In the article published by BBC News, Moylan (2015) reports that a significant discovery of oil was made on the Horse Hill near Gatwick Airport in the United Kingdom. The discovery is characterized as a potentially the largest onshore discovery of oil on the territory of the UK. Since the discovery is recognized as the world-class source of oil, it is likely to change the position of the UK in the global oil market because this is the resource that it never had previously (Goodway 2016).
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Much excitement was caused by the discovery near Gatwick Airport for both the UK government and UKOG, the company that will be extracting the oil. The process of negotiations of the oil contract will be heavily impacted by the current political situation in the country; namely, the recent Brexit that caused the significant drop in the domestic currency value (Negotiation of Oil and Gas Contracts 2009).
Some of the key aspects that need to be discussed during the negotiation are the environmental factor, alongside the political, social, and economical; however, the most critical sides are the technical and commercial spheres of the issue (Radon 2006). In the particular case of the Horse Hill discovery, UKOG will feel empowered and motivated to dictate its interests since it will be involved in the extraction of the resource that the government deems extremely valuable.
To be more precise, the technical side of the question will probably be the most important part of the negotiation because it will take up to 95% of all the operations and costs (Radon 2006). That way, the primary objective of UKOG will be to cover the costs of dry wells and exploration investments. The key goals of the contract negotiations will be the establishment of who and how will cover the costs of the oil extraction and how they profit from the oil will be divided between the negotiating sides. An agreement based on a mutual compromise needs to be reached; preferably, it has to be beneficial for both parties (Salih & Salih 2015).
First of all, the negotiating sides need to decide on the teams responsible for all the negotiation process. Further, the type of contract needs to be chosen. In this regard, the government is to ensure that the oil exploration results in the desirable return to the domestic oil industry and the state budget; it also needs to establish the regulations about the administrative burden, and avoid the resource speculation (Salih & Salih 2015). The stable income from oil is a desirable outcome for the government; however, it is likely to result in expropriations (Slippery Negotiations: The Give and Take of Oil Contracts in Foreign Countries 2012).
At the same time, the company is interested in receiving the coverage of their costs and the return on investment of resources as fast as possible, obtaining access to more resources, and making sure that their resources and costs are replaced (Salih & Salih 2015). Besides, the negotiating sides need to decide on the provisions that will be included in the contract (such as the actual negotiators, prices, taxes, regulations, governing laws and stabilization clauses, work program or plan, and the termination requirements).
It is crucial to include as many details as possible in the contract. For that, the experienced teams of negotiators are to be involved to discuss all the necessary terms and conditions for the agreement to be reached. The needs of both the government and the oil company are to be satisfied so that the parties are in agreement.
Goodway, N 2016, Gushing Gatwick ‘can supply 25% of UK’s oil’.
Moylan, J 2015, Oil discovery near Gatwick airport ‘significant’.
Negotiation of Oil and Gas Contracts 2009.
Radon, J 2006, Initiative for Policy Dialogue Working Paper Series.
Salih, MS & Salih, RS 2015, ‘Strategy of Oil Contract Negotiation’, International Journal of Business and Social Science, vol. 6, no. 9, pp. 168-175.