Fiscal Regimes: Different Types of Oil and Gas Contracts
Oil and gas are valuable scarce natural resources that need strong collaboration between rights holders and developers for effective exploration, extraction, production, and processing. Take aware that these activities are subject to stringent government rules. Furthermore, defining the scope and bounds of this partnership is an important upstream activity in the oil and gas business.
Countries having confirmed or suspected oil and gas deposits, particularly those without production capabilities, have established and implemented a legal framework that outlines the duties and obligations of the mineral rights owner or lessor and the developer or lessee. The majority of these developers or lessees, on the other hand, are transnational foreign firms or multinational corporations profiting from a certain country’s oil and gas riches. Some nations, particularly experienced oil and gas exporters, do, however, have locally-owned national businesses.
This page covers and analyzes the many forms of oil and gas agreements that exist between states or mineral rights owners and developers or lessees, as well as the benefits and drawbacks of each. Keep in mind that oil and gas agreements are often known as licensing systems or fiscal regimes.
THREE TYPES OF OIL AND GAS AGREEMENTS: FISCAL REGIMES
- Concessions Scheme
A concession, often known as a concession agreement, is a sort of contract. between a state or mineral rights owner and a firm that grants the former the right to conduct a business within the jurisdiction of the latter on stipulated terms and conditions
Concessions are the oldest sort of contract in the world of oil and gas agreements, having originally originated during the 1800s oil boom in the United States and become widespread in the Middle East beginning with the oil boom in Saudi Arabia.
A concession agreement is theoretically based on the American notion of land ownership, in which resources on the surface and beneath the earth are held by the recognized landowner. In a specific concession deal, the landowner offers another organization or firm exclusive rights to explore and own the resources.
This corporation is in charge of supplying the cash and capabilities required to explore, extract, or produce oil or gas reserves, as well as process them.
The corporation is the lessee in the case of an oil and gas concession, while the state or mineral rights owner is the lessor. The primary advantage to the lessee is ownership of the oil or gas deposits, while the lessor benefits from taxes and royalties obtained from productive economic activity.
- Production-sharing contract
A production sharing agreement, often known as a production sharing contract, or PSC, is a form of oil and gas deal that was initially presented by Indonesia in 1966, Concession agreements have been viewed as a remnant of imperialistic and colonial eras in Indonesia, and PSA has been supported and positioned as part of the country’s resource nationalism movement. As a result, since the 1960s, PSAs have been a preferred kind of oil and gas agreement in several Asian and Caucasus countries.
Unlike concessions, a PSA does not give the lessee ownership of the oil or gas resources and reserves. The state retains ownership and rights. However, this ownership is only in part. This is because PSA deducts a portion of the cost of exploration, extraction, and production from the oil or gas revenue. Once these expenses are met, the state and the corporation divide the remaining money based on an agreed-upon percentage allocation.
- Service agreements
A service contract or service agreement, like a PSA but unlike a concession, is another form of contractual framework that does not provide an engaged hydrocarbon business ownership of oil or gas resources and reserves. However, unlike a PSA, the engaged business is not a lessee but only a service provider with no claim to the economic advantages from oil or gas production.
In other words, a service contract assigns a corporation to develop a certain land area for productive economic activity. This corporation supplies capabilities for oil and gas exploration, extraction, and processing, and consequently receives remuneration from the state for doing so. It should be noted that the revenue generated by this corporate income tax and a specific tax arrangement may still apply to the corporation.
This configuration was initially used in Argentina in the 1950s. Later on, two types of service contracts emerged: pure service contracts and risk service contracts. Pure service contracts have a predetermined contract price as the only income stream for the contracting firm. A state basically commissions a corporation to offer oil or gas exploration, extraction, and production capabilities. Meanwhile, risk service contracts entail paying the contracted business a percentage of oil or gas earnings in exchange for complete responsibility for oil or gas exploration costs.
EACH OIL AND GAS AGREEMENT’S BENEFITS AND DISADVANTAGES
- The Benefits and Drawbacks of Concession
The fundamental benefit of this form of oil and gas agreement or fiscal system is its simplicity. Negotiation is simpler in comparison to PSAs and risk service contracts. Simply expressed, a concession helps a state or mineral rights owner since the deal is simple.
Another benefit of a concession is that the lessee assumes all financial risks, including those associated with oil exploration. If it is not possible to identify the presence of a commercially viable oil or gas reserve, the lessee bears the majority of the financial burden.
However, there are certain unfavorable offshoots. One downside of concession is that it may be difficult for a lessor to find a business ready to offer exploration, extraction, and/or processing skills due to the high financial risks involved.
Another drawback is that concessions are viewed by nationalists as a type of Western exploitation and a relic of imperialism.
- Benefits and drawbacks of a production-sharing agreement
A production sharing agreement, like a concession, has the benefit of not requiring the lessor to make a considerable amount of investment. This also implies that a PSA might be harmful to a lessee. After all, the lessee bears all operational and financial risks under this sort of oil and gas deal.
Another advantage of PSA is resource nationalism. Because of its intrinsic pro-nationalism, sectors that reject significant foreign influence over an economy and control over important natural resources naturally support a production sharing agreement. The associated complexity of a PSA involving a state or mineral rights owner is one obvious drawback. The framework of this form of oil and gas deal is quite complicated, necessitating a high degree of discussion. A lessor must have access to financial and commercial experience, as well as legal, environmental, and technical knowledge.
- The Benefits and Drawbacks of Service Contracts
The main advantage of service contracts is absolute ownership of the property and oil or gas resources. This form of fiscal policy, like a PSA, encourages resource nationalism.
Service contracts, on the other hand, are not for everyone. The main downside of a pure service contract is that it exposes the state or mineral rights owner to significant operational and financial risks. A major downside of a risk service contract, on the other hand, is that the engaged oil firm or contractor bears all exploration costs. This means that if no oil or gas is discovered, the contractor is responsible for the costs.
A NOTE ON THE DIFFERENT KINDS OF LICENSING SYSTEMS OR FISCAL REGULATIONS
Remember that the sorts of oil and gas agreements discussed above between a government or state and an oil and gas business are sometimes known as licensing systems or fiscal regimes. In general, these systems or regimes are classified as either concessionary or contractual. Naturally, all concession agreements are classified as concessionary, whereas product sharing agreements or production sharing contracts, pure service contracts, and risk service contracts are classified as contractual.
