Fiscal-Financial Arrangements of Participation Between National Oil Companies and International Oil Companies as to the Upstream Petroleum Exploration Operations

After conclusion of upstream agreement, the International Oil Company (IOC) may be required to carry out upstream operations with the participation of the National Oil Company (NOC). As a result, after the conclusion of upstream agreement, a joint operation agreement is concluded between the NOC and the IOCs and a participating interest is allocated to the NOC. By allocating a stake to a NOC, one should expect the obligations and risks of the IOC in the upstream agreement to be transferred to the NOC, which in fact means a reduction in the IOC’s obligations under upstream, but this is contrary to the upstream agreement. Since NOC’s cannot participate in operations as a real partner like a petroleum contractor, it is a question of how financial arrangements should be designed so that a NOC can accept participating interest in the joint operating agreement without accepting a commitment or risk. Accordingly, the participating interest of NOC is in the form of a carried interest, meaning that the NOC’s share of costs up to a certain point (often commercial discovery) is borne by the IOCs and after that point the NOC reimburses all previous expenses in cash or the expenses are recovered from NOC’s entitlements.