Definition
Concession is a form of contract in the oil and gas industry between a State and a company to explore and develop these resources.
Comments
Oil and gas concessions are very similar to mining concessions considering that in all countries, except USA, and few others the underground belongs to the State, not to the owner of the upper land.
In this general legal context, the State represented by its Government, or its legal Authority, grants the rights and obligations to an operating company to explore, develop and produce oil and gas resources as any mining company.
These concessions apply the same way for onshore or offshore development as long as located in the Continental Shelf of the State.
The area subjected to a concession is usually called a block with its own rights and obligations.
These concessions are long term agreements signed between the State of a producing country and the operating company, usually an International Oil Company (IOC), for at least 20 years.
Some concessions in Abu Dhabi with BP, ExxonMobil or Total may be 65 years old.
Again, as extrapolated from historical mining code in each country, the financial structure of an oil and gas concession is pretty simple as based on two phases, exploration and production.
The operating company, or a pool of them, shall buy a concession license for the exploration of a given block.
Then the operating company shall pay to the local State a fee per barrel produced in compensation of the production of oil and gas.
This concession fee will depend on the barrel price at the time of the signature of the concession, and also on the quantity and quality of the oil and gas produced such as estimated at the exploration phase.
Usually this concession fee per barrel, or per Barrel of Oil Equivalent (BOE), is fixed for the duration of the concession.
In practice it means that the State will receive this fee regardless of the capital expenditure, profits and losses of the operating company.
All the costs and risks are left to the operating company, but also all the profits exceeding the fee.
This last point created a lot of tensions between the producing countries and the operating companies when concessions were signed 15 to 20 years ago when the barrel price was fluctuating between $10 and $20 per barrel.
At that time the concession fees were a couple of USD per barrel, which then turned the concessions contracts totally unbalanced when the barrel prices started to rocket to $30, $50 and of course $100 per barrel.
So these last 10 years all the countries having such concession contracts investigated all the ways to renegotiate the compensation of the concession, either directly, either in introducing taxes.
Of course the operating companies were very reluctant to accept these changes, not just because it was reducing their growth margins, but also because they had no guaranty to revise these fees downward in the case the barrel price would come down again during the remaining period of the concession.
With the barrel price not only increasing significantly but more importantly fluctuating heavily depending on multiple factors including USD currency, the concession contract appeared less and less adapted to regulate the rights and obligations between States and International Oil Company (IOC) which now prefer to use production sharing contracts (PSC).
