Research Paper: Risk Allocated in Oil

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¶ … risk allocated in oil and gas contracts?

Petroleum agreements

Joint Venture Agreements (JV)

Contractual indemnity

Indemnity clauses in Oil and gas contracts

The legal interpretation of the indemnity clauses

Relationship between Operator and Contractor

Rights and obligations under the contract

Exclusion clauses

Limitation on liability clauses

Willful misconduct and gross misconduct

Fiduciary relationship: utmost good faith

Types of risks in Joint Ventures

Investment and business risks

Environmental risks

Deficit of human capital

The worsening of fiscal terms

Control of costs

The competition for Reserves

Risk allocation

The allocation of risks in oil and gas contract is a complicated legal process that has different approaches. The preferred methods all have different legal interpretations. In this paper, we analyze the methods and process of allocating risks in oil and gas contracts from the legal perspective. We study the different petroleum agreements with illustrations using relevant court cases. A great deal of attention is given to the relationship that exists between the operator and the contractor.

Introduction

The oil and gas industry is very unique as a result of many aspects of the industry such as its capital intensiveness, volatility of the market price, the geographic scope of its assets and operations, the nature of exploration which is high risk, exploitation of natural resources, environmental issues, technological requirements, brand promotion as well as protection matters, political sensitivity and the scale as well as the diversity of the base of employees among other factors may result in high risk levels for the local an international oil and gas corporations (Lovell,2008).The reality of the matter is that the only way of mitigating the risks is by avoiding engagement in activities that involve the handling of hazardous materials. We do however know that the use of technology in the industry can help in bringing forth great benefits to the whole society. This is because such technologies help in minimizing of risks while appreciating the fact that it is never possible to get rid of all risks

The ultimate goal of any firm that operates an installation for oil and gas is to ensure that they reap maximum profits through the quick and efficient techniques of exploring hydrocarbons. Other than being an extremely time consuming process, the determination of liability as well as the awarding of cost to the parties that are injured is normally a very burdensome process that makes the industry to be characterized by heavy sub-contracting. The resulting risk is therefore managed and effectively controlled whenever the perceived risk has explicitly been allocated to at least one or more parties (Van Staveren, 2006).The amount of money that is spent in the acquisition of multiple insurance policies is appropriately considered as an extra expense. This is coupled with the issuing of incentives under the contractual agreement so as to modify the usual approach under common law to the process of risk management which is duly considered an attractive alternative. A very conspicuous and yet recent example of the case of agreements in the petroleum industry involved BP and Anadarko Petroleum Corp. The Gulf of Mexico oil spill which made BP to come up with a victim compensation fund worth a whooping $20 billion in order to assist Gulf of Mexico resident who lost their source of income due to the spill made it apparent that disputes can arise in joint operating agreements (JOAs). In this scenario, BP and Anadarko could not resolve their issues on the compensation. Anadarko refused to honor its part of the bargain and this resulted in a dispute. Arbitration was pointed out as the best way of solving the dispute as opposed to court (Oil Spill News, 2010; Al, 2010). However BP was involved in another legal battle with its leaking well partners on who is to share the burden created by the oil spill cleanup process.

Petroleum agreements

There are various types of international petroleum agreements. The primary types include; concession agreements, service contracts, production sharing, contracts and joint venture agreements as well hybrids of these IPAs. Other than the political risks involved, the international petroleum usually involves very huge long-term investments that have equally large starting capital. Other risks involved are related to instability both economic and geographical. The long-term uncertainty is further compounded by managerial and technical risks (Rappaport, 2006).Petroleum products are universal products which are needed by all the nations in the world, this is because the products are very important of machines and vehicles. Petroleum is said to be as important as electricity. In most instances the expenses of mining coal which is the petroleum's raw material has become very expensive and many countries with coal have not been able to excavate it by themselves. It therefore implies that in the excavation of coal, many companies do come together with the aim of mining it. In a normal life scenario, it is advisable that when two or more people come together, they must have common goal and norms on how to achieve the goal. It is also advisable that each party should be given a part to play in the group.

In cases where two or more companies come together, the issue of legal obligation and contracts are always introduced. In this case the concerned companies come to mutual agreement on which company is responsible for undertaking which activity. Over the years, international petroleum agreements have evolved considerably in response to a variety of economic, social, environmental and geo-logical factors.For that reasons there are several contracts guiding petroleum agreements including; Concession Agreements (CA), Service Contracts (SC), Joint Venture Agreements (JV), and Production Sharing Agreement (PSA). Concession agreement is where the foreign oil companies were given full ownership of oil and gas and they controlled operations and associated risks by themselves. This form of contract was abolished in early 1940s to pave way for the other three types of agreements which included the task of giving the host government a role to play in the petroleum mining. Joint Venture include an agreement between the Host country and the oil company coming to mutual agreement on how they are going to share the benefits of the products .

Joint Venture Agreements (JV)

Joint venture is a term used in the description of an activity that is carried out by two or more bodies/entities in which the member entities each have certain degree of control. This allows the two parties to participate for the benefits of the venture. Nicola (2010) pointed out that the recent economic downturn has caused a number of joint ventures (JVs ) being announced to the general market by dropping by an approximated 50% in the initial half of the year 2009.The relationship of the contractor and the operator in a joint venture is very delicate and yet clearly defined. The concept of joint venture in the oil and gas industry entails the act of one person undertaking the interest of the other party .A judicial duty easily arises.A joint venture is formed in order to execute a single transaction

. The principle that governs the rights as well as the liabilities of the contractor and the operator are similar to the ones of partnership. The most important characteristic of any given joint venture is that fiduciary relationship based on trust as well as confidence should reign. This implies that each of the concerned party has the right and authority to demand as well as expect a full, open, fair and honest information disclosure on all matters affecting the relationship.

Contractual indemnity

Even though these forms on risk management techniques are not unique to the oil and gas industries, one of the contacting practices which have been adopted in order to regulate and manage the physical risks is the indemnity clause (Gordon, 2006). An indemnity is a form of agreement in which one party agrees to secure the other party against a loss which is anticipated or a damage by means of payment that is made to the other party that has the benefits of the party which is indemnified in the actual event that the party which is indemnified does suffer from a loss that was earlier in agreed by the indemnifier (Lectlaw, 2011).

There are two main types of indemnities; the simple one and the mutual one. The simple one is akin do f a one way traffic in which the burden does fall on the indemnifying party in order to cover for the indemnified party suffers a loss that is described by their agreement. On the contrary, the mutual indemnity which can also be referred to as the knock for knock indemnity has a circular configuration. In this scenario, both the parties do indemnify each other. The existing difference however is that the security used is in relation to different losses which are otherwise related loss species.

Indemnity clauses in Oil and gas contracts

The indemnity clauses are very relevant to the different oil and gas contracts. This is because each and every business does possess the anticipated risks and… [END OF PREVIEW]

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