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To explain how oil and gas exploration and production contracts represnt a balancing act between national oil companies (NOCs) and international oil cmpanies (IOCs) using the : USA, Iran, Nigeria, Oman, Nowrway and Thailand as case studies.
Oil and Gas Exploration: testing a number of places for natural resources
Oil and Gas Production: Manufacturing Oil and Gas for sale
"Balancing Act": An attempt to cope with several often conflicting factors or situations at the same time
The Oil and Gas Industry: Upstream, Midstream and Downstream sectors
The Oil and Gas Industry
Upstream (the E&P sector)- search, recovery and production of crude oil.
Midstream- processing, storage and transportation sectors.
Downstream- refining of crude oil, selling and distribution of natural gas.
Oil and gas exploration and production contracts represent a balancing act between national oil companies and private international partners. Critically discuss, providing examples of the experience of one country.
By: Bethan, Chethatai, Farid, Fatma, Gjertrud, Imuetinyan, Karol, Nanret, Patience, Sadegh
IOCs Key Objectives:
Profit maximization- profitability in changing markets
Economic power- market capitalization
Influence on politics
Vertical integration- diversification and mitigation of risks
National Oil Companies (NOCs)
State-Owned Oil Companies holding majority of petroleum services
Foreign policy goals- political relationships
Wealth re-distribution- fuel subsidies, social welfare programs, employment policies
Job creation for the society
General economic development for the nation
Economic security- diversity of producers and security of oil supply lanes
Production Sharing Contracts (PSCs)
crude oil produced is shared by the IOC and host government/NOC in predetermined proportions.
IOC bears all the risks of exploration.
Ownership of oil discovered remains vested in the state or its NOC.
Joint Ventures (JV)
IOC and host gov. / NOC share expenses and profits.
For a specified project and for a defined period of time.
These contracts outline the mutual goals, the duties, rights and extent, and limitations of the joint venture.
Gives mutual right of control.
- IOC receives exclusive right to explore for petroleum on large contract areas for long periods and upon discovery produces, markets and transports the oil and gas bearing specified cost and taxes.
- License or Lease. Shorter period and reduced acreage of contract area. Control is based on partnership and not dominance. Aims to fulfill national development as well as financial goals.
Service contracts- IOC is only brought in to carry out a specified task and does not generally share in the profit generated.
Risk service contracts
- IOCs bear the risk of exploration by providing the entire risk capital for E&P.
Pure service contracts
- IOCs are brought to perform a defined service and are compensated accordingly by a flat fee. Risk is shouldered by the host government/NOC with no transfer of technology.
Technical assistance contracts
- IOC is engaged to provide technical services of which there will be technology and knowledge transfer. Host government exclusively finances the project, owns the oil, equipment and facilities relating to the project and manages it through the NOC. The IOC works under the management of the NOC here.
Oil & Gas EXPLORATION laws differ from laws in EU
-- the u.s. EXPLORATION AND PRODUCTION (E&p) acreage areas granted thru bid rounds and concession agreements (CA)
Main e & P areas include
- Gulf of Mexico
--- Land Privately owned. as opposed to being owned by national governments AS in other countries
---- Landowner rights to underground minerals
U.S. Leasing Revenues -$6 Bln
Royalties - $5.6 Bl
Severance Taxes $3.7 Ml
Substantial source of income to Govt.
– Unpredicted and Unanticipated
Potential inability to achieve profitability or generate positive cash flow;
Unavailability of financing
Inability to accurately forecast operating results;
Regulated by individual states
U.S. Dept. Of Interior/Minerals MGt Svcs (for federal areas)
Federal Law: Title 43 of the Code of Federal Regulations, Part 3100
C O N S T I T U T I O N
L A W S
Shell Oil Co. v. Ross, No. 10-0429 (Tex. Dec. 16, 2011)(Opinion by Lehrmann)
Case Study - TEXAS
History of Iranian oil industry
Current situation of Iranian oil and gas industry
The contracts that has been used by Iran
1901:The extraction and production concession that was granted to William Knox D’Arcy by MozaffaroldinShah – Persian king of the Ghajar Dynasty.
D’Arcy was an investor: Having never set foot in Persia himself, Mr D’Arcy didn’t even have adventure travel stories to show for his investment.( according to BP report)
1901:The exploration was started by “George Reynolds” he and his caravan of explorers had lived through seven years.
Iranian Oil Industry History:
1908: oil start to give up in Masjid-i-Suleiman (Mr. Reynolds would be on the receiving end of an insistent telegraph: drill to 1,600 feet and give up.)
A few months after the masjid-e-Soleiman oil discovery , the Burma Oil Company , the Concessions Syndicates Ltd. , and Lord Strathcona, a British financier , established the Anglo –Persian Oil Company .
Within a year, the Anglo-Persian Oil Company, which would one day become BP, was in business.
1913: Construction of the Abadan oil refinery.
Among the nationalists, Iran’s prime minister spoke vehemently against Anglo-Iranian’s presence in Iran.
In 1951 he convinced the Iranian Parliament to nationalize oil operations within the country’s borders.
1950 Iran’s oil nationalized
1951: The National Iranian Oil Company (NIOC) a government-owned corporation under the direction of the Ministry of Petroleum of Iran, is an oil and natural gas producer and distributor.
Iranian oil industry over the last decade:
This entry is the total oil exported in barrels per day (bbl/day), including both crude oil and oil products.
This entry is the total oil produced in barrels per day (bbl/day). The discrepancy between the amount of oil produced and/or imported and the amount consumed and/or exported is due to the omission of stock changes, refinery gains, and other complicating factors.
This entry is the stock of proved reserves of crude oil in barrels (bbl). Proved reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with a high degree of confidence to be commercially recoverable from a given date forward, from known reservoirs and under current economic conditions.
Oil Proved reserves
4th largest oil reserves and the Second largest natural gas reserves in the world.
151 Million Barrels of oil reserve and 33 trillion Cubic meters gas.
4.4 million barreal of crude oil and 1,470,000,000 Cubic meters in 2017
Current & future situation
According the Iranian oil law: foreign company’s investments in the upstream oil sector operations , or exploration, development and production became possible only through service contracts.( Very similar to “ Buy Back “ contracts of now )
The law prohibited foreign participation in the production and utilization phases.
Based on the new law, foreign companies prepared to ink a service contract , would have to accept the risks associated with exploration operations .
If operations were not positive in leading them to commercially producing fields , they could not exact the amount they had spent
If they reached oil , they had to hand over the discovered field to the National Iranian Oil Company ( NIOC) and exact their expenses in 10 yearly installments and deduct them from their payments for crude oil they purchased .
Currently Iran use buy back contract
A buyback contract is basically a financing arrangement in which the developer sells a property to an investor and then buys it back under a long-term sales contract.
INOC claims: within the buyback contract an IOC receives a fair return on its investment, without any technological (exploration and exploitation) risk.
IOC: There is some risk: higher capital expenditure requirements than agreed upon or its distribution over the construction period, or a production profile below expectations.
Africa’s largest petroleum industry
Average of 2.5 million barrels a day according to DPR
Gas production- 8.0 billion cubic feet per day
Associated gas- 5.20 (BCFD)
Non-associated- 2.80 (BCFD)
Utilization – 6.6 (BCFD)
Companies flare- 1.4 (BCFD)
Gas reserves -182.8 trillion standard cubic feet
Revenue generated- 80%
foreign exchange earnings-95%
Gross Domestic Production -40%
Increase in production by 2020 to 4million barrels per day
1905- first mineral survey in south-west (Ondo state)
1937-Shell D’arcy company was granted a license
Oil rights could be acquired under the Minerals Oils Ordinance 1914
Petroleum Act 1969; No real changes; still no equity participation by the state
1971-merging of NNOC and the Ministry of Petroleum resources to form NNPC
NNPC had rights to explore and produce including concession areas.
Evolution of upstreams contracts
Product Sharing Contracts(PSC)
NNOC and Ashland Oil Nigeria Company
Deep offshore and inland basin contracts in 1993-it is relatively new
Nigeria attracted investors
Job creation for indigenes
Legal protection for investors
Main law – Deep Offshore and Inland Basin Production Sharing Contracts Act No 9, Laws of the Federation, 1999.
It sets out :
General frame work for the operation of PSCs
Royalties(depends on the depth of the water) eg from 801 – 1000metres ; 4%
Tax regimes(50%) must be allocated in a quantum as shall generate an amount of proceeds = actual royalty payable each month
Allocation of profit oil(balance after deducting tax, cost and royalty oil) shall be in accordance to the terms in PSC
Terms- 5years and aggregate period of 10years .( compulsory partial relinquishment)
Some areas in Nigeria in the high political risk zone-Niger Delta
To what extent is the stabilization clause enforceable?
Change in oil and gas regulations:
The Nigerian oil and gas industry content development act 2010- overrides any law that conflicts with its terms
There must be a “Labour clause”
Local buyers must be given preference in oil field auctions
The Petroleum Industry Bill – To replace NNPC that will engage in solely commercial activities. Also, increase in government share.
Inflation affects the IOCs
Prices are subject to fluctuation; reduce in net production revenue and acquisition of oil and gas.
Prohibition on spills, releases or emission of harmful waste
Environmental impact assessment
Cost of compliance associated with changes in environmental laws requires significant expenditure
Indigenous oil companies developing- account for 10% of production
The awarding of marginal fields to indigenous oil companies and the divestment by IOCs may pose a threat
Statoil - Norway
First petroleum licensing rounds started in 1960, weak bargaining power
Without state participation
State interest profits leading to creation of Statoil, Norway’s first and largest NOC in 1972
Still encouraged participation from foreign private sector
Expected benefits such as competition, risk sharing, transfer of technology and petroleum management skills
Only took on companies that would best take into consideration Norwegian interests
Founded in 1972, partially privatized in 2001
Merger with Hydro in 2007
Energy company present in 34 countries with 24,000 employees
Produced 1,96 million barrels of oil equivalent (boe) per day in 2009
Roughly 22 billion boe in proven resources (5.4 billion as booked reserves)
Statoil Brief info:
One of the largest net sellers of crude oil
The worlds largest operator in waters deeper than 100 meters
World leader in carbon storage
The second largest exporter of gas in Europe
Statoil brief info
The relationship between Norway (NOC) and foreign companies (IOC) in the oil and gas industry is usually determined by individual negotiated contracts
The most common type of contract found between NOCs and IOCs in Norway is a Joint Venture (JV) contract
Joint venture contracts in Norway
O – venture with Statoil operator responsibility
S – Statoil’s share of ventures with Statoil operator responsibility
P – ventures in which partners have operator responsibility
C – corporate ventures
Types of Contracts:
Variations of Joint venture contracts in Norway
Unique model that satisfies Norway’s needs that has gradually changed over time as Norway has gathered a pool of experience
A joint venture contract in Norway’s case has been the most efficient way to balance bargaining power between strong IOCs and Statoil
Final Thoughts ...
By the end of 2011, 63 concessionary, 79 Block
30 offshore, 33 onshore
state can collect royalties totaling 51,044 million Baht from 421,627 million baht, 12.1% SRB and Tax 3,986 million Baht
Overall, 32.4% from total price of petroleum
Petroleum Act. 1971
Thailand I, (1971-1989)
-After taking the production cost off, 50-50 between NOC and IOC
-80% of capacity
Thailand II, 1981
-Require annual benefits, based on production
-IOCs get only 20% off the revenue for production cost
-Cancelled – unsuccessful
Thailand III, 1989-present
Avoid the abandon hole
Progressive rate, 5-15%
5% of 2,000 barrels per day,
6.25% 5,000 but under
10% 10,000 barrels per month
15% more than 20,000
Petroleum Tax 50%
Resource rich countries shift political and economic control of natural resources to state owned companies
Can involve increase of taxes, renegotiation of contracts, and ultimately nationalism
Thailand III, 1989-present
Avoid the abandon hole
Progressive rate, 5-15%
5% of 2,000 barrels per day,
6.25% 5,000 but under
10% 10,000 barrels per month
15% more than 20,000
Petroleum Tax 50%
Comparing with other countries in SEA, Thailand gain less profits than others at approximately 64% when other countries in SEA gain approximately 70% of total profits
Originally Driven by decolonization
Rising concern of hostilities towards U.S and allies has prompted renegotiations
Concerns of depletion of national resource levels.
Economic factors - concerns that host countries have not been getting their “fair share”
Political factors – emerging economies wanting acknowledgment, rise in democracy and national parliament.
What drives resource nationalism??
Manifestations of resource nationalism
Australia – mining tax proposed in 2010
Zimbabwe – recently warned of seizing control of all mining companies
U.K – raid on north sea oil industry, 2011 Budget increased tax burden on north sea oil
Venezuela – oil resources majority Venezuelan owned.
Algeria – exceptional profit tax 2006
Countries that have displayed resource nationalism
Cyclical in nature, dependent on oil prices
Oil price decreases foreign investment increases, and vice versa
Recovery of resources becomes more difficult foreign investors become more important
Cyclical in nature
Foreign investment in social programs
Financing from global institutions e.g world bank
Specific clauses in contract e.g stabilization clauses and freezing clauses
Reducing resource nationalism
Promising future for Oil and Gas Industry
IOCs losing grounds to NOCs,
Independent Oil companies etc.
Review exploration portfolio
BPXP’s partnerships to develop resources
in established basins, incl Iraq and India.
Merger with Amoco and the acquisition
of ARCO, brought the prospects of
three companies together.
‘Living off' the merger portfolio.
IOCs – What does the future hold?
Reconsider options for exploration.
Canada’s oil sands, higher costs for IOCs.
Five components for resource renewal:
-conventional deep-water exploration;
-unconventional oil and gas fields e.g. arctic.
-unconventional resources such as tight gas and -heavier oil;
access existing, giant conventional resources;
enhance technology to produce more from existing fields.
- Seismic technology and processing tools;
The future of IOCs
Explore regional resources like shale gas,
Redefine IOC / NOC roles and
relationships; contract-service model
KSP: technical experience, global reach,
deep financial resources
Competitive M & A strategy
Mixed and flexible – collaborations and
The future of IOCs cont…
NOCs control 86% of global oil and 53% of gas reserves,
NOCs future reserves to increase, threat to IOCs future reserves
NOCs and service companies are increasing in competence,
More leading and decisive roles
They have more options –, NOCs/IOCs, NOCs, service companies & contracts – (complex technology and project risk sharing)
specialization, collaborations and partnerships, joint ventures to share expertise, knowledge and investment.
Some NOCs strict local content rules could be problematic
Cash rich NOCs means access to new skills and specialised experience
The future of NOCs
Independents or junior E & P companies
– Heritage, Afren
Independents work with NOCs
Local content / indigenous participation laws
Enhanced oil recovery technology – smaller finds
Easier approval of M & A transactions
Increased partnerships and collaborations
Future of Independents
Nigerians seek $1 billion from Shell for oil spills
Suit on behalf of the people of Ogale in the
Eleme local government area
The Alien Tort Statute, a 1789 US law assures
foreign govts that the US would help prevent
breaches of international law.
Water laced with cancer-causing benzene
at 900 times WHO guidelines
Poor standards to prevent and control
pipeline oil spills.
Landmark cases - potential liability of Shell
Landmark cases - potential liability of BP
BP’s Gulf of Mexico oil spill to $42.4 billion from $42.2 billion.
BP’s class action lawsuits, a "business model" , benefit solicitors,
The US Environmental Protection Agency (EPA) suspended and
BP investors lose bid for class
status in Gulf spill case,
30 days to file a new motion.
Damage to reputation?
First Oil Concession License granted to Darcy Exploration Company in 1925.
In July 1937, the concession license granted to Darcy was transferred to Petroleum Concessions Company Ltd which was later named as “Oman and Dhofar Oil Company (Ltd)”, (part of Iraq Oil Companies Group).
In 1951, Oman and Dhofar Oil Company (Ltd)”, assigned its concession rights in Dhofar Region Concession to City Services Company. Later (in 1952), Oman and Dhofar Oil Company (Ltd) changed its name to Petroleum Development Oman Company (PDO).
Oman Legal framework
Royal Decree No.8 of 2011 (issued 24 January; came into force 2 February 2011)
the Law applies to all Petroleum Substances within Oman
Petroleum Substances are the property of the Government
Concessions cannot be assigned or surrendered without the MOG’s approval
Each assignment requires an RD
a contract for “exploration, excavation, development and extraction of Petroleum Substances”
Petroleum Substances = Crude Oil and Natural Gas (associated and non-associated)
reflects a typical Oman EPSA
EPSA = Exploration & Production Sharing Agreement (MOG standard form)
No person may undertake exploration, excavation, development or exploitation
except under a Concession Agreement
must be for a fixed term
will only be effective upon a ratifying RD
will not grant title to the contract area
Concessionaire must be qualified
technically and financially
to the standards prescribed by the MOG
In advance, the MOG may request a performance guarantee
deposit of between 2-5% of value of agreement
valid for entire term
forfeit on performance failure
Consessionaire must preserve Gas :
Use Gas in order of specified priorities (Art. 41)
After approval of MOG
Concession Agt. may include incentives:
To encourage exploitation of Gas
In proportion to work skope/investment
Consessionare must allocate Gas
For use in local market, if not used in operations
Cost Oil and Profit Oil percentages
Tax rate of up to 55% on profits
Bonuses incl. at signature, renewal, annual rental and discovery (not cost recoverable)
Annual contributions to training and oil and gas data repository
OMAN - EPSA
In January 2007 BP signed a major
with the government of Oman
Appraisal and development of Block 61 and the Khazzan and Makarem gas fields.
The agreement covers an area of some 2,800 square kilometres in central Oman, which contains a number of 'tight gas' reservoirs which were first discovered in the 1990s
Involve drilling around 300 wells, with first gas planned for 2016-17.
Who wil benefit the most?
1. Baker institute policy report. James a. Baker 111 institute for public policy of rice univeristy
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> The international oil companies
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Thailand-Malaysia Joint authority Act. 2533 B.E.
Petroleum Act.,Thailand, 2514 B.E.