2020, Volume 8, Issue 3, Pages: 1242-1246  
J. Environ. Treat. Tech.  
ISSN: 2309-1185  
Journal web link: http://www.jett.dormaj.com  
https://doi.org/10.47277/JETT/8(3)1246  
The Law Applicable to Petrolume Contract  
Maria Joao Mimoso*  
Portucalense Institute for Legal Research (IJP), Research Nucleus Polytechnic Institute of Maia (N2i), Colombia  
Received: 19/06/2020  
Accepted: 02/08/2020  
Published: 20/09/2020  
Abstract  
As the oil industry is the largest industry in the world, and with the oil contract as the object of these activities, it is imperative to  
discern some of the issues surrounding it. Producing countries intend to maximize profits from the exploitation of their natural wealth,  
while consuming countries want to guarantee supply at the lowest possible price. It is important to understand the focus of conflicts in  
this sector. These are linked, on the one hand, to the need for oil, the decrease in new reserves and the increase in its exploitation. On  
the other hand, we have the political instability of the producing countries, the disrespect for the environment and social rights of the  
population on the producing States. This contract has the State and the investor as protagonists. They are often concluded under the  
aegis of bilateral or multilateral investment agreements between the producer country and the investor's country of origin. Since they  
are strategic natural resources, the producing State seeks to safeguard the interests of its population. Thus, it is common to include  
special clauses, maxime stabilization clauses and arbitration clauses. In its regulation, whether in the negotiation or conclusion stages of  
the contract or even in the dispute resolution phase, an appeal to International Commercial Law is required, covering both UNIDROIT  
principles and Lex mercatoria, configured here in Lex Petrolia.  
Keywords: Agreement, Clauses, Conflicts, Lex Petrolia, Regulation  
1
Introduction1  
With the development of the world economy, new and  
2 The international petroleum contract  
complex commercial relations have emerged, giving rise to  
new contractual models. Consequently, international trade has  
not only contributed to the creation of new instruments, but  
also to the improvement of some of the existing ones. One of  
the most striking sectors of international trade is, without a  
doubt, the oil industry, which, due to the high costs it  
presupposes, is able to attract investors from different states. It  
will be difficult to even imagine a transaction in the scope of  
oil that does not involve elements of extraneity. The existence  
of connections between two or more legal systems, either by  
the nationality or domicile of the contractors, or by the place of  
performance of the contract or even through the choice of law  
by the parties, is a factor that does not detract from the  
determination of the legal regime of this contract. In order to  
understand the problem of the applicable law, we must bear in  
mind the complexity of this contract.[1] The oil industry  
integrates several activities along what we might call the  
production chain. We refer to upstream oil exploration,  
development and production activities; refinement, distribution  
and marketing activities, downstream; and transportation  
activities (transportation of oil from production fields to  
refineries and refined products to final points of sale),  
midstream. [2,3] The complexity of this contract will  
inevitably have repercussions on your discipline. After World  
War I, new players started to intervene in international  
commercial relations. We are talking about the States, which  
were compelled to enter transnational trade, thus causing  
changes in the paradigm of international contracts, including  
triggering liability limitation clauses and incentive measures  
for foreign investors, mitigating risks for both parties.  
The Petroleum Contract’s object is the activities that make  
up the oil industry, both for producing countries and for  
consuming countries. The former, maximizing the gains  
resulting from the exploitation of its natural resources, the  
latter, ensuring the supply in the greatest possible quantity and  
at the lowest price. The execution of an oil project covers a  
variety of contractual instruments, all of which will be  
integrated into the oil contract, in a broad sense, seeking to  
regiment the entire production process. Therefore, it becomes  
necessary to articulate all contractual elements, exhaustively  
disciplining all behaviors / activities, in order to guarantee all  
rights and the protagonists involved. Oil, being a non-  
renewable and non-eternal resource, conditions its own  
negotiation. [4,5] Most oil projects are structured according to  
the life of the project. Therefore, they should cover all stages,  
from exploration, through development, production,  
culminating in abandonment. Briefly, we will say that the  
exploration phase is based on the demand for commercially  
viable oil for extraction. This phase, with technological  
modernization, has been carried out through seismic studies  
and data collection, implementing greater assertiveness in  
drilling, since it is an extremely costly phase. Having achieved  
promising results, sampling is made immediately after. Then,  
an assessment will be made to determine the commercial  
viability of the discovery. This depends on the business  
conditions of the company and the legal and financial  
requirements of the country that holds the oil resources.  
After this, development follows, where the necessary  
infrastructure will be created for an efficient and profitable  
extraction. Here, the following aspects will be taken into  
account: geological, location, legal, obtaining hydrocarbons  
and placing them on the market, number of wells to be drilled  
and the type of platform to be built. This phase normally lasts  
for several years and it’s the one that requires the most  
investment. As for production, this usually happens after a  
decade has elapsed since the beginning of exploration and  
*
Corresponding author: Maria Joao Mimoso, Portucalense  
Institute for Legal Research (IJP), Research Nucleus  
Polytechnic Institute of Maia (N2i), Colombia. E-mail:  
mjmarbitragem@gmail.com  
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2020, Volume 8, Issue 3, Pages: 1242-1246  
when oil finally flows in increasing quantities. The last stage of  
the project regards the abandonment. As small areas are  
concerned, this occurs after a period of seven years of  
production; if we are dealing with large areas, this will happen  
after fifty or more years of production. It is in the abandonment  
phase that the infrastructure is collected and an attempt is made  
to restore the environment to its original satus quo.  
Abandonment can occur for several reasons, e.g. problems  
arising from the financial system of the receiving country  
consortia, also seeking, this way, to minimize the liability of  
the assumed obligations.  
4
The Types of the Contract  
Within the exploiting countries, we find three contractual  
models: concession contracts, production sharing and service  
provision contracts. In the concession model, the State,  
responsible for the oil deposits, gives the right to explore and  
produce in the deposits to a foreign or national company, the  
latter assuming the risks and costs of the operation. The  
hydrocarbons are, therefore, in the possession of the  
concessionaire, which assumes its control. As compensation  
for the use of the deposits, the company pays the State royalties  
and fees, providing compensation for the negative effects  
caused by the exploration and production of hydrocarbons.  
Concession contracts are usually related to two phases of the  
process: exploration and development and production. The  
production sharing contract is usually concluded between a  
state-owned company, which represents government interests,  
(where production is based), as this is not economically  
advantageous or no longer technologically profitable. It may  
happen that the company in question, which was in charge of  
the production process, returns the exploration area to the host  
State. Thus, it will impose on the latter the continuation of  
operations and abandon in a timely manner. In this regard, it is  
referred the dismantling. There are also other factors that can  
lead to the cessation or suspension of operations, namely,  
events of force majeure (which suspend obligations until they  
can be resumed), issues of security, social unrest and political  
instability in the receiving State. In these cases, there will be no  
obligation to dismantle.  
and an oil company, or  
a consortium of companies  
(contracted), for oil exploration and production, by  
compensating the parties through of sharing the production of  
an oil field. The payment due to the contracted company, in  
product or in kind, is intended for the reimbursement of costs  
(cost oil) and for its participation in the result of the  
undertaking (profit oil), with the respective share percentages  
being defined in the contract. In the service provision contract,  
the company is hired to carry out the exploration activity, and  
is compensated for that. This modality can be presented as  
pure, in which the company would receive a given amount  
regardless of success, or as a risky contract. In this, the  
company invests in the exploratory phase, being only  
reimbursed when the oil is found and produced. It can receive  
cash or oil, according to the contract.  
3
Protagonists and the Type of Contract  
The contract’s parties are the entities that enter into it and,  
therefore, are bound by its terms and conditions. We refer to  
governments; national oil companies (NOC, National Oil  
Companies owned by the State); major international operators  
(IOC, International Oil Companies); banks; engineering,  
inspection and drilling companies; transport companies;  
dispatchers; refineries and trade; advisory services and  
consultancies. [1,6] However, it is important to underline that  
the main protagonists are NOCs and IOCs, with the remaining  
entities being characterized as subsidiaries or ancillaries.  
NOC’s represent States and, as a rule, are the holders of  
reserves of natural oil resources. They do not give up the right  
of access to reserves and, therefore, they hire IOCs as service  
providers. Often, NOC’s create branches for them to directly  
represent them in certain project operations. It was found, from  
the middle of the 20th century, that many countries  
nationalized their oil reserves. They wanted the national oil  
companies to have a monopoly on exploration. It was in this  
context that the concession contracts between NOC’s and IOCs  
emerged. However, the evolution of the times has  
demonstrated the need to abandon this contractual regime.  
Currently, the standard form is based on the shared production  
contract. [7] The appearance of this new contractual form is  
mainly due to the result that the concession contracts led to,  
namely an unequivocal division of profits and the lack of  
control by the State of the activities carried out by the  
companies. These did not grant ownership of the technological  
means used and did not promote the professional training of  
local agents. This contractual paradigm shift occurred in the  
5
Lex mercatoria versus lex petrolea?  
International trade and the negotiation of goods, services or  
values, carried out at global level by economic agents,  
governed by international commercial practices developed over  
time, culminated in the consolidation of a set of international  
commercial rules, known as Lex Mercatoria. [9,10] There have  
been several contributions to the existence and validity of Lex  
Mercatoria. Originating in the Middle Ages, it was essentially  
in the 1960s that it took a new break in the discipline of  
international commercial relations. It is important to bear in  
mind that not all authors have the same understanding of what  
should be understood by this normative source. Despite the  
differences, there is currently an unquestionable understanding:  
Lex Mercatoria includes a set of spontaneous customary rules  
and general principles. [11] This understanding has enabled an  
extension of Lex Mercatoria's sources, covering not only  
spontaneous law, the General Principles of Law, the arbitration  
jurisprudence itself, but also rules emerging from international  
organizations. [12] We are talking about the UNIDROIT  
Institute, which has contributed a lot to the discipline of  
international commercial contracts and the Chamber of  
International Commerce of Paris (CCI). [10] Differently, but  
equally controversial, is the characterization of its legal nature  
as an autonomous legal order. Due to the specificity of the  
topic we are dealing with, this is not the time to approach it.  
However, we cannot forget the fact that international trade is a  
heterogeneous segment, claiming very specific sector  
specificities. It appears that spontaneous rules have always  
emerged from certain sectors of international trade. In this  
sense, and with regard to the oil industry, specific rules have  
emerged to regulate the contracts that are celebrated in this  
area. It is urgent to highlight the fact that oil is a sui generis  
sector, causing heavy investments, where, above all, one can  
1
950s, more specifically after World War II. Host countries  
(recipients) seek to regain their national pride through oil. [8]  
IOCs are, almost always, transnational private companies,  
which operate in the areas of exploration, refinement and  
commercialization of oil. They have financial and  
technological capacity, designated by majors and independents.  
They explore and develop oil reserves. Often, they participate  
in the oil contract through a subsidiary. This is due to the  
concern with the optimization of taxes, the financing of the  
project, the foreign investment protection regime and legal  
requirements of the receiving State. The subsidiaries are  
incorporated within the legal system of the latter, i.e., inserted  
in a different jurisdiction than the parent company. These  
companies, due to the magnitude of these contracts, especially  
in the financial and technological plan, operate through  
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2020, Volume 8, Issue 3, Pages: 1242-1246  
find a high spirit of solidarity and cohesion among competitors.  
This homogeneity, associated with the activity developed by  
sectorial organizations responsible for compiling uses and  
drawing up model contracts, led to the emergence of Lex  
Petrolea. Although it was, for a long time, considered the  
younger sister of Lex Mercatoria, it has a different position,  
benefiting from some peculiarities. At least, it has achieved  
worldwide recognition for the formation of the expected  
Societas Petroleatorum. Due to its transnational character,  
without being bound by any national legal order and based on  
internationally adopted practices, its general acceptance, both  
by the States that own the resources and by the transnational  
companies operating in the oil sector, has been recurrent. Lex  
Petrolea is considered a legal order, created spontaneously,  
supportive by the players of the transnational oil industry,  
aimed at protecting the interests at stake - viability and  
profitability -, presenting itself as a set of autonomous, self-  
sufficient, valid and effective rules, to discipline the relations  
in question and at the service of the entire transnational oil  
community.  
The recognition of Lex Mercatoria and Lex Petrolea as  
autonomous, adequate and special “legal systems”, in  
permanent progress, aiming to meet the interests, needs and  
problems, with ample room for maneuver due to the parties'  
private autonomy, manage to discipline international trade  
agreements’ relations, while contributing to their development,  
allowing the arbitral coutrs to be their guardians, as promoters  
of their creation, interpretation and application. [13] However,  
the evolution of Lex Mercatoria is not considered complete,  
and there is still one way to go. There are those who  
understand that “international trade operations cannot be  
completely removed from the competence of state rights”,  
since that normative body is not exclusive, systematic and  
constant. We understand, however, that, at present, a more  
evolutionary character must be assigned to it. We cannot forget  
that the phenomenon of globalization has had repercussions in  
the legal world, causing a loss of the legifying monopoly by  
the States, or even of supra-state organizations, such as the  
European Union. In certain sectors and as a result of the  
international trade operators dynamics, an expansion and  
creation of certain instruments / discipline was provided. States  
continue to have their legitimating power, the power to create  
instruments to discipline certain conduct / activities. However,  
at the same time, other forms of standardization appear. The  
principle of autonomy of will under private international law  
allows the parties to elect the law which governs their contract.  
The domestic rights of States, at least the majority, provide for  
the principle of contractual freedom. We can, then, say that  
these legitimizing principles have potentiated and potentiate  
other modes of standardization. [14] The particularities of  
international trade, from an early age, demanded different  
protection from the domestic trade operated in each State. The  
contract as a mandatory bond that it is, generates for the parties  
the first source of discipline in their relations. And it was from  
this important topic, not neglecting the principle of the  
autonomy of the parties that gives it shelter, that certain  
institutes developed in the context of international commercial  
relations and disciplines were sedimented. After all, the  
understanding that its defenders or contestants had of a legal  
order. [15] Some will understand that this will only exist if it is  
emanated from an authority capable of imposing its rules,  
others will base this phenomenon beyond the dialectical  
discourse between sovereign power and spontaneous creation.  
6
Applicable law  
Oil, due to its rarity and scarcity, was initially exploited  
individually, and later, due to its importance, it was taken over  
by large oil companies. Internationalization occurs when  
products are exported by producer countries to the international  
market, with a clear division of the market. On the one hand,  
the countries of the Persian Gulf (producers), on the other the  
countries of Western Europe (consumers). [10] The  
international character of the oil industry is based, above all, on  
the diversity of the agents involved (states, international  
organizations and companies), on the fact that the petroleum  
reservoirs are often not limited to the geographical limits of the  
receiving countries, as well as on the diversity of problems it  
involves. Being the receiving State, or a state company  
representing the government in question, one of the main  
protagonists and the other, a company, normally designated by  
an oil company, originating in another State, acting as a private  
entity, intending to explore and produce from the natural  
resources owned by the former, an unequal position between  
the parties can easily be seen. It was found a need over the  
years to mitigate this inequality. Foreign companies, as  
investors, intend, on the one hand, before entering into any  
agreement, to obtain certain guarantees regarding the full  
fulfillment of the contract. On the other hand, the receiving  
States, acting as sovereign entities, may, during the execution  
of the contract, make major legislative changes, which will  
inevitably affect the investor's rights and obligations.  
Consequently, the latter wants to ensure the obligations  
assumed in the contract at all costs and, therefore, intends to  
include clauses limiting the performance of States, namely,  
clauses on stability, hardship and arbitration. [16,17,18  
Another concern, no less, is related to the contract's regulatory  
law. We cannot fail to emphasize the clear insufficiency of  
national rights to regulate this type of relations and settle all  
controversies, in addition to investors doubting the impartiality  
of the application of the national law of the receiving State. If  
we add to this the strategic importance of the asset involved  
and the values it entails, we find that only special rules,  
directed at this sector, will enhance the desired impartiality and  
technicality. We cannot fail to emphasize the international  
nature of oil discipline. In addition to the private interests  
involved, there are also the interests of the receiving States and  
their populations.  
As already mentioned, the specialization of the discipline  
of oil relations has been taking shape through Lex Petrolea.  
[13] This normative body, devoted to regulating the  
multiplicity of relationships that are established in the sector,  
without being linked to any national legal system, has allowed  
its acceptance by the States that own natural resources and by  
the multinationals of the sector, although certain normative  
rules are relevant the receiving State. It is a sector linked to the  
public domain and, therefore, headed by the governments of  
the States, which naturally impose some limitations. The term  
Lex Petrolea was used in 1958 by the Arbitral Court, which  
considered the case of ARAMCO versus Saudi Arabia. This  
Court understood that the national law applicable to the  
situation should be interpreted and complemented in  
accordance with General Principles of Law, by the customs  
and good practices of the oil industry. In 1982, in the case of  
Kuwait versus AMINOIL, the government in question argued  
based on a set of arbitration decisions handed down in oil  
disputes that would have resulted in Lex Petrolea, recognized  
“gentlemen's agreement” is to be carried out under the terms  
established between the parties (pacta sunt servanda). We  
cannot say that the so-called autonomous systems stand out for  
the inconsistency of control and the absence of sanctioning  
power. Control is exercised in another way, especially by  
actors in international trade and by corporate entities in certain  
sectors, which will also implement other types of sanctions.  
Namely the exclusion by players in the same market sector. We  
cannot fail to see that the whole problem that characterizes  
these autonomous rights in international trade is rooted in the  
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2020, Volume 8, Issue 3, Pages: 1242-1246  
and applicable, in different situations, to the merits of the case,  
exclusively or subsidiary. [19] In the case of Sapphire  
International Petroleum versus NIOC, the arbitrators based  
their decision on Lex Petrolea, appealing to the principle of  
good faith and cooperation between the parties, thus  
identifying a set of disciplinary rules for oil contracts,  
removing the national law of the State of the natural resources’  
location (host state / recipient of the investment). We should  
note the case of British Petroleum (BP) versus Libya, where  
the arbitrators also applied Lex Petrolea in a subsidiary way to  
fill gaps in Libyan law. [1]  
neglecting the predictability and legal certainty. The  
inadequacy  
of  
national  
laws  
has  
fostered  
the  
“deterritorialization” of the discipline of international  
contracts. Having overcome the customary characteristic of the  
rules, we are moving towards a non-state legiferation, carried  
out by entities that have focused on the analysis and study of  
the great mainstays of international trade. To all this must be  
added the role of certain organizations, although sectoral,  
which has contributed to the consolidation of good practices to  
be adopted by the respective players. De iure condendo, we  
will say that all these swift, peaceful and highly effective  
mechanisms for the regulation and resolution of conflicts  
within the scope of international trade relations and the oil  
industry itself will hardly be able to regulate relations in an  
exclusive way, always being imposed, by the State, the defense  
of public interests, whether economic, social, political or  
environmental, namely through the international public order,  
eg lois de police. [14] Finally, it is worth noting the importance  
of the role assumed by both Lex Mercatoria and Lex Petrolea  
in their respective sectors and, above all, for their remarkable  
practical relevance. In short, the globalization of international  
commercial relations has, in a way, seconded commercial uses,  
aiming for a more “deterritorialized”, cosmopolitan and  
universal right. Currently, it is referenced the New Lex  
Mercatoria, covering, in addition to usages and customs, other  
normative realities, called soft law and emerging from entities  
that seek the harmonization of rules to discipline international  
commercial contracts.  
From this jurisprudential list, Lex Petrolea came to  
establish itself as a customary law for the oil industry, as a  
branch of Lex Mercatoria. Lex Petrolea's content and  
effectiveness thus largely depend on the perception of the  
modern world order, from an economic point of view and its  
regulation, where the absence of a world government ended up  
driving transnational regulation, which is nothing more than an  
autonomous and sectoral form of governance. It is understood  
that the legitimacy of the system, of its rules, must emerge  
from its acceptability by the members of the transnational oil  
society. It was from the sector itself that they emerged,  
especially through the contractual models that were being  
consolidated, the codes of conduct and guidelines fostered by  
associative entities in this industry. In short, the intention is to  
establish good practices and international standards to be  
adopted in oil contracts and in arbitrations in the sector. Lex  
Petrolea's existence and effectiveness thus transnationalizes  
the oil industry, overcoming the inadequacy of national  
legislation. This normative source emerges above all from the  
relations established in international politics, from the action of  
the NOC’s and IOC’s, from the political strategies of the States  
and from the legifying activity. The ways in which it manifests  
itself can be varied, namely international instruments (lato  
sensu), standard contracts, usages and customs of the sector,  
arbitration jurisprudence, among others. Its object lies in the  
legal protection of a set of situations, which are necessarily  
linked to the interests, practices and material and immaterial  
values related to the oil industry. Unlike Lex Petrolea and  
despite its origin, Lex Mercatoria, as we said, still suffers, for  
some, from difficult affirmation at Societas Mercatorum, not  
being able to bring together all the actors of international trade  
on a global scale, where i tis possible to consolidate usages and  
customs, reflecting the concerns of the sectors.  
References  
[1] Favacho F. Conflict management in international petroleum  
[
[
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7
Conclusion  
The oil industry developed initially through the figure of  
2
6
the individual producer. It was found that, as the demand for  
the product increased, the figure of the individual producer was  
being replaced by the big oil companies, which started to buy  
the oil not only for their own use, but also started to explore  
and commercialize it. This industry was gradually  
monopolized, with all activities carried out by large economic  
groups, gaining an international dimension when companies  
started exporting from producing countries to consuming  
countries, thus creating an international market. The economies  
of all industrially and technologically advanced countries have  
therefore become dependent on oil. The international oil trade  
created a regulatory specialization, Lex Petrolea, whose  
creation is justified by the importance of the oil trade and  
industry in the world, combined with the technical specificities  
of this activity. The importance of legal autonomy imposed by  
both Lex Mercatoria and Lex Petrolea, as representatives of  
the two major driving forces in modern economies - trade and  
oil - has allowed for a general reflection on the regulation of  
international trade relations. In fact, the specificities of the  
sectors, at international level, have demanded adequate legal  
treatment to the interests of the protagonists, without  
[
[
7] Gala, FJ. The typicality of atypical contractual forms in  
international oil trade. The Law Magazine. 2009; 141(4).  
8] Marques, P. (2004). The legal nature of the Production Sharing  
Agreement (PSA) in the light of the Portuguese legal system.  
energy studies: oil and natural gas. Portugese: Almedina; 2004.  
[9] Baptista LO. International contracts. São Paulo: Lex Editora;  
010.  
10]Mimoso MJ. How oil contracts affect human rights. Europ. j.  
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11]Goldman B. The applicable law: general principles of law  the  
law mercatoria. In Contemporary problems in international  
arbitration, London; 1986.  
[12]Fortier LY. The New, New Lex Mercatoria, or, Back To The  
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13]Otero GC. Reflections on the law applicable to international oil  
14]Glitz, FEZ. Lex mercatoria: autonomous legal order? Magazine of  
the Secretariat of the Permanent Review Court. Mercosur. 2011;  
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15]Schultz, T. (2011). The concept of law in transnational arbitral  
legal orders and some of its consequences. J. Int. Dispute  
59-85.  
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from:  
16]Cameron, P. D. stabilisation in investment contracts and changes  
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17]Dias ND. Stability in international oil contracts and some of the  
general principles of related law: from myth to reality. Bar  
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18]Gjuzi J. The legal status of stabilization clauses under international  
law: the traditional debate revisited. In: Stabilization clauses in  
international investment law. Switzerland: Springer; 2018.  
19]Martin T. Lex petrolea in international law. In: King R (eds.)  
Dispute Resolution in the energy sector: a practitioner’s  
handbook. London: Globe Law and Business; 2012.  
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