Last Updated on Oil and gas agreements and contracts form the backbone of the energy industry. They provide a legal framework for the exploration, extraction, and transportation of oil and gas resources. Oil and gas agreements are complex documents but are vital for governing the rights, obligations, and responsibilities of all parties involved. They play a key role throughout the process of oil and gas production, including the marketing of the resources.
A deep understanding of the legal, commercial, and technical aspects of these contracts and agreements is essential for anyone involved in the industry. In this blog post, we’ll explore the various types of oil and gas agreements and contracts and explain why they are important.
What are Oil and Gas Agreements & Contracts?
Oil and gas agreements and contracts, governed by oil and gas law, are legal documents drawn up between two individuals or entities. They provide legal protection for all parties involved in a potential business deal. In addition, they determine the duties and rights of both sides and also regulate risks and expenses.
Contracts vary widely in terms of the details, but there are two common points they must address: how costs are treated and how profits, also known as rents, are divided between the relevant parties.
Why are Contracts Important?
Contracts are important because they set out the terms of a transaction, exchange, or deal between two or more parties. A contract or agreement outlines the responsibilities and rights of each part together with costs, benefits, and how the contract might be terminated.
In essence, a contract or agreement is a promise that you’re going to take certain actions. These actions might include the completion of work by a specified date or payment for services rendered.
What are the Different Categories and Types of Contracts Used in Oil and Gas?
The oil and gas industry utilizes a variety of different contractual contracts or agreements and they can vary considerably. To help you understand the differences, let’s examine the 5 different categories an oil and gas agreement might fall into and the various types you’re likely to encounter.
Risk Agreements
The oil and gas sector involves complex operations with significant financial and environmental and economic risks. Companies in the industry often enter into agreements to share economic risks. Risk agreements typically outline the responsibilities of each party and aim to mitigate the impact of potential financial losses and environmental damage. There are several types of risk agreements.
Joint Operating Agreements (JOAs)
A joint operating agreement, or JOA, is entered into when two or more owners with working oil and gas interests decide to share the drilling, development, or operations risk concerning the production of gas and oil.
In the agreement, a provision is made for one of the parties to act as the operator. The party will act on behalf of the other parties concerning the joint area covered by the Joint Operating Agreement.
In addition, the JOA specifies the operation that it relates to and how costs and revenues will be shared, determined, and accounted for. It also details individual party rights to the production and the acquisition, maintenance, transfer, and disposal of leases.
Production Sharing Agreements (PSAs)
With this type of agreement, ownership over oil and gas interests, natural resources, and reserves are not conferred to a lessee. Instead, ownership remains with the landowner. The landowner might be an individual company or a state/government enterprise.
A lessee, or contractor, is awarded the right to explore a specified area. They also provide the technical expertise and capital and assume the project risk. This is in exchange for exclusive exploration and production rights.
Following successful oil and gas production and deductions for the cost of recovery and taxes, the remaining portion called the profit Oil, is distributed between all the parties following the agreement.
Farm-In/Farm-Out Agreements (Well trades)
This agreement is written up when an oil and gas working interest owner (farmor) assigns an interest in a lease (farm-out area) to another party (farmee). It is given in consideration of the farmer drilling a well (farm-out well) on the farm-out area. In the agreement, the farmor makes a farm-out and the farmer makes a farm-in.
The agreement may also require the farmee to do more than simply drill a well. It might include seismic and geological studies or paying a monetary consideration for previous costs the farmor incurred.
Royalty Agreements
A royalty agreement relates to the ownership of a portion of a resource or the revenue it produces.
A company or individual person can have a royalty interest. They don’t have to pay any operational costs but own a portion of the resource or its revenue.
Concession Agreements
This type of agreement is one of the oldest types of oil and gas contracts. You’ll also find concession agreements referred to as License Agreements.
With concession agreements, the landowner (the state or mineral rights owner or the lessor) grants another company or entity (the lessee) exclusive rights to explore and own the natural resources and reserves.
There are several different concession agreements commonly signed.
Joint Venture Agreements
A Joint Venture Agreement is written when two or more parties agree to set up a new entity (either a company or a partnership) which then enters contracts in the industry. The new Joint Venture (JV) entity is legally permitted to enter into the contract and provide services and goods in the oil and gas sector.
These are often complicated commercial agreements in which businesses pool cash, share in the risk, and exchange their expertise and best practices.
Risk Service Contracts
Risk service contracts are usually drawn up when a host nation contracts a foreign oil or gas company to explore and develop a particular oilfield asset. The company bears financial and operational risks and assumes all technical and managerial responsibilities. It does this in consideration for a prescribed fee,
Transportation Agreements
Transportation agreements govern the movement of oil and gas from the well to a point downstream where it will be stored for resale or further handling.
Agreements that govern the transportation of gas involve different and additional issues not found in agreements that govern the transportation of oil.
Supply Agreements
A supply agreement stipulates the terms on which sellers supply products to a buyer.
License Agreements
A license agreement grants exclusive rights to explore, develop, sell, and export oil or gas extracted from a specific area. It is usually for a fixed period.
Area-of-Interest Agreements
This is an agreement between two or more oil or natural gas companies. It covers a defined location for a specified period. The agreement details the role each party must play, their ownership percentage, and how contractual provisions are to be made.
The agreement may also include a definition as to how the parties can explore for or extract natural gas or oil in the specified territory.
The main purpose of this type of agreement is to ensure all parties benefit jointly and proportionately from the exploration and development of an area.
Gas Sales Agreements (GSAs)
A gas sales agreement is a standard agreement for the sale and purchase of natural gas for delivery into a pipeline network, facility, or LNG liquefaction plant.
Production Sharing Agreements (PSAs), also known as Production Sharing Contracts, (PSCs)
A production-sharing contract or production-sharing agreement is a common type of contract typically signed between a government and an extraction company or group of companies. It usually specifies how much of the resource, whether oil or gas, extracted from the country each party will receive.
Financial and mineral risks of the initiative and exploration are borne by the oil or gas company. If the exploration is successful, capital and operational expenses can be covered by the money earned from the production (cost-oil). The rest of the money (profit oil) is split between the company and the government.
Service Agreements
Service agreements are given to third-party contractors who perform various technical services over oil and gas field assets. There are generally two kinds of service agreements: pure service agreements and risk service agreements.
EPC Contracts – (Engineering, Procurement, and Construction)
EPC contracts or engineering, procurement, and construction contracts are commonly used on large-scale and complex oil and gas projects. Under the contract, a contractor is obliged to deliver a complete facility to a developer. It is often called a turnkey construction contract because that is all the developer will need to do to start operating the facility.
There are three different types of EPC contracts that are fairly self-explanatory.
Build (B)
An EPC build contract relates to the construction of a facility.
Build and Operate(BO)
An EPC build and operate contract relates to the construction of a facility and its subsequent operation.
Build, Operate, and Own ( BOO)
An EPC build, operate, and own contract is when a facility is built, operated, and finally owned by the contractor.
Other Types of Contracts
Various other types of service contracts are used in gas and oil exploration and subsequent development activities.
Well Support Agreements
There are three possible types of well-support agreements. They are:
- Dry hole contribution: A dry hole contribution agreement is used when a drilling party or parties want to receive monetary contributions from leaseholders located near a well. Contributions related to a dry hole agreement are only paid should the drilling result in a dry hole that was drilled to the agreed depth. The contributor is entitled to all the well data.
- Bottom hole contribution: This is similar to a dry hole contribution but the monetary contribution is paid when the well is completed.
- Acreage contribution: With this agreement, the non-drilling party contributes all or part of the leases, rather than making a monetary contribution.
Upstream Petroleum Contracts
Upstream petroleum contracts define legal, business, and working relationships between oil and gas exploration and production companies and private parties or government agencies that own the specific mineral rights.
Purchase or Acquisition Agreements
A purchase or acquisition is required when two or more parties are in agreement about sharing future purchases of either producing or exploratory gas and oil interests.
The agreement typically specifies what is being purchased, the party interests, pre-purchase and post-purchase costs, and how they will be paid. It also specifies how any revenue will be shared and operating provisions invoked should interests be purchased.
Lease Exchange Agreements
A lease exchange agreement is used when two or more parties exchange rights and interests in oil and gas leases in one area for rights and interests in another.
Seismic Option Agreements
A seismic agreement is used when a party wants to obtain the right to purchase gas and oil interests. It is conditional upon a new seismic survey being done and following the evaluation of existing seismic results. This type of option often involves making a cash consideration.
Cost-Plus Contracts
This is a common type of contract in the oil and gas industry. With this type of contract, a supplier passes on any costs insured and makes a profit on the markup applied. Cost-plus service contracts contain explicit cost-saving initiatives which have to be regularly monitored. The supplier is held accountable for achieving their targets.
Time and Material Contracts ( REIMBURSABLE Contracts )
A time and materials (T&M) contract is a very flexible contract that protects the contractor and the client. Rather than an agreed fixed price for a project, the contractor works out labor and material costs and then adds a markup rate (typically 15% to 35%) to account for profit.
Bidding Agreements
A bidding agreement is used when a group of companies wants to put forward a joint bid for the grant of a prospective concession. That concession could be a production-sharing contract or a licence. The bidding agreement usually forms the basis upon which a consortium application is made.
Build-Operate-Transfer (BOT) Contracts
A build-operate-transfer (BOT) contract is commonly used in the financing of large gas and crude oil production projects. BOT service contracts are a type of contract licensed by government authorities to private entities for the building and operating of infrastructures in the oil and gas industry.
Conclusion
As you can see, there are lots of different contractual arrangements, agreements, and service contracts used in the oil and gas industry. The information above is meant as a guideline only. If you ever need to make an oil and gas agreement or contract, our advice is to seek legal advice from a professional with experience in the oil and gas industry.
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