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Fundamental Legal Issues in the Oil and Gas Industry
IV: The Concession & Risk Service Contracts
After discussing the production sharing contract in the last
episode, this article reviews the other two commonly used
petroleum development regimes the concession and the risk
service contracts.
The Concession
The concession was the principal form of petroleum
development agreement and its first known form was
recorded in 1901 in Iran (the D’Arcy Concession).
Concessions are still widely used, albeit in a very different
form from the D’Arcy concession and others granted in the
periods following shortly afterwards. Commentators typically
classify the concession into two broad categories - the
traditional concession and the modern concession. The
former representing the D’Arcy type concessions and the
latter representing the newer concessions now in use. This
classification would also be used in this article.
The Traditional Concession
The traditional concession was characterised by the grant of
large tracts of land for (sometimes the whole of a country)
for long periods of time (ranging from 60 to 99 years) and
with virtually no control over the activities of the
concessionaire by the State. Additionally, the State’s primary
financial benefits came only in the form of royalties. Indeed
royalties were charged on the basis of a flat rate per ton of
the petroleum produced and was not indexed to the price of
the petroleum in the market. The concessionaires were not
obligated to drill in any of the land which had been conceded
to them nor were they required to relinquish the property in
the position that they did not undertake exploration or
drilling. These traditional concessions were entered into by a
number of countries. The D’Arcy concession in Iran granted
William D’Arcy the exclusive rights to search for and produce
oil over almost 500,000 square miles of Southern Iran for
sixty years. In exchange the Shah of Iran and his government
were given a “bonus” of US$100,000 and shares of an equal
value in D’Arcy’s oil company and a 16 per cent royalty.
Similarly, the ruler of Abu Dhabi granted a 75 year
concession for the whole of his country. In Nigeria, the Shell-
BP consortium was granted a concession covering the entire
mainland of Nigeria.
The traditional concession was a reflection of its time. Most
of the countries where these concessions were granted were
often under some form of colonisation or the other.
Additionally, the countries lacked the requisite legal
structures to govern such matters as petroleum operations.
This created an environment where the interests of the
countries were subordinated to those of the oil companies.
The Modern Concession
The modern concession arose as a result of greater
awareness from the oil producing countries of the injustices
engendered in the existing concession regimes. Beginning in
the fifties, a number of countries sought to renegotiate their
concession terms, introducing new elements, which
significantly altered the balance in the concession regime.
The major changes however, arose after the formation of the
Organisation of Petroleum Exporting Countries (“OPEC”). The
organization was established in 1960 and one of its main
aims was to “gain complete control of the hydrocarbon
industry in its sovereign territories.” In 1968 and 1971, OPEC
made resolutions XVI. 90 of 1968 and XXIV 135 of 1970.
These resolutions enjoined member states to procure
participation and control in the exploration, exploitation and
development of their petroleum resources. The formation of
OPEC was key to the strengthening of the oil producing
countries in their negotiations with the oil companies. The
states shared information about the nature of the
arrangements being offered by the oil companies as well as
the kinds of abuses being perpetrated by the companies
under the traditional concession system.
The renegotiated concessions now gave the State a greater
take in the oil produced in the territory, control over the
operations of the oil companies, covered smaller areas, were
granted for shorter periods, included requirements to
relinquish when oil and gas was not discovered or produced,
amongst other terms.
Nigeria’s OML as a Modern Concession
The Oil Mining Lease (“OML”) provided for under the
Petroleum Act of 1969, particularly as it operates under the
participating joint venture (“PJV”) structure is an example of
a modern concession. Unlike the concession initially granted
to the Shell-BP consortium, under the provisions of the law
the area which an OML may cover is limited to ***. The
Petroleum Act also limits the term of an OML to twenty years.
The Act however provides that this term may be renewed.
The Act also requires that one-half of the area of the lease
must be relinquished ten years after the grant of an oil
mining lease.
The Risk Service Contract
The risk service contract (“RSC”) is in many ways similar to
the PSC. Under the RSC arrangement, the National Oil
Company (“NOC”) holds the right to produce, whilst the
multinational company acts as a contractor. Similar to the
PSC, the contractor provides the funding and technical
expertise required to explore and exploit the oil. In return,
the contractor is reimbursed from the revenue derived from
the sale of crude oil produced from the field. Unlike the PSC,
the contractor is paid in cash, and does not have title to the
oil produced. The contractor may however be granted an
option to buy back the crude oil produced from the
concession, as in the Nigerian RSCs.
In the 1970s NNPC entered into RSCs with three companies –
Agip Energy and Natural Resources Limited, Elf Aquitaine
Nigeria Services Limited and Nigus Petroleum. Recently,
NPDC entered into such a contract with Agip Energy and
Natural Resources Limited.
Concluding Remarks
Whilst the concession, PSC and RSC, differ in form, as a
matter of substance, these petroleum development
contractual regimes may be used to achieve the same ends.
Indeed certain terms have now become commonplace in the
industry and are utilised across the different contractual
structures. These common terms form the subject of the next
article.
Adeoye Adefulu holds a Ph.D in oil and gas industry reform
from the Centre for Energy, Petroleum and Mineral Law &
Policy, University of Dundee. He is a partner in the law firm
of Odujinrin & Adefulues t 1972 .
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