# Exclusive Oil and Gas Contracts: Domestic and International

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Abstract

Generally, this paper seeks to reflect more light on Oil and gas contract vis-à-vis the structuring of an oil and gas exploration and development scheme in Malawi. The government of Malawi hopes that this scheme will be a success owing to the fact that, Malawi’s neighboring Great Rift Valley in Uganda has oil. This is an indication that Malawi might be having some as well. This paper will give an introduction on the background of Malawi in relation to oil and gas; it will also give a review of the Myanmar PSC and make necessary recommendations as to whether Malawi ought to utilize it in attracting exploration and investment. Furthermore, an identification of some of the Myanmar PSC provisions will also be reviewed in determining whether they ought to be included in whatever contract the Malawi Government finally drops.

Introduction

Malawi is one of the landlocked countries geographically located in Nyasa land (Southwest Africa).This country can be categorized to be amongst the world’s least developed countries, as well as most densely populated countries. The economy of Malawi is largely based on agriculture to which the rural areas occupy most. The economy of Malawi historically depended on aids from World Bank, individual nations (foreign aids) and the International Monetary Fund.  By 2009, it was estimated that Malawi had a $12.81 GDP with per capita GDP worth$ 900. Furthermore, the inflation was estimated to be approximately 8.5 % during this same year. Since Malawi is largely populated, and yet faces these economic challenges, it is vital that the oil and gas sectors be looked at to verify any chances of increasing the general economy of the country. This could be a significant strategy in the entire economy of Malawi as a nation, and thus effecting the structuring of an oil and gas exploration and development scheme in Malawi (Background Note: Malawi, 2010).

Despite the evident fact that the Malawian economy is determined by the performance of its agricultural sector (particularly in tobacco production which is Malawi’s top fore earner), oil is a very vital aspect of the said economy. Malawi has for a ling time lacked both gas and oil reserves and thus depended mostly on imported petroleum products from its neighboring countries. Several international oil companies are said to have their marketing activities as well as distribution in Malawi which imports all its petroleum products in a refined state. Oil industry in Malawi is under the regulation of the Petroleum Control Commission (PCC) which is mandated to regulate both the distribution and regulation of fuel. According to statistics, 74% of Malawi’s commercial energy needs are supplied by the oil products, to which the market exceeds 20,000 tonnes in each given month. For a long time, the industry player in this sector has been the Energem and Nyasa Investment Oil and Transport Company, BP Malawi, Total Malawi, Chevron Malawi, Injena Petroleum ltd and Petroida (Malawi Economy Profile, 2010).

In 2004, a team of US climate researchers raised Malawian’s hope of ever owning oil reserves in Malawi. The country is said to have a potential chance of having oil in its land. The team of researchers alleged that there could be some oil under Lake Malawi. This is however contrary to previous researches which concluded to the effect that, oil and gas have not yet formed under the said lake. The structures as well as age of Lake Malawi’s sediments scientifically suggest that it is capable o harboring oil. More evidence of oil has been found previously in the Great Rift Valley lakes `such as Lake Albert in Uganda. Therefore, although there exists no evidence to the contrary, it is evident that Malawi has the potential or the high chances that it could be having oil underneath its lake. Malawi’s lack of adequate funding has thus prevented it from embarking on an intensive search for oil in its regions, which would consequently increase their low economy. Below is a diagram illustrating on the drilling sites of Lake Malawi.

Source: Lake Malawi Drilling Project.

Utilizing the Myanmar PSC in attracting exploration and investment

The PSC contract contains some clauses which can be varied after some time upon exceptional circumstances. A model agreement provides the basis for negotiating an ultimate contract; however, changes may take the form of clarifications attached to the model type. There exist several clauses under the PSC, which could be necessary in attracting exploration and investment within Malawi. These clauses make the contract viable and worth embracing (Oil Sector, 2010).

By virtue of clause 2.2 under scope of the PSC, the contractor is given responsibility over MOGE for purposes of executing Petroleum operations but within the provisions of the contract itself. The contractors are further mandated to provide both technical and financial assistance necessary for petroleum operations. Since the given contractor will carry the risk of petroleum costs needed, he shall also have an economic interest in the development of the said petroleum within the contract area. This clause has a great significance to which the Malawi government might be interested in adopting. This is because the contractor benefits directly from the said contract having an economic interest in the general development of the petroleum contract. However, this clause is also challenging by nature because it gives the risks of the petroleum costs to the contractor (Oil Sector, 2010).

Basing on clause 3.1, the contract remains effective even during the exploration and production period. This would be very beneficial to Malawi as a government because it can be able to demand its contractual rights arising during the exploration as well as production. This will in turn attract investments and more explorations on the same. Furthermore, clause 3.2 gives the contractor discretion to extend the six month study period and the three month extension. This is very essential because it gives the contractor time to satisfactorily study the given exploration area and sufficient fulfillment of his obligations. Investors are most likely to be attracted to such a contract because of the said reason which could also enhance the exploration activities (Effect on Malawi economy, 2010).

Clause 4.1 of the PSC reflects on the relinquishments of contract areas exclusive of production, discovery and development areas. Upon the lapse of the exploration period, and the all contractual areas will\be relinquished with an exception of the excluded areas. If a contractor decides to enter into another extension of the said exploration period, (as described under clause 3.2), he can select 75 % of the contract area to conduct further petroleum operations. This is also an attractive bit of this PSC because it gives the contractor the opportunity to conduct any other activities in relation to the exploration of the petroleum. This ought to attract explorations and investors because any and many petroleum operations are allowed as stipulated in this contract.

With respect to clause 6.6, the contractor is given a right to alter the details of a work program upon given circumstances. This right shall be exercised by the contract as long as the alterations made will not change the general objective of the wok program or add on expenditure. This is also a vital factor because a contractor is able to make changes where something is not efficient or fails to meet intended purpose. This is another attractive aspect of the PSC, which can enhance exploration and attract more investors (Malawi, 2010).

Furthermore, clause 6.7 of the contract also eliminates any restrictions that might hinder attempt to\ protect contractual interests upon emergencies. This clause gives parties the right to take necessary action during extraordinary circumstances or emergencies. This should be done for protection of contractual interests of the parties and employees in question. The costs incurred are to further be added in the petroleum costs. This clause is very good by the fact that it allows protective actions to be taken during emergencies. Some contracts are known to place very strict rules that apply even during emergencies. Exploration and investment will be magnetic to such a contract because these terms reflected in the said clause are attractive (Central Intelligence Agency, 2010).

The clauses reflected above are most likely able to attract exploration and foreign investors by the nature of the wording and terms stipulated therein. From the given clauses and the other mentioned clauses in the contract, it is evident that under a PSC, both the government and companies share the gas and oil output. If they fail to find deposits, the risk is on the concessionaires. Reimbursement however can be effected for both exploration and production costs if the vital reserves are found to be exploited. However, many governments that have used PSC for a while have witnessed some difficulties in calculating the definite revenuer of concessionaires which reflects on the amount of royalties it was entitled to. The weakness of PSC is further manifested in the contract by its costly recovery scheme (Professional Services Contract, 2010).

Today PSC contracts are utilized by many nations in oil and gas companies such as Malaysia, Libya, Russia and Vietnam. The major advantage if embracing a PSC contract is the fact that, the government of Malawi will be able to have control over the gas and oil found in the country. This will further enable the government of Malawi to decide as to whether a particular gas deposit ought to be sold either in the local markets or via exportation. This is very important in guaranteeing them the domestic availability of both oil and gas in Malawi. This type of contract is widely accepted and encouraged by countries like Iraq. Iraq is a major producer of oil and is said to have a petroleum law that requires the utilization of PSC.

Basing on all that has been discussed and pointed out from the contract itself; I would encourage the Malawi Government to adopt the PSC contract. However, I would also ensure that they look at the disadvantages that may accrue from its adaptation, to balance which contract will best suit their needs (PSC is not always the Best Type of Petroleum Contract for Governments, 2008).

Vital Myanmar PSC provisions

Under the given Myanmar provisions, some clauses ought to be placed in whatever contract the government of Malawi might ultimately utilize. Clause 2.2 is very vital in that, it gives the contractors a direct involvement in the exploration operations. This clause makes the contractor the exclusive company allowed to conduct petroleum operations in the given contract area. The contractor is legally allowed to have an economic interest in the general development of the said petroleum. This clause is very essential in any given contract that the government of Malawi may opt to adopt and will thus be prudent to include it in any contract they will choose.

Clause 2.4 is also of great significance by its provision. This clause states to the effect that, MOGE will assist contractors in their work performance by supplying all relevant data as well as information that relates to the contract area. This provision is essential and ought to be including I any contract that the government of Malawi will finally choose. The importance of this clause is that, the contractor is given a right to have access to all relevant information that will be necessary for the exploration activities within the contract (Simbolon, 2010).

Basing on the terms stipulated under clause 3.1, the contract remains effective to both parties until and unless terminated by the terms stipulated therein. This contract remains in effect even during exploitation period, production period and any development period whatsoever. This clause is also important in the contractual agreements that the Malawian government seeks to adopt. This clause therefore gives the stipulate contractual obligations and rights to take effect throughout the mentioned period (Cebu, 2006).

Clause 3.2 further reveals the rightful discretionary right accorded to a contractor to extend exploration period. Although the exploration period has a definite period, a contractor is given an option to extend the period at his own discretion so that he can fulfill his intended obligations and any other business needed in the study. This clause also reveals an important aspect that ought to be included in any kind of contract that the government of Malawi may decide to undertake.

Conclusion

In a nutshell, the Myanmar PSC contract reveals a lot of good terms that may be able to facilitate and accommodate more exploration and investments in Malawi. However, the PSC contract evidently has loopholes that need to be addressed to suit the intended needs of the Malawian government in they contract.