Negotiating Contracts With International Oil Companies: Key Areas For Governments

Issues During Negotiation

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?

Oil and gas discoveries create a lot of excitement in the private as well as the public sector as and when the same are discovered in any nation. Both the government as well as the oil companies put in a lot of efforts to understand the technical, commercial and the legal aspects in the developmental field of this industry. The initial challenge in this matter is posed by the negotiation process when the contract is drafted (Alcantara, 2013). In this present paper, we shall look into the basic concepts that should be taken under consideration by the government while the negotiation process is done. The impetus shall be applied on the key concepts that should be considered of prime importance that insight the matters of informational environments, the elementary issues as well as the time horizon.

As and when the nations come to know of the natural resource called oil, they get hold of an extreme feel of happiness (Tracy, 2013). But, as soon as they inextricably move towards implementing the industry in their nation, they get exposure to the prevailing reality which throws light over the financial, commercial and the political constraints which are directly attributable to the fact that none of the resources underlying in the nation can be used to be transformed into a usable liquid asset popularly known as cash (Brooks and Odiorne, 1984). The most impelling challenge is posed in the negotiation process itself. In most of the situations, the resource rich nations keep a special interest to draw the attention of the international oil companies so that their natural resources can be further explored and they can be transformed into usable products (Taylor, 2005). But, as soon as the negotiation process with the international players start, it is realised that these market holders already have a wider and higher exposure in this particular field and hence, they stand in better financial positions thereby possessing higher degree of knowledge while dealing with these contracts (Radon, 2012).

This happens to be a vital reason why a high level of motivation is displayed by the oil companies when they enter into the negotiations (Crockett, 2003). The immoderate and theoretical investigations are hated by them and considering the total number of dry wells that they experience, they quickly try to move out and mitigate the out-of-pocket expenses made. They do not have any fixed assurance that their home governments will extend any protection to them and hence they often end up mourning for the hostile environment that is provided to them for working. Adjustment in the negotiation style is made by the oil companies following the political satire in which they are bound to stay (Radon, 2012). They resort to taking a self-protecting and uncompromising attitude while the negotiations for these purposes are met.

Dealing With The Locals

There may be two classes into which the key issues arising during the negotiation process are divided into. One of them deals with the conflict zone under which control is exercised over the company and the issues related to the recruitment concerns are dealt with in this part. This conflict zone deals with the maximum efforts (Nyden, Vitasek and Frydlinger, 2015). The concerned issues are related to either technical matters or commercial purposes. While on the other hand, there are several other factors which are ignored in the negotiation process and these are related to the environmental, economic, social, and political ones on the whole.

Attempt shall now be made to know the various challenges that a oil company faces while it enters into dealings. The first challenge is faced by the companies when the local and the indigenous population comes forward with their demands as they start facing a lot of problems and go through a substantial amount of loss as and when the oil companies come forward and take up the land that was previously owned by these people (Wilson, 2004). The demand which they raise is that they ask for either job offers in the company once it is set up or claim for compensatory payments. As far as these demands are concerned, they have to be attended to especially in the process of negotiation and must be handled both with domestic process along with a good amount of political influence. Generally speaking, all oil contracts are the result of a comprehensive negotiation process as all that is negotiated upon is finally incorporated in the contract (Radon, 2012). As such, they do not differ from the bidding situations that are generally referred to as negotiation neutral. The issues rise in different stages in the contract process and each one of them takes up a complex structure as and when progress is made in the procedure. The final achieved result after all sort of negotiations is nothing but an outcome of give and take as whatever is achieved is done through a negotiation itself negotiation (Crump, 2011).

Once the issue is settled with the locals, problems start arising in the matters of cost of exploration and development as the market conditions change and evolve constantly and the field size possibility. The risk of falling under the trap of dry holes can never be forgotten and these are only a few of the long list of difficulties. Hence, the requirement at this instance is that the negotiators taking part in the process are supposed to have a working knowledge of the process so that the several instances in which the negotiation takes place happens just like an element of poker in which the bidder with the big deals always has the higher chances of winning the deal (Zartman and Spector, 2013). The negotiators should rely on effectively managing the time at this instance. While the procedure continues, there are certain intervals when one should hurry up and just a moment later, time comes when one should deal with things patiently. Time is one of the most important factors to ensure that what is wanted is achieved. The aim is principally limited to maximise the returns that the country can achieve while the lowest cost is spent keeping the economy and the society under control. Put in simple words, this means that one is supposed to understand the pressures that are posed both from the political attitude as well as the corporate setting maintaining a balance between the two.

Cost Related Matters

When we make an attempt to understand the negotiating challenges in case of oil companies, the major challenge faced by the government is often regarding the personnel who would be sitting in the negotiating team. This is challenging on various instances because it is the responsibility of the negotiators to see that a coherent strategy is developed under the well conceived tactics. Another duty that is bestowed on them is to compartmentalize the negotiable factors from the non negotiable ones. While all this is in action, they should focus on maximizing the profit of the principal investor which is none else then the oil company. The investors in the oil companies always look towards having a proper foundation over the legal and the institutional stability (Jones Gill LLP, 2015). Generally, the countries having a new exposure in this field try to move towards the world wide terrain but the challenge before them is that their exposure in the legal or technical or financial framework and their attempts to excel in the implementation and the management is often very minimum. A viable option is to take advice from the foreign nations but while attempts are made in this regard, the government often fails. The major one is related to the conflict of interest between the big companies that are often pre established (Radon, 2012).

On the first hand, in order to exercise the regulatory power, the government protects the interest of the public sector; exactly on the other hand, in order to develop and culture an environment which will have a positive aspect over the foreign investment, it calls the private sectors to come to the forefront. This tries to promote the economy of the nation directly or indirectly and increases the opportunity in the employment sector and at the same time opens the doors for further development and research.

Here, the time commences and it becomes necessary that both the private actors and the public sector go hand-in-hand with each other. Generally, the difference of opinion that arises in the process of oil negotiation is easy to deal with in a developed nation like that of Canada or Norway that have excellent processes and regulations related to the oil negotiations.

Another constraint that is suffered by the negotiators is in relation to time. The time is largely a variant of the price of the oil in the nation which on the other hand is dependent upon the political and economic situation of the country. The high expectations maintained by the host country is put into proper shape by the negotiators when they predict and deal with all the changes that are foreseeable as well as unforeseeable. While the contract is framed, it is necessary on the part of the negotiators to base their discussion on the various issues related to time. If these trivial matters are not discussed here, then, the companies start facing difficulties at a later stage when the competition in the sector crops in and the situation goes out of control thus causing distress to both the company as well as the nation (Druckman, 2001). Thus it is very important for the negotiating team to keep in mind that the stability clauses should remain well discussed prior to setting the agreement that shall eliminate the contractual ambiguities that are likely to arise and change the determinants of the regulatory factors of the oil companies. These clauses can be relied upon by the oil companies for a comprehensive period of five to seven years so that the regulations that are related to the tax structure as well as the financial as well as the commercial concessions remain under the control of the company.

The Negotiating Team

It should be made sure by the negotiators that the stability clause should be able to provide protection to the oil companies if any changes are made in the laws of the nations (Radon, 2012). The stability clauses should possess the ability to limit the liability over the oil companies as and when amendments are made by the legislatures where the relation of the law is with the environment or labour factors. While the contract is being entered into, the parties should also focus on the instabilities in the legal sector. It is no doubt that the more the instability in the legal sector of an economy, more is the demand made by the oil company (Oil-gas-leases.com, 2015). These ever increasing demands can be settled by having a good control over the bargaining power.

The settlement in this regard can be made in a reconciled way. It should be kept in mind by the negotiators that the ultimate benefit should be in favor of the oil company and their interest should never be compromised. Both the demands of the government as well as the company should be addressed by the negotiators and an amicable way should be derived in a harmonious settlement thereby resulting in a better structure of the company (Kennedy, Benson and McMillan, 1982).

This requirement can never be overlooked while drafting the contract. There is undoubtedly any dispute on the fact that the oil company is dependent on the nation for the raw materials which is nothing but the oil and the same is derived from the land within (Smith, 2009). Hence, it is very essential that transparency should be maintained in the process for the fact that more the agreement is transparent, more public acclamation will be achieved by it (Radon, 2012). By transparency, it is simply meant that all the matters of note in the oil contract and the payments should be expressed in coherent terms while the non-disclosable information and the trade secrets should be kept under secrecy. A duty of care is definitely there towards the individuals who are the shareholders in the company. They are supposed to secure their payments in the shareholdings that have the risk of falling owing to structural changes in the company or civil issues within the nation or because of natural calls of naturalization (powerdriverbasin.org, 2015). This non closed attitude will prove beneficial for the oil company in the long run as the trust of the stakeholders is gained and thus the resources can be pooled in proper time. The public participation increases as a final result and the total process of negotiation goes in favor of the company.

Public-Private Conflict

In order to make the agreement, there are four different forms of contract that can be entered into. These are being discussed in the following paragraphs:

In agreements of these kinds, the rights to explore, export, develop or sell the oil are retained by the companies for a specified area which is clearly indicated in the agreement. Agreements of these kinds require special assistance from the professional experts and hence, possessing an expertise is one of the major prerequisites (Khong, 1986). Of course, there are a few commercial disadvantages which are related to the matter as the entire process is based on the bidding structure.

Agreements of these kinds, rest on the principle that the ownership of the oil which is the raw material of the nation, rests on the citizen of the country rather than being a property of the private parties who are involved in the exploration work. The risks of finance and operation that are associated with the work are borne by the oil company (Radon, 2012).  These agreements put a larger pressure over the government as the obligation to share the profits with the host private parties and at the same time, they are also expected to get along with the enforcement procedure in the environment maintaining a parity with the regulations that are placed before them.

These arise when two or more parties join hands together and come forward to pursue a joint undertaking. This relies on the form of a partnership and thus requires proper mechanism of resource allocation, effective management, bringing down the financial risks along with having a proper understanding of the responsibilities that come associated with it (Radon, 2012).  Usually, these joint ventures are a dreaded thing by the negotiators as it takes a long time for them to get into an amicable settlement in these agreements.

These agreements provide specific services for which hiring of employees is done. Fixed payment is given to the contractors and it is based on the discovery of the oil or its price (Brown, 1975).  The final responsibility in these matters rests on the government.

Some of the essential features are being summarized as under in case of oil negotiations:

• The negotiable matters should be kept compartmentalized from the non negotiable matters concretely;
   
• Since the structure of tax and the price of oil keep changing, hence, structuring the payments is important;
   
• Simplicity needs to be maintained and it needs to be ensured that none of the beneficiaries or the stakeholders undergo any losses; and
   
• The health and environment matters should be given importance to ensure sustainable development (Brister, 2013).  

References

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