Possibly in anticipation of the PIB there has been a steady shift of the interest of Oil Majors from Nigeria’s shallow waters to deep offshore fields with higher risk and huge returns, Chevron being the latest oil major to indicate an interest in divesting its stakes in two shallow water oil blocks.
Old and new energy lawyers are probably going to have their hands full with the increase in transactional and regulatory compliance briefs that come with the sale and purchase of Oil and Gas assets. This article attempts to give a brief overview of some key issues in Oil and Gas Contracts.
Issues to Look Out For In Oil and Gas Contracts
“Oil Is Oil” And “Gas Is Gas”
Some times when reading contracts and case law the simple distinction can be lost, especially, contracts and case law that use the words “Oil” and “Gas” seemingly interchangeably. For us as lawyers “gas” often means “natural gas” or “associated gas”. Oil “black gold” is refined into a thousand and one finished products including petrol and diesel. The distinction between Oil and Gas is quite important and means a lot to our clients and to us as we advise our clients and negotiate contracts on their Oil and Gas are sold in different markets, each with its own distinct set of pricing variables. Oil is usually sold in an international market, while gas because it’s harder to transport is sold more locally, this is often the case in “developed countries” (in emerging economies gas is either sold via LNG or flared, some of it is however sold locally as infrastructure for local sale of gas is just being laid). However, Liquefied Natural Gas seems to have changed a art of the formed equation, with gas being sold internationally via LNG vessels. Pipeline development and control seems to be growing but its fate seems uncertain as Floating LNG has now emerged.
Oil And Gas Contracts Are Stories…
Many years ago, energy contracts were sealed with a firm handshake. Nowadays Energy contracts are always in writing. Interestingly Energy Contracts are not different from “novels” in the sense that they tell a story about the agreement that the Government and International Oil Company (IOC)/contractor have arrived at having started their negotiation from the initial negotiating points of the “Government’s Model Contract”. A good story has a beginning, middle and an end. A good energy lawyer would know what material to look out for in each part of the document and how to negotiate for the exclusion of some items and the inclusion of others.
Model Contracts Are Initial Negotiating Points
“Model Contracts” are the initial negotiating points from which the Government and International Oil Company (IOC)/contractor proceed in their walk towards a mutually beneficial energy contract. Consequently, negotiating an oil and gas Contract requires legal knowledge, foresight and plenty of common sense.
What Are the Essential Functions Of An Energy Contract?
Firstly, it forces consideration by the Host Government and ultimately the International Oil Company (IOC)/contractor of the issues involved in a particular energy transaction. It ought to clearly establish the obligations of the parties (the Host Government and International Oil Company (IOC)/contractor) to each other in a way, hopefully, that will preclude future disputes (which are usually very costly) and will, if a dispute does occur, enable a tribunal better to determine the issues involved, as a result of the clarity of the drafting of the said energy contract.
Decoupling Of Oil and Gas Prices
Historically there has always being some relationship between the price of crude oil and that of natural gas. That is barring any unforeseen occurrences like natural disasters, militancy and civil unrest etc. “Decoupling” is usually temporary. However, three factors tend to point to a possible “permanent decoupling” of prices and a possible dip in some areas. They are; the globalization of natural gas, specialization in all parts of oil and gas production by companies and the emergence of shale gas.
A basic understanding of key issues like; who are the parties to the contract? What exactly, is the subject of the Energy contract? What is the preferred Choice of Law? Are the essential safety clause properly worded? What are the provisions for risk allocation and indemnity clauses? Sound knowledge of key clauses like; Penalty; Termination; Knock On Knock Indemnity (Macondo seemed to have brought this clause to the fore again); Third Party Indemnity; Force Majeure; National Interest Provisions/ Local Content; Stabilization; Settlement Of Disputes; Choice Of Law; The Umbrella
Clause; Abandonment/Decommissioning And Agreed Damages For Pollution.
Emerging Trends Perhaps…
IP/Data Protection in Oil and Gas
Research and operations in the oil and gas industry constantly produce new ideas, procedures, software, compositions, equipment and plenty of data, especially in areas bordering on seismic data collection, well enhancement activities and asset optimization for the oil and gas industry. This innovation has potentially transformed the oil and gas industry from a commodity market to knowledge/innovation/intellectual property based industry.
In addition, the divestment of assets by Oil and Gas companies can possibly lead to some form of employee mobility; this kind of employee mobility usually makes the loss of valuable data or even Intellectual Property more probable. It may seem wise for Oil and Gas companies to pay more attention towards protecting such IP and proprietary information; especially as it concerns former and disgruntled employees.
Contract Review Can Help Strengthen Regulatory Powers
Energy Contract terms determine how much a producing country earns from its natural resources; and they can strengthen the regulatory power of government to enforce environmental, health and other standards, where they are not well established like in many an emerging economy…
Need for Pre Agreed Damages Clauses for Pollution
Basic contract review and negotiation can help stem the tide of pollution and environmental degradation and harsh post pollution measures by host governments…by making sure energy lawyers negotiate and include clauses that enact stringent but balanced conditions for environmental protection including stipulating a pre agreed fine for every barrel spilled, especially after a certain period of grace, please remember the Macondo well blow out and the heavy fines that followed …
Emergence of Social Normative Norms in Oil Pollution?
Lax enforcement of the law in the area of environmental degradation sometimes results in host community hostility targeted at the International Oil.
Region Specific Nuances
Nigeria, Brazil, Ecuador and China have recently sought to impose huge liabilities on oil companies for pollution incidents. Interestingly it seems the US Department of Justice tends to want the wrongdoer to ‘bear the sanction’, and hinders attempts to pass the financial burden of a fine to its insurers (its fines are often times massive – Macondo’s case).
Negotiating Energy Contracts requires legal knowledge, foresight and common sense. The information contained in this piece should help inform the lawyers to Government and International Oil Company (IOC)/contractor as to some possible issues they should be aware of, their parameters of analysis and possibly help foster frank discussion between the Government and the Oil Company prior to signing any agreements.4
(Olufola Wusu © 2016)