The Art of Agreements, Petroleum Contracts

The Art of Agreements, Petroleum Contracts

Agreements are concluded between two or more persons in public international law, and thus raise a case for international responsibility when there is a dispute.

As for contracts, they are concluded between two or more private law persons, and these contracts are often concluded between natural persons, and may include a foreign party, making them contracts of a special nature.

As for petroleum contracts, they are concluded between a national party (the state or one of its public institutions or bodies which enjoys legal personality) and a foreign party represented by a private foreign company belonging to a country other than the host country.

Therefore, these contracts are called by different names, including economic development contracts, quasi-international contracts, international investment contracts, and economic development agreements.

Petroleum contracts are contracts of a special mixed nature, which indicates that petroleum contracts are a compound legal act or of a dual nature. Therefore, we see that oil contracts are contracts of a special and exceptional nature.

Because petroleum contracts contain exceptional conditions that are not familiar in private law or in other contracts, such as conditions for legal stability and conditions of contractual stability.

The different legal forms of petroleum contracts varied, due to the diversity and difference in the legal relationship between oil-producing countries and foreign companies working in this field.

Conventional concession contracts were the first legal form that prevailed for a long period of time due to the nature of the political situation. It was considered a legalized depletion of natural resources in general and petroleum resources in particular. Where the host or donor country was in charge of concluding traditional petroleum concession contracts with foreign companies.

We can define the concession contract as the legal disposition according to which the host country grants the foreign company the absolute right to search and explore for the petroleum resources inherent in its territory or part of it, and the right to exploit these resources and wealth, and dispose of them within a specified period of time in return for the granting country obtaining certain financial returns.

We note that most of the concession contracts granted by developing countries to foreign companies have taken place in different situations in all respects, especially political and international ones. Therefore, the terms of these concessions were unfair to the interests of developing countries, as they were under colonialism.

In traditional franchise contracts, foreign oil companies were granted the absolute right to search and explore to discover and extract oil from the concession areas, as well as the right to transport the extracted oil. In addition, foreign companies had the right to own and dispose of the produced petroleum.

One famous example includes the oil concession contract concluded in 1901 between the Shah of Iran and the English millionaire (William Darcy), and it is the first oil concession contract concluded in the Middle East (for sixty years). This is in addition to the concession contract concluded between the Kingdom of Saudi Arabia and the Standard Oil Company of California in 1933 (one of the companies known as the Seven Sisters).The concession contract of Qatar Petroleum Company with the Sheikh of Qatar, concluded in 1925 (for a period of 75 years) would be yet another example. The Egyptian concession contracts were distinguished from other countries, especially in terms of the time period (30 years, renewable for 15 years).

There are some restrictions on the right of a foreign party to own the petroleum produced from it: (1) that the donor country takes certain quantities free of charge from the oil produced, (2) paying a royalty to the host country, which is represented in a certain percentage of the produced petroleum and its derivatives, (3) not to sell any petroleum products to any foreign authority hostile or unfriendly to the donor country.

When it comes to the issue of finances, there are several types of financial payments. Royalty is cash or in-kind payments that the concessionaire company is obligated to pay to the contracting state for each oil production unit it obtains. Rent value is a sum of money to be paid annually in return for the foreign company’s use of the surface of the land covered by the concession. Finally, a Signature bonus is a sum of money obtained by the state from the foreign company as soon as the contract is concluded.

But we must know that the financial returns obtained by the host country are very small compared to the fantastic profits achieved by foreign companies.

The traditional concession contracts did not provide any opportunity for the producing countries to participate in exploiting their latent oil wealth in their territories. These contracts were sufficient charters in and of themselves to engage in oil extraction and exploitation investment operations, in the almost total absence of valid legal systems to regulate the contractual relationship and without any governmental oversight from the offender of the producing country.

After the oil-producing countries gained their independence from foreign colonialism, some adjustments took place that were in line with the developments in the situation that emerged for these countries. The first adjustment was related to the rule of equal profits from the point of view of the sovereignty of states over their natural resources and wealth, which is that the producing country receives an amount equivalent to (50%) of the profit resulting from the operations of these companies. Nationalization of the Anglo-Iranian Petroleum Company due to the British side’s refusal to apply the rule of interest equalization between it and Iran in 1951. The second was related to the spending royalty or rent: the royalties or royalties are considered part of the production expenses or costs and not part of the contracting countries’ share in the total profits. The third had to do with the system of giving up unused spaces: the principle of relinquishment is that the foreign company relinquishes any parts of the unexploited concession areas, as the company used to freeze large and unexploited areas in order to avoid competition with other petroleum companies. The fourth involved adopting the system of participation in traditional petroleum concession contracts: one of the most important amendments that occurred in the traditional concession contracts is the introduction of the participation system, which led to the demise of the concession contracts in their traditional form, and benefits the participation of the state that owns the region in the management and exploitation of the petroleum resources inherent in its lands.



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