Oil is a valuable national asset that cannot be underestimated or left without a specific and clear legal framework, as it is no secret to anyone that it could have positive impacts on the economic and social arenas. It is the main income for producing countries, and there is no other equivalent for their national economy. The majority of oil-producing countries depend on it at a rate ranging between 95% and 98%
In extractive industries, the contracts define the relationship between the state and the companies operating in this sector, in addition to the rights and duties of each party. It highlights plans for exploration, extraction and production, financial conditions, consequences of waiving the exercise of the petroleum right, methods of keeping records and accounting…etc.
There are three types of these contracts in this sector, which are concession contracts, production sharing, and service sharing contracts. Each type of contract has characteristics that distinguish it from other types of contracts.
- Concession Contract
The government grants concessions to a company or companies to work in a specific sector, such as oil exploration in a specific geographical area.
The rights to the natural resources belong to the concessionary trading company(s). These companies fund all exploration, development and production operations.
Usually, in this type of contract, the state’s profits consist of a specific percentage of royalties and taxes, in addition to social taxes and bonuses. If the state participates through its national companies, the company’s share of the profit oil is added to its profit.
- Production Sharing Contract
Ownership of natural resources belongs to the state. Companies have the exclusive right to exploration, development and production.
In this type of contract, companies bear the cost of exploration, development and production, and recover their investments later from the oil they extract and export. Then, companies share the profit oil with the state according to a previously agreed upon formula.
The state’s profits in general consist of its share of the profit oil, royalties and taxes.
This type of contract is common in the oil sector and is rare in the gas sector and is not applied in the mining sector.
- Services Contract
Natural resources are under state ownership. It concludes an agreement with companies to provide specific technical services, such as exploration work, construction work, transportation…etc.
The state keeps the resources it produces and pays companies for their services, either in cash or a commodity, such as oil or other types of commodities.
These types of contracts are rare and are adopted by countries, such as Saudi Arabia, Kuwait and Iran.
- Each contract includes axes in which the duties and rights of each of the companies and the state are refuted, namely: technical, commercial, social, environmental, production and obligations.
Technical Hub:
The technical axis revolves around the exploration plan, the geological systems for petroleum proposed by the right holder, the potential reservoirs, their depth and number… etc. This includes the companies’ obligations and the time, geological and practical plans for extracting oil from sea or land.
Commercial Hub:
This axis highlights and defines the method of calculating the profits of the rights holders and the state from oil production.
Social Hub:
This axis highlights the obligations of the rights holders towards the community in terms of employment, training, financial assistance, and financing for activities beneficial to the host community.
Environmental Axis:
This axis highlights the laws, rules and requirements that rights holders must respect and implement to protect the environment and public safety.
“Establishing a proactive culture of commitment to health, safety and environmental values among all workers involved in petroleum activities.”
Production and Commitments:
There are obligations and minimum work requirements that the right holder must abide by, such as carrying out geophysical surveys, geological surveys, aerial surveys…etc.
The right holder must also drill at least one exploratory well.
If production issues and obligations center on broad lines and rules, the right holder must apply them.
- The legal nature that governs the contractual relationship between the oil-producing countries, that is, the owners of natural wealth, is one of the issues that affect national sovereignty in the first place. We saw how this relationship developed and went through many stages.
With the beginning of the oil discoveries, specifically after the Second World War, the investing companies had absolute privilege. Oil-producing countries were on the simple side of knowledge, follow-up and validity. But as we reached beyond the year 1952, the picture changed and the sovereign and independent countries began to demand from foreign investors for direct support, the expansion of contracts and granting countries more power over what is essentially a public domain.
The United Nations intervened, intentionally or unintentionally, towards the issuance of Resolution No. (545 of 1952), related to the right of peoples to self-determination. It should be noted that self-determination in all aspects related to the state is the same, whether from an economic or social point of view, due to the interdependence of the two elements towards achieving the public benefit that accrues good for the citizens of all peoples.
These countries sought independence to achieve the signs of economic self-sufficiency, and they largely achieved this goal, each in the manner that is deemed appropriate with the general policy of the state and its laws in force.
It is not acceptable to think that the oil-producing countries have become completely isolated from Western investors, but they are, to a large extent, dealing with them as equals. We see them seeking national cadres, administrative control, and equal financial profits to a reasonable extent. The best example is what is happening now in Kuwait in terms of discussions with foreign companies that are trying to conclude contracts similar to the old ones, but the Kuwaiti National Assembly is striving towards achieving the greatest economic gains in this field. This is in addition to many countries that proceeded and achieved many deals that are considered new to investing companies.
