PETROLEUM

AGREEMENTS AND
BIDDING
THE INVITATION TO BID
The majority of the remaining world hydrocarbon reserves lie under
the control of NOCs.
The host Government may invite third parties to participate in the
region.
The geographic area of interest is divided up into a number of blocks
by a grid. The size of these blocks varies from country to country and
even from area to area in some cases.
When specific licence blocks are offered, and an interested bidder is
left to his initiative to make an evaluation of the block.
This may be based on speculative regional studies performed by
consultants, made available for purchase by the author, or on the
company’s own understanding of the block, using regional data,
analogue data and any public domain information available.
MOTIVATIONS AND FORM
OF BID
In offering an exploration opportunity in a block, the motivation of
the Government is to encourage investment in form of exploration
activities, such as shooting seismic and exploration drilling, with a
view to development if the exploration is successful.
The offer will have a bid deadline, after which submitted bids will be
opened by the Government, or its NOC representative.
The winning bids may be publicly announced, or kept confidential,
depending on the country.
BLOCK AWARD
The successful bid will result in award of the block, giving the rights
to explore.
Any signature bonus offered will be cashed by the Government.
The criteria for a commercial well would be based on production rate
during testing of a discovery well, whereas the declaration of a
commercial discovery (DCD) would depend on the oil company
demonstrating that an economic development can be justified.
FISCAL SYSTEM
The Petroleum Agreement will also include a description of the fiscal
terms by which the Government will claim its share of revenues
during the production period.
This will fall broadly into four categories.
Within these broad categories, there are in excess of 120 different
fiscal systems in place around the world.
Some 50% of these are PSAs and 40% Tax and Royalty systems.
FARM-IN AND FARM-OUT
The participants in the block may change over time, for various
reasons.
At any stage of the field life cycle, a company may choose to reduce
its share in a block by selling a fraction to another company – this is
known as ‘farming out’.
The company who accepts the share is said to have ‘farmed in’.
UNITISATION AND
EQUITY DETERMINATION
Nature does not confine the hydrocarbon field size to the regularities
of the grids imposed, and commonly a field will span two or more
blocks, often owned by different groups.
Most governments will insist that the field is ‘unitised’ and treated as
one unit for development purposes.
The owners of the field or the Government will nominate an
operator, and the development will be planned based on the physical
properties of the field, uninfluenced by ownership.
The split of the costs of development and the resulting net cash flow
will be determined by the ‘equities’ held by the owners of the licence
blocks which the field straddles.