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Before the Flood

Pure service contract

In a pure service contract, all exploration and production risks and rewards are retained by the state. The [international oil company (IOC)] is contracted to perform certain services (eg consulting, engineering, construction, operational, managerial services and so on), as defined by the agreement, in return for fee. The IOC is a mere contractor, working under the supervision of the state, and it has no legal or beneficial interest in the enterprise itself. This category of contracts includes management contracts (eg, contracts for management services, start-up and operational assistance and so on) and turnkey contracts (under which the contractor will be responsible for the construction and commissioning of a whole facility). Occasionally, the IOC may be given the right to buy back a proportion of production from the state, under separate sales arrangements.

– Geoffrey Picton-Turbervill (ed), Oil and gas: a practical handbook (Globe Law and Business, 2009), p38.

Risk service contract

In a risk service contract, the [international oil company (IOC)] is responsible for the capital expenditure and management of exploration and development and all exploration is undertaken at the IOC’s own risk, which means that, unless hydrocarbons are found in sufficient quantities, the IOC will not be compensated. If oil can be produced in commercial quantities, the capital expenditure and operating costs incurred are treated as a loan by the IOC to the state, which may be recovered (plus interests) from the state …

– Geoffrey Picton-Turbervill (ed), Oil and gas: a practical handbook (Globe Law and Business, 2009), p38.

Service contract

The service contract is a regime under which the host state at all points retains full ownership of all the hydrocarbons being produced on its soil and the [international oil company] performs the exploration and production work as a service to the state. They have been adopted in countries with strong elements of nationalism, including those in which the constitution actually prohibits foreign control or ownership of natural resources, such as Saudi Arabia, Kuwait and Iran. These countries usually have substantial capital at their disposal, but seek the technical expertise of [international oil companies] to carry out the exploration and production activities.

– Geoffrey Picton-Turbervill (ed), Oil and gas: a practical handbook (Globe Law and Business, 2009), p38.