Upstream Petroleum Contracts: Where the “Rubber Hits the Road” in a Petroleum Regime

Blog contributed by Jay Park, a partner with Norton Rose, who will be one of the ‘sprinters’ in our booksprint initiative to write “How to Read and Understand Oil Contracts”.

Zara Rahman’s recent blog post described OpenOil’s initiative to do a ‘booksprint’ to write a book about “How to Read and Understand an Oil Contract”.  I am pleased to be a part of this initiative.  Let me explain why.

I have been a student of ‘petroleum regimes’ for over thirty years as I have worked on oil & gas projects in forty-five countries.  A petroleum regime is the set of rules that govern how a state regulates and manages its petroleum assets.  It is comprised of four components:

The detail tends to increase as you go from the constitution (which will set out a few simple principles regarding petroleum) through the petroleum law, regulations and the contract.

The differences that exist among different petroleum regimes are really quite remarkable. The rules for driving a car differ very little as you travel the world. But petroleum regimes vary widely from country to country. It’s a bit surprising how significant these differences are.

The booksprint will be an effort to help explain and describe the ‘host government contract’ component of a petroleum regime. This is the contract between the state and the investor. The other parts of a petroleum regime are important, but the host government contract is where the action happens: the investment will occur, the wells will be drilled, the oil will be produced. This is where the ‘rubber hits the road’, as it were.

The wide variation among global petroleum regimes is also reflected in the many different types of host government contracts. There are fundamentally four flavours of host government contract: concessions, joint ventures, production sharing contracts and risk service contracts. In order to distinguish between them, it is necessary to ask two questions: (i) who has the exclusive right to conduct petroleum operations in the contracted area, and (ii) who owns the oil & gas that results from successful operations. Contracts can then be categorized into the four main types as follows:

Some states will mix up the features of the four main types to create a ‘hybrid’ host government contract. Consequently, there are many different variations of contracts used around the world.

The challenge in writing a book about “How to Read and Understand an Oil Contract” will be to put all these different types of contracts into a context, and identify what is common and what differs among them. We are currently identifying suitable examples from different countries; personally, I like Brazil’s concession, Ghana’s joint venture, Indonesia’s production sharing contract, Iraq’s service contract and Libya’s hybrid production sharing contract as good cases for analysis.

I am passionate about petroleum regimes because of the significant impact they have on whether and how a country’s petroleum resources will be explored and developed, and how well the state administers and regulates petroleum activity. My view is that a well-designed, durable petroleum regime (and its host government contract) focuses on seven key factors for the state, three key factors for the investor, and implements an efficient regulatory design:

It is my hope that the book “How to Read and Understand an Oil Contract” will elaborate on each of these.  Understanding the key components of petroleum contract is a critical step in designing a good and durable petroleum regime, so that exploration, development and production can occur for everyone’s optimal benefit.

To find out more about the booksprint, read this two page pdf document, and to pre order your free electronic copy go to http://openoil.net/contracts-booksprint and fill in your email address.  Feedback on the project and suggestions for what you’d like to see included can be made by emailing zara.rahman@openoil.net; every useful contribution will be attributed in the printed book.

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