CHAPTER 1: INTRODUCTION AND BACKGROUND TO THE OIL AND GAS INDUSTRY 4
In this section, we broadly discuss the following background concepts to the oil and gas industry: 1.1 Introduction to Oil and Gas hydrocarbon system elements and the formation of oil and gas; exploration, development and production activities including the types of drilling shale gas basics 1.2 Sector organisation 1.3 Market and Pricing 1.4 Oil and Gas in Africa History and overview Future developments
CHAPTER 2: OIL AND GAS PROCESS AND KEY CONCEPTS 3
CHAPTER 3: LEGAL FRAMEWORK 3
UPSTREAM CONTRACTS – TYPES OF COMMERCIAL AGREEMENTS
There are a number of commercial agreements that can be concluded between private parties to regulate their contractual relationships and obligations in respect of their upstream activities.
Joint Bidding Agreements
Where companies agree to bid for a specific licence, they may enter into a Joint Bidding Agreement. This type of agreement is concluded before a Joint Operating Agreement; however, it generally makes provision that a Joint Operating Agreement must be signed if the licence application is successful.
A Joint Bidding Agreement provides the parties with a mechanism for allocating liabilities and financial commitments while attempting to obtain a licence.
Farm In/Farm Out Agreements
Similar to the establishment of an unincorporated joint venture arrangement, in terms of which a party agrees to discharge certain capital expenditure or other agreed work obligations within set time frames in exchange for a participating interest in the production of output of a licensed area.
The operator will be required to carry out the exploration and development activities according to good industry practice and norms.
The important features of this contractual arrangement is that they provide a means of managing asset portfolios outside of licensing rounds. Essentially, this arrangement allows for the holder of an exploration licence to, by farming out, share the risk and cost of exploration and development.
Joint Operating Agreements
Establishes a contractual relationship between participating members comprising exploration or production licensees or PSA contractors. This type of agreement is concluded to specify the terms on which the various parties to a licence or PSA will work together to exploit the reserves. A Joint Operating Agreement only comes into effect after a licence has been awarded and regulates all joint activities from the award of the licence to termination or surrender including exploration, development, production, lifting and transportation as well as processing.
This an agreement by the owners of a reservoir which extends into more than one licence area to develop it as a single unit. The areas although separated, are operated as if they are a single source and there are no boundary restrictions. The aggregate production is then allocated in proportion to their agreed participation in the deemed single block.
The benefits of this arrangement is that it prevents competition for resources, allows for increased profitability resulting from the enhanced recovery and a reduction of overall capital expenditure and operational expenditure by combining operations.
Further it allows for efficient operations and reservoir management.
These agreements are entered into with contracts and set out the content, planning and implementation of the decommissioning process.
A Financial Security Agreement otherwise referred to as a Decommissioning Fund is designed to ensure that each of the parties to a joint venture that has any financial liability for decommissioning holds or deposits adequate financial security to meet its share of the total obligations.
As previously discussed, there are three main drilling contracts:
- Day rate contracts are the most The operator of a drilling project will pay a day rate to the drilling contractor in exchange for the contractor providing the rig, the drilling personnel and other incidentals.
- Footage contract the drilling contractor is paid to drill to a specified formation or depth. In terms of a footage contract, the drilling contractor is paid a set amount per foot drilled, and is given broad control over how to do the work.
- Turnkey contract in exchange for an agreed price the drilling contractor promises to perform specified functions. However, the lease operator does not have any discretion to control the drilling contractor, and so assumes little or no liability for damages that the drilling may cause.