Legal Aspects of Oil and Gas Industries

Question: Describe the legal aspects of oil and gas industries? Answer: The oil and gas industry attracts complex, risky, as well as operations that are expensive that happens for a long period. Employments of special contract are done in guiding the relationship among different parties that are merged in the operations. When the operations and the relation is complex in nature, many disputes happen in the course of activity. Disputes may happen concerning the claim of maritime boundary, claim relating to equipment, claim over jurisdiction, claim in tune with the quantity and quality of goods, etc. Hence, to restrict the progress of oil, as well as gas operations it is important that the parties do proper means of resolving the disputes (Kendall, 2008). The common method of resolving dispute is by the process of litigation but due to the fees and time span involved in it, parties to the contract uses the concept of arbitration that plays a major role in settlement of disputes by amicable means (Born, 2009). When the dispute happens, it relates to two different countries and this leads to tussle between two countries. Hence, the legal system is concerned with many factors like issues relating to legal system, convention, as well as international treaties, implementation of laws, etc. It is to be noted that contract states the scope of dispute resolution. The main idea relates with the sovereign immunity is concerned in international law that states the party to the contract cannot be sued in the absence of a clause. The presence of corporations helps in recognizing the principle of restrictive sovereign immunity (Born, 2014). The application of Foreign Sovereign Immunities Act provides waves of the express or implied clause. High risk is involved when it comes to oil exploration. Such agreements can be entered into by way of agreement that is joint in nature or marketing agreement. When it comes to joint operating agreement, one of the parties assumes the position of an operating party that is responsible for everyday exploration and management of the affairs that are related. The other non-operating party will provide reimbursement of the operating party at the determined percentage that is done on a pro rata method (Brister, 2014). Hence, in this particular contract, the share of interest determination can be termed as important and may lead to dispute. Beyond question, the accounting principles help in chalking out the expenses, as well as revenue, cost reimbursement that is incurred by the party that is operating and indemnification that happens of the operating party when there is a default. Hence, when it comes to payment or liability, it is done based on casting of votes either for or against the resolution that is proposed (Brister, 2014). Marketing contract is another type of contract that is related to oil and gas where the rights, as well as marketing of the oil along with the LNG are provided to the other party residing in another nation (Oil and Gas disputes, 2015). Such contracts need s strong grasp of the market and the skills to store, transport the gas, and maintain them at the needed temperature. It requires huge cost and hence the market research needs to be extensive in nature before entering into a contact (Brister, 2014). In contracts, the provision of dispute resolution are done when the relationship are soured. Therefore, it should be necessary that proper emphasis must be provided to the provisions at the starting stage (Paul, 2010). Arbitration can be said to be a part of ADR that helps in settling the dispute between two parties without referring to the traditional court. In case of arbitration, the parties to a dispute refer to one or more persons who are termed as arbitrator or an arbitral tribunal by whose decision or award are set. An international commercial arbitration can be institutional or ad-hoc arbitration. When it comes to institutional process of arbitration, the parties to dispute agree to adhere to a dispute for determination that is in tune with the arbitral institution. The institutions have well settled policies and programs that help in conducting arbitral proceedings (Kluwer, 2014). Qualified arbitrators can be selected in this regard. The disadvantage that can be viewed over here is the hefty fees that can becomes more than the dispute. On the contrary, when it comes to ad hoc system of arbitration, no fees is payable to the institution and the arbitrators having the final say on the rules, as well as regulation of the arbitration. Hence, better flexibility is observed in ad hoc arbitration and therefore majorly attracts the claims that are smaller in nature and less expensive (Paul, 2010). There is a difference change when it comes to oil and gas industry. This change was witnessed after the process of liberalization and hence more venues were opened for the trade and agreements. The court proceeding that is traditional in nature needs the disclosure of information that is sensitive in nature and might be of strategic importance. Hence, can be termed as a disadvantage of litigation. Held in the case of Lyondell-CITGO Refining, LP v. Petroleos de Venezuela, the court wanted an access to the minutes of the Board Meeting though the Law of Venezuela prohibited an access without involving security clearances (Kluwer, 2014). Hence, the plaintiff was based in a position that was unenviable. In such specific situation, the forum of International Arbitration comes to help where the access can be denied by resorting to NOC. When it comes to International Commercial Arbitration, it helps and allows for selecting the expert who is impartial so that the documents can be evaluated and the objectivity of the information can be subjected to better security. Moreover, two different countries are involved in case of oil and gas contract and none of the party is willing to be subjected laws of another country. To devoid home country any advantage, the Rule of International Arbitration needs the appointment of an arbitrator that is neutral in nature and it is done after considering the place of the arbitrator who is independent in nature. Moreover, the relationship of the nation of the arbitrator with the parties to the arbitration is also considered. Therefore, arbitration can be termed as the appropriate method that can be adhered to disputes and can be termed as the best option for the parties to the contract. The proceedings of the corresponding are also simpler in nature and flexible as compared to the court of the US. The rules of IBA also include a provision where the Tribunal Arbitral can provide the judgement without intake of any information that is sensitive in nature. The court of US allows information withholding of information when it comes to the common ground but does not stress on the rejection of the element of disclosure that may arise due to confidentiality based on technical or commercial aspect. The institution of arbitration considers this aspect (British Petroleum, 2015). Hence, it can be commented that arbitration has better terms in comparison of the court when it comes to the point of disclosure. The party who drafts the agreement of arbitration contains the procedure of arbitration that dwells on mutual facts and understanding. It is a vital concept of the International Arbitration that provides the parties to the contract can select the seat of arbitrators. However, when the parties are unable to undertake this, the role of Arbitral Institution comes to the forefront. The selected Arbitrators are qualified and expert in their subject contains knowledge that deals with the subject matter of the contract, as they are majorly concerned with selection and appointment of the parties as against the magistrates and judges of the court who do not possess the specialization in specific cases of business (Born, 2014). Moreover, the arbitrators do not have any link with the disputed parties or the countries to which they belong. The process of litigation is complex in nature and needs a description. When it comes to the process of litigation, the appointment of judges are done by the state and the law of the state prevails where the case falls. This is defined as a strict happening. On the other hand, in the case of arbitration there is freedom in this entire scenario. In the case of litigation, the parties to the contract are completely dwelling under the influence f the lawyers, advocates and barristers who undertakes the case and gives it a proper direction by the evidence and their skills whereas in case of arbitration, the case remains personal to the party involve as the parties can put forward their viewpoints (British Petroleum, 2015). Hence, the parties can represent their argument and fight according to their benefit. Moreover, the losses or gains rest entirely on the parties. Therefore, the prospects are good for the parties as the settlement is done by peaceful manner. This helps in maintenance o f the relationship between both the parties. Moreover, the time, as well as cost involved in litigation is high because the court fees, barrister fees are required to be met. Moreover, the time span is longer as new dates are taken for representing and producing the evidences. However, arbitration cannot be termed as a less expensive method, but requires less time. The case happens on a fast mode and the judgement happens quickly (Born, 2014). The court considers a lot of time and is expensive in nature. In case of arbitration, the element of privacy and confidentiality is maintained that makes the process flexible and result oriented in nature. The process of globalization leads to influence of one particular order of court on the transactions of other. It was witnessed in the case Yukos, the largest oil private player that filed for Texas bankruptcy, the government of Russia could not lead to the assets sale as an injunction was obtained for the sale in Texas. Hence, it can be witnessed that the commercial as well as global parties are influenced by the order of the court and therefore to avoid all such situation international arbitration can be seen as a method for the settlement of dispute by helping the parties to draft contractual terms that are favorable in nature (Buhring Kirchhof, 2006). With the due passage of time, there has been much criticism on the private oil players because of the heavy profit making, regular scrutiny by the taxation authorities and the packages to the top executives. The process of litigation leads to share of information to the public and can be kept at bay with the help of international arbitration. When two parties knock the gates of the court, a bitter relationship happens between the two parties. As oil and gases contracts spreads for a long period, it is essential to have peaceful relationship between the two. Peaceful ways enables strong understanding, as well as judgment (Kolkey et. al, 2012). Arbitration provides a mean that is peaceful and helps in settlement of dispute. For a long term perspective, it is better that the process of arbitration is followed. There are various reasons that influence the parties to the oil and gas contracts to prefer the process of ADR as against litigation. This can be commented considering the theories and the practice in the current scenario. In short, when it comes to the arbitration party a neutral value is chosen for the settlement of dispute. Moreover, the process of arbitration is aptly termed as a neutral process (Kluwer, 2014). The field of litigation has undergone a vast change in the past decade, however considering the overall impact and the result it is still cumbersome. In this scenario, the process of arbitration comes to the forefront as it helps in settlement of the disputes by peaceful means and without any loss of secrecy (Deventer, 2010). Both the parties to the contract are provided sufficient chances of keeping their talk and therefore it are effective in nature. Hence, to have a strong situation and especially a win-win situation it is essential that the dispute is settled by way of arbitration. Moreover, a strong bond is maintained between the parties to the contract that may be adversely affected when the process of litigation is used. References Born, G 2009, International Commercial Arbitration, Kluwer Born, G 2014, International Commercial Arbitration, Frederick, MD: Wolters Brister, A 2014, Farmout Agreements: The Basics, Negotiations and Motivations. Oil and Gas Law Digest. Brister, A 2014, Introduction to Joint Operating Agreements. Oil and Gas Law Digest. British Petroleum 2015, BP Global/About BP/Angola, viewed 17 March 2016, www.bp.com/sectiongenericarticle.do?categoryId=427contentId=2000571#2014344. Buhring,U.C and Kirchhof, G.L 2006, Arbitration and Mediation in International Business, Washington DC. Deventer, N.K 2010, Yearbook commercial arbitration, Huntington: New York Kendall, J 2008, Expert Determination. 4th edition Kluwer A 2014, International Commercial Arbitration, Austin: Walters Kolkey, D.M, Chernick, R, Neal, B.R 2012, Practitioners Handbook On Arbitration and Mediation, Huntington, N.Y. Oil and Gas disputes 2015, Global Dispute oil and gas, viewed 16 March 2016, https://www.fess-global.org/files/OilandGas.pdf. Paul, S.T 2010, LLM Oil Gas Law, University of Aberdeen: Assistant Lecturer, Rivers State University Of Science And Technology, Port Harcourt: Nigeria.