Stability in petroleum contracts : rhetoric and reality : lessons from the experiences of selected developing countries and economies in transition 1980-2002
The discourse on stability of petroleum contracts revolves around how to resolve the tension between the sovereign right to regulate the petroleum industry and the necessity to protect the legitimate interests of foreign investors. The irreversible nature of investment in the petroleum sector, the long pay back period in petroleum contracts, and the political and commercial risks inherent in petroleum projects necessitates stability over the life of the contract as an essential condition for achieving economic interests for the main players in the petroleum industry. The stability of a petroleum contract involves a complex interaction of the legal, economic and political environment in the host country in which it operates and is profoundly shaped by the interplay between internal and external factors governing the petroleum industry. The aim of the thesis is to examine and analyse the recent trends on stability of the petroleum contract in developing countries and economies in transition. Perception of petroleum as a finite, non-renewable resource and the attendant public interest dimension embedded in the contractual arrangements for its exploitation makes the petroleum industry a highly regulated and historically popular area of state intervention. Petroleum contracts are also vulnerable to various kinds of change of circumstances, which can disturb the economic equilibrium of contracts. Stability mechanisms in legal, contractual and economic forms are needed to counter these political, fiscal and commercial risks in petroleum contracts.The study observes that over the last two decades, the fierce competition among the developing countries and economies in transition for attracting foreign investment in natural resources exploration and the end of their radical nationalistic feelings and hostile attitude towards foreign investment have persuaded them to provide favourable conditions in petroleum contracts for the petroleum companies. The study finds that the petroleum contracts in these countries during this period have been marked by increased stability guarantees, greater flexibility in fiscal terms and increased efforts of the parties to make provisions for renegotiation and adaptation of the contract in changing circumstances to maintain stability in the contract and to attract foreign investment in petroleum projects. The growing concerns about negative environmental impact and consequently regulatory and liability risks by the host states have appeared as a significant political risk factor to the petroleum companies. Similarly, host communities' hostile actions spurred by negative social impact of petroleum operations and human rights violations at various stages of petroleum development can pose a threat to stability and to the economic viability of petroleum projects. The study emphasises that integration of environmental and social concerns in petroleum development, assessment of environmental and social impacts, consultation with key stakeholders in the project design and implementation, equitable distribution of economic benefits from the project, respect for human rights of the host community in petroleum exploitation are all seen as key issues to be addressed in order to reduce negative impacts from project, and to enhance stability of the projects. A clearly defined role for the government and company in the area of social responsibility is needed to reduce much of the uncertainty about the allocation of responsibilities that they should undertake.