The oil market has a huge impact on the global economy. Russia is the third largest oil producer in the world. It accounts for over 12 percent of the world’s crude oil production. Now, the Russian oil and gas industry is a powerful conglomerate that extends its influence far beyond the country’s borders. For a number of foreign countries, Russian oil is economically more profitable on the market. This is due to a number of factors: low fuel prices, a well-developed logistics system and the structure of oil production.
Oil is the best-selling feedstock in the world. A contract for the supply of petroleum products is one of the most popular trading instruments. Fuel purchasers – industry, power plants, and transport, create the principal demand for oil. The main sellers in the oil market are oil-producing companies. In the field of oil trading, futures contracts are most often used. They are concluded for the purchase or sale of oil with future settlements.
International trade in crude oil and petroleum products is of great importance for the Russian economy. Contract technology in oil trading contains several specific aspects that fundamentally distinguish this type of trade from trading in other types of goods.
As a rule, international contracts for the purchase and sale of Russian oil are subject to English law. To make a contract binding under English law, the following conditions must be agreed upon:
- subject of the contract;
- quantity and terms of delivery;
- time of performance.
Product description and quality.
Oil type and quality are defined at the very beginning of the contract. In addition, the contract refers to the “Measurement, Sampling and Testing” clauses. Since almost all settlements in oil trading are made using a letter of credit, there is a need of exact correspondence of all information entered into documents: in the bill of lading, in the letter of credit and in the contract. A deviation of some indicator will lead to the fact that the bank will not accept such a document, and the process of receiving payment for the product can become very complicated and time-consuming.
It is also unacceptable to overload the body of the contract with technical details and numbers. It is sufficient that the parties carefully and accurately describe the quality of the goods in the appendix to the contract. To minimize the risks of quality discrepancies in both documents, the Seller and the Buyer agree on the main quality parameters before entering into a transaction.
Furthermore, the provisions on the moment of transfer of ownership and the risk of accidental loss of goods, as well as the conditions for quality and inspections are of great importance in international oil purchase contracts.
Terms of delivery of goods.
All Russian producers of crude oil and petroleum products sell their products primarily on the terms of FOB (port of shipment). The goods are considered handed over to the buyer at the time of its loading at the port of departure. At this point, all responsibility and all risks pass from the seller to the buyer. In order to minimize the risks of quality loss, the seller and the buyer nominate inspection companies (surveyors), which issue a quality certificate. It will serve as a quality assurance in case of disagreement.
It should be noted that an international oil purchase and sale contract might contain a reference to INCOTERMS (a set of delivery conditions developed by the International Chamber of Commerce in Paris). Russian companies involved in international oil sales usually include a reference to INCOTERMS in their contracts. In this regard, it should be considered that if the contract does contain a reference to INCOTERMS, then Western counterparties might insist on supplementing and clarifying its terms.
The activities of oil companies, as well as organizations and individuals involved in the oil trade, are always associated with certain legal risks. It must be remembered that the legal remedies are in the hands of the parties themselves. In order to avoid possible disputes, when drawing up export contracts, it is worth taking into account the specifics of international legislation and industry practices.