The Law Applicable to Petrolume Contract

Journal of Environmental Treatment Techniques

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

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

242

Journal of Environmental Treatment Techniques

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.

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.

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

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

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

243

Journal of Environmental Treatment Techniques

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.

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

244

Journal of Environmental Treatment Techniques

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

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

contracts .

Available

from:

http://www.esdc.com.br/RBDC/RBDC-18/RBDC-18-243-

Artigo_Frederico_Favacho_(A_Gestao_de_Conflitos_em_Contrat

os_Internacionais_do_Petroleo).pdf

[

2] D’Almeida AL. Oil industry in Brazil and worldwide: training

development and ambience current. Sao Paulo: Editora Blucher;

015.

3] Intan WS. The analysis factors of experential marketing, product

quality, and customer satisfaction of motor bike as a main

transportation mode in bandung-indonesia. Int. j. bus. adm. Stud.

2016; 2(1): 6-8.

[

4] Cyrne CC. The choice between renewable and non-renewable

energy sources: A fallacious dichotomy. Trvista Espacious. 2016;

6(2).

Available

from

https://www.revistaespacios.com/a16v37n26/16372603.html

5] Kharina Z, Nauly M. The effect of person-organization fit and

hardiness on turnover intention among graduate trainee of a private

palm oil enterprise in Indonesia. J. adm. bus. stud. 2018; 4(1): 18-

Conclusion

The oil industry developed initially through the figure of

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

[

6] Brandão C. Lex Petrolea . Available from:

https://www.e-

publicacoes.uerj.br/index.php/rbdp/article/view/5732/4171

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.

multidiscip. stud . 2018; 3(4):30-39. Available from:

[

http://journals.euser.org/index.php/ejms/article/view/4019

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

Future. Arbitration Int . 2001; 17(2): 121-128. Available from:

https://doi.org/10.1023/A:1011242631762

[

13]Otero GC. Reflections on the law applicable to international oil

contracts. J. World Energ Law Bus . 2013. Available at:

https://core.ac.uk/download/pdf/19722299.pdf

14]Glitz, FEZ. Lex mercatoria: autonomous legal order? Magazine of

the Secretariat of the Permanent Review Court. Mercosur. 2011;

[

245