Foreign Investment Contracts in the Oil & Gas Sector: A Survey of Environmentally Relevant Clauses
| Author | Kyla Tienhaara |
| Position | Co-Director of the Climate and Environmental Governance Network and Research Fellow at the Regulatory Institutions Network, Australian National University |
| Pages | 15-20 |
SUSTAINABLE DEVELOPMENT LAW & POLICY15
INTRODUCTION
The Deepwater Horizon tragedy in the Gulf of Mexico in
2010, which resulted in the largest ever accidental marine
oil spill,1 was a star k remin der of the environmental
risks posed by the oil and gas industry. Although disasters o n
this scale are for tunately rare, the average oil and gas operation
has many other commonplace , yet significant, environmental
impacts throughout its lifespan. Environmental issues begin with
exploration ac tivities—seismic tests, used to locate petroleum,
often disturb local wildlife—and car ry on to the end of the pro-
duction phase when facilities must be dismantled and disposed
of.2 The everyday operation of many offshore petroleum instal-
lations involves the discharge of oi l-contaminated “produced
water,” drill cutti ngs and mud, and productio n c hemicals.3
Onshore, land clearing for bas e camps, helipads, roads, pipe-
lines, waste disposal sites, and other facilities has a considerable
ecological impact.4 Furthermore, the indu stry is a sign ificant
contributor to air pollu tion and a major emitter of greenhouse
gases. In 2008, thirty-two companies in the Inte rnational Asso-
ciation of Oil and Gas Producers (“OGP”) reported emissions of
296 million t onnes (metric tons) of ca rbon dioxide, 2.1 million
tonnes of methane, 1.1 mill ion tonnes of non-methane volatile
organic compounds, 366 thousand tonnes of sulfur dioxide, and
827 thousand tonnes of nitrous oxides.5
The ind ustry faces increasingly strict environmental stan-
dards in developed coun tries such as the United States and the
United Kingdom.6 However, the majority of the world’s proven
oil reserves are in developing countries and economies in transi-
tion, which often lack sophisticated regimes for environmental
protection.7 Even when legislative frameworks are well devel-
oped, there are o ften deficiencies in capacity and an unwilling-
ness to monitor and enforce environmental regulation.8 There is,
furthermore, no comprehensive global convention on the envi-
ronmental impacts of petroleum exploration and producti on.9
Although a number of multilateral and regional agreemen ts
cover certain aspects of the industry, they require adoption into
domestic legis lation to have a direct effect on international oil
companies (“IOCs”).10
Apart from domestic and internatio nal law, one could also
look at conditions attached to loans and investment insurance,
as well as voluntary corporate social responsibil ity codes as
sources of environmental standards for the petroleum industry.11
However, the intent of this article is to shine a light on a much
less studied and poorly understood domain of environmen tal
regulatio n: the forei gn invest ment c ontracts signed between
IOCs (or consortiums of IOCs ) and host states , which allocate
rights to explore for and exploit hydrocarbons within an area of
land (or an offshore block) over a fixed period of time.
In a 1994 monograph, Zhiguo Gao noted that environmen-
tal issues had “not received enough attention” in the oil and gas
contracts he had reviewed.12 His conclusion raises the question
of whether environm ental issues have received great er atten-
tion in more recent oil and gas contracts (i.e. those negotiated
and signed in the last fifteen years). This question is difficult to
answer, not least because foreign investment contracts gener-
ally are not disclosed to the public.13 Many governments’ model
agreements are publicly available,14 but it should be noted that
these models may be substantially altered or ignored altogether
in the negotiation of actual contracts.15
In this article, sample clauses from forty-one u pstream oil
and gas contracts (both onshore and offshore) covering thir ty-
five count ries and the period 1994 -2008 were reviewed. Four-
teen of the con tracts were models.16 An e ffort was made to
find the m ost up-to-date model contracts, as governments peri-
odically revise the m. However, it should be noted that so me of
the models were undated. The twenty -seven signed contracts
reviewed were from twenty-six different countries17 and had an
average signature date of 1999. Some of contracts in the sample
are available on the Internet, either because governments have
chosen to release them or because they have been leaked to non-
governmental organizations (“N GOs”) that have subsequently
published them . Others are available in company filings to the
U.S. Securities and Exchange Commission.
Given the small number of contracts that were reviewed, and
the great variety of clauses that were encountered, nothing can be
extrapolated from this preliminar y survey about the frequency
with which any particular type of clause is likely to appear in oil
and gas contracts. Furthermore, in any given situation, a contract
should be considered within the broader context of a country’s
petroleum law, environmental law, and other domestic legisla-
tion. The purpose of the article is not to provide a full picture of
environmental regulation o f petroleum operations in individual
Foreign inveStment contractS in the oil
& gaS Sector:
a Survey oF environmentally relevant clauSeS*
by Kyla Tienhaara**
* A lengthier version of this article was published in the online journal Oil, Gas
and Energy Law Intelligence in September 2010.
** Co -Director of the Clim ate and Environmental Governa nce Network and
Research Fellow at the Regulatory Institutions Network, Australian National
University.
SPRING 2011 16
countries, but instead to draw a ttention to how con tracts can
either bolster or undermine environmental protection efforts.
TYPES OF FOREIGN INVESTMENT CONTRACTS
There are thr ee main types of foreign investment contracts
in the upstream oil and gas sector: (1) concessions or licenses;
(2) production sharing contracts (or agree ments) (“PS Cs” or
“PSAs”); and (3) risk-service contracts. In addition , all three
may be subje ct to association or joint-venture agreement s.18
Under concessio n contracts and lic enses, IOCs are oft en given
exclusive rights to explore for and produce hydrocarbons and in
return are required to pay royalties, taxes, and fees to the govern-
ment.19 In a PSC, the IOC has similar rights, but obtains only
“cost oil” and a share of any “profit oil” produced, with the state
recouping the remainder in lieu of, or sometimes in addition to,
collecting royalties.20 The IOC also pays taxes and fees.21 Under
a risk-service contract the IOC explores for and produces petro-
leum on behalf the government and is paid a fee for its services,
with a possible right to buy a portion of the production.22 Asso-
ciation or joint venture agreements involve IOCs partnering with
host governments or state-owned ente rprises and, as i n a PSC,
sharing petroleum production.23
In practice, t hese forms and labels ten d to be much less
important than the speci fic content of a contract. 24 However,
one r elevant difference is that unlike a typical concession, an
IOC’s costs are gene rally recoverable under a PSC in the for m
of “cost oil.” 25 If costs associated with remediating and com-
pensating for environmental har m are “cost recoverable,” the n
the host government, not the IOC, would assume the risk of such
costs.26 A similar issue may arise with risk-service contracts and
even with concessions that have royalty rates that are somehow
indexed to costs.
ENVIRONMENTAL STANDARDS CLAUSES
Most, though not all, of the oil and gas contracts reviewed
contained a section on the environmental standards to be applied
to the project. In this regard, there are five general forms that
contracts appear to follow:
(i) reference to domestic environmental law only;
(ii) reference to international industry standards only;
(iii) reference to both domestic law and international
industry standards;
(iv) reference to domestic law and/or industry
standards and international environmental
agreements; or
(v) development of project-specific environmental
standards.
Some reference to dome stic environm ental legisl ation is
clearly desirable from a public policy perspective. Domestic
standards have been developed (in most cases) under a demo-
cratic system of rule, have often been designed with local envi-
ronmental condi tions in mind, are familiar to the agencies that
are tasked with monitoring and enforcement, and are in the pub-
lic domain. However, as noted previously, in many developing
countries environmental regulation of the oil and gas sector i s
still in its infancy and it may be inadequate in some situations.27
As such, reference in contracts to domestic legislation alone may
be undesirable. In any event, it would appear that parties rarely
adopt this form. A contract from Peru28 and one from Algeria29
were the only contracts in the sample that referred solely to
domestic environmental legislation.
In several of the contracts in the sample, the parties instead
included a reference to internatio nal ind ustry standards and
failed to men tion the application of do mestic environmen-
tal law.30 The advantage from an environmental persp ective
of refer ring to inte rnational industry standards is that in so me
cases, they may be higher than, or cover spe cific iss ues not
addressed in, domestic legi slation. Fur thermore, reference t o
international standards allows some scope for change and evolu-
tion of the environmental management regime of an investment
over time, thus providing a way aro und a cont ractual require-
ment for stability, as will be discussed below. However, there are
serious problems with referring only to industry standards, given
their inhe rent ambiguity. The termino logy “goo d oilfield prac-
tices”31 or “good production practices”32 is frequently employed
in environmental standards clauses, as well as in other types of
provisions discussed further below, but these phrases are seldom
defined.33 A 2002 Cambod ian contract provides a rare example
of a definition:
Good Petroleum Industry Practices means the standards
and practices, and exercise of that degree of skill, pru-
dence and foresight that would reasonably be expected
of persons car rying out international petroleum opera-
tions, and adherence to generally accepted standards of
the in ternational petrole um industry, includ ing sound
environmental provisions.34
It is not at all clear where exactly one should look for “gen-
erally accepted standards” as there are a multitude of potential
sources. For example, members of the American Petroleum Insti-
tute (“API”) “pledge” to manage their businesses according to a
set of eleven environmental principles.35 However, the majority
of these principles are imprecise, such as the commitment “to
reduce overall emission and waste generation.”36 The API also
has guidelines for environmental protection in both onshore
and offshore oil and gas operations, although they are not freely
available to the public.37 Other potential sources include guide-
lines produced by the previously mentioned OGP,38 the Austra-
lian Petroleum Production & Exploration Association,39 as well
as bodies such as the International Organization for Standard-
ization ( “ISO”).40 As Wawryk notes, the existence of so many
guidelines in the petroleum industry makes it impossible to point
to one that can definitively be considered “good” practice and
furthermore the “actual practices of international oil companies .
. . vary from company to company and, for one company, across
jurisdictions . . . making it difficult to identify the best practices
actually in use.”41
The majority of contracts reviewed for this article contained
reference to both domestic environmental law and international
industry standards. In most cases, there was no mention of how
these two sources of standards would be reconciled in the event
SUSTAINABLE DEVELOPMENT LAW & POLICY17
of a conflict. However, in some contracts a form of hierarchy was
established. For examp le, Article 21.1 of Brazil’s 2001 Model
Concession C ontract indicates that industry standards are only
intended to act as a supplement to domestic legislation:
The Concessionaire shall adopt, at its own co st and
risk, all the necessary measures for the conservation of
reservoirs and other natural resources and for the pro-
tection of the air, soil and water in the surface or in the
subsurface, subject to Brazilia n legislation and r ules
about environment and, in their absence or lack, adopt-
ing Oil Industry Best Practice in this regard.42
In contrast, the clause below, from a 1994 Azerbaijani con-
tract, has evidently been adopted to ensure that do mestic envi-
ronmental regulation is no t more stringent than intern ational
industry standards:
Contractor shall comply with present and future Azer-
baijani laws or regulations of general applicability with
respect to public health, safety and protection and res-
toration of the environment, to the extent that such laws
and regulations are no more stringent than the then
current international Petroleum industry standards and
practices being at the date of execution of this Contract
those shown in App endix IX, with which Contractor
shall comply.43
In add ition to dom estic law and industry st andards, some
oil and gas contracts refer to international environmental agree-
ments, although this does not seem to be a common practice. One
example is Article 6.5 of Liberia’s Model PSC, which states that:
“The Co ntractor further undertakes to carry out all pet roleum
operation s in accordance with the Environmental Protectio n
and Management Laws of Liberia and all international environ-
mental pr actice.”44 It is questionable whether such a sweeping
reference to international environmental law will have anything
more than symbolic value. Provisions in multila teral environ-
mental agreeme nts are not only ty pically “soft” in nature; they
also generally require adoption i n domestic legislation befor e
they can have any impact on private actors.45 Furthermore, few
environmental agreements tackle specific issues concerning the
management of petroleum exploration and production. However,
there are some tr eaties covering ma rine pollution that are rel-
evant to offshore operations.46 In this respect, Mauritania’s 1994
Model PSC is less ambiguous in its referen ce to inter national
environmental law, noting in Article 6.6 that:
The Contractor shall take ail [sic] necessary precautions
to prevent pollution of the marine area of the Explora-
tion Perimeter and observe, inter alias, the provisions
of the Internati onal Convention on the prevention o f
petroleum pollution of sea waters signed in London on
May 12, 1954 and th e amendments an d texts enacted
for the implementation thereof.47
The final for m of standards clause obser ved in the sample,
although only in one contract, is the developmen t of a proj -
ect-speci fic environm ental r egime. A 1 996 con tract be tween
Azerbaijan and a consortium of investors stipulates that the con-
tractor, the state-owned oil company, and the State Comm ittee
on Ecology and Control over the Use of Natural Resources will
jointly agree on a set of saf ety and environmental standards
based on “( i) intern ational pet roleum ind ustry sta ndards and
experience with thei r implementatio n in exploration and p ro-
duction ope rations in other parts of t he world and (ii) existing
Azerbaijan safety and environmental legislation.”48 Once devel-
oped, this set of standards can only be altered through a written
agreement and if any standards that have not been agreed upon
are applied to the project, the investor can invoke the contract’s
stabilization clause.
STABILIZATION CLAUSES
According to a 2008 study, the use of “stabilization clauses”
in hos t-government contracts “is widespread a cross industries
and regions of the world.”49 Stabilization clauses come in vari-
ous forms.50 In their most basic for m, they “freeze” the law that
applies to th e investment at the time th e contract is signed.51 A
more nuanced version is often referred to as an “economic equi-
librium” clause, which requires the government to restore the
balance of risks and rewards established in a contract when it is
upset by a new regulation or tax.52 A stabilization clause can be
strictly circumscribe d to only cover very specific issues, or the
parties to the contract can explicitly “c arve out” areas such as
environmental protection from its application. For example, in a
1997 contract from Kazakhstan, the stabilization clause contains
the caveat:
provided, however, that no amen dment to this Agree-
ment shall be required hereunder as the result of (i)
changes to Laws concerning health, safety or environ-
mental protection that cause such Laws to be consistent
with internati onal standards for health , safety or envi-
ronmental legislation and are applied on a non-discrim-
inatory basis . . . .53
As Lorenzo Cotula notes, this provision is weakened by its
ambiguous reference to “international standards,”54 but it is still
far preferable to the stabiliz ation clauses found in many con-
tracts and even in model agreements tha t are worded in su ch a
broad manner that they can stifle any future regulation that might
be perceived to undermine the profi tability of an i nvestment,
including effort s to address corr uption, to saf eguard human
rights (including labor rights), and to protect the environment.55
ENVIRONMENTAL IMPACT ASSESSMENT CLAUSES
Environmenta l Impact Assessments (“EIAs” ) and corre-
sponding management plans have become a staple requirement
for investment projects in many sectors.56 Unfortunately, a recent
survey of e nvironment al governance in petroleum producing
countries commissioned by t he World Ba nk found that “much
of the emphasis of the EIA process appear s directed towards
the approval of oil and gas projects, rather than t o a life cycle
approach for minimizing environmental and social impact.”57
An EIA is typically mandated to be completed after a con-
tract with th e state has been signed 58 and most of the contracts
reviewed for this article contained some reference to the need
for an EIA. However, the form of the EIA clauses varied widely
SPRING 2011 18
across the sample from a simple note o f the existenc e of a
requirement,59 to detailed specifications of what the EIA should
cover, who should prepare it, when it should be submitted, and
so forth.60
CLAUSES ON ACCESS TO PROTECTED AREAS
Petroleum opera tions are particularly conte ntious when
they are lo cated, even partia lly, within wildlife reserves, parks,
or areas of cul tural o r biologic al signi ficance.61 NGOs have
long argued that such areas should be off limits to the extrac-
tive industrie s,62 but most governments are not ready to forgo
the potential economic opportunities that the exploitation of
these areas offer. This is evident in several of the contracts in the
sample. For example, Article 37.6 of Madagascar’s 2006 Model
Offshore PSC states:
In the event that a po rtion of the Co ntract A rea is
located within a natural reserve area, the Operator shall
deploy the necessary effort s in order to minimize the
negative impacts on these na tural reserves, in accor-
dance with generally accepted environmental practices
in the international petroleum industry.63
This is an incredibly weak p rovision. A 2004 PSC from
Uganda is similarly permissive, but it also cont ains a bizarre
caveat:
In the event of protest from responsible concerned third
parties within or outside Uganda regarding the conduct
of Petroleum Operations in any National Park or Game
Reserve and the consequent effects upon the environ-
ment or wildlife, the Government and Licensee shall
meet to determine what if any action should be taken.64
Given that this clause provides nothing more than an obliga-
tion for the investor and the government to meet, it is question-
able why the parties bothered to include it at all.
CLAUSES ON ACCESS TO WATER &
OTHER NATURAL RESOURCES
Petroleum operations require natural materials in their con-
struction phase, and significant amounts of water and electricity
throughout their operation. While many operations are self-suffi-
cient in terms of energy supply, other natural resources may need
to be obtained from within or outside the contract area.
From an environmental and community rights pe rspective,
as well as from an economic-development perspective, it is dis-
turbing that many governments appear to focus sol ely on the
potential revenue that they can obtain from pe troleum produc-
tion and are willing to simply give away other valuable natural
resources under the terms of oil and gas contracts. For example,
Article 27.8 of Mozambique’s 2007 Model concession contract
provides for the right of the investor “to drill for and have the free
use of water and impound surface waters.”65 A contract from the
Kurdistan Regional Government of Iraq is even broader, giving
the contractor the right to “freely use sand, water, electricity, and
any other natural resources located inside or outside the Contract
Area for the Petroleum Operations.”66
Some of the contracts in the sample were completely silent
on t he issue of access to natural resources, and a s mall num-
ber had more nuanced provisions than those quoted above. For
example, a 1994 contract from Ethiopia states that the contrac-
tor shall “have the right, subject to the approval of the Minister,
to use water in the Contract Area for operational purposes, but
the Contr actor shall not deprive any lan d, domestic settlement
or livesto ck watering p lace of th e water supply to which they
are accustomed.”67 A 2008 Model PSC from Bangladesh goes a
step further by requiring that the contractor pay for the natural
resources, such as water, that it utilizes.68
CLAUSES ON GAS FLARING
The World Bank estimated in 2004 that the volume of asso-
ciated gas being flared and vented globally every year was about
110 billion cubic meters—enough fuel to provide the combined
annual nat ural gas consumption of Ger many and France.69
Although som e short-term flar ing during testing or in cases of
emergencies is accepted as standard practice in the industry, the
flaring of more substantial amounts of gas is only practiced in
poor countri es with limited infrastructure and weak regulat ory
institutions.70 Aside from being incredibly wasteful, flaring has a
significant impact on local air quality and also makes an appre-
ciable contribution to climate change.71 At the World Summit on
Sustainable Development in Johannesburg in 2002, the World
Bank launched a Global Gas Flar ing Redu ction in itiative t o
tackle the problem.72 Despite this development, and widespread
condemnation of the practice, flaring continues in many states.
In 200 8, thirty-two companies in the OGP ad mitted to fla ring
18.6 tonnes of gas for every thousand tonnes of hydrocarbon that
they produced.73
Many oil an d gas contracts, even recent models, appear to
be lenient on the issue of flaring. For example, the Bangladesh
2008 Model PSC notes in Article 15.3 that:
Any Associated Natural Gas as is not used under Article
15.1 or Article 15.2 and which Contractor does not con-
sider possible to recover economically shall be offered
to Petrobangla wi thout any payment to Contra ctor but
at Petrobangla’s cost at the well-head or field facilities
in the Production Area. To the extent that Petrobangla
does not so take any of such Associated Natural Gas,
Contractor may flare such Associated Natural Gas pro-
vided that such flaring is included in the Development
Plan submitted under Article 8.10.74
Although this clause gives priorit y to utiliz ation of th e
resource, there is no requirement for the gas to be reinjected
into the ground if it is not taken by the state-owned enterprise,
and economic concerns clearly tr ump environmental ones.75 A
1997 c ontract from Indonesia also reflects this position in the
statement that gas “may be flared if processing and utilization
thereof is not economical.”76 Oth er contracts, such as a 200 0
contract from Belize77 and a 1998 contract from Angola,78 allow
for flaring only if it is authorized by the government. A Ugan-
dan contract from 2004 also follows this model, but includes the
caveat that the government’s consent “shall not be unreasonably
SUSTAINABLE DEVELOPMENT LAW & POLICY19
withheld or delayed.”79 The most stringent clauses, found in only
a few contracts in the sample, restricted flaring to cases of an
emergency or for safety reasons.80
CLAUSES ON RESPONDING TO EMERGENCIES
AND ACCIDENTS
In 2008, thirty-two companie s in the OGP reported 2,978
spills greater than one barrel in size, resulting in the release of
18,266 tonnes of oil into terrestrial and marine environments.81
In many of the oil and gas contracts in the sa mple, the parties
have recognized that spills and other accidents and emergencies
have the potential to occur and should be planned for. As such,
as a part or separate from an EIA, an emergency response plan is
often required from the contractor.82
Some oil and gas contracts also cover three a dditional ele-
ments in respect of em ergencies: notification, response, and
consequences for failure to respond. In the oil and gas contracts
reviewed, notification was limited to the contractor apprising the
government of the situation, but not the local community or the
broader public.83 In terms of response, the requirements were
often vague (e.g., “take prudent steps”) or simply provided refer-
ence to good oilfield practices.84 However, some of the contracts
in the sample did additionally stipulate that in the event that the
contractor did not act promptly to respond to an emergency or
accident, the government had the right to mount its own response
and charge the contractor for expenses that it incurred in doing
so. An example is found in a PSC from Ghana:
If C ontractor does not act promptly so as to control,
clean up or r epair any pollu tion or damag e, GNPC
[Ghana National Petroleum Corp oration] may, after
giving Contra ctor reasonable notice in the circu m-
stances, take any actions which are necessary, in accor-
dance with accepted Petroleum indust ry practice and
the reasonable costs and expenses of such actions shall
be borne by Contractor and sha ll, subject to Article
17.5 be included as Petroleum Costs.85
CLAUSES ON LIABILITY, INDEMNITY, & INSURANCE
Liabil ity for environme ntal damage is a n increasingly
important issue for the oil industry. The dispute between Chev-
ron and the residents of the Ecuadorian Amazon concerning the
company’s liability for oil pollution is a prime example of why
most modern contracts have express provisions on liability that
cover environmental damage.86
Issues of liability for environmental damage can be com-
plex, especially when multiple parties, i ncluding state -owned
enterpris es, are involved i n petroleum production. Contracts,
therefore, should have provisions th at are explicit about who is
to be liable for what and to whom. The issue of “who” depends
somewhat on the form of contract, but generally it is the con-
tractor or concessionaire (the IOC) who will be liable, except in
cases where fault can be directly attributed to the state or state-
owned enterprise.87 If there is more than one contractor involved
in the project, then there will likely be a clause that sti pulates
that they are jointly and severally liable.88
The issue of “what” concerns the types of harms (e.g., only
death or injury or also “damage to the environment”), the period
in which the harms were caused (i.e. no liability for prior envi-
ronmental damage established in a baseline assessment), and the
legal form of the liability (fault, strict, or absolute).89 Finally, on
the issu e of to “whom” the contra ctor is liable, there are typi-
cally two separate issues covered in contracts: liability to the
state and liability to third parties. 90 In the latter case, the issue is
not directly one of liability—contracts cannot affect the rights of
third parties under national law—but rather one of indemnity.91
Through indemnity clauses, IOCs commit to compensate states
for any costs incurred resulting from a third-party liability suit.92
Most contracts in the sample made specific mention of
“pollution” or “enviro nmental damage ” in liability/indemnity
clauses and adopted a strict liability approach. 93 However, a
2002 Cambodian94 contract provided only for fault liability. The
most developed liability/indemnity clause in t he sample was
from a contract signed by Belize in 2000, which required that the
contractor contribute one tenth of one percent of the value of the
gross annual production to a fund managed by the government
“for the sole purpose of indemnification against any or all envi-
ronmental damages cause during the petroleum operations.”95
An additional issue closely related to liability and indemnity
is the requirement for contractors to have insuran ce coverage.
These clauses often specify that insurance should cover “pollu-
tion” or “environmental damage.”96 One potential problem with
both lia bility/indemnity and insurance clauses is that the term
“pollution” is quite n arrow and does not cover all of the vari-
ous environmental impacts from oil and gas operations. 97 Even
references to “environmental damage” could be subject to inter-
pretation if not defined in the contract.
CLAUSES ON DECOMMISSIONING & REMEDIATION
When an o il operat ion reach es the end of pr oduction, a
number of costly activities must be undertaken. Onshore wells
need to be plugged an d structures dismantled, with material s
removed and ultimately recycled or disposed of. Remediation of
the local environment ( e.g., decontamination and revegetation)
may also be required. Offshore installations present particularly
complex issues in terms of decommissioning, although it is also
in this area that international law has its most direct and signifi-
cant impact on the oil and gas industry.98
The extent to which decommissioning is dealt with in con-
tracts depends somewhat on the contractual relationship between
the parties and th e expected life of t he project . Under some
arrangements, states retain ownership over production facilities
and may continue operat ions after t he termination of the c on-
tract. However, even in such instances, there may be contractual
provisions covering decommissioning of installat ions that are
not destined to be taken over by the state.
Clauses on decommissioning and remediation found in con-
tracts in the sample were generally lacking in detail. For exam-
ple, a 1997 PSC from Benin states:
At the end of the Contract, in any other situation than
the abandonment case, t he Contract or must take t he
SPRING 2011 20
measures according to the Go od Practices of the Oil
Industry to restore the environment and the sites where
the Petrole um Operations have be en performed to
their original state on the Effective Date of the Con-
tract, taking into account the rules of the abandonment
procedure.99
Althoug h th is p rovision appears quite stri ct, as it s ug-
gests that sites should be restored to their “original state,” it is
weakened by the generic reference to good oilfield practices.100
According to a recent World Bank report, the absence of guide-
lines for what should be included in a decommissioning plan is a
pervasive problem in petroleum producing countries.101
In addition to an absence of guidelines, there are obviously
strong incentives for some companies to “cut and run” or to con-
duct only superficial remediation to minimize costs. One method
for ensuring that decommissioning and remediation are carried
out to plan is to use a financial mechanism such as a perfor-
mance bond or reserve fund. Tanzania is an example of a country
that has set up such a regime in its 2008 Model PSC.102
CONCLUSION
Since Gao’s study was published in 1994,103 there have
been significant changes in the content of upstream oil and gas
contracts vis-à-vis environmental protection. The smal l sample
of contract s reviewed in this article indicates that a significa nt
number of clauses covering a variety of issues—from baseline
environmental assessments all the way through to environmental
remediation—can be found in modern contracts. Given the mon-
umental increase in environmental awareness an d the intense
scrutiny that the industry has come under in the t wo deca des,
this is unsurprising. What is remarkable is that a handful of con-
tracts still resemble those that Gao criticized for having only a
token mention of environmental protection, and that references
to ambiguous terms such as “good oilfield practices” remain so
pervasive.
Further research wil l be req uired to build an understand-
ing of why there are such wide disparities in contracting prac-
tice between countries. For example, it would be interesting to
explore whether the environmental provisions in oil and gas con-
tracts reflect domestic attention to these issues o r if the capac -
ity of the government to negotiate with IOCs is a more relevant
factor. Additionally, empirical work is required to determine the
extent to which contract clauses on environmenta l issues are
actually implemented by IOCs and monitored and enforced by
governments.
1 Ronen Perry, The Deepwater Horizon Oil Spill and the Limits of Civil
Liability, 86 waSh. l. rev. 1, 3 (2011).
2 Zhiguo Gao, Environmental Regulation of Oil and Gas in the Twentieth
Century and Beyond: An Introduction and Overview, in environmental regu-
lation oF oil anD gaS 3, 4-7 (Zhiguo Gao ed., 1998).
3 Sergei V. Vingradov & Jay Paul Wagner, International Legal Regime for the
Protection of the Marine Environment Against Operational Pollution from Off-
shore Petroleum, in environmental regulation oF oil anD gaS 93, 96 (Zhiguo
Gao ed., 1998).
4 Amy B. Rosenfeld, Debra L. Gordon & Marianne Guerin-McManus,
Approaches to Minimizing the Environmental and Social Impacts of Oil Devel-
opment, in environmental regulation oF oil anD gaS 279, 294 (Zhiguo Gao
ed., 1998).
5 int’l aSS’n oil & gaS proDucerS, environmental perFormance in the
e&p inDuStry 2008 Data 6 (Nov. 2009), http://www.ogp.org.uk/pubs/429.pdf.
6 See Gao, supra note 2, at 32-35.
7 Id. at 35-37.
8 Kit Armstrong, Managing Environmental Legal Risks in Oil & Gas Explo-
ration & Production Activities, in environmental regulation oF oil anD gaS
359, 374-75 (Zhiguo Gao ed., 1998).
9 See Ayesha Dias, The Oil and Gas Industry in the Tangled Web of Environ-
mental Regulation: Spider or Fly?, in environmental regulation oF oil anD
gaS 59, 63-72 (Zhiguo Gao ed., 1998).
10 See Lawrence L.C. Lee, Basle Accords as Soft Law: Strengthening Interna-
tional Banking Supervision, 39 va. J. int’l l. 1, 3-4 (1998) (noting that interna-
tional soft law must be adopted into domestic law to be legally binding).
11 See Jdrzej George Frynas, Corporate Social Responsibility in the Oil and
Gas Sector, 2 J. worlD energy l. & buS. 178 (2009); Peter Utting & Kate
Ives, The Politics of Corporate Responsibility and the Oil Industry, 2 St. anto-
ny’S int’l rev. 11 (2006).
12 Zhiguo gao, international petroleum contractS: current trenDS anD
new DirectionS 213 (1994).
13 See peter roSenblum & SuSan mapleS, revenue watch inSt., contractS
conFiDential: enDing Secret DealS in the extractive inDuStrieS 11-14 (2009),
http://www.revenuewatch.org/files/RWI-Contracts-Confidential.pdf.
14 Id. at 38.
15 Id. at 12.
16 From the following countries: Angola, Bangladesh, Brazil, Egypt, Equa-
torial Guinea, India, Liberia, Madagascar, Mozambique, Pakistan, Tanzania,
Timor-Leste, Trinidad & Tobago, and Vietnam.
17 Algeria, Angola, Azerbaijan, Bangladesh, Belize, Benin, Cambodia, Cam-
eroon, China, Equatorial Guinea, Ethiopia, Georgia, Ghana, Guinea, India,
Indonesia, Kazakhstan, The Kurdistan Region of Iraq, Mongolia, Peru, Russia,
Senegal, Sudan, Timor-Leste, Uganda, and Venezuela.
18 King & Spalding LLP, An Introduction to Upstream Government Petroleum
Contracts: Their Evolution and Current Use, oil gaS & energy law, Mar.
2005, at 3, http://www.ogel.org/article.asp?key=1730.
19 See generally Michel Kerf, Concessions for Infrastructure 7 (World Bank,
Working Paper No. 399, 1998), http://rru.worldbank.org/Documents/Toolkits/
concessions_fulltoolkit.pdf.
20 See bernarD taverne, an introDuction to the regulation oF the petro-
leum inDuStry: lawS, contractS anD conventionS 24, 28 (1994); Thomas W.
Waelde, International Energy Investment, 17 energy l.J. 191, 200, 202 n.53
(1996).
21 taverne, supra note 20, at 27.
22 Id. at 20-21.
23 Id. at 133-35.
24 Waelde, supra note 20, at 200.
25 Id. at 202, n 53.
26 taverne, supra note 20, at 24-25.
27 Gao, supra note 2, at 35-37.
28 contract For hyDrocarbon exploration & exploitation in the ucayali
baSin between perupetro S.a. & chevron overSeaS petroleum (peru) ltD.
(block 52) (Nov. 8, 1995) (Peru) (on file with the author).
29 contract For the exploration anD exploitation oF hyDrocarbonS
between bhp petroleum (exploration) inc. anD Sonatrach (boukhechba
area) (May 31, 1997) (Alg.) (on file with the author).
Endnotes: Foreign Investment Contracts in the Oil & Gas Sector
Endnotes: Foreign Investment Contracts in the Oil & Gas Sector
continued on page 39
