INTRODUCTION ABOUT OIL SECTOR MANAGEMENT
The oil sector is gaining huge significance in modern area due to increasing demand and lack of availability. The report herewith deals with all the aspects related to management of oil sector in West African. The study covers the topic with perspective government or nation and the individual company in oil sector.
Role of Companies in Oil and Gas Sector
Key features of contractual agreement
West African countries are bestowed with significant amount of oil. The government has decided to be in contract with reputed oil company. The oil company in turn will be in contract with Engineering, Procurement and Construction (EPC) contractor.
There are different kinds of contractual arrangement existed between the parties as follows:
Fixed Price or Lump sum contracts:
It is one of the most acceptable agreements between the parties. In this kind of contracts architecture and engineers have already develop a framework to carry operations1. The owners evaluate bidding price of multiple contractors and assign contract to the one with lowest bid.
Cost Plus contracts:
The owner under this arrangement tends to pay all estimated costs of project construction in addition to decided fees. The fee can be a specific amount or certain percentage of total costs2. In this the contractor is not selected on the basis of lowest cost offered but on the basis of other factors such as contractor experience, fees demanded, reputation and ability to carry construction.
This is the concept of cost plus incentives. Under the arrangement contractors are paid basic fee and incentives for completion of work on time and achieving benchmarks.
Mixed contracts: The arrangement suggests that engineering and procurement facilities are done on reimbursement basis while construction activity is agreed upon fixed price1.
b) Performance measurements and Government control
The oil companies acquire contract in order to earn sufficient profits due to lower level of competition prevailing in the sector. However, government should ensure that all valid terms and conditions are to be included in contract before granting license.
government has entire responsibility for economic growth. The government should include following terms and conditions as a part of the contract:
The foremost criterion that should be agreed upon is once the permission is granted the company should start construction work. Many-a- times companies bid for contract due to lucrative profits associated; but with contract in hand they either postpone the operations or cancel the project due to heavy investment involved and change in their perceptions1.
- The company should operate within boundaries of area for which license in granted.
- The regulatory agency at local level may intervene to ensure the activities are carried with efficiently and helps in economic development.
- The Environmental laws that company is abided by should form the part of contract. The clause sets boundaries within which Oil Company needs to work.
- The oil mining is a process that involves dealing with natural resources of the company. Henceforth, the company needs to be abided by rules and regulation of the specific country.
- The contract should be entered into in accordance with international standards so that it will not harm economic growth of any country2.
- The government should ensure that oil requirements at domestic level should be satisfied before exporting it to foreign countries.
- It is also duty of government to make sure the company is not having any criminal records or defaulter in past before assigning them contract.
- The government should also make it clear beforehand the amount of initial investment to be made by the investor.
Task 2 Legal Arrangements and Contractual Relationships
a) Key Considerations for a host country
The government of host nation is entering into contract with multinational oil company on the basis of Production Sharing Agreements (PSA). This is an agreement made between government and a resource extraction company. Under the arrangement proportion of oil divided between the company and government is decided1. The company into contract utilizes the money earned from produced oil so as to recover initial investment made. These expenditures are termed as “cost oil” and the amount saved thereafter refers to “Profit oil”2. This profit oil is then distributed between government and the company into consideration.
In the present scenario, government has formulated Production sharing agreement with foreign oil company in following manner:
According to the agreement for initial five years government will receive 5% of profit sharing and 95% of profit falls into Foreign Oil Company. However, no revenue is earned for initial 4 years due to initial stage of development. In fifth year oil extraction unit starts generating revenue.
The agreement contains the clause that profit sharing increases by 20% every five years of time. From 6th year to 10th year government demands 25% of share and company is left with 75%. This ratio for government goes on increasing and for company decreasing. Time Company tends to recover its cost and earns profit. Once the initial investment the government gets more amount of profit sharing.
West African Nation and Oil sector multinational. The government has entered into the contract with following objectives:
- To create sufficient profitability for both government and the business unit entered into contract.
- Providing foreign companies to earn adequate return in initial years to cover huge outlay incurred by them.
- Achieving overall economic growth of the country in long term1.
- Providing expansion option to business unit.
- Meeting the oil requirements exist in domestic market.
- Increasing the proportion of their profits with passage of time. This assist in helping the foreign oil company in recovering initial investments and earn profits during initial years; and in final years of operations government will be able to earn major part of profits2.
- Safeguarding the interest of community, all related parties, stakeholders, business unit and country at whole.
Task 3 Risks Faced By the Industry
The oil industry being one of the growing sectors across world is exposed to various kinds of risk. The technical risk is one that arises during process of oil and gas extraction. The risk may result in lesser production and operational inefficiency. The oil sector is exposed to following technical risks:
Technical failure: The error or fault in machineries and equipments may result in stoppage of production. The technical failure is the aspect that moves with production process in oil and gas sector. The continuous support of technical equipments is necessary for ensuring sufficient production. The company within sector should ensure that they have sufficient technical back up and support for the purpose of manufacturing.
Inexperienced Personnel: The unavailability of trained personnel is one of the risks that oil sector is facing. The oil and gas extraction needs experienced persons for conducting operations. The industry should ensure that adequate number of individuals should be trained and taught the skills required for conducting operations1. The government within country should adopt measures to promote learning of sector within society.
Climatic changes: The extraction of natural resources is always subject to risk of climatic changes. Uncertainty of environmental changes is of highest disastrous nature. These types of risks are uncontrollable by human efforts. However, certain precautions should be taken so as to prevent the effects of climatic changes.
The report provided a deep understanding of the manner in which oil sector is regulated. In addition, it throws light on contractual agreements between related parties and the role of government to safeguard the nation’s interest. Through graphical impact of various factors is analyzed on government revenue and profit from oil and gas industry.