DISPUTE RESOLUTION CLAUSES IN OIL AND GAS CONTRACTS

DISPUTE RESOLUTION CLAUSES IN OIL AND GAS CONTRACTS 1.

Introduction

In recent years, the oil, gas, and mineral extraction industry has become widespread across both developed and developing countries. As Al-Asady acknowledges in his seminal text, this industry typically accounts for a large share of the gross domestic product of developing countries.1 It also accounts for a significant part of export earnings, government revenues and job creation. For this reason, this industry has continued to expand its reach throughout the years. Al-Asady2 also recognizes that the individuals and institutions that have been working in this industry acknowledge that it has a remarkable potential for economic and social transformation. Indeed, when it is handled in an effective manner, it retains the capacity to convert a country’s natural resources into the kind of capital that can allow a country to improve its economic might.3

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1

Al-Asady, Janan. Iraq’s Oil and Gas Industry: The Legal and Contractual Framework. (Routledge 2019).

Ibid.

3 Thune, Taran, Ole Andreas Engen, and Olav Wicken, eds. Petroleum Industry Transformations: Lessons from Norway and 2

Beyond. (Routledge 2018).

1

To facilitate effective transactions in the oil and gas industry on an international scale, individuals and institutions have had to develop practices that are specifically suited to the industry. As Leroy notes in his text considering the significance of the oil and gas industry to countries’ economies, even though oil and gas contracts are similar to other commercial contracts used by practitioners in other fields, they usually contain specific clauses which distinguish them from other contracts.4 As such, there has arisen a number of industry specialists whose primary responsibility is not only to study the manner in which the industry operates, but also to draft contracts that are custom-made for the industry.

Leroy also argues that the complexity and risk typically found in the oil and gas sector usually increases the importance of developing clear procedures on how to conduct affairs.5 The drafting of contracts is often done in such a way as to ensure that there is a clear chain of command from the pre-contractual phase to the post-execution phase. In addition to this, this drafting of contracts has to anticipate the various issues that may arise in the process of carrying out the obligations specified in a particular contract. Therefore, the people responsible for the drafting of contracts have to devise special strategies to address the unique aspects of oil and gas contracts.6 For example, a drafter will usually ensure that, for each of the terms that are outlined in the contracts, there is clarity regarding the specific actions that will be involved in their successful implementation.7 In such a case, the critical issues to address include the question of health, issues related to safety, various environmental factors, certain strategic metrics such as the market share, research and development costs, maintenance costs, and other expenses related to leasing arrangements.8 Using the above section as an entry point, this paper will conduct a critical analysis of several unique aspects of the oil and gas sector. Specifically, it will delve into an examination of dispute resolution and related clauses within the context of oil and gas contracts. This paper will also specify the best drafting practices in oil and gas contracts while also considering how this practice may be limited by legal and regulatory constraints. Finally, the

4

Leroy, Alain. Production Availability and Reliability: Use in the Oil and Gas Industry. (John Wiley & Sons 2018).

5

Ibid.

Raszewski, Slawomir, ed. The International Political Economy of Oil and Gas. (Springer 2017).

6 7

Arfania, Behshid, and Emad Molla Ebrahimi. Peaceful Resolution and Alternative Conditions as Dispute Resolution Methods in Upstream Contracts for the Oil and Gas Industry with an Emphasis on IPC Contracts. (2018) 4 Journal of Researches Energy Law Studies 2, 293320.

8 Subai, Pereowei. Local Content Oil and Gas Law in Africa: Lessons from Nigeria and Beyond. (Routledge 2019).

2

paper will explore how the COVID-19 pandemic has influenced dispute resolution clauses in oil and gas contracts.

2.

The Unique Concepts Undergirding Oil and Gas Contracts

Arfania and Ebrahimi maintain that, over the years, oil and gas industry has developed a well-established pattern for transacting business.9 Thus, customs and usages that control the industry often find a way of getting into contracts. These authors also argue that oil and gas practitioners have to understand the application of these customs and usages not only for their importance in the development of form contracts, but also for the important role that they play in negotiations. Through customs and usages, an oil and gas practitioner will also have the ability to set expectations while also perceiving standards of fairness.10 From the assertions made by these authors, one gets to understand that oil and gas contracts are undergirded by specific rules of practice that are unique to the field. More importantly, their work implies that these contracts have a universal aspect to them. In this regard, no matter where an individual or entity is located in the world, the universality of the customs and usage facilitates the negotiation and drafting of contracts as most – if not all – practitioners will be working from the same template.

In light of the fact that oil and gas contracts usually have individuals and institutions who have diverse interests, the oil and gas industry has often relied on various types of contractual arrangements.11 The choice of contracts in the oil and gas sector is unique because of the attendant need to ensure that the contracts that are in use are able to address the specific issues typically addressed by those in the sector. Arfania and Ebrahimi note that the most common types of contracts used in the sectors are granting instruments, joint ventures, and service agreements.12 The choice of contract often depends on the specific needs that stakeholders have.

2.1.

Granting Instruments

A granting instrument is often used in the oil and gas sector to define those documents that use a grant to create a mineral interest. In the typical case, the owner of a particular piece of property will use a mineral deed to create a mining interest in the name of another entity.

However, this method is not the only way that a granting instrument can work. According to Martin Patrick and Bruce Kramer, a landowner may also convey a particular piece of 9

Ibid.

Charrett, Donald. "The FIDIC Golden Principles 1." The International Application of FIDIC Contracts. (Informa Law from Routledge 2019).

11 Charles, Ackah, and Mohammed Asaah. Local content law and practice: The case of the oil and gas industry in Ghana.

No. 152. (World Institute for Development Economic Research (UNU-WIDER), 2018).

10

12

Ibid.

3

property but retain a particular mineral interest. Usually, the retention of the mineral interest means that one has executive and development rights that allow an entity to engage in the process of extraction.13 When considering granting instruments, it is important to note that, in the international context, it is not usually the case that conventional mineral interests are granted.

Instead, there are certain situations which are likely to ensue. First, an entity may, after obtaining a granting instrument, obtain the right to drill and produce certain minerals, but not to own the minerals that have been produced. Therefore, depending on the country from which a person comes, granting instruments may not be applicable to entities who are do not come from the USA.14 2.2.

Joint Ventures Klass and Hannah note that in the oil and gas industry, the use of joint ventures is the

rule and not the exception.15 Indeed, a review of the leading companies working in the industry demonstrates that joint ventures are extremely popular. One could argue that the reason for this popularity is that joint ventures allow entities to maximize economies of scale and therefore limit their exposure to risk. Usually, once a company has obtained the rights which allow them not only to operate a project in the oil and gas industry, but also to engage in development, it has to determine how it will run its operational costs. Most companies find that they are reluctant to incur a substantial amount of risk only to engage in one exploration project. For this reason, joint ventures became the best way through which the projects can be operated. As Klass and Hannah argue, it is often the large companies who undertake major exploration projections on their own.16 For other smaller entities, there is always a need to find partners with whom one can work on a particular project.

Under a joint venture, the confidentiality agreement is one of the most important documents to negotiate. As was seen in the case of Monarch Petroleum v Citco Australia Petroleum,17 it is through settling the terms of the confidential agreement that the companies who are working together can engage in serious discussions. Additionally, Killing notes that, when negotiating confidentiality agreements, the entities who have access to geoscience data often find that they have a competitive advantage over those that do not.18 As a result, therefore, the negotiating of confidentiality agreements often involves the process of 13

Martin, Patrick H., and Bruce M. Kramer. Williams & Meyers, Oil and Gas Law Abridged. (LexisNexis 2018).

Ibid.

15 Klass, Alexandra, and Hannah Wiseman. Energy Law. (West Academic 2016).

16 Ibid.

17 1986 WAR 310 319.

18 Killing, J. Peter. "How to make a global joint venture work." International Business. (Routledge 2017).

14

4

protecting this specific advantage. In recognizing the significance of confidentiality agreements, Killing argues that, considering the fact that they are often drafted hastily, the fact that there are relatively few cases based on these agreements is something that could be considered or remarked upon.19 Even so, Al-Emadi notes that, in the case that confidential agreements are litigated by the various parties to a dispute, usually the main subject of the dispute is the non-competition portion of the agreement.20 2.3.

Service Agreements Service agreements are particularly useful when it comes to the oil and gas industry. As

Killing21 implies in his work, the most common service agreements in the oil and gas industry are drilling contracts. In such contracts, the drilling contract work is undertaken on a turnkey or a daywork basis. Under the turnkey basis, the drilling contractor usually agrees to take either some or all of the risk involved in mechanical failure. Small entities are likely to make use of this kind of contract because it allows them to pay a driller a special premium which then allows them not to be subjected to huge costs that may come as a result of the drilling process.

Under daywork drilling contracts, the producer is usually responsible for paying the chosen driller a daily rate. To this extent, in the case that there should be challenges which limit the extent to which the contract can be carried out, the drilling company in question will continue to incur fees. Killing argues that such contracts may not be the best option as they could result in significant costs for the producer.22 Even so, on the other hand, those who rely on such contracts argue that paying a daily rate is beneficial because if the project is short, the producer will not be forced to incur significant costs. In sum, drilling contracts are often considered to be the most important service contracts as they determine the particular economics of an oil and gas deal.

3.

Dispute Resolution and Related Clauses in Oil and Gas Contracts

Othman’s work demonstrates that, because of its international and multifaceted nature, disputes in the oil and gas industry occur frequently.23 Therefore, whenever disputes inevitably occur, the stakes involved in various transactions means that there is a need for the development of a smooth and speedy resolution methodology. Practitioners in the oil and gas 19

Ibid.

Al-Emadi, Talal. Joint Venture Contracts (JVCs) among current negotiated petroleum contracts: a literature review of JVCs development, concept and elements. (2010). Georgetown J Int Law 1 645 21 Ibid.

22 Ibid.

23 Othman, A. Dispute Resolution in Petroleum Contracts. (2018) 4 Journal of University of Human Development, 4, 36-41.

20

5

industry will be interested in ensuring that their business operations continue even as attempts to solve disputes are ongoing.24 Furthermore, depending on the portfolio that a particular entity has, a dispute in one area may mean that all the operations of the business come to a halt in other regions of the world. For this reason, the high stakes involved in the oil and gas industry may mean that dispute resolution mechanisms are chosen for their benefit to the overall interests of a particular venture.

It is worth noting that, in general, international energy contracts will involve the making of substantial and long-term capital investments. Additionally, these investments are often made in international jurisdictions. As Othman notes in his work, the foreign jurisdictions in question may have an unreliable legal system or be prone to political instability.25 For this reason, understanding the nature of disputes that are likely to occur in the oil and gas sector is necessary. According to Steven Mucci, disputes in this sector can take an infinite variety of forms.26 Therefore, whenever oil and gas practitioners are considering the best way to solve a particular dispute, they will have to begin by considering the needs of their business and then determining whether the chosen method of dispute resolution is able to respond to the said needs.

Generally, disputes in the oil and gas industry can either be vertical or horizontal. To understand these two categories, there will be a need to understand the industry as a pyramid that has four tiers.27 The first tier consists of host governments who are the owners of the natural resources in question. The second tier consists of oil and gas companies such as Shell.

In the third tier, the main players are service providers such as Transoceans. Finally, the fourth tier consists of the entities whose role is the provision of equipment. Under the vertical category of disputes, parties who are in different industry segments find that they are in a dispute. On the other hand, in a horizontal dispute, the parties to the dispute occupy the same tier in the pyramid. Understanding whether a dispute is vertical or horizontal is important because it will guide the method of dispute resolution that a party chooses.28 3.1.

Alternative Dispute Resolution (ADR) Clauses ADR has been seen to be one of the best ways of settling disputes in oil and gas

contracts for two main reasons. First, this dispute resolution mechanism is faster than other 24

Anderson, Owen, et al. Oil and Gas Law and Taxation. (West Academic 2017).

Ibid.

26 Mucci, Steven A. Political and investment risk in the international oil and gas industry. (Lexington Books 2017).

25

27

Dentons, ‘COVID-19 and force majeure positions on Oil & Gas industry standard agreements.’ (Dentons, 30 March 2020). < https://www.dentons.com/en/insights/articles/2020/march/30/covid-19-and-force-majeure-positions-on-og-industrystandard-agreements. Accessed 16 December 2020.

28 n16.

6

traditional methods. Secondly, under this mechanism the parties to a dispute may save on costs and time while also preserving any relationships that they may have. Othman argues that, in oil and gas contracts, negotiation usually happens as a matter of course.29 For this reason, a provision for negotiation may or may not be written into an oil and gas contract. In other cases, the negotiation clause could be incorporated into the contractual agreement as a part of a multi-step dispute resolution process. Even so, when the negotiation clause is incorporated into a contract, there will be a need to ensure that it sets accurate and clear timelines. More importantly, negotiation clauses in oil and gas contracts are rarely the only form of dispute resolution as their use may result in an impasse.

There could also the use of a mediation clause in an oil and gas contract. As Othman argues, apart from arbitration and litigation, mediation is usually the ADR method of choice for many oil and gas practitioners.30 Across jurisdictions, it remains the method that is most used compared to other ADR methods such as negotiation and arbitration. A proper mediation clause in a contract would require the parties to abide by three key measures. First, the parties will be required not only to be well-prepared, but also to remain committed to the process. Secondly, the parties will be required to avail their decision makers at the area where the mediation process will be taking place. Finally, the parties will have to ensure that they have a skilled mediator who will help them to come to a decision.

The third form of ADR clause that can be incorporated in an oil and gas contract is an arbitration clause. Othman notes that, in the oil and gas industry, arbitration is widely accepted and the most-used form of ADR.31 In incorporating an arbitration clause in an oil and gas contract, the parties will have the benefit of a legally binding process that is extremely flexible. The arbitration clause in an oil and gas contract is usually the foundation of international arbitration. As such, there is a need to ensure that, when it is drafted, it is based on the principle of autonomy. Under this principle, parties to the contract usually retain the right to decide how they want to resolve their disputes and where they would like the resolution of the dispute to occur. The arbitration clause should be couched in language that clarifies that the contract is not just binding, but also enforceable. Finally, when crafting arbitration clauses, each party should ensure that it maximizes its benefits and minimizes its risks.

3.2.

Expert Determination Clauses

29

Ibid.

Ibid.

31 Ibid.

30

7

In incorporating an expert determination clause, the parties to a contract agree that they shall rely on what an expert determines regarding their dispute. Usually, this clause is incorporated into a contract to address the questions regarding economic valuations or technical assessments that typically appear in oil and gas disputes.32 In other words, this clause is usually incorporated in a contract where one foresees that there may arise a need for the resolution of disputes involving highly technical questions. Even so, in incorporating this clause, it will be necessary for the parties to understand that the decision of the expert is not enforceable in the same way that an arbitration award usually is.33 Instead, the decision of the expert functions as a contract between the parties to the dispute.

3.3.

Litigation Clauses Dhillon notes that, due to the fact that litigation is often lengthy, it may not be the best

dispute resolution mechanism for oil and gas practitioners.34 Even so, it is worth noting that litigation is the most familiar dispute resolution mechanism for legal practitioners. In incorporating this clause into an oil and gas contract, the parties to the dispute will understand that it may not be the preferred forum for international disputes because of the difficulty of enforcing court judgements and the suspicion that most foreign investors have when it comes to relying on local courts. Even so, in the case that all parties to an oil and gas contract come from the same jurisdiction and are familiar with the jurisdiction’s court system, then one may incorporate a litigation clause in the contract.

4.

Best Drafting Practices in Oil and Gas Dispute Resolution Clauses

Menkel-Meadow notes that one of the ways through which one can ensure that they are putting into effect the best drafting practices in oil and gas dispute resolution clauses is by creating a template from which to work.35 The general understanding of a template is that it is a means that one uses to create a standard document. This document may contain complete provisions or may be limited to certain layouts and styles. In using a standard template, oil and gas practitioners will be able to have consistency in the documents that they use. In addition to this, a standard from template will allow an oil and gas practitioner not only to draft contracts efficiently, but also to create and modify contracts quickly.

32

Pereira Eduardo. Protection against Default in Long Term Petroleum Joint Ventures. (Oxford Institute for Energy Studies

2012).

33

Dhillon, Balbir S. Safety and reliability in the oil and gas industry: A practical approach. (CRC Press 2016).

Ibid.

35 Menkel-Meadow, Carrie J., et al. Dispute resolution: Beyond the adversarial model. (Aspen Publishers 2018).

34

8

The other best practice is to use internal references in a document. These references include the table of contents, cross references, table of authorities, and footnotes.36 One of the most important reasons for using footnotes is that they enable a person to update a draft contract easily. In addition to this, an oil and gas practitioner will be able to navigate the document quickly because they can easily go to directly to the section or article that has been referred to in the table of contents or footnotes section.37 In using these internal references, it will be necessary to ensure that they are used consistently in the document.

When drafting the dispute resolution clause in a contract, it is also necessary to find a mechanism of comparing documents so that an oil and gas practitioner will always be aware of the changes that have been made to a document.38 This comparing process is particularly important where there have been multiple revisions to a document. Finally, when drafting a contract, it will be important to ensure that the execution and acknowledgement sections of a contract have been drafted appropriately to ensure that they comply with statutory requirements.

5.

The Legal and Regulatory Limitation of Oil and Gas Contracts

In the United Kingdom, the legal framework comprises of the Petroleum Act,39 the Energy Act,40 the Infrastructure Code of Practice on Access to Infrastructure (ICOP),41 and the Oil and Gas Authority. When drafting and applying dispute resolution clause, the provisions of the ICOP – particularly with reference to the Energy Act – are important. This document provides the Secretary of State specific powers of settling disputes that relate to access to infrastructure. The Oil and Gas Authority also has powers to attend negotiation meetings when the parties to a contract have a dispute. Furthermore, if the negotiations fail, parties will be able to refer the dispute to the Oil and Gas Authority not just for consideration, but also for determination. As such, the drafting of dispute resolution clauses has to be done in such a manner that takes this aspect into consideration.

6.

Dispute Resolution Clauses in Oil and Gas Contracts During Covid-19

The COVID-19 pandemic has introduced new challenges in the oil and gas sector. In particular, the consequences for oil and gas practitioners have been far-reaching, with workers having to isolate themselves, rigs having to undergo closures, and numerous supply chains encountering disruptions. Thus, there have been concerns that the disruptions brought 36

Ibid.

Ibid.

38 Ibid.

39 1998.

40 2008.

41 2004.

37

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about by the pandemic will lead to the non-fulfillment of contractual obligations. For this reason, one can anticipate that there may be a surge of enquiries that are related to an invoking of the force majeure provision in contracts.42 Under the principle of force majeure, there is usually an unprecedented event that has occurred, thus preventing a party from performing its contractual obligations.43 Therefore, even as oil and gas practitioners contemplate drafting dispute resolution clauses in oil and gas contracts, there should be a clause that clearly details what ought to happen when a situation such as COVID-19 happens. This clause will be particularly important where the situation prevents one of the parties to the contract from carrying out their contractual obligations.

7.

Recommendations and Conclusion

As the work of the various authors in this paper has shown, the oil and gas sector is important to a country’s economy. Even so, due to the fact that oil and gas contracts are often multinational and multi-faceted, disputes in the sector are rife. Thus, oil and gas practitioners often have to devise strategies to ensure that they use dispute resolution strategies that are unique to the sector. The incorporation of dispute resolution clauses in oil and gas contracts is essential as it allows the parties to contract to have clarity regarding the appropriate procedure to use during a dispute. Furthermore, the incorporation of these dispute resolution clauses has to suit the circumstances of the particular contract. For this reason, best drafting practices such as the use of internal references and the use of standard form templates become effective as they help the oil and gas sector to run effectively. It is also necessary to note the various ways through dispute resolution clauses may be affected by the legal and regulatory framework of a particular region. In the UK context, the performance of these contracts is governed by statutes such as the Energy Act (which sets up the Oil and Gas Authority), the Petroleum Act, and the Infrastructure Code of Practice on Access to Infrastructure. Finally, as the COVID-19 pandemic continues to demonstrate, the incorporation of dispute resolution clauses in oil and gas contracts has to foresee the occurrence of events that may frustrate the performance of contractual obligations. In this case, the force majeure clauses that are used in contracts have to be in line with the dispute resolution clauses.

42

Dentons, ‘COVID-19 and force majeure positions on Oil & Gas industry standard agreements.’ (Dentons, 30 March 2020). < https://www.dentons.com/en/insights/articles/2020/march/30/covid-19-and-force-majeure-positions-on-og-industrystandard-agreements. Accessed 16 December 2020.

43 Bortolotti, Fabio, and Dorothy Ufot, eds. Hardship and Force Majeure in International Commercial Contracts: Dealing with Unforeseen Events in a Changing World. (Kluwer Law International BV, 2019).

10

References Primary Sources Energy Act 2008 Infrastructure Code of Practice on Access to Infrastructure 2004 Minera Aquiline Argentina v IMA Exploration 2006 BCSC 1102 Monarch Petroleum v Citco Australia Petroleum 1986 WAR 310 319 Petroleum Act 1998 Secondary Sources Al-Asady, Janan. Iraq’s Oil and Gas Industry: The Legal and Contractual Framework.

(Routledge 2019).

Al-Emadi, Talal. Joint Venture Contracts (JVCs) among current negotiated petroleum contracts: a literature review of JVCs development, concept and elements. (2010).

Georgetown J Int Law 1 645.

Anderson, Owen, et al. Oil and Gas Law and Taxation. (West Academic 2017).

Arfania, Behshid, and Emad Molla Ebrahimi. Peaceful Resolution and Alternative Conditions as Dispute Resolution Methods in Upstream Contracts for the Oil and Gas Industry with an Emphasis on IPC Contracts. (2018) 4 Journal of Researches Energy Law Studies 2, 293-320.

Bortolotti, Fabio, and Dorothy Ufot, eds. Hardship and Force Majeure in International Commercial Contracts: Dealing with Unforeseen Events in a Changing World. (Kluwer Law International BV, 2019).

Charles, Ackah, and Mohammed Asaah. Local content law and practice: The case of the oil and gas industry in Ghana. No. 152. (World Institute for Development Economic Research (UNU-WIDER), 2018).

Charrett, Donald. "The FIDIC Golden Principles 1." The International Application of FIDIC Contracts. (Informa Law from Routledge 2019).

Dentons, ‘COVID-19 and force majeure positions on Oil & Gas industry standard agreements.’ (Dentons, 30 March 2020). < https://www.dentons.com/en/insights/articles/2020/march/30/covid-19-and-force-majeurepositions-on-og-industry-standard-agreements. Accessed 16 December 2020.

Dhillon, Balbir S. Safety and reliability in the oil and gas industry: A practical approach.

(CRC Press 2016).

Killing, J. Peter. "How to make a global joint venture work." International Business.

(Routledge 2017).

11

Klass, Alexandra, and Hannah Wiseman. Energy Law. (West Academic 2016).

Leroy, Alain. Production Availability and Reliability: Use in the Oil and Gas Industry. (John Wiley & Sons 2018).

Martin, Patrick H., and Bruce M. Kramer. Williams & Meyers, Oil and Gas Law Abridged.

(LexisNexis 2018).

Menkel-Meadow, Carrie J., et al. Dispute resolution: Beyond the adversarial model. (Aspen Publishers 2018).

Mucci, Steven A. Political and investment risk in the international oil and gas industry.

(Lexington Books 2017).

Othman, A. Dispute Resolution in Petroleum Contracts. (2018) 4 Journal of University of Human Development, 4, 36-41.

Pereira Eduardo. Protection against Default in Long Term Petroleum Joint Ventures. (Oxford Institute for Energy Studies 2012).

Raszewski, Slawomir, ed. The International Political Economy of Oil and Gas. (Springer 2017).

Subai, Pereowei. Local Content Oil and Gas Law in Africa: Lessons from Nigeria and Beyond. (Routledge 2019).

Thune, Taran, Ole Andreas Engen, and Olav Wicken, eds. Petroleum Industry Transformations: Lessons from Norway and Beyond. (Routledge 2018).

12