Nature of Petroleum Arrangement in View of Licensing Agreement: Contractual or Regulatory

Abstract

Countries endowed with oil and gas resources may enter into concession or licensing, production sharing agreement (PSA) or service contract for the purposes of raising fund and for the social and economic development of the country.

In licensing agreement, the host government (HG) gives to the international oil company (IOC) exclusive rights to explore, develop, sell and export oil or minerals extracted from a specific area for a fixed period of time. Companies compete by presenting bids which may be accompanied with signing of bonuses for the license of such right. Countries such as Kuwait, Sudan, Angola, Ecuador operates this kind of petroleum arrangement.

Under the PSA, the HG permits the IOC to manage and operate the development of the oil field while ownership of such still vests with the HG. Under a PSA, the IOC bears most of the financial risks of exploration and development, even though the HG faces some risks too. Often times, the national oil company (NOC) joins the consortium as an interest holder in a PSA, contributing to some of its profit as "shared capital" in developing the area granted under a PSA.

Most times, the HG has the cost of its initial contribution "carried" by the IOC. The carried cost will then be paid to the IOC from the HG future profits under the PSA.

Countries such as Azerbaijan, Norway operate this kind of petroleum arrangement.

Under a service contract on the other hand is a long term arrangement used by the HG to acquire expertise and capital from the IOC without handing over the field and production rights to the IOC.

These petroleum arrangements however have their advantages and disadvantages but will not form part of this paper as this work will review the nature of petroleum arrangement between the HG and the IOC for the purposes of determining if such arrangement is contractual or regulatory.

In recent times there has been a controversy as to the nature of petroleum arrangement between the HG and the IOC, However this work will review a number of literatures on the subject matter using the licensing regime as a case study for the purpose of determining the nature of such petroleum arrangement. It will do so by examining the characteristics of a contract and a regulation; it will consider the regulatory nature of a licensing agreement in view of what is obtainable in the United Kingdom (UK).

The review of this paper suggests that during petroleum arrangements, the relationship between the IOC and the HG is rather regulatory than contractual in view of the fact that the conditions of a license are embedded in a legislation in most practicing states. The substance of a license the substance of a license remains regulatory in nature in the sense that considerable degree of discretion remains with the state with respect to the execution of certain projects by the IOC, the fact that it is a government grant from the state and could be unilaterally amended by the state without prior consent of the licensee, the administrative function of the state to checkmate the activities of the licensee throughout the duration of the license and more as discussed in this paper.