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Oil and Gas Contracts

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Oil and Gas Contracts: The Legal Backbone of the Energy Sector

Introduction

Oil and gas contracts are the legal cornerstone of the global energy sector, dictating the terms under which companies explore, develop, produce, and commercialise hydrocarbons. These agreements are complex, often involving multinational stakeholders, and serve as risk-allocation tools that provide certainty in one of the world’s most volatile industries. With projects typically requiring substantial upfront capital, clearly defined contracts are indispensable in managing legal, fiscal, and operational frameworks across borders.

Live Examples and Case Studies

Example 1: Joint Operating Agreement in the North Sea

In the UK North Sea, companies such as BP and Equinor commonly operate under Joint Operating Agreements (JOAs), which define the roles of operator and non-operators. A 2021 case involved TotalEnergies exiting a North Sea asset, with the JOA guiding the redistribution of rights and liabilities among remaining partners. The transition occurred smoothly, avoiding litigation due to the contract’s robust dispute resolution mechanism.

Example 2: Production Sharing Agreement in Nigeria

Nigeria uses Production Sharing Agreements (PSAs) for offshore developments. In one notable case, the Bonga field, operated by Shell under a PSA, saw a renegotiation in 2018 due to changing oil prices and taxation policies. The revised terms led to increased revenue for the Nigerian government while preserving project viability for the operator.

Impact

Such agreements shape government revenues, investor confidence, and operational continuity. A poorly structured contract can lead to investor withdrawal, stranded assets, or prolonged arbitration.

Types of Oil and Gas Agreements

1. Concession Agreements

Definition:
Concession Agreements are arrangements where a host government grants an international oil company (IOC) exclusive rights to explore, develop, and produce hydrocarbons in a defined area for a specified period. In exchange, the IOC typically pays taxes, royalties, and may offer signing bonuses.

Key Features:

  • Government retains ultimate ownership of the resource.

  • Oil company gains ownership of the extracted hydrocarbons.

  • Fiscal regime includes royalties, corporate income tax, and bonuses.

Pros:

  • Simpler legal and operational framework.

  • Attractive to investors in politically stable jurisdictions.

Cons:

  • Less beneficial to governments in high-profit projects.

  • Greater exposure of the government to commodity price fluctuations.

Example:
Saudi Arabia historically used concession models with companies like Aramco before evolving towards more integrated partnerships.

2. Production Sharing Agreements (PSAs) / Production Sharing Contracts (PSCs)

Definition:
Under PSAs or PSCs, the oil company finances the exploration and development activities. If hydrocarbons are discovered, the production is divided into “cost oil” (to recover investment) and “profit oil” (shared with the government).

Key Features:

  • Government retains legal ownership of the resources at all times.

  • Contractor assumes all risk and is reimbursed only upon success.

  • Usually includes a “cost recovery limit” and profit split formula.

Pros:

  • Government maintains resource control.

  • Encourages investment in frontier areas.

Cons:

  • Complex cost recovery mechanisms.

  • Frequent audits and potential for disputes.

Example:
The Bonga field in Nigeria, operated by Shell under a PSA, was renegotiated to increase state revenues following commodity price shifts.

3. Risk Service Contracts

Definition:
The oil company provides services and bears exploration and development risk. In return, it receives a fee, either in cash or a fixed share of production, without gaining title to the oil or gas.

Key Features:

  • Contractor is not entitled to equity oil.

  • Government retains full ownership and marketing rights.

  • Common in resource-nationalist or state-dominant models.

Pros:

  • Limits foreign influence in hydrocarbon marketing.

  • Guarantees government control over resource revenues.

Cons:

  • Less attractive to foreign investors.

  • Higher state responsibility in managing operations.

Example:
Mexico’s PEMEX used risk service contracts for deepwater exploration under its old legal framework before the 2013 energy reforms.

4. Joint Operating Agreements (JOAs)

Definition:
A JOA is a contract between multiple parties holding interests in the same licence or lease area, outlining how operations will be conducted and how costs, liabilities, and profits will be shared.

Key Features:

  • Designates one party as the Operator.

  • Defines scope of operations, cost-sharing, dispute resolution.

  • Overseen by a Joint Operating Committee (JOC).

Pros:

  • Allows cost and risk sharing.

  • Encourages technical and financial collaboration.

Cons:

  • Risk of disagreements among parties.

  • Operator negligence can impact non-operators.

Example:
In the UK North Sea, JOAs are based on Oil & Gas UK (OGUK) model forms, such as the JOA used in the Sullom Voe Terminal operations.

5. Farm-In / Farm-Out Agreements

Definition:
A Farm-Out Agreement allows a party (the farmor) to assign an interest in a licence or lease to another party (the farmee), who in return agrees to fund part of the exploration or development costs.

Key Features:

  • Common in early-stage or high-risk projects.

  • Often includes milestone or drilling obligations.

Pros:

  • Enables the spreading of financial exposure.

  • Facilitates entry of new partners with expertise or funding.

Cons:

  • Complex valuation and negotiation process.

  • Can delay operations if approvals are prolonged.

Example:
Cairn Energy farmed out part of its Senegalese offshore blocks to Woodside Energy in exchange for drilling cost contributions.

6. Royalty Agreements

Definition:
These agreements entitle the royalty holder to receive a percentage of the revenue (or volume) from the production of oil or gas, typically before cost deductions.

Key Features:

  • Royalties are usually calculated as a gross revenue percentage.

  • Paid to governments, landowners, or private entities.

Pros:

  • Guarantees a steady income stream to the royalty owner.

  • Simple to implement in concession regimes.

Cons:

  • Reduces net revenue for producers.

  • Can discourage development of marginal fields.

Example:
In Texas, private landowners commonly receive royalties of 12.5% to 25% from oil and gas production on their land.

7. Transportation and Supply Agreements

Definition:
These agreements govern the logistics, cost, and responsibilities related to the movement of oil and gas from production sites to refineries or markets.

Types:

  • Pipeline Transportation Agreements

  • LNG Offtake and Shipping Contracts

  • Rail or Trucking Agreements

Key Features:

  • Define capacity, tariff, liability for loss or damage.

  • May include “ship-or-pay” provisions.

Example:
TC Energy’s Keystone Pipeline uses long-term transportation agreements with producers.

8. Gas Sales Agreements (GSAs)

Definition:
GSAs specify the terms under which natural gas is sold from a producer to an offtaker (utility, industrial user, etc.).

Key Features:

  • Often long-term (15–20 years).

  • Include pricing formulae, delivery volumes, quality standards.

  • “Take-or-pay” clauses enforce minimum payment obligations.

Pros:

  • Bankability for project financing.

  • Provides revenue certainty.

Cons:

  • Inflexible if market conditions change.

  • Take-or-pay liabilities can accumulate during low demand.

Example:
LNG export projects in Qatar rely on GSAs signed with Japanese and Korean utilities.

9. Service Agreements

Definition:
Contracts under which an oilfield service company performs specified services (e.g. drilling, seismic acquisition, engineering) for a fixed price or a cost-plus fee.

Types:

  • Lump Sum Turnkey (LSTK)

  • Day-rate Drilling Contracts

  • Performance-Based Contracts

Pros:

  • Allows operators to outsource specialised tasks.

  • Provides cost predictability in some models.

Cons:

  • Risk of disputes over performance metrics or costs.

  • Misalignment of incentives between parties.

10. EPC and BOT Contracts

EPC Contracts (Engineering, Procurement, and Construction):

Definition:
Under EPC, the contractor delivers a complete facility, including all engineering, procurement, and construction. Also known as “turnkey” contracts.

Key Features:

  • Fixed price and delivery timeline.

  • Contractor assumes design and construction risk.

Example:
Used extensively in building gas processing plants, refineries, and LNG terminals.

BOT Contracts (Build-Operate-Transfer):

Definition:
A private party builds infrastructure, operates it for a concession period, and then transfers ownership to the government.

Key Features:

  • Common in LNG terminals and pipeline infrastructure.

  • Encourages private investment in public projects.

Example:
India’s Dabhol LNG Terminal was originally developed under a BOT framework.

Key Elements within Oil and Gas Contracts

Oil and gas contracts are not only legal documents but strategic instruments that define and manage multi-billion-dollar projects. Here are the critical components found across most upstream and midstream contracts:

1. Grant of Rights

Definition:
This clause stipulates the legal authority granted to a contractor, licensee, or operator to explore, develop, or produce hydrocarbons within a designated geographic area.

Key Components:

  • Duration: Defined licence or contract term, e.g., 30 years for a PSA, broken into exploration and production phases.

  • Acreage: Geographical extent, typically measured in square kilometres or blocks.

  • Scope of Activities: Whether rights cover seismic surveys, drilling, production, transportation, etc.

Importance:
It provides the legal basis for accessing subsurface resources, and outlines reversionary rights to the state if development conditions are unmet.

2. Financial Terms

Definition:
These define the fiscal obligations of the contractor, forming the economic backbone of the contract.

Components:

  • Royalties: Paid to the host government or landowner, usually based on gross production.

  • Taxes: Includes income tax, VAT, resource rent taxes, and windfall taxes.

  • Profit Splits: In PSAs, specifies how remaining profits (after cost recovery) are shared.

  • Bonuses: Signature, discovery, and production bonuses payable at milestones.

  • Cost Recovery Mechanism: Rules around how much of the investment can be recovered before profit-sharing.

Note:
These terms vary depending on contract type (e.g., PSAs vs. concessions) and impact investment viability.

3. Operational Provisions

Definition:
Outline the obligations of the contractor regarding execution of exploration and production operations.

Typical Provisions:

  • Minimum Work Programmes: Number of wells, metres of seismic, or other specified activities.

  • Development Plans: Approval of field development and production schedules.

  • Technology and Methods: Use of best practices or specific technologies (e.g., horizontal drilling, CCS).

Legal Implications:
Failure to comply can lead to contract termination, penalties, or loss of acreage.

4. Liabilities and Indemnities

Definition:
This clause allocates responsibility for losses, damages, and third-party claims among the parties.

Relevance in JOAs:

  • Operator typically indemnified for actions unless gross negligence is proven.

  • Non-operators are liable for costs proportional to their interest.

  • Third-party liabilities (e.g., environmental spills) are governed by insurance and indemnity terms.

Risk Management Tool:
Essential to limit exposure and ensure appropriate insurance coverage.

5. Dispute Resolution

Definition:
Specifies the mechanisms by which disputes arising from the contract are to be resolved.

Common Mechanisms:

  • Arbitration (ICC, LCIA, ICSID): Standard in international oil and gas contracts.

  • Mediation or Expert Determination: For technical or operational disputes.

  • Choice of Law & Jurisdiction: Typically international law or a neutral jurisdiction like England & Wales or Singapore.

Importance:
Ensures contractual enforcement even in politically or economically unstable jurisdictions.

6. Environmental Compliance

Definition:
These provisions require adherence to environmental regulations and implementation of risk mitigation strategies.

Key Inclusions:

  • Environmental Impact Assessments (EIAs)

  • Decommissioning and Restoration Plans

  • Spill Response and Liability Allocation

Significance in Offshore Operations:
Due to high environmental risk (e.g., Deepwater Horizon), these clauses are scrutinised and enforced rigorously.

7. Local Content Provisions

Definition:
Mandates the inclusion of local workforce, goods, and services to foster national economic development.

Common Requirements:

  • Use of local suppliers and subcontractors.

  • Employment quotas for local nationals.

  • Technology and knowledge transfer obligations.

Consequences for Non-Compliance:
Penalties, loss of preferential status, or disqualification from future tenders.

Exemplary Contracts in Upstream Operations

Upstream operations involve significant legal coordination among companies exploring, drilling, and developing oil and gas fields. The following are essential contract types frequently executed:

1. Area of Mutual Interest (AMI) Agreements

Purpose:
To define the geographic areas in which parties agree to jointly pursue oil and gas opportunities.

Key Terms:

  • Non-compete within the defined area.

  • Obligation to offer participation in new licences or acquisitions.

  • Duration of the AMI obligation.

Utility:
Promotes joint strategic planning and prevents competitive bidding among partners.

2. Confidentiality Agreements (CAs)

Purpose:
To safeguard sensitive technical, commercial, or legal information shared during project evaluation or negotiations.

Features:

  • Defines confidential information.

  • Duration of confidentiality obligations (often 2–5 years).

  • Permitted disclosures (e.g., affiliates, regulators, legal counsel).

Limitation:
Must comply with constitutional protections on information access in some jurisdictions.

3. Joint Bidding Agreements (JBAs)

Purpose:
Enable multiple companies to combine technical and financial resources to submit a unified bid for a licence or block.

Key Terms:

  • Bid preparation and submission responsibilities.

  • Ownership split upon successful award.

  • Exclusivity period and withdrawal rights.

Legal Consideration:
Must comply with anti-trust and competition law.

4. Unitisation Agreements

Purpose:
To govern the joint development of a hydrocarbon reservoir that extends across two or more licence areas or jurisdictions.

Features:

  • Defines unit boundary and participating interests.

  • Appoints unit operator.

  • Sets out production allocation formulas.

Example:
Cross-border fields like the Frigg gas field between the UK and Norway required unitisation

5. Lease Exchange Agreements

Purpose:
Permit the exchange of interests in leases or licence areas between companies for strategic or operational reasons.

Key Elements:

  • Mutual representations and warranties.

  • Valuation of exchanged interests.

  • Regulatory approvals and consents.

6. Seismic Option Agreements

Purpose:
Allow a company to conduct seismic surveys on another party’s licence area with an option to farm-in afterwards.

Terms Include:

  • Scope of seismic activity.

  • Option exercise period.

  • Terms of eventual farm-in, if exercised.

Used in:
Frontier basins where acquiring proprietary data is essential before committing to drilling.

Differences and Similarities: Oil vs Gas Contracts

Key Differences

Factor Oil Contracts Gas Contracts
Market Traded globally on spot and futures markets (e.g., Brent, WTI) Often sold under long-term bilateral contracts
Price Mechanism Priced based on market indices Index-linked (e.g., oil-indexed, Henry Hub, TTF)
Infrastructure Simpler (trucks, tankers) Capital-intensive (pipelines, LNG terminals, regasification)
Flexibility More flexible in terms of sales Less flexible due to take-or-pay terms
Storage Easier and cheaper to store Requires complex cryogenic or pressurised systems
Contract Duration Short- to medium-term Often long-term (15–25 years)
Environmental Impact Higher emissions per barrel Cleaner burning but methane leakage is a concern

Key Similarities

Despite commercial and logistical differences, oil and gas contracts share common structural and legal features:

  • Use of Similar Frameworks:
    JOAs, PSAs, and concessions are common to both commodities.

  • Risk Allocation Principles:
    Cost recovery, joint liability, and operator duties are structured similarly.

  • Dispute Mechanisms:
    Both rely on international arbitration and neutral governing law clauses.

  • Technical Provisions:
    HSE (Health, Safety, and Environmental) requirements, local content rules, and decommissioning duties apply equally.

  • Government Interface:
    The need for continuous compliance with regulatory, tax, and reporting obligations exists in both.

Pros and Cons of Various Oil and Gas Agreement Types

Type Pros Cons
Production Sharing Agreements (PSAs) ✅ Government retains ownership of hydrocarbons.
✅ High incentive for contractor to manage costs and maximise production.
✅ Often include local content and technology transfer clauses.		 ❌ Complex cost recovery and accounting mechanisms.
❌ Susceptible to renegotiation due to political change or oil price volatility.
❌ Audits and fiscal disputes common.
Joint Operating Agreements (JOAs) ✅ Clearly defines roles and responsibilities of operator and non-operators.
✅ Enables cost and risk-sharing.
✅ Operational decisions supervised via a Joint Operating Committee (JOC).		 ❌ Potential for operator vs non-operator conflict.
❌ May lead to project delays due to decision-making stalemates.
❌ Liability exposure if operator is negligent.
Concession Agreements ✅ Simpler legal and fiscal frameworks.
✅ Contractors take full control of production and marketing.
✅ Widely used in established jurisdictions (e.g. USA, UAE).		 ❌ Government has minimal control over operations.
❌ Revenue heavily reliant on fixed royalties and taxes.
❌ Less flexible in ensuring social and environmental goals.
Risk/Service Contracts ✅ Low risk for governments—no exploration cost exposure.
✅ Fixed-fee structure simplifies cost forecasting.
✅ Suitable for NOC-dominant systems.		 ❌ Limited upside for contractors—deterring investment.
❌ Government bears all price and production risk.
❌ Less incentive for innovation or cost efficiency.

Decarbonisation Clauses in New Concession Agreements

Overview:
Modern concession agreements are beginning to mandate emissions reporting, methane monitoring, and flaring reduction.

Emerging Clauses:

  • Emissions penalties or carbon-linked profit shares.

  • Mandatory CCS or offset investments.

Jurisdictions Leading:

  • EU-member host states.

  • Colombia and Canada integrating such clauses in licensing rounds.

Evolving Gas Sales Agreements (GSAs) in LNG-Dominated Markets

Overview:
GSAs are shifting from rigid long-term, oil-indexed deals to more flexible, hub-linked contracts (e.g., Henry Hub, TTF).

Recent Trends:

  • Buyers seeking destination flexibility.

  • Sellers adding take-or-pay minimums to reduce revenue volatility.

Notable Example:
India’s renegotiation of Qatar LNG GSAs due to oversupply and low demand.

Risk Allocation in Deepwater and Ultra-Deepwater Joint Operating Agreements

Overview:
As exploration pushes into ultra-deepwater, JOAs must reflect high technical and environmental risks.

Key Provisions:

  • Liability caps for blowouts and subsea equipment failures.

  • Enhanced indemnity and insurance obligations.

Lessons Learned:
Post–Macondo (BP), JOAs in the Gulf of Mexico and West Africa are more operator-liability focused.

Use of BOT (Build-Operate-Transfer) Contracts in National Infrastructure Projects

Overview:
BOT models are now common in the development of LNG import terminals, refineries, and pipelines.

Key Regions:

  • Pakistan, Bangladesh, India, and Egypt are leading BOT adopters.

  • Private operators recover costs and earn returns before asset transfer.

Contractual Concerns:

  • Performance guarantees.

  • Sovereign risk protection for international lenders.

Arbitration Trends in Oil and Gas: ESG and Investor-State Disputes

Overview:
More oil and gas disputes are reaching international arbitration centres over climate issues, tax regimes, or termination of fossil projects.

Examples:

  • Rockhopper vs. Italy (under ECT) over offshore drilling ban.

  • Arbitration against Colombia for revoking licences on protected land.

Key Considerations:

  • ESG compliance as a legal requirement, not just ethical.

  • Surge in BIT-based claims in Africa and Latin America.

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