Petroleum Agreements: The Backbone of The Exploration and Production Sector

The petroleum industry is considered one of the modern industries in the Middle East and the oil-producing Arab countries, which means that the history of petroleum contracts is relatively recent. The first oil contract concluded in the Middle East was between the Iranian government and the English British Petroleum Company in 1901, being the first model of the contractual relationship between an oil-producing country and a foreign company specialized in the oil industry and affiliated with a consuming country.

Crude oil receives great attention from the major countries as one of the national, security, economic, industrial and development goals for all countries of the world. As officials of the energy sector in the world seek to provide resources for foreign exchange, this can be achieved through several additional tracks, including issuing more bids for research and exploration in promising and attractive areas for international companies. This is in addition to re-evaluating the agreements signed with companies currently operating to improve the terms of the contract, if this was a legal issue, especially in light of the thirst for global energy markets and the strong competition between production companies.

Therefore, we find that commitment agreements to search for and exploit oil and gas represent the backbone of the oil and natural gas sector in particular and for the state in general. According to those agreements, oil and natural gas exploration can be done through foreign, Arab and Egyptian companies, which in turn supply billions of dollars as direct investments, with the aim of increasing and supporting the production of oil and natural gas. This is in addition to indirect investments, which directly  affects the state’s public treasury  and the country’s national product positively. Increasing research, exploration and development work and the subsequent increase in production rates also work to reduce the import bill and the cost of production, which is ultimately in the interest of the national economy.

According to the foregoing, we find that the oil sharing contracts are based on the participation of oil and natural gas producing countries or one of their oil institutions with a foreign company in oil exploration and exploitation with equal participation in obligations and rights. Therefore, the basic idea of oil sharing contracts is to consider the state or one of its national companies as a full partner in the exploitation of oil and natural gas, provided that the exploration risks remain on the shoulders of the foreign partner. In partnership contracts, the company undertakes the financing and implementation of development, operation and production operations throughout the contract period and the formation of a joint management committee between them periodically to follow up and discuss the common basic matters.

It is worth noting that foreign contracting companies that came to contract are looking for two things:

It is securing energy for its countries during the global struggle of the economic blocs, and most importantly, marketing it and using it as a political card, and then the profit comes.

Material profit to support the national economy for partner companies in production.

On the other hand, petroleum sharing contracts take multiple forms between oil-producing countries and foreign companies operating in the oil industry, the most important of which is the joint venture contract and the production sharing contract.

In general, petroleum agreements contribute to attracting more investments and have an effective role in developing the oil and gas resources of countries and strengthening national energy security by working to achieve self-sufficiency in oil and natural gas. It also helps achieve fair geographical distribution of development plans throughout the country, with ensuring that there is enough oil and natural gas supplies to meet the needs of future generations.

There is no doubt that achieving these goals requires more major investments to support and develop the infrastructure of the oil and natural gas industry, including pipeline networks and production facilities, as well as investment in all activities and fields of the oil and gas industry, refining and petrochemicals. In order to start implementing this plan, there is a need to include clauses in the model of petroleum agreements that stimulate and encourage foreign partners to invest, especially in light of the high cost of developing discoveries in general and in deep water areas in the Mediterranean in particular, as well as the risk factor. Therefore, some clauses were put in the new agreements. It aims to achieve an appropriate return on investment, which encourages the foreign partner to invest and quickly put discoveries into production to meet the needs of the local market, especially of natural gas, and work to promote and achieve a balance between the interests of the two parties.

Is It Still Profitable?

Even with oil prices at $80/barrel, exploration can be profitable for companies. Ironically, the price crash of 2015 favored exploration, as much capital shifted away from traditional exploration to short-cycle shale oil. Since 2016, the majors have drilled fewer traditional exploration wells – which are usually capital-intensive and long-term – and instead focused on faster-yielding exploration. And six of the seven main companies achieved higher returns from traditional exploration in the period from 2016 to 2020, compared to the previous five years.

On the other hand, the largest oil producers in the world face limits that prevent them from extracting it, as the average commercial success rate reached about 40%, while the technical success rate in the countries of the world reached about 50%, as the world witnessed a state of decline in exploratory drilling rates, Governments that have the resources will want to maximize the value of their oil and gas revenues through the energy transition.

In conclusion, agreements in the field of oil and natural gas have become one of the most important legal tools that govern this important strategic activity. This is especially the case in countries that depend almost entirely on oil and where the exploitation of oil requires entering multiple contracts between the country that has natural wealth and one of its agencies or companies. On the one hand, an acceptable degree of balance must be achieved between the interests of the producing country and the companies that conduct research and exploration.

By Dr. Ahmed Sultan.

Vice-Chairman Energy Committee Cairo Engineers Syndicate.

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