1. Purpose of regulating the petroleum industry
Upstream sector activities require significant investments. Typically, governments invite international oil and gas companies to take the risk to invest and (if successful) to profit from petroleum operations on the basis of a long-term contract, setting out detailed terms and conditions. Ownership of petroleum almost always lies with the host country rather than foreign investors. Where an established petroleum industry exists, as in Mexico or Nigeria, a public or mixed-owned entity may play a leading role in developing the resources. The host state normally regulates petroleum activities through a body of law based on a series of policy choices, contract forms and fiscal instruments in a distinct structure or framework.
Petroleum legislation aims to regulate sector operations and determine the sharing of the petroleum revenues and income between the State and the entity authorised to undertake these operations. It also aims to maximise and preserve monetary benefits in the long term and foster exploration. In practical terms, knowledge of what the ground rules allows a prospective investor to model business operations in advance of making an investment.