The Legal Policy In The Gas And Oil Industry - Essay Example

The Legal Policy In The Gas And Oil Industry Table of Contents Table of Contents 1 Introduction 1 Implementation of Production-Sharing Agreements (PSAs) 3 Joint Ventures Agreement 5 Risk & Benefits Associated with Joint Venture Agreements 7 Legal Issues 8 Service Contracts 11 Critical Analysis 14 Conclusion 16 References 1 Introduction In relation to gas and oil industry, the legal provisions and the contractual agreements govern the production and distribution system of the same. Notably, there does not lay any consistent approach of contract, which can be commonly implemented by all such nations that are engaged in the production of oil and gas. In this regard, each nation establishes and applies the method of contract or fiscal system, which assists the respective governments to meet the sovereign needs. In general perspective, there lay varied sorts of contract agreement in gas and oil industry that include production-sharing agreements (PSAs), joint ventures, service contracts and concession systems1. All these forms of contract are been utilised for accomplishing the same purpose i.e. promoting the economical growth of oil and gas production and extraction with sustainable environmental effect. Specially mentioning, the above stated contract agreements possess own advantages along with disadvantages. Malaysian oil and gas industry plays a key part in developing the economy of the nation through contributing 40% in the national revenues. The major issues that arise during the selection of contract in this regard include the share of distribution of profit between the government and companies participating in the contractual agreement and the cost structure that the involved parties need to be accepted. It will be vital to mention that oil and gas industry plays a vital part in boosting the overall growth of the nations in international scenario. Thus, the proper selection of a specific contractual agreement will not only assist the respective governments of the nations to eradicate the issues but also impact the overall growth of economy at large. Besides, the prior reason for undertaking an effective contractual agreement in the oil and gas industry between countries and international oil companies is to utilise the reserves in an appropriate manner2. However, at certain times, the selected approach of contract becomes complicated, which significantly leads towards rising disputes between the involved parties. Moreover, contractors need to follow varied industrial norms, environmental laws, international and comparative policies of different international environmental agencies. Correspondingly, this essay intends to discus and analyse the legal problems and issues that arise while selecting appropriate contract agreements in the context of oil and gas industry. Implementation of Production-Sharing Agreements (PSAs) By taking into concern the international scenario, it can be inferred that the notion of sharing production and operational activities of oil and gas amongst states and companies by forming an efficient commercial enterprise was significantly developed during 1950s in Bolivia. PSAs are regarded as one of the most widely utilised contractual agreements in the oil and gas production as well as exploration segment especially in most of the developing nations in this current scenario including Africa, South-East and Central Asia3. PSAs are principally viewed to be the legal contracts based on which the respective states and the companies desire to invest substantial funds over the activities of oil and gas production. This sort of agreement gives the right to the companies in exploring natural resources. Moreover, the contractual agreement also binds the companies to claim for sunk costs and shares, if they are able to extract oil or gas from the conduct of respective activities. However, undertaking this type of contract is often regarded as highly complicated and disputing regarding the share of authority and responsibility between the parties. Additionally, this form of contract allows the companies to gain exclusive rights in undertaking job roles within the defined areas in terms of bearing the entire cost of the project, operational, financial and other risks. It is worth mentioning that ‘Petroliam Nasional Berhad PETRONAS Carigali’ working along with various other multinational petroleum organisations through PSAs is engaged in producing and exploring oil and gas in Malaysia4,5. Correspondingly, in this type of contractual agreement i.e. PSAs, it is often notified that the contractors endeavour to recover their upfront costs in as much as possible, which significantly led the companies to perform unfair trade practices. Likewise, in several circumstances, during the time when the contracts come to end, highly complex chain of independent agreements leads to crucial issues. Moreover, after the extraction of oil and gas from the production procedures, the contractors are often viewed to make requisitions, which are known as ‘Oil Cost or ‘Cost Recovery’ for procuring all the costs that they have incurred during the process. In this regard, it frequently becomes problematic when the cost estimated by the government of host country mismatches with the claimed amount. This point of issue mainly arises due to the fact that the host government allows the contractors to recover the incurred costs based on the assessment of the situation but government at certain times overlook the hidden and unnecessary costs that companies often bear during the operational process. Additionally, apart from the cost related issues in this form of contract, share in the profitability i.e. ‘Profit Oil’ is also identified to create further issues regarding uncertainty of availability and time span during distribution of share of profit6. The disagreements in relation to PSAs mainly arise due to the increases in the share of profitability. In the current scenario, growing importance over the environmental aspects by the international agencies due to high rate of emissions generated from the operational activities is likely to create several crucial issues in this form of contract. Similarly, in order to obtain high amount of profitability, the contractors also in certain situations tend to ignore contractual terms, which may lead to severe issues in preserving sound relationship existing between the government and contractors or sub contractors. Correspondingly, in most of the PSAs, there lay the participation of National Oil Companies for reaping varied advantages. In this context, the rate of this participation in Malaysia is around 25%. Moreover, this situation of distribution of job role and engagement of partners will hinder the proper management of the contract. Apparently, in order to undergo with the task of oil and gas production and extraction, huge figure of manpower and workforce is required for smooth conduct of the operational activities that might create possible issues regarding wage discrimination and uncertainties in payments. Besides, the international companies need to follow different law and provisions related to the host country and any deficiency in mismatching such provisions may create issues in the contract7. Since the mid of 70’s, Malaysia significantly opted for PSAs contract from concession system contract. Notably, in certain PSA contracts, the rate of taxation is amounted to be around 60-80%. In this regard, the amount of tax rate amounted in Malaysia is around 45 %, which might result in creating disagreements between the parties to the contract regarding negotiation and replacement along with reduction in tax rates. Besides, Malaysian contractors who usually pay taxes claim for production bonuses, which significantly lead towards several consequences of financial issues between the government and the contractors. Moreover, if the terms of negotiation fail to create the balance amongst the views of both the parties, this may create issues in relation to PSAs contracts. However, contractors will remain highly cognisant regarding the duration of PSAs contract and thus they desire to endure as much as profit from the agreement8. Joint Ventures Agreement The agreement made through joint ventures provides better opportunity for a business towards developing its entity. It is strongly believed that this particular contract agreement enhances the credibility of the organisations to perform effectively, which in turn, enables them to attain long-term objectives. The approach also provides an opportunity in the form of promoting tradeoffs between different business entities. This certainly helps in providing the different business entities with the effective support to carry out their respective operational activities across borders. According to Geringe & Hebert9, business across borders is presently conducted with the use of joint ventures owing to the strategic importance that these hold in the present day context. Beamish & Lupton10 commented that joint ventures effectively assist in accessing new markets and thus enhance the parent companies to find new opportunities in such markets. Proper management of different attributes and enhancing ability of selecting partners further develops managerial abilities, which further increases the credibility of joint ventures11. Stewart & Maughn12 stated in this regard that the strategic opportunities through international alliances develop business across different cultural and economical societal settings. The international relationship in the context of oil and gas companies is duly maintained with the use of independently negotiated contracts. Thus, the joint venture agreements can be duly considered as one of the most important forms to develop the terms and conditions of the businesses and maintain cordial relationship at both ends13. Malaysia has been one of the emerging oil and gas sector across the world. The country has been developing its oil crudes and business across the globe with the use of joint venture contracts or joint venture agreements14. Risk & Benefits Associated with Joint Venture Agreements Identifiably, there lay certain risks or issues that can be related with the joint venture agreements. The joint venture contracts majorly undergoes with the view of developing certain underlying features of forming the contract. The series of differences that are involved in companies who are dealing across nations could be broadly identified to be based on their economic and environmental differences. The international policies that are prevalent in the countries create a contradicting impact on the international organisations further affecting their contractual relationship15. It is even noted that there exist series of issues that can be associated with the joint venture agreements. These issues arise out of the differences that are present in the countries dealing with oils and gas in relation to the management of resources. At present, the oil and natural gas sector majorly observed to be facing vulnerabilities owing to the financial and economic variations prevalent across countries. The differences in the economic practices perform by the respective governments are observed to be imposing huge impact on the development of different attributes relating to distinct commercial activities. The different value of money has also been affecting the execution of venture agreements. Another major risk that could be identified is the changing rates of currencies across borders. Thus, there is a huge amount of hedging risk involved amid countries dealing across borders through joint ventures. Furthermore, the changing values of money have been creating a massive impact of formulating contracts that would safeguard the interest of both parties. The Malaysian oil and gas industry in this context is observed to be undertaking the contracts relating to joint ventures based on risks as well as profit sharing. The strict governmental rules often prohibit the licence of a foreign concern, as these are not associated with a local entity in the oil and gas sector. This has forbidden the entry of foreign organisations freely into the country that possesses keen interests in operating in the sector of oil and gas16. The major benefits that can be obtained from the use of joint venture contract agreement in relation to oil and gas industry include formation of permanent business across borders and increase the adaptability of such business within different environments. The joint venture contracts in respect to oil and gas companies are majorly observed to flourish in different regions of the globe with the entry of foreign big players. It is even noted that owing to the ease of formations and relaxed legislative obligations, the oil corporations have been majorly inclined towards investing in the similar industry through joint ventures. The local organisations operating in the market have been effectively developing their respective foreign connections due to the intensive amount of capital requirement for the development of the market17. To develop the potentiality of the market, the joint venture contracts would enhance the ability of local companies dealing in Malaysia with respect to oil and gas segment18. Legal Issues Huge amount of capital requirement in oil and gas sector has triggered in creating varied legal issues for various international entities. It is often noted that the capital-intensive nature of the sector has been involving different operations. Hence, the oil and gas companies majorly undergo a joint operation agreement rather than a joint venture agreement. The oil companies of Malaysia are majorly operating through the ventures that involve the risk sharing clauses19. It will be vital to mention that the contractual terms related with deciding budget and maintaining expenditure are one of the major legal requirements of the organisations entering into contracts20. In general, across the globe, there have been several legal obligations that inclined with change in ownership, changing market settings and prevalence of staffing issues. It can be affirmed that after the failure of implementing PSAs, the joint venture contracts (JVCs) generally appear in the picture, delegating different operational activities to the involved parties. The major concern of the host companies at that juncture remains in developing a capital base so that they can ensure sustainable development in long term21. The risk sharing policies that are prevalent within Malaysian oil and gas companies are observed to be imposing positive impact on the development of the local market in the specific sector22. Similarly, in the case of Clean Energy Fuels Corp. v. California Public Utilities Commission (Southern California Gas Company), certain legal issues can be witnessed impacting the decision-making procedure of the organisation towards delivering quality natural gas to the customers at a standard distribution mechanism. Justifiably, according to the case, Southern California Gas Company (SoCalGas) made an application for obtaining the approval of Public Utilities Commission (PUC) in order to enlarge its services concerning gas compression. In response, Clean Energy Fuels Corp. (Clean Energy) is identified to protest the proposal made by SoCalGas by justifying the fact that by gaining the approval, an unfair business market competition will be emerged. However, by considering varied legal aspects in relation to cost tracking as well as marketing restrictions, Clean Energy failed to present appropriate evidences in the context of preventing SoCalGas from competing in the respective industry in an unfair mean23. Service Contracts Notably, oil and gas companies are dealing with service contracts so that the chances of interference from the venture partners could be reduced. This intervention must be specifically reduced in the major areas such as production and drilling of the products. It is worth mentioning that the long-term contracts enable the organisations to acquire international corporation’s expertise as well as capital without sharing the production and other major rights24. With the evolution of the industrialised civilisations, there has been a steep increase in demand for oil and gas. The rapid industrialisation has catalyst needs of oil and gas to meet the basic needs of the developing societies. This evolution has in turn changed the production and operational functionalities of the sector to meet with the increasing demand. The service contracts are usually agreed between companies on the terms that they will be providing specific services as per the mentioned clauses against payments. These payments are often designed in such a way that covers all the costs involved with the company’s operations for providing the services. Under service contracts, there are certain legal obligations that guide the operations of the service providers. These guidelines provide a proper outline towards developing contracts related with the services of different oil corporations25. Service contracts does not involve the transfer of the title, hence the amount of legal obligations that are related with such contracts is less than the other contracts that are prevalent in the oil and gas sector. Under a service contract, the transfer of ownership does not happen, which signifies that the right over natural resources available in its crude form is not transferred. However, the services that are accepted from the partners are based on a previously agreed term26. The different laws that underline the service contracts are mentioned on an agreed term. Like all other contracts, the terms given under a service contract provide a detailed outline of the possible transactions that are to be undertaken while prosecuting the job. Specially mentioning, each service contract bears salient features that provide a detailed outline specifying the services and the terms of payments. The parties possess an equal right to terminate the contract, if there is a breach of fundamental rights that are mentioned in the clause. However, the uniqueness of the contract lies in the negotiating rights that provide each party an option to refine their rights to maintain the objective that was determined while framing the contract27. Oil organisations usually adopt different drilling contracts for outsourcing their operations and enhancing their ability to perform in the respective industry as compared to other competitors. However, service contracts are deemed to be quite complex in terms of accounting disclosures. There are several issues that are observed while formulating a service contract, which majorly rotates around different licensing agreements. These agreements are related with the use of different machines in the course of operations. Since, the products i.e. oil and gas needs to be drilled out from the ground, several risks are related with such operations. Hence, the licensing agreements should be as per the terms mentioned by the government. These terms majorly rotate around safeguarding any harm caused on the environment28. Unlike other contracts, the service contracts provide freedom of operation to the host states. The credibility of the service contracts are identifiable through the terms and conditions related with the services provided. There are several types of service contracts that are broadly classified as risk service contracts and service contracts29. Particularly, in Malaysia, the risk service contracts are identified to be more in common than the other service contracts. Hence, the Malaysian government develops a positive approach towards sharing the risks involved with the operations that are prevalent in the sector30. The major distinctions that could be ascertained amongst the two types of contracts mentioned above are based on their respective terms and conditions. The major area of difference between the two is identifiable from sharing of underlined risks. The different service contracts are involved with operations and the underlying terms are defined according to the operations that cover the services. Depending on the potential of the different services, the terms of the contracts are specified and the guidelines are mentioned accordingly. Notably, the service contracts are framed by analysing the different consequences that may arise from the operations undergone by the service providers. The host country as well as the service provider has huge chances of facing conflicts depending on the terms and conditions that define the services as well as the underlying risks involved31. The service contracts are more inclusive than any other contract that is operating in the sector. On a positive note, the service contracts, owing to clear as well as defined terms of contract, possess lower chances of confusion. In this context, companies or the states dealing with different contracts can effectively develop their operations based on the specific services that they want to avail32. In this regard, Malaysian companies operating in oil and gas sector have been dealing across the globe with the use of service contracts that possess an underlined risk-sharing clause33. Critical Analysis Pirog34 reflected on diversified mode of operations that the oil companies experience and their imposition of huge impacts on generating positive outcomes. The changing positions of the oil companies have been affecting the supply and demand of the market. This in turn negatively affects the price of the products and also the conditions of world market. The different legal obligations that are involved with the contracts are based on the complexities underlined in framing the same. These contractual terms are essential for developing a strict guidance over the extraction of oil as well as gas. The different contracts that are undertaken by the companies are defined by the needs of legal obligations and the economic bindings that exist within a country35. Conversely, it is even noted that the different contracts prevalent within the sector often make situations complex36. The different strategies that are incorporated within the system of PSAs eventually make the companies to take effective and independent decisions about promotion of ownership and the utilisation of the available resources in an effective manner. For instance, the different venture contracts that undertake by Malaysian oil and gas companies underline the clause of risk sharing, which aids them to conduct easy operational functions. Furthermore, the risk sharing clauses would even prevent from the exploitation of the market based on increased amount of intervention. The government interventions often tend to be primitive towards safeguarding the over extractions of the resources37. There have been a series of corruptions and exploitations under different contractual terms throughout the globe. The Malaysian government has initially been using the PSA terms to enhance its relationship with the other traders across the globe. This certainly affected the use of contracts and the upstream licensing terms, which in turn, remained catalyst in the exploitation of the natural resources38;39. It can be critically argued that the selection of contracts is deemed to be most important in the context of e safeguarding the use of natural resources as per the needs. The contracts bind the parties under certain strict guidance and effectively limit their operations by a certain level. This is even noted that the different tax regimes are regarded as determining factors for the development of contractual terms. There have been different terms and conditions that underline the decision of selecting a contract40;41. The changing motivation of the companies and the recent control over different natural resources have certainly developed contractual terms that would provide less control of the companies on preserving the natural resources. With the changed interests of the organisations towards managing different resources, it is eminent that the respective governments have been majorly inclined towards safeguarding the resources from exploitation42. Observably, the legal obligations prevalent under the Russian government provide laws with more flexible terms to the companies in order to explore their natural resources. The transfer of ownership is even helping the organisations to develop the different exploration opportunities for the organisations to perform43;44. Contradicting to the above context, the Malaysian government has opted using the risk sharing terms for developing a clear picture in the sector45. In this context, this approach is further noted to be enhancing the ability of the nations to monitor different natural resources in an effective system46. On a positive note, the different organisations as well as nations are opting for the development of joint venture contracts. These contracts have been meeting the different needs of the organisations in alignment with the different bases of requirements and enhancing the ability of the organisations to perform47. Conversely, the Malaysian government has adopted as well as followed certain strict policies that prevent free entry of the foreign organisations in the respective markets in oil and gas sector48. Conclusion Based on the above analysis and discussion, it can be ascertained that varied contracts, which are prevalent in the sector of oil and gas, majorly incline towards the development of a responsible entity. This majorly reflects on the different approaches of the government to develop their natural resources and enhance the acceptance of the same to increase the credibility of the organisations to perform. This is even likely to influence the different exploration as well as the exploitation of the natural resources that are operating in the nations. Furthermore, the interests of the nations even play an important role towards implementing different contracts that would enhance the implication of the same in the respective markets. It is worth mentioning that the contracts are framed based on different contractual terms that enhances the ability of the organisations to penetrate markets across borders. Notably, several conflicts of interest and legal issues are duly emerged due to the differences persisting in contractual terms. 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