PROGRAM ON NEGOTIATION

AT HARVARD LAW SCHOOL

AN INTER-UNIVERSITY CONSORTIUM TO IMPROVE THE THEORY AND PRACTICE OF CONFLICT RESOLUTION

MERIDIA AND PETROCENTRAM

OIL DRILLING OFF THE EASTERN SHORE
OF CENTRAL AMERICA
GENERAL INFORMATION
The Federal Republic of Meridia, located in Central America, is negotiating to sell off-shore oil leasing
rights along its eastern coast. The capital of Meridia, Qintaro, is on the western Coast. Its population is
500,000. Meridia's western coast already has a number of off-shore oil drilling facilities, but this would
be the first in the east where oil reserves have just recently been discovered in that maritime area. The
eastern off-shore oil fields are considered by the government to be a major means of improving the
economy its eastern region, including Cuaca, the nearest coastal city in the east with a population of
100,000--one of the cities most affected by the recently settled six years civil war. With the right terms,
the off-shore project is considered a valuable business opportunity for a major oil company. Meridia
has announced that it has narrowed the negotiations to three such companies. One of these is Compania
Petrolera de Centroamerica y el Caribe (known as Petrocentram), a company headquartered in
Venezuela. The names of the other two companies have not been disclosed.
Negotiations between Meridia and Petrocentram have been going on for about a month. Meridia's team
is headed by its Minister for Economic Development and Reconstruction, Mr. Lipeno. Petrocentram's
team is headed by its Vice President for Central America, Mr. Garza-Lopez.

Many issues have been resolved satisfactorily: the location and type of drilling rigs; location of the
land-based heliport; construction of new housing for the construction crew, with the housing to be used
later by permanent employees; port facilities for vessels during construction as well as permanently
during operations; location of the on-shore refineries; an agreement as to maximum and minimum
volumes of oil to be extracted annually; a commitment by Petrocentram to employ Meridian nationals in
the construction operation; an agreement by Meridia not to impose its income tax on foreign employees,
nor to impose its custom duties on their vehicles, household effects and office equipment; public utilities
in the form of water, sewer and electricity, and the rates to be paid by Petrocentram for them; and
shipping lanes both for construction materials and for refined petroleum--all have been agreed.
The following four issues are the only ones remaining; the negotiations will concern only these issues.
While other points may be discussed, these four issues are the only ones that count:
1. The percentage royalty rate to be given to Meridia.

This case was developed by Abram Chayes and Antonia Handler-Chayes Co-Directors of the Project on International Compliance and Dispute Settlement at
Harvard Law School. Copies are available at reasonable cost from the Clearinghouse, Program on Negotiation, Harvard Law School, 518 Pound Hall,
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Annual oil revenues are assumed to be $500,000,000 [$500 million]. Meridia has indicated it expects an
overall royalty rate in the range of 16%. You may choose an intermediate number, or change
percentages during the term of the agreement. Petrocentram is proposing a maximum of 8%. For OPEC
and other reasons, the agreed rate must be an even-numbered increment -- either 8, 10, 12, 14, or 16%.
The industry-wide average for Latin American off-shore oil is 10%, although both sides are aware that
there are many secret, negotiated royalty variations from country to country, and company to company.
The lowest is rumored to be 6%, and the highest is thought to be 18%.
THE MERIDIA AND PETROCENTRAM GENERAL INFORMATION

2. Whether Petrocentram will make any contributions to reconstruction and other development
projects in Meridia, and if so, which ones, and at what cost?
It is customary for the company awarded oil concessions such as these to contribute to other
development projects in the host country. Meridia has insisted on such arrangements arguing post-civil
war realities and the importance of democratic consolidation. It has been agreed that the total capital
cost of the project or projects selected will be divided 50-50 between Meridia and Petrocentram. The
capital cost for each project will be amortized in part over 10 years by the sale of bonds. The possible
projects are listed below.
(a) local manufacturing products deriving from petroleum, such as plastics and chemicals;
(b) participation in field demining operations in the central part of the country;
(c) a major new interior road system;
(d) a new electric and telecommunication system;
(e) a new post-trauma center for the local hospital in Cuaca.
Meridia has stated that it hopes for Petrocentram's contribution on all of them.

3. The extent of Meridian nationals to be employed in management positions of the new

enterprise.

Meridia wants at least 50% of top management positions to go to Meridians. Petrocentram has proposed
20%. No non-Meridian company has a Meridian national heading any major operation in Meridia.
4. Whether there will be a guarantee against nationalization, and if so, for what period of time.
Petrocentram has said it wants at least a 25-year guarantee, with a reserve fund set aside in a Swiss bank
as security in the event of a violation. Meridia has proposed a 10-year guarantee, with no reserve fund.
For capital investment reasons, the guarantee against nationalization must be expressed in 5-year
increments.
A "final" negotiating session is about to begin. It will be a one-on-one session of Mr. Lipeno and Mr.
Garza-Lopez. If an agreement is not reached today, Meridia will proceed tomorrow into a similar
"final" negotiating session with one of the other companies. All three competing companies have been
brought to this final stage, but if Meridia can reach agreement today with Petrocentram, the commitment
will be made, and negotiations with the other two companies will not go forward.