Legal Guide to the Global Oil and Gas Industry

Question: Examine and evaluate the key areas and features that governments should focus on during their negotiation process and in the drafting of contracts with the International Oil Companies? Answer: Introduction: This article will be a discussion paper on different legal factors regarding the negotiations that did by the governments with various oil companies and also with the drafting of contracts with the oil companies. The main objective of this paper is to enlighten the focal area upon which the government should pay some attention at the time of negotiating with the oil companies. It can be observed that in the world many countries are full of natural resource, but they are under developed or developing for some reasons. These countries always try to use these valuable natural resources to gather essential capitals for their future development process. Oil is natural resources. But the exploration of oil is a difficult task. Therefore the govt. of oil intense countries try to make a contract with some oil companies for the exploration. There are different aspects behind this oil exploration such as legal, technical and commercial. Both the govt. and oil exploring companies make an effort to perceive these aspects. However, while making the process of contract with the oil companies, the first challenge the govt. has to face all the time is the negotiation with the oil exploring countries. In this negotiation process, both the parties have some advantage, and these advantages make the negotiation process so difficult ultimately. Oil natural gas abandoned countries always thinks that the oil and gas reserves are the properties of the countries irrespective of the ownership of the surface land. They always try to acquire gains as much as possible from this oil exploration and the sale of various oil products after the processing of explored crude oil. On the other hand, the oil exploring companies are very much experienced in the negotiation process as one of the important tasks of the management authorities of these companies is to negotiate with different oil and gas abandoned countries. Another important advantage of these oil exploring countries is they have expe rt professional and very much aware about the technology needed for the proper exploration. These companies follow minimum cost production process that the country may not able to employ if they want to explore the oil itself. The negotiation also depends on the current political situation of the country. It can be observed in most of the case that, due to lack of development the oil companies put a lot of pressure on the weak govt. In this case, the behavior of the oil companies is very much aggressive and also inflexible. Their main goal was to earn a profit from this exploration process as much as possible. These companies also use sometime illegal tactics to earn a higher profit than is possible under a legal contract. However the govt. always tries to make the contracts with these companies in a legal manner. The government has mainly three choices for the oil exploration. These three options are 1) Transfer the right of the exploration of the oil and natural gas from the surf ace area to some international oil exploring companies, 2) exploration of crude oil and natural gas by the govt. owned companies and 3) exploration of oil and natural gas by both govt. owned companies and international companies i.e. the exploration of oil through a joint venture of both public and private companies. The government of Russia, United Kingdom, and Canada follow the first option whereas the government of Mexico, Arab Emirates have opted the second option. Most of the Asian countries like Kazakhstan, Indonesia, Pakistan, and India employ both public and private companies to explore the crude oil and natural gas and their marketing i.e. they implement the third option. Problems faced during the negotiation process: The problems that arise during the negotiation time can be classified into two parts. They are significant problems and non significant problems. The govt. generally does not pay much emphasis on the insignificant problems. The companies give almost 80% time to the resolution of these problems. These problems arise from the political, environmental and social factors. For the resolution the oil exploring companies hire expert personnel. The problems come under the significant problem part, which is also known as conflict zone are solved by the govt. of oil and gas reserve countries. These two types problems are now discussed briefly in the following paragraphs. 1) Negotiator expertise: The government of oil and gas counties sometime faces some problem while employing appropriate negotiators or negotiator team. Proper negotiation needs a lot of pre-designed plans, good but effective tactics and the most important thing is the ability to separate important factors like remuneration from the other unimportant factors like rules and regulation in the oil exploration and other relatively insignificant matters of the companies. It can be said with confident that the oil exploring companies has high negotiable power than the govt. because of it has skilled labor, up to date technology, equipments, enough capital to invest etc. Therefore, it is important for the govt. to hire an efficient as well as an independent negotiator from their side who can able to fetch some gain from this negotiation process. But, unfortunately, most of the time it can be seen that the govt. pay less importance in this important problems. A two-sided beneficiary negotiation is possible only under the expert advice as this process is a very complicated job. But the problem arises in this section due to the govt. oversight. 2) Transparency in the contract: Oil exploration needs a huge amount of capital investment and for this public involvement is necessary to run the whole process. A transparency in the negotiation process as well as in the contract paper is mandatory to increase the public reliability on oil exploring companies. They expect that both the govt. and oil exploring companies will maintain transparency in the whole process. But in reality, it can be seen that a lot of govt. officials and also top level management personnel of the oil exploring countries are engaged in the corruption. This creates a bad image about both the govt. and the companies and effects very much on the public investment. 3) Conflict of the interests: At the time of negotiation process, the govt. has to keep in mind the various role played by itself. On the one hand, the govt. has to protect its residents from any unexpected loss results from this oil exploration. It can be done through the regulatory power of the govt. On the other hand, the oil exploring countries are private companies. Their main objective is to secure high profit through the exploration process. Therefore the govt. should make appropriate conditions for them so that they can show some interest in the oil exploration in these countries. This investment by the private companies will eventually make a lot of employment opportunities and help for future economic growth. Moreover, another objective of the govt. is to gain some funds from this negotiation as much as possible which it can use for its future development. But all these different kinds of object make a conflict in the interest of the govt. 4) Time: The strength of negotiation from the govt. side mostly depends on the time at which the negotiation takes place. The prevailing price of oil at that time, the economic, social and political condition of the country, the demand for oil and natural gas by the country and also by the global market and their future change causes significant effects on the negotiation process. Therefore, a contract with oil exploring countries must include these time variating factors so that the contract will be effective in the future even in the presence of some unexpected events such as a big hike in oil price or a large reduction in oil price. But in most of the contract, these facts are overlooked by the govt., which should not be done. 5) Effects on other communities: Two important participants of the negation process are the govt. of oil abandoned countries and the oil exploring private companies. These two parties will be affected moistly this negotiation process. However, there are some other units may also affected by this negotiation process. They are the residents and owner of the surface area below which the oil and gas reserve exists. The govt. of the country includes these surface areas as their area. However, recently the residents and the owner of these surface areas start demanding compensation either in the form of cash or form of job opportunity from both govt. and oil exploring countries. These residents and owner community do no directly take part in the negotiation process. However, to start the oil exploration processes without any hindrance the govt. and also the oil exploring countries have to consider them into the negotiation process. The oil exploring countries take initiatives to give them either suitable job opportunity or compensation so that they can run the whole process smoothly. The oil exploring companies also help in the economic development of this local community. These make the whole negotiation process a little bit complex and also time-consuming. Froms of contract: There are different forms of contracts. An important task of both the govt. and the private oil exploring companies is to take a decision regarding the types of contact they want to follow. They forms of contract can be of four types. They are 1) Joint Ventures, 2) License Agreements, 3) Production sharing agreements and 4) service agreements. These different forms are discussed in the following paragraphs briefly. 1) Joint Ventures: The joint venture is the working of two or more companies together. In case of joint venture, the goals or objectives of the two companies, their way of operating business must be same. Otherwise, they cannot make a joint venture business. The joint venture can be seen as an open end contact. Therefore the govt. of oil and natural abandoned countries and also the private oil exploring countries will not be interested to enter into a joint venture project. Now if the govt has to make a joint venture with the oil exploring countries due to some reasons then the main advantage of the govt. will be it can avail the opportunity of the usage of skilled labor, and low production cost modern technologies. But the disadvantage is the govt. cannot take any decision independently. It is known that the objective of the govt. and the goals of the private oil exploring countries may be different. This difference may create conflict in the time of making a joint business decision. Another important factor is joint venture forces the govt. to share profits as well as the loss risk also. This loss will affect the future growth of the country gradually. Therefore, it can be suggested that the govt. should not enter into the joint venture with the private oil exploring companies in the case involving a lot of uncertainties (Law.ed.ac.uk, 2015). 2) License Agreements: This agreement is often known as Confession agreements. This agreement is a kind of one-sided agreements. In this type agreement, the oil abandoned countries give all the rights of exploration and sale of crude oil and natural gas to the private oil exploring companies. These companies in the return of this right offer some bonus to the govt. The government of the country sometime choice this type of contract. The main advantage of the selection of this type of contract is the developing country has not to bear the loss and the uncertainty involving in this operation process. Moreover, the govt. does not need to invest any in the oil exploration. Therefore, the required capital will be less compared to the other forms of contracts. However, the disadvantage of this form of contract is the govt. has less negotiation paper. Therefore the govt. cannot be able to fetch a high compensation from the oil exploring countries and also can not earn any share of the profit acquired by the priva te company (Internationallawoffice.com, 2015). So, it can be said after the analysis of advantages and disadvantages of the license agreements that this contract form will be appropriate for the developing countries. 3) Product sharing agreements (PSA): In this type agreement, the oil ownership goes to the residents of the oil abandoned countries whereas the risk involved in the production and operation has to be bear by the private oil exploring countries. The rule and regulation of this kind agreement is almost same as the license form of contracts. In this type of contract the govt. will be offered a monetary reward. But this kind of reward is waved so as the govt. can fetch profit in the future time. But the disadvantage of this kind of contract is the govt. of the oil reserve country has to make a repayment of operating expense to the private oil exploring countries. In this types of contracts, the private companies have to make a tax payment to the govt. However the govt. can waive theses taxes in returns of the profits share. This contract form is also very good for the developing countries, but it is important to note that the success of this kind of contract form mostly depends on the legal structure of the contract between two parties (Www4.rgu.ac.uk, 2015). 4) Service agreements: This type of agreement is well for the initial period, but this contract form is not good for the long run. In this type of agreement, a cash payment is offered for each and every task and service (USFILTER STRENGTHENS PROFILE IN OIL AND GAS, 2002). Terms of contract: Terms of contract which are applicable to all of the above forms of contracts are discussed in the following paragraphs now. 1) Termination of Contract: In the contract paper, the clause or the conditions have to be mentioned under which any one or both the parties can terminate the contract without making any confliction. It is very important to include those particular conditions in the contract paper and also both the party should be agreed over these conditions (Aberlour-press.com, 2015). 2) Work Program: The operation of the private oil companies can be slowed due to the unfavorable conditions and if the company finds the production process relatively expensive than if it would lower level. This eventually affects the overall business growth of the private company and also the economic growth of the country as well. Therefore, the govt. of the host country should pay some attention to the resolution of such problem to keep the operation of the private company at a moderate level (Inkpen and Moffett, 2011). 3) Stabilization: The stabilization clauses are those clauses that if include in the contract paper then that will be a great disadvantages for both the companies and the country. It can be observed that this inclusion may make the legal structure of a country most inefficient. Another disadvantage is this clause forces the country govt. to make compensation to its investors (Internationallawoffice.com, 2015) 4) Parties: In the making of a contract paper, the selection of party is a very crucial decision. The reason behind this is that, if the govt. of the oil abandoned country directly is directly linked to the contract then it has to be responsible for all the liabilities. Therefore, it is better to make any govt. enterprise a party of the contact. Conclusion: Now, it can be expected that the oil and natural gas abandoned countries are well experienced with the negotiation process with different international countries. They are also expected to have proper knowledge on the oil exploration process. This can place the countries in relatively stronger position while negotiating. At the same time, the country has to ensure the companies that they will get a favorable situation in all aspect. A fair treatment will be beneficial for both the parties. References Aberlour-press.com, (2015).The Technical and Legal Guide to the Global Oil and Gas Industry. [online] Available at: https://www.aberlour-press.com/ [Accessed 4 Aug. 2015]. Hg.org, (2015). [online] Available at: https://www.hg.org/oil-and-gas-law.html [Accessed 4 Aug. 2015]. Hilyard, J. (2012).The oil gas Industry. Tulsa, Okla.: PennWell. https://unctad.org/en/docs/diaeiia20097a1_en.pdf. (2015). 1st ed. Inkpen, A. and Moffett, M. (2011).The global oil gas industry. 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