The Law of Electronic Oil and Gas Contracts: Research Proposal

The developing countries do not have the financial capability to invest in the energy security of their oil produce and other facets of development. As such, these countries ought to invite foreign investors to invest in their oil and gas resources in order to get returns that could facilitate their development and reinvestment in the security of their energy. Such nations are highly susceptible to political risk, an aspect that makes it a difficult decision for investors to commit their money, capital, and technology in the form of contractual arrangements, with the view of developing these oil and gas resources. As such, there is a risk that the host government may change the terms of agreement when the investor has already invested in the contract completion process, at a time when the contract cannot be revoked (Ad-Hoc-Award, Kuwait v. The American Independent Oil Company (AMINOIL) , 1982). Such risks may result from the assertion of more control over indigenous natural resources by host governments, and the fluctuating gas and oil prices coupled with an increase in revenue earnings and taxation by host governments in order to reflect the increase in earnings from the increased prices. Considering the importance of international investments of multinational companies in the oil production of developing states in connection to not only economic growth but also energy security, the need to secure a stable political and legal environment that promotes investment is apparent. This dissertation suggests that legal stability and investment protection in developing oil-producing countries can be assured through the inclusion of renegotiation and stability clauses in electronic oil and gas contracts.

The author will apply legal, historical and empirical analysis of electronic contract law in oil and gas production in order to come up with proper data relevant to this research, which would lead to action. In the historical method, the author reviews the historical development of contract laws in the oil and gas industry in order to determine any assumptions made in the development process and their impact in current interpretation of the laws. The author will also review the shared problem of energy insecurity in developing countries in relation to their contract local laws, in the legal comparative research. Lastly, the author will apply the empirical research method in review of literature concerning the subject in order to establish areas of concern to the subject and the need for reform.

Background Information

The digitization of the contemporary society is an aspect that covers all fields including the field of law. As such, organizations have leaned towards applying the internet in developing collaboration with other organizations and creating virtual communities that are connected by business practices. However, recent studies by different researchers have revealed that lack of trust is the biggest hindrance of organizations in using new media in conducting business especially when it comes to electronic contracts and their legal binding. This extends to lack of trust in the electronic communication’s security among such organizations. It is evident that the contracts mechanism in the modern society forms a basis for economic development. Continuous modernization has resulted in the change of the information system in the service and industrial society, all towards establishment of a digital economy (Gisler, Stanoevska-Slabeva, & Greunz, 2000).

Nevertheless, the lack of trust in the electronic contract among the economic community is bound to hinder the new economy from unfolding its maximum potential and thus hold back any societal benefits that are likely to accompany the new technology. As much as it may be easier to develop technical solutions for Electronic Contracts’ legal validity, it is more complicated to redefine an entire legal mechanism that has been used in the establishment of contracts for centuries (Gisler, Stanoevska-Slabeva, & Greunz, 2000). However, it is important to note that the legal systems that were established years ago do not have the vital components that entail the modern ways of communication. As such, it is important to diversify the contact law to allow for legal binding in establishing secure electronic contracts.

Statement of the Problem

Contract laws developed in the initial years, which form a basis for the current economic growth, are not as effective as they may seem. These laws uphold stabilization in the sense that a pre-determined agreement remains active until the completion of the project, which is fair enough (Nwokolo, 2003). However, it is evident that the security of energy in developing states that produce oil is faced by a series of challenges in line with creating an assurance of continued demand and supply of their oil and gas in order to receive returns that would ensure the success of other development agenda. These countries are highly exposed to political unrest, an aspect that raises questions of the security of investing in their oil and gas resources. This draws back to the issue of trust, which is viewed as more important especially in embracing electronic contracts as pushed by technological advancement. As such, there is need for these countries to demonstrate their protection of investment in order to encourage investment into their oil resources (Tienhaara, 2011). This would ensure that they make good returns from their products and in turn explore other aspects of development and stability.

Purpose of the Study

The purpose of this study is to explore the importance of including renegotiation and stabilization clauses in electronic contract laws in order to promote energy security and to guarantee contractual stability and investment security to companies that deal with Oil and Gas. In the sight of an ardent observer, the relationship between renegotiation and stabilization clauses and energy security may seem remote in general terms. However, this is not the case when considering oil-producing developing states. Unlike the case of developed countries, the energy security for developing countries that produce oil is determined by the concerns for ‘security of demand’ (Barkindo et al, 2006). This is because such countries depend on the revenue from the sales of these products to finance other dimensions of development. In addition, such states depend on the same revenue in order to facilitate upstream reinvestment and ensure that the rising demand is met. As such, these developing states have a call to put in place all possible measures in order to support supply security and to promote market stability (Taverne, 1999).

Preservation of the security of demand by these states requires proper investment in the exploitation and development of the gas and oil resources, in order to ensure that there is increased local production and that supply needs are met. Nevertheless, it is evident that most developing states that produce oil do not have the technical and financial capabilities required of them to develop the available resources and they thus depend on foreign investors. On the other hand, oil-producing developing states are often faced by cases of irresponsible leadership, political turbulence, and unreliable judicial and legal processes, which lead to investment hazards and political risks that are beyond the normal business risks faced in oil contracts and other political risks experienced in developed countries (Likosky, 2009). For instance, poor definition of the parties bound by a contract can lead to the state stepping out in the case of a political crisis with the claim that they did not recognize the agreement. As such, it is important to establish if the state is standing in for the multinational company or if the company is representing itself in the agreement (Amoco International Finance Corp v Iran , 1987 ). This puts the foreign multinationals in a dilemma on whether to invest in this oil producing countries or not, with investors agreeing to invest only in those cases where they are assured of the security of their investments by the host government. In this vein, this study pushes for the importance of including renegotiation and stabilization clauses in electronic oil and gas contracts for developing countries, as guarantee tools of such contracts even in cases of overarching political risks in these states.

Project Rationale

Energy Security in Oil-Producing Developing States

Energy security varies with time and country, an aspect that allows developed countries to identify their energy security elements in accordance with their peculiar vulnerabilities (Barton, 2004; Luft, Korin, & Gupta, 2010). As such, the subject of energy security does not call for a general definition, but rather a case-to-case definition. This is not the case when the works of most researchers in this field are reviewed, as most of them tend to give the general definition. As agreed by most writers of this subject, Sir Winston Churchill largely shaped the energy security concept through his strategic decision to use oil instead of coal as the base of power for British naval ships during the First World War (Yergin, 2006). Due to this decision, the oil market origins were defined and sources of supply and demand were converged in a market comprising of distinctive political factors, geopolitical factors, vulnerabilities, and other factors that emphasized the crucial nature of safety and certainty in the supply of oil. As such, energy security for each individual state is determined by the peculiar state vulnerabilities that are related to the energy demand and supply chain (Luft, Korin, & Gupta, 2010). In the case of developing countries, lack of a stable market for their gas and oil products is an area of possible vulnerability, an aspect that fails to guarantee the returns required in the implementation of the developmental agenda and the sustainability of their economies. Thus, energy security in these states revolves around the security of demand for the states’ oil and gas (Yergin, 2006).

Legal Stages in the Process Of Contracting

In the process of accomplishing the business phases of a contract, the contact partners “will” changes permanently, a situation that does not suit transactions that are legally binding (Gisler, Stanoevska-Slabeva, & Greunz, 2000). As such, declaration of “will” is used as a mechanism of freezing the contract party “will” at a constant position in order to ascertain the legal consequences regardless of the fact that it may change at later stages. This is an important mechanism in building trust between two contracting parties in the electronic oil and gas transactions. In most cases, the declaration is made verbally, but for the security of electronic contracts, a written complement is used to complement the verbal declaration. The complement, also referred to as the document, is an important proof that can be used in a court of law to challenge a given case. As such, the legal process of electronic contracts can be defined as a combination of static aspects involving the declaration that freezes the contract party “will” at a given point, and the dynamic aspect that involve the phases where the contract parties’ “will” goes through permanent change (Gisler, Stanoevska-Slabeva, & Greunz, 2000).

The first phase of the legal process of electronic contracts is the contract conception (Camarinha-Matos, Afsarmanesh, & Novais, 2007). This phase is mainly concerned with obtaining of general information concerning the market by the contacting parties. Such information is not legally binding, as it does not invite either party to an offer. As such, this stage does not pose any legal consequences for the phases that follow. The contract preparation phase involves the creation of the ‘invitation to treat’ document. However, the document fails to legally bind and can be revoked. The contract negotiation phase is the first phase that provides for a legally binding document referred to as an offer (Environmental Law Alliance Worldwide (ELAW), 2013 ). In this case, the offeror and the offeree agree upon contract details and the former has to settle the contract in accordance with the agreement. The last phase of the contracting process is the contract fulfilment process. In this phase, the agreement between the offeror and the offeree is declared a contract and each of the parties is given an obligation (Angelov & Grefen, 2009). As such, in the oil industry, it is the obligation of the investor to pay for the production while the host government or company has an obligation to provide the natural resource and to share in the returns. Receipts are important legal documents in this phase as they confirm a conducted transaction.

The Secure Electronic Contract

A contract’s major function involves storage of information concerning accepted liabilities in a manner that is legally binding. Thus, an electronic oil and gas contract has the mandate of promoting the storage of agreement information. In these contracts, a secure contract container formed based on an XML is developed for the sake of structuring contract data (Angelov & Grefen, 2009). In specifying the contract’s basic data elements, Data Type Definitions (DTD) are used to define a template document for the container. The container is made of two parts including the administrative section and the content section. The latter contains all information that is vital to the contract and that has been agreed upon by the contracting parties. It is important for the electronic contract to be safeguarded from unauthorized handling as the secure container holds information concerning the obligations and rights of the parties in contract. Thus, another issue of legal importance in these type of contracts is the section containing the signature block in which the parties are expected to sign as a form of congruence to the content of the contract. This section contains the X509 certificates, which offer the signers public keys that define the authenticity of the contract and prevent public manipulation (Angelov & Grefen, 2009).

In order to guarantee investors of the security of their investments, renegotiation and stabilization clauses should be incorporated in the contract data and secured under the secure contract container. This would allow the investors to change the terms of the contract in case the host government or company backs out of or acts contrary to the initial agreement. These clauses will also provide immunity to the contract against any political, social, or economic turbulence that may be experienced within the host country. Because of these clauses, the developing countries will be able to attract investors with an assurance of the security of their investment, and thus earn returns from the facilitated production and supply of their products. Such returns would ensure economic growth for these countries and further investment into the security of their energy.

Methodology

In order to obtain sufficient information regarding the application of stability and renegotiation clauses in electronic oil and gas contracts, the author will review data from within the field of law and in other fields related to the subject. Moreover, the author will apply the comparative, historical, and empirical research methods in establishing data relevant to the thesis.

Legal Comparative Method

In this method, the author will compare various legal systems through distinguishing different legal families. In this case, the author will review laws related to oil contracts and relate them to the research in order to compare similarities in the security problems in such contracts laws, especially in developing countries.

Legal Historical Method

The author will also engage in a legal historical review in order to identify the legal institutions and the legal development within the security law, which need to be reformed in order to suggest initiation of reform. It is important to note that there is an interdependency between theory and practice when it comes to legal science. Through practice, legal theories are put in practice vis-à-vis. As such, legal measures have been put to test throughout the decades against Biblical, authoritative, legal, and justice and reason related requirements. However, a gradual shift was noticed in the law towards a scientific approach, an aspect that made lawyers to become blind and mechanical in the application of law. As much as there may be correct application of such law in the technical sense, it is possible that it will be established on various wrong assumptions or an acceptance of legal norms without criticism. Thus, this approach will allow the author to establish grounds onto which the oil and gas contract laws have been developed in developing countries and to identify any assumptions made in the development of such contracts, which jeopardize the security of such laws.

Empirical Method

This method will involve an overview of literature related to electronic oil and gas contract law and the stability of oil producing developing countries. This will allow for an extensive exploration of the subject and establishment of a ground for making conclusions on the need for reform.

Conclusion

Energy security in oil-producing countries is subject to various peculiar challenges that these countries face in line with ensuring that there is constant demand in their gas and oil products. Constance in demand is important in ensuring that there is a constant flow of revenue for pursuance of other agenda related to the development of these countries, including re-investment in the security of energy. As such, the energy security of these countries is majorly concerned with protecting the oil and gas security for demand, which largely depends on investments of multinational companies. Nevertheless, these developing countries are expected to guarantee the investors of protection of their investments due to the exposure to political risks that their oil and gas resources have. In this case, the inclusion of renegotiation and stabilization clauses in electronic oil and gas contracts involving developing countries is an assurance of investment protection for multinational companies. These clauses would promote energy security and thus attract investors to these countries, which is good for development. It is important to note that developing states that produce oil depend on the revenue they receive from the oil to invest in modern energy security. Thus, renegotiation and stabilization clauses in electronic oil and gas contracts for developing countries would be important not only in terms of attracting foreign investors but also in ensuring continuous investment in energy security.

References

  • Ad-Hoc-Award, Kuwait v. The American Independent Oil Company (AMINOIL) , 21 ILM 976 (Arbitration Tribunal March 24, 1982).
  • Amoco International Finance Corp v Iran , 15 Iran-USCTR 189 (February 15, 1987 ).
  • Angelov, S., & Grefen, P. (2009). B2B eContract Handling A Survey of Projects, Papers and Standards . Retrieved from Universiteit Twente: http://doc.utwente.nl/37370/1/0000005e.pdf
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