Petroleum laws and contracts can be explained to be the vital manifestation of policy. The laws and contracts are mainly as a result of extensive discussions and have a remarkable dynamic. On the other hand, it can also be explained that as pointed out by Kong , between year 1999 and year 2010 over 30 nations worldwide amended their petroleum contracts and at the same time either amended or entirely modified the respective petroleum legal as well as fiscal framework. On the other hand, it can also be explained that the main reasons why over 30 countries amended or revised their legal policies pertaining to petroleum is mainly due to the fact that these countries want to ensure that the petroleum resources in their countries are used for the benefit of the respective countries that are endowed with the natural resource. This paper features a comparative analysis of international petroleum laws and policies of Saudi Arabia, Nigeria, and the United states.
Saudi Arabia is the home of two Islam’s holiest cities, Mecca and Medina. It is officially referred to as the Kingdom of Saudi Arabia (KSA) with Riyadh as its capital city. Saudi Arabia is a monarchy and the official language is Arabic. The country is governed through the Islamic law. It is the largest oil producer in the world and tops the list of global oil exporting countries. Its gas reserves rank the sixth in the world and its oil reserves is the second largest in the world. Due to its thriving economy, Saudi Arabia has the largest Human Development Index. Islam is the only religion for Saudi Arabia and its citizens are required to be Muslims. No one be it a citizen or a guest to Saudi Arabia has the freedom of religion. Lunar Islamic calendar is used in Saudi Arabia (Ismail et al., 2016).
Nigeria is a West African country with Abuja as the capital city. It was colonized by the British and it became an independent nation in 1960. It is headed by a president who is democratically elected by the Nigerian people. Roughly half of Nigeria is occupied by Christians in the south while Muslims occupy the northern part of the country. Its economy is ranked 20th largest in the world while it has the largest economy in Africa, followed by South Africa. The country has been troubled by Boko Haram insurgents seeking establishment of Sharia law since 2002. English is the official language, although there are more than 500 spoken ethnic languages. Nigeria supplies 11 percent of United States oil imports. Nigeria ranks 12th largest oil producer globally and 8th largest oil exporter (Chimobi, 2016).
United States of America consists of 50 states, has a population of about 324 million people, with Washington, D.C as its capital city. The U.S holds the largest economy in the world in terms of human development, productivity per individual and per capital income. America has the most powerful military in the world, and highly influential political and cultural systems in the world. U.S is the largest oil importing country in the world (Epstein & Sonu, 2016).
2 Overview of petroleum production in Saudi Arabia, Nigeria, and the United states
Saudi Arabia, Nigeria, and the United states have been producing oil for the last couple of decades. In this section, background information pertaining to the production of oil in the three countries as well as the policies in the countries.
2.1 Saudi Arabia
Oil in what was referred as the Arabian Peninsula and is currently part of the Kingdom of Saudi Arabia was discovered in the year 1908 even though it was only until the year 1932 when oil was discovered in the neighboring Bahrain that Kingdom of Saudi Arabia started to seriously look for oil. The initial major oil discovery in Saudi Arabian was located in Dammam well no 7 which was discovered in the month of March during the year 1938. This major discovery played a major role in ensuring that the country’s economy transited from tourism to the oil & gas major player that the company has become today. The Dammam field which is located close to the Eastern coast of Saudi Arabia has demonstrated to be a very ideal discovery as it played a major role in putting the country to the position of the leading oil producer globally. In the year 2012 Saudi Aramco reported that it was planning to reopen the Dammam field so that it could produce about 100,000 Barrels every day since by doing that, the country would be able to benefit from the approximated 500 million barrels of oil that are still in the Dammam field. Currently, majority of Saudi Arabia’s oil fields are mainly based in the Eastern part of the Kingdom. These fields comprises of;
a) Ghawar oil field – It is the biggest in the world and is estimated to still have 60-70 billion barrels of the remaining reserves. Up to 60% of the oil and gas that is extracted in Saudi Arabia comes from this field. The field started operations in the year 1951.
b) Safaniya oil field – Safaniya oil field oil field is the biggest offshore oilfield. It is located in the Northern part of Dammam in Persian Gulf. This field started its operations in the year 1951 and is reported to have at least 37 billion barrel on its reserves.
c) Shaybay Oil field – The field was developed in the 1990s and is reported to have 14 billion of oil reserves.
d) Khurais oilfield- Initially, this field was developed in the 1980s even though it was only until the 2000s that it was re-explored. The field are estimated to have over 27 billion barrels of oil on its reserves.
e) Manifa Oil Field – This field is an offshore files and was initially discovered in the 1950s. It has recently been revived and is aimed at producing about 900,000 barrels of oil each day .
In the 1980s, Saudi Arabia was producing about 10.3 million barrels per day. In the year 2006, the country was producing about 10.6 million barrels per day, while in the year 2008, the company was producing 9.2 million barrels per day. Currently, the country has the biggest oil production in the world .
2.1.3 Role of oil in Saudi Economy
As already pointed out, Saudi Arabia is the world’s biggest oil exporter. Oil in the Kingdom of Saudi Arabia is not only abundant but it is also under pressure and very close to the surface of earth. As a result, the country finds it cheaper and also more cost-effective to mine petroleum in Saudi Arabia than in majority of the countries. In the country, oil sector accounts for an estimated 70 % of the country’s budget revenues. However those who are in charge of the country have adopted various measures in order to ensure that the country stops its overdependence on oil .
2.1.4 Government Stability
Saudi Arabia government can be explained to be stable .
2.1.5 Refineries in Saudi Arabia
As a major oil leading country globally, there are different refineries in Saudi Arabia. Among others, some of the leading refineries are; Riyadh Refinery, Rabigh Refinery, Jeddah Refinery, Yanbu’ Refinery, Jazan Refinery, Jubail Refinery, and Yasref refinery.
2.1.6 Corruption levels
Corruption levels in Saudi Arabia is very high and companies that have plans to invest in the country are prone to high risk of corruption. Moreover, it can also be pointed out that abuse of power, nepotism, and use of middle men is also quite common in Saudi Arabia .
2.1.7 Nationalization of the oil industry
The oil industry in Saudi Arabia has for many years been owned and under the control of the national government. However, in early 2016, the government of Saudi Arabia announced that it was planning so privatize some of the subsidiaries of Aramco .
Nigerian oil and gas sector has been in operation since the year 1956 after Shell Groud discovery of crude oil. Nevertheless, it can be explained that oil and gas industry in Nigeria was mainly controlled by international corporations. However that changed during the 1990s as various Nigerian companies started establish presence in the sector. In particular, it can be explained that entry of local companies in the sector was enhanced by the enactment of the Nigerian Content Directives that were declared by the Nigerian National Petroleum Corporation (NNPC) as well as the proliferation of the Nigerian Oil and Gas Industry Content Development (NOGIC) Act (The Act) in 2010. Specifically, it can be explained that the Act aims to enhance the use of Nigerian companies/resources in the award of oil licenses, contracts and other oil projects .
2.2.2 Sector’s importance to the economy
Since discovery of oil in Nigeria, it can be explained that the ensuing oil sector has had major impacts into the economy of the country. Since the impact of a given product or sector to the national economy can be quantified by the percentage that the product or service contributes to the GDP, it is ideal to consider the impacts that the oil industry in Nigeria has on the GDP of Nigeria. Since discovery of oil in Nigeria, it can be explained that a review of the contribution of oil to the GDP of the country has increased gradually over the years. Specifically, it can be explained that by year 1965, oil only accounted for 3.43% of the GDP. By year 1975, that figure had increased to 9.27% while by year 1975, it had increased to 19.37%. By year 2010, the oil sector was contributing 39% of the country’s GDP. Thus, it can be explained that the oil sector is very important to the Nigerian economy .
2.2.3 Corruption Levels and government stability
Corruption levels in Nigeria are very high as the country is considered to be among the most corrupt countries in the world. In view of the government stability, it can be explained that Nigeria has a democratically elected government. However, the government cannot be considered to be fully stable since the country experiences regular attacks from different groups such as Boko Haram which demands that the country needs to stop having any connection with the Western countries .
2.2.4 Privatization of the sector
At the moment, companies operating in the Nigerian oil sector are owned by the government as well as private companies. However, as far as the oil refineries in the country are concerned, they are owned by the government. Nevertheless, in the year 2010, the Nigerian government started to privatize the refineries while at the same time removing the fuel subsidy .
As far as the USA oil sector is concerned, it can be explained that petroleum in the country has been a key sector after the discovery of oil in the Oil Creek region of Titusville, Pennsylvania in the year 1859. The petroleum sector encompasses exploration for, production, processing (refining), transportation, and marketing of natural gas and petroleum products. As of year 2014, U.S. was the world’s third biggest producer of oil as the country was producing an estimated 8.5 million barrels of oil and natural gas liquids every day. Texas is the area that has biggest oil production volumes in the US as 3.17 million barrels of oil are produced everyday from Texas. The federal zone of the Gulf of Mexico comes in second as it produces 1.40 million barrels every day and it is followed by North Dakota which produces 1.09 million barrels every day .
2.3.2 Sector’s importance to the economy
As earlier pointed out, the easiest way to determine the type of impact that a given sector has on the economy of a given country entails evaluating the percentage that the sector contributes to the GDP of the country. In case of the US, the petroleum sector contributes only 7% of the GDP .
2.3.3 Corruption levels and government stability
The corruption levels in the USA is quite low as US is among the top least corrupt countries in the world. In view of the government stability, it can be explained that the US government is very stable as the government is democratically elected every four years.
2.3.4 Trading with the Enemy Act
The Trading with the Enemy Act is applicable in the US and is mainly applied when the US is trading with different countries. In particular, it can be explained that the act makes it impossible for the country to trade with countries that it considers to be enemy. For instance, the act makes it impossible for the country to trade with North Korea which the US government considers to an enemy to the US.
3 Treaties and conventions
Treaties and conventions can be explained to comprise of compacts and agreements that are made between two or more independent countries mainly in the view to the public Welfare. In these section of the report, the treaties and conventions that Nigeria, USA, and Saudi Arabia are part of will be discussed.
3.1 U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards
UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards enacted by a UN diplomatic conference in the year 1958 even though it came into effect in June 1959. The Convention demands courts of contracting nations to give effect to private agreements to mediate and to recognize and put into effect arbitration awards made in other contracting countries. It is the foundational instrument for international arbitration. As far as Saudi Arabia, Nigeria, and UK are concerned, it can be explained that these three countries have ratified the convention as they are all member State of the United Nations.
3.2 Convention on the Settlement of Investment Disputes between States and Nationals of Other States
The purpose of the convention on the settlement of investment disputes between states and nationals of other states is mainly aimed at ensuring that the investors are protected. In particular, the convention provide facilities for conciliation and arbitration of investment disputes amongst Contracting States and nationals of other Contracting States as per provisions of the Convention. The US and Nigeria ratified on 14th October 1966, while Saudi Arabia ratified on 28 September 1979.
3.3 Convention on Combating Bribery of Foreign Public Officials in International Business Transactions
These convention is aimed at fighting bribery especially in international business transactions as bribery has become common and normally results to some parties been disadvantaged. Between USA, Nigeria and Saudi Arabia, it can be explained that USA is the only country that has ratified to the convention.
3.4 Inter-American Convention on International Commercial Arbitration
The Convention is also referred to as the Panama Convention and came into effect on June 16, 1976. Since the convention is mainly Inter-American, Nigeria and Saudi Arabia have not ratified to the convention while USA ratified to the convention in the year 1990.
3.5 Multilateral Investment Guarantee Agency (MIGA) Convention
This convention promotes direct foreign investment in developing countries specifically as it offers assurances against political risks. Saudi Arabia, Nigeria, and USA have all ratified the convection .
3.6 An agreement under the U.S. Overseas Private Investment Corporation
The Overseas Private Investment Corporation is an “independent” U.S. Government agency that sells investment services to US based businesses thus ensuring that the US based businesses are able to effectively invest in developing countries that are normally very risky. From that perspective, it can be explained that US based investors who want to invest in Nigeria or Saudi Arabia can seek insurance from US Overseas Private Investment Corporation.
3.7 Bilateral investment treaty with US
A bilateral investment treat can be explained as a contract or agreement that specifies the terms and conditions for private investment by citizen as well as corporations of one country into another country. From a review of a list of United States Bilateral Investment Treaties, it can be explained that Saudi Arabia and Nigeria have no bilateral investment treaty with US .
3.8 Tax treaties with US
A tax treaty basically entails a mutual agreement between two nations to resolve issues involving double taxation of both passive and active income. As far as US is concerned, it can be explained that the country has no tax treaty with Saudi Arabia and Nigeria .
4.1 Foreign ownership provisions
In case of Saudi Arabia, it can be explained that in the past, the oil reserves as well as oil drilling companies could only be owned by the State. However, as earlier pointed out, the country’s leadership has in early 2016 announced that it is planning to sell some stake to foreigners implying that petroleum companies in the country will for the first time be owned by foreigners. In case of US and Nigeria, it can be stated that the constitutions of the two countries allow foreigners to own companies operating in the oil sector.
4.2 Contractual arrangements permitted or required for petroleum development in the three countries
The US constitution is very specific on the contractual arrangements when it comes to petroleum development. However, in case of Nigeria and Saudi Arabia, it can be explained that the constitutions of these two countries are not quite specific on the contractual arrangement to be complied with. Moreover, in case of whether the constitution addresses the relationship between international law and municipal law, it can also be pointed out that only the US constitution does that.
5 Petroleum Legislation
The oil and gas rights to a specific parcel could be owned by private individuals, corporations, Indian tribes, or by local, state, or federal governments. Oil and gas rights extend vertically downward from the property line. Unless explicitly separated by a deed, oil and gas rights are owned by the specific individual who owns the land.
In view of offshore reserves, the oil and gas rights belong to either the state or federal government and are normally leased to oil companies for explorations. However, it can also be highlighted that the oil and gas laws differ from one state to another even though there are no major differences.
In view of the contracts, it can be explained that oil and gas contracts to a certain extent differ with standard contracts. For instance, when an project of an oil and gas lease specifically states that any expansion or renewal of the lease can only be done through overriding royalty, a new lease that is considerably comparable to the initial lease and acquired by the assignee during the term of the initial lease, is considered, as a matter of law, as an expansion of renewal of the initial lease.
The two main popular contractual agreements that are normally signed by oil and gas companies in US entails the Farmout Agreement as well as the Joint Operating Agreement. As far as the Farmout Agreement is concerned, it involves an agreement between an organization that owns a lease and another organization that wants to be extract the oil or gas. The organization that intends to drill is referred to as the farmee and it normally offers the drilling services in exchange of high ownership of what will be drilled.
The Petroleum Act, 1969 is the most important petroleum legislation in the country and states that the ownership as well as the control of all petroleum in the country is vested in the state. Under the Act, the Minister of Petroleum Resources can grant three different types of interests that comprises of exploration, prospecting and production license or rights.
The exploration Licence is granted to undertake preliminary exploration surveys to be undertaken. The license is nevertheless non-exclusive and is usually valid for one year even though it can be renewed. The Prospecting Licence permits extensive exploration surveys. It is an exclusive license valid for one up to five years. Finally, the award of Oil Mining Lease permits for full scale commercial production after oil has been discovered in commercial quantities normally at least ten thousand barrels a day. The Lease bestows the exclusive right to undertake prospecting, exploration, production and marketing activities in and under the specified land/region normally for period of twenty years.
5.3 Saudi Arabia
Saudi Arabia’s natural resource laws can be explained to be unfinished and to a certain extent not permit meaningful public inquiry of the sector. As per the Basic Law of Saudi Arabia, all the gas and oil found in Saudi Arabia belongs to the government “All Allah’s bestowed wealth, be it under the ground, on the surface or in national territorial waters, in the land or maritime domains under the state’s control, are the property of the state as defined by law. The law defines means of exploiting, protecting, and developing such wealth in the interests of the state, its security and economy “.
Over the years, Saudi Arabia has not yet amended any of its oil and gas sector legislation. indeed, it can be explained that exploration of oil, drilling and production are still closed to direct foreign investment. Thus, at the moment, Saudi Aramco still continues to enjoy its domination on the kingdom’s upstream concession interests. nevertheless, it can also be explained that foreign investment in other areas is permitted with up to 100% foreign ownership been allowed in Saudi Arabia in oil and gas field services and geological/geophysical among others .
However, as has already been pointed out, there are plans for Aramco which is owned by the stated to be made a public company whose shares will be sold in various stock markets worldwide. In that view, it is thus expected that petroleum legislation of Saudi Arabia will be amended in the near future so that the impeding changes in the sector can take place.
6 Host Country Contract
A host country contract entails an agreement between an overseas investor and a host government prevailing the rights as well as the commitments of the foreign investor as well as the host government regarding the advancement, building and functioning of a project by a foreign investor. In addition, the contracts also specifies the obligations that the host government has regarding the project as well as the responsibilities of the foreign investor. Most of the host country contract entails a stabilization clause that is aimed at reducing the financial and political risks that the foreign investors might be exposed to. Normally, host country contracts are common in countries where foreign investors’ rights are not safeguarded by a bilateral investment treaty .
As far as USA is concerned, it can be explained that the fact that the oil and gas reserves in the US are mainly owned by the land owners implies that anyone who has interest to invest in extracting of oil has to negotiate with the land owners. Thus, it can be explained that there exists no host country contract with those who have interest to invest in the US oil and gas sector. Nevertheless, there are various incentives in place that are aimed at ensuring that as many investors as possible invest in the US oil and gas sector. For instance, the Alternative Minimum Tax makes it possible for all excess insubstantial drilling costs to be exempted as a “preference item” on the substitute minimum tax return .
6.2 Saudi Arabia
Saudi Arabia provides a variety of investment incentives that are aimed at attracting both domestic as well as foreign investors. However, it can be explained that the Kingdom of Saudi Arabia’s interest in the investment incentives was manifested in April 2000 when the country issued Foreign Investment Regulations to substitute the country’s Foreign Capital Investment Code that has been issued in 1979.
Tax incentives exists mainly with the objective of attracting investors to regions that are less developed. The tax concessions are valid for up to ten years. The variety of tax incentives entails 50% discount of yearly wages that are paid to the indigene employees, 50% discount on the annual training expenses of the indigene employees. Extra discounts are awarded when the amount of investment exceeds one million Saudi riyals .
The companies can be explained to be petroleum and hydrocarbon companies benefit from tax regimes that are less than the current 25-45 % company income tax. In addition, a 15% withholding tax is charged on dividends that are payable to non-residents, while an extra 10% withholding tax is charged on management fees as well as the royalties. Nevertheless, as has already been pointed out, Saudi Arabia is currently in the process of changing its oil and gas policies as it aims to privatize the sector that has been in the past under total control of the government. Thus, oil and gas policies that are currently in place are expected to change in the near future.
As a developing country where oil plays a major role in the economy of the country, Nigeria has put in place various incentives that are aimed at attractive foreign investors into the country’s oil and gas sector. Nevertheless, it can also be explained that there exists no host country contract between Nigeria and other countries since the government of Nigeria does not want to take any responsibilities for any risks that the foreign investors in the country might experience.
7 Foreign Investment Law
Foreign investment law entails law pertaining to capital flows from one nation to another, offering extensive ownership stakes in both domestic companies as well as assets.
7.1 Saudi Arabia
The Saudi Arabia foreign investment law that has 18 Articles covers two sectors that comprises of the industry sector and the services sector. The oil and gas explorations in the country can be explained to have been covered in the industry sector as exploration, excavation and production of petroleum products has been classified to be part of the industry sector. In that view, it can be explained that the foreign investment law is applicable to the petroleum extraction and drilling in the country. In particular, the applicable provisions in petroleum projects are:
a) The foreign investor may obtain more than one license for different activities, and the regulation shall specify the necessary requirements.
b) A foreign firm licensed under this Law may acquire necessary real estate as needed for operating the licensed activity, or for housing all or some of its staff, subject to the provisions governing real estate ownership by non-Saudis.
c) Disputes arising between the government and the foreign investor in relation to his investments licensed in accordance with this Law shall, as far as possible, be settled amicably. Failing such settlement, the dispute shall be settled according to the relevant laws .
In case of Nigeria, the country has foreign investment law that has to be complied with by all foreign investors who have plans to invest in the country. As already pointed out, since the year 1995, Nigeria laws have been friendly to foreign investors. The two laws that are significant when it comes to foreign investment in the country entails; Nigerian Investment Promotion Commission Act 1995 CNIPC Act”) and Foreign Exchange (Monitoring and Miscellaneous provision act 1995 (“FEM Act”). In view of the petroleum projects, foreigners who want to invest in Nigeria need to have a license awarded by the ministry.
In the US, the foreign direct investment law is vested in the Foreign Investment and National Security Act of 2007 that was enacted on 26th July 2007 and happens to be an Act of the United States Congress. The Act focuses on the investments that are made by foreign entities in the United States. From a review of the law, it can be explained that there are no provisions applicable to petroleum projects .
From the review of the oil policies of USA, Nigeria, and USA, it can be noted that even though the three countries have different oil policies, the main objective of the oil policies is to ensure that the countries are able to ensure that the existing oil reserves are beneficial to the country. On the other hand, from the comparison of the policies in place in the three different countries, the policies that are in place in Saudi Arabia are to so extent different to the policies that are in place in Nigeria and USA. In particular, it can be explained that the reason why that is the case is mainly due to the fact that government of Saudi Arabia is the sole owner of the resources while in both USA and Nigeria, the land owners own the oil reserves in the their land. Nevertheless, it can be explained that the recent announcement by the Saudi Arabia government that it is planning to make it possible for investors to invest in Aramco implies that it is only a matter of time before the existing oil policy is amended. Also, you can read this renewable energy essay if you interested to know how these countries work with renewable energy resources.