Oil and Gas Exploration and Production Contracts - Essay Example

Oil and Gas Exploration and Production Contracts Represent a Balancing Act Between National Oil Companies and Private International Partners. Tableof Contents Introduction……………………………………………………………………1 History of contracts……………………………………………………………1 Agreement on production Sharing…………………………………………...2 Contract on Risk sharing……………………………………………………..3 Concession agreement………………………………………………………...3 Joint venture…………………………………………………………………..4 Service contract……………………………………………………………….4 Law cases……………………………………………………………………...5 Case study: Nigeria…………………………………………………………...6 Oil discovery in Nigeria………………………………………………………7 Petroleum development in Nigeria………………………………………....10 The structure of production sharing contract in Nigeria…………………11 The service risk contract in Nigeria………………………………………..12 Nigeria petroleum Arrangement on Gas…………………………………..12 The arrangement of Petroleum in Nigeria…………………..…………….12 Nature of Ownership………………………………………………………..13 Law Cases in Nigeria………………………………………………………..13 Law Cases in Nigeria……………...…………………………………………14 Law Cases in Nigeria………………………………………………………...15 References……………………………………………………………………19 List of Tables Table 1. Petroleum fiscal arrangements……………………………………….5. 1. Introduction The act of finding and the extraction of energy in the form of oil and a gas is a day-to-day work in public and private companies in domestic and foreign countries. Oil and gas are examples of natural resources. A company’s extent of experience is an important factor that enables it to meet the daily needs of the users. The protection of the environment due to oil and gas mining is well regulated in developed energy mining countries. There are strict environmental standards that have been directed to the energy mining industries in the developed countries. The countries in the world that have been proven to have the world’s oil reserves are not in the developed but in the developing countries. There is a lack of set sophisticated regimes in these developing countries in the pursuit of protecting the environment for better health of the living creatures in the universe. Many private and public countries have shown the unwillingness to follow the procedures meant to cater for the environment despite the development of good legislative frameworks. Some countries utilise the production sharing agreements that are contracts used between the government of the country and the oil and gas extracting company. The establishment or the implementation of the international agreements do, however, lack consistency in their approach. Why? It is because any mining country is expected to establish a type of agreement that best suits their sovereign needs. History of Contact. The origin of concession was from the E&P of the petroleum in the developing petroleum mining countries by the international oil companies.1 It dates back to the late 19th Century when most of oil producing countries were under the European power political control. The Indonesian GOE and a foreign oil company were the first to form a Production sharing company in 1966 that was under the foreign company’s people’s empathy together with the countries aiming to control the natural resources within Indonesia. In between 1958 and 1961, Service contract was introduced for the first time in Argentina by the Argentinian government. The service contract introduced was in three types that included financial exploration, drilling, and development in the aim of achieving the most advanced technology. A third type of contract that is the joint venture was for the first time introduced in the Italian GOE, Iranian GOE, and Egypt. It was meant to participate in the Managerial decision. The ownership of petroleum is granted by the concession agreement. Examples of contracts in the exploration and production of oil and gas i) Agreements on production sharing The production sharing agreements are meant to help decide on what amount of share each will get. It is after a country executes the award of production to oil exploring and producing companies. The baring of the mining and financial risks are met by the company that takes the responsibility of exploring and finding the required field of mining. A successful2 company in finding a mining field is permitted to use the money that is gained from the produced oil in recovering the expenditure expenses together with the capital.3 The type of money used for this purpose is known as cost oil. On the other hand, profit oil, which is the amount of money that remains is shared in between the government of that particular country and the extraction company at a specified rate of about 80% for the government while the company goes with the remaining 20% of the profit oil. In some contracts, the changes in the prices of oil in the international markets or fluctuations in the cost of production can have a negative impact on the company’s production share. There is no grant of ownership by PSC. In this type of agreement, the revenue for the government is gotten from taxes and profit oil. ii) Contracts of Risk Sharing. It occurs in a situation where two parties come together and agree on sharing loss upon identification of a loss. It is a performance based agreement meant to benefit both the local and the private partners from the successful exploration and production of these natural resources in the mining countries. However, this type of contract is rare especially in those transactions that are outsourced. iii) Concession agreement The ownership of petroleum is granted by the concession agreement. Traditionally, the concession agreement consisted of only royalty payment that is 12.5 %, which is based on the crude oil tonnage on the production of a large area over a long period. A fixed period is, however, granted in the modern concession. In this situation the revenue for the government is mainly deprived from royalties. iv) Joint Venture The joint venture is a type of contract granted from the government to the company, and the company to another company as well. It can be found both in concession and PSC. v) Service contract. In this type of contract, a private company producing oil or gas makes an agreement with the government to perform particular specified services for the government in which, they receive a fixed payment for the service or even receive payment in terms of profit. It is, therefore, a framework contract that is a long-term governing relationship between the host countries and the international oil companies. The IOCs are mandated to explore the natural resources on behalf of the government, after which, they benefit from pre-determined fees. The government does not, however, hand the control of the fields fully to the oil companies. The nature of payment is the differentiating factor between PSC and service contract. The payment could be in the form of money or crude oil. In recent years, there have been a rise in oil and gas producing countries in the adoption of service-type contracts as compared to the production sharing contracts (PSC)45. The following table shows a summary of petroleum fiscal arrangements. Concessionary system Contractual system Concession Production Service contracts sharing costs Oil Field Ownership International Oil Company National Oil National Oil company company Crude production ownership International Oil Company International Oil Company/ National Oil company National Oil company Oil field operator International Oil Company National Oil Company International Oil Company/ National Oil Company How the international Oil company is compensated N/A A share of Flat free production Who Bears the risk International Oil Company International Oil Company/ National Oil Company International Oil Company/ National Oil company Table 1 Law cases In disputes relating to both oil and gas production, it is evident that there is involvement of both state and non-state entities been the major contract types. These include the concession and the exploration/production sharing agreements (EPSAs) that necessitate the participation 5 of both parties. Disputes may of course arise between the private investors in the petroleum companies to a petroleum joint venture. The participation of the state will, however, raise questions of immunity. There have been a major forum involved in the settlement of the disputes arising due to the disputes between states and their foreign investors in the present time and period by the World Banks’s International Centre for the settlement of investment disputes (ICSID). The facilities of the International Centre for the settlement of investment disputes can be used by both the member states in accordance to the 1965 Washington convection on the settlement of investment disputes between the states and the nationals of other states, and also by non-members through the International Centre for the settlement of investment disputes Rules for the additional facilities. In accordance to a review by the ICSID, those cases that relate to oil and gas disputes have revealed that the vast majority of the proceeding in the disputes do not result from the determination of the arbitrary bodies. The situations arises whether due to discontinuation after a request by one part, where there have been a settlement agreement through conciliation. It can also be as in one case the tribunal has declined the jurisdiction over the presented dispute. Case study: Nigeria Nigeria is the most populous country in Africa. Oil mining is the country’s largest industry and its main generator of the gross domestic product (GDP). There were claims that the oil sector in Nigeria is killing its economy. The claim was in accordance with the association of chambers of commerce, industry, mining and agriculture (NACCIMA).6 There have been a negative effect on other businesses by the oil sector in Nigeria and real value is not been added to them. The sector has even affected the agricultural exports resulting to their decline. Oil discovery in Nigeria. Oil in Nigeria was found in 1956 by Shell BP and other known developers who were in pursuit of petroleum that would be commercially available. There was great reliance on agriculture in Nigeria prior to the Discovery of Oil in the country. Shell BP discovered oil in the country after 50 years of oil searching at Oloibiri that is in the Niger Delta. The discovery has contributed to a greatly to the growth7 of the economy that seemed to have an increased production. As a result, there has been a great competition for the profits resulting from the export of oil to other countries. It has in return resulted to a point of an increase in the level of terror in Nigeria experienced by the citizens that live in the region. There are five different phases followed during the extraction of natural resources like oil and Gas. The phases are as described below. a) Exploration: it is the initial step that involves the process of seeking these important natural resources by the use of the knowledge gained from various articles and the readings from data. b) Production: after the exploration and finding of a suitable mining site follows the production process. It simply involves getting the resources from the ground. c) Transportation: after the required resources have been produced from the mining site, they are then transported to specified places for further processing of storage prior to the transportation of the end products to the market. d) Processing: it involves the process of converting the raw materials from the extracted material from the mining site to an end product for use by the consumer8. e) Disposal: it is the final phase that involves making the end product available to the end user. The end products are transported to the end user from the processing plants creating market for the products. Shell enjoyed the dominant role of exploring oil and gas in the country until the time of the Nigeria’s membership in the organization of petroleum exporting countries (OPEC), in which, it became a member in 1971. Since then, Nigeria began to take a more firm control of its resources of oil and gas. The act was in line with the practice of the other OPEC members. During this period, there was a witness of the emergence of National Oil Companies (NOC) that were noticed to have emerged across the OPEC member countries. The National oil companies were formed with the objective of monitoring the stake of the countries producing oils towards the exploitation of the resource. Unlike the other countries that were members of the OPEC that allowed the National Oil Companies to take the full control of the production within them, Nigeria followed a different route. It allowed the Multinational Oil Companies with the petroleum production operations, though not individually but under Joint Operating Agreements. The joint Operating agreements clearly specified the respective stakes of the petroleum products producing companies with that of Nigeria’s government in the ventures. The period was marked with the arrival of other Multinational Oil Companies including Gulf Oil and Texaco, Mobil, Agip and Elf Petroleum (Total). These oil companies joined Shell in the production of the petroleum products in the country setting up competition.9 The new companies also operated under the Joint Operations Agreement within the Nigeria National Petroleum Corporation (NNPC), but with percentages that varied in the stakes in the acreages they occupied. Up to date, the above mentioned companies are still the major oil and gas producing companies in Nigeria. In the production, shell accounts for almost 50% on the country’s daily production of the products. The production currently stands at 2.4 million barrels of oil per day. The hydrocarbon resources have been referred to as ‘lifeblood’ of industrialisation, which is due to the responsibility of the hydrocarbons in lighting, transportation, cooking, and heating plus many other uses. Although the developing countries hold greater reserves of petroleum products, the high significance of the petroleum products have made the industrialised countries to dominate the world’s petroleum development activities Petroleum Development in Nigeria. The joint operation agreements were created between the indigenous companies and the international oil companies in order for them to achieve the indigenous participation policy. Farm outs were also created between the international oil companies and NNPC that also is aimed at enhancing in the achievement of the participation policy. The petroleum act is part of the OPEC and provides the participation by the Federal military government that is also aimed by the government to participate in the venture to which licensee is mandated to relate on the terms to be negotiated. There was also enacting of the NNPC Act that was done in order to allow it to have joint ventures in the petroleum development activities.10 The Above Act is used to stipulate partnerships in the exploration of the petroleum products. It encourages and lays the procedures meant to enter into contracts with any company willing to do so. It could also be a firm, a person or even a firm willing to enter into a contract, where in all the cases the corporation’s opinion takes the responsibility of discharging the specified duties under the Act. It also includes the things that are required to give the effect of the agreements that have been entered into by the federal Government in which there is the view to secure the federal Government’s participation in the corporation of the activities that are connected with petroleum mining and processing. The structure of Production Sharing Contract in Nigeria. The production sharing contract in Nigeria describes the International oil companies as contractors and NNPC as OPL/OML holders. The PSC in Nigeria are almost like the risk with the exception in the situation where NNPC opts to change the contractor at the phase of production of the Risk Service, as well the contractor’s oil sharing that is a well assured action under the production sharing Act. The international oil companies are contracted, so as to carry the operations regarding the petroleum and their products exclusively within the area stipulated for the contract. There is no recital of the statutory of the minister that is required and that would be obtained, although the approval by the minister is endorsed in the PSC. There is no Statutory that is provided directly and this allows the production sharing contract to be carried out in Nigeria. The international oil companies that are dependent on the process of production are allowed to happen only if the NNPC acquires an OML. On the other hand, the OML will depend on all its OPL conditions been met by NNPC.11 The Service Risk Contract in Nigeria. The only notable case of risk service contract has been noted between the Agip and the NNPC over the Agbara oil field. The NNPC has the right at any time to take over petroleum operations, or even replace any contractor with another potential contractor at the phase of production. There can be the reimbursement of a contractor from production proceeds directed in the costs of exploration, development, and production processes. The contractor is also entitled to remuneration in which case, it is based on a formula prescribed to factor in volume and price of the market of the produced crude oil. In the lieu of remuneration, the contractor is given the option to take prescribed oil quantity. The operations are controlled by the NNPC through approving the programs of work, subcontractor’s appointment, the process of approving the budgets and the expenditure. The responsibility of paying the tax is mandated to the contractor, whereas the royalty is done by the NNPC.12 Nigerian Petroleum Arrangement on Gas Petroleum is defined as Natural gas or crude oil in the petroleum act. The current development of petroleum in Nigeria gas has been due to the incident of the associated oil. There has been no framework of statutory or even for contractual purposes that has been set especially for the development of gas processing and, therefore, takes into account its peculiar character. It is so, especially in the longer development time required. One contractor is found to take the responsibility of notifying the NNPC under the product sharing contract and the risk if gas will be found and the second contractor is also found who is supposed to be entered into the arrangement for the development of the gas. The Arrangements of Petroleum in Nigeria There has been identified features through the parameters that foreign investors use to determine whether they will invest in a certain country or not. These features include the nature of the protection that they will be granted from the defined ownership. The second feature is the fiscal regimes nature and also the nature of the ownership that will be granted. However, other features may also exist and be applied by a company in determining whether or not they will invest in the country involved in the production of oil and gas. Nature of ownership In accordance with the mining rights, under the production contracts and the Risk service legal title confers alone in the NNPC. The property used for operation under the Production Sharing contracts and the risk service are allowed to use the property and equipment for the various operations in the petroleum production and processing. These are at the end transferred to the NNPC in case the contract comes to an end. All the data recordings of the operations are retained by the NNPC including the reports, logs and also information that is acquired during the performance of the contract under the production sharing contract and risk service13. Law cases in Nigeria The oil companies have always been caught in disputes that are long standing in their oil producing areas. The long-time disputes relating to the oil companies centre on the issues such as, the boundaries relating to plots of lands. The shell BP oil company lied to a Dutch court over oil spills in the country. The case was brought to the court accusing the multinational oil company over by four farmers and friends of earth in Nigeria. They claimed for the compensation by shell due to damage that had resulted from the bursting of a major pipeline where the local communities were devastated. The case went to court in the year 2002 in Hague, the layer presenting the company told the court that the company had taken the necessary precautions meant to avoid spilling of oil spills in the Niger delta that included installation of a detecting device to detect the leakage any time it occurred. The documents presented by the lawyers representing the farmers was showed to the high court in the UK indicated that there was no detection system. In 2008, the court admitted in public that the there was a mistake where the trans-Niger pipeline that is 24 inch in diameter did burst twice within two days, in a situation where over 100,000 barrels of oil were spilt over the surface. It’s, however, not clear to what extent the damage occurred. It was estimated that over 30 million people living within the delta region were affected significantly over time by the spilling of the oil from the burst pipeline.14 Other situations do exist where the oil company has been involved in oil spilling in Nigeria in which it has admitted in two cases. It has, therefore, been fined hundreds of millions of dollars in penalties to be used in compensating the victims especially the farmers within the region. £3,500 and 50 bags of rice, 50 bags of beans, and a few cartons of sugar plus tomatoes and groundnut oil having been offered by the company within two years to compensate and assist the affected agricultural community due to the massive damage they experienced as a result of the burst pipeline. The offer by the company was, however, rejected in accordance to the communities within the affected region. The company, however, accepted the legal advice later In another case, the Agip Company had entered a communal land near Oloibiri in the Rivers state in the year 1977. The plaintiffs sued the defendants for having received rent and compensation that came up as a result of the oil operations of Agip. Although the land should have been the disputed matter, the payments for compensation due to the oils spills have been the motive behind the lawsuits. The court was asked by plaintiffs for a declaration where they were entitled to all compensation payments. This included the 143,234 Naira that was deposited to the court By Agip. The court was also asked to impose an injunction against the Agip Company that it would be prevented from paying any form of compensation to any other person rather than themselves. Even though the case in the court was in order to compensate for the damage due to oil operations. There has been, however, a land dispute that has been standing for 20 years before the Agip Oil Company took over the area for the oil production.15 According to the judgement that was presided by the court in regard to the issue, it seems that the defendants in the case had continued to use the land that was under the dispute despite the Native court’s injunction to restrain the defendants from using the land in question until the defendants establish their ownership right over the land. In conclusion, the operations in oil production just revived an old dispute16. The oil and gas industry is regulated by the ministry of petroleum that is mandated with the primary oversight of the industry. The mandatory functions of the ministry are exercised through the department of petroleum resources. The body responsible for the detection of the oil spillage is the National Oil Spill and Response Agency (NOSDRA). 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