There are several universal contractual concepts used globally by governments to allow international oil companies to carry out oil and gas exploration and development of production operations. The type of contract chosen by a country and the terms and conditions agreed upon depends on the host government policies and bargaining strength which mostly depends on the potential petroleum acreage and the state of the international oil market. Crude Oil and gas is an integral part of Libya's economy and forms the basis on which the country's energy policies are formed.
The economic policy reforms brought by former Libyan president Muammar al-Qaddafi in mid-2003 for privatization of oil and Gas industry was a significant move away from the socialist, government-controlled economy. In the recent years, the country has been awarding contracts to over two dozen companies as a means of generating enormous revenue and investment in Libyan hydrocarbon industry. The move by the past regime to blend old and current energy policies has raised a lot of concerns about the country's future direction and structure of the oil and gas sector. Over the years since economic reforms were made local and international opportunists have been profiting from Libya's oil production by causing endless political disruptions (Allen, 2018).
The latest oil and gas development policies proposed by Libyan government are special service contract and concession contract. The two proposals have some similarities and differences and likewise advantages and disadvantages. Under the special service contract, the Libyan government proposes that the contracted operating company will handle all the production costs and will be compensated by a fixed price per unit gas produced. However, the ownership of petroleum products produced will remain with the state. The second proposal is the concession contract where the government gives the operating company legal rights to operate within its jurisdiction under certain terms. The services company becomes subject to government charges royalties and corporate taxes.
To begin with the two contracts differ in the ownership structure, in the concession contract, the foreign oil company is the owner of the oil and petroleum resources that are being exploited or produced whereas in the special service contract the oil and gas resources are for the host country which is Libya through the National Oil Company. Here the products are for the Libya government and they only pay for the services of the hired Oil Company.
Furthermore, the Libyan government gives exclusive prospecting, extraction and prospecting rights to the investor on agreed fees, who in turn bears all the cost and expenses such as taxes and royalties as stated by the law in concession contract while in special service contract, the Libyan government does not give exclusive rights as the state intervenes in the regulatory laws of the prospecting company.
It is also important to note that in the concession contract, the operations in the field is entirely for the Oil Company which provides the technical knowledge, the machines and the finances needed for the extraction process while under special contract, the Libyan government with cooperation of the National Oil Company are the filed operators with absolute asset ownership.
One major advantage of a special service contract is sovereignty over natural resources. Under the service contract framework, the operating companies are not allocated field ownership. This gives the operators less control over fields and the crude products while still utilizing the expertise of the companies. Ghandi and Lin, (2012) point out that while the service contract may best address issues of natural resource sovereignty, the framework presents a potential risk of profit loss. In concession contract, sovereignty concerns arise because the contract framework gives decision making powers to the service companies in handling exploration and operation.
One major significant advantage of concession contract is that facilitates mobilization of capital from private investors. Under the agreement, international oil companies contribute capital for the exploration project. This helps in bringing efficiency and effectiveness for the companies to increase their returns in the project. While the international companies provide capital in the concession contract, special service contractors only provide their services and not capital investment. Its drawback is the loss of managerial control.
From the economic point of view, the Libyan government is guaranteed of the maximum returns from the extraction of the oil and gas products with the special service contract due to her control on the production as compared with the concession contract and generally other petroleum contracts.
Technically, the risk sharing and compensation are on flat fees basis and the oil company bears the risk in special service contracts while in the concession contract, there is no compensation applicable to the owner as the Oil Company solely bears the risk.
In terms of fiscal system, the special contract is relatively simpler and easy to manage regarding royalties and taxes provision whereas the concession contract fiscal system is more complex since the lease agreement are normally for a longer period and this has been the primary cause of disputes during execution of the contracts.
Libya is a country that is well-endowed with oil reserves and various interests are at play especially from the political leadership when it comes to the signing of exploration and production of the oil and gas. The government when negotiating the contracts always look forward to the contracts that can promote the development of the country even though in most cases, they are vested in the self-interest of the political class.
From the above analysis, it is evident that even though both the special service and concession contracts are essential in particular aspects, the special service contract, however, remains the most viable for the development of Libya and therefore the government should exclusively adopt special contract and only arrange for specialized contracts on experts, technology, and finance since oil and gas extraction is a capital-intensive venture.
Allen, F. (2018). Politics of State/Oil Multinational Alliance and Security Response. In The Political Ecology of Oil and Gas Activities in the Nigerian Aquatic Ecosystem (pp. 295-305).
Ghandi, A., & Lin, C. Y. C. (2012). Do Iran's buy-back service contracts lead to optimal production? The case of Soroosh and Nowrooz. Energy Policy, 42, 181-190.
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