Oil and Gas Exploration and International Law - Coursework Example

Oil and gas exploration and international law Legal aspect A critical evaluation of the ment that host-governments “concedes” control or sovereign rights over their countries’ natural resources to foreign oil companies.” Oil and gas exploration and international law Introduction Oil and gas exploration is a beneficial venture where companies engage in transforming natural resources into national resources. This venture brings bout millions of dollars in revenue that can be used to better lives of people. Many governments in these mining regions dedicate the work to foreign manpower. Some countries for instance do not have the required machinery, technology and skills to carry out these activities. Foreign companies therefore come in handy in these cases and part of revenue is directed to the host government. Both the offshore and onshore mining techniques calls for complex machinery, large scale production, automation and skilled human resources in addition to detailed research on areas suspected to possess the oils and gas fields. International laws therefore come in to help regulate this relationship and efficiency in the oil and gas exploration activities. The legislations also look at the issues of environmental protection and other post-exploration factors (Weaver & Asmus, 2006). International law on oil and gas exploration Asante, (1998) argues that these legislations seek to address issues relating to exploration such as analysis of rights of exploration, engagement of joint ventures, infrastructure, exportation, and trading as well as the setbacks that come along with the oil and gas exploration. Sources o f these laws are also explained and terms that subsist in these contracts that involve large scale exploration schemes and most of which are medium to long term contracts. Parties here in therefore include; lawyers, oil and gas companies and the government officials in the respective ministry such as ministry of natural resources (Williams, 2003). These rules that guide the “geology and economics” establish equitable treatment between the parties such as a high tax burden imposed by the host government to the exploration companies. It is also important to take note that the foreign investors do not only consider the existing legislation but the host country’s political climate and the economic well being. Legislations therefore protect the investor rights and encourage future oil and gas investment in view of s stable, transparent and straight forward legal framework (Suleimanov, 2004) According to Gao (1998), over the years, it has become vital for countries to enter in international treaties especially in the oil and gas exploration zones so as to deal with challenges resulting to worldwide environmental protection. The regional and international environmental legislation pose a significant concern in the Oil and Gas (O&G industry) but the O&G industry has no direct involvement in the formulation of these laws. This industry therefore need to follow closely to the unfolding events in the development of these international laws. Traditionally, international laws (also referred to as sic utere principle) outlined that: “No state has the right to use or permit its territory to be used in such a manner so as to cause injury on, or to the territory of another or the properties of the persons therein” (Robert, 1980). Its application was evident in Trail Smelter Arbitration (United States v Canada). Following its smelting activities in Canada, the Canadian government was forced to pay US government for the pollution by the sulphur dioxide. Further, the principle was illustrated in Lac Lanoux (France v Spain) that restricted usage of upstream water because it was utilized downstream. However, today the trans-border pollution and oil and gas exploration has led to amendment in the international laws such as the recent General Assembly Resolution 44/207 passed on 22nd December 1989 that recognizes that foreign investors in the O&G industry has a responsibility in protection of global environment as well as in the host nations (Ong, 1999). The General Assembly Resolution 1803/XVIII (14 December 1962) and General Assembly 3281/XXXIX (12 December 1974) granted liberty for nations to dispose off their natural resources in line with the national interest and consistent of the rules and regulations that the citizens view as a necessity. Principle 21 of the Stockholm declaration concurred with the above resolutions but recognizes that these nations should make sure that “activities within their jurisdiction or control do not cause damage to the environment of other states or of areas beyond the limits of national jurisdiction” (Agyemang, 1989). The Draft Treaty administers the trans-boundary submarine natural resources and the exploitation so as to protect the environment. It has been of international concern to put measures in place to regulate such contracts since their effects are widespread such as eastern part of Canada experiencing acid rain from US and Scandinavian Countries experiencing emissions from the United Kingdom (Casper, 2009). In majority of states, the Public international laws recognize these natural resources as publicly (state) owned. These investment projects put a strain on the government budget and therefore private investors are called in to bear certain production costs. The aspect of joint venture (the private public relationship) kicks in which is, in most cases controlled by the state. Issues arising should therefore be solved following existing legal frameworks (Maniruzzaman, 1993). Sourcing of these private investors follows the state’s laid down procurement and tendering legislations. One issue is therefore has to be noted. That in this contractual partnership, the host governments do not just play as private parties but are “state contracts” or “economic development contracts” that are in the interest of the citizens and done to economical benefit them. It therefore goes without saying that these investment projects be classified under the Energy Charter Treaties (ECT). International law makes recognition of the concessions and licenses, authorization to engage in these projects, participation agreements and the Joint Operation agreements (JOA). These investment projects takes into account both the international laws and national laws (The Journal of World Energy Law & Business Advance Access published March 14, 2013) For straddle nations, the United Nations Convention of the Law of the Sea (UNCLOS) grants sovereign rights for exploration in the subsoil and the seabed of the waters within their territory and Exclusive Economic Zones (EEZ’s). The exploration beyond the other side therefore has restrictions (Aguirre, 2004). The liability of this exploitation infringement is therefore governed by the international law. This is referred to as the rule of capture. As observed in Kuwait and Iraq, this approach propagates for competitive drilling, conflicts, un-ending court proceedings and financial implications in terms of high costs (framework (legislation, treaties, industry practice, guidance, etc) that exists for neighboring states to develop trans boundary offshore oil and gas resources ) Concessions are widely used in the O&G contracts. Concessions entitle the exploration company exclusive rights in exploration, production and trading of the natural resources. Foreign investors are procured through the nations legal frameworks relating to tendering. Basic contract principles of offer and acceptance are used as well. Financial bargain is done by the parties involved. Customary, compensation is attached on the volume of the oil and gas produced such as the Oil concession of 1934 which was between Kuwait and Kuwait Oil Company limited (UK) (Banani, 2003). Herein, “royalty was payable on each English ton of 2.400 lb of net crude petroleum won and saved by the company…after deducting water sand and other foreign substance…” companies pay huge amounts for mining rights to the host governments .in some of these investment projects, the host government as a party could offer loans to the mining company (Nehemkis, 1973). Nature of the government involvement could however be dependent on the type of the contract. Types recognized under the international laws are service contracts, modern concessions, joint ventures and production sharing agreements. Joint ventures for instance involves the host government on a more wider scale, at times greater stake in equity and grater relative ownership percentage (Contracting and regulatory issues in the oil and gas and metallic minerals industries) Of late, oil prices have been a major concern in oil and gas exploration. In fact four years ago, OPEC necessitated the barrel price to $22-28. In the light of the conflict in the Middle East, exploration has come with the psychological effect. Many oil and gas producing countries have seen growth in economic levels for instance India and China. US as well have registered high revenue in imports. This means the world has embrace exploration and this calls for redefining existing legislations for effectiveness. Modern technology, complex machinery and newer methods have been incorporated in the oil and gas production. Research and information analysis have been stepped up to discover new oil and gas fields (Laik, 2009). Examples of oil and gas contracts from Angola Sonangol is an oil company owned by the government of the people’s republic of Angola. It is the central organization in the oil exploration and foreign investments. In need of doing business in the O & G industry, it must liase with it. These contracts take the form of Production Sharing Agreement (PSA) and joint ventures. There has been an allegation running that for these multinational companies to acquire trading rights, they have to pay signature bonuses in billions of dollars to Sonangol which is undisclosed to the general public. Evidentially, some government officials who own large stakes in the company have illegally awarded oil contracts to these companies. This contravenes both the Angolan laws and the international laws. It is also observed that legislations relating to pollution control are insufficiency (Casper, 2009). These foreign companies therefore exercise their home and international legislative measures in absence of reinforcement of Angolan environmental laws. In disguise, they carry in cost-effective voluntary exercises under corporate social responsibility. The Angolan judiciary lacks independence and other watchdog organs like the Ombudsman and Attorney general Report to the Angolan president. This scenario creates less legislative enforcement in the oil and gas exploration and therefore gives loophole for the few advantaged individuals to swindle public resources in terms of oil revenue (Leader, 2006). Another challenge is Sonangol’s PSA contracts exempting European Union and New US legislations that enforce the need to present comprehensive tax and loyalty payments to the government of Angola. Corruption therefore breeds in such weak legislations that lead to loss in revenue at the expense of the nation’s economic development (Finer et al, 2008). Governments, such as Angolan government, have conceded control of oil exploration rights to multinational companies. this sometimes is not exercised in the legal framework leading to the beneficial of few involved parties and not in the economic benefit of the nation’s citizens contrary to the international laws regarding the oil and gas industry (Angola’s Oil Industry operations: Open Society for Southern Africa (OSISA)) Partial block by block analysis published reports in 201 show discrepancies in revenues from Sonangol as reported by Sonangol and the Ministry of Finance Oil block Concessionary revenues Min of Finance (In dollars and Kwanzas) Concessionary revenues Sonangol (In dollars and Kwanzas) Block 2-05 56,796,054 USD 5,090,119,182 AKZ 52,956,039 USD 4,918,239,235 AKZ Block 2-85 45,527,183 USD 4,133,349,277 AKZ 45,445,054 USD 4,220,664,034 AKZ Block 3-05 433,586,420 USD 37,122,517,786 AKZ 444,904,870 USD 41,320,094,957 AKZ Block 3-85 172,726,591 USD 13,051,860,788 AKZ 157,313,340 USD 14,610,319,214 AKZ Retrieved from: (Angola’s Oil Industry operations: Open Society for Southern Africa (OSISA): page 17, http://www.osisa.org/sites/default/files/angola_oil_english_final_less_photos.pdf The oil and gas industry results in great cash inflow as a result of foreign direct investment as well as importation of the latest technology that can help a nation deal with prevailing problem such as unemployment and help grow the general economy. Poor enforcement of international laws, insufficient domestic environmental laws and political interference can be a major different to earning oil and gas revenues. For countries such as Nigeria, the oil and gas industry earns 90% of the foreign exchange. Efficacy of the national and international legislations this industry has compromised the value that can be realized from this lucrative business venture (Emiri and Deinduomo, 2009) Conclusion Oil and gas exploration is a productive activity. International laws have been in existence to guide these contractual relationships between the government and the multinational oil and gas corporations. These laws define how the contracts are formed; obligations that parties engage in as well as the global environmental legislations that seek to protect the environment from the exploration activities. International laws recognize these oil and gas exploration contracts as joint agreements, service contracts, modern concessions, and production sharing agreements. In the 21st century, it is prudent to argue that governments have granted multinational companies the right to explore and exploit national resources in the interests of the citizens and in full enforcement of the national laws and exercise of the international laws. This is because of lack of specialized techniques and machinery more especially to the developing worlds. Enforcement of the international law therefore is vital to mitigation for related conflicts and preserving of sound, beneficial and long lasting relationships between these multinational companies and the governments. References Aguirre, D. (2004). Multinational Corporations and the Realisation of Economic, Social and Cultural Rights. Cal. W. Intl LJ, 35, 53. Agyemang, A. A. (1989). Applicability of Host Developing Countries Laws to Investment Contracts-The African Case, The. Austl. Intl L. News, 2. Angola’s Oil Industry operations: Open Society for Southern Africa (OSISA): Maria Lya Ramos, 2011: http://www.osisa.org/sites/default/files/angola_oil_english_final_less_photos.pdf Asante, S. K. (1998). International law and foreign investment: a reappraisal. Intl & Comp. LQ, 3 Primoff, L. R. (1996). International Regulation of Multinational Corporations and Business-The United Nations Takes Aim. J. Intl L. & Econ., 11, 287.7, 588-590. Banani, D. D. (2003). International arbitration and project finance in developing countries: blurring the public/private distinction. BC Intl & Comp. L. Rev., 26, 355. Casper, K. N. (2009). Oil and gas development in the Arctic: softening of ice demands hardening of international law. Nat. Resources J., 49, 825. Contracting and regulatory issues in the oil and gas and metallic minerals industries: Micheal Likosky, Hauser Global School Program, New York University Law School: 2006; http://unctad.org/en/docs/diaeiia20097a1_en.pdf Festus Emiri, G. D. (2009). Law and Petroleum Industry in Nigeria: Current Challenges : Essays in Honour of Justice Kate Abiri. Lagos: African Books Collective. Finer, M., Jenkins, C. N., Pimm, S. L., Keane, B., & Ross, C. (2008). Oil and gas projects in the western Amazon: threats to wilderness, biodiversity, and indigenous peoples. PloS one, 3(8), e2932. Framework (legislation, treaties, industry practice, guidance) that exists for neighboring states to develop trans boundary offshore oil and gas resources : Ronnah Tumusiime, http://www.academia.edu/3825242/framework_legislation_treaties_industry_practice_gui dance_etc_that_exists_for_neighbouring_states_to_develop_trans_boundary_offshore_oi l_and_gas_resources Gao, Z. (1998). Environmental Regulation of Oil and Gas. Alphen aan den Rijn: Kluwer Law International. Lagoni, R. (1979). Oil and gas deposits across national frontiers. American Journal of International Law, 215-243. Laik, S. (2009). Recent trends in exploration, exploitation and processing of petroleum resources. New Delhi : Tata McGraw-Hill Education. Leader, S. (2006). Human rights, risks, and new strategies for global investment. Journal of International Economic Law, 9(3), 657-705. Maniruzzaman, A. F. (1993). New Generation of Engery and Natural Resource Development Agreements: Some Reflections, The. J. Energy & Nat. Resources L., 11, 207. Nehemkis, P. (1973). Supranational Control of the International Corporation: A Dissenting View. Cal. WL Rev., 10, 286. Ong, D. M. (1999). Joint Development of Common Offshore Oil and Gas Deposits:" Mere" State Practice or Customary International Law?. American Journal of International Law, 771- 804. Robert, P. (1980). The optical evolution of kerogen and geothermal histories applied to oil and gas exploration. Kerogen: Paris, Editions Technip, 385-414. Suleimanov, M. (2004). Oil and Gas Law in Kazakhstan: National and International Perspectives. Alphen aan den Rijn: Kluwer Law International. The Journal of World Energy Law & Business Advance Access published March 14, 2013: http://eprints.ucm.es/20470/1/jwelb.jwt004.full.pdf Weaver, J. L., & Asmus, D. F. (2006). Unitizing oil and gas fields around the world: a comparative analysis of national laws and private contracts. Hous. J. Intl L., 28, 3.z Williams, C. A. (2003). Civil society initiatives and soft law in the oil and gas industry. NYUJ Intl. L. & Pol., 36, 457. Read More