CRITICALLY DISCUSS HOW TO CHOOSE BETWEEN A SERVICE CONTRACT AND A JOINT VENTURE FOR A 50-250 MILLION

DOLLAR OIL AND GAS TRANSACTION. CITE EXAMPLES FROM AFRICA AND ASIA.

By:Emilios FrangosStephanie PolykarpouTope AjaoYasmin Ben UmarYiannis Philotheou

INTRODUCTION:• Joint Ventures and Service Contracts have both been chosen in the past for different

reasons in different countries.

• When deciding on what contract is most appropriate to use a number of factors have to be determined in order to make sure that the correct and most appropriate contract for the circumstances is applied. In order to achieve this a number of factors have to be examined. The following points are to be discussed in order to draw a conclusion during this presentation.

• How big is the transaction that is to be discussed?

• What is a Joint Venture

• What is a Service Contract

• What are the advantages and disadvantages of each.

• Examples of application of each individual contract in different countries.

JOINT VENTURES: THE DEVELOPEMENT

• It developed when the Concession agreement disappeared.

• As a result of the Host countries not having an active role in their resources.

• The formation of OPEC

• UN resolution from 1952to 1966 aided its development(Principle of Permanent Sovereignty)

PHASES OF A JOINT VENTURE

• Planning : this defines commercial rationale and identifies partners.

• Formation :here legal and commercial structures are built.

• Operation: joint venture are operated and managed on an ongoing basis.

• Dissolution: it involves winding up of JV.

LEGAL VEHICLES FOR FORMING A JOINT VENTURE:

• Contractual Joint Venture: here no separate legal entity is formed and it purely a contract.

• Joint Venture Corporation: here legal affairs is incorporated. JV governed by corporation law of relevant state.

• Joint Venture Partnership: governed by partnership laws of relevant state. It can either be written or oral but usually written in the oil and gas industry.

ADVANTAGES OF JVS ON PART OF GOVERNMENT.

• It is not alone in the decision making and responsibility for project.

• It counts on the expertise of a Major Oil Company.

• Shares profits and remunerations like taxes and royalties

DISADVANTAGES FOR GOVERNMENT.

• Risks and cost are also shared.

• Responsibility comes with potential liability including environmental damage.

• It takes a long time to negotiate.

• It requires more legal advice from exerts in petroleum contracts which will cost more for both parties.

SERVICE CONTRACTS:

• Private company perform services for the government

• Contractor provides all capital

• Is exploration is successful the costs are recovered

• All production belongs to the government

• Contractor bears all the risks

SERVICE CONTRACTS CONTINUED.• Types of Service Contracts:

• Risk service contracts

• Pure service contracts

• Technical assistance contracts

• Why service contracts?

• Government has greater control over the project

• The contracting company does not share any profit oil

• For small reserves.

EXAMPLES OF RISK SERVICE CONTRACTS IN ASIA AND AFRICA

EXAMPLES OF SERVICE CONTRACTS IN ASIA:

• Coastal Energy Company committed itself to a Risk Service Contract in Malaysia with respect to 3 marginal fields involving 320million dollars for 3years

• See Coastal Energy Company presentation: Malaysian Risk Service Contracts(July 2012)

• (http://www.coastalenergy.com/operations/offshore-malaysia.)

EXAMPLES OF SERVICE CONTRACTS IN AFRICA

• Agip committed itself to service contract in Agbara field and Okono/okpoho fields in Nigeria

• Nigeria Field Trip: Claudio Descalzi Senior Vice President for Operations Italy, Africa and Middle East E&P Division (October 2002)

EXAMPLES OF SERVICE CONTRACTS IN ASIA

• Risk service contracts are called buyback contracts in Iran.

• In march 1995, a buyback contract was awarded to Conoco for the development of the offshore Sirri A and E fields.

• HOW COMPETITIVE IS THE IRANIAN BUY-BACK CONTRACTS IN COMPARISON TO CONTRACTUAL PRODUCTION SHARING FISCAL SYSTEMS? HOOMAN FARNEJAD∗

• hfarnejad@marathonoil.com

CONCLUSION:• As International Oil Company:

• Service contracts seem to be more appropriate for the given circumstances

• This has been decided on the following factors:

• That setting up a joint venture would be way to expensive for such a relatively small deal. Cost of expert legal advice and time spent between IOCs to know each other would make service contracts a more easily acceptable choice.

• Basically the cost involved in a modern day oil and gas joint venture deal surpasses 100million dollars. For example, Shell Nigeria (shell petroleum development company) from the year 2006 – 2010 has contributed at least 31billion dollars in respect to its JV agreement with Nigeria.

As a Host Country

• In recent times, a service contract can easily apply to such a transaction involving such an amount. As usual, a host country would still be happy to see the IOCs bear all the risk involved.

REFERENCES

Contracting and regulatory issues in the oil and gas and metallic minerals industries

• Michael Likosky

• http://archive.unctad.org/en/docs/diaeiia20097a1_en.pdf

• The ABCs of Petroleum Contracts: License-Concession Agreements, Joint Ventures, and Production-sharing Agreements

• Jenik Radon

• http://openoil.net/wp/wp-content/uploads/2011/12/Chapter-3-reading-material1.pdf

• Joint Venture Contracts (JVCs) among Current Negotiated Petroleum Contracts: A Literature Review of JVCs Development, Concept and Elements by Talal Al Emadi

• https://www.law.georgetown.edu/academics/law-journals/gjil/upload/6-al-emadiFIXED.pdf.