The Gas and The Oil Industry

Question: Demonstrate a good understanding of the substantive rules of international law applicable to the oil and gas industry Evaluate the key principles of contract formation in international commercial transactions and key international law principles and trends in the oil and gas sector Assess the effectiveness of international law in addressing the environmental impact of oil exploration and exploitation Demonstrate a critical understanding of the importance of oil and gas law as a distinct subject, studied in a practical and commercial context. Answer: Introduction The different players in the gas and the oil industry have to encounter different kinds of risks. There are different kinds of risks and they are HSE accidents, mechanical breakdowns as well as unfavorable price change. Furthermore, there are also risks regarding contract between the host country and government and international oil companies or contractors. With the aim of reducing the exposure, industry players generally carry out different kinds of measures as well practices so that they are able to manage the risks efficiently. It is significant to note that one significant aspect of risk management is the risk allocation between or among the parties who are engaged in an undertaking. But it is quite difficult in the Oil and Gas Industry because there is large number of parties who are involved in a single project. Risk allocation in the Oil and the Gas Industry can be carried out by setting out in the contract clauses. It is these clauses which assess that which party will be held responsible for a certain risks and to what extent. The characteristics of the upstream oil and gas contracts are highly affected by the fundamental interest of the Host Government and the International Contractor. The Host Government is generally concerned with attracting risk capital to modern EP technology for securing the national interest while the international oil companies and the contractor focuses on the ways to acquire the excessive return on their investment. To make a clear distinction between the rights of Host Government and the international oil companies so that they are able to address and manage the risks, Production Sharing Agreement (PSA) has been introduced. Production Sharing Contracts was first introduced in Bolivia in the beginning of 1950s and this contract is able to provide benefit to the host country lacking expertise. Discussions The search of petroleum pushes the gas and the oil companies from their home countries out into the world. The worldwide scope of the exploration for the production of the oil and gas has given rise to multinational and international companies. These companies are generally found in home countries but carry out their business all over the world. It has been found out that presently all the significant oil companies can be found in different oil producing regions of the world. Furthermore, it has also been found out the medium and small petroleum companies also carry put their business in more than one country of the world (Hilyard, 2012). It is significant to note that each country formulates and implements different kinds of laws and regulations which help in developing the oil and gas industry sector of that country. So, it is probable to demonstrate the basic approaches and the concepts which are related with the international petroleum. Several laws have also been passed by the United States which applies to the international operation of the US Companies. Risk Allocation Approaches Usually, there are three kinds of research allocation approaches which are used in the Oil and Gas Industry (Darst, 2007). They are: Indemnity Exemption Limitation of Liability Indemnity Following this agreement, the party which is entitled to obtain a benefit will acquire payment from the indemnifying pay in case the indemnifying party suffers a loss (Benigno and Kk, 2012). Indemnity can be classified as mutual or unilateral indemnity. As per Mutual indemnity, all the parties involved in the contract acts as a potential indemnifier and recipient of probable indemnity. As against this, unilateral indemnity highlights a situation in which one party undertakes the liability of indemnifying another party if the second party incurs a loss in the contractual relationship. Scope of Indemnity for multiple parties: In Oil and Gas Industry, there are large numbers of parties involved. It has been seen that, whenever different parties are involved in a contract, it often creates an abstract result on the indemnity clause (Bowen, 2011). It has been interpreted by the court that whenever several parties are involved in a contract then one party will condensate other for any kind of loss. Scope of Indemnity when there is subrogation: If the indemnifier has undertaken an insurance policy to cover the similar risks which is the subject of the contract, the responsibility to indemnify will be turned off based on the fact whether or not there is an express duty of the indemnifier to take out the policy (SCARANTINO, 2010). Exclusion of liability The clause of Exclusion of liability is to release a party from the obligation for loss arising from outlined risks. However, the forgiveness will depend on the kind of risks or risks rising from the contract. These provisions in a contract generate a class of injury whose happenings are highlighted not to be qualified for remediation by the party with the responsibility to the risk covered (Zinn, 2002). The Oil and the Gas contract Parties agree to exclude liability for the following: Consequential Loss Loss resulting from willful conduct Loss resulting from gross negligence Limitation of Liability A liability clause may allocate the obligation for remedying loss which rises from an action of providing advantage to the party and at the same time put a cap on it. The cap will be put depending on the prearranged segment of the loss or a fixed amount of money. It should be noted that a limitation clause will limit the liability of the duty bearer (LIMITATION OF LIABILITY FOR MARITIME CLAIMS, 2001). There are different forms of limitation and they have been given below: Fixed amount Limitation: The parties may want to offer for the maximum amount of the loss that has been incurred so that either of them would be responsible for in the event of the risk happenings. The Clause 35 of Logic Standard Contract Supply of Major items are an example of fixed amount limitation. It ensures that: This kind of contracts is generally utilized in Oil and Gas industry. This is because there is option for unlimited as well as probably excessive liability is kept unrestrained (Johnsen Oil signs major Russian filtration supply contract, 2011). They may act as conciliation whenever the parties disagree on a mutual hold. It has been seen that some of the Oil and Gas project are so precious that the losses which are incurred are unbearable for the contractors. Thus, it is evident that a liability cap is carrying out the role of providing a second line of defense of indeterminate liability. Proportionate Liability: There are a large number of contracts which restricts the liability of the parties who are engaged in the proportion of their participation in the undertaking. Production Sharing Agreement Production Sharing Contract is a common kind of contract that is signed by the government of the host country and the international oil producing countries highlighting how much of the oil extracted will be received by government and the oil producing companies. In this agreement, the government of the host country grants the international oil companies with the permission to carry out with the exploration and the production of oil. It is duty of the oil companies to bear the mineral as well as the financial risks of explore and initiative. If the company is successful in acquiring money then the profit will be shared between the company and the government at a rate of 20% and 80% respectively. This contract is able to provide benefit to the host country lacking expertise and want foreign companies to carry out the task. At the same time, his contract can also be profitable for oil companies involved in the project (Zedalis, 2009). Key Features Parties- Generally, this type of contract will be carried by the National Oil Corporation (NOC) in behalf of the government. However, in case of India, these contracts are generally carried out Ministers who are in charge of the Mines and Ministers for Petroleum and Natural Gas respectively. In Tanzania, Tanzanian Petroleum Development Corporation is a party (Zedalis, 2009). Term of Contract- The length of the terms of the contract depends on a large number of factors and thus terms is negotiable. There is no fixed term period for the Model Contracts. Kenyan Model which follows the Clause 2: Relinquishment It focuses on ensuring speedy and effective exploration. It provides benefits to both the parties. The Clause 7 of the Kurdistans Model PSC is an example of Relinquishment Clause. National Interest Provisions National Interest Provision helps to upgrade and protect national socio-economic well-being of the host country (SCARANTINO, 2010). Cost Recovery Oil With the help of this provision, International Oil Corporation is able to recover its costs from the extracted oil and gas even before the profit is shared. Profit Oil This includes the return on exploration after the international Oil Corporation has recovered the costs. This is shared between the different parties in a sliding scale. The allocation of the government of the host country will increase with the rise in the production or the economic return of the contractor (Pirog, 2006). The product Sharing Agreement was first utilized in Indonesia in the year 1960. This was signed between the International Oil Cooperation and Pertamina. Presently, Product Sharing Agreement was used in developing and maintaining relationship between International Oil Contribution and some of the resource rich state for the exploration, development and the production of the oil and natural gas. As mentioned above, the most significant notion of this contract is the shared production. Generally, Product Sharing Agreement is signed for a time period of 25 to 30 years. However, the contract can be signed for longer years. This can be seen in the contract for developing the oilfield in Kashagan in Kazakhstan (Pirog, 2006). The project was signed in the year 1977 and it continued for about 40 years. After the extraction of the oil, the profit is shared between the parties who are involved in the contract. The share of the host country will be given to SOE. If the contract involves different number of parties, then one of the parties can assume the role of the operational management of the project. However, it should be noted that the function of the operational management will be assigned to the largest investor and he will also be responsible for settling the disputes or any problem that may arise in this case. The technical operational management varies greatly from the commercial operational management. This is because the technical operational management deals with the actual field development procedure whereas the commercial operational management focuses on the process of controlling the financial settlements as well as relation between the different parties about the production sharing calculations (Lai, 2011). The Product Sharing Agreement makes it clear that National Oil Corporation should represent the state. The NOC should possess two responsibilities. Firstly, that of a contractor with proper shares of the contract and secondly, it represents the interest of the state and thus receives the share of the profit of the oil on behalf of the state (Liu and Zhu, 2013). However, it should be noted that the share of National Oil Corporation varies from one country to other based on the negotiation process of Product Sharing Agreement and the share of National Oil Corporation in a specific project. However, different laws of product Sharing Agreement want National Oil Corporation to enjoy a share of the controlling stake of a project. In order to avoid any kind of problem, PSA is planned in such a way so that the contribution of NOC is executed by some other group members and the group members and the government repays the contribution from its share of profit (Lai, 2011). The different principles of Product Sharing Agreement have been analyzed below: On the host state side, an NOC an act as a party of the contractThe state holds legal title to the unproduced natural resources and only changes title to the share of the International Oil Corporation.The International Oil Corporation undertakes the risks at the exploration stage.If the Product Sharing agreement is negotiated and signed then it will become a part of the national legislation (Lai, 2011).The International Oil Corporation is provided with the right to search, develop and extract oil.The capital is invested by International Oil Corporation. The capital expenditure and the cost of maintenance are subtracted from the production in the form of cost oil.Cost oil and the profit oil are computed depending on the exact amount of oil being produced.The parties who are involved in the project will share the profit oil as long as the contract exists. The taxes are paid to government by the parties once the oil has been acquired (BELEW, 2011). Conclusions The entire project highlighted how the different kinds of risks associated with the Oil and Gas Industry are managed by the different parties. It also shows the importance of the Product Sharing Agreements and its role in sharing the risks and the responsibility between the host country and the international oil companies. The Host Government is generally concerned with attracting risk capital to modern EP technology for securing the national interest while the international oil companies and the contractor focuses on the ways to acquire the excessive return on their investment. The report showed that there are three kinds of research allocation approaches which are used in the Oil and Gas Industry. In Oil and Gas Industry, there are large numbers of parties involved. 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