Oil And Gas Law/ State Control

Oil and Gas/State Control

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INTRODUCTION

Oil and gas activities operate within a highly complex frame as negotiations obligatorily have to take place between the State and privately owned companies. These negotiations tend to harmonise both parties' objectives since in most circumstances the successful outcome of an envisaged petroleum exploration and production agreement, will generate revenue for the State to the same extent as commercial income would to the private company.

Nevertheless, as the concerned parties may have different standpoints in particular circumstances given that the States' interests will not necessarily align with the aims of the private sector in every case, it is essential to the maximisation of oil recovery and consequently for the obtaining of the highest possible income to the State, to set up a body of terms that will underpin in detail the relationship between the mentioned parties and the way it will be managed and legally governed.

Within this setting, arrangements between the State party and the private sector are generally achieved through the utilisation of either an exclusive license granted by the pertaining State's authority, which is the customary arrangement in developed countries such as the United Kingdom, or the negotiation of a contract governed by the rules of private law, specifically the Production Sharing Agreement, (hereinafter PSA) which has been adopted by most developing countries, mainly after having developed its oil industry within the framework of a license system.1

As is further discussed below, in most circumstances the particular model that each State adopts will depend on political matters, organising therefore the corresponding legislation to support the method through which the oil industry operations will be conducted, especially in regard to the relation between public and private interests.

1 See: Taverne, Bernard, “Production Sharing Agreements in Principle and in Practice", in M.R. David (editor), Upstream Oil and Gas Agreements, Page 48, for a wider approach of the states that have shifted into a PSA.

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This essay will cover the differences and similarities, observed between the two mentioned types of arrangement, based on the issue designated at hand, which reads: “From a legal point of view there is nothing to distinguish a Production Sharing Agreement from a petroleum license – any difference between them is visible only from the perspective of politics", albeit not only from the standpoint of the United Kingdom legal background, but also from an alternative legal approach, namely, the Civil Law system, referring, in respect to the latter, to the French administrative law, given that fundamental differences can be highlighted within the frame of each particular system.

UNITED KINGDOM LEGAL SYSTEM APPROACH

(COMMON LAW APPROACH)

A license is a permission authorising an activity, the conduct of which would otherwise be unlawful.2 The aforesaid concept, be it in the Common Law setting or be it in the Civil Law setting, contains a general descri ption common to both systems in relation to the nature of the legal institution of the license, albeit in the particular field of oil and gas industry and its legal regulation, it reaches a superior level of complexity as the license comprises countless parameters that regulate, inter alia, from the property of the oil once extracted, to the subsequent taxation and royalty scheme.

That said, and within the boundaries of the common law setting, the many facets of the issue to be dealt with, have to be subsumed in a detailed legal instrument, which in the case of the United Kingdom Continental Shelf, as representative of the vast majority of oil fields therein, is comprised within a both legislative and administrative scheme. The pertaining legislative component comes from the model clauses laid down through a parliamentary Act, namely the � PETROLEUM ACT", specifically its schedule section, which establishes “model clauses for seaward area production licenses". Subsequently, the license as such will be issued by the executive through an administrative provision, based on the above mentioned model clauses.

2Concept from: Greg Gordon, “Petroleum Licensing" in Gordon and Paterson (eds) Oil and Gas Law- Current Practice and Emerging Trends, Dundee University Press, 2007, Chapter 3, Page 29.

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In the light of the foregoing, in administrative law, the powers of the Administration may generally be divided into three clearly distinguished types, judicial, quasi-judicial, and administrative (or executive)3, the latter being the one through which the Administration exercises its discretionary powers in order to determine to whom, and under what circumstances, a license will be granted. Therefore, any oil and/or gas exploration and/or production license granted by the State as the legitimate owner of the natural resources in situ to a private company will be issued through an administrative provision governed by the rules of public law.

On the other hand, and still within the scope of common law, a PSA, being a government contract, should be subject to the ordinary law of the land, both in respect of contracts made with governmental bodies generally, and in respect of contracts made with central government (the Crown) in particular4.

In accordance to the above mentioned, licenses and PSA's have an utterly different legal basis given that as any other contract, the latter will be governed by the rules of private law, in other words, the contracts of public authorities are in general subject to the same law that governs contracts between private persons. There is no separate body of law governing administrative contracts, as there is in France5, that is to say that theoretically there is a fundamental distinction between the legal frame in which a license is granted and a PSA is attained, setting out a remarkable difference not only in the manner through which the mentioned arrangements are negotiated and finalised, but also in terms of government's liability and the possible legal actions thereof, given that depending on whether a contract is allegedly breached or a license's provision is overlooked, public law actions or private law actions will be undertaken by their

3 Classification made by: JAG Griffith and H Street, in “The Principles of Administrative Law", Pitman Publishing, Fifth Edition, Chapter 4, Page 140.

4 Cane, Peter, in “An Introduction to Administrative Law", Tony Honore and Joseph Raz (eds), Clarendon Press, Oxford 1986, Chapter 16 “Government Contracts", Page 215.

5 A.W. Bradley & K.D. Ewing, in “Constitutional and Administrative Law", Chapter 31 “Liability of public authorities and the Crown", Addison Wesley Longman (Editor), Twelfth Edition, 1997, Page 844.

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respective applicants, through different procedural paths, this being the only relevant practical difference between the legal instruments in analysis.

Nonetheless, another set of differences can be pointed out between the nature of a license and a PSA, based on the fact that regularly, the granting of an oil and/or gas license, conveys the absolute property of oil once extracted, into the hands of the licensee, and the income of the State will be generated by the revenue obtained trough accumulation of taxes and royalty.

The above mentioned, could be considered as a major difference between a oil license and a PSA, although strictly speaking, the aforesaid are standard elements of a license, as long as it adheres to its customary structure. However, no statutory provision precludes a wider range of negotiation whereby oil property, once extracted, can be dealt with in a different way and included in the license's terms. Therefore, there is not a legal prohibition about entering into sharing oil production terms within the realm of a license.

Ultimately, notwithstanding the different legal basis regarding each particular agreement, the adoption of one of them in particular, will be a mere political decision, based on the special interests of each State.

CONCLUSION

In sum, it can be highlighted that, from a strictly legal point of view, within the setting of the common law, that PSA and Licenses stem out of different legal spectra, namely, private law in the former case and public law in the latter. The aforesaid, despite of its essentially substantive basis, will not have consequences in a purely formal sense, but also in a practical setting, where complaints in each particular case, will only be able to be filed in its own adequate scope, and therefore, through its own distinctive procedure.

Nonetheless, from a different legal background, diverse conclusions may be reached. As it will be discussed below, the civil law scope may provide a different approach to the subject referred herein.

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FRENCH LEGAL SYSTEM APPROACH

(CIVIL LAW APPROACH)

Droit administrative (French administrative law) is a primary source of the legal systems in Italy, Greece, Netherlands, Belgium, Spain, Portugal and Luxembourg, where a separate administrative justice and administrative law system have been established not far removed from the French system6, hence the civil law standpoint on the subject referred herein, will lay upon French administrative law basis, as they will cover the basic foundations of the continental administrative law.

In contrast to Common Law, Civil Law's approach comprises not only one, but two different possible scenarios where government's contracts can be dealt with in different manners. French Administration can enter into two diverse types of contracts, namely administrative contracts (contrats administratifs) and private law contracts (contrats de droit prive)7, the main difference between them being, the particular relationship between the parties, given that administrative contracts' clauses are not established between equals, but unequal parties, exercising the State its regulatory powers.

One of the main features of the administrative contract, is the presence of 'clauses exorbitantes de droit commun', or 'exorbitant clauses', which enable the State to establish noticeable unequal terms, that may allow the government inter alia to unilaterally terminate the contract, to determine the creation and conduction of the work scheme, to impose new operators, and so forth. Exorbitant clauses have been used as a tool to ensure the State's supremacy in a unequal contract, whose subject can only address the provision of public services, based on which, the Administration claims legitimacy to oblige a private party to enter into this type of contract.

6 Neville Brown, L & Bell S. Jhon, “The Influence of Droit Administratif Outside France" in “French Administrative Law", Fourth Edition, Clarendon Press, Oxford, 1993, Page 252.

7 Neville Brown, L & Bell S. Jhon, in“French Administrative Law", Fourth Edition, Clarendon Press, Oxford, 1993, Page 192.

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As it was mentioned above, the licensing regime observes no difference in respect to the legal system it rests upon, be it Common Law or Civil Law, whilst in respect to the PSA, a substantial difference emerges when it comes to the civil law system. On the other hand, within the common law system, an arrangement between the State party and a private venture can only be achieved through one out of two paths, whether it sits upon the regulatory frame, therefore becoming a License, or it can be established as a PSA, becoming a contract and thus falling under the realm of the private law.

CONCLUSION

The administrative law under the civil law system permits the co-existence of two types of contracts which the Administration can enter to, namely the “administrative contract" which is an unequal agreement whereby the State exercises its discretional powers, and whose breach is subjected to the rules of public law and the civil contract, in which the State party is considered on equal footing to the private venture, and which is enforced by private law.

A License is by nature an administrative contract but within the civil law spectrum a PSA is also an administrative contract. Both are then regulated by administrative law their breach must be filed before administrative tribunals, according to the principles of public law. Therefore, in a civil law system, there is no legal argument to differentiate a License from a PSA. Ultimately, the final decision whether to enter into one or another, will only depend upon political matters, such as a sense of sovereignty, or absolute control of natural resources from the standpoint of the local constituency, and the capability to negotiate in an international setting, where, through the control of oil reservoirs, a powerful position can be achieved in the energy security scope worldwide.

LENGTH: ONE THOUSAND NINE HUNDRED AND NINETY TWO (1992) WORDS.

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BIBLIOGRAPHY

1. Bradley A.W. & Ewing K.D., in “Constitutional and Administrative Law", Chapter 31 “Liability of public authorities and the Crown", Addison Wesley Longman (Editor), Twelfth Edition, 1997.

2. Cane, Peter, in “An Introduction to Administrative Law", Tony Honore and Joseph Raz (eds). Clarendon Press, Oxford 1986. Chapter 16 “Government Contracts".

3. Gordon, Greg “Petroleum Licensing" in Gordon and Paterson (eds) Oil and Gas Law- Current Practice and Emerging Trends, Dundee University Press, 2007, Chapter 3.

4. Griffith JAG and Street H, in “The Principles of Administrative Law", Pitman Publishing, Fifth Edition.

5. Neville Brown, L & Bell S. Jhon, in“French Administrative Law", Fourth Edition, Clarendon Press, Oxford. 1993.

6. Taverne, Bernard, “Production Sharing Agreements in Principle and in Practice", in M.R. David (editor), Upstream Oil and Gas Agreements.

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