Examine and evaluate the key areas and features that governments should focus on during their negotiation process and in the drafting of contracts with the International Oil Companies.
This study focus on the discovery of oil as well as gas companies and understanding the technical, commercial as well as legal aspects as far as field development is concerned. Further, this study gave a detailed investigation of various negotiation issues and how it can be resolved with the help of lawyers for legal matters and professionals (Cramb, 2013). Various contracts are drafted so that the negotiation becomes easy and some of these are licensing, joint venture and service agreements. Several issues were faced by the government in order to select an eligible team for the purpose of negotiation.
The landowners who are affected in the indigenous communities mostly demand for compensation on the basis of usage as well as disturbance that was caused to their property. Oil companies are forced to make certain commitments to engage in domestic labor so as to solve the social issues. For the complex matters, experts are hired, engineer for the purpose of technical knowledge, and lawyer for the purpose of legal knowledge (Dale, Osegowitsch and Collinson, 2014). Most of the contract of oil companies has proved to be connected with the negotiation.
A negotiator who is efficient knows that every solution leads to an element and it is considered in a more focused way. There are further many issues that need proper attention and this includes exploration cost, as well as development in the market conditions. Time is an important factor that helps in achieving the return of a desired country. The economic as well as societal cost is kept lower so that it is minimized in order to view at the environmental damage caused to the organization. Therefore, it actually means the various political as well as corporate issues that need attention as such to eliminate the risk factors caused by the oil companies.
The government faces an issue on selecting an eligible team who can carry out the negotiation issues effectively. In order to select the desired team, it is first essential to understand the basic demands that are required in the job. Negotiation is that issue that actually hosts the various elements in order to come up with corporate strategy (Habiger and Beroza, 2015). The negotiable factors include compensation that is demanded in the creation of an effective plan. On the other hand, non negotiable factors include regulatory matters that directly concern the investors as far as oil companies are concerned.
It is often noticed that investors believes in legal stability so as to avoid the political issues, societal issues in order to handle the resources effectively. Conflict as well as development challenges are taken into consideration so as to avoid that will help in prevailing the natural resources for the same. Profit maximization is the only motive of all oil companies that operates in most of the zones of conflict, believes in preparation of skilled as well as financed based negotiations. It is often noticed that stability occurs when government is able to compensate regarding any laws, rules as well as regulation on the basis of overall nation. Another issues that need to be resolved is the conflict between the public as well as private in specified oil contract that includes instability of the business enterprise.
As far as oil contract negotiation is concerned, negotiations are completely dependent on time that includes current market situations (Jayachandran et al. 2013). Certain expectations should find ways in the contract because it will help in anticipating the oil price on the basis of change in demand. For instance, the Norway government took initiative in order to entice the oil companies with a desirable tax regime that includes ten percent of royalty as well as license fee. Further, there was no mortgage allowed by the Norway government for the sake of company’s future, rather it got double the rate in royalty with eighteen percent in three years of time frame. It is therefore, not possible to implement any plans without prior permission from the government, so the rules that are needed to be followed often get delayed because of the time constraints. Professional lawyers are hired so that they can solve the negotiation issues and come up with innovative plans that can help the oil companies to achieve success in the near future.
Transparency helps in achieving overall public acceptance as far as contract is concerned. It helps in allowing the civil society to form the informal mechanism to have a check on the balances with the formal mechanism (Kelland, 2014). Transparency proves to be only way that can help to dispel at the greed as well as corruption level related to the oil contracts. Transparency is not a revolutionary concept; rather it is more risky than, as well as it has a steady acceptance of relevant principles. Transparency helps to prevent the officials such as government in order to agree the terms that can politically accept the issues, and will not be subject to criticism of any attack.
The government generally finds difficulty to select the contractual system that basically helps in particular license agreement, joint venture, and service agreement. Each agreement includes number of pros and cons and these are explained below with proper justification:
Agreements on licensing helps or grants the oil companies to sell, develop, explore as well as export the extraction of oil in a particular area (Killing, 2012). It has made the company to receive the exclusive development as well as rights on production for a specified period of time frame. Basically, licenses are considered to be risk free for the government and it is a serious limitation in the case of expense on the basis of time. In case of bidding process, it does not majorly accept the technical competent as far as bidder is concerned. One of the disadvantages of licenses is that it gives rise to insufficient knowledge regarding the concession area. Companies are responsible to take an account of calculated risk in order to bid the price that will be taken as conservative way with the specific amount offerings.
Agreement on production sharing- This agreement includes to recognize the ownership of the concerned oil rest that will affect the citizens of the country, rather the private parties. The host government are responsible to share the profits, but Production sharing agreement further focus more on the finding the linkage with the government to determine to involve in profit making (Klotz and Bolino, 2013). This will help in enforcement of various regulations that will have a positive impact on the environment. PSA (Production Sharing Agreement) have successfully provided the oil companies with a voice that helps in regulatory enforcement on the basis of provisions on contractual issues.
Joint ventures take place if two parties are willing to undertake business practices and share the profits in equal ratios. If there is lack in adequate laws by the host countries, then negotiation can be even more intense (Kumar and Rabinovitch, 2013). Joint Venture can help in transfer of skills, technology, as well as expertise to the respective host country. It basically require operation allocation, management of financial risk, and taking adequate responsibilities that will help the government to participate in the exploitation of natural resources.
Service agreements- This agreements basically are employed that provides presence in providing payments for different types of tasks as well as services. The contractor mainly receives payment in fixed manner that actually is independent on the basis of oil price. The decisions of the management are basically present in the hands of the government.
It is important to separate the negotiable from non negotiable issues as negotiation is considered to be an integral part within the process of most of the oil agreements (Leone and Reichstein, 2012). If there is no proper division of relevant issues, then it will pose difficulty in horse trading that takes place in seeking low compensation in order to maintain state in return. Strict rule are enforced so that the separation can be effectively achieved that will include the environmental standards. A flexible contract will help in the development of system that will include stability clause.
Contracts of oil are basically business custom that includes tradition as well as private documents. It can be noticed that the oil contracts that are with government are not traditionally involved in public instruments. Rather, it takes place with the enactment of laws pertaining to the negotiable issues (Mitchell and Mitchell, 2014). If there is lack of transparency as well as availability, then it is difficult to judge the fairness of a nation related to objectivity. The negotiator, here, has to rely on his experience, judgment that may be lacking, if incomplete information is provided to them. A benchmark can be set by the economist that helps in understanding the position of the negotiator that further includes oil production at national as well as export data made available for future references.
There is extensive negotiation that takes place in the provision act, irrespective of any contract form that is selected (Paik, 2012). The most important concept in the contract is basically the compensation that is to be received by viewing at the factors by the government. The contract clauses include those issues that are related to compensation, and these are oil prices, tax regime details, plans on development and the other costs and expenses.
Oil price- Compensation on host government is in the form of taxes, arrangements in profit sharing, royalties, as well as agreement on contractual issues that basically affect the selling pattern of oil prices of a company. But the main challenge is to apply for specific objective at considerable price (Pillar, 2014). The government should never encourage or accept price that are paid in between two or more related companies as the prices are determined by manager of the company on an internal basis and this will not be able to reflect at the market rates in the current scenario.
Costs, expenses and taxation- a host government is liable to receive a percentage amount of compensation that does not include royalties, and are basically shows a decrease curve as far as expenses are concerned by the relevant oil company. In a fast growing nation, it can be noticed that skilled accountants are lacking that can handle the tax system in an effective manner and are good at number calculations.
Plans on development- The government faces a challenge to increase the need of rents in order to maximize in exploration as well as development that are essential in fields (Popli, Rodgers and Eveloy, 2013). If the government faces too high in the intake, then an oil company will not be able to continue in order to develop in a particular track. If the agreement is well structured, then it will be easy to provide for any of the losses or termination that will help in the development process.
Health and environment- The oil business is considered to be a dirty business because it directly affects the health of the workers as well as local communities that are directly having a relationship in the disputed oil industry (Ramos and Veiga, 2011). Environment is also affected by way of escaped gases, spills as well as explosions. It can be also stated that the oil companies do not hold any local legislation that directly impact the compliance cost. The workers should be provided special training on health and safety so that they do not get harmed while working in the organization. Special protection should be given like gloves, helmet so that they can protect themselves because getting into accident not only affects the workers but also the family at the same time. Oil and gas companies actually are a reason to pollute the environment because of the gas emissions from chimneys that directly harm the health of the local communities.
Stabilization- A specific stability law should be enforced that will include certainty of commitment as well as planning of different types of investment issues. The changes made annually as well as periodically in the tax rate can directly increase in the risk as well as uncertainty (Sigman et al. 2013). Still, most of the developing nations are facing an issue with the legislative as well as institutional system.
Social projects- Most of the oil companies sometimes have to undergo negotiation that they indulge in social projects so that they proved to be good citizen. The social projects includes, building of schools, hospitals, playgrounds. If this project is undertaken, then it will be a reason of public spirited as well as gaining an honorable position (Sun and Lee, 2013). The government should aim at maximizing the compensation, rather charity that will help in execution of oil contracts in an effective manner.
Oil contract parties- The oil companies mostly operate on the basis of special purpose that will include limited capitalization as well as no technical expertise is encouraged. Money as well as skills is usually present with the parent companies and other responsible business entities on the basis of various subsidiaries (Warneke et al. 2014). Therefore, if a contract on oil is not given the permission on subsidiary parent company, then there will be no protection for the parent company. There will be no varied assurance as well as performance will be curtailed that will affect the goodwill of the oil company as a whole.
Termination- The provision on termination includes the ultimate possibility on various development rights that will help in recognition of various rights. If the termination is proved to be ineffective, then the government can deny the provision of acting as a tool (Yusuf et al. 2014). This will ensure a direct compliance with the oil contract as because there may be repeated failure with the developmental issues for specified period of time.
With the increase in the global competition, acquisition of energy resources are controlled that mainly includes oil companies. There is no way that the oil producing nations can determine as they are treated fairly or not. If the oil companies make ways in building the trust factor, then there is a possibility that they can get a fair treatment by the government. Mutual trust and understanding will help in building long term partnership that will become a competitive advantage top the specific oil company, and therefore they can be easily recognized as a multinational corporation. So, efforts must be made to play a fair game that will make them sustain in the market as well as get over all the negotiation as far as possible.
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