Some aspects of understanding production sharing agreements

Under a production sharing agreement, the state instructs the investor to search for, explore, evaluate, develop, and produce hydrocarbons in the contractual area, and the investor undertakes to carry out oil and gas activities at its own risk and expense.

In the terminology dictionary of each production sharing agreement, the phrase «production sharing agreement» covers the concept of «hydrocarbon sharing agreement, including the annexes that are an integral part of it.

The appendices to the production sharing agreement mostly disclose the details.

For example, an appendix to the production sharing agreement is a five-year work program for the geological study of oil and gas subsoil, including experimental and industrial development of deposits, where the parties of the production sharing agreement considered on a certain number of work titles by type of work.

On the practice, many questions arise, especially how to correctly read production sharing agreements, if the general part of the provisions of the production sharing agreement declares the state's obligation to compensate for the cost of work under the program of geological study and experimental industrial development of deposits, but in the content of the works, a certain work is absent.

So, should we compensate for the cost of «uncoordinated» works according to the appendix or be guided by the general provisions of the production sharing agreement on the comprehensiveness of compensation for issues incurred by the investor?

We offer you our understanding of the rules of interpretation of the production sharing agreement.

The approaches and motivations for overcoming contractual conflicts are highlighted below.

Сase: Investors Compensation Scheme Ltd v West Bromwich Building Society

(1) Interpretation is the establishment of the meaning by which a document should be understood by a person who has all the prior knowledge and is understandable when the parties were at the time of the conclusion of the contract.

(2) The terms must be reasonably accessible to the parties and, with the exception mentioned below, include absolutely everything that could affect how the language of the document would be understood by a reasonable person.

(3) The law excludes from admissible grounds prior negotiations between the parties and their statements of subjective intentions. The law draws this distinction for reasons of practical policy, and only in this respect does legal interpretation differ from the way we interpret statements in ordinary life. The limits of this exception are in some respects unclear.

(4) The meaning that a document (or any other statement) conveys to a reasonable person is not the same as the meaning of its words. The meaning of words depends on dictionaries and grammar; the meaning of a document is what the parties who use those words in the appropriate context intend.

(5) The context may not only enable a reasonable person to choose between possible meanings of words that are ambiguous, but may even (as sometimes happens in ordinary life) lead to the conclusion that the parties must have used incorrect words or syntax for some reason.

Case: Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749, 768 per Lord Steyn [Mannai v Eagle Star]

«The question is what a reasonable person would have meant in the circumstances in which the actual parties were».

Сase: Reardon Smith Line Ltd v Hansen­Tangen

«Contract interpretation requires a «purely objective assessment» of the contractual terms.

When it comes to the intention of the parties to the contract, it is objective: the parties themselves cannot provide direct evidence of what their intention was, and it is necessary to ascertain what is to be considered the intention that reasonable people would have had if they were in the parties’ place».

Сase: B&B Constructions (Aust) Pty Ltd v Brian A Cheeseman & Associates Pty Ltd (1994) 35 NSWLR 227, 234

«The social purpose... is to enhance certainties by maintaining the effect of the clearly expressed written word»

Сase: New Hampshire Insurance Co v MGN Ltd (15 June 1995)

«The interpretation of a written contract, except where it was known or could reasonably have been known to both parties at the time of the contract, and the court concluded from this that evidence that both parties had the same undisclosed intention as to the meaning or effect of the contract is inadmissible».