Cameron - The Structure of Petroleum Agreements

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Transparency and Accountability

Policy, Legal and Contractual Framework

Sector Organization and Institutions

Fiscal Design and Administration

Revenue Management and Distribution

Sustainable Development

Cameron, P.D., The Structure of Petroleum Agreements, in Petroleum Investment Policies in Developing Countries,  Beredjick, N., Wälde, T., (eds.), (London: Graham and Trotman Ltd, 1988)

The chapter examines some key operational matters that typically need to be addressed when negotiating petroleum agreements. These matters often include, but are not limited to, issues of developmental stages and work program commitments, commerciality provisions, relinquishment, state participation and many more. The author offers alternative ways of tackling the problems which are illustrated using key examples found in petroleum agreements between governments and oil companies.

According to the author, the selection of the provisions presented have a bias towards particular concerns of developing countries; for instance, in determining the level of detail to be included in a work program it is suggested that the non-OPEC developing countries refrain from making too detailed provisions as this may prove to be a deterrent to oil companies as it increases the level of risks associated with the project. However, where this mechanism may only be used for areas of unproven prospectivity, in those areas with high prospectivity this option should prove acceptable to oil companies since the level of prospectivity ultimately reduces the risk profile.

Furthermore, as referenced by the author, issues related to the volatility of the commodity play a crucial role in negotiating provisions in petroleum contracts; for instance, signature bonuses are typically designed to capture more rent to the host government prior to the signing of the contract, but in times of relatively low prices, some countries, as illustrated by examples in China, India and Malaysia, abolished all bonuses as less favorable market conditions translated to lack of investor confidence.

In conclusion, negotiators often have a large measure of flexibility in modifying the standard provisions of petroleum agreements, be it with regards to the size of the acreage being offered, the duration of the exploration period or the relinquishment provisions, all which should not only reflect the exact circumstances of the host country but also respond to volatile market conditions. This could mean including terms that reflect short and long-term goals as well as market predictability or adaptability provisions. The ultimate effect is to create a flexible regime responsive to time changes and not rigid systems which at times of volatility on commodity prices could spell disaster for the host country. 

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