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Negotiating an oil agreement for new economies such as Guyana

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The mere mention of a natural resource discovery, especially of oil and increasingly of gas, ignites personal and national dreams of riches and hopes of prosperous times, fuelled more than ever by recent dramatic changes in oil prices.

Many emerging economies such as Guyana view their natural resources as an asset not belonging to any private party. Irrespective of who may own the surface land and rights, the nation owns the assets, and this position is often enshrined in a state’s most fundamental law, its constitution. The “emerging” players optimistically view such a valuable treasure as a fast track to development. Their vision of tomorrow is the oil-rich nations of Kuwait and the United Arab Emirates of today.

However, the emotional euphoria of a beautiful tomorrow often runs into reality — namely, the financial, commercial, and political challenge of transforming locked underground assets into a useable liquid asset – cash. And dashed emotions can turn to anger. Ruined dreams pose significant political and economic risks for the energy industry, for the consuming nations, as well as for the producing nations. Hence the hurdle: how can the challenge of rising expectations, desires and demands be satisfied.

It is commonly accepted that these challenges involve overcoming technical engineering and related commercial hurdles in exploration and development. Indeed, from the viewpoint of many producing nations, the key hurdles centre on management issues, as evidenced by the renewed desire to establish state-owned energy companies. In fact, however, the first challenges are typically negotiation challenges.

In most cases, resource-rich nations will seek to attract the participation of international companies with the resources and expertise to help them exploit and market their energy resources. Yet, once they start negotiating, they find that major oil and gas companies often possess greater financial resources, superior knowledge of the oil or mining fields, and more experience in negotiating contracts. Indeed, most countries where oil companies operate have far fewer resources than the oil companies themselves. Negotiations can thus become heated affairs.

Oil companies are highly motivated during negotiations. They resent the costly and speculative exploration investments and the number of dry wells encountered and will seek to recover rapidly such out-of-pocket costs in any negotiations. They also lament that they have to deal in extremely difficult and corrupt situations, which admittedly require international institutions and the home government – where oil companies are domiciled – at times provide “political” support” (Radon 2005). Oil companies often tailor their negotiation style to their interpretations of the political environments in which they operate. Accustomed to dealing with authoritarian regimes or in countries plagued by civil strife, oil companies often bring a self-protective, uncompromising, and feisty attitude towards negotiation.

This approach takes on a life of its own. As it is emphasized; too little time and effort get spent on the “people” side of the oil development process, with the result that many of the most important risks of the negotiations and the consequent agreements are ignored. Negotiating a fair distribution of wealth with these companies is a major challenge and requires a significant investment of time and money in assembling a team of experts to conduct negotiations.

Setting the Parameters

Many eyes are on oil negotiations, not just those of the two principal parties. Affected landowners – often indigenous communities – demand compensation for the use and disturbance of their property. This will have to be taken into account, even if such groups are not part of the formal negotiation process. Local communities which, until recently, were on no one’s checklist of factors to take into consideration, now often demand their part of the spoils in the form of jobs and compensation payments.

These demands will have to be handled and ideally resolved, through the domestic political process, and, preferably, as part of the overall oil contract negotiations. Oil companies will thus often make specific commitments to train and engage domestic labour, as well as to support community development and cohesion – the ultimate in so-called soft (or social) issues. More broadly, political discussions on how to spend the not-yet-realized fortunes will quickly monopolize a nation’s airwaves and the public discourse, bringing its own unrealistic momentum and pressure for fast action to bring the oil on-stream.

Political pressures in particular tend to undermine prospective negotiations with international oil companies by subtly establishing an artificial time schedule, namely a fast one. Negotiations will, however – if history is a guide – be intense and invariably time-consuming. They are also likely to be heated, if not acrimonious, as the differences of opinion, goals and objectives among the many participants and affected actors are typically quite significant (Radon 2006).

Despite the keen interests and the size of the stakes, the negotiation process itself is nonetheless all too often given insufficient attention by government parties. Since negotiation is generally accepted as a routine experience, it is often not viewed as a real skill, but rather as something that anyone can do. Even when, for complex matters, parties engage an expert – such as a lawyer, for their legal knowledge, or an engineer, for his technical knowledge – the negotiation itself is frequently handled by the government, which will still tend to regard negotiating as a straightforward activity not deserving of much preparation or focus. Moreover, too often there is a refusal or reluctance to engage the necessary expertise, let alone pay for it. With oil contracts, however, too much is at stake – especially for the producer nation – to permit such a simplistic and narrow approach.

Oil contracts are a direct result of negotiations. This is true even in bidding situations, which are often wrongly perceived as “negotiation neutral.” The issues in an oil contract are many, varied and complex. There is no model result that can or should be achieved. The result is the inevitable give-and-take as each line is negotiated.

Negotiations assume and can be said to thrive on uncertainty, whether stemming from a lack of knowledge of the potential of the oil find, the breakpoint of the negotiating partner, or the obvious inability to predict the future. Good negotiators know that, in every situation, there is an element of poker – a weak hand, if played well, can win, and even win big. Nevertheless, oil negotiations do not have the simplicity of poker, even if steadfastness, focus and other lessons can be applied. There are too many issues to consider: the cost of exploration and development; the ever-changing market conditions; the possible field size, including the possibility of dry holes; and the difficulty of recovery.

The list goes on. Judgment is required to determine the importance and priority of each issue and, ultimately, to strike an ever-changing balance among them, with the result that no two contracts are identical. Moreover, there is the element of time, a powerful tool.

There is a time to be patient and a time to rush. Time is an element to use and to control in order to achieve the desired end: maximization of returns for a country with the lowest economic and societal cost, including minimization of the potential for environmental damage. Overall, this means withstanding political, corporate, and other pressures.

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