Legal Aspects of Oil and Gas Management

Oil and gas mining and management have been ongoing for several decades in different continents. These two activities have been influential in the Industrial Revolution and the growth of several developed societies. Oil and gas also form the world’s most utilized forms of energy making their exploitation and management a very important matter globally. While it has had many benefits, the drawbacks associated with oil and gas management have also been numerous including pollution, national conflicts, mismanagement and depletion of natural reserves. However, it is evident from the scope of consumption and trade in oil and gas products that proper and effective management of the sector is important towards ensuring global stability, progress and development.

Product Sharing Agreement (PSA) is one of the regulations installed to control and administer the oil and gas producing regions. PSAs are essentially contracts that are signed between a state and an oil and gas exploitation firm that establish the levels of extraction of natural resources and the division of revenues from the extraction. Typically, in these agreements, the host country gives the exploitation firm the chance to conduct its activities upon which the company starts its extraction. If successful, the firm is permitted to use the gains from the exploitation to recoup back their invested capital and other costs.

PSAs were first introduced in Indonesia, Asia at around the year 2000 and later on in Russia but the method triggered extensive controversies concerning its financial viability and shift of costs to the mining company making it highly risky. Therefore, most small and medium oil and gas companies desisted from entering into PSA contracts with states for this reason. Nearly all PSAs address the work program and the least dollar contribution, the timeline for the exploitation and the proportion of benefits being received by each party.

The increase in use for Product Sharing Agreements as the preferred approach towards exploiting oil and gas reserves has been supported by several factors. One, most governments greatly encourage and attract companies that show an interest in exploitation under PSA terms. In this way, most governments end up remaining with the exploration after the company discovers oil or gas and get back their costs. PSAs have also increased in popularity among governments because of the strong managerial position that they occupy. Governments coordinate and oversee nearly all aspects of the exploration and this gives tem the leeway to influence many financial decisions.

Joint venture agreements were the main form of agreements that consisted of a mutual agreement between two parties to combine their equity to develop a separate entity. Typically, joint ventures are organized over a set period after which they become redundant and inapplicable. Joint ventures were eventually phased out by PSAs as the main type of agreements because they took too much time and resources to search for the best partners and negotiate the working terms. Each partner also came to the negotiation table with different goals that needed to be clearly delineated and communicated to all stakeholders. Most joint ventures also end up in conflicts and disintegration because of the imbalances in capital share, skills and level of investment among the different shareholders. Miscommunication also creates many problems for parties in joint ventures. Joint ventures are also disadvantageous in that they are constituted by a collection of several companies. This superficial temporary amalgamation brings together companies with different working cultures and management styles that are frequently plagued by poor incorporation and collaboration. These flaws are almost non-existent in the PSA arrangement structure making it the preferred approach when it comes to exploiting and benefiting from oil and gas resources.

Advantages of PSAs

PSAs have several advantages over other forms of arrangements including joint ventures and concessions. The oil or gas exploiting company is responsible for managing all the mining requirements and activities. The government contractor is only responsible for provision of the essential funds and excecution of the procedures. Any other activities are done through consultation. This type of relationship within the PSA is important in that it allows the two parties to develop a long term and sustainable trend and allows the oil or gas extraction company to grow and learn further on the extraction process[1]. The PSA style of operation is also advantageous to the government in that they can assume ownership of the gas or oil discovered. While the mining rights are vested in the company, the government has the rights to the product being mined and therefore stands to benefit for a long time after the company left. This clause was included because the government was still the owner of all natural resources. Another advantage to the government is that the prospecting company furnishes all the starting capital in the agreement that is clearly indicated n the work program. Governments therefore do not have to bear any risks, as the contract would be dismissed if no oil or gas were found.

Conclusion

The shift in approach from joint ventures to Product Sharing Agreements was largely promoted by the huge economic losses that most exploitation companies accrued in their quest to find oil or gas in several companies. PSAs were slowly being preferred due to the huge economic benefits that a company that had took the risk and invested in searching for oil and gas in a country. This is because, if done with proper detail, mining under a PSA would mean certain profit that will be covered by the final product being mined.

Bibliography

Tsalik, Svetlana, and Anya Schiffrin. Covering Oil: A Reporter’s Guide to Energy and Development. (New York: Open Society Institute, 2005).

[1] Tsalik, Svetlana, and Anya Schiffrin. Covering Oil: A Reporter’s Guide to Energy and Development. New York: Open Society Institute, 2005.