Oil & Gas Industry Control Analysis

This assignment delves into the multifaceted control mechanisms governing the oil and gas industry. It examines government policies, such as regulations, subsidies, and special economic zones (SEZs), as key drivers of influence. The importance of company audits as a form of internal control is also highlighted. Furthermore, the essay explores the positive economic impact of the oil and gas sector on GDP and employment, ultimately shaping the balance of power within the industry.

CONTRACTING METHOD

TABLE OF CONTENTS
Q1. Different type of contracting methods used by oil and gas industry ...................................1
Q2. Ways in which global oil and gas industry function ...........................................................3
REFERENCES ...............................................................................................................................5

Q1. Different type of contracting methods used by oil and gas industry
Contracting is the way for forming the legal relationship between the parties. In this
context, it is assessed that there are four different type of contracting methods assessed which are
generally being used by the oil and gas industry such as IOC’s (International oil company) and
HG’s (Host government). The detailed explanation about the same is depicted in below: PSC (Production sharing agreement): It is the legal relationship which is being held
between government and the resource extracting company. In this contract, decision is
taken by the parties that how much resource such as oil will be received by both the
parties which is being extracted from different nation (Stein, 2014). Concessions: It is the type of negotiated contract that is being formed between company
and the government (Concession, 2015). Here, government grants rights to the firms with
regard to operate their business within nation. However, while carrying out operation
companies have to follow all the government's jurisdictions and different conditions. Joint Venture or Partnerships: It is the temporary partnership between two companies. It
is basically formed with an aim to gain the mutual benefit such as sharing of costs and
risk etc.
 Risk/Service contracts: It is the contract in which party who explore oil will incur all the
exploration risks. Thus, here contractor is not entitled to share of production with
government but it is liable to share the profits.
Among all Production sharing agreement is the major form of contract which is being
used by oil and gas companies. The detailed explanation about the same is depicted in below:
Feature of PSC
 It is the legal frame of references which defines about the terms and conditions which is
being held between the parties such as HG and IOC. This agreement is formed through
direct negotiation and either parties do not have any right with regard to impose anything
over other party.
 In this agreement, IOC will enter into relationship with the minister of nation on behalf of
government (Hatami, Sheikholeslami and Ganji, 2014).
 This contract is valid for specific duration and decision about the same is taken by the
government of country.
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Stabilisation and unitisation are two main clauses of PSC. However, PSC has its
advantage and disadvantage to both HG and IOC's. It is shown in following table:
Basis HG IOC's
Advantage of PSC Through this agreement two
way benefit can be gained by
the government of nation.
Here, country can appoint
some other company for the
exploration of resources.
However, at the same time
country can establish control
over its resources.
Before PSC, organizations
used to enter into contract
through concession. This form
of concession involves very
complex tax system. However,
this problem of firm has
resolved when PSC came into
existence because this involve
very simple fiscal regime.
Disadvantage of PSC This proves as ineffective in
the circumstances when the
current government who is
ruling the nation gets changed
(Xinhui and et.al., 2012).
All the risk of oil exploration
is being incur by the IOC's.
The PSC differs from the other forms of contract. In concession government tends to
have less control over its resources. But, in PSC government possess more control over its
resources. Furthermore, in concession companies are entitled for gross production. But, in PSC
companies is entitled for both cost and profit of oil and gas exploration. PSC is also different
from service contract (SC). In PSC, IOC is being consider as the partner and thus it received the
treatment in such a way only. However, in SC IOC's are treated like service provider who
provides services and get fixed pay for the same.
Stabilisation Clauses
These are the contractual protections which are used in the condition when long term
investment is being made by the parties. The main aim of this clause is to protect the project
from the changing conditions which incur in the fiscal and legal environment (Feaster and et.al.,
2015). It includes different other clause such as freezing and economic equilibrium clause. Here,
through freezing clause firm gets this promise from the government that any changes enables
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after the formation of this agreement will not be applied in the present contract. Likewise,
economic equilibrium clause is used to freeze the economic return of investor.
Unitisation Clauses
This clause is used by the ministers of contract wherein they unitize the operation of
country with some other oil exploration company which working within same unit operation.
The main aim of this clause is to increase the reservoir of oil.
Many nations are facing the condition like the scarcity of resources. The same thing can
be applied to the case of oil and gas industry (Doloi, 2012). It is due to the presence of this
aspect, PSC will be consider as best method of contracting because it provides opportunity to the
government of nation with regard to establish control over its scare resources in an effective way.
Thus, government can perform exploration of its resources as per its need. For example, PSA
agreement is used in India, China, Russia and many other countries.
Q2. Ways in which global oil and gas industry function
One of the most basic question which occur in every individual mind that in oil and gas
industry who have the actual control over the resources whether it is the host country or it is the
international oil company. In order to give answer to the particular question following points are
covered:
Who has actual control
On the basis of analysis it is assessed that among both, host country have actual control
over the oil exploration process as compared to the international oil firms. This is because, it is
the government only which makes all the decisions regarding the area where this process needs
to be carried out. In addition to this, government of nation also make the decision about extent to
which the specific drilling process will be carried out (Ruqaishi and Bashir, 2013). Furthermore,
government also control the oil supplying related activity by increasing and decreasing the prices
of oil. Moreover, it is the government only which make all the terms and provisions of contract.
However, in comparison to this international oil company perform the production operation as
per the instruction of respective government. Thus, it can be stated that the host country have
more control over the specific activity.
Who has the advantage in the negotiation process
Before entering into the legal relationship, parties performs negotiation in which they
make the decision about the percentage of profits will be retained by both of them. In this given
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process both parties gain certain benefits. In the negotiation phase, host county have very
prominent role as after all they are providing the place for the exploration of natural resources. In
addition to this, government also possess the authority with regard to entail all the benefits of the
respective country to whom it is being providing place for the exploration of oil. Thus,
government has the authority to claim high percentage of profits (Middleditch and et.al., 2012).
However, in comparison to this international oil company also gain some advantage in
the negotiation process for profits percentage. The international oil firm carries out all the
operational activity. Thus, they have the authority to claim high percentage of profits. This is
because, these invest their resources and material for the specific type of activity. Thus, by giving
emphasizes to the given point, IOC can claim high share in the overall profits.
What are the driving factors that determine control either for the HG or for the IOC
Government has different driving factors for control and among this, tax structure is most
crucial one. Government develops the tax policy and therefore it has control over the operation
of each and every country. Additionally, company audit is another set of control which very
company have to undergone. Beside this, government even make decision for subsidy and SEZ
(Special Economic Zone) which are the key driving factor control.
On the other hand, IOC adds in the economy growth and GDP from which support is
attained in boosting the economy (Rahimpour and et.al., 2012). Additionally, IOC pays huge
taxes from which government is able to meet their expenditures. Further, employment
opportunities are even generated by IOC in the host country and all these certainly act as a
driving factor for offering control in the hand of IOC.
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REFERENCES
Books, journals and online
Concession. 2015. [Online]. Available through: <http://literarydevices.net/concession/>.
[Accessed on 25th December 2015].
Doloi, H., 2012. Empirical analysis of traditional contracting and relationship agreements for
procuring partners in construction projects. Journal of Management in Engineering.
29(3). pp.224-235.
Feaster, T. K. and et.al., 2015. Matrigel Mattress A Method for the Generation of Single
Contracting Human-Induced Pluripotent Stem Cell–Derived Cardiomyocytes.
Circulation research. 117(12). pp.995-1000.
Hatami, M., Sheikholeslami, M. and Ganji, D.D., 2014. Laminar flow and heat transfer of
nanofluid between contracting and rotating disks by least square method. Powder
Technology. 253. pp.769-779.
Middleditch, B. S. and et.al., 2012. Environmental effects of offshore oil production: The
Buccaneer Gas and Oil Field study (Vol. 14). Springer Science & Business Media.
Rahimpour, M. R. and et.al., 2012. A comparative study of three different methods for flare gas
recovery of Asalooye Gas Refinery. Journal of Natural Gas Science and Engineering. 4.
pp.17-28.
Ruqaishi, M. and Bashir, H.A., 2013. Causes of delay in construction projects in the oil and gas
industry in the gulf cooperation council countries: a case study. Journal of Management
in Engineering. 31(3). pp.0501-4017.
Stein, S.G., 2014. Contractor's and Construction Manager's Rights and Duties (Vol. 2).
Construction Law.
Xinhui, S. and et.al., 2012. Homotopy analysis method for the asymmetric laminar flow and heat
transfer of viscous fluid between contracting rotating disks. Applied Mathematical
Modelling. 36(4). pp.1806-1820.
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