A Service Contract Arrangement is a long-term contractual framework used by some host governments to take advantage of the international oil companies' (IOC), expertise and capital over a specified period, without having to hand over the field and production ownership rights to them. .
By the Mineral Oils Ordinance, 1914, the types of oil rights that could be acquired by IOCs for exploration activities were Oil Exploration Licenses, Oil Prospecting Licenses and Oil Mining Licenses. Between 1960 and 1969 these concessions began to be criticized as being too colonialist and exploitative in nature. The contracts which characterized this period were as follows:.
a. Concessions- Upon the discovery of oil in commercial quantities, the IOC is granted an OML for a number of years and is allowed to exploit, produce, and market the proceeds from the acreage exclusively. It however pays royalties and Petroleum Profit Tax to the government.
b. Joint Ventures- Both parties, the host government through its National Oil Corporation and the IOC jointly hold the OPL and OML and fund its exploration, development and production in shared proportions, usually the NOC has controlling shares. This is usually encapsulated in a Joint Operating Agreement. The IOC is designated the Operator with a superintending Management Committee.
c. Production Sharing Contracts. Typically, the OPL and OML is held by the NOC which then engages the IOC to conduct petroleum operations utilizing its resources and underwriting all costs prior to the discovery of oil in commercial quantities. When this milestone is reached, the IOC is entitled to recover its costs together with reasonable profit from the proceeds when commercial production commences. The chief feature of these was that the IOC having been designated the operator, had free reign in determining the production figures, the associated costs and expenses and thereafter have a share of the profit oil in a ratio which although on paper was lower than that of the host government but was in practice grossly higher.
