How to Effectively Answer Law Essay Questions
Here is an example of a sample high first-class law essay from an Oxbridge post-graduate student which should give you an understanding of how to effectively answer law essay questions at uni!
What are the main types of contracts used in the energy sector?
The main contracts that are used in the energy sector around the world include:
1) concessions is the oldest form of a petroleum contract which originated in the US during the oil boom in the 1800, in which the contracting party owns the oil in the ground and grants a license to an IOC to extract oil in a foreign state. Traditionally, at the beginning of the twentieth century, oil and gas explorations were performed under concession contracts. Concessions agreements were granted for very long periods of time. As many resource rich countries did not have the technological expertise, they granted concession agreements to IOC in return for an annual royalty. However, concession agreements were the subject of disputes between states and IOCs because these agreements were favourable towards IOCs. The cases of Trucial Coast v Abu Dhabi (1951) and Saudi Arabia v ARAMCO (1963) demonstrate the initiative of states to regain control over the natural resources despite the award being granted to the IOCs in both cases. In these cases, subsequent agreements were signed which contravened the terms of earlier concessions. Later legal developments established the notion of “permanent sovereignty” of the states over their natural resources (i.e. Charter of Economic Rights and Duties 1964) but the states, which needed foreign investment, were reluctant to continue on a concessionary basis.
2) production sharing agreements (PSA), in which the contractor owns a share of oil once it is out of the ground (first used in Indonesia in 1966) whilst the states retained ownership over natural resources.
3) service contracts, in which the contractor is paid a fee for extracting the oil from the ground. Under this contract, the host government would hire an IOC to perform specific services or an IOC would be remunerate proportionally to the volumes of oil/gas extracted. Service contracts were used in Iraq. However, a service contract carries a high level of risk because an IOC may be unable to recover costs if the project is unprofitable.
4) joint ventures (JVs), in which the state forms a partnership with one or more IOCs. JVs were first used in Egypt in the 1950s. The book “Oil Contracts: How to read and understand them” notes that it is rare to find any contract that fits cleanly into any one of these categories, however, and in reality most contracts combine some elements of each.
which format best deals with the allocation of risk between the contracting parties?
In my opinion, from the four aforementioned contracts, a joint venture deals best with the allocation of risk between the contracting parties simply because it requires a state to enter into a partnership with a private oil company and the relationship between the parties is governed by negotiations in the context of a concentrated or joint effort to explore oil. Of course, the allocation of risk will depend on the bargaining positions of each party and negotiations. In order to work effectively, both parties must negotiate and allocate the risk evenly between the parties (the state and private company). This includes sharing costs between the state and the company and similarly, the host state acquires direct liability in areas such as environmental law as a result of its direct participation in energy extraction. However, it is important to note that the State may be in a stronger bargaining position and therefore exert more pressure on private, non-state companies. Nonetheless, the “joint” nature of this contract type at least gives each party “a say” and more control in this venture as opposed to a service contract which may be given to a party on a “take it or leave it basis”.
Can a state unilaterally revoke the rights granted?
The state can unilaterally revoke the rights granted but financial consequences will follow. The issue of investment security is a major concern to international oil companies ( IOCs ) given the condition that host nations (HNs) may exercise their ‘sovereign power’ over contractual agreements that both parties append signatories to, given such economic conditions IOCs will be rendered both politically and economically vulnerable. To some extent governments actions are determined by international law, in which case states must have accepted the international economic treaties that limit their sovereignty. Moreover, a state may be contractually obligated to provide adequate compensation even in the case where the contract is silent as to the compensation. This is illustrated in the case of Mobil Oil v Iran (1987) . Moreover, an international tribunal may imply international laws and standards into the contract even in where contract is governed by host state law. The case of AMT v Zaire (1997) shows that a state has a duty of care to provide minimum standard of protection against political risk which includes unilateral revocation of rights granted. Governments have the sovereign freedom to regulate their international trade and policies or agreements. The IOC can rely in a first-stage analysis on a professional interpretation of international law for redress. But international law cannot prevent government’s machinery from enforcing and amending its domestic laws wherever it can. The law, both international and local provides some extent of protection from extraterritorial interruption. Investors and states are aided by provisions in international law which grant investment protection. Such laws include bilateral investment treaties such as the Energy Charter Treaty (ECT) which provides that signatories consent to arbitral proceedings under Article 26. Contractual provisions often reduce risk through dispute resolution or stabilisation clauses that can freeze a contract or even allocate the burden upon a host state or NOC.
Does the IOC have to consider additional international law standards for example human rights and environmental standards throughout the duration of the project?
In the absence of adequate environmental and human rights laws and enforcement in emerging economies, there have been calls for oil companies to voluntarily adopt “best practice” in emerging economies.
Oil and gas exploration and production has the potential to cause severe environmental degradation, not only to the physical environment, but also to the health, culture, and economic and social structure of local and indigenous communities. However, environmental laws in emerging economies are often ineffective because they are substantively inadequate and / or because they are inadequately enforced.
Oil companies and industry groups have also recognised that international oil companies operating in emerging economies with inadequate environmental laws should adopt best practice. For example, members of the American Petroleum Institute are responsible for “obeying all laws and best practice” as part of the pledge to a program of continuous health, safety and environmental improvements, while the 1997 Environmental Policy of the Australian Petroleum Production and Exploration Association (“APPEA”) states that APPEA encourages and supports member companies to “comply, at a minimum, with applicable laws, regulations, standards and guidelines for the protection of the environment and in their absence adopt the best practicable means to prevent or minimise adverse environmental impacts”.
IOCs should consider potential environmental and human rights issues. These may be included in the contract but are most often derived from soft law. The “UN Guiding Principles on Businesses and Human Rights” (Ruggie Framework) provides three principles encompassing 1) the duty of the state to protect against human rights abuses by businesses; 2) it is the corporate responsibility of businesses to undertake due diligence; and 3) provide access to remedy for any claim made against the company. ISO 26000 is another standard for corporate responsibility and applies the UDHR and International Covenant on Civil and Political Rights (originally addressed to states but are now applied in the corporate field). The case of EPA v Shell Australia (1999) provides that parties of a petroleum development contract must ensure “best international practices” even if the contract is silent to this issue.
Do they need to take in to account Equator Principles if they are getting financing?
What conditions can a government impose on an exploration licence?
A government, usually the Minister for Energy and Resources may impose and vary conditions on a licence, most notably for the protection of the environment. The conditions that the government can impose on an exploration license include rehabilitation of the land, timing, minimum works schedule, local content requirements, protection of the environment, protection of groundwater, provision and implementation of environmental offsets, expenditure, reports on the discovery of minerals, access to and use of the land by other licence holders, protection of community facilities. Commonly, exploration license holders are bound by a code on mineral exploration which provides guidance about how exploration works should be conducted to meet regulatory requirements and environmental standards in the host state (for example, Victoria, Australia has a DEDJTR's Code of Practice for Mineral Exploration which binds all explorers.
What are the main provisions of a production sharing agreement?
A production sharing contract (“PSC”) can be widely defined as a private contract between one or more contractor and a National Oil Corporation (“NOC”) pursuant to legislation which vests a license or a general exclusive authorisation in the NOC or the IOC to explore for, exploit and produce hydrocarbons.
The contract will often be entered into with the NOC or relevant Ministers on behalf of the government.
Term of Contract
The length of the period over which the contract is to subsist is usually prescribed depending on the country and other factors affecting the speed of exploration and production. The length of the term is therefore negotiable.
A relinquishment Clause obligates the contractor to release portions of the contractual area in phases. It is a measure intended to promote speedy and efficient exploration. It is a clause that works in benefit of both parties.
National Interest provisions
Such provisions are aimed at enhancing and protecting national socio-economic wellbeing of the host country. They may require local content, technology transfer or capacity building.
This connotes the contractor bearing the contributory obligation of the host government towards the production costs to be recovered as a cost. However the national oil company is under no obligation to indemnify or reimburse the NOC in the event that there is no return on production. This strict approach has been incorporated into the laws of some host governments such as Tunisia. However some countries such as India are more lenient and permit apportionment of costs incurred by the IOC irrespective of discovery.
Cost recovery oil
This provision in a PSC enables the IOC to recover its costs from the resulting oil or gas before the profit is shared out.
This constitutes the return on exploration left after the contractor has recovered its costs. It is usually shared between the parties on a sliding scale: the host government’s allocation will rise with increased production or contractor’s economic return
Minimum Work / Expenditure Obligation Clauses
Such clauses oblige the IOC to have completed a measure of operations (e.g. number of wells sunk) or spent a stipulated sum on the operation over a prescribed period.
What type of contracts do you think you would advise a government to include in a bid round for oil exploration?
I would advise a government to include a service contract in a bid round for oil exploration whereby an IOC (contractor) is retained for its services and paid a fixed fee. A service contract will apportion most economic risk to an IOC because an IOC will have to assume all financial losses as a result of unsuccessful operations. This, in turn, shifts the risk away from the government and to the IOC. Furthermore, in a service contract, the state government can select the best IOCs to perform individual services in a project, which cumulatively, can lead to greater efficiency as opposed to where a single company is chosen to perform the entire project.
Explain how an interest in a block can be assigned?
Farm-ins are the oil industry term for deals where a company, not at present a licensee on a particular licensed area, can acquire an interest from one of the existing licensees. The transfers of interest are generally made in return for exploration or other commitments, for exchanges of licence interests, or for cash.
In terms of documentation, share acquisition is an easier method of acquiring a licence interest because the buyer is acquiring the shares in the company which owns the licence interest. An obvious difference between a share acquisition and a farm-in is that in the share acquisition, the buyer is buying everything within the target company which may include a number of subsidiaries involved in any range of activities apart from oil and gas exploration and production, its tax history, its assets and liabilities etc. In other words, it buys the lot.
The most straightforward way, perhaps, is through the licensing rounds conducted by the host government (the Ministry of Petroleum Resources in Nigeria or the Department of Trade and Industry in the United Kingdom). However, due to various reasons, some of them political, which may come into play in the decision about who gets what, this is not a very reliable way of obtaining a decent acreage.
What are the main types of payments made by an IOC to the state under the agreements?
The first is a profit tax, which is payable after the IOC has recovered costs , that can come in the form of a corporate income tax or can be subsumed as part of the amount the government agrees to take from any profits. Tax inspectors collect data on production and sales volume data and the price at which the product is sold, and the inspectors audit company expenses.
Another tax often imposed on oil companies is a royalty, (often on a sliding scale) or excise tax, which is normally a percentage of the value of the production, although it can be a set fee based on volume or quantity. This tax is often imposed on top of other taxes. According to a survey conducted by Moggy, governments like these taxes because they are easy to administer, in contrast to the corporate income tax, and their collection does not have to wait until the project becomes profitable. On the other hand, according to a research note by Kiskis and Ivy, these taxes can be inefficient because they tax production without any regard to profit. When the project is marginal or not competitively profitable, the royalty or excise tax may discourage further investment.
Bonuses are another source of revenue that are easy to administer. A host country can require a one-time payment before the company starts exploration (signature bonus), or continued fixed payments once production reaches certain levels (production bonus). Bonuses are fixed payments and do not take into account the success of the project or its profitability, they are usually tax deductible.
Why are gas supply contracts (PPA and/or off-take agreements) so critical to the success of an energy project?
PPA are critical to the success of an energy project because they provide Banks with an element of surety that income will be generated from the project and paid to the Banks to repay the loan. This encourages Banks to lend money for energy projects.
The offtaker, i.e. the customer of the electricity, LNG or natural gas, agrees to buy part or the total output of the power plant or gas production facility, at pre-determined prices and conditions. This is normally over the long term (usually from 15 to 25 years, depending on the type of project), necessary for making available to the SPC enough funds to repay the debt and to pay necessary operating costs and expenses.
Thus, instead of relying on an uncertain customer market base, for there is no kind of guarantee, project finance is backed by agreements that have the legal force to lock in a given customer for the time deemed necessary for the debt-service. Another risk, however, emerges. It is the credit risk of the offtaker. Of course, an offtake agreement has no value unless the creditworthiness of the project product buyer is previously assessed and assured. The intention of this agreement is to provide the project company with stable and sufficient revenue to pay its project debt obligation, cover the operating costs and provide certain required return to the sponsors.
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