Nations that are rich in natural resources tend to use these resources to obtain funds. The governments of these resource-rich nations enter into oil and natural gas contracts with the international oil companies. The international oil companies is thereby enabled to develop and explore these resources. These negotiations are very challenging in the present times. The negotiation process is a very challenging aspect as a lot is at stake, and a lot of research, knowledge and technical knowhow is required to get a good bargain at these negotiation processes.
The oil-rich nations regard the oil and gas resources to be the assets of the nation as a whole and not the property of individual members of the society, irrespective of the rights over the surface land. Oil-rich nations are eager to involve the participation of the international oil companies for the exploration of their natural resources. These oil companies are well equipped for exploiting and marketing the said resources. The governments faces many problems while negotiating the terms of the contract. This is owing to the fact that oil companies have high knowledge regarding the exploration processes and also they are highly experienced in negotiating these contracts. The oil companies generally get a good bargain on these contracts. The oil companies approach these contracts in a cynical, aggressive nad inflexible manner (3 oil & gas contracts for Aker Kvaerner, 2007).
In this paper, we will evaluate the various aspects of oil and gas negotiations between the governments and the international oil companies and would emphasize the significant areas of these contracts which the governments should keep in mind while negotiating the oil and natural gas contracts (Ariño et al., 2013).
The oil contracts emerge out of the direct negotiation between the parties, and various complex issues are involved in these types of contracts. The various factors that the governments must keep in mind while undergoing a process of negotiation for oil and natural gas contracts may be summarized as follows;
Time plays a very important role in the negotiation process of the oil and gas contracts. These contracts are to a great extent dependent on time responsive factors, like, the economic and political situation which is prevalent in the host country and the possibility of variation of such factors in future; the present market price of oil as oil prices vary considerably. Keeping these factors in mind the oil contracts are supposed to be drafted. The terms of the contract must be such that they end up surviving the challenge of time (Babusiaux, 2004). Such survival is only possible if the terms of the contract are responsive to the foreseeable as well as unforeseeable changes and demands. The only solution to the problem of dealing with the ever changing circumstances is to make the contracts responsive to such changes and not static.
The drafting of the terms of the contracts must be such that in case, the rules and regulations governing exploration or the laws of the host country change, the government should compensate the oil companies (Bantekas, 2009).
The oil contracts are entered into between the oil companies and the governments, but there are many stake holders of these contracts. For instance, the indigenous communities, the surface land owners. These groups of individuals are not part of the formal negotiation process, but their interests have to taken into consideration while entering into these contracts. The government has to make sure that the demands of the indigenous communities are met through the process of negotiation. Mostly the indigenous communities demand jobs and compensation. Since, many-a-times the oil companies make commitments but do not meet the commitments, the governments should take steps to ensure that such commitments are met (Bath, 2012).
The negotiators must conduct the negotiation process in a transparent manner. In fact, transparency of the negotiation process is one of the aspects which ensures that the contracts are acceptable to the public. By transparency, we mean that the terms of the contract and the consideration involved must be disclosed to the public at large. Transparency is a mode by which corruption may be controlled. If the government officials are aware that the terms of the contract are susceptible to being criticized by the public, they will deter from incorporating such terms in the contract (Bindemann, 2000).
Conflict of interest is a common feature of these contracts. On the one hand, the government is acting as a business entity with the motive of profit maximization out of the negotiations on the other hand the government has to act as a protector of the interests of the public and attempt to magnetize the participation of the oil companies (Bret-Rouzaut and Favennec, 2011). So the government has to play dual roles of acting as a successful business negotiator, and also it must keep in mind public good.
The team that would negotiate the contracts on behalf of the government must be chosen very carefully. The process of negotiation is an art. A good negotiator is capable enough to segregate the negotiable factors, such as compensation from the non negotiable ones like giving importance to the concerns of the oil companies. The oil companies has an upper hand in these negotiation processes because of their experience, technical knowhow, and financial stability. Since the governments of the host countries generally lack these resources they must hire skilled negotiators having expertise in all the aspects that are involved in an oil contract. The negotiators ought to keep in mind that the purpose of the negotiation is to reach a mutually agreeable point that serves the inertest of both parties concerned. Better bargain in a negotiation process would not be possible without expert advice (Contracts. Future Prices and Their Duration Left to Negotiation, 1923).
The form of contract which would be adopted to give effect to the negotiations is one of the critical decisions that the parties have to take. The government and the oil companies may decide to enter into any of the following types of contracts;
These agreements are in vogue since the beginning of the 1900s. Under this type of agreement, the oil companies acquires exclusive rights for exploring, developing and selling the oil or the minerals for a specific period. These are single ended contracts. This is one of the commonly used modes of contracting by the oil companies and the governments of the oil-rich nations. The host companies receives lump sum bonus from the oil companies as consideration of granting the exclusive rights (Crump, 2011).
These contracts are very advantageous for the governments of developing countries. This is a straight forward mode of contracting between the parties. In fact, the extent of advice and support required for entering into this type of contract is far less.
But this type of contract is not free from disadvantage. The commercial aspect of the negotiation process is a disadvantage to the developing countries when entering into this type of contract.
A joint venture agreement is entered into between parties when the parties are consensual about entering into a joint venture with respect to oil exploration. While entering into a joint venture, the parties concerned must possess adequate knowledge about the interest, business modes and goals of each other (Ghandi and Lin, 2014). If the parties are not consensual on these aspects, the joint venture would not be a success. Owing to the open-ended nature of the joint venture agreements neither the governments nor the oil companies are very keen to enter into this type of agreements.
The only advantage that the government can get by entering into joint venture is that it would be able to count on the expertise of the companies and would not have to make decisions on its own. The government is in a position to share profits with the oil companies under this type of agreement.
There is also a risk associated with the process of profit sharing. The government will have to share the associated risks and costs along with the oil company. This type of contract engages the direct participation of the government of the host country.
The peculiar aspect of this type of agreement is that the citizens of the host country are in fact the owners of the oil and minerals and not private entities. The responsibility of operating and managing the oil resources lies with the oil companies. The PSA is similar to a licensing agreement in many aspects. In both these agreements, the government of the host country receives a signing bonus. The expenses of operation are to reimbursed by the government to the oil companies. Current expenditure must be reimbursed immediately, and reimbursement of capital expenditure may be done over years. The oil companies under this agreement have to pay taxes applicable under the laws of the host country but in most cases the government tends to waive the taxes and the amount is included in the profits of the government. If the existing legal system in the host country is not accurate, a PSA would not be successful (Jennings, 2002).
This type of agreement is very advantageous for the governments as all associated risks with oil exploration are vested on the oil companies. The only expenditure of the host government is the cost that it has to incur for proper negotiation. Even in case of failure of the exploration project, the government would not have to incur the losses. The governments of the host countries have an opportunity of earning profits with this type of contract without making the investment (Sas, 1989).
The fact that A PSA is an inclusive document is a disadvantage if this type of contract for the government.
In addition to the above-stated types of contracts, the parties may as well enter into service agreements. In essence, this type of agreement allows disbursement. This agreement does not prove to be a useful one in the long run (Mabadi, n.d.).
There are certain provisions that may form a part of all the types of contracts and agreements described in the above section. These include the following;
When the government enters into the contract, the direct party to the contract must be chosen very carefully keeping in mind that if the government, itself, becomes a party to the contract then it would be directly responsible and the liability of the government would be unlimited. But on the other hand if one of the enterprises of the government is a party then this liability would be limited (Martin, 2009).
Stabilization clauses are not of much benefit to the governments as it has the effect of making the laws of the host country inapplicable and as a consequence the oil companies may demand compensation from the government (Mosburg, 1983).
The government of the host countries must insist on such a work plan that clearly provides the circumstances under which an exploration project may be shelved or delayed. This is essential because the oil companies have a tendency of setting aside or delaying projects that are not very profitable.
The provisions regarding termination must be clearly laid down in the contract. All instances under which a contract may be terminated must be exhaustively laid down (nawawi and rahayu, n.d.).
The prime reason owing to which the governments of the host countries are keen to enter into these oil and natural gas contracts is securing funds for the development of the country. The governments earn huge profits out of these contracts which it an utilize for developing the infrastructure of the country.
The oil companies try to maximize their profits out of the negotiation process but the government must keep in mind the development of the country. If the government fails to secure its interests in the negotiation process then the oil companies would take up the maximum share of the profits and the country would not be able to gain anything out of the contract (Oil and gas exploration and production: reserves, costs, contracts, 2005). Thus, the government must put forward certain terms before the companies. These terms should encompass the following;
During the process of negotiation, the government may compel the international oil companies to abide by its CSR while carrying on the exploration project in the host country. The government may require that al the rules applicable to the domestic companies with regard to CSR would be applicable to the oil company as well during the tenure of the project (OIL AND GAS: New Contracts, 2008). If the government does not emphasize this point, there is every possibility that the company would evade the obligation of CSR and the coutry would lose an opportunity of development.
Oil projects involve a lot of capital and man power. The government may require the oil company to provide jobs to the people of the indigenous communities. If the unemployment prevailing in the host country can be taken care of, the country would be able to strengthen its financial standing. These clauses are profitable for the companies as well because they get local labor and do not have to get labor from outside.
Sustainable development is a very important concept in the present times. Ecological balance can be maintained by way of adopting sustainable development techniques. The government may require the oil company to maintain the sustainability of the environment (Soyer and Tettenborn, n.d.). Oil and natural gases deplete with continued usage. Thus, the companies should take care that such quantity is extracted which is capable of being restored. Thus, the permitted quantity for extraction must be specified by the government to the oil companies so that they do not extract above the specified level.
The government may also require the oil companies to make endeavor for the overall development of the country (Thornton, 1992). These may include, setting up hospitals and schools, developing the roadways, providing funds for development of sectors like, health care and education, etc.
From the above discussion, we may conclude that there are several aspects which the government must take care of while negotiating the terms of a contract of oil and natural gas with the international oil companies. The oil companies are profit oriented and thus it is the responsibility of the government to make sure that such terms are entered in the contract which in the long run would be beneficial to the country as a whole. Since a lot is at stake the governments should make sure that the negotiation is done in a proper manner so as to be able to get a better bargain. The good negotiation would enable the government to maintain the economic, social and environmental well being of the country.
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Ariño, A., Reuer, J., Mayer, K. and Jané, J. (2013). Contracts, Negotiation, and Learning: An Examination of Termination Provisions. Journal of Management Studies, 51(3), pp.379-405.
Babusiaux, D. (2004). Oil and gas exploration and production. Paris: Editions Technip.
Bantekas, I. (2009). Oil and Gas Production Contracts. The Journal of World Energy Law & Business, 2(3), pp.263-264.
Bath, D. (2012). India – Legal aspects of oil and gas projects for foreign investors. ac, 1999(21).
Bindemann, K. (2000). The response of oil contracts to extreme price movements. Oxford: Dept. of Economics [Oxford University].
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Ghandi, A. and Lin, C. (2014). Oil and gas service contracts around the world: A review. Energy Strategy Reviews, 3, pp.63-71.
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Mosburg, L. (1983). Contracts used in oil and gas operations. Oklahoma City, Okla.: Institute for Energy Development.
nawawi, a. and rahayu, s. (n.d.). Sharing Revenue of Oil and Gas Industry between Center and Local Government from Legal Perspective. SSRN Electronic Journal.
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