LLM: Law of Oil and Gas Contracts

Dr Mohammad Hedayati-Kakhki
m.m.hedayati-kakhki@durham.ac.uk

Week 1:

Introduction- Historical Overview and the Role of Oil Contracts

This course will provide you with an introduction to the legal and historical background of oil
contracts, the regulatory and contractual framework and the cross-jurisdictional issues that
surround this essential natural resource.

In today’s world, oil and gas are likely to be key drivers of the world economy for the
foreseeable future. Notwithstanding the sort of economic downturn and prior volatility that
we currently experienced due to the coronavirus pandemic, the long term growth in
economies such as India, China, Russia and the US, coupled with the demand for oil and gas
for transportation, power generation, petrochemical products and other industrial usage, is
likely to continue to ensure that demand for these resources will remain high.1

According to a 2019 report from the International Energy Agency (IEA), global oil demand
in the third quarter of 2019 grew by 1.1 million barrels a day, more than double the 435,000
barrels a day in the previous quarter. China was the largest contributor, with demand
increasing by 640,000 barrels a day.2 Based on current emissions promises by governments,
the IEA forecast a global oil demand of 106.4 million barrels a day in 2040. Emissions will
continue to rise, if more slowly than today, and will not peak before 2040. 3 In a recent report
by the IEA (December 2020), it is said that in 2020, we have seen unprecedented and historic
turbulence in energy markets. ‘Oil demand will rebound more slowly than initially
anticipated in 2021, as the transportation/aviation sector takes longer to recover from the
coronavirus hit. Global consumption is expected to come in at 96.9m barrels a day in 2021
and the demand for oil is ‘clearly going to be lower for longer than expected’. 4

It is petroleum contracts that determine how much a producing nation earns from its natural
resources and whether a government will have the regulatory authority to enforce
environmental, health, and other standards that apply to the contractors.

Of relevance to the legal profession such agreements heavily involve lawyers in the
negotiation and drafting stages as well as their role in representing parties where disputes
may arise (either through court proceedings or alternative dispute resolution). Therefore it is
vital for those studying law on a postgraduate level to have specialist knowledge in the
international petroleum contractual system and the key players in such process and their
respective concerns and interests when negotiating a particular type or aspect of the contract.

1
Gordon, G. & Paterson, J. Oil and Gas law: Current Practice and Emerging Trends. Dundee, Dundee
University Press
2
CNBC [ https://www.cnbc.com/2019/11/15/iea-growth-in-global-oil-demand-more-than-doubled-in-the-third-
quarter.html]
3
The Guardian [https://www.theguardian.com/environment/2019/nov/14/suvs-will-ensure-oil-demand-grows-
for-decades-warns-iea]
4
Financial Times, 15th December 2020 [https://www.ft.com/content/409e7552-ce07-4807-b4e6-b7bd762c86e6]

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Whilst oil contracts can differ in their details, all are similar in determining two key issues
namely how profits/rents are divided between the government and participating companies
and how costs and risks are to be distributed.

From the natural resource–rich countries’ perspective, it is in their interest to use their
resources to obtain funds for social and economic development which they do not already
possess by entering into contracts with foreign companies; negotiating the right contract is
therefore vital to a government’s efforts to obtain the benefits of its natural resources to
maximize its revenues. To do so, governments either create their own state companies for
development, exploration and production or they would invite private foreign
companies/investors to develop their natural resources. Alternatively, they may combine
these two systems (state own and foreign companies) and/or invite a consortium of oil
companies to act as the contractor when developing particular oil fields.

It is through the contractual terms that the benefit received by each party is determined, and
that the hosting government will have the right to enforce certain regulations that apply to the
contractors on the issues such as environmental, health, and other standards to preserve their
resources.

It is expected that a government will use its domestic law to protect the overall public interest
ensuring, that for instance, oil spills do not cause pollution e.g. infecting public drinking
water whilst they are also expected to create a positive environment for investment that
promotes economic and job growth. They are also responsible for legislation relating to
foreign investment and imposing sanctions for any violation. Host governments need to
achieve a balance between these competing needs especially in view of the fact that they
must negotiate such needs with major oil companies, which have the advantage of employing
hundreds of well-skilled legal representatives who try to insert their own beneficial clauses
which may conflict with the hosting government’s regulatory power and domestic law.

It is important to note that usually minimal information is made public about negotiations and
contract terms in the oil industry, thus creating a potential environment for corruption and
abuse on both sides. Foreign oil companies bidding for potentially profitable contracts have
sometimes made illegal payments to government officials or their representatives as an
incentive to obtain financial advantages; it is therefore difficult to establish whether a
company was selected due to its real competence for the deal or as a result of bribing decision
makers/the regulators. However, when a criminal investigation is initiated, focus is normally
placed on the contractual terms and clauses to establish whether one sided financial
advantages are evident and if so whether they could be as the result of corruption by the
officials or undue influence by the decision makers. There are a number of examples of
successful prosecutions against officials based on corruption in various oil rich countries.

At the time of negotiation one of the challenges is the increased level of uncertainty caused
by incomplete or even incorrect information as at the time of signing the contract the parties
cannot indefinitely asses the costs relating to exploration and development of the field or
whether future oil prices will justify if the field is economically viable.

It is important to remember that parties to international oil contracts deviate from the standard
understanding of risk distribution as accepted in law. They do this in order to spread the risks
to those who can handle risk more effectively. As judges in different countries and

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jurisdictions interpret contracts depending upon the socio-legal and political interests of that
particular country, inspection of any two international oil contracts is unlikely to reveal
exactly the same terms.

A key decision that the government must make at the beginning of any negotiation is to select
the type of contract it will use to develop the field; that is to say whether it is better to sign a
concession or license agreement or whether a joint venture agreement, a production-sharing
agreement (PSA) or any other type of service contracts such as buy-back would be the most
suitable agreement to be followed for a particular oil field. As will be explained, each type of
contract has its own specification including various advantages and disadvantages for the
parties. Some similarities between various agreements may also make it difficult to establish
the nature of the contract we are dealing with (e.g. the provisions of license-concession
agreements and PSAs often resemble each other) as the negotiator sometimes uses terms
from various types of contracts and combines them to create their own draft irrespective of
the title given to the particular agreement itself.

It goes without argument that the oil industry is complex, hazardous and capital intensive,
which makes it remarkably different from other industries. From seismic shootout up to
refining the final product, numerous types of technology are involved and various hazards are
present, often necessitating complex and lengthy contracts. Additionally, considerable
amounts of cash are required in order to fund such projects. These factors are multiplied
when operations take place offshore and higher levels of risks requires an adjustment of the
contractual risk allocation matrix, where the indemnity concept is one of the key elements.

Within these lectures we will also discuss the socio-legal constraints and politics of energy
distribution which may influence the international petroleum contracts. We will investigate
the connection between the aggressive foreign policy of oil-rich countries and the rapid
development of international exploitation and pipeline deals. It should be noted at the outset
that oil has always been an intensely political commodity, with many countries deriving all or
most of its foreign exchange through oil exports. Thus, it is hoped that by the end of these
lectures, you will not only have an understanding of the requirements, formalities and
complexity of international oil contracts, but also harness an awareness of the political and
commercial issues involved therein.

The Importance of Oil: A Brief History

Throughout human history, energy has been a key enabler of living standards. To survive in
the agrarian era,5 people burned wood for warmth and cooking. In addition to use as a
building material, wood remained the chief global fuel for centuries.

The invention of the first modern steam engine, at the beginning of the 18th century, heralded
the transformation from an agrarian to an industrial economy. Steam engines could be
powered by either wood or coal, but coal quickly became the preferred fuel and it enabled
massive growth in the scale of industrialization. A half-ton of coal produced four times as
much energy as the same amount of wood and was cheaper to produce and, despite its bulk,
easier to distribute. Coal-fired steam locomotives dramatically reduced the time and cost of
5
An era of human history, beginning roughly 10,000 years ago and lasting until the beginning of the modern
era, when the production of food through agriculture was a central focus of many human societies, and a large
number of people living in those societies worked the land.

3
inland transportation, while steamships traversed oceans. Machines powered by coal enabled
breakthroughs in productivity while reducing physical toil.

The New Oil Economy

According to Chester (1993) the extraction of oil is not a new idea.  The Mesopotamians
exploited asphalted bitumen, obtained from seepages of rock to produce construction mortar,
mosaic cement, road surfacing, and waterproofing materials. This form of petroleum was
called pitch, and was basically the residue left after natural gas and volatile liquid fractions
evaporated from crude oil. Ancient Bahrainis also coated pottery and baskets with pitch, and
in the biblical story of Noah, pitch is used to caulk the ark.

Oil and gas was also used in some capacity, such as in lamps or as a material for construction,
for thousands of years before the modern era. The earliest known oil wells were drilled in
China in AD 347 or earlier and transported in pipelines made from bamboo. They had depths
of up to about 800 feet (240 m) and were drilled using bits attached to bamboo poles.

The modern history of the oil and gas industry however started in 1847, with a discovery
made by Scottish chemist James Young. He observed natural petroleum seepage in the
Riddings coal mine and from this seepage distilled both light thin oil suitable for lamps and a
thicker oil suitable for lubrication. Following these successful distillations, Young
experimented further with coal and was able to distil a number of liquids including an early
form of petroleum. He patented these oils and paraffin wax, also distilled from coal, in 1850,
and later that year formed a partnership with geologist Edward William Binney. There are
also some reports of a possible oil-distilling factory at the Absheron Peninsular, Azerbaijan,
as early as 1837, but these may have used non-industrial methods. In 1848, F. N. Semyenov,
a Russian engineer, drilled a well to 21m at Bibi-Heybat on the Absheron peninsular,
Azerbaijan. By 1861 this well produced 90% of the world’s oil.

In 1853 Ignacy Lukasiewicz, a polish pharmacist interested in the potential of refining

seeping rock-oil as a cheap alternative to whale oil , improved Abraham Gesner’s earlier
refining method to produce clear kerosene from seep petroleum.

The first US oil well is also famous. It was drilled (not dug) by Edwin Drake, using a steam
engine to reach a total depth of 21m at Oil Creek (also named for its natural oil seep), near
Titusville, Pennsylvania in 1859. Initial production was 25 barrels per day (bpd), but by the
end of the year production had dropped to 15bpd.

Throughout the 20th century oil and gas production grew exponentially. Our standard of
living today is the result of, and utterly dependent upon, our ability to find, extract, and use
this stored hydrocarbon energy. Historic events such as the 1929 crash, WW1, WW2, the
Middle East oil embargo, and the economic recessions did affect demand, but today the globe
produces around 30 times as much crude as in 1900.6

Pre-World War II

6
https://grandemotte.wordpress.com/peak-oil-4-exploration-history/

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Oil was first discovered in the Middle East in Persia (Iran) by a British Company led by
William D'Arcy on May 26, 1908. Its global importance was immediately recognised, not
just by the Admiralty in London, looking for new sources of supply for its oil-fired
battleships, but in other European capitals as well—leading to a brief British-German-Turkish
skirmish for control of the pipeline at the start of World War I.

Oil also played an important role in the struggle after the WW1 over the future of the
Ottoman province of Mosul, where a large oil field was eventually discovered in 1927 at
Baba Gargur near Kirkuk in the new, British-mandated Iraq. Oil was next found in the
Middle East beginning with Bahrain in 1931; there were subsequent discoveries in Kuwait,
Qatar, Saudi Arabia, the Trucial States (Abu Dhabi and Dubai), and Oman. By 1960 the
smaller Gulf countries were producing 15 percent of the world’s oil, with another 10 percent
or so coming from Iraq and Iran. By 1970 this had risen to 30 percent

Before World War II, Middle Eastern countries competed for investment from international
oil companies (IOCs)7. The largest IOCs were more fearful of an oil glut, which would
depress prices, than of shortages, which would inconvenience consumers. Under the 1928
Red Line Agreement, the partners in the Iraq Petroleum Company agreed that none of them
would explore for or develop new oil in the former Ottoman Empire unless every partner
consented to each new project. Countries inside the Red Line had difficulty getting the IOCs
consent to find and develop the oil that could have increased their national incomes because
the largest - and richest - Red Line companies were reluctant to add to already excessive oil
production capacity.

Oil partnerships and concession patterns limited the leverage of Middle Eastern governments.
Instead of one government hosting several firms that operated on various parts of its territory,
the initial pattern of oil industry development in the region was to have a single operating
company, often a joint venture or partnership, as the only oil producer in each country. Joint
ventures are common in the oil industry because of its capital intensity and high risk and will
be discussed in more detail later in these lectures. Individual parent companies like Gulf
(now part of Chevron) and the Anglo-Persian Oil Company (later Anglo-Iranian Oil
Company, then British Petroleum, and now BP Amoco), set up jointly owned operating
companies such as the Kuwait Oil Company (KOC) to pool financial resources and risk.

Oil was discovered in Kuwait in 1938 which eventually led to Britain taking total control
over the country in 1941. Subsequently, Kuwait’s ability to choose a concession partner was
limited by treaties between its ruler and the British government, which gave Britain the final
authority to approve concession agreements. Britain would not allow Kuwait to contract with
a non-British company, although Kuwait eventually persuaded Britain to accept a non-British
firm as a partner in KOC. The concession further limited Kuwait's autonomy by giving KOC
exclusive rights for ninety years to find and produce oil over the entire land area of Kuwait.
Had Kuwait sought better terms from another company during that time, that company would
have faced legal challenges from KOC's parents, preventing it from selling Kuwaiti oil in the
international market.

Post-World War II

7
Sampson, A. (1975) The Seven Sisters: The Great Oil Companies and the World They Shaped. Viking. New
York

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Post-world war II Iran also found itself in exactly this situation. In 1951, the Iranian
government under Prime Minister Mohammad Mossadegh nationalised the operations of
Iran's oil company following a conflict with its managers. Iran had only one parent company,
Anglo-Iranian Oil Company (AIOC), which was the owner of the oldest oil production
facilities in the Middle East. As a result of the Iranian government’s actions, the AIOC
obtained court orders enjoining other companies from buying Iranian oil.

Afraid that successful nationalisation of the oil industry by Iran would lead to a similar trend
in other Middle Eastern governments, the British and American governments worked to
destabilise and eventually overthrow the Mossadegh regime. The restoration of the Shah,
Mohammad Reza Pahlavi, in 1953, following a brief period of ouster, also reinstated foreign
oil companies as managers of the nationalised Iranian oil company. Rather than restoring
AIOC to its former position as sole owner, however, the Iranian government sought a
"Kuwait solution" and invited non-British participation in the National Iranian Oil Company
(NIOC). When NIOC was reorganized, American companies and the French national oil
company received 60 percent of the shares, leaving AIOC with only 40 percent.

It is clear that the one-company/one country concession pattern allowed oil companies to
treat one or more Middle Eastern host countries as marginal suppliers of oil to the
international market despite the cost advantages of their oil over what could be obtained from
most other sources. This balancing act was possible because all the major companies whose
production holdings stretched across the Middle East were partners in two or more
concessions. The way the Iranian crisis was resolved in the 1950s made the management of
crude oil supply by the IOCs even easier. The reorganised NIOC was the first operating
consortium in the Middle East to include all of the Seven Sisters - the IOCs dominating the
industry from the end of World War II until the oil revolution. Once these companies had
estimated the amount of oil needed to balance market demand, they could regulate production
by increasing or decreasing off takes in countries whose governments could not retaliate
easily.

Following the reorganisation of the Iranian concession, which incorporated several

independent companies, independents began to compete more vigorously against the majors
to win new concessions. When the government of Libya opened bidding for concessions in
1955, it divided its territory into individual parcels, eventually awarding rights covering 55
percent of its land area to fifteen operating companies whose owners included independents
from France, Germany, and the United States. At about the same time, older producers with
unallocated offshore properties began to auction them off. The independents were innovative
bidders for all these properties, offering terms that included higher-than-average lump-sum
payments and royalties along with equity shares for host governments. Better terms for new
concessions encouraged host governments to demand that prior concession holders relinquish
un-exploited territories. The new concessions that were signed for relinquished properties
included sunset provisions allowing the contracts to lapse if the companies failed to develop
promising properties after a predetermined period of time. As more and more independents
won concessions and then found oil, markets became glutted and prices weakened.

In 1959 the U.S. government imposed a quota on U.S. oil imports. The U.S. market, the
largest in the world, was doubly lucrative because the high cost of domestically produced oil
gave sellers of lower-cost foreign oil the potential to reap high profits by selling at or slightly
under high U.S. product prices. U.S. based IOCs had long been encouraged by their
government to find oil overseas, and access to the protected U.S. domestic market reinforced

6
other incentives to invest abroad. When profits from their international operations were
squeezed by higher concession costs and competition from independents, IOCs with
marketing outlets in the United States looked toward U.S. oil sales as a source of deliverance.
However, cheap imports threatened the domestic price structure, and firms that owned only
U.S. production facilities fought oil imports, especially from the low-cost Middle East.

The U.S. government asked oil companies to limit imports voluntarily, but hard-pressed firms
were unwilling to forgo profits from crude sales in the United States. Domestic producers,
citing national security and the risk of becoming dependent on foreign imports, soon
demanded real protection. In 1959, voluntary quotas became mandatory. Meanwhile, the
major companies had begun to consider reducing per-barrel prices paid to host governments
as a way to improve deteriorating finances. In February 1959, after consulting one another
(but not their hosts), the IOCs unilaterally reduced the posted prices of crude oil used to
calculate operating-company tax obligations to host countries. Despite the outcry that
followed, the IOCs lowered posted prices again in August 1960. In September, Iran, Iraq,
Kuwait, Saudi Arabia, and Venezuela formed the Organization of Petroleum Exporting
Countries (OPEC).

The OPEC Era

Through OPEC, major oil exporting countries had the same opportunities to coordinate their
oil policies that the IOCs had long enjoyed. They used the companies' refusal to engage in
joint negotiations with an OPEC representative to ratchet oil prices up in successive
negotiations, each taking the best deal made by any other member as its floor for the next
round, a tactic called leapfrogging. Following a failed Arab oil embargo imposed after the
1967 Arab - Israel War, OPEC militancy in relation to the IOCs grew. In 1970, the Libyan
government used its superior structural position to induce leapfrogging among its own
concessionaires, enforcing production cuts on the most vulnerable to make them agree to
price increases and then imposing those increases on the rest.

In 1971, OPEC moved toward participation, a concept referring to gradual nationalisation,

which had originated with Saudi Arabia's oil minister, Ahmad Zaki Yamani. The process
allowed each OPEC member to develop a strategic plan for assuming control of its oil
industry. After nationalisation, most national oil companies (NOCs) managed their new
responsibilities far better than predicted, some with the assistance of former concession
owners. A few acquired overseas holdings and most added to their hydro-carbon reserves and
expanded operations, such as refining, that added value to their exports. Such exports became
the driving force behind industrialisation, affirming that we cannot underestimate the
importance of oil in today’s global economy.

This conjecture is avowed because there is no country or area in the world today that can
insulate itself from problems in the oil market, as the recent shortages in Europe highlight. 
Oil affects every nation on earth with no exceptions.8

The Impact of Oil Today

Nowadays, oil is remarkably pervasive in society and can be found in a multitude of

commodities.  Arguably consumption in the twenty first century has been abundantly pushed
8
Odell, P. R. (2001) Oil and Gas: Crises and Controversies 1961-2000, Volume 1: Global Issues. Studies and
Commentaries (England, Brentwood: Multi-Science Publishing Company Ltd

7
by automobile growth, though it is a misconception that oil is merely present in petroleum
fuel for cars.  Oil is used for heating homes, running electric power plants, fertilizers and
pesticides and a whole variety of plastics. 

The latest predictions from the IEA are that that under its central scenario the world will be
consuming over 106 million barrels of oil a day in 2040, increasing from 96 million barrels a
day in 2018. However over the same time the IEA expects that conventional crude oil output
from existing fields is expected to fall by around 40 million barrels per day by 2035. This
indicated that new sources of oil will need to be developed, and new contracts must be signed
to make up for the decrease. The development of unconventional oil will clearly have an
important role in the coming years.9

The IEA also highlights the Middle East as being at the centre of the longer term oil outlook.
Even taking into account the significant increase in domestic consumption in the region,
exports will continue to be integral to global supply. From the international investors’
perspective, this will require a large investment in both exploration and production, an
estimated amount of $660bn investment per year will be required to meet global demand.

The IEA further commented that Iraq, due to its huge oil reserves, could be the single largest
contributor to global production growth on a condition that appropriate steps are taken to
enhance its legal and financial framework within which foreign investment could be
operated.10

Overall, oil fulfils many important roles. It is a key global commodity, political bargaining
chip and economic catalyst or, as the Iraq/Syria war showed us, excuse for military
intervention. In any of these roles, oil is undoubtedly very important.

A quarter of a century ago, the economist Walter J. Levy deplored "the years that the locust
hath eaten," the resources consumed rather than invested to achieve long-term, post - oil age
economic security11. Since then, the locusts have consumed many more resources, while
Middle Eastern governments and populations remain acutely dependent on oil revenues for
basic needs. Wisdom suggests anticipating the end of the oil age by adopting new investment
policies, but the combination of expediency and their strong positions in hydro-carbons offer
more tempting and far easier alternatives to Middle Eastern countries making choices about
how to use their petroleum resources.

Before we begin by focusing on the provisions of various oil contracts it seems appropriate to
address some of the key terms which are frequently used in petroleum agreements. Generally
we use petroleum to describe both oil and gas as both substances contain hydrocarbon
compounds and are often found in the same location. 12 This course places its focus on the
exploration and production stages, and refineries as well as transportation are outside the
scope of these lectures.

Upstream:

9
https://www.gov.uk/government/speeches/middle-east-and-north-africa-energy--2
10
Ibid
11
Levy, Walter J. "The Years That the Locust Hath Eaten: Oil Policy and OPEC Development Prospects."
Foreign Affairs 57 pg. 287 - 305
12
Oil Contracts: How to Read and Understand Them, OpenOil, 2012 http://openoil.net/understanding-oil-
contracts/

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These operations deal with the exploration process relating to the oil and gas industry. This
stage primarily begins with locating areas which can then be tested and drilled for oil and gas.
When commencing oil exploration, in order to increase efficiency and limit wasting time and
money, seismic testing is undertaken. The aim of seismic studies is to ‘use sound waves, shot
down into the earth, to see what is underground.’ 13 This process gives an indication of
whether oil and gas may be present in a given area; however this cannot be confirmed until
the drilling of an exploration well has commenced. Once an area has been located and
relevant seismic testing has been completed the drilling will begin. Carrying out such tests
and drilling can be a long process ranging from several months to between two and four
years.14 All of these activities are regulated by the contract signed between those with
knowledge/technical equipment on one hand and the hosting country on the other.

Once testing has been completed and it has been verified that “commercially viable”
quantities of oil are present for extraction 15 the wells must be prepared for the
exploitation/production process and a separate contract will be drafted for the extraction stage
all of which falls under the general concept of upstream operations.

Midstream:

Operations which occur during the midstream stages of oil and gas production include the
processing, transporting and marketing of the oil or gas which has been located. This includes
purifying the gas and compressing it in order to transport it by way of pipelines from its
original source. Decisions must be made about the appropriate way to transport the oil or gas,
which differs depending on whether the area is onshore or offshore. Onshore, the streams are
brought into production facilities over a network of gathering pipelines and manifold
systems,16 whereas it is now becoming increasing common for offshore companies to use
“boat like structures” to extract the oil and gas.17

Downstream:

Downstream operations refer to the activities which take place after the production phase
including refining and distributing the products. Refining aims to provide a defined range of
products according to agreed specifications and often includes product distribution terminals
for dispensing product to bulk customers such as airports and gasoline stations. 18 This phase
continues on to the retail and selling of oil and gas. As mentioned this area of study and the
related contracts are outside the scope of this course.

Offshore/Onshore:

13
Ibid
14
Ibid
15
‘An introduction to oil and gas production, transport, refining and petrochemical industry,’ Harvard Devold,
online article, last accessed 10th January 2017
16
‘An introduction to oil and gas production, transport, refining and petrochemical industry,’ Harvard Devold,
online article, last accessed 10th January 2017
17
Oil Contracts: How to Read and Understand Them, OpenOil, 2012 http://openoil.net/understanding-oil-
contracts/
18
‘An introduction to oil and gas production, transport, refining and petrochemical industry,’ Harvard Devold,
online, last accessed 10th January 2017

9
Onshore refers to operations occurring on land whereas offshore exploration/exploitations
take place on the sea bed. There is another area falling between these operational fields which
could also be economically prominent known as Shallow deposits. Offshore operations are
more expensive than onshore operations due to the type of facilities and structures required.
Shallow deposits can be drilled with lesser supporting equipment than traditionally used in
offshore explorations; however, deep water drilling is more costly due to the fact that the
platforms are technically more difficult to construct further out to sea. These issues are
considered in any given negotiation for contracts and are addressed within the agreements by
way of allowing various financial incentives (e.g. tax reductions) etc.

Conventional Oil & Gas

Conventional Oil and Gas is simply known as the traditional way to drill for crude oil and
natural gas. After a well is drilled, oil and gas is extracted by the natural pressure from the
wells and pumping operations. Conventional resources tend to be easier and less expensive to
produce simply because they require no specialized technologies and can utilize common
methods. Because of this simplicity and relative cheapness, conventional oil and gas are
generally some of the first targets of industry activity.

Unconventional Oil & Gas

In contrast, unconventional oil or gas resources are much more difficult to extract. Some of
these resources are trapped in reservoirs with poor permeability and porosity, meaning that it
is extremely difficult or impossible for oil or natural gas to flow through the pores and into a
standard well. To be able to produce from these difficult reservoirs, specialized techniques
and tools are used. For example, the extraction of shale oil, tight gas, and shale gas must
include a hydraulic fracturing step in order to create cracks for the oil or gas to flow through.
In the oil sands, in situ deposits must utilize steam assisted gravity drainage to be able to
extract thick bitumen from underground deposits. All of these methods are more costly than
those used to produce fossil fuels from a traditional reservoir, but this stimulation allows for
the production of oil and gas from resources that were previously not economic to extract
from. These resources become reserves when they can be utilized economically.

Crude Oil

Mixture of naturally developing hydrocarbons which are refined into diesel, gasoline, heating
oil, jet fuel, and many other products known as petrochemicals. Crude oils are labelled based
on their origins and contents and categorised in accordance with their weight per unit.

Barrel of Oil

A barrel is a measure of volume for crude oil and petroleum products. One barrel equals 42
US gallons which is equivalent to 35 UK (imperial) gallons or around 159 litres. As of 11 th
January 2021, a barrel of Brent crude oil is $55.50 which shows a significant decline since
2012.19

Questions to consider:

19
https://oilprice.com/oil-price-charts/46

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  Consider the historical development of oil contracts from its conception up to the
modern era in a given region. Use examples from particular countries to demonstrate
how the contracts have developed in terms of distribution of benefits and risks
between hosting countries and international oil companies.

 Consider the nationalisation of the oil industry in a particular country and discuss the
political and social reason behind such development. Iran and Latin American
countries could be good examples for such discussions.

Further Reading:

1. The History of Oil by Paul Stevens, September 2010, EU Policy on National

Resources (POLINARES, online)

2. Daniel Yergin, The Prize: The Epic Quest for Oil, Money, & Power, New York:
Simon & Schuster, 1991

3. Philip Andrews-Speed, “International Competition for Resource: The Role of Law,

the State and of Markets.”(2008)

4. Useful links:

Summary of the Modern History of Oil: [https://www.youtube.com/watch?

v=xMQUGSrnbP8]

Fundamentals of Upstream Oil and Gas:

[https://www.youtube.com/watch?v=gIWH5b1_bRY]

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