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Introduction
The public and
private arrangements under which oil production is authorised have gone through
a variety of phases since the emergence of petroleum as an internationally
traded commodity in the middle decades of the last century (Smith, 1991).
International oil companies (IOCs) and host states (HSs) have over the years
adopted various schemes of arrangement to project and protect their interests.
The relationship between the IOCs and the HSs forms the substratum of the
petroleum industry and is accountable for the birth of various types of
contracts in industry.

It is through
these contracts that IOCs acquire the right to embark on Exploration and
Production (E&P) projects within the territory of the HSs. In particular,
they define, in case, commercial petroleum discoveries are developed and
exploited, how the production, income and risks will be allocated between the
government and the investor.
Types of E&P
Contracts
1. Concession
2. Production
Sharing Contract
3. Joint Venture
4. Service
Contract
1. Concession
Under this form
E&P contract, the government grants the IOC ( concessionaire) the exclusive
right natural resources in a given area for a specified period of time, in
exchange for payment of royalties and taxes (Cotula, 2010). Contemporary
practice indicates the modification of concession agreement to ensure greater
participation by host states. This modification finds expression in modern
concession contracts. In practice, allows for varying shades of government
supervision and participation.
2. Production
Sharing Contract
Production
sharing contract (PSC) is a distinct petroleum arrangement that has been
developed by many countries in the exploration and production of their
petroleum resources as it guarantees the sovereign right of the state over these
resources and meet their economic desires by providing capital and technology
for their production ( Ogunleye, 2015).
Introduced by
Indonesia in 1966, in opposition to the one-sided classical concession regime,
this form of E&P arrangement offer HSs greater participation in E&P
projects. PSC arrangements are resorted to when HSs seeks to reduce their
financial obligations in E&P projects, while not losing ownership and
participatory rights. The entirety of commercial risks is borne by the IOC who
executes the project on behalf of its self and the HS represented by its
National Oil Company (NOC).
On the project
becoming economically viable, both parties, both parties take their share of
the oil in accordance with the formula laid out in the law or contract. Royalty
oil is first allocated to the NOC in accordance with agreed quantum. Cost oil
which represents an IOC’s operating cost is then allocated to the contractor.
Tax oil, being the balance of oil after deducting royalty and cost oil is then
allocated to the NOC. The residue ( being what is left after the above
deductions is then shared between the IOC and NOC as profit oil according to
the terms of the PSC.
3. Joint
Venture Contract
Under this
arrangement, both the IOC and the NOC contribute to funding E&P operations
in the proportion of the JV equity holdings, and generally receive crude oil in
the same ratio (KPMG, 2014). A JVC creates a partnership agreement, in which
both parties interests somehow are balanced by jointly bearing the rights and obligations
in the petroleum operations (Ghadas & Karimsharif, 2014).
A key feature and
requirement in a JVC is that the HS should be able to participate in the
venture by meeting its full financial obligation. The inability of most HSs to
meet this requirement perhaps informs the resort to PSC. For example, the PSC
regime currently obtainable in Nigeria was a reaction of the government its
inability to discharge its financial obligations in many of its JVs.
JVCs can be
created either by contract or by incorporation. Within the regime, the joint
venture is created and managed through contractual agreements of the parties.
Both parties own the equipment and facilities of the project, as well as the
oil and gas productions (Al-Emadi, 2010). In the alternative, a separate legal
entity is formed with venture partners as shareholders with the objective of
carrying out E&P as set out by the JVC.
4. Service
Contract
Where a state (
as is the case with most oil producing states) lack technological capabilities
to exploit its resources), it may contract IOC to provide highly technical
E&P services in return for payment of a pre-determined fee. This is
arrangement is referred to as Service Contracts. Here, the IOC undertakes to
explore for petro carbons at its own risk and expense on behalf of the NOC and
by which it is reimbursed and remunerated in cash depending on the success of
the exploration (Guirauden, 2004).
This scheme of
arrangement can be categorised into either ‘pure service contract’ or ‘risk
service contract’. IOCs in pure service contract execute the E&P project in
exchange for a flat fee. Recovery of their operational cost is not tied to the
commercial viability of the project. An example of this is a contract to
construct at oil platform offshore. Once construction is completed and payment
is made to the IOC, the service contract comes to an end.
Risk service
contract incorporates an undertaking on the part of the IOC to bear all the
attendant risk of exploration, development and production of oil and gas. The reimbursement
of the IOC is predicated on the commercial viability of the project. Once there
is a declaration of commercial productivity, the company has a right to be paid
for its services and to additional compensation for the risk it has undertaken
(Smith, 1991).
Conclusion
The evolution of
oil and gas contracts reflects decades of struggle by HSs to obtain favourable
financial conditions and the desire of IOCs to maximise their profits. The
choice of a particular scheme should not be informed its wide international acceptance
and applicability. Rather, attention should be paid to factors like finance,
technology, political environment etc.
Currently, it may
appear as though oil and gas contracts have achieved apotheosis. However,
opportunities the development of newer schemes remain limitless. As events
around continue to re-shape the oil and gas industry, affecting prices, fiscal
policies and legal regimes, a new type of oil and gas contract may just be in
the waiting.
References
Smith, Ernest
(1991) From Concessions to Service Contracts, 27 Tulsa Law Review 493-524.
Leuch Honore ,
‘Recent Trends in Upstream Petroleum Agreement : Policy, Contractual, Fiscal
and Legal Issues ‘ in Andreas Goldthaw (ed) ‘ The Handbook of Global Energy
Policy.
Cotula L, (2010).
Investment Contracts and Sustainable Development; How to make Contracts for
Fairer and more Sustainable Natural Resources Investment (1st ed) International
Institute for Enviroment and Developmemt
Ogunleye Taiwo,
(2015), A Legal Analysis of Production Sharing Contract Agreements in the
Nigerian Petroleum Industry,5 Journal of Energy Technologies and Policy
KPGM Professional
Services Nigeria (2014) Nigeria’s Oil and Gas Industry Brief.
Ghadas Zuhairah
& Karimsharif Sabah, (2014) Types and Features of International Petroleum
Contracts. 4 South East Asia Journal of Contemporary Business,
Economics and Law, 34-40
Al-Emadi
Talal(2010) Joint Venture Contracts (JVCs) among Current Negotiated Petroleum
Contracts: A Literature Review of JVCs Development, Concept and Elements.Geo.
J. Int’l Law: The Summit 
645-667.
Guirauden, D.
(2004). Legal, Fiscal and Contractual Framework. In J.-P. F.-R.-R. Denis
Babusiaux, & N. F.-P. Bret-Rouzaut (Ed.), Oil and Gas Exploration and
Production; Reserves, Costs and Contracts (3rd Edition ed., pp. 170-210).
Paris, France: Editions Technip.
Disclaimer: This article is only intended to provide general
information on the subject matter and does not by itself create client/attorney
relationship between readers and the authors. Specialist legal advice should be
sought about the readers’ specific circumstances when they arise.

Anemuyem Akpan
& Uduak Nsungwara


Anemuyem Akpan is a Lagos-based Legal Practitioner. For
feedback, send an sms/mail to08063624048,
aloyanem@gmail.com
Ed’s Note – This article was originally published here.