Oil and Gas Contracts

Oil and Gas Contracts

Contracts in the oil and gas industry are typically concluded through a structured process. Initially, project plans and technical specifications are prepared, followed by the publication of tender documents. Contractors are then invited to participate in the bidding process. After reviewing contractors’ qualifications and evaluating their proposals, the preferred contractor is selected, and a contract is executed with that party.

Rights and Obligations of the Parties in Oil and Gas Contracts

Several common types of contracts are widely used in the oil and gas industry:

• Engineering Contracts (E): Engineering contracts cover only the design phase of a project and focus exclusively on technical planning and preparation.
• Engineering and Procurement Contracts (EP): EP contracts include both the design phase and the procurement of project materials and equipment.
• Procurement and Construction Contracts (PC): PC contracts apply to projects in which contractors are responsible for both procurement and construction. Many national projects are carried out under this contractual model.
• Engineering, Procurement, and Construction Contracts (EPC): Many large oil and gas projects are implemented under EPC contracts, and a substantial number of ongoing projects are executed using this model. The primary advantages of EPC projects include improved control over project implementation and faster execution. Under this model, engineering, procurement, and construction activities are performed simultaneously under a single contract. In the modern market, particularly for projects financed by private investment or financial arrangements, certainty regarding final cost and completion deadlines is essential. EPC contracts provide greater assurance concerning project completion timelines and overall project cost.
• The term EPC is derived from the first letters of the following three components:
  • Engineering.
  • Procurement.
  • Construction.

Joint Venture Contracts

These contracts can generally be divided into two main categories:

• Production Sharing Agreements: Under production sharing agreements, foreign companies undertake to pay taxes and, in certain cases, royalties. They may also assume obligations relating to training local personnel and cooperating with the host government. Under these agreements, the operating company and the host country share both the profits and the risks associated with petroleum operations. However, the degree of participation varies by concession agreement, and the host government retains an interest in production under the contract.

Service Contracts

Service contracts represent one of the oldest forms of contractual relationships among individuals and societies and can be divided into three principal types:

• Pure Service Contracts: These contracts are generally not used for exploration activities and are primarily applied in production operations. Compensation under these agreements consists of a predetermined and fixed monetary payment. In certain cases, additional incentives such as the right to purchase a portion of production may be included to encourage foreign investors to provide higher-quality services. In simpler forms of these contracts, contractors receive a fixed fee without any share in oil production.
• Risk Service Contracts: Risk service contracts are primarily used for the exploration of oil and gas fields. These contracts typically involve limited consideration of issues such as taxation and royalties. If no commercial discovery is made, the contract is automatically terminated. However, if oil or gas is discovered, the contractor is obligated to develop the field and bring it into production. Regardless of discovery, all production remains under the ownership of the host country, while the operating company receives payment in accordance with contractual provisions.

Buy Back Contracts

Under buy-back contracts, investors are responsible for installing equipment, launching operations, and transferring technology. After completing the project and initiating production, the investor transfers the project to the host country. Since repayment of the principal investment and profit is made through crude oil or petroleum products, buy-back contracts are considered a type of service purchase agreement. These contracts are typically used in countries where domestic law prohibits private or foreign ownership of oil and gas resources.

Frequently Asked Questions Regarding Oil and Gas Contracts