining a community’s FPIC involves governments or companies engaging with local communities to agree together on how, or whether, projects are implemented. It is also a crucial part of gaining a social license to operate.
A government must also obtain the FPIC of indigenous peoples before adopting and implementing legislative or administrative measures that may affect them.
Any consent obtained is to be ‘free’, occurring without coercion, intimidation or manipulation; it must be obtained sufficiently ‘prior’ to the commencement of the project or policy; and it should be given after the group is sufficiently ‘informed’ about all aspects of the project, including potentially adverse effects, through the provision of information in an accessible and culturally appropriate format.
Environmental Impact Assessment
An Environmental Impact Assessment (EIA) is an assessment and evaluation of the environmental impact of a proposed investment project.
An EIA "aims to predict environmental impacts at an early stage in project planning and design, find ways and means to reduce adverse impacts, shape projects to suit the local environment and present the predictions and options to decision-makers."
Source: Convention on Biological Diversity: What is Impact Assessment
An extractive industries term to describe the search to identify areas that may warrant examination for oil and gas or mineral discoveries, including geological, geophysical and topographical surveys and drilling exploratory or prospective wells. The aim of exploration is to discover commercial deposits.
The compulsory seizure of private property by, or compulsory surrender of private property to, a government authority, ostensibly for the public benefit.
Extractive Industries Transparency Initiative (EITI)
The EITI is a voluntary global standard to promote and support improved governance in resource-rich countries through the full publication and verification of payments by companies and revenues to governments from the oil, gas and mining sectors.
A grievance mechanism is a routinized process through which an individual or group of people can bring complaints concerning any aspect of an investment and seek a remedy. Grievance mechanisms can be operated by the State, or by other entities, such as investors or financiers, and can be judicial or non-judicial in nature.
Human Rights Impact Assessment
A human rights impact assessment (HRIA) is a "process to measure the gap between the human rights commitments of the state and the actual enjoyment of these rights by rights-holders. By calling on the participation of all stakeholders involved in the investment project, the [HRIA] seeks to identify the rights that are not respected, or indications that they might not be respected in the future, so that satisfactory solutions can be found."
Source: Rights & Democracy: Getting it Right: Human Rights Impact Assessment Guide.
International Oil Company (IOC)
A private sector oil company with operations in many countries.
Refers to measures that require foreign investors to use a certain proportion of local resources when producing goods or providing services. It includes local ownership requirements, local employment, skills training requirements, local procurement requirements, and technology transfer requirements. Local content measures are a type of performance requirement.
London Metals Exchange
London Metals Exchange is the “world center for industrial metals trading and price-risk management. More than 80% of global non-ferrous business is conducted here. Its prices are used as the global benchmark.”
Source: The London Metals Exchange website
Net Present Value
The net present value of a project is essentially the value in today’s terms of future incomes and expenditures; it is “a method used in evaluating investments, whereby the net present value of all cash outflows (such as the cost of the investment) and cash flows (returns) is calculated using a given discount rate, usually the required rate of return. An investment is acceptable if the NPV is positive. In capital budgeting the discount rate used is called the hurdle rate and is usually equal to the incremental cost of capital.”
Refers to gas reservoirs containing only natural gas and no oil.
Mining Development Agreement
A type of a concession agreement that governs the relationship between the government and a license holder for the exploration of a certain area of land for minerals or for the mining of minerals in a certain area in exchange for royalties, taxes and other obligations.
For more on Mining Development Agreements, see: Mining Contracts: How to read and understand them (2013)
Periodic Review Clause
A term in an investment contract, which provides the circumstances under which the parties to the contract can revisit the terms of the deal.
For sample periodic review clauses in a mining contract, see the MMDA’s model periodic review clause.
A term generally used to refer to both oil and gas, as both are hydrocarbon compounds and both are often found in the same location.
“The commercial exploitation of oil and gas found in an authorized contract area, specifically the operation that brings hydrocarbons to the surface and prepares them for processing, but more generally may be considered to include all incidental activities, including the design, construction, installation, operation and maintenance of any plant and infrastructure and the processing, stockpiling, transportation, export and sale of products. This phase may also be referred to as exploitation or development.”
Contracts commonly used in the petroleum sector between an investor and the host state or a national oil company (NOC), which entitle the host state to a share of the physical quantities of the petroleum produced. Such an agreement typically allocates a proportion of the hydrocarbon resources to reimburse production costs, then splits control of the remaining “profit” oil or gas between the operating group of companies and the government/NOC. The government/NOC either sells its portion of oil or gas on its own, or takes cash payment from the operating companies in lieu of physical delivery of the commodity.
Source: Natural Resource Governance Institute: Oil, gas & mining fiscal terms
A public-private partnership (PPP) is, broadly speaking, an arrangement between the public and private sectors, whereby some public sector services are provided by the private sector with clear agreement on the shared objectives for delivery of the public infrastructure or public services. Such an arrangement usually requires the private sector party to design, finance, build or rehabilitate, operate, and maintain the infrastructure required to provide the public service.
Source: PPIAF: Overview of PPPs
Operational Expenditure (OpEx)
Operational expenditure is the cost of operating a fixed asset. For example, the cost of running a mine or a power plant once it has been constructed.
In the context of the extractive industries rent is the difference between revenues and the cost of extraction. The concept is particularly important given the sharply varying costs of production of a commodity that is sold at a set market price. Rents should be collected by government institutions and channeled through the budgetary process so that they can become productive public assets and contribute to sustainable development. However, this is often not the case in the extractive industries where there can be a large difference between rent and a normal rate of return on capital, or profit, which leads to rent-seeking behavior.
Source: World Bank: Rent to Riches: The Political Economy of Natural Resource-Led Development (2012).
Payments made to the host government to compensate it for granting an investor the right to extract (and purchase) a non-renewable natural resource. Most royalties are either ad valorem (based on a percentage of the value of output, e.g., 10% of the value of the minerals produced) or per unit (based on a fixed amount, e.g., $10 per ton).
Royalties should be assessed, not only on the basis of their percentage or per-unit value, but also on the basis of the market price and value of the resource.
Source: Natural Resource Governance Institute Oil, gas & mining fiscal terms
Social Impact Assessment
A Social Impact Assessment (SIA) "includes the processes of analysing, monitoring and managing the intended and unintended social consequences, both positive and negative, of planned interventions (policies, programs, plans, projects) and any social change processes invoked by those interventions. Its primary purpose is to bring about a more sustainable and equitable biophysical and human environment."
A clause in a contract between an investor and a host state that addresses changes in law in the host state during the life of the project. There are three broad categories of stabilization clauses:
- Freezing clauses specify that the law that is in effect on the day that a contract is signed will apply to the project for the life of the project notwithstanding any subsequent changes in law.
- Economic equilibrium clauses require an investor to comply with new laws, but to be compensated by the host state for doing so. Compensation can be in the form of rebates, adjusted tariffs, an extension of the term of the project, or tax reductions, for example.
- Hybrid clauses are a combination of freezing clauses and economic equilibrium clauses (IFC Study).
Stabilization clauses are widely used across industries and regions of the world.
The purpose of a stabilization clause is to offer investors – and their lenders – some assurance that the investment will not be subject to unpredictable and costly changes in law – for example, in relation to the level of taxation applicable to a project. However, they may also have negative impacts on the host country by, for example, reducing its ability to maintain flexibility to changing economic and political circumstances. Stabilization clauses should therefore be narrowly drafted and limited in scope and time, particularly in relation to major revenue streams such as royalties, taxes, duties, and major fees. Stabilization clauses should also not freeze environmental, labor or other similar rules.
Transfer pricing refers to the mechanism by which cross-border, intra-firm transactions are priced. It occurs, for example, where a locally-incorporated mining company operating in a host country procures goods or services from another company in the same multinational group.
Transfer pricing per say is not illegal. What is illegal, or abusive, is where the intra-company provision of goods or services is not conducted at a fair (or market price) value, and is thereby used as a means for a company to lower its tax burden in the host state.
“Unsolicited proposals are not requested by a government and usually originate within the private sector. These proposals typically come from companies with ties to a particular industry—such as developers, suppliers, and financiers—that spend their own money to develop basic project specifications, then directly approach governments to get the required official approvals.”
Source: PPIAF’s working paper on Unsolicited Infrastructure Proposals
Income tax deductions on dividends and salaries. Withholding taxes are collected at the point of income disbursement and are paid directly to the State by the collecting entity.