Abstract: As Bangladesh transitions from a least developed country (LDC) to a developing nation, the exploration of oil and gas resources becomes paramount, particularly given the potential of the blue economy in the Bay of Bengal. This article examines the importance of reevaluating existing oil and gas exploration contracts to align with Bangladesh's economic goals. It highlights the nation's remarkable progress in energy consumption and economic growth and emphasizes the need for energy security. Despite having significant natural gas reserves, Bangladesh relies heavily on oil imports, presenting challenges in the sector. The legal and regulatory frameworks governing the industry, including the Bangladesh Petroleum Act 1974, are explored, with Petrobangla serving as the principal regulatory body.

As Bangladesh progresses from being a least developed country (LDC) to a developing
nation, crucial to thoroughly explore the possibilities for oil and gas exploration contracts.
This is especially vital given the potential importance of the blue economy in the Bay of
Bengal. Therefore,  imperative to assess available contracts in this sector, emphasizing the need to depart from outdated concession agreements for the nations benefit. Bangladesh recent progress positions it as a standout success story in Asia, with oil and gas playing pivotal roles in its economic development and national strategies. The country surging energy consumption, coupled with its projections for substantial economic growth, underlines the critical importance of ensuring energy security. Despite being small, Bangladesh boasts significant natural gas reserves, though its oil reserves remain limited, necessitating heavy reliance on imports. The government's focus on gas exploration and its dependence on international oil companies reveal challenges in the sector. Legal and regulatory frameworks, including the Bangladesh Petroleum Act 1974 and subsequent enactments, outline the governance of the oil and gas industry. Petrobangla serves as the principal regulatory body, overseeing exploration and production activities. Bangladesh involvement in international treaties, especially in arbitration, investment, trade, and taxation, reflects its efforts to foster a conducive environment for energy development and economic growth.

The petroleum sector stands out as one of the most lucrative industries, albeit fraught with
considerable risks depending on the operational framework. Investments in this sector are
often linked to substantial geological, political, or economic risks. From a geological standpoint, exploration represents a journey or expedition towards discovery, accompanied by both evident and hidden risks. On the political front, successful resource investment is
contingent upon an investor-friendly environment characterized by stability, predictability,
and, above all, adherence to the rule of law. Economically, the market fluctuates, leading to
changes in product prices during the period between commercial discovery and exploration.

In this context, the fiscal trend aims to harmonize the conflicting interests of foreign investors
and host governments to achieve the mutual highest reward while sharing or mitigating
inevitable risks. Investors, being business-oriented individuals, are driven to maximize profits
at the lowest possible cost. Host governments, as sovereign nations, have objectives that may
be politically contextualized but ideally seek to maximize revenue, minimize risk, and conserve their resources.

Analysis of the Risk Service contract

The risk service contract, specifically known as a risk-bearing service contract, is alternatively termed a risk contract, risk clause contract, or simply a service contract. In this arrangement, a private oil company commits to supplying both the risk capital and services for exploration and development. The capital and services are repaid and rewarded through cash or buy-back oil, or a combination of both, post the production of oil. As the name implies, the RSC differs from the non-risk service contract by assigning the responsibility of shouldering the risks and costs of exploration to the service company. In cases of unsuccessful efforts, the service contractor does not receive any compensation.

It should be emphasized that with the evolution of RSC, the compensation structure in the
form of a "risk fee" for the foreign contractor has become varied. This fee may manifest as a fixed amount per barrel or may be tiered based on factors such as the scale of discoveries, the level of risk capital invested, a government-designed intricate formula, or other relevant considerations.

The essential element of the risk service contract unmistakably highlights one of its
fundamental characteristics, even though the idea of risk capital is not novel in the petroleum
industry. Every risk service contract explicitly declares in its preambles that national policy dictates the expedited exploration of the country petroleum potential through risk investments made by contractors. The contractor is obliged to expressly address this
commitment in the contract, with the risk obligation reiterated in the risk clause, specifying
that exploration and development services "shall be carried out at the sole cost and risk of the CONTRACTOR."

Shortcomings of RSC:

Under the Risk Service Contract (RSC), the contractor assumes a heightened level of risk
associated with development costs, project completion dates, reserves, and production rates.
This is in stark contrast to Production Sharing Contract (PSC) arrangements, where the host
government shares these risks to a greater extent through inherent compensation mechanisms in cost recovery and profit oil features.

Additionally, in full-cycle exploration and production buyback agreements, partners are not
guaranteed the right to develop commercial discoveries made on the block, although
preferential negotiation rights are provided. In the event of a commercial discovery, partners
must bid against other interested parties for the development phase, utilizing the buyback
agreement. This differs significantly from PSC arrangements, where parties have the right to
explore and develop discovered resources per the original contract terms. If exploration does
not lead to development, contractors bear the full exploration cost, as seen in unsuccessful
exploration PSCs.

In the RSC framework, the government bears a notable share of oil price risks, differing from
Production Sharing Contracts (PSC) where contractors assume more risks. The fixed rate of
return in RSCs may not motivate International Oil Companies (IOCs) to optimize project
returns through actions like discovering reserves and employing cost-saving measures. RSC
contracts typically have short durations (5-8 years), lacking incentives for IOCs to maximize
field life and hindering flexibility and trust-building. The brief contract period in RSCs poses
challenges for the transfer of capital and technological skills, limiting the utilization of
advanced technology. Additionally, the transfer of management skills in the RSC concept
may be impeded, as it requires catching up with global industry changes over a relatively short timeframe. Longer-term upstream contracts may better facilitate the optimal development of projects by allowing for more extended skill transfer processes.

Analysis of Production sharing contracts and Iranian Buy Back Contract:

The existing contracts available in the petroleum sector other than the risk service contract
include concession arrangement, licensing regime, joint venture contract, production sharing
arrangement, Chinese Hybrid contract and a modified version of the risk service contract that
is known as the Iranian Buy Back Contract. The fundamental difference between a concession
arrangement or a licensing regime and production sharing arrangement, Chinese Hybrid
contract or the modified version of the risk service contract that is known as the Iranian Buy
Back Contract is in essence in the title and right of the resources.

Under the concession system, the government grants the exploration and development rights
of its petroleum resources to a contracting company in exchange for a portion of the profits.
While most countries maintain ownership of all mineral resources, the title is typically
transferred to the company upon production. The United States serves as an extreme
illustration of the concessionary system, where individuals may own mineral rights.
Governments secure economic rent from concessionary regimes by receiving royalties and
taxes from the foreign oil company. On the other hand, in production sharing contract,
Chinese Hybrid contract, Iranian Buy Back Contract and the risk service contract, the title and
right of the resources belongs to the host state.

In a concession contract, the sovereignty of the state's resources is potentially compromised as the title and ownership are transferred to the International Oil Company (IOC). An analysis of production sharing arrangements, Chinese Hybrid contracts, and Iranian Buy Back Contracts could be undertaken to formulate a sustainable arrangement that fosters a more investor- friendly legal regime. Such a regime would grant international oil companies (IOCs) greater control over the course of operations.

The Production Sharing Contract (PSC) was introduced by Indonesia in 1967 with the aim of
restricting International Oil Companies (IOCs) from possessing rights to subsurface
hydrocarbons. In the Indonesian model, the IOC functions solely as a contractor, tasked with
financing and executing all exploration and development activities according to an agreed-
upon work program and budget. The specific level of risks assumed by the private investor in terms of investment and costs is contingent on the provisions outlined in the sharing
agreement and production bonuses. 8 The PSC can be differentiated from the RSC by the
virtue that in the PSC, the production bonuses are shared among the host state and the IOC
whereas is RSC, the contractor is being reimbursed for the service that they are stipulated to
provide. In an Iranian buy back contract (BBC). The Iranian buy-back agreement functions
essentially as a risk-service contract. Similar to the Production Sharing Contract (PSC)
arrangement, in the buy-back contract, the International Oil Company (IOC) bears all
investment costs and executes exploration and/or production operations on behalf of the
National Iranian Oil Company (NIOC) as per an agreed scope of work. In return, the IOC is
entitled to remuneration for advances on these investment funds, operating costs, associated
bank charges with interest, and a negotiated rate of return, facilitated through NIOC's
allocation of production. Remuneration is derived from the sale of petroleum, up to a
maximum of 60% of production under a long-term export oil sale agreement (LTEOSA), and
becomes effective upon the successful completion of development activities, acceptance of
facilities by NIOC, and the attainment of the agreed production level.

There are evidently shared characteristics between Production Sharing Contracts (PSCs) and
buyback agreements, wherein the host government will:

 Maintain control over the management of petroleum operations, with the foreign oil company,
acting as the contractor, responsible for executing these operations in accordance with the
contract terms.
 Retain complete ownership of oil reserves in the ground throughout the contract's duration,
yet provide International Oil Companies (IOCs) with a mechanism to classify their
compensated hydrocarbons as proven oil reserves.
 Acquire ownership of equipment purchased or imported into the country by the contractor as
part of the project investment.

Furthermore, both types of arrangements necessitate the contractor to furnish all essential
capital, equipment, technology, and expertise, along with assuming the exploration and
development risks as per the approved work program.

The hybrid contract has found limited application in only a few countries with active oil
production. In China, this contractual model has been alternatively termed a "risk contract," a
"shared risk contract," or even a "production-sharing contract." However, recent consensus in the country leans towards using the term "compound contract" to describe this new form of contract. This terminology is deemed more fitting due to its legal nature involving diverse incorporations and its overall comprehensiveness. On an international scale, this type of agreement is more commonly known as the "hybrid contract" or, at times, "the comprehensive contract."

In China, foreign investment in upstream industry for oil and gas is confined to the
"cooperative development" model with the state oil company. According to the petroleum joint venture model contract, the contractor bears all exploration costs, assuming the risk if no commercial discovery is made. China National Offshore Oil Corporation (CNOOC) is carried by the contractor during exploration, and upon a commercial discovery, the state company can join with a 51 percent working interest after completing appraisal work. Development costs are then shared proportionally, with 51 percent for CNOOC and 49 percent for the contractor. However, CNOOC can choose not to participate or participate below 51 percent, requiring the contractor to cover the remaining development costs. The 51 percent working interest holds political significance, representing China's assertion of permanent sovereignty over its petroleum resources. The joint venture is overseen by a Joint Management Committee (JMC), consisting of representatives from both CNOOC and the contractor, chaired by the chief representative of the former.

The upstream oil and gas industry, marked by inherent risks, prompts host governments to
intricately structure their fiscal systems. This strategic design seeks a delicate balance
between the government's objectives and the risks assumed by International Oil Companies (IOCs). Operating under diverse legal regimes, governments aim to increase indigenous petroleum resources, attract modern technology and foreign investments, ensure employment of nationals, and enhance profit orientation in petroleum operations.

To realize these objectives, host governments employ various mechanisms like taxes,
royalties, and bonuses to maximize their share of petroleum rent. The term "Economic Rent"

denotes returns exceeding the investment's supply price, aligning with the goals of oil
companies focused on discovering hydrocarbon reserves and maximizing profits.

Royalties, as compensation to the government from IOCs, are a tax on gross revenue, posing
challenges for oil companies due to their regressive nature, as they do not differentiate
between profitable and unprofitable fields. Despite this, royalties provide a steady revenue
stream to the government, especially in the initial production stages.

Corporate Income Tax (CIT), a tax on profits, is applied universally to corporate entities and
is preferred by governments willing to take on more risk in oilfield development. Positioned
at the progressive end of the tax spectrum, CIT targets economic rents, offering economic
superiority over royalties by allowing deductions of investment costs. CIT's flexibility
accommodates oil price fluctuations and uncertainties for IOCs. However, governments may
adjust tax rates on short notice to mitigate windfall revenues, as observed in the United
Kingdom.

Furthermore, as it is evident in the Chinese Hybrid contract whereby the IOC are under an
obligation to employ to local nationals in order to create employment and train them to
actively participate in the operation. It can be seen in recent times that Chinese oil and gas
companies are providing expertise in field of oil and gas around the world which is direct
result of their inclusion in the operations of under the Chinese hybrid contract. Such methods
would empower the nationals of Bangladesh to be trained in such upstream oil and gas
industry.

In the RSC, the government bears a significant portion of oil price risks, unlike in the
Production Sharing Contract (PSC), where the contractor assumes relatively more risks. The
fixed rate of return fails to incentivize the International Oil Company (IOC) to enhance total
project returns through actions such as discovering additional reserves, employing enhanced oil recovery techniques, introducing cost-saving measures below contract specifications, and
optimizing production targets. Nevertheless, a fixed return may be advantageous for a risk-
averse IOC, particularly in anticipation of future low commodity oil prices. 15 Moreover, RSC,
being a short-term contract enable the IOC to engage in further arrangements in other host
states as the contract period is brief.

The Ministry of Power, Energy and Mineral Resources (MPEMR), Bangladesh has
implemented the Innovative Natural Oil/Gas Exploration Policy of 2019, aimed at
diminishing reliance on oil and gas imports through the adoption of advanced, technology-
driven exploration techniques. This policy mandates state-owned oil and gas exploration and
production entities such as Petroleum Exploration Company Limited (BAPEX), Bangladesh
Gas Fields Company Limited (BGFCL), and Sylhet Gas Fields Limited (SGFL) to adhere to
standardized operating procedures throughout the exploration process.

The Bangladesh Oil, Gas, and Mineral Corporation Act of 2022, introduced by State Minister
Nasrul Hamid, aims to expedite the exploration of the nation's natural resources. This
legislation replaces the invalidated 1985 ordinance, establishing the Bangladesh Oil, Gas, and
Mineral Corporation (Petrobangla) with expanded capital and authority. Petrobangla will have perpetual succession, hold property, and operate from Dhaka, with provisions for additional offices. Its Board of Directors, including a government-appointed Chairman, will oversee its operations. The corporation is empowered to deposit funds and invest in approved securities.

Bangladesh's rapid economic growth has led to a surge in energy consumption. To sustain this growth, the country must secure reliable and sufficient energy sources. This underscores the need for effective exploration of its natural oil and gas reserves and the potential discovery of new oil and gas fields. Strategic exploration involves using advanced technology and innovative methods to identify and develop new energy resources. The 2019 Innovative Natural Oil/Gas Exploration Policy exemplifies this approach by promoting modern, technology-driven exploration techniques to reduce dependence on imports. The choice of contractual frameworks significantly impacts the success and sustainability of energy projects. Various models, such as Risk Service Contracts (RSC), Production Sharing
Contracts (PSC), and Iranian Buy Back Contracts, Chinese Hybrid Contracts each offer
different mechanisms for risk and reward sharing between the government and international oil companies (IOCs). Selecting the most suitable contracts ensures balanced risk
management and maximizes benefits for both parties.

Effective resource management is essential for maximizing the utility of Bangladesh's natural resources. This includes not only discovering and exploiting new reserves but also optimizing the use of existing ones. Legal and institutional reforms, such as the restructuring of Petrobangla, are designed to improve oversight and operational efficiency in resource
management. The petroleum industry is inherently risky, involving geological, political, and
economic uncertainties. The government's strategic policies and contractual frameworks aim to distribute these risks appropriately between the state and private investors. For instance, while RSCs place more exploration and development risks on the contractor, PSCs involve more shared risks, allowing for a balanced approach. Another critical aspect is the transfer of technology and skills from international partnerships to local entities. This not only builds local capacity but also ensures that Bangladesh can independently manage its resources in the future. The emphasis on employing and training local nationals within the contractual frameworks fosters a knowledgeable and skilled workforce.

In summary, as Bangladesh moves towards greater economic development, the strategic
exploration of energy resources and the implementation of optimal contractual agreements are vital for ensuring energy security. The government's proactive policies and robust regulatory frameworks play a crucial role in attracting investments, enhancing resource management, and mitigating risks, thereby laying a solid foundation for sustainable growth and energyindependence.

Author’s Identity:

Ahamed Ihteyaz Thamid (Shahad)
Barrister-at-Law, Lincoln’s Inn & Advocate
LLB (Hons.) SOAS, University of London