Legal Aspects of Oil and Gas Industry (Essay Sample)

EVALUATION ON THE KEY AREAS AND FEATURES THAT THE GOVERNMENTS SHOULD FOCUS ON DURING THEIR NEGOTIATION PROCESS AND IN THE DRAFTING OF CONTRACTS WITH THE INTERNATIONAL OIL COMPANIES
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Introduction
Usually, the discovery of oil and gas creates national as well as personal dreams of richness more so during the time when the oil and gas price is high. Although there is emotional exhilaration in regard to the exploitation of oil and gas, the governments are faced with vital contract negotiation challenges that need special focus during the process of contract negotiation and contract drafting with the International Oil Companies. Mostly, nations that are rich with resources try to draw the International Companies’ participation with the know-how as well as resources to assist in the exploitation and marketing of oil and gas. In the process of negotiation, they find that those Companies of oil and gas have an enhanced financial resources and a better knowledge of contract negotiations. This essay looks at what the government should focus on during the process of contract negotiation and drafting with international oil companies to ensure that these companies distribute wealth in a fair manner.
The setting
The government should focus on the setting as one of the significant parameters in contract negotiation. The setting involves all the parties affected by the process of oil extraction such as landowners as well as the indigenous communities who usually demand to be compensated regarding the usage as well as property disturbances caused. There is a need for the government to take into account this kind of groups although they aren’t part of the official negotiation process (Gao, 2009. In the recent past, local communities have not been focused as an important element, currently often what their part in terms of the compensations paid as well as the jobs created. The process of domestic politics should ensure that these demands are resolved ideally through the overall process of negotiating contracts. There is a need to ensure that International Oil Companies make particular commitments regarding the training as well as the development of the community support and solidity while drafting oil contracts.
The negotiating team
According to Gao (2009), the government should focus on the team that negotiates during the process of negotiation as well as the drafting of contracts with the International Oil Companies. The right team should be selected for the recognition of the job demands since the process of negotiation incorporates numerous elements into a strategy of cohesion. There is a requirement of plan creation, appropriate tactics as well as negotiable factors separation including compensation from non-negotiable factors including issues of regulatory, while making deliberations as well as addressing the legitimate concerns of the international oil companies. Mostly, International Oil Companies desire as well as want legal and stability of the institution, and try to avoid political instability, inexperience in society while handling resource wealth. Therefore, it is critical for the government to focus more on the negotiation phase as well as employ the highly skilled, autonomous and devoted negotiators so that the International Oil Companies’ immense better knowledge and funds can be countered in the negotiation process.
Information environment
In the process of negotiation as well as the drafting of contracts with the International Oil Companies, there is a need for the government to focus more on transparency since it is a key element in the contract’s public acceptance. Transparent is significant where there aren’t formal mechanisms as it gives informal mechanism regarding checks and balances by the civil society. Transparency is seen as terms of an oil contract disclosure as well as the made payments, although there is confidentiality regarding particular contractual issues for a given period. The government’s focus on transparency removes the continuous corruption as well as greed issues linked with contracts of oil. Government officials are prevented from approving to terms that are not politically accepted by the citizens. There is a need for the government to ensure that public forums on the negotiation process are open to the general public so that they can have a feeling of being part of this important asset to a country (Taverne, 2008)
The contractual form
There is also a need for the government to focus on the contractual system type that will be used particularly a joint venture, a production sharing agreement, and a concession agreement. In the contract negotiation as well as drafting of contracts with the International Oil Companies, the government should focus particularly on the traditional advantages as well as disadvantages of each contractual system. The concession agreements give International Oil Companies exclusive rights of exploring, developing, selling as well as exporting the extracted oil in a particular area from which it has got the rights of producing and developing in a given period (Taverne, 2008). It is also important for the government to understand that the production sharing agreements recognize that the oil ownership rests on the country’s citizens and not the private parties. Therefore, International Oil Companies control as well as supervise the oil field development and bear the risk of finance and operation. Gao (2009) argues that for the joint venture, the government needs to understand that it is partnership based hence a need to allocate operation management as well as responsibilities since in this case the government also has an interest in regard to the exploitation of oil.
The negotiated issues
In the negotiation process and drafting of contracts with the International Oil Companies, there is a need for the government to separate the negotiable from the non-negotiable matters i.e. the contracts’ subject matter. This should be incorporated into the issues of traditional regulations including safety as well as health, embedded in and administered by the appropriate policies, conventions as well as the domestic laws (Nawawi & Nahayu, 2006). When this kind of laws is insufficient or vague, there is a need for the reference to be made on the contract to offer guidance. The government should ensure that in the application, the domestic laws are general, without prejudice or biases, as well as not agreeable the adjustments of self-interest since it lead to unnecessary pressure from International Oil Companies. During the negotiation process, this matter should not be negotiated with amid individual International Oil Companies. The negotiable items are issues of compensation or commercial i.e. what a country obtains as rent. In negotiating a contract, compensation can be prepared in different as well as manifold ways including income tax form, royalty fee and arrangements of bonus payment recast as a tax. Usually, parameters of compensation are outlined in the legislations. Though they are detailed in the law, there is a need for flexibility during the process of contract negotiation, more so in a situation where there is speculation in terms of the geological data. If the negotiable and non-negotiable issues are not divided, the International Oil Companies will try to lower the compensation amount paid to a country in lowered. The country receives this kind of compensation in return to maintaining as well as complying with, for instance, the set forth environmental standards in a contract (Taverne, 2008)
Payment Structure
According to Palazzo Almada, & Parente, (2013), the government should also focus on the payment structure during the negotiation process as well as contracts drafting with International Oil Companies. At times, when creating a system of oil compensation, particular essential concepts are overlooked in a developing nation. There is a need for each and every company to pay corporate tax whereby the International Oil companies are inclusive. However, the corporate tax doesn’t take into account the fact that a country in many ways is the oil possessor, as distinguished from the private party. Taverne (2008) reiterates that a tax profits is, efficiently, merely a tax from the earned profits regarding the utilization of equipment as well as services to change the oil into an asset of cash. Hence, there is a need for the state to be compensated for the oil "transfer" into a private party from the state, which apparently happens over a long period as the development of oil fields goes on. Without this kind of tax, the government will not get a share that is equitable in regard to any increased asset price while there is stability of the International Oil Companies’ cost since over a given period there are changes in the oil prices (Taverne, 2008). Thus, the government should take into consideration this kind of tax in the negotiation process as without it the oil is sold at low contractual price and there isn’t any benefit obtained from a substantial increment in oil prices.
Health and environment
According to Diebold & Turner (2004), it is vital for the government to focus on the health and environmental issues during the process of negotiation and in the drafting of the contracts with the International Oil Companies. This is because the business of Oil development is regarded as "dirty" whereby it affects the workers’ health including the individuals as well as communities staying near the fields where the oil extractions occurs. In a great way the environment is also affected via the flaring, gases that escape as well as the spills. Taverne (2008) reiterates that there is a need for the government to foc...