Key Areas And Features For Governments In Negotiating Contracts With International Oil Companies

Parameters of Oil Negotiations

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?

Nations that are rich in natural resources tend to use the said resources for the process of development. When oil and gas resources are discovered the governments put in a lot of efforts to comprehend the legal, technical as well as viable issues associated therewith. The foremost challenge is the process of negotiation. In this paper, we shall examine the issues that the governments should be careful about during the process of negotiations. The key areas that are required to be emphasized by the Government while negotiating with the oil companies would be analyzed in this paper. Oil-rich countries regard the oil resources of their countries as the property of the country and not of any individual entity notwithstanding the fact that the surface area belongs to any particular individual. The laws of the nations also make provisions to this effect so that the owners of the surface land may not claim the resources lying underneath. To earn revenue for the country the governments try to attract the participation of the international oil companies in the process of exploration. The oil companies negotiate on the basis of the economic, social and political issues prevailing in the oil-rich country. Since the oil companies is better equipped as regards, experience of negotiating with different countries coupled with technical knowhow and experience in the negotiation process the international oil companies appear to be optimistic, stubborn and antagonistic. Thus, it is very important for the oil companies to be extra cautious while negotiating with these companies. Projects concerning mining and exploration have the potential to make a country earn wealth but, unfortunately, most resource-rich nations lack the capability to negotiate with the oil companies so as to derive maximum benefit for their countries.

Oil contracts result as a consequence of direct negotiation between the oil companies and the government of the oil-rich countries. Various issues are associated with oil contracts. The governments mostly have an indecisive attitude in the process of negotiation. Such indecisiveness of the oil companies in the process of negotiation results from the paucity of consciousness regarding the oil field, inability to make predictions for future and lack of technical knowhow. When the governments engage in oil negotiations, they must keep in mind the following important factors. The cost of exploration, the size of oil fields and the changing markets, etc. Enough attention is not paid by the oil companies to these aspects irrespective of their severe interest. The governments of the oil producing nations have a lot at stake as regards these oil negotiations. The usual practice of the Governments is to engage experts 

Issues that arise in the Process of Negotiation

The various issues that arise in the process of negotiation of oil contracts are of broadly two heads; the factors that are usually overlooked in the process of negotiation and the other is the conflict zone (3 oil & gas contracts for Aker Kvaerner, 2007). The factors that are generally overlooked include the economic, social, political and environmental issues. The significant issues may be discussed as follows;

Factors that are time responsive are very crucial for oil contracts. These include the oil price in the market which varies with time, the economic and political condition of the host country, the possibility of varying the said factors depending on the change of these factors. The oil contracts must be drafted with such expertise that would enable it to survive the test of time. The terms should be such that it makes provision for changes depending on foreseeable and unforeseeable demands. In a nutshell, the contracts must be responsive to the changes in circumstances. As an example, we may cite the case of Norway. To entice the international oil companies, it introduced such taxation provisions that were very much profitable for the oil companies. Without such enticing provisions, it would have been difficult to attract the participation of the oil companies to such geologically taxing terrains (Babusiaux, 2004).

Though the oil companies and the governments of the oil-rich nations are the direct parties to the oil contracts, other classes of individuals are also greatly influenced as a consequence of the oil contracts. These are the indigenous communities of the host countries. These indigenous communities expect to be compensated for the use and disturbance that is caused to their property as a result of the oil exploration projects (Bantekas, 2009). The government should keep in mind the interests of these groups while negotiating with the companies.

The process of negotiation must be transparent. In fact, public acceptance of the contracts depends upon the transparency of the process of negotiation. By transparency, we mean the disclosure of the contractual price and terms. But at the same time certain aspects must be kept confidential (Bhattacharyya, 2009). Transparency also serves the purpose of dealing with corruptions in the negotiation process. As a consequence of transparency, the government officials deter from including such terms in the contracts that might be subjected to criticism by the public.

In negotiation of these contracts, conflict of interests is often witnessed. The Government, on the one hand, is expected to induce the participation of the oil companies so as to increase the revenue of the country which in turn would lead to employment generation and economic growth. On the other hand, as the government is a party to an international contract the government acts as a business entity with the prime intention of maximization of profit (Bindemann, 2000). Thus, the Government is supposed to maximize profits and at the same time act as a regulator of its own conduct. Thus, the contracts must be drafted keeping in mind these factors.

Forms of Contract

The Government should be extra cautious while selecting the members of the negotiating team. Negotiation must be treated casually as it is more of an art than just a process. It involves undertaking good tactics, making a good plan and also the capability of segregation of nonnegotiable factors from negotiable factors. Negotiable factors mainly include compensation whereas nonnegotiable factors include regulations and consideration of the concerns of the oil companies. The Governments is in a vulnerable position in the negotiation process as compared to the oil companies (Cardella, n.d.). As far as skills, technical knowhow and financial status is concerned the position of the oil companies is far better.

It is thus desirable that the governments treat the process of negotiation seriously and appoint highly skilled professionals in the negotiating team. It is essential for the oil companies to employ skilled personnel to negotiate the terms of the contract.

The purpose behind these negotiations is to reach a mutually agreeable balance between the interests of the host country and also the concerned oil company. This purpose would not be served without employing successful negotiators. The companies would end up incorporating such provisions that are favorable to them (Crump, n.d.).

There are several types of contracts that the governments may enter into so as to give effect to the negotiation process. There are mainly four types of contracts which may be which the governments and the oil companies may elect to enter into. These four types of contracts have been discussed as under;

License or Concession Agreements give an opportunity to the oil companies the right to develop, explore, export and sell the oil which has been extracted from a specific oil field over which the said oil company has procured exclusive extractive rights for the particular period. In order to give effect to these contracts the lawyers, as well as economic and financial advisors must be included in the negotiation process of these types of contracts. In these type of contracts, the governments draft the contracts in accordance with the laws of its own country and then opens the terms for the companies to bid. The company that succeeds in the negotiation process is required to pay to the government of the host country a licensing fee. This fee is retained by the government notwithstanding production. In case, production takes place the host country would receive compensation in the form of royalty and income tax. The oil company bears all the risks associated with the exploration process. The government is at an advantageous position in these types of contracts (Ghandi and Lin, 2014).

In these types of agreements the ownership of oil vests in the citizens of the host country and not on private entities. As in the case of licensing agreements even in these type of contracts, the developmental and managerial responsibilities of the oil fields are borne by the oil companies(Jennings, 2002). The risks are also borne by the oil companies. In this case as well the host government may earn signing bonus but in most cases the said right is waived by the companies so as to earn future profits. The government, however, must compensate the host government as regards the capital investment as well as expenses of operation. After the said deduction, the rest is divided between the government and the company in the agreed ratio and the burden of paying taxes is borne by the company out of its share of profits. The successes of these types of contracts are greatly dependent upon the solidarity of the domestic legal framework of the host country. If the legal system cannot rely on then, the PSA ought to be drafted in such a manner that the agreement may become the law itself (Mahmud and Russell, 2002).

One of the prime requirements of a joint venture agreement is that both parties concerned must be well aware of the goals and modes of conducting business of each other. This is a very important aspect, in order to render a joint venture agreement successful. This type of agreement does not evoke the interest of either party in case of oil and natural gas exploration.

However, the government of the host country has the advantage of relying on the decision-making power of the oil companies under this type of agreement and does not have to make decisions all by itself. The profits accumulated out of the exploration project are shared between the company and government. But, the flip side to this is that the government also has to share the risks together with the company. Under this type of contract, the government of the host country is directly involved in the process of exploration (Marshall, 2003).

The parties also have the option of entering into service agreements which makes way for disbursement. This type of agreement is not very common in the exploration field (Martin, 2009).

The below-stated terms may be commonly incorporated in any type of exploration contract.

The oil companies have a tendency of shelving or delaying exploration projects, in case, they feel that the said project would not be much profitable for them. As a safeguard against such steps taken by the companies, the governments should lay emphasis upon the incorporation of such terms in the contract which unambiguously lay down the circumstances under which the project may be delayed or shelved (Mosburg, 1983).

Governments should try and avoid the inclusion of stabilization clauses in the oil contracts because they are not very useful to the governments of the host countries (Oil and gas exploration and production: reserves, costs, contracts, 2005). In effect, these clauses restrict the application of the laws of the host country to the exploration project.

The government should not itself become a direct party to the exploration contracts as it will have to bear direct and unlimited liability, in such a case. It is advisable that the government enters into such contracts indirectly, by way of making any of the government enterprise a party(OIL AND GAS: New Contracts, 2008).

The development of the country should be the sole mission and vision of the government for entering into these exploration contracts. The exploration projects generate huge profits and the Governments should aim at the welfare of the people of the country out of such profits. Moreover, the government may also require the oil companies which are huge financial reserves to donate funds for the infrastructural development of the country.

The oil companies are profit oriented. They try to negotiate in such a manner so as to maximize profits as much as possible. It is the responsibility of the government to try and make maximum out of the negotiation process as in the contrary, the company would take away the major portion of the profit and the country would not be able to develop (Pongsiri, 2004). Thus, the government should emphasize the incorporation of certain specific elements in the contract. These may include the following;

Exploration projects require huge manpower. The indigenous communities would be highly benefitted if they are offered jobs in the exploration projects. As a consequence, the problem of unemployment o the country may be done away with (Razavi, 1989). The oil companies also are benefitted by these clauses because they would be able to mobilize local and cheap labor.

Since oil and natural gas are such resources which may deplete faster than regeneration, the governments must ensure that the companies are not extracting such levels of oil or natural gases that the conserves would deplete.

The governments should emphasis that the oil companies perform their CSR while undertaking the project in the host country. Such provisions should be clearly incorporated in the contract (Thornton, 1912).

The mechanism for dispute resolution must be unambiguously laid down in the contract. There are various modes of dispute resolution which the parties may decide to adopt. The parties may opt to settle their disputes through formal court proceedings or outside the traditional court proceedings. Since court proceeding are time consuming, it is advisable that the parties opt for alternative dispute resolution mechanisms as a mode of dispute resolution (Tade, 1989). The major problem with court proceedings is that the oil contracts are made at an international level and the application of the laws of the host country is not always possible. The aspect of enforceability becomes questionable in such a case. On the other hand, the parties may easily take resort to arbitration, mediation, conciliation for dispute resolution. International Commercial Arbitration laws are the most widely used mode of dispute resolution in the international context. Under this system, the parties are at liberty to chose the rules applicable, the adjudicators, place of arbitration, etc. A lot remains within the powers of the parties. The procedures are also user friendly (Soyer and Tettenborn, n.d.).

Conclusion

From the above discussion, we may conclude that various aspects must be considered and taken care of by the government while negotiating exploration contracts with the international oil companies. The only intention of the oil companies is to make as much profit as possible, thus, it is the duty of the government to ensure that the contract turns out to be beneficial for the country. The government should keep in mind all the above stated aspects while negotiating. The sole purpose should be to get a good bargain out of the negotiation process.

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