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Issue No: 235
September 09, 2011

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Law Book Review

Nuances of petroleum law

Dr. Ridwanul Hoque

Dr. Abdullah Al Faruque
Petroleum Contracts: Stability and Risk Management in Developing Countries.
Dhaka: BILIA, 2011.
Price: Tk. 500.

Open market economy or the so-called globalisation process has become an important driver to shape contours of 'the law' and its concerns. Legal systems that have guaranteed an expected level of legal certainty, protection against arbitrary acquisition of property, and have ensured an efficient and delivering adjudication system have attracted more foreign investments than others. Alongside these public law incentives, the private law of contract has become the oft-utilized bargaining chip to negotiate about the rights and limits of powers between investing companies and the host states. Accordingly, contracts in the petroleum industry tend to keep provisions that would strike a balance between the right of exploring corporations and the rights of the host states. This balancing phenomenon is described by what is known as 'stability and risk management in petroleum contracts', a discourse that has given birth to a bunch of issues including, famously, 'the tension between the sovereign right to regulate the petroleum industry and the necessity to protect the legitimate interests of foreign investors'.

The present book under review written by Dr. Abdullah Al Faruque, Associate Professor of Law, Chittagong University, is an insightful examination of the nuances of this tension between state regulation and the investors' leverage and autonomy in the petroleum sector from the perspective of developing countries. This is indeed a study in the law and development in that the author has virtually argued that the more stable and less-risky an investment contract is the more chance for the retention or attraction for investment, leading to development. By examining some select developing countries' petroleum contracts, the author reports that 'over the last two decades, the fierce competition among the developing countries for attracting foreign investment in natural resources exploration [...] have persuaded them to provide favourable conditions [...] for the petroleum companies'. There is indeed a significant rise in the insertion into these contracts of 'stability guarantees' and other fiscal and administrative leverages.

The book is divided into three parts, analysing theories of risks in petroleum contracts, effectiveness of contractual and fiscal devices of stability, and strategies for managing environmental, political and human rights risks.

PART one, with 3 chapters, is the analytical part. Chapter one gives a general but fascinating introduction to the subject, giving, e.g., an account of several types of petroleum contracts - concession contract, production sharing contract, service contract, and so on. Chapter two gives a dynamic definition of 'stability' and highlights its importance in petroleum contracts. It predicates stability upon, among others, the parties' willingness to co-operate with each other, and the overall fairness in the contractual arrangement. Chapter three focuses on definition and categories of political risks, and examines domestic and international contract law principles vis-à-vis the risks of taking-over of investments of international oil companies.

PART two, spanning through chapters 4-7, is on contractual, legislative and fiscal incentives that generate and sustain 'stability' under petroleum contracts. Here the author examines trends on stability mechanisms by surveying the model and actual petroleum contracts of some developing countries. Chapter four usefully catalogues and analyses classic and modern types of stabilisation clauses and their legal implications. Chapter five focuses on the extent to which renegotiation and adaptation of petroleum contracts can reduce manage the risks that may arise from change of circumstances. Chapter six is devoted to an analysis of fiscal stability, which the author considers inevitable for the greater stability in petroleum contracts. Chapter seven is about settlement of disputes arising from petroleum agreements, focusing also on dispute avoidance tools.

PART three (chapters 8 to 10) analyses the unconventional issues of contention concerning petroleum contracts, taking up environmental and human rights concerns and the cause of transparency and good governance in petroleum industry. Chapter eight shows how legal and regulatory change in the environmental regime of the host country affects contract stability, arguing that states' environmental interventions as well as indigenous people's resistance are an-anti-stability factor. Chapter nine discusses the non-conventional political risks in the petroleum sector: analysing the impact of social and human rights concerns on petroleum contracts. The chapter finds that the long-term survival of a petroleum project depends on its social acceptability, which is significantly predicated upon the operation of a social responsible business. Chapter ten deals with the vital issue of transparency in the management of extractive revenues. Finally, Chapter 11 concludes the study with a bundle of general conclusions. One important insight is that, traditional stability guarantees in law or contracts are unable to properly address the social, environmental and human rights risks, and that both the companies and the host states should take socially relevant 'preventive strategies' to better manage or mitigate these unconventional risks.

I have two critical observations: (i) although references to the Bangladeshi practices under petroleum contracts are made almost in every chapter, there ought to be a separate chapter fully dedicated to petroleum contracts in Bangladesh, incorporating the issues of the author's analytical framework. In Bangladesh, for example, there are problems of transparency not only in the collection and distribution of revenues under petroleum contracts but also in the pre-contract period. Petroleum contracts in Bangladesh are extremely secret documents, and, on this ground, we have seen recent agitations in the streets. Undauntedly there is a need to bring a change into the culture of secrecy and non-participation while negotiating and signing petroleum contracts. Second, I would also expect an independent chapter on how instability in petroleum contracts and lack of transparency may lead to frustration of investments and hence to 'un-development' of whatever degree.

To conclude, this is an excellent study in the complex field of law and development, giving the reader a rather easy idea about the nexus between economic/developmental value of petroleum contracts and the stability mechanisms inserted into them. The book offers a refreshing reading into legal and human rights aspects of operations of international oil companies in the so-called developing countries including Bangladesh. It also provides a wealth of references for other potential researchers.

The reviewer is Associate Professor, Department of Law, University of Dhaka.

 

 

 

 
 
 
 


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