Legal Aspect of Oil and Gas Management - Essay Example

Legal Aspect of Oil and Gas Management Introduction This paper takes into account the fact that whether or not the government has the sovereignty rights over the resource of the state and contracts that give the right to the foreign oil companies to take control over the natural resources of the host governments. This paper focuses on the legal aspect of the oil and gas management, developing the understanding of the substantive rules of international laws applicable to the oil and gas industry in the 21st century. It also discusses the modern principles of contract formation in international commercial transactions and key international law principles and recent trends in the oil and gas sector. Furthermore it also demonstrates the critical understanding of the importance of oil and gas law as a distinct subject, studied in a practical and commercial context in today’s world. In the 21st century the governments possess the control over the resources of the state but this was not always the case. Before the rights were defined by the UN regarding the sovereignty of the natural resource present in the country; powerful countries and companies exploited the natural resources of smaller or weaker countries. It can be predicted that the search of oil and gas will continue, at least for the short term, with the advancements in the extraction technologies. This may result in producing new contracts between the host government and companies addressing the new techniques of extraction. The oldest contract that existed between the host government and the companies dated back to 1859 to the days of Edwin Drake in Pennsylvania. This contact however was not extremely different than the contracts made today. Types of petroleum contracts For exploring oil in the host country the IOC requires a permit. There are four principle types of contracts that can be categorized as: Concession A concession is provided by the government to the prospector. In such a contract the contractor owns the oil present in the ground. It is considered to be the one of the oldest and original forms of the petroleum contract. This type of contract was developed in 1800s in the United States at the time of the oil boom. The idea of this contract was then exported to other countries of the world by the International Oil Corporation. These contracts are based more on the “land ownership” notion of the oil, which is based on the American system of land ownership (Nederlof, 2013). This contract also takes into account the oil that is found under the private property of the owner. It is due to the historical origin that the concession grants the area for land to the organizations, though it only provides sub-surface rights for the land and therefore if the company succeeds in finding oil below the surface, the company has the right to the oil. This contract also provides the contractor with the exclusive right of exploring within the concession area (Claude Duval, et al., 2009). Production sharing contracts (PSCs) It is addressed as the private contract between the National Oil Corporation (NOC) and one or two International Oil Corporations (IOC) pursuant to the legislation, vesting a general exclusive authorization or a license in the National Oil Corporation for exploring, exploiting and producing hydrocarbons. This contract provides equal benefits for the contractors as well as the host government. General features of Production sharing contracts Parties: National Oil Corporation or any private minister enters into a contract with the International Oil Corporation. In the Indian and Ethiopian PSCs are executed by the Ministers who are responsible for natural gas and petroleum and the ones in charge of the mines. Terms of Contracts: The length of the time period over which the subsistence of the contract is dependent and it varies from country to country. Other factors are also present that affect the speed of Exploration and Production (E&P). The length of the time period is therefore considered to be negotiable. Relinquishment: This is due to the relinquishment clause that the IOC comes under the obligation of releasing the portion of the contractual area present in the phases. It is a measure that is intended for the promotion of efficient and speedy exploration. It is a clause that is beneficial for both the parties. National interest provision: Such provisions protect and enhance the socio economic wellbeing of the host government. It may require capacity building, local content and technological transfer. Carry provision: This provision connotes the IOC to bear the HG’s contributory obligation towards the production cost that would be eventually recovered as a cost. NOC is not under any kind of obligation to reimburse or indemnify the NOC in any event in which there is no return on the production processes. Cost recovery oil: The provision present in the production sharing contracts enables the International Oil Corporation to recover its cost from the resulting oil before sharing the profit. The contract usually defines the recoverable costs. Profit Oil: This provision usually constitutes the return on the exploration that is left after the IOC has recovered its cost (Ataka, 2013). Service contracts (SCs) Junseog defines service contract as a contract where the private firms agree on a specified service for the governments and in return they get fixed payment from them. Depending on the level and nature of E&O work involved, the form of payment service contracts are classified into: General features of service contracts Some of the general features of service contracts are discussed below: The role of International Oil Corporation: The role of IOC is to provide NOC and HG with services and information that would help in the development of the country’s own oil resources. The IOC is also engaged in providing equipment and training employees for the purpose of operating the training facilities. Risk Assumption: Despite of the fact that the companies solely invest their own money in the exploration, they are not entitled to any sort of payment unless they discover something viable. Ownership and Control: If the organization has made a successful find and its production has been undertaken, then it is likely to be entitled to a fixed taxable fee for the service being rendered (Dabinovic, 2013). Joint Venture A joint venture is a contract between a National Oil Company and a Foreign Oil Company of the host country. For the host government a joint venture is considered to be the opportunity for transferring technology that may lead in the independence of the NOC (Alikhani, 2000). There are a number of examples of joint venture present in today’s world. One of the examples of joint venture is the contract between the Russian State controlled firm and Shell for the Sachalin Project (Gandhi, 2014). Important aspects of the discussed contracts Protection of the environment The contractors as well as the government recognize the fact that the oil and gas operations will impose some impact on the environment of the areas in which the operation is being conducted. In performance of the contract the contactor must conduct the operation with due regards to concern to the protection of the environment and also to the conservation of the natural resources. The contractors are asked to employ modern oil and gas standards and practices that may include advanced techniques, and methods and practices of operations for preventing the environmental damage while conducting the operations. Preventing the damage to the environment or imposing adverse effects on the environment is somewhat unavoidable. However to minimize the damage the companies must take certain adequate steps. This clause is in favor of the host government and the environment as it imposes minimum negative effect on the environment while carrying out operations (Anon., 2013). Based on this clause the contractors are asked to submit a contingency plan to the government regarding their dealing with fires, oil spills, emergencies and fire accidents, which is designed for achieving effective and rapid emergency response (Ite, et al., 2013). The global business in general has supported the usage of EIA, which has been demonstrated by the business charter of International Chamber of Commerce (ICC) for sustainable development. This charter has been formally endorsed by hundreds of different companies operating worldwide, including many of the major international gas and oil producing companies. This charter consists of 6 principles concerned with environmental management, which declared it a significant aspect of sustainable development (Anon., 2013). A well conducted and thorough EIA provides many benefits to the host-government as well as the IOC. Some of the benefits may include providing a procedure for identifying the adverse environmental impact and cultural impact, before making the decision to carry on with the development activities (Orubebe, 2013). The EIA provides opportunities to the general public as well as the affected people. In also excludes the secrecy involved in the official decision making process, and exposes the development process to scrutiny and provides opportunities for the identification of the alternative development options (Patil, 2013). Recovery of the cost petroleum This contract supports the contactors or the International Oil Corporation. Recovery is a unique term that is used in the production sharing contracts which is basically considered to be the component of the contactor’s share of volume split/production, where the volume of share is calculated by the amount of cost that has been incurred in operating, exploring and developing the petroleum. Beside the “cost recovery” the other component of the share of the contractor is the “profit share” (Akinwumi, 2013). This contract gives the power to the contractor to recover its cost out of the total value of the oil and gas produced. The exploration cost that is incurred by the contractor in the area of operation from the date of the first production should be aggregated and the contractor should be allowed to recover the aggregated amount of this cost out of the cost of the petroleum. The development cost incurred by the contractor in the exploration of the petroleum should also be recovered from the cost of the petroleum. The contractor is allowed to carry the unrecovered cost of petroleum to the following year (Anon., 2008). It is undeniable that the cost recovery does have an effect on the bottom line economics and financials of the IOC and the host government. The share of the government is always more than 50 percent. Considering that the tax rate is 85 percent in any other industry, then the same issue will also be consider true for almost every single penny spent by IOCs. The government is most likely to take the lion’s share from the profit. No matter what the perspectives are, cost recovery is only considered to be the component of entitlement of the volume share of the contractors along with its profit barrels (Anon., 2013). Ownership of the Resources in the 21st century In the 21st century the countries have been conferring the sovereignty of their resources on their governments, avoiding individuals to lay a claim on it. Giving ownership of the resources to the government has been beneficial for the purpose of the international business ensuring stable revenue in the petroleum sector, which is in the end distributed among the different states present in the country. However there are some states like America that believes in both individual as well as state ownership. Activities related to the exploitation and exploration of resources usually put the environment in destabilized situation. Therefore it is critical to minimize the effect of these activities on the environment. With the increase in the environmental damage as the result of the operations of the International Oil companies, the individuals have started taking the control of their natural resources rather than giving the control to the government. In the Article presented by UNGA it is mentioned that the people and the government possess the right of the ownership of natural resources, which should be exercised in the interest of the development of the country and also for the wellbeing of the people living in the country. According to the principles of the International law presented by UN, the state has the right to exploit its resources and in accordance with its developmental and environmental policies ensuring that the activities do not cause any sort of harm to the environment. According to the theory of Absolute ownership the person who has the ownership of the land holds what lies beneath it (the oil). However this theory does have certain flaws. The person who is the owner of the land cannot claim the ownership on hydrocarbons. However the qualified ownership theory states that the one who finds oil and implements techniques of preserving it is allowed to claim it as well. According to the non-ownership theory, petroleum cannot be claimed by any sort of ownership. The aspects of this theory are too naïve to conclude the fact that petroleum is incapable of ownership because it is capable of ownership by the state or the individual. However the national ownership theory states that the government holds the complete ownership of the natural resources. This theory is practiced in most of the countries of the world. It was in the year 1966 that the sovereignty over the natural resources turned out to become the general principles of the International law after it was been included in the Article 1 of the covenants. This article stated that all the citizens have the right of self-determination. It was because of the virtue of this right that may countries gained their sovereignty, for freely pursuing their social, environmental and economic status. The covenant further takes into account the fact that citizens of the country are allowed to freely and fully utilize their national resources. This covenant motivated the countries to gain independence and practice the right that has been granted to them by the international law. The NOCs are seen competing with one another in order to take the responsibilities of the exploitation of the resources. On the other hand IOCs are seen under pressure about their future role in the claiming the ownership of resources. There are a number of drivers that fuels the conflict that exists between the NOCs and IOCs. Many governments including that of UK and USA are the prominent supporters of the role of IOCs in countries. It was because of the notion of “resource nationalism” that the role of IOCs became limited in the operations of the state. Conclusion In the 20th century, the control of oil was in the hands of the powerful IOCs and other ruling entities. In the 21st century the rights of the petroleum is owned by the government because of the laws enforced by UN. Now it is the government that provides contracts of the exploitation and exploration of the resources to the IOCs and NOCs. It is because of these kinds of contracts that the government grants legal rights to the oil firms for conducting the petroleum operation. At times due to the lack of advance technologies and equipment the government hands over the responsibility of the exploration of the resources to the IOCs. There are a small minority of countries that are against the notion of petroleum extraction. They try to manage the extraction processes by themselves, which removes their need of doing partnership with the IOC for carrying out the exploration operations. References Akinwumi, O. A., 2013. Cost Recovery And High Oil Price: How Can Host Governments Capture Adequate Revenue? A Case Study Of Nigeria. [Online] Available at: http://www.dundee.ac.uk/cepmlp/gateway/?news=29867 [Accessed 10 April 2014]. Alikhani, H., 2000. Sanctioning Iran; Anatomy of the failed policy. London: I.B. Tauris. Anon., 2008. PSC Cost Recovery – Demystified. [Online] Available at: http://pscforum.wordpress.com/2008/07/28/psc-cost-recovery-demystified/ [Accessed 9 April 2014]. Anon., 2013. Oil and Gas Exploration Impacts. [Online] Available at: http://teeic.anl.gov/er/oilgas/impact/explore/index.cfm [Accessed 10 April 2014]. Anon., 2013. Petroleum and gas tenure types and forms. 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