Discuss the legal aspect of oil and gas management?
Certain nations that are having huge quantities of natural resources use those resources to maintain their economic stability. They even gather funds that can be used for developmental purposes. In order to do so, the governments of such countries engage into legal contracts with those oil companies that operate in the international oil market and perform various activities associated with the exploration, drilling and processing of such natural resources with the aim of selling the processed resources in the market. The technical, economical and commercial aspects of such oil exploration processes are considered with great importance by both the parties: the government of the countries that are home to such resources and the organizations that are interested in the extraction or drilling procedures. For the exploration of natural resources, both the parties like the government and the oil companies must put efforts on the challenging task of the agreement. One of the challenges is the negotiation process of such agreements. In most of the developing countries, including Mexico, Bolivia and Kazakhstan, the natural resources like that of oil and natural gas are considered to be the national assets, instead of being the property of any individual or private organization or entity. The legal right over the surface land is not considered when the governments of these nations claim their right over the natural resources that lay beneath the ground: the constitutions of these countries are enshrined by laws that validate this process. In this essay, the legal aspect of oil and gas management is discussed, and the contracts that are about the legality of oil and gas management are discussed.
Definition of Contract
The voluntary and deliberate agreement between two or more parties that is bound by law is known as a contract (Berthelot, Coulmont & Thibault, 2013). In general, contracts are well documented by the competent parties that take part in the agreement, but might also be implied in some other form or be developed as a verbal agreement.
The elements that are fundamental for a contract are legality, capacity, consideration and mutual assent (Bhar & Mallik, 2012). The following factual elements are to be in consideration for the legal existence of a contract:
I. An offer that is being made by one party to another.
II. The evidence of the acceptance of the offer.
III. A promise regarding the performance of any job
IV. A mentionable consideration
V. A time span within which the promised performance will be made
VI. Various terms and conditions that apply to the process of fulfilling the above mentioned promises.
There are some stakeholders for the process of exploration of natural resources. But the fact is that the Government of these nations does not put much attention in the development of such contracts and its negotiation. According to Bilstad, Stenberg, Jensen, Larsen and Toft (2013), the experienced and esteemed lawyers are appointed to look after the legal aspects of these contracts, engineers, and engineering firms are appointed to look after the technical aspects of the contracts being drafted.
When there is direct negotiation process, there are successful oil contract generations. However, it is found in general that various complex issues are involved the process of negotiating an oil extraction contract, as such negotiations are more often than not flourished by indecision (Uk.practicallaw.com, 2015). According to Boschee (2013), the indecisions being associated with the lack of knowledge of the location of probable oil field, the lack of any estimation of the amount of oil that could be drilled out of the oil wells and / or the lack of capability of the parties taking part in the contract to make predictions about the future of the market. The experience of domain experts, along with judgmental power are essentially required so as find out the priority and importance of each of these factors, such that a balanced contract can be prepared: however it should also be considered that no such contract is identical to another, as the importance and the priority of the above mentioned factors keep on changing from time to time and from place to place. During the process of negotiation of oil contract, certain factors are to be kept in consideration. These are the probable costs associated with the operational activities of oil drilling, the fluctuations of the market, the probable size of the oil fields and the estimated quantity of oil and natural gases that could be drilled from the oil wells and so on and so forth.
Negotiation process issues are given below:
1) Environmental as well as social issues are not considered for suing the negotiation process.
2) Natural resources conflict zone.
Time Zone Factor
For the process of negotiation of oil contracts, time responsive factors include:
I. The price of crude oil in the international market
II. Socio-political and economic condition of the country and
III. The inter-dependency of the above mentioned factors
To confirm the various changes, the oil contracts must be defined in such a way that it can change itself from time to time.
The interests of indigenous groups should be considered by the government during the negotiation process. The various indigenous communities, who are socially and economically affected by the oil contracts, are drafted in between the governments of the nations and the oil companies’ demand compensations (Dauwalter, 2013).
When the terms conditions and prices are quoted in the contracts, are disclosed to the public, the indigenous communities of the nation can accept legal contracts between oil companies and government. It must be ensured that the minimum level of transparency is maintained at the process of oil contract negotiation.
During the process of negotiation, there is a chance of conflict in regards to the interest of the Governmental part. This is because the government is considered to be one of the parties who is involved in oil contract (Foster, 2012). One hand of the government tries in profit maximization of the nation. The other hand tries to control the interest of the indigenous communities of the country.
The extraction process of oil and natural gas involves certain aspects like economical, legal, technological and environmental. The government must employ experienced domain experts to look after these aspects of the oil contracts, as the international oil employ such experts so as to conduct the negotiation process.
Oil contract types
Various types of oil contracts that occur in between oil companies and the government are as follows:
License Agreements and Concession Agreements process let the oil companies to earn exclusive rights to develop infrastructure, oil fields exploration, and oil extraction and sell oil in the international market. The company pays a license fee to the government, which the government retains, not withstanding production (Skea, Chaudry and Wang, 2012). Then the production starts, the company pays income taxes and royalty to the government. Thus, such contracts put the government in the advantageous position.
Production sharing agreement (PSA)
PSA agreements gather the process of oil and natural gas exploration for both the parties that are involved in the contract. The government and the oil company that is involved in the operational activities of drilling of oil are dealt with PSA (Garren & Brinkmann, 2012). The government also has to take the burden of risks that are associated with the process of oil extraction. However, the government is relieved of the task of taking decisions regarding the operations of the oil fields as this part of the operational activity is considered as the responsibility of the oil companies. Thus, it can be said that such types of agreements mandate the participation of the government in the process of oil extraction.
Joint Venture Agreement
The profits that are generated from the exploration of oil and natural gas are shared by both the parties who are involved in the contract according to this contract. The government and the oil company that is involved in the operational activities of drilling of oil are involved in JVA. The government also has to take the burden of risks that are associated with the process of oil extraction (Samosir, Popineau and Lechon, 2013). However, the government is relieved of the task of taking decisions regarding the operations of the oil fields as this part of the operational activity is considered as the responsibility of the oil companies. Thus, it can be said that such types of agreements mandate the participation of the government in the process of oil extraction.
The process of disbursement is facilitated by the participation of oil companies and the government. These agreements are not found to be common in oil and gas exploration fields.
Terms of contract
When companies realize that a particular plan might not be profitable for them, they tend to delay or shelve the projects. A possible safeguard that the government can introduce against such strategies implemented by the oil companies is that they can clearly state those circumstances only under which the companies will be allowed to shelve or delay it (Lefsrud, Graves & Phillips, 2013).
Drafting of oil contracts must be done in that particular way that ensures stabilization clause is not included in contracts. These clauses deal with the restriction of implementation of certain legislative clauses of the nation for operational activities of oil companies (Gobyr, 2013).
The drafting of oil contracts must be done in such a way that it does not make the government be one of the contact parties. This strategy is taken so as to not bear any direct and unlimited liability of the contract. On the other hand, the government can participate in the contract by the process of making the government enterprise a direct party involved in the contract.
Mission of government in negotiation process
During the process of negotiating any oil contract with international oil corporations, the government should consider the development of the country as the sole interest and mission. The government should also try to include such clauses in the contracts that would ensure that the resources of the companies are utilized properly so that the infrastructure of the country is developed (Haber, 2013). The following section provides some insight into those factors that the government should consider during the negotiation process:
Projects regarding oil exploration require a large number of manpower. To employ the members of indigenous project community, the government must involve clauses for maintaining it.
It must be kept in mind by the Government that oil and natural gas is limited. This exploration of such non-renewable sources of energy must be done according to requirement. Rate of extraction of non-renewable sources of energy must be limited to one particular oil company (Krupa, 2013).
Dispute Resolution Mechanism
For the process of dispute resolution, the various mechanisms that are used must be stated unambiguously in the drafted contract (Wilson, 2013). The most common methods of dispute methods, as mentioned in oil contracts are:
I. The parties that are involved in any oil contract that approach any court of law in the case of disputes: however it should also be considered that most court proceedings are highly time-consuming processes.
II. International Commercial Arbitration laws can also be used so as to resolve disputes regarding those contracts that are signed between international oil companies and governments of various nations.
Conclusion and recommendation
Government of such countries that have very large natural resources reserves like natural gas, oil and coal face problem related to the nature of the contract and its clauses. Most of the organizations that are associated with the process of extraction of oil and natural gases operate in the international domain and specialize in this particular sector, they are much more experienced in such negotiating process that are used to determine the type of contract being made and the clauses that are being mentioned in the contracts. Such companies indulge in all necessary procedures that would lead to the reduction of costs on the part that they often tailor their negotiation strategies according to the political, economical and social conditions that prevail in the impugned country (Rawlins, 2013). During the negotiation process, very often than not, the oil companies express such behavioral traits that might be easily considered as cynical, inflexible and aggressive.
For these reasons, it is very necessary for the Governments to ensure strict procedures and policies to strategies the contract process of negotiation. According to Rawlins (2013), three most important strategies that the nations follow for the adaptation of natural resources to negotiate contract with oil companies are as follows:
I. Forming indigenous state-owned companies that would handle the process of exploration of natural resources, processing of the crude resources and proper marketing of the products. Countries like Venezuela, Mexico, Saudi Arabia and Oman use such strategies to exploit their natural resources.
II. Inviting international oil companies to participate in the process of exploiting the natural resources. Countries like United Kingdom, Canada, and Russia employ such strategies to collect funds for their developmental procedures.
III. Employing a combination of the above mentioned strategies, as done by companies like Indonesia, Nigeria, and Kazakhstan.
Governments of other nation must choose at least one strategy from above to ensure suitability of political and socio-economic culture in the nation for engaging international oil companies in oil contracts.
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