Chapter 2

Players
By: [Link] Alhelali
[Link] Almutairi
Second semester 2022- 2023

1
Section 1
Petroleum Contract– Awarding
petroleum contracts
• How petroleum contracts are awarded?

1. Competitive bid: holding a bid/ tender round of

submitting bids/tenders to HGC or NOCs. Then,
awarding the project to lowest price bidder/tenderer
from lists approved by HGC. Competitive bid usually
for simple petroleum projects.

2. Ad-hoc negotiation: serial meetings held between

parties in order to reach an agreement. Usually, HGC
presents its model agreement on the table for
negotiation and amendments. Negotiation usually
for strategic and vital petroleum projects. 2
Section 1
Petroleum Contract– Negotiation
• Negotiation is a difficult stage in reaching a petroleum
agreement. WHY negotiation is a difficult?
[Link]: Parties don’t know with certainty at the time of
signing the contract how much it costs to explore and
develop a field.
[Link] Prices: No body knows what changes may occur to
petroleum prices.
[Link]: No body knows with certainty how much oil or
gas there is in the reservoir.
[Link]: Parties try to protect their interests and increase
profits to avoid loss.

3
Section 1
Petroleum Contract – types of Petroleum
Contracts
• Will discuss International petroleum agreement (IPAs) between HGC and IOC.

Production Service
Concession
sharing contract
Agreement
agreement

IOC CONTROL HGC

4
 Section 1
Petroleum Contract– History of
concession

 It is the original and oldest types of petroleum

 Concession used to be common in the middle east
agreements.
countries in the period from 1920 to 1960s.
 Developed in the USA in the 1800s by Standard Oil
 Concession agreement in Kuwait was signed in 1934
5
Company.
Section 1
Petroleum Contract– Idea of concession

• The idea in the concession agreement is that full ownership given to IOC for all petroleum resources under

the ground. Full ownership comes from the land ownership (property) law in the USA.

 There are two types of land ownership in the world: Compare United ownership to Split Ownership?

1. United ownership: a landowner owns not only the surface of the land and what is constructed above it but

also the entire natural resources underneath the surface including the petroleum resources (US system ).

2. Split ownership: the State owns all petroleum resources regardless of who the landowner is. So, the

surface and the construction on the land (sub-surface rights) is owned by a landowner but the underneath

resources are owned by the government (like Kuwait and most of the countries in the world).
6
Section 1
Petroleum Contract– Definition of concession

• Define the concession agreement?

A grant given by HGC to an IOC (called the concessionaire) of exclusive rights for

undertaking petroleum operations in a defined area, and entire ownership right of

petroleum resources underneath the surface for usually a long period of time, subject to

being liable for such petroleum operations and to bear all costs including paying royalties

to HGC.

7
Section 1
Petroleum Contract– Features of concession

• What are the features of concession agreement?

Basic Features:
Exclusive rights of Entire (full) Liability of the IOC of Costs of the
petroleum operations ownership for risks of petroleum operations beared
to IOC petroleum resources operations by IOC including the
to IOC payment of royalty
to HGC
Secondary
grant Service provider is Long period of time +40 Used to be common
Features:
called years in middle east from
concessionaire 1920s to 1960s

8
Section 1 Production Sharing
Petroleum Contract– History of Agreement

• History shows that in the late 1950s and early 1960s, some HGCs abandoned
the concession agreement and started PSAs.

• Indonesia was the first country refused to continue in the traditional

concession agreement and preferred to retain ownership of the resources and
negotiate a profit-sharing system. WHY ?

 Reason: the national political pressure after independency towards the

control of IOC on petroleum resources in concession agreements. Indonesia
started the nationalization government movement.

• Indonesia can be credited with the innovation of the PSA in 1966.

9
Section 1 Production Sharing
Petroleum Contract– History of Agreement
• After the Indonesia endorsement of PSA, this model of agreement gradually has
recognized by leading IOCs and HGCs.

• All other countries followed this movement (nationalization) after gaining their
independency and requested to retain title ( ownership) on their petroleum resources.

• GCC countries included, for example in 1976 Kuwait nationalized KOC Limited to be
KOC : a state-owned company, fully owned by the government.

• Another key development supported the PSA, is that most of the HGCs become
members of the Organization of Petroleum Exporting Countries (OPEC). Joining the
OPEC was a type of ( re-balancing ) of government-IOCs relationships.

• What is PSA?

10
 Section 1 Production Sharing
Petroleum Contract– Definition of Agreement
• Define the Production Sharing Agreement (PSA)?

 An agreement between HGC and an IOC (called a Partner) for a specified period of time in which Partner
provides upstream petroleum services in exchange of partial ownership of petroleum produced (a
stipulated share) as a reward for the costs and risks of operations shared between the Partner and HGC.

• What are the features of PSA?

Basic Features: For upstream operations Shared ownership: Shared risks

only Partial ownership of petroleum to IOC after Shared costs
being produced Between IOC and
( stipulated share) HGC
Secondary Features: Service Provider is called Specified period of time ( usually 15 to 25 years)
Partner

11
Section 1
Petroleum Contract– Background of Service Contract
• Service contract is the last model of petroleum agreements .

• History shows that Mexico has the leading example of service agreement.

• Kuwait adopted such type of short-term service agreements for years after
nationalization of the petroleum companies, since 1976 and until now. WHY?

The constitution of Kuwait (Art.152) restricts any type of foreign ownership of

petroleum resources as it has to be by law and for a limited period of time.

• As a result of that, Kuwait used to sign simple service agreement that does
not include any type of partial ownership to IOC.

12
 Section 1
Service Contract
Petroleum Contract– Definition of
• Define the Service contract ?

 A short-term agreement between HGC and service provider whether IOC or local and private oil companies
(called a contractor) for performing petroleum services and allocating risks and liability in exchange of
monetary fees with full ownership of petroleum resources remaining to HGC.

• What are the features of Service Contract?

Basic Features: Short-term Allocation of risks Contractor recieves Full ownership of
agreement usually -7 and liability, usually monetary payment petroleum resources
yrs covered by ( cash money) remaining with HGC
guarantees and
insurance
Secondary Features: IOC or local and • It may include any petroleum service not necessary a petroleum
private oil company operation like maintenance, providing tools,licensing technology
called ( called constructing piplines, …etc
contractor) • So, it may include smaller services not only operations.

13
Section 1 Joint Venture &
Petroleum Contract- Framework Consortuim
arrangements
• A petroleum agreement can be signed with only one single IOC or more than one
IOC. The involvement of more than one IOC in implementing a petroleum
agreement is commercial framework arrangement.
• In this case, joint venture or consortium agreement has to be signed by parties of
the petroleum agreement.
• Some books called it separate type of petroleum contracts although concession
agreement can be joint venture at the same time. So, legally it is a type of
commercial framework more than a type of contract. Any type of petroleum
agreements (concession/JV/PSA) can adopt it.
• Define Joint Venture (JV) arrangement?
 JV is a business and commercial arrangement to undertake petroleum operations
by two IOCs with the objective of accomplishing a petroleum agreement.
• Define Consortium arrangement?
 Consortium is a business and commercial association of more than two IOCs to
14
undertake petroleum operations with the objective of accomplishing a petroleum
Section 1
Petroleum Contract Hybrids

• In reality, it hard to find the same models of petroleum contracts (concession/

PSA/ Service) signed between parties.

• Most of the petroleum agreements are (mix and match) between different types

of petroleum contracts to create a new type that fits parties’ requirements and

objectives of the project.

• These new types with the mix and match method are called (Hybrid) agreements.
15
Section 2 – Kuwait Petroleum Sector
• Kuwait Petroleum Sector (governmental sector) consists of the following entities:
1. Supreme Council of Petroleum
2. Ministry of Oil
3. Kuwait Petroleum Cooperation
4. National oil Companies
• In addition to this governmental sector, a private petroleum sector exists, like :-
1. private petroleum companies ( fully owned by private sector) like Kuwait
drilling company (KDC), ..etc
2. shared petroleum companies ( ownership shared between government and
private sector) like Equite 42.5% owned by government.
16
Section 2 – Supreme Council for
Petroleum (SCP)
• Established in 1974
• Related to cabinet, State organ
• Chaired by Prime Minister
• Members = Deputy Prime Minister, MoForeign Affairs, MoFinance, MoOil,
MoCabinet Affairs, Governor Central Bank + expert non-governmental
members (9), mostly private sector
• What is the highest level of decision-making Body in Kuwait Petroleum
Sector?
SCP is the highest level of decision-making body in Kuwait Petroleum Sector.
It lays down general policy of petroleum industry.
17
Section 2 – Ministry of Oil
• headed by Minister of Oil
• What are the roles of Ministry of Oil in Kuwait?
It assists Supreme Council for Petroleum (SCP) in
performing its roles.
It cooperates with governmental entities in
petroleum matters.
 It represents Kuwait in international organization
also like OPEC.

18
Section 2 - Kuwait Petroleum Cooperation (KPC)

• Established by Decree Law no. 6 of the year

1980
• Minister of Oil = president of Board of
Directors
• Governmental entity: Public corporation with
an economic character.
• Subject to the administrative judiciary (as
opposed to its subsidiaries)
• Employees are government employees.
• Independent legal personality: umbrella
organization. HOW?
All NOCs in Kuwait are owned by the KPC,
they are called subsidiaries of KPC. 19
 Section 2 - KPC competencies
• What are the authorities given to KPC?
1. Carries out all the activities related to all phases of petroleum industries,
through its subsidiaries (NOCs).
2. Supervise the strategies of the NOCs.
3. Ensures applying SPC decisions in all petroleum sector.
• What are the authorities provided to SPC in relation to KPC?
1. ratifies general policy of KPC
2. supervises applying Kuwait Tender Law in (bids and tenders in petroleum
sector)
3. ratifies liquidation/mergers KPC’s subsidiaries
4. reviews annual report KPC
20
5. sets personnel and budget goals
Section 2- KPC subsidiaries
( NOCs)

21
Section 2- KPC subsidiaries ( NOCs)
• KPC subsidiaries are state owned companies ( fully owned by the
government) and under the umbrella of KPC.
• They perform petroleum operations in all phases of industry.
Upstream Midstream downstream
KOC KIPIC

KUFPEC KOTC KNPC

KGOC PIC
Q8

22
Section 3 – The Roles of the Play
At What
Cost?

Petroleum
contracts shall
answer?
When WHAT.
IOC must IOC must How?
start?
do?

IMPORTANT CLAUSES
Where?
IN CONTRACTS

23
Section 3 – The Roles of the Play-
What Parties must do?
• The contract must specify rights and obligations of both parties.
• What are the key grants of rights to IOC?

1. It is the main purpose of the contract.

2. It underlines the entire performance of the contract. All other rights

and obligations are subordinate to it.

3. It is the right to conduct the main petroleum operation.

4. It is might be mirrored by similar statement of obligations.

24
 Section 3 -Obligations of IOC
exploration

extraction Key grant to IOC

production
Conduct petroleum
operations
Construction
pipelines

gathering Obligations
storage of IOC
1. Make investment
2. Bear all costs
Mirrored by 3. Provide equipment
obligations 4. Provide personnel
5. Provide technology
25
 Section 3 – The Roles of
the Play- What Parties
must do?
• What are the rights and obligations of HGC?
1. Rights: Access to project area, inspection of assets. Copies of
manuals, design documents, data program and reports, auditing the
contractor, receiving share of the production. etc.
2. Obligations: granting all necessary permits and licenses, open bank
accounts, entry and work permits for employees, permits to import
equipment and tools, access to pipelines, prevent hindering the
conduct of operation… etc.

26
Section 3 – The Roles of the Play-
What Parties must do?
• How interests of parties conflict with each other in performing
petroleum project?
1. HGC: always has an interest in speeding up the rate of exploration
and increase the production as well.
2. IOC: prefers to maintain their exploration and production rights to
the maximum, with the objective of minimizing the expenses of the
works, and to have freedom in setting their priorities.
• How to deal with these conflicting interests?

27
Section 3 – The Roles of the Play-
How works will be done?
• How to deal with these conflicting interests? How to perform the
petroleum agreement?
Parties try to find balance between these conflicting interests
through the following:
1. Time limit for each phase ( exploration, production, …etc)
2. Relinquishment clause requirements ( Ch.1 explained)
3. Minimum work and expenditure obligations.
4. Supervision and approval of Field development plan by HGC.

28
Section 3 – The Roles
of the Play- Where?

• Area of the contract (project) is an important clause that must be

well-identified in contract. WHY?

1. Granting contractual rights to IOC are limited to this identified

contract area.

2. If the area is small but within same geological area of the other
fields, although it is more likely to discover petroleum, but it might
be more complicated because a contractor needs to coordinate
with other contractors in the area (unitization agreement).
29
Section 3 – The Roles of the Play-
When? At what costs?
• When? Already explained in chapter 1. four phases
(Exploration,Development Production , Abandonment or
decommission).

• At what costs? This will be explained in chapter 3 ( Money and

Economics)

30
 Section 4 – Joint Management
• Define Joint Management and identify its objective?
• Joint management means to create a committee by representatives of both parties to
manage activities within a petroleum contract.
• The objective of this committee to allow each party to have a say in decisions related
the project.
• It can be called:
1. Joint Management Committee
2. Steering Committee
3. Technical Consultive Committee
• How decision are taken by the committee?
Usually through the majority vote of the parties on certain issues.
If no majority achieved, then a deadlock built in. Then, Who has the deciding vote?
31
Section 4 – Joint Management
• Who has the deciding vote when a deadlock built in in joint
management committee?
It is common in the joint management committee do not to specify in
contract who has the deciding vote if there is deadlock built in. Why?
• How to solve the issues when there is a deadlock built in?
The issue will remain unsolved until parties reach a decision.
Each party can refer the issue to its senior management for review.
Parties can agree on appointing independent expert to provide its
opinion.
Lastly, parties may start dispute resolution process, if serious, through
litigation or arbitration. 32
Section 5 – The
Operator
• Who is the operator in petroleum projects?
The operator is the entity responsible for the performance of key petroleum
operations.
If the petroleum contract is joint venture or consortium, there must be a clause
appointing and approving one party as being an Operator.
• How to ensure that the Operator is performing its obligations in a petroleum
project?
This shall be done through Reporting and Monitoring mechanism by HGC, through
the following:
1. Access to IOC’s records about all operations.
2. Data and information to be available to HGC whenever requested.
3. Access to petroleum operation on site.
33
4. Send regular ( weekly, monthly,..etc) progress reports to HGC.