Contract Risk in the Oil and Gas Sector: How to Strengthen Your Agreements in Oman
The oil and gas industry in Oman remains the backbone of the national economy, attracting both local and foreign investors into exploration, production, and related services. Yet, the capital-intensive and technically complex nature of the sector exposes companies to significant contractual risks. From equipment failures to sudden regulatory shifts, the legal challenges are wide-ranging. For businesses operating in Oman, ensuring that contracts are enforceable, resilient, and compliant with local law is not a choice but a necessity.
The foundation of every contractual relationship in Oman is the Civil Transactions Law issued by Royal Decree 29/2013. This law enshrines the principle that valid contracts are binding, provided they do not breach public order or mandatory legal provisions. Special care must be given to clauses on penalties, indemnities, and unilateral termination. Under Article 267, the courts may reduce a penalty if it is disproportionate to the actual harm suffered. Article 272 gives judges the power to intervene in termination disputes. Furthermore, Article 183 makes it clear that no party may exclude liability for intentional misconduct or gross negligence.
Corporate structures are another important consideration. The Commercial Companies Law issued by Royal Decree 18/2019 regulates partnerships, joint ventures, and consortiums, which are common in oilfield services and upstream operations. Contracts signed by individuals who lack the proper authority, or by companies without the required corporate approvals, risk being held invalid.
Employment obligations also shape contract drafting. The Labour Law issued by Royal Decree 53/2023 imposes requirements on Omanisation, subcontracting, and worker protections. Oil and gas contractors must ensure that employment duties are clearly allocated, and that subcontractors comply with ministerial directives. Non-compliance with Omanisation ratios can result in fines, suspension of licences, or even termination of contracts.
Where the state or state-owned companies such as PDO or OQ are involved, contracts must comply with the Public Procurement Law issued by Royal Decree 36/2008 and its regulations. These rules impose transparency and localization requirements, and certain clauses on arbitration, price adjustment, or assignment may be restricted.
Risk allocation remains a recurring theme. Indemnities, liability caps, and insurance provisions are widely used, but their enforceability depends on careful drafting in line with Omani law. Force majeure and hardship clauses must be precise and adapted to Omani jurisprudence, which tends to favour objective and narrowly defined triggers rather than vague or imported standards.
Dispute resolution is another key aspect. Oman allows parties to choose foreign law and international arbitration. However, enforcement in Oman is subject to the Arbitration Law issued by Royal Decree 47/1997 and must not conflict with Omani public policy. If litigation is chosen, proceedings are conducted in Arabic under the Civil and Commercial Procedures Law issued by Royal Decree 29/2002, with a strong emphasis on documentary evidence.
Beyond the statutory framework, the oil and gas sector is guided by policy measures such as the In-Country Value Framework introduced by the Ministry of Energy and Minerals. This requires contractors to commit to using local suppliers, hiring and training Omani nationals, and investing in local infrastructure. Failure to meet ICV obligations can affect eligibility for future tenders and harm a company’s standing with regulators.
Finally, oil and gas projects are highly sensitive to external factors such as changes in legislation, fluctuations in commodity prices, and geopolitical developments. Contracts should therefore include provisions that address change in law, currency shifts, and termination for convenience, giving parties the flexibility to adjust their obligations if circumstances change fundamentally.
In summary, effective contract management in Oman’s oil and gas sector requires more than simply importing foreign templates. Agreements must be carefully aligned with Omani law and regulatory practice. This includes ensuring accurate translations, enforceable indemnities, labour compliance, and practical dispute resolution mechanisms. By working with qualified legal advisors who understand both the domestic legal framework and the realities of the energy sector, companies can safeguard their investments and significantly reduce contractual risk.
