PEH:International Oil and Gas Law

Publication Information

Petroleum Engineering Handbook

Larry W. Lake, Editor-in-Chief

Volume I – General Engineering

John R. Fanchi, Editor

Copyright 2007, Society of Petroleum Engineers

Chapter 17 – International Oil and Gas Law

Mark D. Bingham, Davis Graham & Stubbs LLP, Scot W. Anderson, Davis Graham & Stubbs LLP, Dustin M. Ammons, Chevron USA Inc.

Pgs. 809-830

ISBN 978-1-55563-108-6
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The search for petroleum drives oil and gas companies from the familiar confines of their home countries out into the world. The worldwide scope of the exploration for the production of oil and gas has led to the rise of international and multinational petroleum companies—companies that are nominally based in a home country but operate throughout the world. Today, almost all major oil companies have a presence in most oil-producing regions, and many midsize and smaller petroleum companies operate in more than one country.

Each host country has its own specific laws and regulations that apply to oil and gas development in that country. Still, it is possible to describe some common approaches and concepts that apply to international petroleum law. The United States has also passed certain laws that apply to the international operations of U.S. companies. This chapter describes some of the legal issues affecting international oil and gas development, as well as the laws that will apply to U.S. companies operating internationally.

History of International Oil and Gas Development

Petroleum has been an internationally traded commodity since the late 1800s. International oil and gas development paralleled domestic development in the United States in the 1900s. In the early 1900s, Standard Oil Company of New Jersey held a near-monopoly on domestic oil supply and price. Specific judicial and legislative action by the United States government caused this monopoly to break up, and various large, integrated oil companies were formed, which participated in all petroleum industry segments from exploration to marketing. These major companies sought mineral development opportunities both domestically and abroad. At the same time, European oil companies also sought to capitalize on mineral development opportunities beyond their borders. (For a highly readable account on the history of the international petroleum industry, see Yergin)

Initially, these major companies, from the United States and Europe, sought rights in oil from countries in the Middle East by means of concessions, which authorized the company to explore, develop, and market the oil from certain lands for a specified period of time. The concession area might have covered the entire country, such as Abu Dhabi or Kuwait; the concession period could have lasted decades, such as 75 years for Abu Dhabi and Kuwait or 66 years for Saudi Arabia; the concession might not have contained development obligations, as the concession might have been viewed as a transfer of the mineral rights for a term of years; and the developing company might have had unilateral control over all management and decisions associated with the concession. These concessions were granted by the government or sovereign of the host country, who was often subject to strong internal or foreign political pressures. In exchange for granting the concession, the host country typically received an initial or bonus payment and a right to some fractional share of, or a royalty interest in the value of, the oil produced. In these early development years, produced natural gas was generally considered a waste byproduct and was vented or flared.

Although some host countries may have only granted limited or relatively short-lived concession agreements, others granted broadly scoped rights, which left the host country with little control over what might have been that country’s most valuable single asset. In an effort to regain control over their mineral resources, countries such as Mexico, Saudi Arabia, and Iran resorted to expropriation and nationalization of the petroleum rights by Pemex, Saudi Aramco, and the national oil company of Iran, respectively. Other countries in the Middle East modified their concessions through renegotiated agreements to significantly change the balance of control over the mineral rights. In 1960, the formation of the Organization of Petroleum Exporting Countries (OPEC), an entity that represents the interests of numerous similarly situated oil exporting countries, helped facilitate further changes in contract rights and royalty benefits enjoyed by the member countries.

Today, the term "concession" has lost favor, as it implies that rights might have been conceded or given away, and some host country citizens might have considered their rights and interests to have been abused by the developing companies. Most host countries now issue licenses or leases similar in nature to those used in the United States, covering defined areas or "blocks" and allowing the host country a significantly greater amount of direct participation in the decisions affecting, and the capital costs associated with development of, its natural resources. The license or lease might be a nonexclusive right to conduct exploration operations or an exclusive right to conduct development and production operations. The developing company is commonly obligated to a yearly capital commitment, an established work program, and the relinquishment of undeveloped lands after a specified primary term. There may be multiple bonus payments at various development thresholds, the royalty percentage due the host country might vary based on production volumes and cost recovery factors, and the foreign company could be subject to various local taxes. Many countries have formed national oil companies that may have the right to participate for up to a 51% ownership share under licenses, or those countries may form a joint operating company with the developing company to be the licensee.

Alternatively, host countries may enter into "service agreements," which allow a foreign company to develop the petroleum resources in a specified area for a specified consideration, typically in the form of a share of the production stream taken in kind by the host country. Although the developing company bears all the financial risk, the host country generally does not transfer any mineral or property rights to the developing company, and the host country controls the development of its lands at the developing company’s expense. These types of service contracts are common in countries such as Mexico, where there is a constitutional prohibition against the disposal of any of the national petroleum rights retained by the host country.

Today, produced natural gas has now evolved into a highly desirable commodity, particularly in areas accessed by gas transportation pipelines or liquefied natural gas (LNG) processing and transportation facilities. Today’s international petroleum development agreements, whether in the form of licenses or service contracts, address the value attributable to natural gas and the obligations for its development and marketing.

Interests in Petroleum Properties

Over the years, host countries seeking the development of their natural resources have developed a variety of contractual and legal mechanisms to promote exploration and production. These approaches to the creation of interests in mineral development can be divided into four general categories: concessions and licenses, production sharing agreements, participation agreements, and service contracts.

Concessions and Licenses

Some host countries grant mineral developers the exclusive right to explore, develop, and produce from petroleum properties. Such rights were first granted in the form of concessions. In their earliest form, concessions were granted by host countries to cover large areas and, sometimes, entire countries. The mineral developer had the unfettered right to explore or develop as it saw fit, and the host country retained only a royalty interest in the produced petroleum.

These broad concessions were seen to reserve too little control and revenue for the host country and are no longer used. Despite the demise of the early concessions, many countries, however, still grant oil producers exclusive rights to explore or develop petroleum properties, either through a more limited concession or a licensing process. Under either approach, the mineral title remains with the host country or its national oil company, and the development of the mineral resource is permissive. The title to oil and gas typically passes at the wellhead.

Unlike the broad grants of the first concessions, a modern concession or license typically covers a specific area or mineral property. If the area is not yet producing, the licensee will be required to conduct a work program, typically consisting of gathering or processing seismic data and drilling exploratory wells. A licensee is now required to relinquish areas within the license that are not explored or developed. Concessions and licenses typically run for a set number of years, subject to renewal if certain requirements are met.

Many of the original concessions were negotiated in the Middle East and North Africa, and some countries in these areas still offer concessions to petroleum developers. In Tunisia, for example, a producer may begin exploration under a research permit, which defines the area to be explored. This area can be granted as a concession, which requires a decree from the relevant ministry and the passage of a law by the Tunisian legislature. The concession might be withdrawn should the concession holder interrupt production or fail to pay the required royalties.

Licensing arrangements were developed after the advent and collapse of the earliest concessions. Under a licensing arrangement, the host country retains ownership and control of petroleum in place and grants the licensee the right to explore for and develop that resource. Licenses are used, for example, throughout the North Sea, and have been used in the United Kingdom since the 1960s. In the United Kingdom, the Department of Trade and Industry (DTI) selects tracts that it will offer in a licensing round. Any license awarded in that round will be governed by a standard form agreement, The Model License, which sets out the standard terms for the license. Prospective developers then submit proposed work programs for an area to be licensed. DTI then chooses the work program and licensee it wants to develop a specific area. The DTI may not award a license to the highest bidder, but rather looks to manage the development of resources in the U.K. continental shelf in the manner most advantageous to the host country.

The imposition of a work program has significant benefits for the host country, as it assures that its natural resources will be developed promptly. Even if an exploratory drilling program is unsuccessful, the results of seismic surveys, seismic analysis, and exploration drilling conducted throughout a country and its offshore areas will help the host country better define its mineral resources. In many circumstances, a petroleum producer will win a concession, license, or other mineral development right by bidding for the property with an extensive work commitment. This commitment can, however, lead to uneconomic results. A company might, for example, commit to conduct seismic surveys and drill two exploratory wells as part of a licensing bid. If, after analyzing the seismic data and drilling the first hole, the company doubts the prospectivity of the license area, it is nonetheless committed to drill an additional well. A company may be loath to spend its exploration budget on a second well in a license area at that point. Mineral developers can negotiate alternatives to work program commitments in some circumstances.

In summary, a host country that uses a concession or license to promote mineral development grants the licensee or concessionaire an exclusive right to develop a specific area. That right is gained through certain commitments—e.g., to conduct a work program or to pay royalty—and can be lost if those commitments are not kept. As the area approaches production, the licensee may be required to relinquish portions of the license area that are outside the producing structure.

Production Sharing Agreements

The production sharing agreement was first developed in Indonesia in the 1960s. Production sharing arrangements are common throughout the world and are often favored by countries that lack the financial or technical capability to develop mineral resources. In a production sharing arrangement, the oil producer gains the right to conduct exploration and assumes the entire risk of exploration failure.

If, however, the developing company succeeds in finding petroleum and developing the resource, the host country takes a share of the oil produced. The developing company is allowed to retain some petroleum as reimbursement for its development costs (the "cost share") and then receives a portion of the produced oil as its profit (the "profit share"). The host country typically retains the greater portion of produced petroleum, and many modern production-sharing agreements use a sliding scale, with the host country’s pro rata share increasing as more oil is produced. While the host country often takes the largest percentage of production, the terms can vary significantly, even within a country. Indonesia, for example, recognizes the cost and risk of development in "frontier areas" and awards contractors a higher percentage of the gross revenue from gas sales in those areas.

Because the host country is a beneficiary of the production from a property subject to a production sharing agreement, some agreements provide for tax relief. This relief may come in the form of a straightforward tax amnesty (perhaps limited in its duration) or through an obligation upon the host country to pay any taxes. The host country may also take a role in the management of the project. Many production-sharing arrangements require the host country’s national oil company to operate the field.

Participation Agreements

In participation agreements, petroleum properties are developed through a joint venture or similar arrangement between the host country and the developing company. In some instances, the host country and the developing company will create a new entity to be jointly owned. Other times, the host country and the developing company will create a contractual joint arrangement. The distinguishing characteristic of a participation agreement, in any event, is the cooperative development of petroleum properties by the host country and the developing company.

The joint entity or venture will be managed by both the host country and the developing company, but management control may be tilted toward one side or the other. Some participation agreements provide for the developing company to carry the host country financially, and fund exploration costs, for example. The developing company is then allowed to recoup these costs from future production.

Service Agreements

In some countries, the right to develop petroleum resources has been granted exclusively to a national oil company. In these countries, mineral developers enter into service agreements with the national oil company. The developing company might, for example, simply conduct drilling programs or build facilities in return for a fee. The contractor then has no legal interest in the mineral property. Some service agreements allow the contractor to purchase and export produced petroleum, although these arrangements are often tied to the assumption of some exploration risk by the contractor. Some service companies take equity stakes in international petroleum projects, and, thus, the line between service arrangements and other mineral development arrangements can be blurred. Some large developing companies disfavor service arrangements, as they wish to have an interest in the mineral property itself.

Mexico is an example of a host country that uses service contracts. Article 27 of the 1917 Constitution of Mexico, as amended 10 January 1934, grants the Mexican nation direct ownership of all hydrocarbons. In early December 2001, Mexico’s "Multiple Services Contract" law and regulations were released in an effort to attract foreign developing companies to participate in exploration and production of Mexico’s petroleum resources. Service contractors are paid in cash—not oil—and, therefore, will not be able to book reserves.

Common Contractual Provisions

Because the various mineral development agreements previously discussed are drafted by the host country, they tend to have provisions designed to protect host country interests or promote host country policies. The scope and nature of these provisions will vary from country to country and between the common types of mineral development agreements. Nonetheless, many mineral development contracts will include at least some of the following contractual requirements.

Training. Many contracts require the developing company to provide training to local workers or employees of the national oil company. The training obligation may be described with some particularity, but it is common for the obligation to come in the form of a fixed annual commitment for training expenses.

Local Labor and ServicesPetroleum development contracts often require the mineral developer to use local labor, unless special skills are required, and to contract for services with local contractors. In some countries, there are companies owned by or affiliated with the host country or the national oil company that provide oilfield services. The mineral developer might be required to contract with that particular company, as opposed to a more general obligation to use local contractors. If the company uses expatriate personnel, the petroleum development arrangements may place limits on the number of expatriates, their roles and duties, and even the types of property that they can bring into the country.

Domestic Marketing Obligation. Some contracts require the petroleum producer to sell a specified percentage of its production in the domestic market. Under a production sharing contract, this domestic marketing obligation (DMO) might apply to the share left to the developing company after it has provided the host country with its share of production, thereby creating an even greater financial burden on the production from the mineral property. A DMO can have significant adverse effects on the economics of a mineral property, especially if the market for natural gas or oil is weak in the host country or if the payment for the domestically delivered petroleum is not in convertible currency. Also, a DMO might require the company to sell oil or gas into the domestic market at a discount to international open market prices.

Data. Some mineral development agreements require developing companies to provide copies of data, such as seismic surveys and drilling results, to the host country. Other agreements vest ownership of the data in the host country and provide a license to the oil company to use the data so long as the company maintains its concession, license, or contract in good standing.

Local Office and Local Agent. A contract or license may require the developing company to maintain a local office and to hire local residents to staff that office. Some mineral development arrangements require the developing company to be represented by a local agent.

Choice of Law. Many international petroleum agreements between mineral developers and host countries require that the contract be governed by the laws of the host country. As discussed in Sec. 17.8, the use of an arbitration provision can help manage some of the adverse effects of the application of local law.

Assignment and Transfer Limitations. Mineral development agreements commonly require some sort of host country approval before all or part of a mineral interest can be transferred to a third party. These limitations can be significant, as petroleum developers often like to bring in partners to share the expense and risk of mineral development. In some cases, assignments or transfers can be approved by a ministry or department of the government (or perhaps a few such ministries). In the worst case, a transfer may require legislative approval, which can be difficult to achieve and very time consuming. Such approvals also often require publication or notice periods before they are official, which creates an additional element of risk in a commercial assignment of a mineral interest in a host country.

Equipment. Some development arrangements require the operator to transfer equipment used in mineral development to the host country or to its national oil company. The arrangements also typically place most of the burden of abandonment costs on the mineral developer, although the extent of that cost shift can vary.

Insurance. Many mineral development agreements require the operating company to carry insurance, and these clauses typically dictate that the insurance comply with host country requirements.

Management. Oil and gas development arrangements sometimes create a management role for the host country or its representatives. In a licensing arrangement like that in the United Kingdom, the government does not have a direct management role in field operations, but rather governs that development through regulations and license requirements. In other circumstances, such as the Indonesian production-sharing contract, the national oil company is the operator of the field and has significant management authority. Other arrangements adopt more moderate approaches. In Romania, for example, the standard Exploration and Production Sharing Agreement creates a Management Committee to govern field operations, and the seats are held equally by the national oil company and the producing companies. Committees such as this are commonly chaired by a host country governmental representative. If the management committee is responsible for approving budgets and annual work programs, the host country can gain considerable influence over operations in this manner. Also, some petroleum development arrangements require government approval of the operator of a field. This requirement can also hinder the free transfer of mineral interests.

Foreign Exchange and Banking. The petroleum development agreement may require the foreign developer to open and fund a local bank account. The agreement or local law may limit the ability of the company to convert local currency to other currency and might require that a local bank make the conversion. As noted, the foreign mineral developer may be required to receive some payments in local currency.

Considerations in Conducting Operations in International Projects

There are many complex considerations that must be addressed in each relationship between a host country and a foreign oil company. (For a general discussion of due diligence issues in international projects, see Clark and Pain.) The foreign oil company must recognize and adjust to the existence of the sovereign power of the host country and assume the political risk that its interests and investments might be expropriated, with or without compensation; that the government might be overthrown; or that significant security might be necessary to protect the foreign company’s employees and assets. The foreign company must recognize that there is an increasing awareness by host countries of the need to conserve and protect the environment and to train its citizens to be skilled and competent in the industry. The foreign oil company must remain aware that relationships with host country officials should not involve bribery, favors, preferences, or other illegal actions. Many of these considerations are discussed in greater detail.

Political Risk

There are many risks associated with an international oil and gas development project. The modern commercial reality is that almost every development project will require capitalization and financing, with associated risks and obligations dictated by third parties who are outside the control of the company proposing the international project. Other risks include whether the project will be completed on time and within the anticipated budget. Further, there is the risk that the project, once completed, fails to perform as projected, or that the anticipated product markets do not evolve or that product prices do not reach the anticipated levels. To some degree, each of these risks can be managed by contractual protections. Certain risks cannot be controlled by such protections, however, and they include the political risks of expropriation, inconvertibility of currency, and political unrest.

Expropriation can include the outright nationalization of a developing company’s projects, such as occurred in Mexico and Iran. Expropriation can occur by gradual nationalization through host country taxation or project participation. Expropriation can also occur indirectly by the refusal or mere failure, either through a lack of attention or by willful delay, on the part of the host country government, to issue required approvals or consents for development projects. This process is sometimes referred to as "creeping expropriation."

Currency risks arise when a project is financed in one currency and the resulting petroleum production is sold domestically in a different currency. If the currency standards between these differing markets erode or shift owing to various political and economic factors, the profitability or financial stability of a project can be abruptly undermined even though the accounting figures show the project to be on budget.

Political unrest can exist in violent circumstances such as wars, insurrections, or riots. Potentially more devastating, however, is the political unrest that arises when well-conceived projects and contracts cannot be enforced under applicable laws. Before investing in any host country, the developing company must evaluate the certainty, predictability and enforceability of any contract or relationship with a host country. Certainty can be evidenced by a long-standing constitution, well-established laws, and a reliable governing body. Predictability is evidenced by the host country’s governmental application of its law in a manner that is consistent, evenhanded, and objective. There is little point in investing large amounts of money and time in a development project if the developing company has no means of ensuring that the host country government can either be required by a court to perform its obligations under the applicable contracts or to pay adequate compensatory damages.

Developing companies can mitigate political risks by obtaining financing through export credit agencies such as the U.S. Export/Import Bank and by obtaining political risk insurance from private companies or from quasigovernmental entities such as the Overseas Private Investment Corporation of the United States or the Multilateral Investment Guarantee Agency, which is a member of the World Bank Group. Host countries that do not have established or predicable ownership laws or procedures for enforcing rights, such as countries emerging from military dictatorships to market economies, pose special problems for insurers and for lenders seeking to protect their funds through mortgages or other liens on the producing lands. As a consequence, export credit agencies might impose strict limitations on the availability of financing and could impose stringent insurance coverage requirements. Political risk insurance can be expensive, and its coverage can be limited in scope to only certain events or risks such as expropriation, unavailability of foreign exchange, and war. On the other hand, these credit and insurance agencies will likely be committed to work with the host country government to bring political pressure to bear in order to protect their financial investments.

Other methods to mitigate political risk include joint venturing with host country nationals, good corporate citizenship in the host country, and contractual assurances from the host country in the mineral development agreement. Typical contractual assurances address the stability of the legal regime, waiver of sovereign immunity, effective dispute resolution in a neutral forum, and the selection of a governing law that is consistent with the expectations of the parties. The developing company should seek for stability in the legal regime, including assurances that the government will not unilaterally modify the terms and conditions of the investment or change the tax or participation structure to the detriment of the developing company. A waiver of sovereign immunity will not only allow a developing company to force a host country to a legal forum, but it will also prevent the government of the host country from changing its laws to the detriment of the developing company.

Host countries generally will want contracts involving their government to be governed by the law of the host country and will want any dispute regarding those contracts to be resolved in courts located within the host country. Similarly, the developing companies tend to prefer the laws and courts of their respective countries. A reasonable compromise is to choose a neutral forum and governing law. Choice of law provisions are generally upheld so long as there is a reasonable connection between the transaction involved and the jurisdiction whose law is selected, and there is no evidence of unfair advantage from an equal bargaining perspective. Further discussion regarding choice of law and forums for dispute resolution can be found in Sec. 17.8.

Security

Another form of political risk includes physical risks to employees and assets of the developing company by terrorism, kidnapping, or physical abuse. Developing companies typically have substantial financial and manpower commitments for the security of employees and assets. Fenced compounds, security cameras, and guards may be necessary to protect plant sites, equipment sites, well sites, storage yards, offices, and company employees located therein. "Company towns" help manage the interaction of the developing company employees with host company nationals in a controlled environment. Automobile drivers and bodyguards may be necessary to ensure the physical protection of company employees and their families outside these controlled environments. Also, some insurers offer kidnapping insurance to help mitigate that risk.

Bribery and Corruption

Bribery has many different, but similar, definitions. Some common definitions include: offering, giving, receiving, or soliciting something of value for the purpose of influencing the action of an official in the discharge of his or her official duties; money or favor given or promised to a person in a position of trust to influence his or her judgment or conduct; something that serves to induce or influence; and an advantage that one competitor secures over other competitors by secret and/or corrupt dealings.

There is generally little debate that bribery is unethical, but the determination of what constitutes bribery can be hotly contested. What might be business courtesies such as gifts or favors, consistent with local custom or practice, to some may be construed as a business inducement, bribery, or commercial influence that might or might not be considered unethical or illegal depending on the country where the business is conducted.

In 1977, the United States enacted the Foreign Corrupt Practices Act (FCPA) to impose severe penalties, including fines and imprisonment, on companies and personnel who bribe or otherwise attempt to influence officials of a host country. Almost all countries have adopted similar laws, but until recently, such laws might not have been strictly enforced, and in some host countries, it may continue to be an accepted practice to provide favors to governmental officials in return for special treatment.

The FCPA was enacted in response to embarrassing public disclosures of payments made by prominent U.S. companies to political officials in several countries to secure large orders for military equipment, where foreign government officials might have requested or suggested some special consideration in return for favorable purchase contracts. The breadth of the FCPA covers other overseas business opportunities including the oil and gas industry. Competition for exploration and production rights creates many potential FCPA problems for U.S. companies conducting business abroad. Commonly, foreign investment laws impose limits on foreign ownership, which then requires the developing company to establish some form of a partnership with a company located in the host country. Government officials who could delay or prevent the award of exploration or production rights might feel less inclined to do so if they were "comfortable" with the developing company and its local partner by the suggestion or expectation of some form of inducement or payment.

The FCPA attempts to prevent corrupt practices by two methods: by mandating accounting standards for public companies, and by prohibiting payments from public companies to foreign political officials with knowledge of a corrupt purpose. Compliance with the accounting standards under the FCPA is monitored by the Securities and Exchange Commission. Enforcement of the FCPA falls under the responsibility of the U.S. Department of Justice.

A public company is one that has registered securities or that files reports in accordance with the Securities Exchange Act of 1934. Under the FCPA, public companies are required to maintain books and records in such a way that corrupt payments cannot be hidden within a company’s accounting system. The books and records must be kept in reasonable detail and must accurately and fairly reflect the transactions and disposition of assets of the company. The FCPA also precludes senior management of a public company from avoiding responsibility if corrupt payments are made. The transactions of the company must be executed in accordance with authorizations by the company’s management. Foreign subsidiaries of public companies must also comply with these requirements. Foreign affiliates that are owned 50 percent or less by the public company are only required to make "a good faith attempt" to cause the affiliate to follow the accounting standards.

The FCPA antibribery provisions make it unlawful for public companies or any shareholder, officer, director, employee, or agent thereof to: make use of the mails or other forms of interstate commerce corruptly in the furtherance of an offer, payment, promise or authorization of payment; support any foreign official, political party, or candidate for political office; influence any act or decision of that official or inducing that official to use influence to affect or influence any act of a foreign government or agency; assist a public company in directing business to any person or in obtaining or retaining business with any person. Each of these elements must be satisfied in order for a violation of the FCPA to exist. The fundamental notion of when an act is done corruptly can be difficult to determine. It is apparent, however, that a payment is corrupt if it is tendered with the intent to influence the recipient to misuse his or her official position to divert or obtain business wrongfully.

Retaining a local influential person or agent to help secure a foreign contract is not a violation of the FCPA but rather might be a necessary reality in order to secure the contract. Corporate legal advisers are available to examine the facts and the relevant law to determine if an FCPA violation has or will occur. Some factors to be considered include determining if the host country has a reputation for bribery; if the agent’s commission is excessive or if it will be paid in cash; if the agent is related to a government official or if the government official has any ownership relationship with the agent; if it is illegal under the local law for the agent to act as an agent; if the agent has made statements suggesting that a particular amount of money is needed to secure the business opportunity; if the agent has suggested that any kind of false documentation be used; if the agent has refused to promise in writing to abide by the FCPA.

Although other countries generally have not followed the United States by enacting laws similar to the FCPA to penalize corrupt payments made to government officials to secure business opportunities, the developing oil company should also keep in mind that many host countries have enacted laws to prevent such payments, and any of the actions previously discussed could result in a violation of the host country’s laws in addition to the FCPA.

Indigenous Rights

In a standard oil and gas lease in the United States, a large corporate or sophisticated landowner might sometimes be in a position of negotiating strength to obtain lease provisions that limit or require certain activities occurring on the leased lands. It is rare for this control, however, to include proactive involvement, such as requiring the lessee to conduct certain operations. The large corporation or landowner rarely has any power greater than a veto right. International contracts, however, have a completely different balance of power—one that includes the obligation of integrating individuals in the management and labor force necessary to complete the project.

Host governments typically can exercise a considerable amount of control over all operations within the contract area. This control is commonly exercised through a body known as a joint management committee (JMC). A JMC is typically composed of representatives from the host country government and from the developing company. These representatives meet regularly in open sessions where minutes and approvals are recorded. JMC approvals range from the mundane issues of work programs and budgets to far-reaching and substantial issues affecting the project and the investment by the developing company. If the host country governmental representatives are not educated or experienced in the various subject matters addressed by the JMC, experts are routinely retained to advise the host country representatives. These host country representative positions create a substantial amount of goodwill and are prestigious for the local individual but can be a large financial expense for the developing company.

Another typical requirement of host countries dictates the use of local personnel and materials to perform the operations associated with the project. These provisions are rigidly applied and seriously monitored by host country governments. The requirement to use local materials and labor is commonly applied and administered through the procurement provisions of the mineral development agreement. JMC procurement personnel will play an active role in ensuring that local people are employed and service and supply contracts are given to local companies. Procurement requirements can raise quality concerns for the developing company, as it may fear it will be forced to use local companies or materials that are not suited for the intended job only because the local service or supply company owners are well connected with the host country government. The requirement for the use of local labor and supplies is so important to the host country, however, that the developing company must accept the inevitable and learn to work within the local system.

The salvage rights of a host country also can be burdensome for a developing company, particularly after considering the large investment cost of any development project. Host countries typically mandate that once a project reaches its economic life, all equipment and materials used in connection with the project will become the property of the host country, without any salvage value or consideration given to the developing company. This requirement can even apply to indirect materials and equipment used on the project such as boats, airplanes, helicopters, automobiles, seismic equipment, electronic equipment, and computers.

In addition to the objective of increasing production of petroleum from within its country, another main objective of host country governments is to obtain training of its nationals to perform necessary duties and to potentially take over the operation of projects within the borders of the country.

Training Obligations

Each work program of a mineral development agreement with a host country will include a training budget. These training obligations can be substantial and range from hundreds of thousands to millions of dollars on an annual basis. Important positions associated with the project that are staffed by the developing company are typically "seconded" early in the program with local trainees. This involves putting employees from the host country into operational positions for training under the developing company, while these "secondees" remain as employees of the national oil company. The developing company will be responsible for paying the secondees a salary and benefits comparable to that of the developing company’s staff.

Necessary Relationships for Efficient and Economic Development

The cost of a large foreign development can be so substantial that one developing company alone may not want to take on the risks, costs, or liabilities. Consequently, in addition to the relationships established between a developing company and the host country, there will likely be relationships between two or more developing companies that participate together in an operation in a host country to obtain, maintain, and maximize economic production from a large project. Such participation requires a joint operating agreement to establish and govern the relationship between the multiple developing companies. One company is designated as the operator and is given necessary authority to conduct all operations required under the host country mineral development agreement. Operating committees are commonly established to address and advise the operator on various technical or financial matters. The authority of the operator also may be limited by the working interest parties, who have the right to approve certain actions taken by the operator. Further, participation in certain operations may be optional, and provisions are necessary to govern these elections. International joint operating agreements can be on standardized form agreements or can be individually negotiated by the working interest parties and contain many of the same types of provisions found in joint operating agreements used in the United States for domestic oil and gas developments, as discussed in greater detail next.

Joint Operating Agreement

The exploration and development of oil properties is an enterprise fraught with risk. Consequently, mineral developers look to share the risks, costs, and rewards of exploration and production with other companies. The contractual arrangements between these coventurers can be quite complicated and result in all sorts of contracts. The foundation to these arrangements, however, is the joint operating agreement (JOA). (For a thorough discussion on the nature of operating agreements in the United Kingdom, see Taylor, Tine, and Windsor.)

In international petroleum development, a JOA sets out the basic commercial relationship between two or more petroleum developers. The JOA will name one of the parties as the operator. The operator is responsible for day-to-day management of the exploration and development program. The other parties, the nonoperators, reimburse the operator for its costs on a pro rata basis relative to their respective ownership interests in the project. Many of the issues related to joint operating agreements arise in determining the respective rights of the operators and nonoperators.

A joint operating agreement will set out the percentage ownership interests held by the various parties, and each is responsible for its proportionate share of operating costs. The party with the highest participating interest is typically the operator, but this need not be the case.

The operator will develop proposed work programs and budgets, including Authorization for Expenditures (AFE). These programs are subject to approval by the parties to the JOA. Voting rights are established proportionately, and a proposed program or AFE can typically be approved by a specified voting percentage. If a party’s interest in the property is high enough, it might have a blocking vote.

The JOA will usually include a set of accounting principles to be used by the operator in allocating costs and revenues among the parties to the JOA. The accounting principles will allow an objective determination of costs and expenses. The accounting principles sometimes allow the operator to pass through some overhead charges. These charges relate to the cost of corporate headquarters support for the field operations, and reflect home office charges rather than the charges directly arising from the field. Overhead might be determined on an allocation of corporate costs, or might be negotiated. Overhead charges are sometimes tied to a published index, which allows easy calculation of the costs, and which should reflect standard industry charges for services or the effect of inflation on such charges.

Many JOAs allow a party to "sole risk" a proposed project. One party may wish to drill an exploratory well, and the other parties refuse to authorize payment of the cost. If the votes are insufficient to authorize the well, a party might pay for all those costs by itself, therefore taking on the sole risk for that well’s success or failure. If the well leads to a discovery, the sole risk party gains, in return, the sole right to production from that discovery. The sole risk party will have the right to use field facilities for any resulting production. Some JOAs allow the nonparticipating parties to join in the new development, but only upon payment of a significant premium. The payment of a premium reflects the fact that these parties did not take on the risk of the initial expenditure and so should not be able to simply pay their pro rata share of the costs and gain the benefits accruing from the bold decision of the sole risk party.

JOAs may also create preemptive or preferential rights, allowing the parties to the JOA the right to purchase another participant’s interest before it is sold to a third party. Preemptive rights can be quite restrictive—designed to assure that the existing participants can control future ownership—or relatively relaxed—simply requiring that a first offer be made to the JOA parties or that those parties have a right to negotiate for a purchase before a third party offer can be accepted.

A joint operating agreement typically includes a clause indemnifying the operator from some liabilities that would otherwise accrue to the operator in that role. The notion is that certain risks should be shared pro rata among the parties to the JOA, rather than borne entirely by the operator. Thus, the JOA will typically provide for a fairly broad indemnity of the operator, subject only to exceptions for affirmative acts or omissions of the operator, such as the operator’s willful misconduct, willful default, or perhaps gross negligence. A merely negligent act of the operator, then, might create a liability that is shared pro rata by the parties to the JOA. Some JOAs define concepts like willful misconduct and attempt to limit willful acts to the acts of senior managers or other management employees of the operator. In doing so, the JOA shifts the risk of willful misconduct of lower level employees of the operator to the parties to the JOA, rather than the operator by itself. The indemnity provisions of a JOA and the definitions of willfulness can inspire lively debate in the course of negotiations.

Marketing Arrangements

The marketing of petroleum products is influenced by the nature of the petroleum produced and the location of the field. The market for oil and other liquids is quite different from the market for natural gas. Also, the transportation of oil and natural gas to the marketplace can pose significant commercial and technical issues. As a result, oil producers and energy buyers have developed sophisticated legal arrangements to address these issues.

Oil Marketing

Crude oil can be sold anywhere in the world, and the market price for oil is determined at any one of a number of hubs (central marketing points) throughout the world. Consequently, if an international oil producer can get the oil on a boat, the cargo can be sold into the world market. Local economics, therefore, have little effect on the market price for oil that reaches the marketplace. As noted, however, the producer may be required by its mineral development agreement to sell oil into the local market, or perhaps to sell a portion of its oil to the local government at a discount against the market price at a particular hub.

As discussed, it is common for producing properties to be owned or controlled by a number of parties, including foreign oil companies and national entities. Once oil is produced, the parties must determine who owns the oil and how it will be marketed. The parties operating a field typically enter into a lifting agreement, which describes the process for taking oil from the wellhead to the marketplace. It will also describe the process for determining the parties’ ownership interest in that oil. Ownership of produced oil is typically proportional to the parties’ field interests, but that proportional interest may vary from shipment to shipment. There are occasions, for example, in which one party will overlift (take more than its proportional share) and the other parties will underlift. While this practice is more common with gas agreements than with oil sales arrangements, the parties may enter into a balancing agreement, which is designed to assure that each party takes its pro rata share of oil by the end of the life of the field.

Some international agreements also provide for the foreign oil company to market the oil on behalf of the local companies. The marketing of oil requires a knowledge of the markets and pricing mechanisms, and an oil company may be able to secure a fee or other consideration for providing this service. A sophisticated financial market has evolved around the petroleum market, and companies can trade in futures and derivatives if they choose. These financial instruments are typically used as market hedging devices and do not affect the direct sale of oil into the marketplace.

Where markets are well developed near the producing property, the oil company may be able to transport its oil to market through a pipeline. In some instances, the oil company may have an ownership interest in the pipeline, and indeed may have been required to contribute capital to the construction of the pipeline. In other cases, the pipeline might be owned by the government or a government controlled company, or perhaps another oil company or group of oil companies. Whatever the circumstance, the producing company will be required to pay a tariff to the pipeline company for the right to transport oil through the pipeline. Because pipelines often have a monopoly on transportation from a field or area, it is critical that the oil producer negotiate a tariff rate that remains certain throughout the producing life of the field. Tariffs may be indexed, which allows the tariff rate to vary over time, based on external and objective economic factors. The oil producer may have problems, however, if it is required to renegotiate the tariff rate after it has spent its capital in field development and must rely on the pipeline to get its oil to market. The tariff rate will certainly affect the economic return from a field.

Gas Markets

Unlike the market for oil, the market for natural gas is local. Natural gas can be marketed worldwide only by converting the gas to liquefied natural gas, which is discussed below. In all other circumstances, natural gas must be taken to market through pipelines and put to domestic or commercial use within the pipeline system.

When a mineral property produces natural gas, the mineral developer must address the vagaries and logistics of the local market. In some parts of the world, markets are well developed, and indeed have grown together. The United Kingdom market is an interesting example of how markets can develop over time. When gas was first produced on the U.K. continental shelf, all natural gas was purchased by a single quasigovernmental company. Gas was purchased under take or pay contracts designed to last the life of the field. Gas sellers were committed to sell every molecule of gas produced from the field to that buyer, and the amount of gas taken in any year would swing within a contractually specified range.

Over time, England opened its internal gas market and allowed other companies to buy and sell gas and use the onshore gas transportation system, subject to a uniform tariff for transportation cost. A sophisticated gas trading process immediately sprang up, and gas buyers and gas sellers would trade gas on the day, or buy or sell gas forward. The prior model for gas sales agreements, the long term take or pay contract, diminished in usefulness, as gas producers wanted the flexibility to manage and hedge the market risk of gas. Gas producers and trading companies would enter into master gas sales agreements, which provided standard terms and conditions for any gas sale. Each individual sale thereafter could be consummated over the telephone, and then confirmed by a fax, all pursuant to the master gas sales agreement. Gas producers moved from having every molecule of gas committed to a single buyer under a set of long term contracts to a diversified portfolio of gas sales arrangements designed to meet their commercial needs.

While England was opening its internal market, the European Union passed a gas directive designed to open the entire European common market. Simultaneously with this legal action, a group of companies built a gas pipeline interconnecting England and Europe. The interconnector pipeline created a new market for English gas and opened the U.K. market to European gas. While there are a number of logistical and political impediments to the complete opening of the European gas market, the trend is toward an open market, and the same trading and hedging markets that developed in England are now developing in Europe. Thus, gas sales arrangements are becoming more and more transnational in Europe. To add to the complication, existing or planned pipelines will allow the marketing of Algerian and Russian gas into Europe, which will further expand the borders of the gas marketplace.

For a mineral developer in Europe, the development of a natural gas field allows that producer to tap into a market that is becoming more and more open, which allows the developer to market its gas to a number of potential buyers and use futures and hedging to manage price risk.

In other parts of the world, however, the marketplace for natural gas is much less developed. The natural gas producer is likely to find itself in much the same position as the early gas developers in England—forced to sell gas to a single buyer at a set price. In these circumstances, a long-term contract provides some benefit to the gas producer. The field depletion contract allows the gas producer to recognize a set return on its investment, although the producer won’t have the opportunity to take advantage of the risks and rewards of a vigorous market.

Where market opportunities exist, as in Europe, the various participants in a gas project may have different views of when to participate in the market. As a result, gas producers enter into complex gas allocation and gas-balancing arrangements, which are designed to allow maximum flexibility in taking gas on a given day, while assuring that each party has received its fair share of gas by the end of field life. A certain amount of gas must be used to operate producing fields and pipelines, and the allocation agreement assures that each party receives its proper share of the remainder. Balancing arrangements, as discussed, are put in place to allow a party to take extra gas on a day and then come back into balance over time. If a party has overproduced in the past, it might find that its pro rata share is reduced until its allocation comes back into balance, or at least closer to balance, with the other field owners.

Liquefied Natural Gas

Sometimes a natural gas find is too far from markets to allow the sale of gas through a pipeline. In these circumstances, the mineral developer may choose to convert the natural gas to liquefied natural gas (LNG). The producer must develop facilities to cool and liquefy the LNG and then store the LNG in pressurized tanks. The LNG can then be placed on a ship and transported anywhere in the world. The problem, of course, is that this process is very expensive. Also, the end-buyer must have facilities designed to allow unloading of the LNG, which limits the market for this product. Thus, LNG development is used only where there are large quantities of natural gas available and local markets are insufficient to allow marketing of the gas. Algeria, for example, ships LNG to Turkey, even though there is a pipeline that allows some Algerian gas to enter the European market. Similarly, Indonesian LNG is sold to Japan, China, and India. Alaskan LNG projects are being developed for sales into existing and developing Pacific Rim markets. At present, LNG tends to be marketed under long-term single buyer contracts.

Abandonment

For many years, little attention was paid to the process or cost associated with the decommissioning or abandonment of oil and gas facilities, either by governments or commercial operators. The issues to abandonment and decommissioning are especially acute for offshore installations. The cost of decommissioning is quite high. The United Kingdom Offshore Operators Association (UKOOA) estimates the cost of decommissioning a small southern North Sea structure to be £30 million, with the cost of decommissioning a larger structure running as high as £200 million. Consequently, oil and gas operators prefer to remove as little of an offshore structure as possible, while environmental groups routinely advocate complete removal of facilities.

These issues received a great deal of attention when Shell Oil proposed abandoning the Brent Spar, a large floating oil storage and loading platform. Shell proposed scuttling the platform. The environmental organization Greenpeace decided that this approach to abandonment was inappropriate and focused a great deal of attention on the proposed decommissioning of the Brent Spar. As a result, Shell changed its proposed approach to decommissioning that facility at a significantly greater cost.

There are several international conventions and guidelines addressing the decommissioning of offshore oil and gas facilities. The United Nations, for example, passed the 1958 Geneva Convention on the continental shelf. Sec. 5(5) of that Convention calls for the complete removal of all offshore oil and gas facilities. This Convention, however, has had little effect on the regulation of offshore oil and gas facilities. Only approximately 38 countries are signatories to the Convention, and few countries with abandonment regulations require complete removal of offshore structures. In 1982, the United Nations Convention on the Law of the Seas (UNCLOS) was passed, effectively superceding the 1958 Convention. UNCLOS contemplates the partial removal of offshore facilities.

In addition to these conventions, the International Maritime Organization (IMO) provides standards for the decommissioning of offshore platforms and installations. Under IMO guidelines, for example, structures in less than 100 meters of water must be completely removed. Structures in deeper water can be partially removed but must allow for 55 meters of open water above the abandoned portion of the facility.

The parties to most international oil and gas agreements have only recently been including provisions addressing abandonment of offshore facilities. Some joint operating agreements, for example, simply provide for an abandonment plan to be drafted five years before the end of field life, with some rules concerning the approval of that plan. Other JOA’s now include provisions requiring the parties to contribute toward abandonment as the field begins to decline, with remedies specified if a party fails to meet the contribution standards in the agreement.

Dispute Resolution

The petroleum engineer should have a basic understanding of dispute resolution in international petroleum transactions to effectively evaluate particular projects, strategies, and agreements. (For additional information on international dispute resolution, see the literature.) Disputes are inevitable during the course of long-term transactions, and international petroleum transactions are certainly no exception. Most contracts and operating agreements include dispute resolution provisions, which provide for choice of law, choice of forum, and the method for resolving disputes. While litigation and various other types of alternative dispute resolution (ADR) may be used, including mediation, the preferred method, in international petroleum transactions, is arbitration. Of course, any discussion of dispute resolution, like dispute resolution itself, is of little substance without a discussion of whether judgments and arbitral awards can be enforced.

Choice of Law, Choice of Forum, and Contractual Dispute Resolution Provisions

The primary consideration in any dispute resolution provision is the agreement among the parties about which jurisdiction’s law shall govern and where disputes will be resolved. Choice of law and choice of forum provisions are generally recommended and indispensable because the absence of such provisions may relegate the parties to the uncertainties of a foreign legal system or to a body of law and panel of decision-makers ill prepared to resolve the complexities of international petroleum transactions and oil and gas law.

Choice of Law. An agreement about what substantive law applies to a given transaction is essential to resolving disputes about contract interpretation, performance, and remedies. Choice of law clauses are generally upheld during dispute resolution, but enforceability depends on whether the parties are subject to arbitration or litigation. In arbitration, the choice of law agreed to by the parties is almost always given effect to resolve disputes concerning the substance of the transaction. If the dispute is litigated or otherwise submitted to a court in a particular jurisdiction, most courts have a distinct body of law governing conflict of laws, which provide varying results based upon the particular court’s evaluation of the choice of law clause, the transaction, and the public policies of the particular jurisdiction.

Common law principles applied in United States courts generally provide that the law chosen by the parties of a contract shall apply unless the chosen jurisdiction has no substantial relationship to the parties or transaction and there is no reasonable basis for the parties’ choice, or unless application of the chosen law violates a fundamental policy or interest of a host country that has a materially greater interest. Admittedly, litigation under such common law principles may not provide certainty in enforcing choice of law clauses. Because other legal systems might raise even more questions concerning enforceability, arbitration is often the preferred dispute resolution method.

Choice of Forum. Forum selection clauses allow parties to select a particular group or court to hear their dispute. In the context of arbitration or other forms of ADR, the choice of forum clause is often included within a particular arbitration or ADR clause or is incorporated by reference to the governing arbitration or ADR rules of a specific institution that prescribes the place of hearing and related procedures. In litigation, as with choice of law clauses, there is some uncertainty whether choice of forum clauses will be upheld in all jurisdictions.

The general rule in most western nations is that forum selection clauses are valid and the party resisting enforcement of the clause must show fraud or establish that the circumstances make enforcement unreasonable or unjust before the party can avoid the clause. Of course, fundamental public policy concerns may be considered by a particular jurisdiction, but in the context of disputes between parties from different nations, most western courts generally limit public policy exceptions to situations in which the contractual forum chosen either won’t hear the dispute on a fair and impartial basis or physical danger is associated with the chosen forum.

Arbitration and Alernative Dispute Resolution (ADR)

Arbitration and other ADR systems are particularly suited to the resolution of conflicts in international petroleum transactions. (For a concise introduction to international arbitration and ADR, as well as an exhaustive list of references and links, see the literature.) Litigation is considered more expensive and arguably leads to more adversarial relationships rather than relationships that facilitate long-term development and cooperation typically associated with the development of international petroleum projects. Depending upon the arbitration clause and arbitration forum used, arbitration can offer a quicker, confidential, and binding resolution. A variety of pre-arbitral methods, including mediation, provide nonbinding alternatives to parties who wish to avoid litigation and arbitration.

International Arbitration. Parties may agree to ad hoc or institutional arbitration. Ad hoc arbitration involves arbitration proceedings chosen by the parties themselves in accordance with mutually agreed-upon rules and procedures. This type of arbitration requires the parties to assume the responsibilities of administering and planning the entire arbitration without the supervision of an established institution. The parties can specifically reference and adopt the arbitration rules of other associations. The United Nations Commission on International Trade Law (UNCITRAL) established arbitration rules without an institution that oversees the proceedings so that parties could either use the UNCITRAL rules in their own ad hoc proceedings or require the institution chosen to apply such rules. In ad hoc arbitration, there is no quality control and oversight by a reputable institution. While ad hoc arbitral awards are also observed by most parties and enforceable under the same laws discussed next, international courts may be more likely to intervene than if the arbitration were before an established institution.

In international petroleum transactions, parties more often choose or resort to institutional arbitration before any one of the many public and private institutions. The most recognized and respected institutions are the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), the American Arbitration Association (AAA), and the International Centre for the Settlement of International Disputes (ICSID), although there are countless other regional, local and industry-specialized arbitration forums. (For a thorough discussion of these institutions and for helpful Internet links to other institutions and resources, see the literature.) These institutions provide a sophisticated forum allowing parties to resolve conflicts under established rules and procedures before arbitrators adept at applying international law and understanding different legal systems.

In 1985, the United Nations General Assembly adopted the Model Law on International Commercial Arbitration drafted by UNCITRAL. The model law was created to provide a uniform and common law of arbitration throughout the world with the goal of resolving the many inherent conflicts among various national arbitration laws. UNCITRAL’s model arbitration law has served as the basis for many national arbitration statutes throughout the world and even for some state statutes in the United States. Until the majority of nations fully adopt UNCITRAL’s model law on arbitration, there will be differences among the nations in interpreting and applying the arbitration rules chosen by the parties or the rules of a particular institution.

The actual process of arbitration varies depending upon the arbitration clause included in a particular contract and the rules and procedures promulgated by the arbitral institution chosen. Whether engaged in ad hoc or institutional arbitration, parties must resolve numerous procedural issues, including selection of arbitrators, number of arbitrators, the language used in the arbitral proceedings, and the procedures used for discovery and fact gathering. Institutional arbitration has been criticized because it has taken on more characteristics of litigation, becoming costly and time-consuming, and certain arbitration associations may not provide the expertise and industry knowledge sufficient to resolve disputes concerning complex international petroleum transactions. Increasingly, parties have looked to other forms of ADR to resolve their disputes in less formal environments that accommodate quicker resolution and foster continued business relationships.

International Mediation and Other ADR. Before litigating or arbitrating a dispute, many parties choose mediation, conciliation, minitrial and other pre-arbitral and prelitigation alternatives. International mediation, a popular alternative among eastern cultures, is a formal process in which parties submit their dispute to a mutually agreed-upon third party or to a particular mediation or ADR organization chosen by the parties. Various international organizations have developed the general procedural rules for mediation, including the ICC, UNCITRAL, and the Commercial Arbitration and Mediation Center for the Americas (CAMCA). Conciliation is considered a less formal alternative to mediation and, unlike mediation, is used less for the purpose of obtaining a final settlement and agreement between the parties, and more for the purpose of maintaining communication between the parties. Like mediation, general procedural guidelines have been promulgated by various international organizations (e.g., the ICC Rules of Optional Conciliation) which are designed to assist the conciliation process and assure impartiality, equity and justice.

Other nonbinding ADR alternatives include the use of pre-arbitral referees and minitrials, which allow neutral parties to narrow the issues and assess the facts and law governing their dispute and provides the parties with an unbiased view of their respective strengths and weaknesses. There are many ADR centers throughout the world and offered by many international organizations. Alternatives are less likely to be drafted into international petroleum contracts but are increasingly popular to avoid initiating the lengthy and binding methods of arbitration and litigation.

Enforcement of Judgements and Arbitral Awards

The enforcement of judgments and arbitral awards is the final step in a dispute resolution process and can often be more problematic than litigating or arbitrating the dispute itself. Enforcement efforts usually require bilateral and multilateral agreements among countries. Obtaining satisfaction upon a judgment or award often involves efforts under different legal systems with varying public policies that can be cited to avoid enforcement or limit the satisfaction sought.

There is no settled international law requiring enforcement of foreign judgments, although many nations are either parties to various enforcement conventions and regional agreements or base enforcement upon principals of international comity and reciprocity embodied in their own national laws. The first of two significant sessions for the Hague Conference on Private International Law occurred from 6 June 2001 to 22 June 2001 in pursuit of a new Convention on Jurisdiction and Foreign Judgments in Civil and Commercial Matters. A finalized convention on enforcement of judgments is not expected until after the second session of The Hague Conference on Private International Law scheduled for the beginning of 2003.

Enforcement of judgments varies, depending upon the legal system of particular nations. As discussed in Sec. 17.9, there are many differences between the civil code and common law legal systems. Whereas civil code nations have specific national laws governing recognition and enforcement of foreign judgments, courts in common law countries, such as the United States, will evaluate applicable statutes and analyze each situation based upon developed common law principles affecting jurisdictions, notice and due process, and fraud. Most nations, including those that are parties to bilateral and multilateral conventions or enforcement of foreign judgments, have public policy exceptions that allow the jurisdiction to avoid enforcement. The lack of certainty in enforcement of judgments and the lengthy process often required for obtaining satisfaction are additional reasons for parties to choose arbitration or other forms of ADR.

Like judgments, enforcement of arbitral awards is subject to bilateral and multilateral agreements among nations, but owing to the long history of arbitration as a successful method of resolving international disputes, arbitral awards are generally observed around the world by private parties and governments or state-owned entities. Arbitral awards are automatically enforceable in most countries under the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention. Where arbitral awards cannot be enforced under the New York Convention, the particular host nation’s own domestic laws and other bilateral and regional agreements might provide a mechanism for enforcement. For example, many Latin American countries are not signatories to the New York Convention; however, most of the nations in Latin America have established national arbitration laws or are bound by the Inter-American Convention on International Commercial Arbitration (Panama Convention).

The international agreements and laws affecting enforcement have simple requirements, usually that the arbitration agreement be reduced to writing, signed by all parties, and that the parties had notice of the proceeding and a reasonable opportunity to participate. Conventions, including the New York Convention, have been ratified by countries subject to various public policy exceptions peculiar to each jurisdiction. For instance, many countries governed by Islamic Law maintain an affirmative defense to arbitral awards where a Muslim was not the arbitrator or included among the panel of arbitrators. Even where arbitral awards are recognized in a given jurisdiction, satisfaction of the award by means of seizure of property can prove impossible. This is especially true for assets and property related to exploration and development of a nation’s natural resources, which might be protected under international law and principles of sovereignty, discussed next.

International Law and Legal Systems

Disputes in international petroleum transactions often involve a host country or national oil company. Because governments are often in conflict with other governments or private parties, a variety of international law considerations must be addressed, including national sovereignty, international treaties and conventions, the type of legal system used in a particular nation, and whether certain domestic laws have extraterritorial application.

Sovereignty

Sovereignty refers to the right of a nation to control the people or things within its boundaries. It is recognized among all nations of the world that sovereignty extends to the nation’s natural resources. Notwithstanding trends toward privatization, much of the world’s natural resources remain publicly owned or controlled by governmental entities. Based upon their sovereignty, nations are free to change their legal regimes and laws governing natural resources and have the power to expropriate the property of foreign nationals doing business in their country. Examination of such expropriations or takings by host nations of the property and contractual rights of foreign nationals is precluded by various doctrines of international law. The act of state doctrine, a doctrine derived from the principal of sovereignty, requires courts to refrain from reviewing the official acts of other nations affecting matters and resources within that nation’s borders.

International law also recognizes the doctrine of sovereign immunity. Sovereign immunity prohibits a nation and its state-owned entities from being sued in the courts of other nations absent express and implied waiver of such sovereign immunity. Sovereignty does not grant the license to violate international law and may not protect a nation or its governmental entities from claims related to international commerce. In the context of expropriation, the trend in international law is toward an international consensus that property should not be taken for public purposes without just compensation. While the world community may be far from adopting the takings jurisprudence applied in the United States, where governments must pay compensation for acquiring private property for public uses, many treaties and trade organizations recognize the basic principle. International law presently requires application of the expropriating nation’s own domestic compensation laws before other nations can take actions in response to the expropriation of a foreign company’s property.

When a dispute between citizens or corporations and a national oil company concerns a breach of contract or similar claim other than expropriation, many nations recognize a restrictive theory of sovereign immunity. The restrictive theory holds that when a sovereign nation is engaged in essentially private transactions, such as commercial contracts, there is less risk of interfering with the integrity of the nation. Several nations have statutes that adopt the restrictive theory of sovereign immunity. The United States applies the Foreign Sovereign Immunities Act (FSIA), which allows courts to find an express or implied waiver of sovereign immunity. Generally waiver is construed very narrowly under the FSIA, although the grounds for finding waiver are broader where the national oil company or governmental entity is engaged in worldwide mineral development or are otherwise parties to operating agreements and private contracts other than concessions. Significant petroleum transactions involving governments often stipulate an express waiver of sovereign immunity, and such waivers are generally upheld. The United Kingdom follows a law similar to the FSIA, the State Immunity Act of 1978, and the European Union (EU) has adopted the European Convention on State Immunity and Additional Protocol.

Even though modern laws and international agreements are changing to put all parties, including governments, on equal footing with respect to commercial transactions, there are still obstacles to litigating matters concerning a nation’s development of its own natural resources. In addition to the act of state doctrine previously discussed, many courts deny jurisdiction or refuse to adjudicate international petroleum disputes that raise a political question. In these instances, courts may recognize that the dispute is already subject to trade agreements or national policies, or that such disputes are more appropriately addressed through diplomacy.

Treaties and Conventions

International law is the body of principles and customs that nations recognize as binding on their mutual relations with one another. International agreements, customs, and general principles are the primary sources of international law. Treaties, conventions, pacts, accords, and protocols are all international agreements. (For a thorough listing of international agreements, including helpful links for treaty research, see the literature.) Treaties may be either bilateral, an agreement between two nations, or multilateral, an agreement among several nations. Once signed by the participating countries, the treaties serve as a source of international law to resolve international disputes. Conventions are similar to treaties, but the term refers to larger groups of participating nations, and ratification of a particular convention represents the legal obligation of a participating nation to apply the convention.

The major treaties and conventions include the Vienna Convention on the Law of Treaties, governing how treaties become binding; the United Nations Convention on Contracts for the International Sale of Goods (CISG), establishing rules governing the formation of contracts and contractual remedies similar to the Uniform Commercial Code used in the United States; and the United Nations Convention on the Law of the Sea (UNCLOS), which sets forth generally accepted doctrines used to resolve boundary disputes. Other effective and generally accepted conventions include the New York Convention, as discussed, and other dispute resolution conventions, including the Convention on the Settlement on Investment Disputes Between States and Nationals of Other States drafted by the International Centre for Settlement Investment Disputes. Still other treaties and conventions exist to assist parties in gathering evidence during disputes. The 1970 Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters includes the framework for service of judicial documents, and the 1970 Hague Evidence Convention provides alternative methods of discovery and evidence gathering. The brevity of this introduction to international law precludes an exhaustive list of treaties and conventions, particularly regional agreements that may affect operations and commerce in particular regions of the world.

Civil Law and Common Law Systems

The resolution of disputes, enforcement of judgments and arbitral awards, and the application of international law are significantly influenced by the type of legal system used in a particular nation. The domestic law of a given nation or of two or three nations may need to be considered in international petroleum development transactions if the actual development occurs within the boundaries of a single nation but involves various multinational foreign corporations. Except for the peculiarities of a few legal systems, such as Islamic law, legal systems are either based upon the common law or civil law. These systems have different origins and traditions, and their basic distinctions should be understood to effectively resolve disputes.

The primary distinction between the common law system and civil law system is the scope of the judiciary and origins of law. In common law jurisdictions, the common law is created by the judiciary to address specific facts and circumstances, and detailed opinions are written to build accepted rules and principles that become precedent to assist in resolving future disputes. Legislation is limited to address specific social and economic matters.

Civil law systems limit the judiciary’s role to interpretation of legislation and legislative principles evidenced in very thorough and complete civil codes created to address all issues that may arise. Courts in civil law jurisdictions, unlike common law courts, are not bound by their own prior decisions or by precedents set by other courts. The systems include other differences affecting how evidence is admitted and trials are conducted. For example, common law courts allow extensive discovery prior to trial, including depositions and interrogatories or otherwise limit out-of-court statements not under oath. Civil law courts do not have such strict evidentiary rules, and discovery mechanisms such as depositions and interrogatories are not used to resolve disputes.

An understanding of these legal systems is imperative for the most beneficial selection of a governing law and forum for any dispute under an international petroleum development transaction.

Foreign Corrupt Practices Act and Extraterritorial Application of Domestic Laws

The United States and a few other nations have domestic laws that expressly apply to the foreign conduct of its citizens. The most notable example of extraterritorial application of domestic law is the United States Foreign Corrupt Practices Act (FCPA) discussed in Sec. 17.4. The FCPA was passed to prevent bribery of foreign officials and to protect businesses from having competitors gain an advantage by offering bribes, although the FCPA has been criticized for putting U.S. companies at a significant disadvantage relative to other nations that do not have a similar law governing the foreign conduct of its companies. By its express terms, the FCPA applies to all types of business entities organized under the laws of the United States, including U.S. citizen employees of foreign companies.

Other examples of domestic laws with extraterritorial application include the Sherman Antitrust Act, which purports to govern conduct outside of the United States and even conduct of foreign companies in an effort to prevent monopolies and cartels from affecting interstate commerce. The antitrust laws of the United States do not apply to foreign conduct where the alleged anticompetitive activities do not have a direct, substantial and reasonably foreseeable effect on commerce in the United States. Also, the U.S. Justice Department may decline to pursue such foreign conduct for reasons of international comity. The EU adheres to a similar antitrust law with extraterritorial application known as Articles 85 and 86 of the Treaty of Rome.

The United States also applies its antiboycott law to conduct abroad. The Export Administration Act prohibits conduct that furthers a boycott of countries friendly to the United States for both U.S. citizens and corporations. By its express terms, the act applies to foreign subsidiaries controlled in fact by a U.S. citizen or corporation, although practical application of the act has been limited to Arab boycotts of Israel.

Many nations have laws authorizing export controls and other economic sanctions. As is the case for many world leaders, the President of the United States has the authority to regulate international commerce and property transactions during any declared national emergency under the International Emergency Economic Powers Act. From time to time, this act has been used to prohibit corporate citizens of the United States from doing business in specific countries. Similar economic sanctions have been used by other nations, although such foreign policy controls are far less used than in decades past because much of the world community has recognized the benefits of eliminating restraints on free trade.

References