Risk Service Contracts in Uzbekistan
On 21 July 2020, the Resolution of the Cabinet of Ministers of the Republic of Uzbekistan No. 448 (the Resolution) was adopted to introduce risk service contracts (RSC) as a new form of contractual arrangements between subsoil users and their contractors. Widely used in the international oil and gas industry for the extraction of hydrocarbons from hard-to-recover and low reserves, RSCs were not known in Uzbekistan.
RSCs may now be utilized by subsoil users – state companies, companies having 50% or more of state shareholding, and companies, where 50% or more of shareholding belongs to companies that have 50% or more of state shareholding.
SELECTION OF A CONTRACTOR
Upon receiving proposals from subsoil users, the Ministry of Energy of Uzbekistan, with the approval of the Cabinet of Ministers of Uzbekistan, forms a list of fields that can be contracted out through RSCs. Each field is then tendered separately.
A subsoil user, holding a license and a mine allotment act for the extraction of hydrocarbons in a tendered field, acts as a corporate purchaser. The Resolution does not establish any limitations as to the jurisdiction of potential bidders. Thus, both Uzbek and foreign companies may participate in competitive bidding. Generally, it is expected that these shall be service companies specializing in the extraction of hydrocarbons.
The term of a relevant tender is set, depending on the time required for the review and analysis of geological and technical data on a tendered field and for preparing a tender proposal. However, this term shall not be less than 2 months. During the proposal preparation stage, the subsoil user shall provide bidders with geological and technical data on the field, upon signing a non-disclosure agreement with the bidders.
Organization of a tender, review of tender proposals and determining a winning bidder is done by a tender commission, which shall include representatives of the Ministry of Energy of Uzbekistan. The Resolution establishes certain general rules and procedures for the selection of a contractor, however, it is not clear how these rules correlate with the general procurement rules set in the Law on Public Procurement.
RISK SERVICE CONTRACT
RSC is defined as a contract agreement, pursuant to which a contractor undertakes to perform works (services) to increase the production of hydrocarbons at its own expense and risk with the right to acquire a part of the share of incremented volumes of hydrocarbons as contractor’s remuneration and compensation of costs. So, all the geological, technical, technological and financial risks related to the implementation of RSC are borne by the contractor and neither the relevant subsoil user nor the Government of Uzbekistan is responsible for their reimbursement.
Once a winning bidder is defined, RSC is concluded between the subsoil user and the winning bidder. The winning bidder, unless it is an Uzbek company, shall establish a wholly-owned subsidiary, which shall act as an operating company.
RSC may be concluded for a term of up to 10 years with possible extension for up to 5 years by mutual agreement between the subsoil user and the contractor. As per the Regulation, RSC may be subject to foreign law.
The Regulation sets a list of the minimal requirements that RSC shall comply with. Hence, there are particular obligations imposed on the contractor with respect to (i) the implementation of measures preventing negative effect on the environment; (ii) the use of modern technologies and effective management of works; (iii) procurement of goods, works and services on a priority basis from Uzbek companies; (iv) employment and training of Uzbek citizens.
OPERATIONS
The contractor does not need to obtain a license to undertake works under RSC. The contractor will undertake works on relevant fields on the basis of mine allotments and licenses for the extraction, processing and sale of hydrocarbons held by the subsoil user.
RSC shall envisage the establishment of an operating committee that shall be responsible for interaction between the subsoil user and the contractor.
CONTRACTOR’S REMUNERATION
The contractor has a right to a part of the incremental volumes of hydrocarbons, which is calculated as the difference between the actual production volume and the estimated base production volume. The estimated base production volume is determined by the subsoil user as the starting conditions for the increase of the hydrocarbon production and is set in the tender documentation.
The contractor’s share in the incremental volumes of hydrocarbons is fixed in RSC. The contractor’s share of gas condensate and oil may either be sold as a raw material in Uzbekistan or processed and sold either in Uzbek markets or exported to foreign markets, whereas the contractor’s share of natural gas may only be sold in Uzbekistan and may partially be used for contractor’s own needs. Any proceeds in local currency received by the contractor from the sale of its share of hydrocarbons may be freely converted into hard currency and remitted to its bank accounts abroad.
