Regulating Petroleum Industry: Purpose, Key Forms and International Law

Regulating Petroleum Industry: Purpose, Key Forms and International Law

By Mohsen Ahmed Farhan – Drilling Department Head, General Petroleum Company (GPC)

Petroleum sector projects are complicated and high-risk investments, which need further care when it comes to drafting a regulatory framework that combines sustainable economic development for the host countries as owners of the resources with warranties and incentives to investors who are willing to invest their capital in this kind of projects.

Here, we will explain the hierarchy of petroleum law in exploration and production stages, as well as how the national legislations react with international law tools.

This article highlights  the purpose of regulating the petroleum industry, key forms of upstream phase legislation and commonly regulated activities and international law.

Usually, governments invite international exploration and production oil and gas companies to take the risk to invest and –if successful–  to profit from the oil and gas production process on the basis of a long-term contract, determining detailed terms and conditions.

Ownership of oil and gas fields is always controlled by the host state rather than foreign partners or investors.

In the case of established oil and gas industry existence, as in Canada or Algeria, public or mixed-owned organizations may play a leading role in developing the resources.

The host country typically regulates all of the petroleum industry activities through a series of laws and regulations based on political visions, contract forms and financial tools in a distinct structure or framework.

Petroleum legislation aims to regulate petroleum industry operations and set out the sharing of the petroleum production revenues and income between the country or government and the investor or partner who is authorized to carry out these operations.

It also targets maximization and preservation of monetary or economic benefits over the long term, as well as encouraging new exploration activities.

In practical terms, good awareness or realization of what the basic investment rules allows a prospective foreign partner to model business operations in advance of establishing the project or investment.

There are two key forms of petroleum legislation; a basic law which deals with the petroleum industry upstream phase’s activities to set out the roles and responsibilities of key stakeholders, and the subsidiary laws or and specific ministerial decisions that may deal with a variety of more detailed subjects, such as the award of licenses or approval of contracts.

The regulations are more easily and more frequently changed than  basic laws.

The key actors in oil and gas industry include the  government authorities –such as a ministry of petroleum or a petroleum corporation– National oil companies (NOCs) –e.g. the General Petroleum Company of the Arab Republic of Egypt– the international oil companies (IOCs) –e.g. Exon Mobil, ENI, or BP), independent companies and service enterprises.

The resource-owner country needs to regulate and control oil and gas activities, as well as  creating proper strategic policies to develop its resources.

This often involves special legislations; i.e. a petroleum or natural gas law, which cope with other relevant legislations such as fiscal and investment laws.

The special legislation also needs to comply with the country’s constitution, which may contain provisions or rules related to oil and gas industry operations. For instance, the constitution of  resource-rich country may contain principles for expropriation in the public interest and compensation (i.e. Norwegian constitution), or set up rules on ownership.

Other examples are the constitutions of both Ghana and Bolivia, which give ownership of their natural resources to their people.

There are three typical approaches used to design a petroleum legal framework or petroleum legislation to regulate the upstream sector.

This includes the comprehensive or highly detailed approach to legislation, which relies on individually legislated contracts or agreements, and a mixed approach that combines less comprehensive or framework legislation with detailed regulations and flexibility in contracts or agreement requirements.

Some of the key areas of consideration when drafting an upstream petroleum phase law usually include; ownership of resources, the organizational structure of the sector, procedures for granting permits and awarding of licenses, requirements for qualification, contractual schemes, fiscal & taxation principles, HSE measures, the role of national oil companies, competent authorities, reconnaissance, local content, emergency plan and supplies, right to construct installations and pipelines, land access, stability provisions, dispute settlement; and decommissioning and abandonment.

Most of the above commonly are governed by special legislation based on the social and economic characteristics and political attitude of each country and the legislative framework or legal approach that has been chosen for application.

Anyhow, licenses are generally awarded via competitive bids or auctions. There will also be interactions with investment law and foreign partnership control laws.

International law recognizes the state’s sovereignty over its natural resources under the organized international agreements.

Permanent sovereignty emphasizes that a host country owns and controls petroleum resources entirely under its jurisdiction.

Acknowledgement of permanent sovereignty means that the host countries could nationalize or expropriate foreign company assets. However, they could only do so for purpose of public utility, security or national interests and –if it happened– they would have to pay  a compensation in accordance with the host country’s laws and international law.

Based on the international laws and agreements,  expropriation is only allowed when it is undertaken for the purpose of the public interest, due process of law and it is accompanied by prompt, adequate and effective compensation.

Also, comprehensive rules have been developed for investment protection and a model intergovernmental and host-government cross-border pipeline agreement for natural gas has been created.

With regards to off-shore exploration and laying of subsea pipelines, the international law of the Sea provides both fundamental and international rules, including rules on obligations for the removal and disposal of offshore installations and structures.

One of the major considerations for the petroleum sector in creating and applying of oil and gas law is the potential for conflicts between national interests and the interests of the international petroleum industry.

It is important to ensure there is sufficient competition amongst oil companies and within the supply industry to serve the interest of national and international industry participants, by opening up the sector and building dialogue within the authorities and the petroleum industry on the direction of legislative development.

This interaction should aim for capacity and trust-building among the industry stakeholders, on one side, and between them and policymakers, on the other side, as well as enhancing

transparency when deciding on approvals for each important activity such as drilling, field development, pipeline transportation, and disposal.

For the foreign partner or investor, it is often preferable that the general framework for exploration and production to be legislated under a generic petroleum law, so there is room for negotiations of the details under the contract.



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