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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

TEACHER'S PACKAGE

Review Copy Do Not Reproduce


Copyright © 1998, 2006, 2009 by the President and Fellows of Harvard College. All rights reserved. (Rev. 1/09)

MERIDIA AND PETROCENTRAM OIL DRILLING OFF THE EASTERN SHORE

OF CENTRAL AMERICA DEBRIEFING SUMMARY OF COSTS/GAINS TO MERIDIA AND PETROCENTRAM – (in millions)

Issue/Outcome Meridia Petrocentram 1. Royalty rate (annual payment)

a. 8%

40

(-) 30

b. 10%

50

(-) 37.5

c. 12%

60

(-) 45

d. 14%

70

(-) 100

e. 16%

80

(-) 200

2. Other development projects (annual cost)

a. Local manufacturing

40

(-) 25

b. Demining operations

20

(-) 15

c. New road system

100

(-) 75

d. New electric & telecom. system

30

(-) 10

e. Post-trauma center

5

(-) 5

3. Employment of Meridian managers

a. 50%

20

(-) 25

b. 40%

15

(-) 20

c. 30%

10

(-) 5

d. 20%

4

(-) 2

e. Top Meridian manager

5

0


MERIDIA AND PETROCENTRAM: COSTS DEBRIEF

Copyright © 1998, 2006, 2009 by the President and Fellows of Harvard College. All rights reserved. (Rev. 1/09) 2

Issue/Outcome Meridia Petrocentram 4. Guarantee against nationalization

a. 25 year, with reserve fund

(-) 150

100

b. 25 year, without reserve fund

(-) 0

10

c. 20 year, with reserve fund

(-) 100

80

d. 20 year, without reserve fund

(-) 0

10

e. 15 year, with reserve fund

(-) 50

50

f. 15 year, without reserve fund

(-) 0

10

g. 10 year, with reserve fund

(-) 25

40

h. 10 year, without reserve fund

(-) 0

10

5. Bonus for reaching agreement

10

5

TOTALS NEEDED TO AGREE

$120 million

(-)$80 million




Debriefing Score Summary Issue/Outcome

Team 1

Team 2

Team 3

Team 4

TOTAL

Meridia

Petrocentram

Meridia

Petrocentram

Meridia

Petrocentram

Meridia

Petrocentram

1. Royalty rate

2. Other projects



c. New road system




e. Top Meridian mgr.

4. Guarantee vs. nationalization





2


Team 5

Team 6

Team 7

Team 8

TOTAL

Meridia

Petrocentram

Meridia

Petrocentram

Meridia

Petrocentram

Meridia

Petrocentram

1. Royalty rate

2. Other projects



c. New road system










3


Team 9

Team 10

Team 11

Team 12

TOTAL

Meridia

Petrocentram

Meridia

Petrocentram

Meridia

Petrocentram

Meridia

Petrocentram

1. Royalty rate

2. Other projects



c. New road system










4


Team 13

Team 14

Team 15

Team 16

TOTAL

Meridia

Petrocentram

Meridia

Petrocentram

Meridia

Petrocentram

Meridia

Petrocentram

1. Royalty rate

2. Other projects



c. New road system










5


Team 17

Team 18

Team 19

Team 20

TOTAL

Meridia

Petrocentram

Meridia

Petrocentram

Meridia

Petrocentram

Meridia

Petrocentram

1. Royalty rate

2. Other projects



c. New road system









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 online at www.pon.org, Telephone: 800-258-4406, Fax: 617-495-7818. This case may not be reproduced, revised, or translated in whole or in part by any means without the written permission of the Director of Curriculum Development, Program on Negotiation, Harvard Law School, 518 Pound Hall, Cambridge, MA 02138. Please help to preserve the usefulness of this case by keeping it confidential. Copyright © 1998, 2006, 2009 by the President and Fellows of Harvard College. All rights reserved. (Rev. 1/09)



GENERAL INSTRUCTIONS 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 eastern maritime area, where oil reserves have just recently been discovered. The government considers these off-shore oil fields to be a major means of improving Meridian’s eastern region’s economy, 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 would be 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, J. Lipeno. Petrocentram's team is headed by its vice president for Central America, A. Garza-Lopez. Many issues have been resolved satisfactorily: the location and type of drilling rigs; the 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.


MERIDIA AND PETROCENTRAM: GENERAL INSTRUCTIONS


The four issues listed below are the only ones remaining. The negotiations will concern only these issues. While other points may be discussed, these are the only issues that count: 1. The percentage royalty rate Meridia will receive.

Annual oil revenues are assumed to be $500 million. Meridia has indicated it expects an overall royalty rate in the range of 16 percent. The negotiators may choose an intermediate number, or change percentages during the term of the agreement. Petrocentram is proposing a maximum of eight percent. For OPEC and other reasons, the agreed rate must be an even-numbered increment -- 8, 10, 12, 14, or 16 percent. The industry-wide average for Latin American off-shore oil is 10 percent, 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 six percent, and the highest is thought to be 18 percent.

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. The companies have 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 to each of these projects.

3. How many Meridian nationals will be employed in management positions in the new enterprise.

Meridia wants at least 50 percent of top management positions to go to Meridians. Petrocentram has proposed 20 percent. 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 five-year increments. A final negotiating session is about to begin. It will be a one-on-one session between Lipeno and Garza-Lopez. If an agreement is not reached today, tomorrow Meridia will hold 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.

HOW TO PLAY 1. Read the general instructions handout. 2. Each of you has been assigned one of two roles: the Meridian representative (Lipeno) or

the Petrocentram Company representative (Garza-Lopez). You will have a set of confidential instructions. Please read them carefully, and do not share them with the others.

Discussion with others who play the same role as you is encouraged. We will give you time before the negotiation to discuss strategies with other players who are playing the same role. But do not talk to your opponent until you begin to negotiate.

3. This game is scored, and it is important that

you calculate your score correctly. Each side is given a minimum score that it must achieve or there is no deal. If your score is lower than your assigned minimum score, you cannot reach an agreement. Your opponent does not know your minimum score, or your alternatives to a negotiated agreement.

In real life, we rarely put a number on intangibles, and some of the numbers may seem "wrong" to you -- you might value one item more highly than another, which has been given higher value. Don't substitute your intuitive values for the quantitative values of the game. Nor can you change the rules by changing the numbers in any way. It is hard to quantify intangibles, but it is good discipline, and will help you to establish priorities in future negotiations.

For Meridia, the minimum score is expressed in net gains. For Petrocentram, the minimum score is expressed in net costs. Calculating your score is complicated, because

Hypothetically, if your minimum score were a $1 million gain and you had the following circumstances:

1. a gain of $ 600,000 2. a gain of $ 400,000 3. a gain of $ 300,000 4. and a cost of (-)$ 400,000

you could not make a deal because, although your gains add up to $1.3 million, your costs are $400,000, leaving you with a net total of $900,000.




it involves adding gains and subtracting costs to reach your final score. We have expressed costs throughout with the prefix (-).

4. Both parties hope to do better than their minimum scores. Your confidential instructions

tell you the value of each of the four items to be negotiated. Your side may have a different value for an item than the other side. That is the value you must work with.

5. Your first step is to prepare for the negotiation and to think through your strategy.

Meeting with others who have to negotiate for the same party will help you. Refer back to the negotiation checklist handout.

6. At the end of your confidential instructions you will find a personal score sheet, which has a

place for your preferred solution, and the solutions you finally negotiated. Use it to plan your strategy, and to help you calculate your score as you go along.

7. You will have ample time to negotiate an agreement. Since the issues and scoring are

complex, you may want to ask for a short time out to do further preparation, based upon new information or offers you have received in the course of negotiation. These recesses should be relatively short.


P R O G R A M O N N E G O T I A T I O N A T H A R V A R D L A W S C H O O L AN INTER-UNIVERSITY CONSORTIUM TO IMPROVE THE THEORY AND PRACTICE OF CONFLICT RESOLUTION



OF CENTRAL AMERICA Score Sheet

Issue/Outcome

Team

Meridia

Team

Petrocentram

Team

Meridia

Team

Petrocentram 1. Royalty Rate

a. 8%

b. 10%

c. 12%

d. 14%

e. 16%

2. Other projects



c. New road system




a. 50%

b. 40%


MERIDIA AND PETROCENTRAM: SCORE SHEET


Issue/Outcome

Team

Meridia

Team

Petrocentram

Team

Meridia

Team

Petrocentram c. 30%

d. 20%



a. 25 year, with fund

b. 25 year, no fund

c. 20 year, with fund

d. 20 year, no fund

e. 15 year, with fund

f. 15 year, no fund

g. 10 year, with fund

h. 10 year, no fund


TOTAL





OF CENTRAL AMERICA

CONFIDENTIAL INSTRUCTIONS FOR A. GARZA-LOPEZ, PETROCENTRAM’S VICE PRESIDENT FOR LATIN AMERICA You have been negotiating both with Meridia and with its neighbor to the south, Fevala, for rights to develop a potentially rich oil field off the shore of both countries. The oil reserves under the ocean are known to extend to areas off both countries and could be developed by either country. You prefer to make an agreement with Meridia, because of your good experience with your Meridian facilities off the western coast. However, it would also be beneficial to work with Fevala. Other oil companies are beginning to express interest in the eastern coast, and you would like to be there first. Fevala negotiates in secret, so you do not know if you have competitors for their business there, or who they might be. In order to reach an acceptable agreement with Meridia, your total annual costs in this negotiation must not exceed (-) $80 million. J. Lipeno of Meridia does not know this. You know that Fevala has offered you an arrangement where your costs will be just above that, or (-) $81 million. That is your alternative, and it is not unattractive. But you do not just want to achieve your minimum threshold; you also want to do better than that. You want to do as well as you can for your company, and for your own reputation as a good business negotiator within the company. In all the following scores, gains are shown without parentheses; costs are shown with (-) before the figure. There are only four open issues: 1. Royalty rates Meridia has asked for a 16 percent royalty rate. You have offered eight percent. There are two facts that Meridia does not know: First, you have a secret tax agreement with Venezuela under which your corporate tax rate is 25 percent. Since royalty payments count as an expense, and therefore reduce your tax, you know that the cost to you is actually 25 percent less than Meridia thinks it is.


MERIDIA AND PETROCENTRAM: CONFIDENTIAL INSTRUCTIONS FOR A. GARZA-LOPEZ


2

Second, you know that to go higher than 12 percent will set an extremely bad precedent; it will likely force the rates up in your western facilities in Meridia. Moreover, it will influence your negotiations in several other countries that are also trying to increase the rates above the current industry-wide average of 10 percent. You therefore estimate full costs at the 14 percent and 16 percent rates as much higher than simply the royalty payments to Meridia.

Thus, based upon $500 million in equivalent oil revenues, you calculate the net cost to Petrocentram as follows:

At rate Royalty Payment Full cost to Petrocentram 8% $40 million (-) $30 million 10% $50 million (-) $ 37.5 million 12% $60 million (-) $ 45 million 14% $70 million (-) $100 million 16% $80 million (-) $200 million

2. Other development and reconstruction projects You know that you can cut your actual costs on several other development and reconstruction projects to less than the 50 percent Petrocentram would be expected to contribute. On other projects, the full costs to you are greater than the 50 percent costs that you have agreed to. Thus, your real costs are listed below. They may be quite different from Meridia’s calculation of your costs.

(a) Local manufacturing. It is one of those ideas that sounds good, but actually it is much more efficient to transport raw materials into neighboring Surania, where there are already major plastic "maquiladoras," with a large, trained employment force. You therefore estimate the cost of this as high, since so much infrastructure and training would be required.

(b) Participation in field demining operations. This is something to which you can contribute in two ways: first, by using your own mine and explosive experts who generally work on oil exploration but would need special training to work on demining operations; and second, by contributing to the financing of operations conducted under the supervision of the Junta Interamericana de Defensa (the Inter-American Defense Commission). In part because of the dangerous nature of the work and in part because of the financial costs of the contribution, you estimate the cost of demining as actually more than your 50 percent share. Should you choose to offer the help of your demining experts, you would ask Meridia to provide for 50 percent of the compensation to their families in case of death or accident. This would be the first time Petrocentram would participate in such an operation.

(c) The major new interior road system. This is an immense project, even though asphalt is a derivative of petroleum, and you could produce most of the raw material for the project. But you do not want to get into the extensive engineering involved, or the political problems in putting together a giant road system. In addition, secured and demined fields in the center of Meridia




would be an imperative. Therefore, you estimate this cost as much higher than your 50 percent share; but as a side deal, you would be willing to sell Meridia petroleum for the project. You can offer this as a future possibility at low cost, but not make it part of the off-shore negotiations.

(d) A new electric and telecommunication system. This system could be designed and built by the same engineering and construction team that you would use for the off-shore facilities. This would provide them with employment once the off-shore facilities have been built, and avoid potential lay-offs. Therefore, you estimate the costs as less than your 50 percent share.

(e) A new post-trauma center for the local hospital in Cuaca. This is not something your people are trained to build. However, given the sensitivity of the Meridians to your presence in the area and given the great need for such a center to serve the town of Cuaca and neighboring area, building the center would bolster your image as a friendly partner, which could have positive repercussions for other negotiations you are (or might be) conducting in other countries in the region. Therefore, your costs are therefore estimated at less than your 50 percent share.

Summarizing, the full annual costs to Petrocentram of the five proposed other projects are:

(a) Local manufacturing: (-) $25 million (b) Demining operations: (-) $15 million (c) New road system: (-) $75 million (d) New electric and telecommunication system: (-) $10 million (e) Post-trauma center: (-)$5 million

3. Employment of Meridian Managers With respect to hiring Meridian managers, you are sympathetic, but you have your limits. You have already offered to fill 20 percent of your managerial positions with Meridians. You could agree to 30 percent, because the national university in Galico could accommodate that number in its school of business administration (where you have looked for other more qualified Meridians), and because of returning business graduates educated abroad. However, you have explored with the university whether it could educate the number of students you would need if Petrocentram were to commit to a Meridian management group of 40 percent or 50 percent. The University replied that Petrocentram would have to share in underwriting the cost of an entirely new program, including the facilities and the faculty. If you are expected to share these costs, the annual costs of employing Meridians would be very high, and there is a time lag until enough people are educated. You will need middle management from the outset. Thus, the cost of going to these greater percentages is high. However, such a contribution to the university in Galico would enhance Petrocentram's already good reputation throughout Latin America. One requirement on your part would be that such a new education center carry the name of the company.

One other factor that is probably unknown to Meridia is that Petrocentram has been training Mr. Rajales, a Meridian national, in its management for several years, moving him into higher levels of responsibility. He is currently the deputy of a major operation in another Latin American country. He would be an obvious choice to head the Meridian operation, but he has a difficult personal situation since he fled the country when the civil war started and has made several




4

statements against the political party now in power and democratically elected. Yet, in view of the newly elected regime’s eagerness to demonstrate its legitimacy, and as a contribution to national unity, his return to Meridia could easily be arranged. Despite his relocation allowance, and the paperwork and politicking it would entail, this cost is balanced against the good will that would be gained by Petrocentram for moving him into Meridia in this instance. Therefore, you calculate no increased cost by assigning Mr. Rajales as CEO of the Meridian operation. Your calculation of total costs on the Meridian management issue is:

Percent of Meridian Managers Cost 50% (-) $25 million 40% (-) $20 million 30% (-) $ 5 million 20% (-) $ 2 million

4. Guarantee against nationalization With respect to the guarantee against nationalization, you want to come away with a guarantee and a reserve fund -- since that gives the guarantee teeth. The fund does not need to be very high since in making the guarantee public you get some additional assurance, considering the new image Meridia is trying to project as a democratic country that can be trusted. A shorter guarantee with a reserve is worth more to you than a longer guarantee without. You calculate your gain from guarantees against nationalization as follows:

25 year, with reserve fund $100 million 25 year, without reserve fund $ 10 million 20 year, with reserve fund $ 80 million 20 year, without reserve fund $ 10 million 15 year, with reserve fund $ 50 million 15 year, without reserve fund $10 million 10 year, with reserve fund $40 million 10 year, without reserve fund $10 million

NOTE: Because of your preference for working with Meridia and the uncertainties of dealing with Fevala, you should give yourself a bonus credit of $5 million if you reach an agreement with Meridia today. You see this negotiation as more than an opportunity for your company. You want to make the most advantageous agreement possible so that Petrocentram's officers will recognize your potential for future corporate leadership. Be sure to use the scoring sheet on the next page as instructed.


MERIDIA AND PETROCENTRAM – CONFIDENTIAL INSTRUCTIONS FOR A. GARZA-LOPEZ


SCORING SHEET: PETROCENTRAM (DO NOT SHARE THIS SHEET WITH YOUR OPPONENT) Your real name: ___________________________________________ Your opponent's real name: __________________________________ Team number: _______

Issue/Outcome

Your value (preference)

Your value (final)

1. Royalty rate Costs

a. 8%: (-) $30 million

b. 10%: (-) $37.5 million

c. 12%: (-) $45 million

d. 14%: (-) $100 million

e. 16%: (-) $200 million

2. Other projects Costs

a. Local manufacturing:

a. (-) $25 million

b. Demining operations: (-) $15 million

c. New road system: (-) $75 million

d. New electric & telecom. system: (-) $10 million

d. Post-trauma center: (-) $5 million

3. Employment of Meridian managers Costs

a. 50%: (-) $25 million

b. 40%: (-) $20 million


MERIDIA AND PETROCENTRAM – CONFIDENTIAL INSTRUCTIONS FOR A. GARZA-LOPEZ


Issue/Outcome


Your value (final)

c. 30%: (-) $5 million d. 20%: (-)$2 million

e. Top Meridian mgr: (-) $0

4. Guarantee vs. nationalization Gains

a. 25-year, with fund: $100 million

b. 25-year, no fund: $10 million

c. 20-year, with fund: $80 million

d. 20-year, no fund: $10 million

e. 15-year, with fund: $50 million

f. 15-year, no fund: $10 million

g. 10-year, with fund $40 million

h. 10-year, no fund: $10 million

5. Bonus for reaching agreement: $5 million

TOTAL

Must be (-) $80 million in costs or less to be a valid agreement






CONFIDENTIAL INSTRUCTIONS FOR J. LIPENO, MERIDIA’S MINISTER FOR ECONOMIC DEVELOPMENT AND RECONSTRUCTION You have just been told by the International Monetary Fund (IMF) that negotiations on the re-scheduling of the Meridian debt will begin next week. You have also been told by the World Bank that negotiations on your demand for a structural adjustment loan will begin as soon as your debt re-scheduling negotiations are successfully concluded. You need to show both economic viability and political stability (mainly through concerted efforts on the democratization of your political institutions and a lesser participation of the military). If you do not succeed in negotiating a deal with Petrocentram, your first choice, negotiations with the IMF and consequently the World Bank might be postponed indefinitely, which could in turn jeopardize the reconstruction and the democratization process. All other things being equal, you prefer to deal with Petrocentram because of the neutral position Venezuela adopted during the six-year civil war, and because of its backing in the Organization of American States (OAS) for the Meridian peace process. In addition, Petrocentram has been known to hire local managers and to move some of them to significant management positions in the company. This could provide employment for the local population as well as some of the high-ranking military officials, thus moving them out of the political scene. In order to reach an agreement with Petrocentram, you must score a net gain for Meridia of at least $120 million. Otherwise, you will call off the negotiations with Petrocentram and negotiate with your second choice, which assures you of a gain of nearly that much: $119 million. You also want to do better than your minimum threshold -- you want to do as well as you can for your country so that Meridia gains as much as possible. In all the following scores, gains are shown without parentheses; costs are shown with (-) before the figure. There are only four open issues: 1. Royalty rates With respect to royalty rates, you would like to move the rate above the industry-wide average of


MERIDIA AND PETROCENTRAM: CONFIDENTIAL INSTRUCTIONS FOR J. LIPENO


2

10 percent. You would like to use a higher rate in this new facility as leverage to renegotiate with Petrocentram and other companies in the west. You know your gains in the form of royalty payments will be:

8%: $40 million 10%: $50 million 12%: $60 million 14%: $70 million 16%: $80 million

2. Other development and reconstruction projects With respect to other development and reconstruction projects, you have calculated your net total gain from each, after taking into account your 50 percent contribution to the capital costs. The gains are:

a) Local manufacturing: $40 million b) Demining operations: $20 million c) New road system: $100 million d) New electric and telecommunication system: $30 million e) Post-trauma center: $5 million

Each project is important for the reconstruction and development of your nation. The local manufacturing operations will provide jobs for your local population (civilians, military, and ex-guerrillas). Contributions to the demining operation in the center of Meridia by Petrocentram will help alleviate your costs to an already poorly endowed Junta InterAmericana de Defensa (the Inter-American Defense Commission) and ensure the durability of the operation until not needed. The new road system will greatly benefit your country by helping traffic move freely across the country. The new electric and telecommunication system will also help the economy, and will provide remote areas with the necessary means to insure their participation in the nation's political and economic reconstruction, thus helping to prevent renewed conflict. The post-trauma center at the local hospital in Cuaca will benefit the local and surrounding population, still suffering from physical and psychological traumas. The center will help them re-enter and participate in the nation’s economy and political life. 3. Employment of Meridian managers With respect to employment of Meridian managers, corporations have been cooperative about training and hiring Meridians for low-level jobs, but they have been slow to train and hire Meridians as corporate managers. In the medium and long run, you know this is essential not only for your economic development, but also for your political endeavors, as it could provide jobs for top-level military personnel who might feel disempowered under the new political regime. They have the managerial skills and would only need little technical training. Both other oil companies have pledged that they would hire 20 percent Meridian managers, but you want to try to get a better deal from Petrocentram. You know that if you insist on a very high




3

percentage, there will be a need for additional university facilities. While Petrocentram can be expected to pay 50 percent of such expansion (new facilities and faculty), Meridia would have to pay the rest, and the costs are high. The gains assigned to the various percentages of Meridian managers are:

50%: $20 million 40%: $15 million 30%: $10 million 20%: $ 4 million

In addition to the above gains, if you can get Petrocentram to commit to naming a Meridian in charge of the whole operation, that would be a major breakthrough of both real and symbolic importance. If you achieve that goal, you may credit yourself with a bonus of $5 million. 4. Guarantee against nationalization With respect to the guarantee against nationalization, you consider all the guarantees that do not have a reserve fund to be virtually without cost to Meridia. It is true that a financial and monetary imbalance would lead to a devaluation of the local currency against the dollar, and could increase the probability for nationalization as a way to retain assets. But such projects would most probably not include off-shore petroleum facilities. However, the issue of the reserve fund is another matter. You could establish a reasonable reserve fund by setting aside a portion of the royalties through 15 years; but thereafter, for years 16 through 25, all of those royalties must be used to retire the World Bank loan. You cannot give more than a 15-year reserve fund. Your costs for the various guarantee options are the following: 25-year, with reserve fund: (-) $150 million

25-year, without reserve fund: $ 0 20-year, with reserve fund: (-) $100 million 20-year, without reserve fund: $ 0 15-year, with reserve fund: (-) $50 million 15-year, without reserve fund: $ 0 10-year, with reserve fund: (-) $25 million 10-year, without reserve fund: $ 0

NOTE: You get a bonus of $10 million if you reach an agreement today. You regard this negotiation as a very important economic and political opportunity for your country as it tries to regain legitimacy as a trustworthy, democratic, and economically viable nation. But you also want to make the most advantageous agreement possible so that your future in national politics is recognized, as you plan to present yourself in the next presidential election in three years.




4

SCORING SHEET: MERIDIA

(DO NOT SHARE THIS SHEET WITH YOUR OPPONENT) Your real name: ___________________________________________ Your opponent’s real name: __________________________________ Team number: ___________

Issue/Outcome


Your value (final)

1. Royalty rate Gains

a. 8%: $40 million

b. 10%: $50 million

c. 12%: $60 million

d. 14%: $70 million

e. 16%: $80 million

2. Other projects Gains

a. Local manufacturing: $40 million

b. Demining operations: $20 million

c. New road system: $100 million

d. New electric & telecom system: $30 million

e. Post-trauma center: $5 Million

3. Employment of Meridian managers Gains

a. 50%: $20 million

b. 40%: $15 million

c. 30%: $10 million




5

Issue/Outcome


Your value (final)

d. 20%: $4 million e. Bonus for top manager: $5 million

4. Guarantee vs. nationalization Costs

a. 25-year, with fund: (-)$150 million

b. 25-year, no fund: $0

c. 20-year, with fund: (-) $100 million

d. 20-year, no fund: $0

e. 15-year, with fund: (-) $50 million

f. 15-year, no fund: $0

g. 10-year, with fund: (-) $25 million

h. 10 year, no fund: $0

5. Bonus for reaching agreement: $10 million

TOTAL

Must be at least $120 million to agree


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