Hydrocarbon resources

All hydrocarbon resources in the soil and the subsoil, in interior waters and in the territorial sea, on the continental shelf and in the exclusive economic zone are typically the province of the state. However, it is often the case that states with significant hydrocarbon resources do not have easy access to risk capital and lack the  technical expertise to explore and develop the hydrocarbon resources located in their territory. In these cases, the task of finding and extracting oil and gas is delegated to an international (and in some cases domestic) oil company (IOC) which possesses the expertise and financial resources to undertake the task. The relationship between the state and the IOC must then be regulated by some type of legal instrument or contractual framework which specifies the rights and obligations of each party …

– Geoffrey Picton-Turbervill (ed), Oil and gas: a practical handbook (Globe Law and Business, 2009), p27.

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Service contracts

Service contracts–Contracts entered into between petroleum project parties and various contractors will be required to provide for essential services throughout the lifecycle of project development, including contracts for the activities of seismic survey, drilling, well-testing, design, front-end engineering, construction, installation, removal, and decommissioning …

– Peter Roberts, Petroleum Contracts: English Law and Practice (Oxford, 2013), p40.

Petroleum contracts

Petroleum contracts (whether model form contracts or negotiated contracts) can be relatively formulaic. This can imbue a welcome measures of certainty, and could contribute to the development of an accepted body of custom and practice …, but it can also bring its own dangers. The English courts have recognized a well-known canon of construction that where parties have used language that means one thing in a contract to which they were parties, and they use the same language in another contract, it is likely that the language will have the same meaning. Thus, the wording of any particular petroleum contract should always be considered carefully.

– Peter Roberts, Petroleum Contracts: English Law and Practice (Oxford, 2013), p37.

The post-1950s concessions

The post-1950s concessions are significantly different with respect to ownership of hydrocarbons. The state has permanent sovereignty over the hydrocarbons within its territory and the concessions grant an IOC a legal title to the hydrocarbons, but only once recovered at the well-head. As with licences, the concessionaires have propriety rights over the concession areas. In addition, the modern concessions are for shorter periods of time and the concession areas are limited to smaller geographical areas that may be required to be relinquished depending on the work programme and budget. The IOC takes most of the exploration risks and the state generally derives all its revenues from royalties, income taxes and other similar payments.

– Geoffrey Picton-Turbervill (ed), Oil and gas: a practical handbook (Globe Law and Business, 2009), p33.

Licence regime

A licence (referred to in some countries as a lease) is essentially a permission granted by a state to an IOC to exploit a certain geographical area in return for a fee or a royalty. All hydrocarbons are owned by the state in situ, but ownership or any extracted hydrocarbons transfers to the IOC at the well-head. Therefore, the license grants the licensee a proprietary right over the hydrocarbons at such point and any profits obtained by the IOC from sale of the hydrocarbons are taxed by the state. The licensing regime is a relatively free market regime, under which the IOC bears most of the risk and enjoys a significant share of the benefits and is allowed to pursue it interests with relative freedom, subject to environmental, timing and other constraints imposed by the terms and conditions of the licence.

– Geoffrey Picton-Turbervill (ed), Oil and gas: a practical handbook (Globe Law and Business, 2009), p29.

The fundamental legal difference between a PSA and a license

The fundamental legal difference between a PSA and a license is that the relationship between the IOC and the state under a PSA is that of a contractor or service provider. Under a PSA, the state always remains the owner of the resources in the ground–although the contract establishes the agreed compensation that the IOC will receive for services rendered, part or all of which will be in hydrocarbon revenues. The IOC will therefore have a contractual right to be delivered a portion of the hydrocarbon production which becomes available (usually after treatment and processing) at the point of transfer. In other words, the PSA is a service contract with payment in kind. While in practice this arrangement provides the state with the same share of the hydrocarbons extracted that the tax and royalty regime would allocate, maintaining formal ownership of the hydrocarbons has been an important factor for countries keen on protecting their sovereignty over their national resources. This aspect appealed to the growing nationalist cultures of host states in the post-colonial era.

– Geoffrey Picton-Turbervill (ed), Oil and gas: a practical handbook (Globe Law and Business, 2009), p35.

Risk allocation in oil and gas contracts

The oil and gas industry has developed a number of contracting  practices to allow it to regulate and manage these physical risks. Generally speaking, and subject to certain important exceptions, up- and midstream oil and gas contracts seek to depart quite radically from the common law’s presumptions about how such risk should be allocated. Three vehicles are commonly used to achieve this risk re-allocation: (a) indemnity and hold harmless clauses; (b) clauses which exclude or limit liability for what are commonly, if rather loosely, described as ‘consequential losses;’ and (c) overall limitations on liability.

– Greg Gordon, “Risk allocation in oil and gas contracts,” in Greg Gordon, John Peterson and Emre Usenmez (ads), Oil and gas law–current practice and emerging trends  2nd edition (Dundee, 2011) p443.