13/05/2024
Oil and Gas Contracts.
Oil and gas contracts are the backbone of the energy industry. They provide a legal framework for the exploration, extraction, and transportation of oil and gas resources. Oil and gas agreements are complex documents but are vital for governing the rights, obligations, and responsibilities of all parties involved. They play a key role throughout the process of oil and gas production, including the marketing of the resources.
Oil is a valuable national asset that cannot be underestimated or left without a specific and clear legal framework, as it is no secret to anyone that it could have positive impacts on the economic and social arenas. It is the main income for almost every producing countries, and there is no other equivalent for their national economy. The majority of oil-producing countries depend on it at a rate ranging between 95% and 98%
In extractive industries, the contracts define the relationship between the state and the companies operating in this sector, in addition to the rights and duties of each party. It highlights plans for exploration, extraction and production, financial conditions, consequences of waiving the exercise of the petroleum right, methods of keeping records and accounting…etc.
There are three types of these contracts in this sector, which are concession contracts, production sharing, and service sharing contracts. Each type of contract has characteristics that distinguish it from other types of contracts. each type is further divided into subtypes which are not going to cover here.
Concession Contract
The government grants concessions to a company or companies to work in a specific sector, such as oil exploration in a specific geographical area.
The rights to the natural resources belong to the concessionary trading company(s). These companies fund all exploration, development and production operations.
Usually, in this type of contract, the state’s profits consist of a specific percentage of royalties and taxes, in addition to social taxes and bonuses. If the state participates through its national companies, the company’s share of the profit oil is added to its profit.
Production Sharing Contract
Ownership of natural resources belongs to the state. Companies have the exclusive right to exploration, development and production.
In this type of contract, companies bear the cost of exploration, development and production, and recover their investments later from the oil they extract and export. Then, companies share the profit oil with the state according to a previously agreed upon formula.
The state’s profits in general consist of its share of the profit oil, royalties and taxes.
This type of contract is common in the oil sector and is rare in the gas sector and is not applied in the mining sector.
Services Contract
Natural resources are under state ownership. It concludes an agreement with companies to provide specific technical services, such as exploration work, construction work, transportation…etc.
The state keeps the resources it produces and pays companies for their services, either in cash or a commodity, such as oil or other types of commodities.
These types of contracts are rare and are adopted by countries, such as Saudi Arabia, Kuwait and Iran.
Each contract includes axes in which the duties and rights of each of the companies and the state are refuted, namely: technical, commercial, social, environmental, production and obligations.
Technical Hub:
The technical axis revolves around the exploration plan, the geological systems for petroleum proposed by the right holder, the potential reservoirs, their depth and number… etc. This includes the companies’ obligations and the time, geological and practical plans for extracting oil from sea or land.
Commercial Hub:
This axis highlights and defines the method of calculating the profits of the rights holders and the state from oil production.
Social Hub:
This axis highlights the obligations of the rights holders towards the community in terms of employment, training, financial assistance, and financing activities beneficial to the host community, this axis should be understood well by those who are working in oil and gas industry in South Sudan, especially those in legal department and petroleum economic department as per the current situation of our country.
Environmental Axis:
This axis highlights the laws, rules and requirements that rights holders must respect and implement to protect the environment and public safety, the producing state must be very keen on how oil and gas waste are being treated and disposed .
“Establishing a proactive culture of commitment to health, safety and environmental values among all workers involved in petroleum activities.”
Note:
This is just brief public lecture and if you want to read more, please don't hesitate to go through Petroleum economic. You will get more than this.
Thanks
# . Samuel Apachdit Aka Samuel Mabor Mading.