OGEL Special Issue: "Host Government Contracts in the Upstream Oil and Gas Sector"
Article from: OGEL 4 (2010), in Editorial
In recent years, the oil and gas industry has seen both a surge in resource nationalism as well as a significant shift in the sophistication of host government granting instruments. While recently, the tide of resource nationalism seems to have stemmed, with various governments trying to incentivize international investment, particularly to develop unconventional or challenging reserves, the host government share of profits from such operations continues to rise. Since the spike of crude oil prices in the summer of 2008, host governments around the world have been working to claim a greater percentage of perceived windfall profits in exploration and production ("E&P") operations.
In light of new and developing mechanisms such as windfall profits taxes, compulsory service agreements and joint venture operations, increased use of price-linked fiscal terms as opposed to R-factor formulas, and limitations on reimbursement through cost oil and depreciation allowances, OGEL felt it was time to have an international survey of various fiscal regimes, including an effort to examine the current balance of power between international oil companies ("IOC"), national oil companies ("NOC") and host governments. This issue has endeavored to find experts not only drafting from an international perspective, but hopefully finding those elements within various host governments experiencing changes in their E&P regimes and host government contracting strategies to tell us their opinion from a domestic practitioner's point of view.
The work contained herein has been a joint effort between Steven P. Otillar and James Sonnier, together with a tremendous amount of support from both the OGEL publisher and OGEL Editor in Chief Kim Talus. We sincerely thank each and every one of the authors for their contributions to this issue, and we trust that it will be of interest to OGEL readers.
We believe that the over-arching trend which is demonstrated in the various articles contained herein is that host governments are increasingly becoming more sophisticated and, although the means and methods which they use to achieve greater revenues for the host government may vary, the common theme between virtually all developing nations is similar. Essentially, as crude oil prices increase, so will the amount of revenues that remain in a host country that are generated from E&P activities. In addition, there is another group of host governments such as Brazil, Indonesia, Venezuela and Mexico that are introducing new fiscal regimes and contracting modalities for the exploitation of hydrocarbons in their countries.
With the election of Dilma Rouseff in Brazil on October 31, 2010, it is anticipated that she will continue the Labor Party's efforts to introduce a production sharing contract regime for the massive pre-salt discoveries found offshore Rio de Janeiro and surrounding states. A new state controlled entity commonly known as Petrosal will be the chairman of each pre-salt operating committee, and it is intended to be an institution dedicated to managing the Brazilian government's participation in the pre-salt activities as well as serving as an engine for social and community development. The model is similar to that which is in place in Norway, however it will be on an unprecedented scale with massive implications for the future social welfare of the Brazilian population.
Meanwhile, Mexico is in the process of implementing a new model services contract in an effort to spur additional investment in the E&P sector. Years ago, Mexico realized the limitations of attracting foreign investment under their existing legal system and in 2008 they introduced several changes to the PEMEX law and related regulations. Finally, Mexico has developed a new model services agreement to implement the 2008 reforms, which is purportedly being approved as of the date of the publication of this special edition. Mexico hopes to generate the type of investment that has been obtained in Iraq for its service contract model. Such optimism is tempered by the well known fact that the risk profile in Mexico is significantly different from that which exists in Iraq, and the terms and conditions to be contained in the model agreement promulgated by PEMEX will likely determine the success or failure of the program to generate needed upstream investment in Mexico. The service contract model, with inherent flaws associated with difficulties in IOCs booking reserves under most securities exchange regulations, continues to grow in popularity in Latin America, and has been introduced in several countries in the region.
In addition to articles on new contracting modalities and reforms, you will find an interesting analysis of the future potential of unconventional gas development in Poland. There has been a sea change in the United States, with wet and dry shale plays completely changing almost all fundamental energy supply estimates for North America. There has been an enormous shift of investment in the US shale plays, with many transactions being seen as training grounds to expand the use of horizontal drilling and fraccing technologies in Asia and Europe.
With the development of new E&P regimes, this special edition of OGEL also includes some interesting analyses of developments in nascent oil and gas industries in Africa and Ghana and Uganda in particular.
Lastly, there are several articles on a more general or global basis, focusing on host government contract terms, including stabilization clauses and environmental liability, as well as an analysis of various fiscal systems by Daniel and David Johnston. We hope that you find this special edition of OGEL not only interesting from an intellectual standpoint, but also from a practical standpoint of understanding how fiscal regimes and host government granting instruments are developing in the current environment. Host governments continue to balance the need to spur new and additional international investment to promote not only E&P operations, but also to develop stronger internal systems and local industries in an effort to strengthen domestic markets and create opportunities for a more educated and sophisticated local work force.
Steven P. Otillar,
James C. Sonnier,