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Allocation of Risks and Liabilities in Upstream Oil & Gas Projects

Andrew J.W. Haynes, International Mining and Oil & Gas Law, Development and Investment (2009)

The international oil & gas industry is an industry which every day needs to face many risks from deep within the earth to commodity trading floors in financial centers to refineries across the globe. The industry has developed at different stages in a variety of jurisdictions around the world as new oil & gas provinces have emerged, and over time different contractual, statutory and insurance approaches to allocating risk have developed, each of which gives rise to its own peculiarities and incentive structures. This paper seeks to step-back from the day to day detailed issues upstream oil & gas lawyers face and the detailed analysis of individual industry contracts such as the Production Sharing Agreement (PSA) or Joint Operating Agreement (JOA), and to seek to reflect, from the point of view of an upstream exploration and production company, on the overall framework for allocating risk in upstream oil & gas ventures utilizing a variety of common instruments.

1. Risks & Liabilities in Upstream Oil & Gas Projects

Exploration Risk

The most fundamental and intractable risk in the oil & gas industry is exploration risk. Contrary to the understanding of the man in the street and many populist politicians around the world, the vast majority of exploration efforts (principally seismic and drilling) do not lead to commercial discoveries and are a dead loss