International Oil and Gas Law - Research Paper Example

? International Oil and Gas Law Content page Introduction …………………………………………………………………………….3 2. Case scenario…………………………………………………………………………………..3 3. Objectives…………………………………………………………………………………4 4. Type of agreement that Urbania should enter for continued development and production from the Western plateau region after the expiry of the concession…………………………………………………………………………………5 4.1 Risk management……………………………………………………………………...5 4.2 Importance of risk management ………………………………………………………5 4.3 Classic concession ……………………………………………………………………6 4.4 Territorial jurisdiction………………………………………………………………..7 4.5 Guarantee schemes……………………………………………………………………8 4.6 Collaborative agreements…………………………………………………………….9 5. Ways in which Urbania should proceed with the proposed oil development in the Amazia Forest region and ways in which should it decide which oil company to work with ……..................................................................................................................................10 5.1 Tackling the ethical issue …………………………………………………………………………………..10 6. Type and sources of financing which Urbania will require if it is not able to completely fund out of its own resources on any developmental project ……………………………12 6.1 Emphasis on World Bank……………………………………………………………………………………..12 6.2 Multilateral Guarantee Agency (MIGA)………………………………………………………………………………….14 7. Conclusion……………………………………………………………………………….15 Reference ………………………………………………………………………………..16 1. Introduction Oil is one of the most precious natural resources utilized by countries in business arena rigorously reaping enormous revenues and adds to the growth and development of an economy. The omnipotence of oil utility is also magnificent as we all know. But oil is not a renewable resource and thus its importance against its tremendous usage becomes much more pronounced. The developing countries in the world are mainly instilled with vast resources of oil and gas and their increase in demand is also increasing in rapid scale in the recent years. Multinational oil companies, investors, suppliers, contractors as well as consulting firms are considerably shifting their attention towards these developing nations for carrying on their business operations (Razavi, 1996, p.2). The escalation in global oil production also carries along with it an urge of unparalleled risk management. With the rise in peaking of oil production, the liquid fuel prices and price volatility has been rampant subjected to dramatic influence on economic, social and political forefronts of the countries. Strategies are devised by the organizations engaged in the oil industry for risk mitigation. The risk management paradigm is indeed of great significance for mammoth investments in the oil industry projects which are time consuming. Apart from that, running business in an ethical manner is a definite necessity. Oil companies working in a country be it national or international must comply with the proper legal environment so that business operations are done in a suitable way and oil productions are carried on in a sustainable manner. The countries are required to maintain a strong legal environment which is an utmost necessity (Razavi, 1996, p.2). 2. Case scenario: Urbania is a country that has been ruled by military dictator President Millapot. In the first year when the President came to power there was a classic style concession with the oil company Nobel oil limited for development of the oil reserves on the Western Plateau region of Urbania. There has been substantial production from the development and Urbania and it has been receiving royalty of around 16%. This particular arrangement will be terminating in the month of June 2013. The oil company, Nobel oil has employed a few locals from the area but its majority of the workforce is foreign oil workers. In the developmental dimension, the company has constructed a pipeline in the port of the neighboring country Ruritania’s port for export of oil. The company Nobel oil limited is interested in continuing their future involvement in the country but recently two multinational oil companies Atlantic Petroleum Inc and Phillips Petroleum Ltd have also shown an interest in working in Urbania. It should be noted however, that Phillips Petroleum has recently had to pay a substantial fine in Ruritania for breaches of Ruritanian environmental laws. A new and potentially large oil reserve has been discovered in the Amazia Forest area, which is situated on the Eastern coastal area of Urbania, but this area is also home to a large community of aboriginal people. Thus it can be seen that the case provide a legal dimension regarding its future operations along with intervention of international oil companies and ethical perspectives where the issues of the aboriginal people are associated. 3. Objectives: Now on the basis of this case scenario thus developed, the target of the paper will be to develop a particular legal framework which will allow the country to continue development and production from the western plateau region. Discussion will be also on an ethical dimension which will deal with the decision of the country in oil exploration associated with Amazia forest and lastly in case if the country is unable to fund out of its own resources any development projects then what are the types and available source of financing available will be also discussed. Now the first part of the paper will be discussed in the subsequent section. 4. Type of agreement that Urbania should enter for continued development and production from the Western plateau region after the expiry of the concession. 4.1 Risk management Project risks are associated with the investments in the oil industry. The project risks are generally divided into two groups and they are commercial risk and the second one is the political risk (Alan, 2003). Commercial risks are risks which are associated with overruns, delays as well as shortfalls in the revenue generation through uncertain sales and prices. On the other hand, political risks include expropriation of assets, civil disturbance as well as foreign exchange convertibility. In developing countries, a major problem lies in the lack of well established legal and institutional framework which helps the government in executing actions in a proper manner which substantially affect the costs as well as revenues of the government. The government controls the domestic oil prices or takes part in changing the oil terms of gas taxes and royalties. One of the biggest threats to the private investment in the oil and the gas sector of the developing countries is that of risk. In countries where the government have adapted steps in establishing a stabilized framework and also present clarification in their project, project sponsors may not also possess the full confidence that the new environment will be remaining in a stable manner or not. There is also uncertainty that whether the government will be realizing fully the obligations in a proper and fair manner or not (Razavi, 1996, pp.3-4). 4.2 Importance of risk management Thus, the issue of risk management is of significant importance in order to reflect the fruitfulness of investments within the oil and gas industry. The political risk must be properly addressed at the first instance before the outset of project preparation. Majority of the investors and financers carry a notion that commercial risks can be effectively managed but they feel that the political risks are beyond control. It is a common agenda that the people engaged in this sector take the proposal in a serious manner till they receive proper assurance from the authorities that the political risks are manageable. The political risks can be mitigated through different ways and they include different forms like different guarantee forms and also the involvement of various types of partners as for example a key state entity or that of a powerful local and companies. The formal guarantees are provided by host through the methods of multilateral as well as bilateral agencies. For the purpose of choosing a form of comfort over another, the sponsors will be trying to receive the most comprehensive coverage at the lowest possible cost. The role of the government plays a predominant part and it varies from countries to countries and from project to projects. The project sponsors in this case require a take-or-pay or throughput agreement with the entities in order to maintain a sustainable policy (Razavi, 1996, pp.3-4). Now the following section will discuss the type of concession used by Urbania in its oil industry. 4.3 Classic concession Classic concession, a type of concession used in Urbania is related to the mineral rights made through the government of a country over a large acreage area and it is done basically for a longer period of time. This type of grants also provides the international oil corporations to exercise extensive control over the schedule and the manner in which the mineral reserves are developed and also provide reserving some rights to the sovereign. As instance it can be stated that in the year 1901, in Middle East such concession was obtained by William D’Arcy from the shah of Persia. In lieu of $ 100,000 another $ 100,000 in stock in the oil company along with 16 percent royalty were secured within next 60 years. In the year 1933, concession was given by the King of Saudi Arabia to the Standard oil of California with a term period of 66 years. Later on the Ruler of Abu Dhabi also granted a 75 year concession for the purpose of covering the whole country into a consortium which was composed of five major oil companies. In Kuwait there was a similar concession for 75 years term. These concessions also do not specify the obligation to the companies in drilling on any of the lands granted for releasing territories if there was no drilling or exploration measures undertaken. The host countries do not possess the right in participating in the managerial decisions (Bishop et al, 2005, p.216). In the early arrangements several early concessions also led to freeing of the companies from all the tax obligations except those which are mentioned specifically within the agreement Thus it can be stated that the classic concession which Urbania has entered is a long term contract and the international oil companies possess a larger volume of exercising right to extensively utilize the resources. Now the subsequent section will discuss about the type of agreement that Urbania should enter for the purpose of maintaining a continuous development and production. 4.4Territorial jurisdiction Territorial jurisdiction is one of the important aspects which must be taken into prime consideration. A case will be discussed in brief. In the International court of justice (ICJ) in October 8, 2007 stated in a 94 page judgment revealed that Honduras and not Nicaragua possess sovereignty over four disputed islands in Caribbean Sea. Through a 14-3 case, the court fixed up a single maritime border line between the two nations in the Caribbean Sea. The case was brought by Nicaragua in the year 1999 and for solution it took nearly 8 years followed by a prolonged time phase of diplomatic problems and occasional maritime incidents adversely affecting the relationship among these two Central American neighbors. In the year 1894, these two Central American countries entered into a general boundary treaty which did not demarcated the boundary between the two states and did not reflect proper manifestation of the territorial limitations on which the states should be authorizing their control. There evolved a Mixed Boundary Commission that directed towards demarcating the boundary of land from Pacific Ocean to that of the Atlantic Coast. The provisions of UNCLOS (The United Nations Convention on the Law of the Sea) are to be included for the purpose of delimitation. Article 15 of the UNCLOS state the provisional drawing of a median or an equidistant line subject to a possible adjustment to give effect to "special circumstances" in the case of the delimitation of the territorial sea, whereas the exclusive economic zone and the continental shelf are to be delimited by "agreement on the basis of international law" to "achieve an equitable solution" (Articles 74(1) and 83(1) of UNCLOS)” (Bekker & Stannic, 2007). Plotting of a single maritime boundary is necessary in accordance with the equitable principles/relevant circumstances method. The process involves drawing of a provisional equidistant line along with consideration of additional factors in further adjustments of the line for achieving an equitable solution (Bekker & Stannic, 2007). 4.5 Guarantee schemes Protecting the perspectives of the investors is necessary for maintaining sustainability. The political risk insurance or the guarantees which are issued by Multilateral Guarantee Agency (MIGA) guided through World Bank will help the investors in managing the non commercial risks within many diversified markets. Compliance with MIGA helps in the promotion of foreign direct investments within the emerging markets through the provision of political risk insurance or guarantees. The guarantee coverage is able to protect the investors and the lenders from the expropriation, conversion of currency, breach of contract and that of civil disturbance. MIGA is capable of generating confidence within the investors and its structure as international organizations with branding of World Bank with shareholders from 171 member countries which attaches the weight necessary for deterring the action of the government which can stand in the way of disrupting business operations. MIGA serves as a truthful agent that ensures the success of the investments and also resolve disputes before this claim reach a point of claim. MIGA through its rigorous national as well as local expertise under the purview of World Bank’s is also tailored for neutralizing growing conflicts among the national and the local governments. MIGA has been engaged in monitoring and settling disputes in countries like Argentina, China, Guatemala, Kyrgyz Republic, Mauritania, Moldova, Nicaragua, Nigeria, Senegal and Venezuela and so on (Barry, 2008, p.32). 4.6 Collaborative agreements An effective way of maintaining sustainability can be done through the execution of collaborative projects. Shared rig campaigns are an effective solution. Drilling rig is basically secured on a long term basis with contracts of 12-18 months which attracts a lower day rate as compared to the short term contract. This if done through a third party then the operators will be benefited from the engineering expertise and cost savings as a result of aggregated buying power developed by program and efficiencies delivered through continuous program. Multi-operator and multi-well campaigns are able to bring great benefits but it must be ensured that they are drill ready (Rig sharing the way forward for UK operators, 2012). 5. Ways in which Urbania should proceed with the proposed oil development in the Amazia Forest region and ways in which should it decide which oil company to work with 5.1 Tackling the ethical issue Vast oil reserves have been identified in the Amazia forest region but it is also a fact that it is a home to a large number of indigenous people. The situation here brings the issue of ethics. This is an ethical challenge for the country. One of the obnoxious elements associated with the oil industry is that of environment degeneration. Environmental degeneration is one of the foremost concerns of the international community. The oil and gas projects are rigidly associated with environmental and safety risk. These risks are strongly subjected to investigation and proper management. In the industrial economies environmental standards are quite high and they are practiced in a clear and transparent manner. But in the developing countries environmental standards associated with the oil and gas sector is loose and this affects the local environment and the people in a bad manner. Previously, majority of the oil companies applied the techniques of in house standards acting as shields for various concerns related to the environment. The existing oil and gas facilities in several countries are operating at suboptimal levels which cause tremendous damage to the local and global environment (Razavi, 1996, p.3). The term ethical oil can be introduced here. A conservative activist pundit Erza Levant have coined this term with respect to the rights of the indigenous people in the Canadian oil industry. The countries that produce ethical oil protect the right of women, workers, indigenous people and also other minorities like the gays and lesbians. On the contrary, conflict oil regimes stand in the way of oppressing the citizens and they operates with no accountability to voters as well as that of the press or of independent judiciaries. The indigenous people form an indispensible part of the local culture and transferring them to any other places will threaten their minimum conditions for their survival. Oil drilling is welcome in the Amazia forest region but policies have to be adapted for properly protecting their rights. First of all, there should be a recognition of the values and traditional knowledge management practices which would be leading to an environmentally sound as well as sustainable development. Secondly, there should be also recognition that sustainable harvesting can be made as necessary towards promising the economic and physical well being of the indigenous people and their communities. There should be also development and strengthening of the national dispute resolution arrangements related with settlement of land and resource management concerns. There should be also support associated with alternative environmentally sound production means which would be ensuring a variety of choices dedicated towards improving life quality which would help the indigenous people in effectively participating in the sustainable development. There should be also enhancement in the capacity building of these people and communities and that should be based on adoption as well as exchange of traditional experience, knowledge and resource management practices which would be ensuring sustainable development (Weber et al, 2000, p.13). In the Arctic region the government has settled properly the issues related to the property rights of the indigenous people. It can be said that majority of the indigenous the people are in the process of supporting oil and gas in the Arctic. Indigenous people of Alaska and Canada are already associated with the extraction of oil and gas (Mikkelse, 2008, p.343). Phillips Petroleum has recently breached Ruritanais’ environmental laws but it still wants to cater in the oil industry of Urbania. In this respect, the issue has to be tackled in a proper manner. Not letting the company to work or nationalizing will not be a feasible solution as the international oil companies add rigorously to the economic development of the nation. In this case proper legislative framework should be established so that the company gets no chances in future to breach the environmental laws. Developing petroleum codes can lead to the increase in the compliance. In the developed countries there exist effective enforcement provisions. As for instance in France, petroleum code requires the companies in maintaining certain parameters. Failing to comply with the requirements the companies will be penalized with heavy fines and the company’s manager of operation will be also facing criminal liability. In countries like United States, Fiji, Seychelles there is establishment of corporate liabilities as well as criminal liabilities. In the United States, Federal Oil Pollution Act of 1990 is the most stringent penalties that are exercised with the companies that breach environmental laws. The law states that USA and the Indian tribes have the power of recovering all removal costs, natural resources damages, loss of royalties as a result of contamination (Gao, 1998, p.338). These policies are highly significant in deterring the oil companies in protecting the environment as well as the indigenous people. Thus in these ways Urbania can proceed with the proposed oil development and also manage its continued relation with the IOC (International oil corporations) and lead to a sustainable development in its oil industry. 6. Type and sources of financing which Urbania will require if it is not able to completely fund out of its own resources on any developmental project. 6.1 Emphasis on World Bank Majority of the petroleum projects till the 1970s in the emerging economies were financed through the international oil companies through the process of internal cash generation. This scenario transformed after 1970s when the government became thoroughly engaged within the petroleum sector for ensuring proper control of their reserves and also in case of petroleum importing countries for mitigating various concerns associated with the oil supply security. In the decades of 1990s, focus turned towards the financing of the private sector as because majority of the governments started to restrict their financial contribution within the oil and gas sector. Coming to the cases of international oil companies it has been found that these companies are less prone towards financing the projects on their own and have started in including a large number of partners. The reasons include political necessity for local participation as well as that of a desire in sharing project risks. It can be also stated in this case for all these reasons there has been emerging complexities in the funding dimension associating the public as well as the private investors and financers. In the year 1995, the World Bank through reexamination of the strategies associated with consultation with the member countries has brought about different dynamic changes from deviating from previous history of 5 to 10 years. Strategy formulations over the years has steered the bank in providing most effective assistance to the member states involved. The new strategy of World Bank is focused on helping the developing countries in mitigating project risks and enabling the government in serving as effective regulators. The bank also helps in the creation of a healthy competitive market for encouraging protection of health, safety and environment as well as acting as a nucleus of the private capital and acting as a lender of last resort. World Bank has recently entered into cooperation with recognized institutions like International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA) for the purpose of providing technical assistance as well as lending and providing guarantees. The bank through its collaboration identifies and finances the most urgent and economically viable projects in the process of oil development, processing and that of distributing in absence of sufficient private sector resources. The Bank also provides various guarantees in covering risks for significant environmental projects. Starting from the year 1994, World Bank has offered two types of guarantee schemes. One is the partial risk guarantee which covers up the non performance of the contractual obligations of the government which include selling of inputs to the project, purchasing of the end products or that of making various related investments. Apart from that, the partial credit guarantee scheme which typically extend the maturities beyond the amount provided by the creditors through the guaranteeing of late dated repayments. The World Bank also facilitates many international trade projects mainly that of gas pipelines and also that of liquefied natural gas projects and that of the oil pipelines. The gas pipeline projects particularly gets help from Bank as investments that have long payback period and are predicted risky by the private oil companies. World Bank acts as a facilitator in projects that are really complex in nature and which require direct state participation (Razavi, 1996, pp.3-5). 6.2 Multilateral Guarantee Agency (MIGA) Co-operation with MIGA may also act as a significant and alternative source of finance. MIGA protects the investments from the results of political disturbances throughout the globe. MIGA helps in mitigating risk as and also minimizing investment costs. MIGA assisted El Paso Energy International Company in participating in one of its largest investments in Latin America “through the involvement of cooperation as well as operation of 3150 Km long natural gas pipeline from Santa Cruz in Bolivia to Porto Alegre in Brazil” (Barry, 2008, p.34). $ 14.6 million guarantee scheme of MIGA is currently protecting investment as compared to the transfer risks, expropriation war and that of civil disturbance. In El Paso, the expropriation coverage shields the investment projects against various measures taken by the government which affect project enterprise in either country. As recommendations it can be stated that the sponsors of the oil and the gas projects in the developing countries find themselves in a never ending process at the time of designing ownership structure, packages of security and that of finance plan. The sponsors also may try and achieve various conflicting objectives with the minimization of risks as well as that of financing costs and also maximizing successful and timely implementation of the projects. For the purpose of managing the project risks and the upstream oil and gas projects, state’s role should be reduced to the minimum possible extent. In case of the infrastructure projects there is a requirement of the state intervention in a large scale. Along with an appropriate ownership, the sponsors are eligible for receiving support from the international institutions like World Bank which offers flexible finance schemes for facilitating fund mobilization from diverse sources (Razavi, 1996, p.5). 7. Conclusion Managing the oil industry and its production is a complex task and it includes proper regulatory framework for ethically running the same. Urbania has been using classical concession with Nobel oil limited who has recruited mainly foreign nationals and few local people. Now in classical concessions the oil companies have a significant power in expropriating the petroleum resources. Various risks which can arise are described and ways to tackle them are also mentioned which includes maritime boundary and compliance with norms of UNCLOS for the purpose of achieving equitable solution. Along with that MIGA’s guarantee schemes are required to be taken into consideration for helping the investors and managing the non commercial and political risks. In the ethical grounds proper evaluation of the rights of the indigenous people should be taken into incorporation along with devising of proper environmental codes. In cases of alternative financial assistance Urbania can take help of World Bank and its collaborated agents for proper flow of finance and maintaining a proper standard in the oil production. References 1. Bishop et al, (2005), Foreign Investment Disputes: Cases, Materials And Commentary, Kluwer Law International 2. Alan, B, (2003). Managing Political Risk in the Oil and Gas Industries, International Oil, Gas & Energy Dispute Management. Available at, (accessed on December 19, 2012) 3. Bekker, P & Stannic, A, (2007), The ICJ Awards Sovereignty over Four Caribbean Sea Islands to Honduras and Fixes a Single Maritime Boundary between Nicaragua and Honduras, Vol.11, Issue 26. 4. Barry, M, (2008), MIGA GUARANTEES KEEP OIL AND GAS PROJECTS ON TRACK, World Bank Group. Available at, (accessed on December 19, 2012) 5. Gao, Z, (1998), Environmental Regulation of Oil & Gas, Kluwer Law International 6. Mikkelse, A, (2008), Arctic Oil and Gas: Sustainability at Risk?, Taylor & Francis 7. Razavi, H, (1996), Financing Oil and Gas Projects in Developing Countries, Finance & Development. Available at, (accessed on December 19, 2012) 8. Rig sharing the way forward for UK operators, (2012). Available at, < http://www.offshore-mag.com/articles/print/volume-68/issue-8/departments/beyond-the-horizon/rig-sharing-the-way-forward-for-uk-operators.html> (accessed on December 19, 2012) 9. Weber et al, (2000), Indigenous Peoples and Conservation Organizations, Experiences in Collaboration. Available at, (accessed on December 19, 2012) Read More