Appropriate Banking Contracts from the Perspective of Legal and Executive Requirements of the Oil and Gas Industry

Document Type : ISI

Authors

1 PhD Candidate in International Oil and Gas Contracts Management, Faculty of Law, Allameh Tabataba’i University, Tehran, Iran

2 Associate Professor of Law, Faculty of Law, Allameh Tabataba’i University, Tehran, Iran.

Abstract

Introduction
Today, the main need in the upstream and downstream activities of the country’s oil and gas industry is financing. Due to various financial and banking restrictions and sanctions, financing the oil industry through foreign sources is very difficult under the current circumstances. In this regard, the principled and accurate use of banks’ financial resources can be of great help. In Iranian law, there are certain legal and technical restrictions on using non-partnership contracts. On the other hand, the possibility of benefiting from partnership contracts and bank investments in financing the oil and gas industry faces doubts due to factors such as the strong likelihood of a lack of genuine participation and disruption of fair competition.
The primary question is: which of the existing contracts in Iran’s banking system, considering legal restrictions and the legal norms of competition law in Iran, has the best function in financing the oil and gas industry?
Method
In this research, in order to achieve the desired goals, the available literature and resources (books, articles, and laws) were reviewed and studied. Interviews were conducted with experts and informants regarding banking contracts in the oil and gas industry, and the opinions of respected university professors and specialists were also used, along with the evaluation of theories, analyses, and argumentative explanations. Therefore, the method adopted in this research is descriptive and analytical.
Conclusions
A review of each banking contract in terms of its suitability with the needs and requirements of the oil and gas industry and the possibility of benefiting from them shows that:

The use of partnership contracts in financing the oil and gas industry is appropriate, provided that some basic conditions are observed.


According to the laws and regulations, the Mudarabah contract is only applicable to the commercial sector; therefore, it is suitable only for the purchase and sale of oil and gas industry products (domestic trade and export/import of petroleum and petrochemical products) in the downstream sector—provided that the rules of fair competition are observed.
The use of civil participation contracts in the upstream oil and gas sector is appropriate, provided that a genuine civil participation contract is concluded by a bank specialized in the oil industry and that the specialized bank and the joint management committee closely and continuously monitor the implementation of oil projects.
The use of civil participation contracts in the downstream oil and gas sector is also appropriate—provided that a genuine civil participation contract is concluded by a specialized bank in the oil industry, the bank continuously monitors downstream projects, and the rules of fair competition are observed.
Given the possibility of more effective oversight in a legal participation contract—due to the existence of a company and corporate governance—this agreement is more suitable than a civil participation contract for financing both upstream and downstream oil and gas projects. The use of a legal participation contract in the upstream oil and gas sector is appropriate, provided that it is concluded by a bank specialized and experienced in the oil and gas industry on behalf of depositors with joint-stock companies in the sector, and that an insurance company specialized in the oil and gas industry acts as a guarantor of profits and losses, or at least as a guarantor of the current value of shares. It is also appropriate to use a legal participation contract to finance downstream oil and gas projects, provided that it is concluded by a specialized bank and that fair competition rules are observed.


non-partnership contracts, including Murabahah, Jualah, Istisna, Lease on Condition of Ownership or Hire-Purchase, Installment Sales, Purchase Debt, and Salaf, are respectively more compatible with the needs of the oil and gas industry and suitable for financing its projects because:


Murabahah contracts are suitable for the supply of goods and services in the development and production stages of upstream oil and gas operations, as well as in downstream operations.
The adequate capacity of the Jualah contract can be used to finance upstream oil and gas operations in the development and production stages, as well as downstream operations.
The Istisna contract is suitable for supplying the goods, equipment, and facilities required for oil and gas projects at various stages of upstream and downstream operations.
A Lease on Condition of Ownership or Hire-Purchase contract is suitable for supplying goods required for upstream operations in the exploration, development, and production stages, as well as for supplying goods, equipment, and facilities for downstream operations.
Installment Sales contracts are suitable for the procurement and supply of raw materials, spare parts, work tools, production equipment, machinery, and facilities, as well as consumer goods required in the development and production stages of upstream oil and gas operations and downstream industry activities.
The Purchase Debt agreement can be used in the development phase (after initial production is achieved with the help of a payment commitment certificate) and in the exploitation phase of upstream operations, as well as after the launch of a downstream project.
The Forward (Salaf) contract can be used when the upstream oil and gas project is approaching the production and operational stages, and the downstream project is about to be launched.

 
 

Keywords

References

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