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The UK has a chance to earn from the development and production of up to 100 billion barrels of oil onshore following the discovery of oil near Gatwick airport reported by Moylan (2015). The report shows that much of the oil does not need fracking technology, which can be costlier than conventional drilling. Therefore, the risk involved in the project is not as high as sceptics might imagine, which makes one to assume that the local community will give support toward the project. Nevertheless, as with many oil exploration and production ventures, there is significant business risk involved and a high capital investment requirement. The United Kingdom uses concessions, which are special licenses, thereby allowing an international oil company to enjoy exclusive rights for exploration, developing, and producing petroleum in a particular region. In return, the company has to pay royalties and income taxes.
This paper shows that the United Kingdom will benefit more from a service contract, which is a long-term contract that will allow the government to get the expertise and capital necessary for exploration and production. On the other hand, the government will be able to retain ownership of the resources. With a service contract, the IOC doing the production does not share the profits, but it operates as a typical client company by getting remuneration as its source of profit. Such contracts are likely to deter the production company because of exchange rate risks and overall capital expenditure risk. However, the government can adopt variation of the contract as used in Venezuela between 1991 and 1997, where the IOC can recover its initial investment plus interest calculated on market parameters (Gandi & Lin, 2014). Besides, the government’s involvement in the product is compensated by an additional fee per barrel that is dependent on the prevailing prices, in addition to the standard negotiated contract price for development and production of oil (Gandi & Lin, 2014).
The UK wants to maximize economic recovery of oil and sustain high-quality jobs in the UK at the same time. The government puts its interest in controlling development and production very high, which explains the recommendation for a service contract (HM Government, 2013). The country can identify threats to contractors doing business in the UK, such as workforce demographics, fiscal policies, and declining oil and gas drilling success rates. Additionally, it can modify the contract to compensate for risks such that the offer remains lucrative for IOCs and promotes competitive bidding. This should lead to the best terms for the UK, regarding the full exploitation of its oil resources (HM Government, 2013).
Contracting is the most recent method of dealing with IOCs and still maintaining interests of government and service contracts or their variations. Contracting continues to work for seasoned and new producers of oil. They include Tanzania, Russia, Libya, Iraq, Egypt, Angola, and India. It means that contracts work in all kinds of economies, thereby allowing governments to earn income from the royalties based on production, the shares of profits or full profits if the IOCs are only getting fixed fees, and the income taxes (Tordo, 2007). The service contract is also a good avenue for introducing joint partnerships in particular aspects of the industry, such as supply chain, which can fulfil UK’s interest of sustaining high-quality jobs for its citizens.
Reference List
Gandi, A & Lin, C 2014, Oil and gas service contracts around the world: A review. Web.
HM Government 2013, UK oil and gas: Bussiness and government action, Department of Business, Innovation and Skills, London, UK.
Moylan, J 2015, Oil discovery near Gatwick airport ‘significant’. Web.
Bank for Reconstruction and Development/World Bank, Washington, DC.
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