International Oil & Gas Law - Coursework Example

Number International Oil and Gas Law Table of Contents Table of Contents 2 0.INTRODUCTION 3 1.Facts about Polenskya 3 2.0.THE OIL AND GAS INVESTMENT BY ATLANTIC OIL IN POLENSKYA 4 2.1.Atlantic Oil Company in Context 4 2.2.The Context of Oil and Gas Drilling Polenskya 4 2.2.1.Atlantic’s Oil Responsibility with respect to Polenskya’s Reserve Exploitation 5 2.3.Production Sharing Contracts between Polenskya and Atlantic Oil 6 2.3.1.Advantages of PSC 8 2.3.2.Disadvantages 8 2.4.Stabilisation Clauses 8 2.5. Environmental Impacts and Mitigation 9 2.6.Farming and Animals in context to the Petroleum Production 11 12 3.0.ASSESSMENT OF THE IMPACTS OF THE OIL AND GAS DRILLING 12 4.0.FINANCING OPTIONS TO THE PROJECT 13 5.0.CONCLUSION 14 6.0.Bibliography List 16 6.1.Books 16 6.2.Articles 17 6.3.Reports 18 6.4.Thesis 19 6.5.Acts and Statutes 19 Advice to Atlantic International Oil Company Regarding Investment in Polenskya Unexploited Massive Oil Reserves 1.0. INTRODUCTION The oil and gas industry in the contemporary world has seen considerable growth and development. In the past decades, oil exploration in the world has been enhanced, and new national oil producers are emerging attracting attention from international investors.1 The massive oil reserves of Polenskya is a clear example, and the following section highlights the facts on the ground with respect to Polenskya and issues touching the actions to be undertaken by Atlantic Oil Company-as the interested investor. 1.1. Facts about Polenskya Facts about Polenskya include massive unexploited oil reserves in the developing country having a population of 20 million of which, majority are illiterate. In Polenskya, there exists no established banking system thus financial saving and investments in the country calls for massive turn over. Regarding the commercial practices and environmental care, there are no international, commercial or environmental laws to safeguard the integrity and decency of the environment, as well as trade. Further, Polenskya has little national oil industry expertise; thus, international investment is the only option for Polenskya realising its dream of exploiting its oil reserves. This is through the incorporation of international oil investors to the country to drill the resource at set agreements or concessions. On the political environment, in Polenskya; it is rumoured that President Millapot might resign due to ill health after ten years in power. This gives rise to the probability of a new regime coming in power in the near future with the initial development on the project. Issues concerning the oil reserve land; this is a home to an endangered species attracting tourist throughout the year, as well as an indigenous community growing food crops on the land. With respect to ventures into transportation survey, there exists a small port 100 miles from the area, which is primarily utilised for fishing. 2.0. THE OIL AND GAS INVESTMENT BY ATLANTIC OIL IN POLENSKYA 2.1. Atlantic Oil Company in Context Atlantic oil is a multinational oil company interested in investing in the nation of Polenskya. The venture will have to look into the following factual information. A. Atlantic is considering entering into a Production Sharing Agreement with Polenskya. This report wills advice Atlantic Oil on the advantages and disadvantages of undertaking a Production Sharing Agreement with Polenskya. Further, clauses to be included for this agreement will be discussed to enlighten the company on the impending terms of the contract. B. On the basis of Atlantic Oil not wholly funding any development project in Polenskya, the types and sources of financing available will be analysed. Further, the mode of minimising commercial and political risks will be discussed. On the same note, the project entails having very minimal disruption to the environment. Therefore, critical environmental issues that Polenskya will have to undertake to look critically into this will be of the essence to highlight and probable recommendations made to ensure the development is environmentally and socially sustainable. 2.2. The Context of Oil and Gas Drilling Polenskya The eventual phase of massive oil reserves in Polenskya offers a unique and exciting chance to alleviate the observed levels of poverty, illiteracy and create a broad-based development and improved standards of living across the nation of Polenskya. Atlantic oil undertakes the challenge of investing in the nation of Polenskya, and the following are critical issues that it has to put to task to achieve a great deal in striking this massive exploitation of the oil reserves. 2.2.1. Atlantic’s Oil Responsibility with respect to Polenskya’s Reserve Exploitation History has shown us that, oil and gas plays a critical in improving economies in the world and nations.2 On the same note, the oil exploration and drilling has posed major challenges politically, economically and environmentally.3 This venture by Atlantic oils will make sure that any occurrence of conflicts will be averted prior to progress of the project. Most countries mainly depend on oil as the main fuel source.4 From the factual issues highlighted above, it is clear that Polenskya is out to create socio-economic conditions that will lessen poverty through the prudent use of newfound massive oil reserves once they are on stream. This is a highly critical goal that is central to Polenskya’s continued, sustainable growth and development. Atlantic oil is bound to ensure that Polenskya oil reserves prove beneficial to its entire population as a true “resource blessing”. Investment requires given organization constituting Legal, Political, Social and Economic instruments.5 Millennium Ecosystem Assessment has clearly illustrated that conflicting economic and environmental goals achievements is very critical.6 It is often difficult to reconcile new progress with environmental fortification and nature conservation. Atlantic is thereby bound to encourage sustainable development of oil drilling in Polenskya to enhance the prevailing levels of natural capital. Further, innovation and planning in the decision making process is very crucial as it entails ensuring that all issues at hand are looked into prior to their arising. In respect to this, there is a need to assess the environment critically as a support tool to mitigation on the impacts of drilling oils and gas in Polenskya, and enhance positive effects.7 In this regard, there is the need to analyse the international, as well as local commercial and environmental laws pertaining to oil and gas production. In the case, of Polenskya, there exists no such laws; this calls for the investing company to propose to the authorities for the incorporation of such laws in their legislation to safeguard their heritage. 2.3. Production Sharing Contracts between Polenskya and Atlantic Oil Production Sharing Contracts (PSCs) are very critical parts in the petroleum exploration, its production and commercialisation.8 The main purpose of PSC is to aid the finding and commercialisation of deposits of oil and gas. PSCs are very important for the investing company, unlike the service contract. According to Johnson and Rogers,9 service contract is a regime under which the state has the full ownership of petroleum and gas on its soil while the international company undertakes the exploration and production work as a service to the state. The clauses are aimed at safeguarding the private investor through the restriction of the legislative or administrative power of the host nation. This is with respect to the sovereignty of the country and legislator: in its given legal system, to modify the contractual guidelines or even to annul the agreement.10 Consequently, any modifications to the terms and conditions of the contract may only be made, by joint written approval of the parties. The effectiveness of the kind of provision is dependent on the consent having acquired the force of law.11 Finally, the legislation applicable to the development agreement is the law of the host State in force at the time of contract termination. Therefore, that excludes the applicability of any future laws and regulations to Atlantic Oil Company.12 The PSC are essential and can be described as situations where the contracting state enters into a PSC with the contractor for a given period.13 The contractor incurs all the finances in the exploration and extraction of the oil that is, the development of the project. On the occasion of the success of the oil extraction, the investing company recovers its costs and then earns profit by sharing the proceeds with the government. With respect to these contracts, the royalty and Income tax are paid as required with significant control to the contractors, though the state has contractual controls.14 To ensure stabilisation, the agreement takes precedence over any given provisions enacted consequential thereto; be it by mode of legislation or administrative ruling; if the effect of such provisions is to the investors prejudice,15 owing to this, achievements may be realised only by conferring to the agreement of the force of law so that its necessities may not be tailored by general legislation.16 Production Sharing Agreements are very crucial as they allow the recovery of invested sunk cost by the contractors in the case of successful venture. The government shares potential profits without having to make a direct investment. Further, the exploration risk is shared among the contractor and the government. In respect to the carrying out of the project, the government of Polenskya will retain ownership of resources but negotiates the sharing of profits. The main idea behind clear terms of agreement in petroleum extraction is basically to determine two key issues: (1) The sharing of profits among the government and Atlantic Oil Company and (2) The mode in which costs are to be paid for or recovered. This will aim at achieving the main objective for a reasonable and mutually acceptable balance between the interests of the Polenskya’s government and the Atlantic Oil company. In respect to the progress of the project during extraction, a work plan is highly crucial and that entails the specifications and clear definition on the circumstances, the project to be pursued. In cases of delay or discontinuation, the plan should incorporate all the attributes and remedies.17 There is a need for stabilisation clauses as they minimise risks for oil companies via the provision of the contract. Stabilisation clauses are highly critical in addressing political risks and consequently preserve the political quo.18 To summarise on the Production Sharing Contracts, it is crucial to highlight the probable advantages and disadvantages with respect to the investing company-Atlantic Oil. 2.3.1. Advantages of PSC They are considered the most attractive investments model for inviting Risk Capital and have been very successful at attracting foreign and private investors to the unexplored areas at no cost to the government. The contractor has considerable autonomy in the running of exploration and the eventual production operations and leaves everything done to make sure success is realised, and the “Cost Recovery” are awarded. The contractor is entitled to get back the sunk cost with successful ventures. The contracting government gets the advantage of sharing the potential profit without making any direct investment. 19 2.3.2. Disadvantages The contracting government has limited knowledge or potential of the Block/Field than the contractor Conflicts of interest may be faced by the contracting authorities. The government has to ensure balancing of higher profit along with optimal exploration and regulatory concerns.20 2.4. Stabilisation Clauses With respect to International Petroleum Agreements, these will incorporate attempts by Atlantic Oil Company to neutralise the Polenskya’s power to unilaterally amend the terms of the agreement afterwards in the course of the project implementation. The change of balance of power from the side of Atlantic Oil Company to that of Polenskya after the investment has been made; demands that Atlantic Oil Company insist that the contractual term as remain constant throughout the life of the project or otherwise, any change would require an agreement between both parties prior to its effective measures.21 It should be noted that there exists conflicting views concerning legal and functional value of stabilisation clauses in the international agreements regarding petroleum investments.22 Nevertheless, facts remain that they serve a very crucial function in these agreements as one of the best channels utilised by the International Oil Companies to manage the eventualities of political risks faced by petroleum projects. The use of stabilisation clauses in the international oil agreements is best understood on focussing on the inherent risks exposed to international oil investors in foreign countries. These dramatic risks are evident from the past century experience which resulted into large scale expropriations and nationalisations in oil producing countries. The results were many international oil companies loosing their investments to the host countries.23 Another major importance associated with stabilisation clauses are due to the peculiarities of petroleum projects demand for stability. Usually, projects of this nature take long durations with each project phase lasting many years.24 The clauses are exceedingly capital concentrated with discovery and development programmes costing between tens to hundreds of millions of dollars. The projects pose acute risks and are heavily reliant on loan finance from various institutions that have strict repayment schedules. 2.5. Environmental Impacts and Mitigation The prevention of environmental pollution is critical when done at the initial stages of the project initiation. Atlantic Oil Company is bound to come up with an implemented pollution prevention technique to look into the environmental protection measures. These will not only improve efficiency but also, enhance profits while at the same time minimising environmental impacts.25 With the given case of Polenskya, there exist no commercial and environmental laws. The reference to international standards ought to be avoided as they are at best norms or guidelines and consequently not very precise. Therefore, the government of Polenskya and the parliament have to enact objective environmental regulations and statutes that look into the nature of the country and its preservation of the flora and fauna. The likes of such environmental standards can be termed effective with respect to their enforcement, and in the event of violation, they pose a cost that is high enough to serve as a deterrent.26 Thus, Atlantic Oil while venturing into the agreement with Polenskya should be keen into ensuring that effective and possible environmental laws are proposed properly. Breaches of environmental legislation are a contravention of law; thus, are criminal offences and penalties effective and applicable to the natural persons and the company, as well.27 The protection of the environment and health of the lives around the area of oil production is very crucial. This relates to the protection of the endangered species and the minimisation of greenhouse gases production. Flaring of natural gas and oil spills is two of the best examples of extraction, related activities that negate the health and environment impacts.28 Atlantic oil has the responsibility of studying the ecological affiliation of the endangered species in the extraction land and ascertains their protection or relocation. This will be enhanced by ensuring that the living conditions of the animals are clearly researched and ascertained. With respect to externalities, in specific terms it regards to the health and environmental costs; this incorporates ensuring that the area does not loose its health status, and development progression. With regard to the lack of commercial and environmental laws, this proves no major hindrances with respect to contractual restrictions brought about by regulations and local legislations. There are strategic moves that can be undertaken to enhance the sustainable environment protection. These include the reduction in material input, re-engineering processes to reuse by-products, improving management practices, and employing substitution of toxic chemicals in the extraction process.29 Measures that are critical to the reduction of the impacts associated with water runoff can apply to all aspects of oil and gas investigation and production. The following gives a number of measures that Atlantic oil could undertake to safeguard the ecological nature of the land of oil drilling.30 One notable measure could be the reduction of materials like drilling fluids and other chemicals stored on-site due to the rainfall and storm water run off. This can be realised by the incorporation of storing drums and other materials under cover to contain the chemical toxicants to the environment. This would see the reduction in the effects caused by such chemicals to the environment including the plants and animals. Ensure the sufficiency of materials and equipment in the containing and control of spills. This is highly crucial in the protection of runoff contamination. This would effectively ensure the surrounding environment is free of any pollutants to the ground soil. Efforts ought to be made to make certain that environmental requirements are reached, as well as relevant measures on ground taken to contain and control all spills of any impending waste from the site.31 2.6. Farming and Animals in context to the Petroleum Production The farming conducted in the area will be affected by the oil extraction in the area and thus, calls for strategic moves to critically cater for safeguarding the same. On the same note, the endangered species is very critical, and the government of Polenskya in conjunction with its environment and wildlife management bodies have the obligation of looking strategic measures to safeguard the lives of the animals.32 The two issues above are related in a way and their solutions may tally. For example, the farming process and the endangered animals’ existence will be impacted by the activities of the oil and gas exploration. This calls for relocation of the farmers to a different area with complete compensation done. The relocation of the animals would be very critical with respect to getting a favourable ecological condition that matches the present one; thus proving quite a puzzle. This calls for the inclusion of zoologists to provide the best option to cater for the animals not to hamper with their ecological conditions. Polenskya being a nation with no set environmental laws ought to borrow the leaf from world players in the oil and gas production world. The oil and gas industry’s achievement in successful environmental management is attributed to learning from past experiences, as well as the use of best practices and establishing environmental guidelines.33 The sprawl of the oil and gas fields can cause harsh habitat disintegration through the propagation of roads, pipelines, and well pads across the countryside. The big game animals can also be impacted negatively by oil and gas development.34 This clearly shows the effects associated with oil drilling thus; there is a need for greater perspective for looking into the future of Polenskya. 3.0. ASSESSMENT OF THE IMPACTS OF THE OIL AND GAS DRILLING The impact assessment is an integral part of any project undertaking.35 The development and implementation of the gas and oil production project by Atlantic Oil calls for the conduction of the routine assessment in the course of their operation. Processes and techniques for impact assessment continue to improve with heightening technology. This calls for the Atlantic Oil Company to remain at per with the upcoming techniques for impact assessment so as to alleviate the effects of the project. The evaluation process calls for evaluation before and in the course of the project, public involvement, early identification of environmental, social, economic and other issues, as well as risk/benefit analysis.36 One critical aspect in the case of Polenskya land of oil is the understanding of the habitats dynamics and restoration technologies. The farming being conducted in the area is crucial, but consequentially, the proceeds cannot be equalled to the proceeds to be obtained with regards to the oil drilling. This calls for public awareness and assurance that the production of oil will benefit the country largely by improving not only the economic structures, but also, the social infrastructures that directly touch into the lives of the public. The essence of public awareness is with respect to the occurrence of relocating the locals; conflicts will be minimised with an enlightened people but, with clear and full compensation. With regard to the transportation of oil from the extraction site, is also another object of critical analysis. With 100 miles from the land to the small port available, it means land transport will be utilised. This calls for measures of reducing environmental disruption with road, rail or pipeline construction. The use of pipeline in the oil transportation, calls for strategic measures looking into the eventualities of oil spills with respect to pipeline failure or outbursts; this could impact negatively to the flora and fauna. With respect to the area under consideration, a pipeline would be very effective for transporting the oil to the port. The major issue regarding use of the port entails the fishing practices carried out around the port. The mitigation measures to safeguard the aquatic life should be enhanced.37 This is with respect to ensuring oil spillage to the waters is managed. Thus, in the event of Atlantic Oil utilising the port for transporting the oil, stringent measures towards safeguarding the aquatic life are imperative. 4.0. FINANCING OPTIONS TO THE PROJECT With clear a perspective that the investing company-Atlantic Oil will not be in a position to wholly fund the project; this calls for outsourcing of funding from lenders. On the same note, the oil and gas industry has been hard pressed by large amounts of capital requirements to operate the projects along with long times taken prior to getting returns of the same investments. The Republic of Polenskya has no established banking system meaning the source of investment and funding within the borders is very difficult. This calls for the international partners like World Bank or the International Monetary Bodies coming in to support the project. Atlantic Oil will have to outsource funding for the project from loans granted by banks or other lending institutions. Further, funding from the stock exchange has proved a probable venture to solicit for funding for oil and gas projects.38 This has been through the oil company stock exchange whereby, Atlantic Oil could float shares to acquire funding for the project. With the promising venture, of Polenskya, the venture for people staking in the project would be very high. Other sources of financing the project could arise from mutual funds investment from the investors. These involves stock in major oil companies; stock in independent companies and exploration projects. Notable among utilisable funding is the drilling funds and royalty funds.39 The latter is provided by small companies giving out funds for drilling projects, the exploration and developmental drilling projects. One advantage with the royalty funds is that they last for long periods of time and carries low risk factor along with low returns. Atlantic Oil could also enter into multilateral investment with the World Bank. This is promoted by Multilateral Investment Guarantee Agency (MIGA).40 MIGA promotes direct investment in the developing countries in support of economic growth, reduction of poverty, and in the improvement of the public livelihood. The advantage behind this is the political risk guarantees of MIGA that are well suited to reduce non-commercial oil and gas investment risks. The latter options discussed provide a better solution owing to the enhanced interest rates by bans lending in the recent past.41 Amid the few outlined sources of funding for Polenskya oil and gas drilling, the International Monetary Fund and World Bank are very active in supporting developmental projects in the developing world. This is in line with their strategic measures of improving the world economy. With all these facts, Atlantic Oil is favoured to solicit for extra funding towards venturing into oil extraction in Polenskya. 5.0. CONCLUSION In conclusion, the undertaking of PSC Atlantic oil will benefit greatly with eventual profit shares and Cost Recovery. With the massive oil reserves at Polenskya, there is confidence in making proceeds from the project unlike the many that are undertaken to identify the viability and sustainability of the reserve. With respect to Polenskya, PSC is highly crucial as it is a developing nation that is not in a position to fund the project. History has shown that PSC system has been used effectively in developing countries to exploit its oil reserves to generate income, though with high extraction costs and high exploration or technical risks. The limelight comes in the sense that, with PSC, the problems of financial resources and technical know-how can be resolved by these countries. The investment at Polenskya by Atlantic Oil Company is a very critical and imperative task. This is one venture that Atlantic Oil cannot fail to utilise to realise success in its international exercise of oils investment. With respect to this, Atlantic Oils has the obligation of looking into various strategic measures to this regard. As clearly highlighted in the discussions above, the Production Sharing Contracts proves a highly crucial venture with regard to the investing company and Polenskya. The advantage of PSC with respect to a developing country with no expertise is that the contracting company provides the expertise and finances the project. This has major benefits as well illustrated in the section 2.3 and specifically 2.3.1. On the same note, stabilisation clauses with respect to PSC has been clearly highlighted and well illustrated in regard to the investment. Further, both the investing company and the Polenskya government have the obligation of ensuring the oil and gas drilling project does not pose any environmental negative implications. With respect to this various mitigation measures have been discussed with a detailed assessment of the impacts regarding the project. With the investing company, it is possible to predict and manage the risks by conducting geological and seismic research to ascertain whether the project is feasible and profitable. With respect to changing political environments, the PSC are not affected by change of governments, thus with respect to the case of Atlantic Oil and Polenskya with the eventuality of President Millapot getting out power due to ill health, the terms of contact signed will still hold. Finally, the whole project calls for major incorporation of extensive amounts of money. The fact the Atlantic Oil is not wholly funding the project has led to the discussion on the probable sources of funding with respect to international investment. Section 4.0 clearly shows that, with respect to developing countries, there are major sources of funding with the IMF and the World Bank being at the forefront to ensure funding of such projects. Atlantic oil in regards to this investment will outsource funding from international lenders. The advantage behind the venture is that it is a direct one without the taking of chances for making considerable proceeds. The oil reserves at Polenskya are evidently large and thus, profit making is a reality. 6.0. Bibliography List 6.1. Books Ariweriokuma S, The Political Economy of Oil and Gas in Africa, The Case of Nigeria (Routledge, 2009) 26-30 Easo J, Licences, Concessions, Production Sharing Agreements and Service Contracts. In G. Picton-Turbervill (Ed), Oil and gas: A practical handbook. (Globe Law and Business, 2009) 28-36 Machmud T, Indonesian Production Sharing Contract: an Investor’s Perspective (Kluwer Law International 2000) 12 Ramirez J, the Handbook of Corporate-Equity-Derivatives, and Equity-Capital -Markets (John Willey & Sons Ltd, 2011) 28-36 Write C, and Gallun, R, Fundamentals of Oil and Gas accounting (Penn Well Corporation, 5th edn, 2008) 17 International Energy Agency (World Energy Outlook 2005) Middle East and North Africa Insights (OECD/IEA, 2005)1 Smith E et al., Internationa, Petroleum Transactions, Denver (Rocky Mountains Mineral Foundation 3rd edn, 2000) 338. 6.2. Articles EPA Office of Compliance Sector Notebook Project, Profile of the Oil and Gas Extraction Industry, Office of Enforcement and Compliance Assurance, U.S. Environmental Protection Agency, Washington (October 2000) 12 J Daniel and T Rogers, International Petroleum Taxation, Independent Petroleum Association of America, Hancock (New Hampshire, Daniel Johnston & Co, Inc, 2008) 13 J Daniel, Changing fiscal landscape. Journal of World Energy Law and Business, (2008,) 1 M Martin, The Legal Obstacles to Foreign Direct Investment in Mexico’s Oil Sector. Fordham International Law Journal The Berkeley Electronic Press-bepress, (2009, 33, 1) 5 M Jeffrey, Financing of Oil and Gas Transactions. (2009) 10 . O William, Legal Frameworks Used to Foster Petroleum Development; Fuel Poverty Reduction (UNDP Discussion Paper) 6 R Jenik, How to Negotiate the “right” Petroleum Contract (UNDP Discussion Paper) 6 . R Pat, and M Walter, Drilling Smarter, Using Directional-Drilling to Reduce Oil and Gas Impacts in the Inter-mountain West. . T Walde, Stabilising International Investment Commitments: International Law versus Contract Interpretation, CEPMLP Professional Paper (1994, PP13) 21. 6.3. Reports J Blake and C Roberts, Comparing Petroleum Fiscal Regimes Under Oil Price Uncertainty (Resources Policy 31 2006) 95-105. . H Powell and GF Lindzey, 2000 Progress Report: Habitat Use Patterns and The Effects of Human Disturbance on the Steamboat Elk Herd. Unpublished Report, (Wyoming Cooperative Fish and Wildlife Research Unit, 2001) 21. RK Sinha, Global View of Production Sharing Contract: Indian Perspective. (Petroleum Regulatory Framework, 2010) 2 . Miga Brief, Oil and Gas: Securing Oil and Gas Investments (2012) 10 Read More