Concession Contracts in Oil and Gas Industry - Research Paper Example

Concession contracts in oil and gas industry Introduction Concession is a prime form of petroleum development agreement. The very first known principal form was recorder in 1901 in Iran. Today, concessions are widely used albeit in a different format from the initial forms1. Different commentators have broadly classified concession into two categories: the classical concession and the modern concession, the former represents the very first concession (the D’Arcy type of concession) and the latter show the new form of concession in use (Oyewunmi, 2011). This paper seeks to discuss the two concessions and the development of oil and gas contracts and concession in the state of Qatar. Oil and Gas Contracts and Concessions on the Qatar Petroleum Company Qatar Petroleum is a petroleum company owned by the state. The company is responsible for all activities involving oil and gas in Qatar, including production, exploration, transport, refining, and storage. The company is managed and directed by Mohamed Bin Saleh Al-Sada, who is also heads the Ministry of Energy and Industry in Qatar. The operations of Qatar Petroleum are linked directly with the agencies of state planning, policy making bodies, and regulatory authorities. Qatar Petroleum is currently ranked the world’s third largest oil Company by the oil and gas reserves. It is vital to note that the revenues from the company’s oil and gas totals to 60 percent of the gross domestic product (GDP) of the country2. The operations, activities, contracts and concessions of Qatar Petroleum are regulated by the Ministry of Energy and Industry of Qatar alongside regulatory authorities and policy making agencies. The oil and gas industry performs its operations in countries all over the world with compliance to different kinds of agreements. Generally, these agreements fall into a combination of four categories or one of the categories: concessions, production sharing contracts or production sharing agreements, risk agreements, and service contracts. This paper however focuses on concessions: a principal form of contracts between a company in oil and gas industry and state to explore and develop oil and gas resources. Oil and gas concessions are much more similar to the concessions of mines considering that in most countries save for the United States of America, the state owns the underground and not the real owner of the upper land3. With this legal context, generally the State which is represented by its legal Authority, or its Government, grants the obligations and rights to an operating company in oil and gas industry to explore, develop and produce resources: oil and gas, as any other company doing mining (Pereira, 2011). The concessions apply for offshore or onshore development in the same way and capacity as long as the site is within the State’s Continental Shelf. The area or site that is subjected to concession is usually referred to as a block with its own obligations and rights. These concessions are normally long term agreements that are signed for a minimum of 20 years between an oil and gas operating company and the State of a producing country in the oil and gas industry, normally and International Oil Company. In addition, as extrapolated or inferred from the historical code of mining in every country, the structure of finances of a concession of oil and gas is much simple and is based on two stages: exploration and production. The procedure of concessions is then described in the signed agreement between the operating company or a pool of them, and the state of the operating company4. The operating company in the oil and gas industry, or a group of them, shall buy a license for concession in order to explore a given block. The operating company shall then pay a fee per barrel produces to the local State in compensation of the production of oil and gas. This payable concession fee will mostly depend on the price of a barrel at the time of concession signing as well as on the quality and quantity of the produced oil and gas such as approximated at the phase of exploration. The fee per barrel in a concession is usually fixed for the concession period. Practically, it means that the State of the operating company will receive the concession fee without any regard to the capital expenditure or losses and profits of the operating company. All the risks and costs are left to the operating company, as well as the profits that exceed the quoted fee. This section of the concession often brings tensions between the concession parties. The issue of risks and costs being left to the operating companies creates some sort of tension between the operating companies and the producing countries for example when concessions are signed for 15 to 20 years and the price per barrel fluctuates between 10 dollars and 20 dollars per barrel5. This unbalances the concession contracts especially when the prices per barrel rockets much higher. For the last 10 years, most of the countries have had that kind of concession contract and have today investigated all the means possible to have the compensation of the concession renegotiated, either in introducing taxes or directly. The operating companies are however reluctant to accept these alterations, not only because it reduces their margins of growth, but also because they do not guarantee any revision to the fees downwards in case the price of a barrel may significantly come down during the remaining duration of the concession. With the price per barrel not just significantly increasing, but also heavily fluctuating depending on various factors including the US dollar currency, the concession agreement appears less adapted to regulate the obligations and rights between the International Oil Company and the State, which today prefer using the production sharing contracts (PSC). We will now look at the comparison between the classical concession and the modern concession (Bishop, 2002). The Classical Concession The classical concession is characterized by the award of large land tracts for a long duration of time, sometimes the whole country, for 60 to 99 years, and with no control virtually over the activities of the concessionaire by the state. In addition, the primary financial benefit of the State only came in form of royalties. Indeed, royalties were basically charged on the basis of flat rate per tone of the produced petroleum and was not indexed to the petroleum market price. The concessionaires were not initially obligated to drill in any part of the land which had previously been conceded to them. The same concessionaires were also not required to give up the property in a different position that they did not embark on drilling or exploration. These classical concessions were previously entered into by various countries6. An example of classical concession is seen in Iran, William D’Arcy the exclusive was awarded the exclusive rights, in the D’Arcy concession, to search for and produce oil in a wide square mile almost 500000, of southern Iran for 60 years. As an exchange, the Iran government and the Shah were given a bonus of 100000 US dollars and shares of an equivalent value in the oil company, D’Arcy and 16% of a royalty. On the same note, the Abu Dhabi ruler awarded a concession of 75 years for the entire country. In another example of a classical concession in Nigeria, the consortium of the Shell-BP was granted a concession agreement that covered the whole of the main land of Nigeria. The classical concession was actually a reflection of its duration of time (Jannatifar, 2010). In many countries where such classical concessions were awarded were under some form of colonization often, or the other. In addition, these countries lacked the legal structures requisite in order to govern matters such as the petroleum operations. This created an environment in which the oil companies subordinated the interest of these countries. Today, most oil producing countries have adopted modern concessions due to the loop holes identified in the classical concession as described in the earlier sections of this paper. The Modern Concession Due to the injustices identified in the classical concessions by the oil companies, they resorted to a modern concession as a result of awareness that originated from the countries producing oil. The injustices engendered in classical concession regimes led to the rise of the modern concession7. As mentioned in the earlier sections, the issue of risks and costs being left to the operating companies created some sort of tension between the operating companies and the producing countries. This unbalances the concession contracts especially when the prices per barrel rockets much higher. For the last 10 years, most of the countries have had a kind of concession contract where concessions are signed for 15 to 20 years and the price per barrel fluctuates between 10 dollars and 20 dollars per barrel. This led to the investigation of all the means possible to have the compensation of the concession renegotiated, either in introducing taxes or directly. Starting from the fifties, many countries wanted to renegotiate the terms of the previous concession, and introduce new concession elements which altered significantly the balance in the regime of the concession. However, the main alteration arose after the establishment of the Organization of Petroleum Exporting Countries (OPEC). This organization, (OPEC), was formed in 1960 and one of its primary goals was to attain complete control of the industry of hydrocarbon in its sovereign territories. In 1968 and 1971, the Organization of Petroleum Exporting Countries (OPEC) made resolutions that enjoined the member states in order to procure control and participation in the development and exploration of their petroleum resources8. The formation of Organization of Petroleum Exporting Countries (OPEC) was pivotal to the strengthening of the countries that produce and export oil in the negotiations they carried out with the oil companies. The member states shared information about the nature and type of arrangements that are being offered by the oil exploring companies under the classical concession system. The concessions that were renegotiated now gave the member states an upper hand and a greater take in the elements such as: the produced oil within the territories of the member states, control over the oil company operations, had smaller areas covered, shorter duration of grant concession, and included the demand to relinquish whenever oil and gas was not produced or discovered. These in addition to other new terms of concessions were adopted and formed the modern concession (Waibel, 2011). The Risk Service Contract In addition to the modern concessions, the risk service contract is also one of the categories of agreements through which oil and gas industry performs its operations in countries all over the world. The agreements as stated in earlier sections may fall in one category or in a combination of the four categories: concessions, production sharing contracts or production sharing agreements, risk agreements, and service contracts. Hence, this is the importance of looking into the risk service contract in this paper. The risk service contract (RSC) is similar in many ways to the production sharing contracts (PSC). Under the risk service contract arrangement, the National Oil Company possesses the right to produce oil, and at the same time, the multinational company acts in the capacity of a contractor. Just like the production sharing contract, the funding is provided by the contractor as well as the technical expertise that is needed in order to explore and exploit the petroleum9. In exchange, the contractor is then reimbursed from the derived revenue from the crude oil sales that is produced from the field. In contrary to the production sharing contract, the contractors are often paid in liquid cash, and do not possess any particular title to the produced oil. However, the contractor may be given an option to purchase back the crude oil that was produced from the concession. For example, this was seen in the Nigerian risk service contracts (RSC). An example of risk service contract was witnessed in Nigeria in early seventies, when the NNPC got into a risk service contract with companies such as Elf Aquitaine Nigeria Services Limited, Agip Energy and Natural Resources Limited, and Nigus Petroleum. NPDC has also entered in a similar contract with Agip Energy and Natural Resources Limited. We can therefore conclude that, even though the concession, production sharing contracts and risk service contract are different in form, the petroleum contractual development regimes are used to obtain similar ends as a matter of substance. Certain terms have now indeed become more common in the oil and gas industry and are used across different contractual structures. These common terms are things like the development of oil and gas contracts and concessions in member states of the Organization of Petroleum Exporting Countries (OPEC) (Jannatifar, 2010). This is why we next look into the development of oil and gas contracts and concessions in the state of Qatar. The development of oil and gas contracts and concession in the state of Qatar The development of oil and gas contracts and concessions in the state of Qatar started back in 1935, when the Saudis and the British onshore concession that was given to Anglo Persian Oil Company was transferred to the Petroleum Development (Qatar), which was an affiliate of the Iraq Petroleum Company10. Several countries had been behind scenes in the wrangles involving the United States and the British. The French, British, and the United States oil companies had shares in Iraq Petroleum Company. In 1953, the Petroleum Development (Qatar) was changed to the today’s Qatar Petroleum Company. Due to the adequate supply of crude oil at the time, the exploratory Qatar drilling never began until 1938. Oil was discovered on the west coast Dukhan, in 1939, which saw about 4000 daily barrels being produced by 1940. However, the oil and gas development was brought to a halt by the World War II between 1942 and 1947, which led to the delay of the beginning of exports until 1949. The crude oil at Dukhan has a sulphur content of 1.2 percent and has been given an American Petroleum Institute rating of 40. The crude is carried through a pipeline from the fields of Dukhan to refining, storage, and terminal facilities in the peninsula east side at Umm Said (Pereira, 2011). Shell Company of Qatar, a Royal Dutch Shell subsidiary, got a concession in 1952 for offshore exploration on the shelf of the continent. The main offshore fields discovered included: Maydan Mahzam in 1963 and Idd ash Sharqi in 1960. Since Abu Dhabi and Qatar claimed the field of Al Bunduq, the two parties had an agreement and exploited the field jointly beginning 1969. In addition, there was another offshore field discovered 1991 summer by Elf Aquitaine Qatar. This crude had an American Petroleum Institute rating of 36 and 1.4 percent sulfur content11. The combined reserves of the onshore and offshore as of January 1990 were about 4.5 billion barrels, providing 32 years of production at the levels of 1989. Both of these concessions were for 75 years. The concession gave the oil and gas companies the obligation and right to explore, refine, produce, market, and transport all oil and gas that was found in the stipulated region and marked area. The concessionaire companies were additionally exempted from duties on exports and imports and taxes, however, they were required to hire, where possible, the local labor (Oyewunmi, 2011). In this concession, the Anglo Persian oil Company was required to pay, after 400000 rupees down payment in 1935, Shaikh Abd Allah Ibn Qasim 15000 rupees per annum subsequently. However, during the period of World War II when there was a suspension of oil operations, the annual payment was elevated to 300000 rupees. When exportation took off, began, oil became profitable extremely in Qatar due to the favorable terms of concessions as described in the modern concession in the earlier sections, relatively cheap costs of pumping and drilling, cheap labor, and easy transport access. The 1935 concession was however revised in 1952 (in accordance to other areas) in order to divide the profits in a fifty fifty basis between the ruler and the company. The share of Shaikh Ali bin Abd Allah was raised from around 1 million US dollars in 1950 to 61 million US dollars in 1958. Later his profits dipped to 53 million US dollars in 1959 and failed to rise to the level of 1958 level up to 1963. Even though some money reached the local economy, the very first impact of oil exports constituted majorly high inflation on basic the commodities and high income earnings for the Al Thani12. Qatar Petroleum Company was however seen by workers and rulers as an inept and high handed when it kept aloof from the Shaikh from its initial 1935 concession. For example, Qatar Petroleum Company triggered strikes by not issuing coffee rations to the workers, and by forcing them inadvertently to work during the holidays of observed by the Muslims. The company however had its own infrastructure by 1950s such as water, power, housing, and communications, and offered police protection and health care to its workers (Waibel, 2011). In order to attain leverage with regards to pricing, revenue, and production over the oil company, Qatar joined the Organization of the Petroleum Exporting Countries (OPEC) back in 1961, only a year after its formation. Qatar has also stayed very close to its production quota of the Organization of the Petroleum Exporting Countries (OPEC) especially when it is in its economic interest, and has exceeded often its production quotas in order to take advantage of the increment in prices or to compensate the soft markets that resulted from the invasion by Iraq of Kuwait in 1990, August. The annual production of oil more than doubled between 1960 and 1970 from 165000 bpd (60.4 million barrels) to 363000 bpd (132.5 million barrels). The production however leveled off between 1973 and 1980 in the range of 410,000 bpd to 520,000 bpd, after the peak of production at 570,000 bpd (208.2 million barrels) in 1973. There was however, a steady decline in early 1980s save for 1984 where there was a small recovery. Annual production leveled to 415000 bpd (151.5 million barrels. The production level of 395,000 bpd in 1989 and early 1990 however exceeded the production quotas of the Organization of the Petroleum Exporting Countries (OPEC)13. After the country’s independence in 1971, the Qatar National Petroleum Company was established a year later, 1972, in order to take care of all oil operations and activities. The government held in 1973, 25 percent of each Qatar Petroleum Company and Shell Company of Qatar. The Qatar General Petroleum Corporation (QGPC) was developed two year later, and the government signed fresh agreements with the companies dealing with oil operations and gave 60 percent ownership to the Qatar General Petroleum Corporation (QGPC). Both the onshore and offshore operations were in 1977 nationalized and the former concessionaires were given service contracts. Conclusion In summary, the petroleum products production started back in 1953 when Qatar Petroleum Company, an owned refinery, began with a 600 bpd capacity. The refining capacity had however expanded by 1975 to 6000 bpd, and another capacity of 4000 bpd added by the early 1980s. In 1983, a refinery opened and had 50000 bpd added in capacity. This brought the national capacity to a total of more than 60000 bpd14. The National Oil Distribution Company in 1990 refined an average of 62,000 bpd, and 75 percent of this production was particularly exported. Due to the price fluctuation that arose from the Iraqi invasion of Kuwait, the profits of 1990 were about 40 percent higher (1 billion US dollars) than in 1989. It is important to note that most of the refined products are locally consumed (Waibel, 2011). Summary of the articles of Qatar Oil Concession 1. The Qatar Oil Concession was made on May 7, 1935 between the Ruler of Qatar, His Excellency Abdullah Shaikh bin Qasim and Clark Charles Mylles, on behalf of the Anglo Persian Oil Company Limited. Shaikh granted to the company the concession under the following conditions, in virtue of this agreement: the principal sole right to explore, throughout the principality of Qatar, to prospect, to drill for and to extract and ship and to export, and the right to refine and sell natural gases and petroleum, and any other thing extracted there from. 2. The company was also granted the right to operate during the 75 years period in any part of Qatar as State save for places like cemeteries, religious lands, lands that are occupied by essential enterprises, or by religious buildings. The State of Qatar covered the whole region under the rule of Shaikh. 3. The company was also given the right to explore and drill the State of Qatar by any method(s) which it deems fit in its opinion in order to enable it to ascertain the possible existence of the substances. The company is obligated to keep accurate records, drawings and maps of the drilled wells for inspection by Shaikh. 4. Sheikh tabulated a structure of fees that the company had to pay in consideration of the rights that His Excellency granted to it. 5. The company measures all liquid matters as and when they are extracted from the wells either by measuring instruments or dipping reservoirs, and weigh the solids by weighing them and then give copies of the register upon demands by His Excellency Shaikh. 6. The company may maintain, construct and operate telegraphs and roads and telephone installation as well as their wireless and lines stations, refineries, railways, pipelines and pumping stations, houses, workshops and other useful things as needed for operation reasons as well as the required accommodation for employees. 7. The company was granted the occupation and use of uncultivated land by Shaikh that the company may need for operations except the lands that surrounds Riyan free of charge after an understanding between the company and Shaikh about them. The company informs Shaikh of the houses and lands required for operation purposes from time to time. 8. The company may take any water quantity required for operations free of charge in condition that it does not cause damage or loss to any inhabitants. 9. The company is granted permission to take any mud, earth, lime, gravels, stones, gypsum and other similar substances required for operations without any charge, however, it shall not prevent people from taking these materials as their customary requirement. 10. The company has the right to import fuel, water, petroleum, motor cars, machinery, aero planes, Lorries, utensils, building materials, office equipment and all other things needed by the company for operations by its employees but not for sale to other people. It shall also export without duty or tax its substances or derivates. 11. Shaikh admitted that he will definitely afford the assistance necessary to conduct this agreement and use his authority to protect the employees of the company as well as their property as far as possible. 12. The company has a sole right to transfer or sublet the agreement to any other commercial company, but not to any government whatsoever. 13. The company may bring to an end the agreement whenever it finds it disagreeable to set upon the same, however, it has no right to abandon or cancel it except after 3 years from the beginning and giving a six month notice in writing. 14. Shaikh has the right to abandon or cancel the agreement if the company fails to pay the mentioned sums within six months and if the company is in default. 15. Shaikh shall not take the company as liable if default occur on the part of company in fulfilling the agreement provisions 16. Any occurring disputes are referred to two arbitrators if no agreement can be arrived at for resolution. The arbitrators are appointed by Shaikh and the company, 17. The employees of the company must be from the Shaikh’s subjects and approved by him 18. The company and Shaikh declare that the actions on this agreement are on the bases of pure belief and good faith. 19. Not anything in this agreement will prevent Shaikh from granting other parties concessions for anything except for the substances mentioned in the agreement. 20. The company will pay all due sums to Shaikh in accordance to the agreement 21. The agreement binds both the parties as well as their successors 22. Any expression of day, year or month means what is consistent with the English Solar calendar References Bishop D.R. International Arbitration of Petroleum Disputes: The Development of a Lex Petrolea: International Oil, Gas & Energy Dispute Management 1 (2002) Energy Charter Secretariat Carbon Capture Report 2009 (2009) Iran v United States ICJ Case Concerning Oil Platforms Memorial Submitted by Iran June 8 1993 (1993) Jannatifar M. Iran in a Dilemma: Adherence to Buyback or Transition to Production Sharing Agreements? International Oil, Gas & Energy Dispute Management 4 (2010) Oyewunmi T. Stabilisation and Renegotiation Clauses in Production Sharing Contracts: Examining the Problems and Key Issues: Production Sharing Contracts, 6 (2011) Pereira E.G. Rights and Obligations under Oil and Gas Joint Operating Agreements - The Non-Operator's Perspective: A Comparative and Evaluative Study : Contract Management, International Petroleum Contracts, 6 (2011) Waibel D. Does the Current Legal Regime Governing the Arctic Provide an Adequate Basis for Investment by Oil and Gas Companies or an Appropriate Framework for Oil and Gas Exploration in This Sensitive Region? Production Sharing Contracts 1(2011) Read More