7. Contracts versus licences
There are differences between the nature and categories of rights granted under licenses, see the diagram below:
The license holder typically carries all the risk along the value chain, from exploration to the point of supply or delivery of production. It differs from a typical administrative license in that it has a contractual character. A licence is administrative when granted by decrees or orders, and contractual when signed by both parties, as in the UK.
The term “Exploration and Production (E&P) contract” generally is used to refer to any agreement or legal instrument authorized under the applicable law between a host country (or its National Oil Company) and an oil or gas company (or a consortium of companies) selected by the country to conduct exploration exclusively within a given area and at its own risk. If an E&P contract results in a commercial discovery, the contract allows the development and production of the discovered oil and natural gas fields.
Exploration and production (E&P) contracts
E&P contracts show a great variety across the world, as each country tends to pursue specific policies in enacting their own petroleum regime.
While some states prefer the licensing route (i.e. an exploration license followed by, in case of commercial development, a production license), some prefer the award of contracts. Where the state’s national legislation on petroleum is extremely detailed, licensing is generally the preferred route.
If the petroleum law is limited to the fundamental principles and the fiscal system is not sufficiently defined, a comprehensive E&P contract corresponding an ad hoc investment agreement for petroleum would typically be signed. This enables the contract to fill any gaps in national petroleum laws and regulations. E&P contracts set out the economic and tax provisions applicable to each contract-holder.