Problems of Negotiation
“Discoveries of oil and gas generate much excitement and great effort is put into understanding technical, commercial and legal aspects of field development. In fact however the first challenges to governments are negotiation challenges.”
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.
The nations that are rich in natural resources tend to use its natural resources for the aim to secure funds for the process of development within the country. The governments of the specific countries have to enter into an agreement and contract to develop the existing resources of the country and also to explore them for the betterment of the country. The contract is made between the government of the country and the oil companies of that specified country (chalmers, 2012). Both of the contract holders have to put emphasize on the technical issue and the commercial understanding about the exploration of oil. But in making this contract successful, the first obstacle which the government usually faces is the process of negotiation.
Different developing countries and also different developed countries like - mexico, kazakhstan, and bolivia appraise their natural resources of oil and gas as assets or property of the country. These natural resources are not considered as any private property of an entity or individual, though an individual might be the owner of the surface land or water bodies. The government of the country is the only owner of the underlying natural oil and gas resources, according to the laws of the nations. The main aim of the countries that are rich in natural oil and gas resources is to maximize the participation of oil companies in the country as these companies possess abundant expertise and thus they could properly exploit the natural resources and market them globally (grant, 2012). But at the time of negotiation, these companies face various problems. The reason behind this is that, as these companies are much experienced about the variety of contracts and have greater practical knowledge regarding the exploitation of natural oil and gasses. The oil companies are highly motivated towards the act of negotiation. Thus, they tend to decrease the costs. This process of negotiation is tailored by the oil companies based on the political condition of the specified country (gustafson, 2012). The process of negotiation of the oil companies is very inflexible, cynical and aggressive. Thus, the contract of negotiation should be done in a proper and systematic way.
Development of Natural Resources
There are three different ways to develop the natural resources of the country by the government; these are as follows –
Firstly, different foreign companies can be invited by the government of a particular country having its natural oil and gas resources for the exploration and in the process of exploring the government of the specified country should help (hults, thurber and victor, 2012). For example, countries like – canada, russia, and united kingdom have applied this methodology.
Secondly, for better exploration, the government of a particular country should create new state companies if the government has the capability to invest in establishing new companies (looney, 2012). As this would help the government of the country economically by providing chances of better exploration, much production, and high development. For example venezuela, oman, mexico and saudi arabia have applied this methodology for their economical improvement.
Lastly, some countries like – nigeria, kazakhstan, and indonesia might apply the combination of both the ways.
The process of negotiation is of high interest for the shareholders. Thus, the size of shareholders is also huge in the worldwide. But the governments show lesser interest or pay lesser interest in the negotiation process. The share holders are more concerned about the negotiation process than the producing countries of natural oil and gasses. Thus, the governments appoints some experts like – technical engineers of the related field, lawyers for their legal knowledge in the related field and many more for handling the complex issues (muttitt, 2012).
Direct negotiations are done in oil contracts. Negotiations are occurred on indecision as an oil contract is consisted of many complex issues. These types of indecisions are occurred due to the improper awareness of probable oil field, dissociation of the partner of negotiation, or the inability to make predictions of the future. The negotiators who are expert in the field know that the presence of a weak point is common whatever might be the situation, and by using that properly, they get a high chance to win (nikiforuk, 2012). Various types of issues should be considered during the negotiation of the oil contract, these are – the costs of exploration, dynamic nature of the existing market, estimated size of the fields and many more, as the list is never ending. To determine the importance of each and every issue of the negotiation of the oil contract, proper judgments and expertise is the most important criteria. As these qualities would help to strike a balance such that the various contracts could be made nonidentical to each other.
The Parameters of Negotiation
There are mainly two major types of issues regarding the process of negotiation. These are – the zone of conflict and the factors that are not usually paid attention during the process of negotiation. These include the social, political, economical and environmental factors of the specified country. Generally, any particular company spends about 90 – 90 % time in this particular zone (ross, 2012). This particular zone makes the company to feel that they are in control and thus recruits especially skilled employees.
- Dealing with indigenous communities:
The negotiation of oil is of great importance to different groups of individuals. These individuals might include – the surface land owners, indigenous communities and many more. The negotiation of oil is of great important to the indigenous communities because they started to demand for compensation for the usage of their personal property and also for creating disturbance. Formally, these groups are not the main part of the process of negotiation, but still both the principal parties of contracts that is, the governments and the oil companies have to consider their demands in the process of negotiation (larson and smajgl, 2012). Through the process of negotiation, the demands of these local communities are settled down. Their demands mainly composed of offers of jobs or compensation. Thus, the oil companies make commitments that they would provide employment to local peoples in mass as labors and also to give back support in the development process of the local communities. These negotiations are heated many times and thus are very time consuming.
- Time factor:
The contracts of oil are negotiated depending on the factors of time responsiveness. These factors include – the present political, environmental, social and economical factors in the host country, the probability of variation of these factors in near future, and the current situation of the market regarding the oil price. The terms and conditions of an oil contract should contain the ability to survive the time challenge by the method of anticipation of foreseeable as well as unforeseeable changes and demand. For example, the country norway is known well for its instability, thus, it introduces tax regimes in the favor of the oil companies with the aim to attract the oil companies to invest in the geographical challenging and uncertain terrains (wittcoff, reuben and plotkin, 2013). But norway did not put its future in the endanger by making the rule of taxes permanent and the tax rates were raised within three years. To make the contracts more reactive in the changing world is the only way to deal with the problem of insufficient arrangement effectively and efficiently.
Different Issues of the Process of Negotiation
The stability should be drafted in such a way that the oil companies should be compensated for the various changes of rules and regulations in the law which takes place frequently. The oil companies would not be established in the countries if they have to suffer loss due to the change of laws in the specified country (schwarzenbach, 2012). For example, if a country implements new law regarding the development of the environment, then the cost of the oil companies would increase due to various process of refining the waste materials of the company. This make the company to run in loss, thus, these companies of oil are usually exempted from such developmental laws. And if exemption is not possible by the government, then the government would itself reimburse the compliance cost of the specified oil company. The clauses of stability are used by these companies to get exemption from the application of the rules and regulations of the laws of the host country (guo and ghalambor, 2012). Even the jurisdiction of the courts of such country is not applicable to the clauses of stability.
- Expert negotiators:
The government of a specified country has to face various problems regarding the selection of personnel who would be the representative of the negotiating team. Negotiation is a process of art, thus, it requires good tactics, effective plan and the capability of segregation of various negotiable factors like – compensation from non negotiable elements, such as – addressing and consideration of the concerns of the oil companies, and regulation concerned matters (kartashov et al., 2014). It is obvious that, at the time of negotiation with the government of the country, the oil companies are under the guidance of any circumstance in a better situation like finance, skills, and preparedness. But the developing countries which are enrich with natural oil and gas resources do not consist of sufficient legal, financial and technical knowledge.
Generally, the negotiations are considered as the one time investment in the developing countries. Therefore, they intend to hire negotiators who are skilled, dedicated as well as independent, such that they could understand the footing of the oil companies (jacobson, 2008). Most of the times the oil rich developing countries overlook the importance of employing expert negotiators for the process of negotiation. The contracts of oil require advice of expert negotiators as they are only capable of covering the broad range of complicated factors.
The main focus of a oil contract should be to reach reasonable and agreeable balance such that, the interests of both the government of the country and the investor company get fulfilled (lewicki, barry and saunders, 2011). For making the negotiations successful, the advices of the expert negotiators are mandatory.
- Conflict of interest:
The government of a country faces various conflicts of interest regarding the negotiation of the contracts. The government is acting as a protector of the interest of the public by applying its power of regulation on one hand and on the other, it acts as the signatory to a commercial oil contract as a business personnel with the aim of maximization of profit. The government has to also create a friendly environment for investment, such that the investors are magnetized which would help in creation of employment and also enhance in the growth of economy of the specified country (mannix, neale and overbeck, 2011). Therefore, on one hand, the intension of the government is to maximize its profit from negotiation of the oil contracts and on the other hand to locate objects for its own regulations. In developed countries, this type of problem can be managed but in the developing countries it is hard to manage.
The objective of the negotiators is to maintain transparency in the negotiation process. The reason behind this is that, to increase the acceptability of the oil contracts by the general public of the country to keep or to maintain transparency is the key element (bayne and woolcock, 2011). Transparency is defined as the disclosure of the contractual terms and conditions and also the consideration paid through certain factors which should remain confidential for a particular period of time in terms of negotiation of oil contracts. Transparency also helps to avoid corruptions which might occur in the oil contracts. It only helps to prevent the officials of the government to accept or implement such terms in these contracts that might cause criticism from the citizens.
The types of contract are an essential matter for the government of the country. The decision regarding the form of contract is the most necessary part of the development of the resources of the country. Generally, the oil companies and the government of the country like to adapt four specific types of contract during the formation of the agreement. These are as follows:
- Joint ventures:
When two or more parties want to enter into an agreement through the undertaking of joint venture, then only joint venture can takes place. Both the parties of the joint venture should understand all the ways by which each of the parties could conduct their business, their interest and also their aims and objectives (ward, 2012). However, if this understanding is not available among the parties of the contract, then it is impossible to come up with the agreement of joint venture. As the joint venture is an open ended contracts, both the governments and the oil companies do not show interest in entering the agreement of joint venture.
The only advantage the government of the host country can avail is that it does not have to make and take decisions on its own but also it can take help of the experts of the oil company. According to this type of contract, the government of the country has to share its profit with the oil company.
In this type of contract, the government of the host country has to directly take part in the oil extraction process
- Production sharing agreements:
The acronym of product sharing agreements is psa. According to psa, the ownership of oil lies with the citizens of the country and it cannot lie with any of the private entities. Though the cost of operation of the oil field and the management and also the associated risks lie with the oil companies. According to this agreement, the government of the specified country has to reimburse the oil company as operating expenses (orsi, 2012). The taxes which fall under its share have to give by the oil company but the government of the particular country waives these taxes and thus is included in the share of profits of the government. The laws of the country would bring success to the application of psa.
The oil company bears all the risks. Even any loss would also be bear by the oil company thus there will be no effect on the government.
Psa is an inclusive document, thus its very nature acts as a disadvantage for the government.
In the year 1900s license was introduced. These are mainly one sided contracts. In the current years, these contracts serve the exclusive rights for development, exploration and sale and export of minerals of the oil companies (progoff, halpern and yang, 2012). For acquiring such rights, the oil companies offer signing bonus.
These contracts are straight forward, thus it is considerable in developing countries.
The commercial aspect of the contract is the main disadvantage. Risks are associated with the price of license.
- Service agreements:
This type of agreement provides disbursement for particular tasks or services.
The main disadvantage of this service agreement is that it cannot be used in long run.
The oil producing countries should possess the professional knowledge for negotiation of oil contracts with international oil companies. The process of negotiation should be open at same time. The companies have to make the oil companies feel that they would be treated fairly. The sense of fair treatment and fair return would also prove to be beneficial in the long run for the international oil companies in the large competitive market.
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