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Energy Contracting & Negotiation-5

Energy Contracting & Negotiation-5



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Published by: rathneshkumar on Feb 19, 2009
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CHAPTER 5Farm-in Agreements
 A farm-in agreement is an arrangement under which a holder of an exploration ormining right agrees to assign a portion of its interest to another party (who "farms-in") inexchange for a certain amount of expenditure or the performance of specific activities.
Farm out (in) arrangement:
An arrangement, used primarily in the oil and gas industry,in which the owner or lessee of mineral rights (the first party) assigns a working interestto an operator (the second party), the consideration for which is specified explorationand/or development activities. The first party retains an overriding royalty or other typeof economic interest in the mineral production. The arrangement from the viewpoint ofthe second party is termed a "farm-in arrangement."
Shell and Cairn conclude a Farmout/Farmin Agreement in Rajasthan, India
Shell India Production and Development B.V. ("Shell") and Cairn Energy PLC announcetoday that they have concluded an agreement whereby Shell will immediately assign toCairn a 27.5% interest in Block RJ-ON-90/1 in Rajasthan. In addition Cairn has beengranted options to increase its stake in the Block to 40% on a promoted basis. TheRajasthan Production Sharing Contract area, awarded to Shell in 1995, is located 100kms north of the proven oil and gas province of the Cambay Basin, and covers an areaof 8,856 sq. kms. The assignment is subject to obtaining all necessary Governmentapprovals.Shell will assign a 27.5% interest to Cairn. In return Cairn will pay Shell 100% of the firstwell costs to a cap of $10 million and historic costs of approximately $1.75 million. Todate Shell has spent approximately $10 million on 2D and 3D seismic. Shell intendsspudding its first exploration well on RJ-ON-90/1 at the end of 1998. ONGC, the IndianGovernment owned oil company, has a 30% back-in right.Bill Gammell, Cairn's Chief Executive, said:"We are delighted to have acquired a material early entry position in an explorationBlock in one of our target growth areas in India. The fact that RJ-ON-90/1 is operated byShell, our joint venture partner in Bangladesh, is doubly pleasing."Tony Wildig, Shell's Vice President for New Business, Middle East and South Asia,said:
"The geology of this Block is fascinating , potentially a mirror-image of the CambayBasin. It represents an excellent opportunity for ourselves and Cairn to take forward inthe spirit of our developing relationship."
 "Cairn" as referred to above means Cairn Energy PLC and/or its subsidiaries asappropriate.
ONGC announces that it has signed a Heads of Agreement with Cairn for farm-in incertain assets of Cairn, the participation of Cairn in two exploration blocks of ONGC,and the formation of a strategic alliance for future opportunities.The proposed transaction with Cairn is subject, inter alia, to finalisation of mutuallyacceptable sale and purchase agreements between the parties and approval by theGovernment of India.The proposed transaction comprises the following:i) The farm-out by Cairn to ONGC of a 90% operated interest in deep water explorationBlock KG- DWN-98/2 with an effective economic date of 30th September 2003. Cairnwill retain operatorship of Block KG-DWN-98/2 until the closing date, following whichONGC will assume operatorship under the terms of transfer of operatorship agreementsto be agreed between Cairn and ONGC.ii) The farm-out by Cairn to ONGC of a 15% exploration interest in Block CB/OS-2 and a10% interest in the Lakshmi and Gauri Development Areas with an effective economicdate of 1st January, 2003. (together “the Farm-out Interests”)iii) The farm-in interest by ONGC to Cairn of a 30% interest in each of Block GV-ONN-97/1 onshore Northern India and CB-ONN-2001/1 onshore Gujarat Western India, withan effective economic date of 30th September, 2003 (“the farm-in in Interests”)ONGC will pay to Cairn a cash consideration of US$135 million (“the CashConsideration”) for the farm-out interests. The cash consideration will be adjusted toreflect net working capital movements between the respective effective economic datesand the closing date.
Cairn will pay to ONGC a cash consideration equivalent to economic monetary value ofthe blocks as assessed by ONGC at the time of bidding for its farm-in participativeinterest in two ONGC blocks (to be evaluated by Cairn).In addition, ONGC and Cairn yesterday submitted joint bids for three blocks onshoreGujarat in the NELP-IV licensing round. If successful, Cairn will retain a 30% interest inthese blocks and ONGC will be operator.Further information on the Farm-out Interests and the Farm-in Interests is included inthe Appendix to this announcement.
Bill Gammell, Chief Executive, commented :
“We are delighted to extend our relationship with ONGC and to create a strategic alliance to look at opportunities both within India and elsewhere. The farm-out of discovered and producing interests is consistent with our strategy of both creating and realising value from exploration success. The transaction also significantly augments our onshore acreage position in India.” 
Subir Raha, Chairman & Managing Director of ONGC commented:
 We are delighted to reinforce the equation with Cairn through a strategic alliance, to addvalue from opportunities in Indiaand abroad. These transactions will synergise thecompetencies of ONGC and CAIRN, and enhance our cost- efficiencies.
Block KG-DWN-98/2
 Cairn currently holds a 100% operated Interest in Block KG-DWN-98/2, which wasawarded pursuant to the first round in India’s New Exploration Licensing Policy. It is adeep water block located in the Krishna-Godavari basin offshore Eastern Indiain whichwater depths range from approximately 300 to 3,000 metres.Cairn signed a PSC for the block in April 2000 following which it conducted an extensiveexploration campaign resulting in several hydrocarbon discoveries during 2001. During2002 Cairn completed a detailed subsurface technical review of the results of theexploration programme with a view to seeking a partner to optimise plans for futureexploration, appraisal and development activity on the block.

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