CRITICALLY DISCUSS HOW TO CHOOSE BETWEEN A SERVICE CONTRACT AND A JOINT VENTURE FOR A 50-250 MILLIONDOLLAR OIL AND GAS TRANSACTION. CITE EXAMPLES FROM AFRICA AND ASIA. By: Emilios Frangos Stephanie Polykarpou Tope Ajao Yasmin Ben Umar Yiannis 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 JOINTVENTURE:• 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 OFGOVERNMENT.• 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 INASIA 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/o perations/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 ∗• email@example.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.
REFERENCESContracting 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.