Legal Aspects of Oil and Gas Industries
It has been said that host-governments ‘concedes’ control or sovereign rights over their countries’ natural resources to foreign oil companies. This statement is still applicable in the present climate of the global oil and gas industry. Basically, the production, transportation and pricing strategies and policies adopted by foreign oil firms are directly influenced by the host nations (Kaygusuz 2012). The laws that regulate ownership of oil and gas differ significantly across the world, for example, there is private ownership in U.S.A and national government ownership in most European countries (Joffé et al. 2009). Nevertheless, oil and gas extraction is normally regulated by individual local, state and/or national governments through common law and statutes (Guenther, Hoppe & Poser 2006). The oil and gas sector is one of the most crucial industries globally, and a sound contractual and regulatory legal environment is a critical element to successful development in the sector (Cleveland 2005).
Basically, there are complicated legal concerns that surround the global oil and gas sector due to a number of factors, for example, the politics surrounding the actual owner of oil and gas resources, international obligations, upstream investment concerns, and the integral role played by contractual agreements between the sellers and buyers (Cleveland 2005). The legal framework determines the foundation for bargaining since involved parties (host governments and foreign oil firms) are made to understand the elements they must adhere to in order to avoid negative consequences in addition to distribution of responsibilities and benefits (Bernardini 2008). The laws and regulations enacted by host nations are critical to bolstering the security of their oil and gas resources. In addition, foreign investors are protected against violation of their rights and contractual agreements (Frynas 2009). However, Hirsch (2008) argues that the legal provisions seek to serve the oil-producer’s interests in a manner that encourages responsible oil investors while rendering any special grants and guarantees unnecessary. The legal provisions cover contractual agreements, joint ventures, environmental protection, concession, service and production sharing contracts, taxation and occupational or workplace health and safety in the global oil and gas system over specified exploration and exploitation periods (Pongsiri 2004).
Vivoda (2009) postulates that there is continuously increasing awareness across less developed nations with respect to the need for establishing laws as a control measure pertaining to natural gas and oil resources. This can be attributed to the fact that these countries have recognised the existing and potential benefits that may be gained from their oil and gas resources (Stevens 2008). Simply put, host governments are increasingly imposing conditions inclined towards their advantage in contracts with foreign oil firms. The approaches applied to achieve such results range from suggestions, requests, negotiations, agreed amendments, nationalisation to boycotts seek to sustain the relationships and interactions between host countries and foreign investors. Here, the former intends gain unparalleled enrichment in terms of economic development, while the latter seeks to gain profitability. The factors that have led to these developments are closely related to political changes, technological advancement, and changes in persons’ attitude (Stammler & Wilson 2006; Wälde 2008). Watts (2005) argues that the legal principle of permanent and overall sovereignty over oil and gas among other natural resources have made host countries to seek ways through which they can secure control of these resources from within. One of the approaches has been pursuing joint ventures between the host government and foreign oil firms in the realms of ownership and day-to-day operations of oil and gas companies (Umbach 2010). Oil-producing nations have adopted approaches that take the form of legal-economic agreements, or acting collectively as host nations under the banner of the Organisation of the Petroleum Exporting Countries (OPEC). To a greater extent, such partnerships boost the bargaining power of oil-producing countries. OPEC is a fundamental organisation which determines the direction in host countries should follow to control their oil resources. Through the organisations, host nations are able to establish international collective bargaining within the legal orders (Magrini & dos Santos Lins 2007; Weaver & Asmus 2006).
From contractors and operators to minority stakeholders, existing provisions for distribution of responsibilities are generally undefined. Taxation in the oil and gas sector is a specialised business, including complex tax questions, continuous tax disputes, and sophisticated relationships between operating contracts and national tax laws. In addition, there is no in-depth definition of decommissioning among other common topics. As a result, the tax system in the oil and gas sector has not been good (Maniruzzaman 2009). The oil and gas sector remains a fundamentally unique industry because of the large amount of investment needed, the strategic significance of the oil and gas products to concerned parties such as foreign company owners and host and consumer countries, the few countries that produce the product, the need for strong relationships between host nations and oil production companies. In fact, countries such as the United Arab Emirates (UAE) directly tax companies in the oil sector and the industry is greatly protected by the government (Konoplyanik & Walde 2006). Mostly, oil rich countries have implemented solid economic structures supported by legal and regulatory frameworks to protect their valuable oil and gas sector (Bernardini 2008). Basically, there are huge monetary gains that come with restrictive foreign investment in the oil industry. Multinational contractors and operators are challenged by extremely high taxation risks across the oil-producing nations globally. It is worth noting that the nations that have large oil and gas reservoirs greatly control these risks, which are cumulatively increasing gradually. The oil firms are also expected to work within the set carbon emission constraints as a measure against considerable environmental degradation and climate change, while positively contributing to sustainable development (Pongsiri 2004; Utting & Ives 2006).
Today, oil and gas extraction contractual agreements are often based on public-private partnerships. Concerns with oil and gas investments are certainly justified due to its considerable significance for companies in the sector, oil-producing nations, and other nations such as consumers (Konoplyanik & Walde 2006). Maniruzzaman (2009) claimed that the oil and gas sector is very important to a country in both national and foreign contexts. As a foreign investment in third world and developing countries, the oil and gas sector is one of the most important industries for the U.S. and other developed nations. Aside from the obvious economic benefits associated with the oil and gas, the sector has attracted legal challenges with respect to foreign private investments in most less developed nations (Bernardini 2008). However, these problems must be remedied through collaborative participation between the host countries and oil firms. Cleveland (2005) advances the principle of mutual equivalence in contractual advantages to build long-range and lasting relationships between oil-producing countries and foreign oil firms. According to Konoplyanik and Walde (2006), nationalisation is undesirable option for host countries because national governments may not afford to raise the capital, the required exploration skills and knowledge, or the sales and marketing outlets. As such, nationalisation may not be a feasible solution today or in the near future. Hirsch (2008) argues that the sanctity of legally-bidding contracts is one of the most critical elements of strong relationships between oil-rich countries and foreign companies. According to Weaver and Asmus (2006), the entire process of contract negotiations, countermeasures and ongoing change are important in actual oil and gas concessions.
Typically, the oil and gas industry is guided by rights that extend from the country where the reservoirs are located. This remains the case until the oil and gas resources are extracted from the surface, where rights can be sold, transferred or purchased just like other products (Vivoda 2009). Host governments may lease the gas and oil rights to qualified firms for development, because the former are the owners of the underneath oil and gas resources. The laws that govern oil and gas stems from the fact that the owner of a surface also owns all the things that are below it (Watts 2005). In today’s modes of operation in the oil and gas industry, host countries put pressure on foreign oil firms with respect to increasing production and controlling pricing (Kaygusuz 2012). Iran is one of the latest examples of host nations that exert pressure on contracted oil firms to continually increase their oil production. Contract risk, international boundary and production sharing disputes, and international sanction issues make the global oil and gas sector an extremely complex operation area with regard to legal and regulatory issues (Cleveland 2005). In view of the day-to-day oil concession issues, the aspect of permanent sovereignty and mutual equivalence should be guided by law. Nevertheless, the subject should never be approached as an endless process of negotiations, agreements, adjustments and operations, but should be tailored to adapt to changing socio-economic and technological factors (Frynas 2009).
With the increasing reliance on tertiary approaches to oil and gas exploration in different parts of the world, it is apparent that the hydrocarbon reservoirs are increasingly drying up. Moreover, there are many legal issues faced by countries, especially the non-producers who are subjected to laws created by governments in countries where oil and gas reservoirs are located. It appears that a number of people perceive that the traffic controlled by oil and gas resources has led to a transportation issue. Countries with poor legal climates are generally faced with transportation problems (Humphreys, Sachs & Stiglitz 2007). National governments continuously seek to gain additional authority over their oil and gas resources, but they must involve foreign companies to realise the full potential of their hydrocarbons (Utting & Ives 2006). According to Joffé et al. (2009), oil and gas industry has a truly long history in production and commercialisation. Oil and gas laws and regulations are formulated from time to time across the world to adapt to changing demands. There are widespread liberalised economic policies adopted by various governments in pursuit of licensing and regulating the oil and gas sector. Over years, there have been different laws that have been devised and implemented by host governments to regulate various aspects of the oil and gas industry, for example, importation, transportation, refinery and production of petroleum (Weaver & Asmus 2006). Further, the host governments have implemented regulatory frameworks for national oil and gas fields (Utting & Ives 2006). Cleveland (2005) asserts that the participation of host governments in the oil and gas sector, along with enactment of domestic and global petroleum and energy legislation and agencies greatly influence the cooperation between the host nations and foreign oil investors.
In conclusion, it is evident that the global oil and gas sector is complicated by laws and regulations. Currently, there are a lot of pollution and environmental issues related to the oil and gas sector. Apparently, a lot of legal and regulatory issues have played an integral role in all aspects and areas of cooperation between the developed and less-developed nations as well as between host governments and foreign oil investors. Successful relationships between oil-producing countries and foreign oil firms are challenged by a number of factors such as huge taxation that negatively affect the latter. The host governments play a great role in creating laws pertaining to rights associated with acquisition, ownership and discovery aspects of the oil and gas industry, along with adjudication related to the rights. This is inline with the host nations’ permanent ownership and sovereignty principles associated with their natural oil and gas resources. Stakeholders in the oil and gas sector must have essential knowledge and skills to work within legal provisions that are mainly mandated by host governments. While organisations such as OPEC are critical to successful bargaining by host nations towards better terms between them and oil firms, there are explicit conflicts with joint ventures that are based on mutual agreements between a country and an oil country. The relationships between host governments and foreign oil firms are often complex due to processes of negotiation and countermeasures. Concerns related to judicial processes mainly guide negotiations to ensure that specific legal elements are considered.
Bernardini, P 2008, ‘Stabilization and adaptation in oil and gas investments’, The Journal of World Energy Law & Business, vol. 1, no. 1, pp. 98-112.
Cleveland, CJ 2005, ‘Net energy from the extraction of oil and gas in the United States’, Energy, vol. 30, no. 5, pp. 769-782.
Frynas, JG 2009, ‘Corporate social responsibility in the oil and gas sector’, The Journal of World Energy Law & Business, vol. 12, no. 1, pp. 255-264.
Guenther, E, Hoppe, H, & Poser, C 2006, ‘Environmental corporate social responsibility of firms in the mining and oil and gas industries’, Greener Management International, vol. 2006, no. 53, pp. 6-25.
Hirsch, RL 2008, ‘Mitigation of maximum world oil production: Shortage scenarios’, Energy policy, vol. 36, no. 2, pp. 881-889.
Humphreys, M, Sachs, JD, & Stiglitz, JE 2007, ‘Future directions for the management of natural resources’, Escaping the Resource Curse, vol. 2007, no. 1, pp. 322-336.
Joffé, G, Stevens, P, George, T, Lux, J, & Searle, C 2009, ‘Expropriation of oil and gas investments: Historical, legal and economic perspectives in a new age of resource nationalism’, The Journal of World Energy Law & Business, vol. 2, no. 1, pp. 3-23.
Kaygusuz, K 2012, ‘Energy for sustainable development: A case of developing countries’, Renewable and Sustainable Energy Reviews, vol. 16, no. 2, pp. 1116-1126.
Konoplyanik, A, & Walde, T 2006, ‘Energy Charter Treaty and its role in international energy’, J. Energy Nat. Resources L., vol. 24, no. 1, pp. 523-527.
Magrini, A, & dos Santos Lins, L 2007, ‘Integration between environmental management and strategic planning in the oil and gas sector’, Energy Policy, vol. 35, no. 10, pp. 4869-4878.
Maniruzzaman, AF 2009, ‘The issue of resource nationalism: risk engineering and dispute management in the oil and gas industry’, Texas Journal of Oil, Gas, and Energy Law, vol. 5, no. 1, pp. 79-108.
Pongsiri, N 2004, ‘Partnerships in oil and gas production-sharing contracts’, International Journal of Public Sector Management, vol. 17, no. 5, pp. 431-442.
Stammler, F, & Wilson, E 2006, ‘Dialogue for development: An exploration of relations between oil and gas companies, communities, and the state’, Sibirica, vol. 5, no. 2, pp. 1-42.
Stevens, P 2008, ‘National oil companies and international oil companies in the Middle East: Under the shadow of government and the resource nationalism cycle’, The Journal of World Energy Law & Business, vol. 1, no. 1, pp. 5-30.
Umbach, F 2010, ‘Global energy security and the implications for the EU’, Energy Policy, vol. 38, no. 3, pp. 1229-1240.
Utting, P, & Ives, K 2006, ‘The politics of corporate responsibility and the oil industry’, St Antony’s International Review, vol. 2, no. 1, pp. 11-34.
Wälde, T 2008, ‘Renegotiating acquired rights in the oil and gas industries: Industry and political cycles meet the rule of law’, The Journal of World Energy Law & Business, vol. 1, no. 1, pp. 55-97.
Watts, M 2005, ‘Righteous oil? Human rights, the oil complex, and corporate social responsibility’, Annu. Rev. Environ. Resour., vol. 30, no. 1, pp. 373-407.
Weaver, J, & Asmus, D 2006, ‘Unitizing oil and gas fields around the world: a comparative analysis of national laws and private contracts’, Hous. J. Int’l L., vol. 28, no. 3, pp. 36-47.
Vivoda, V 2009, ‘Resource nationalism, bargaining and international oil companies: challenges and change in the new millennium’, New Political Economy, vol. 14, no. 4, pp. 517-534.