Fundamental Legal Issues in the Oil and Gas Industry

IV: The Concession & Risk Service Contracts

After discussing the production sharing contract in the last

episode, this article reviews the other two commonly used

petroleum development regimes the concession and the risk

service contracts.

The Concession

The concession was the principal form of petroleum

development agreement and its first known form was

recorded in 1901 in Iran (the D’Arcy Concession).

Concessions are still widely used, albeit in a very different

form from the D’Arcy concession and others granted in the

periods following shortly afterwards. Commentators typically

classify the concession into two broad categories - the

traditional concession and the modern concession. The

former representing the D’Arcy type concessions and the

latter representing the newer concessions now in use. This

classification would also be used in this article.

The Traditional Concession

The traditional concession was characterised by the grant of

large tracts of land for (sometimes the whole of a country)

for long periods of time (ranging from 60 to 99 years) and

with virtually no control over the activities of the

concessionaire by the State. Additionally, the State’s primary

financial benefits came only in the form of royalties. Indeed

royalties were charged on the basis of a flat rate per ton of

the petroleum produced and was not indexed to the price of

the petroleum in the market. The concessionaires were not

obligated to drill in any of the land which had been conceded

to them nor were they required to relinquish the property in

the position that they did not undertake exploration or

drilling. These traditional concessions were entered into by a

number of countries. The D’Arcy concession in Iran granted

William D’Arcy the exclusive rights to search for and produce

oil over almost 500,000 square miles of Southern Iran for

sixty years. In exchange the Shah of Iran and his government

were given a “bonus” of US$100,000 and shares of an equal

value in D’Arcy’s oil company and a 16 per cent royalty.

Similarly, the ruler of Abu Dhabi granted a 75 year

concession for the whole of his country. In Nigeria, the Shell-

BP consortium was granted a concession covering the entire

mainland of Nigeria.

The traditional concession was a reflection of its time. Most

of the countries where these concessions were granted were

often under some form of colonisation or the other.

Additionally, the countries lacked the requisite legal

structures to govern such matters as petroleum operations.

This created an environment where the interests of the

countries were subordinated to those of the oil companies.

The Modern Concession

The modern concession arose as a result of greater

awareness from the oil producing countries of the injustices

engendered in the existing concession regimes. Beginning in

the fifties, a number of countries sought to renegotiate their

concession terms, introducing new elements, which

significantly altered the balance in the concession regime.

The major changes however, arose after the formation of the

Organisation of Petroleum Exporting Countries (“OPEC ”). The

organization was established in 1960 and one of its main

aims was to “gain complete control of the hydrocarbon

industry in its sovereign territories.” In 1968 and 1971, OPEC

made resolutions XVI. 90 of 1968 and XXIV 135 of 1970.

These resolutions enjoined member states to procure

participation and control in the exploration, exploitation and

development of their petroleum resources. The formation of

OPEC was key to the strengthening of the oil producing

countries in their negotiations with the oil companies. The

states shared information about the nature of the

arrangements being offered by the oil companies as well as

the kinds of abuses being perpetrated by the companies

under the traditional concession system.

The renegotiated concessions now gave the State a greater

take in the oil produced in the territory, control over the

operations of the oil companies, covered smaller areas, were

granted for shorter periods, included requirements to

relinquish when oil and gas was not discovered or produced,

amongst other terms.

Nigeria’s OML as a Modern Concession

The Oil Mining Lease (“OML”) provided for under the

Petroleum Act of 1969, particularly as it operates under the

participating joint venture (“PJV”) structure is an example of

a modern concession. Unlike the concession initially granted

to the Shell-BP consortium, under the provisions of the law

the area which an OML may cover is limited to ***. The

Petroleum Act also limits the term of an OML to twenty years.

The Act however provides that this term may be renewed.

The Act also requires that one-half of the area of the lease

must be relinquished ten years after the grant of an oil

mining lease.

The Risk Service Contract

The risk service contract (“RSC ”) is in many ways similar to

the PSC. Under the RSC arrangement, the National Oil

Company (“NOC ”) holds the right to produce, whilst the

multinational company acts as a contractor. Similar to the

PSC, the contractor provides the funding and technical

expertise required to explore and exploit the oil. In return,

the contractor is reimbursed from the revenue derived from

the sale of crude oil produced from the field. Unlike the PSC,

the contractor is paid in cash, and does not have title to the

oil produced. The contractor may however be granted an

option to buy back the crude oil produced from the

concession, as in the Nigerian RSCs.

In the 1970s NNPC entered into RSCs with three companies –

Agip Energy and Natural Resources Limited, Elf Aquitaine

Nigeria Services Limited and Nigus Petroleum. Recently,

NPDC entered into such a contract with Agip Energy and

Natural Resources Limited.

Concluding Remarks

Whilst the concession, PSC and RSC, differ in form, as a

matter of substance, these petroleum development

contractual regimes may be used to achieve the same ends.

Indeed certain terms have now become commonplace in the

industry and are utilised across the different contractual

structures. These common terms form the subject of the next

article.

Adeoye Adefulu holds a Ph.D in oil and gas industry reform

from the Centre for Energy, Petroleum and Mineral Law &

Policy, University of Dundee. He is a partner in the law firm

of Odujinrin & Adefulu e s t 1972.