Energy  

Law
Course  1:  Introduction  to  Energy  
Law
General  Introduction
 What  is  Energy  Law  or  Oil  &  Gas  Law?

Energy Law or Oil & Gas Law refers to the legal regimes adopted by
governments for oil and gas exploration and production (E&P), including the
various types of arrangements that allow the parties/stakeholders to create
legally binding rights and obligations between them.
 Who  are  the  main  players  in  the  Oil  and  Gas  industry?

• The State:  the  owner  of  the  natural  resources;

• The Government:  the  administrator  or  regulator  of  the  oil  and  gas  industry;  
• The  NOC:  the  advisor,  promoter,  main  License  holder/  JV  Partner;  
• The  IOC:  the  investors/licensee/contractor/service  provider/technical  advisor.

CAN  YOU  LIST  SOME  EXAMPLES  OF  IOCS  AND  NOCS?

 Who  are  the  main  players  in  the  Oil  and  Gas  industry?
Due to the highly technical and capital intensive nature of the oil and gas industry, the
active role in the E&P process is usually left with the International Oil Companies
(IOCs) leaving National Oil Companies (NOCs) to act as agent of the government.

Some of the benefits of Oil and Gas activities undertaken by IOCs in a certain country:
• Training and employment of nationals;
• Local business and investor opportunities;
• Technology transfer;
• Security of energy supplies;
• Local research and development opportunities;
• Importantly, a stream of government revenues.

However, some exceptions apply: in some countries where the NOCs are technically
and financially capable of carrying out E&P activities, IOCs are invited as contractors to
carry out particular services. In fact, some NOCs are also able to carry out E&P
activities outside their countries like for example Sinopec and Statoil. IOCs enter into
different contractual arrangements with other players in the industry but all their
activities and arrangements are governed and prepared according to the legal regime
of the host country, notably its petroleum law.
 What  are  the  main  phases  of  the  Oil  and  Gas  industry?

The Oil and Gas industry is generally divided into 3 major phases:

• The Upstream industry: The Exploration and Production industry which consist of
searching for potential underground or underwater crude oil and natural
gas fields, drilling of exploratory wells, and subsequently drilling and operating the
wells that recover and bring the crude oil and/or raw natural gas to the surface.

• The Midstream industry: This involves the transportation (by pipeline, rail, barge,
oil tanker or truck), storage, and wholesale marketing of crude or
refined petroleum products.

• The Downstream industry: the refining of petroleum crude oil and the processing
and purifying of raw natural gas, as well as the marketing and distribution of
products derived from crude oil and natural gas.

• Following the cessation of production and at the end life of the platforms and
installations, decommissioning occurs.
 Legal  regimes  in  the  Oil  and  Gas  Industry

Early contractual arrangements in the US and in Middle Eastern countries were very
similar, they provided for shallow inexpensive drilling over large areas for long periods
of time. These arrangements allowed for the dominance by the IOCs, notably by seven
powerful oil companies called the “seven sisters” through traditional leases and
concessions.

The seven sisters included:

• Standard Oil of Jersey (Esso then Exxon)
• Standard Oil of New York (Socony-­‐Vacum then Mobil)
• Standard Oil of California (Chevron)
• Texaco
• Gulf Oil (acquired by the Company later acquired by Chevron)
• Royal Dutch/Shell
• Anglo-­‐Persian Oil Company (became Anglo-­‐Iranian and now BP)

TO WATCH: The Secret of the Seven Sisters – Episodes on Al Jazeera:

http://www.aljazeera.com/programmes/specialseries/2013/04/201344105231487582
.html
In the year 1938, following the expropriation of the national oil industry and
banishment of all IOCs from Mexico, the dominance of IOCs in the industry was
slightly interrupted.

The major restructuring occurred during the 1970s when the IOCs agreed to amend
the original concessions to provide for greater host state participation through the
participation of NOCs. Today, most oil producing countries have NOCs that have
contractual relationships with IOCs mainly through modern concessions, production
sharing agreements (PSCs or PSAs) and service contracts.

Generally, the main purpose of any legal regime governing the oil and gas industry is
the following:

• To provide basic rules to facilitate the exploration and production operations in a

host country;
• To provide, amongst others, for an administrative body that will be responsible to
control the sector.
• To regulate industry operations and provide transparent rules for license holders;
• To define administrative, economic and fiscal guidelines;
• To define industry and government role and;
• To stimulate investments in the sector.
Ø A legal regime consists of a legal framework that is made up of a range of laws,
regulations and rules designed for the purpose of regulating exploration and
production operations under the jurisdiction of a host state.

Ø An important part of the legal framework governing a country’s oil and gas
industry is the contractual arrangement that will govern the relationship between
the IOC and the government or the NOC (as the case may be). Most governments
around the world have adopted three different types of petroleum arrangements:
Concessions, PSCs, and Service Contracts. The main purpose of these
arrangements is to capture the highest possible benefits from all phases of the
upstream operations (surveys, exploration, development and production of the oil
and gas resources in the country). A major issue for consideration by any
government, which has found commercial quantities of oil and gas is which
contractual arrangement to adopt in the development of its oil and gas sector.

We  will  study  these  agreements  in  detail  in  the  next  two  courses.  
Ø Early petroleum arrangements between IOCs and host governments consisted
mainly of traditional concessions which provided the State with limited power and
control over its natural resources. Host governments sought to regain their power
and increase their revenues from their oil and gas industry by implementing
alternative regulatory and contractual regimes. Some countries preferred
maintaining the concession system to which they introduced significant
amendments while other countries chose to switch into a contractual regime,
notably Production Sharing Agreements. The PSA has become one of the most
widely implemented petroleum arrangement governing the partnership between
IOCs and host governments.

Ø Applicable petroleum regimes determine whether and who and to what extent the
government would explore develop and produce oil and gas resources in its
jurisdiction, directly through operations of its NOC or through IOCs. An increasing
number of governments have developed a wide variety of arrangements in order
to seek the maximum benefit for the host State. Oil producing countries use one or
more combination of some of the three types of petroleum arrangements
mentioned above.
 Main  features  of  the  legal  framework  
The main elements of the framework include the petroleum law, the implementation
regulations and the model contract, which could be complimented with specific laws
such as petroleum taxation and also laws for health, safety and the environment.
An IOC wishing to explore and exploit oil and gas must have obtained, prior to such
activity, the necessary permissions and approvals from the State depending on the
legal framework governing the industry.

The main elements of the petroleum law are usually very broad and generic,
complimented by enabling regulations and a model contract that governs the
relationship between the IOC and the host government.
The key issues that are addressed in a typical petroleum law consist of:
• Ownership of the oil and gas resources.
• Role of the government
• Role of the NOC
• Application procedures for licenses/contracts
• Petroleum operations (permits, approvals etc.)
• Taxation of profits
• Environmental Health & Safety
• Dispute Resolution
• Applicable law for the contract.
 Ownership  of  the  Oil  and  Gas  Resources  

Ø One of the most important issues in Oil and Gas Law is the ownership of the oil
and gas resources. Most countries, through their Constitution or relevant
legislation, bestow exclusive ownership to the State (such as the case of Lebanon).
In this respect, all oil and gas resources found within a State’s territory, both
onshore and offshore, is exclusive property of the State.

Ø Therefore, any party wishing to explore and exploit those resources should apply
to the State for permission to do so (through a license or contract depending on
applicable laws and regulations). The extent and the nature of the permission
granted by the State to the requesting party is dependent on the degree of
involvement of the State that varies according to the Oil and Gas regime applicable
in the host country.

Ø The issue of ownership is based on the concept of sovereignty, which plays an

important part in the law and stems from the internationally recognized principle
of “Permanent sovereignty of the State over its natural resources”. Generally
speaking, the principle is the basis upon which States assert ownership and
jurisdiction or control over the resources and the exploitation of such resources
within their territorial boundaries. A State’s sovereignty is based on a proprietary
right over its territory and the right to exercise therein to the exclusion of any
other State, the function of a State.
 Ownership  of  the  Oil  and  Gas  Resources  

Ø The rights include the right to create rules of law by legislation or administrative
act and the right to enforce these laws in courts.

Ø Therefore, the sovereign rights of a State over its oil and gas resources include the
ownership of the resources and the jurisdiction or control over the activities to
exploit them.

Ø In general, a transfer of ownership of petroleum resources takes place from the

State as the owner to the licensee at the moment when the petroleum enters the
licensee’s well. However, following the extraction of the petroleum from the
reservoir, the ownership will depend entirely on the commercial arrangement
existing between the government and the oil company.
 The  main  Government  Objectives  for  Petroleum  Development  

Monetary  Objectives:

• Generating Revenues: Petroleum resources play a very important role to the

national economy of resource endowed countries since they are a major source of
revenue for such countries. Governments obtain this revenue by levying taxes on
oil companies or petroleum projects or by directly participating in petroleum
activity.

• Encouraging Foreign Investments: Given the high technical and financial

requirements of petroleum development, the governments invite IOCs to explore
the resources singularly or in partnership with the State. A special feature of the
petroleum industry is its high cost of capital. In general, States do not have
requisite capital to efficiently exploit these resources and therefore, they
encourage foreign investments into this industry.
 The  main  Government Objectives  for  Petroleum  Development  

Non-­‐Monetary  Objectives:

• Security of Resource Supply: Resource development helps Government to

safeguard and ensure the security of domestic supply of petroleum to its citizens,
thus reducing the uncertainties and costs of importing petroleum.

• Risk Sharing: A petroleum venture is a high-­‐risk venture. From the point of

exploration to post-­‐ production, one is faced with geological, technological, price
and market risks. It is only when the resource is exhausted that you know precisely
the contents of the reserve. Through petroleum development, Government shares
operational risks with private investors who are ready to take such risks provided
the reward is commensurate and hence decrease the risks it bears.

• Transfer of Know How: Typically, many Sates lack the technical skills, manpower
and experience to efficiently exploit petroleum resources. Hence, Government
aims to ensure that petroleum development provides an avenue for the transfer of
these capabilities so as to enable it gradually obtain more control and expertise
over time.
 The  main  Objectives  of  IOCs  for  Petroleum  Investment    

• To  generate  high  revenues  from  their  investments.  

• To  explore  and  produce  under  a  stable,  predictable  petroleum  regime  which  allows  
them  the  rights  both  to  “monetize”  their  profits  and  to  arbitrate  their  disputes,  if  
any,  with  the  host  country  in  a  neutral,  international  forum.  
Common  Issues  theories  in  the  Oil  
and  Gas  Industry  
 Resource  Nationalism  

• This is generally referred to as the “battle between national interest and foreign
influences”. For example nations wanting to make the most of their natural
endowment and impose maximum level of control over the activities in their oil
and gas industry, and IOCs wanting to make the most of their investments in the
industry.

• The State tries as much as possible to limit the operations of private IOCs and
assert a greater control over natural resource development. Resource nationalism
tends to assert the State's sovereign authority over the upstream (and often even
downstream) activities of IOCs in the petroleum industry.

• The issue of resource nationalism usually and mainly arises after the IOC has
injected its investment and subsequent oil discoveries are made. As a result of
commercial oil discovery in a State, the relative bargaining power shifts in favor of
the host government who then tries to increase its fiscal take by changing the
terms of the original contractual agreement. For example, Venezuela is generally
described as an unattractive investment destination but due to their large oil and
gas reserves along with massive offshore discoveries, IOCs flock there.
HOW  CAN  IOCS  OVERCOME  OR  AT  LEAST  MITIGATE  
THE  RISK  OF  RESOURCE  NATIONALISM?
 Resource  Nationalism  

• Contracts can provide for a progressive remuneration system for the host State,
with the host State fully participating in increasing oil prices, together with the
investor. A host State that considers that it is receiving a “fair take” which will swell
as oil prices rise will be less willing to countenance aggressive action against an
investor which could lead to disruption of production and a reduction in sums
received by the State.

• Stabilization clauses can be included in contractual arrangements which aim is to

preserve the legal and economic bargain agreed by the investor and the host state
at the outset of the investment. This will be further discussed in another course.

• International arbitration: Instead of litigating any disputes in the courts of the host
state, investors can bring their claims in a neutral venue before a neutral tribunal.
The advantage would be to evade the deliberations of a potentially partial
judiciary or a judiciary obliged to apply any new laws enacted which form the
subject of the investor’s claim. Arbitration can involve the appointment of a
sophisticated tribunal and potentially, the rendering of a portable arbitration
award in the investor’s favor which can be enforced anywhere in the world. This
will be further discussed in another course.
 The  concepts  of  pacta sund servanda and  rebis sic  stantibus in  relation  to  
international  oil  &  gas  contracts

Oil and Gas Contracts (which will study in details in the next courses) consists of two
main characteristics:
• They are concluded by the investor with a State or a State entity, thelatter being
entrusted by the State with the task of administering in the public interest the
country’s petroleum resources.
• The are concluded for a very long duration.

By its nature, an investment in the oil and gas industry implies the establishment of a
relation with the territory of the host State by far exceeding that of a normal
commercial contract between private parties. The very nature of the activity to be
deployed by the investor under this type of arrangements, characterized by the
various phases of the petroleum operations (exploration, development, production,
transport, storage and other downstream activities), demands a long-­‐term duration
(normally, averaging 20–30 years, or even more under the still surviving concession
agreements).
 The  concepts  of  pacta sund servanda and  rebis sic  stantibus in  relation  to  
international  oil  &  gas  contracts

In the presence of the mentioned characteristics the question has been raised
whether the need to protect the private investment makes it advisable to include a
stabilization clause in the contract in order to ‘freeze’ the parties’ rights and
obligations in the name of the sanctity of contracts (pacta sunt servanda) or whether
an adaptation clause should be added providing for the renegotiation of the
contractual conditions in the presence of a change of circumstances, in the name of
the rebus sic stantibus rule

By nature the future is uncertain. In long-­‐term contracts, prices may suddenly

increase, inflation may rise, performance may become more onerous. However,
parties are expected to foresee. They can plan the future through contracts, especially
through long-­‐term contracts. In these contracts, they can fix the price and define the
performance once and for all. The sanctity of contract is, understandably, a
paramount feature of the law of contract. Pacta sunt servanda: the contract has to be
respected. As a matter of principle, parties must adhere to the terms of their contract.
 The  concepts  of  pacta sund servanda and  rebis sic  stantibus in  relation  to  
international  oil  &  gas  contracts

However, in general, national legal systems contain a rule that changed circumstances
may affect the binding force of a contract (especially in long term contracts). This
possibility is known under the maxim rebus sic stantibus: the contract remains binding
"provided that things remain as they are".

In this respect, the mechanism adopted long term in oil and gas agreements vary from
one jurisdiction to another and from one case to another. It also depends on the
negotiation power of the parties involved.
 Peak  Oil

This refers to a situation where global oil supplies would reach a peak after which they
decrease never to rise again. There are diverse opinions on peak oil with some experts
stating peak oil has already occurred, others, it is occurring and some it will soon
occur.

IT  HAS  BEEN  SAID  THAT  PEAK  OIL  IS  THE  DEFINING  CRISIS  OF  THIS  CENTURY.  
ALTHOUGH  HUMAN  INNOVATION  HAS  LET  US  EXPAND  VIRTUALLY  UNCHECKED  FOR  
THOUSANDS  OF  YEARS,  THE  DREAM  OF  INFINITE  GROWTH  IS  COMING  TO  AN  END.  
DO  YOU  AGREE?  
 Peak  Oil

Dr. M. King Hubbert proposed the peak oil theory in the 1950s to describe the
production pattern of crude oil as being “bell shaped” and approximately symmetric.
Hubbert’s theory was verified when oil production in the USA peaked in 1971 and now
it is applied to worldwide oil production. There are diverse opinion on peak oil with
some experts stating that peak oil has already occurred, others it is occurring and
some it will soon occur.

The peak oil theory: It is widely accepted that oil is a finite resource; there are basic
laws which describe the depletion of any finite resource:

• Production starts at zero;

• Production then rises to a peak which can never be surpassed;
• Once the peak has been passed, production declines until the resource is
depleted.

Therefore, we can say that the dream of infinite growth is coming to an end,
however, we do not know when will this end arrive.
 Energy  Security  of  Supply

What  is  Energy  Security?

Ø Energy security is defined as “the uninterrupted availability of energy sources at an
affordable price”. Energy security has many dimensions: long-­‐term energy security
mainly deals with timely investments to supply energy in line with economic
developments and sustainable environmental needs. Short-­‐term energy security
focuses on the ability of the energy system to react promptly to sudden changes
within the supply-­‐demand balance.

Ø Lack of energy security is thus linked to the negative economic and social impacts
of either physical unavailability of energy, or prices that are not competitive or are
overly volatile. In cases such as the international oil market, where prices are
allowed to adjust in response to changes in supply and demand, the risk of
physical unavailability is limited to extreme events. Supply security concerns are
primarily related to the economic damage caused by extreme price spikes. The
concern for physical unavailability of supply is more prevalent in energy markets
where transmission systems must be kept in constant balance, such as electricity
and, to some extent, natural gas. This is particularly the case in instances where
there are capacity constraints or where prices are not able to work as an
adjustment mechanism to balance supply and demand in the short term.
 Energy  Security  of  Supply

What  is  Energy  Security?

Ø Ensuring energy security has been at the centre of the mission of the International
Energy Agency (IEA) since its inception. The IEA was founded in 1974 to help
countries co-­‐ordinate a collective response to major disruptions in the supply of
oil.
Ø The ability to respond collectively in the case of a serious oil supply disruption with
short-­‐term emergency response measures remains one of the core activities of the
IEA. The long-­‐term aspect of energy security was also included in the Agency’s
founding objectives, which called for promoting alternative energy sources in
order to reduce oil import dependency. The IEA continues to work to improve
energy security over the longer term by promoting energy policies that encourage
diversification, both of energy types and supply sources, and that facilitate better
functioning and more integrated energy markets.
 Energy  Security  of  Supply

Reliable/uninterrupted   Energy  Security Accessible/Available  

supply supply

Affordable  competitive  supply

 Reading  

Daniel Yergin, The Prize – The epic quest for Oil, Money and Power, Free Press,
London 2003.

Ernest Smith & John Dzienkowski, A Fifty Year Perspective on World Petroleum
Arrangements (1989) 24 Tex. Int’l L.J 13.