1.jv oil & gas industry
TRANSCRIPT
Exploration and Production (E&P)
Transportation
Refining and Gas Processing
Marketing and Distribution
Exploration and Production (E&P)
Transportation
Refining and Gas Processing
Marketing and Distribution
Characteristics of Oil & Gas Industry
A high level of riskA long time span before a return on investment is receivedA lack of correlation between the magnitude of expenditures and the value of any resulting reservesA high level of regulationComplex tax rulesSpecialized financial accounting rules
A high level of riskA long time span before a return on investment is receivedA lack of correlation between the magnitude of expenditures and the value of any resulting reservesA high level of regulationComplex tax rulesSpecialized financial accounting rules
Not every rock can hold hydrocarbons
To serve as an oil and gas reservoir, rocks have to meet several criteria
Not every rock can hold hydrocarbons
To serve as an oil and gas reservoir, rocks have to meet several criteria
It should contain enough hydrocarbons to make it economically feasible for the operating company to drill for and produce them.
It should contain enough hydrocarbons to make it economically feasible for the operating company to drill for and produce them.
Porosity: A measure of how much pore space is between the rock grainsPermeability: A measure of how well the pore spaces are connected by pathways
Porosity: A measure of how much pore space is between the rock grainsPermeability: A measure of how well the pore spaces are connected by pathways
Porosity Permeability
A high area on the reservoir rock where oil and/or gas can accumulate. It is overlain by a cap rock (seal)A high area on the reservoir rock where oil and/or gas can accumulate. It is overlain by a cap rock (seal)
Mineral Rights (MR) &
Mineral Interests (MI)
Mineral Rights(MR): The ownership, conveyed by deed, of any mineral beneath the surface
Mineral Interests(MI): An economic interest or ownership of minerals-in-place, giving the owner the right to share of the minerals produced either in-kind or in proceeds from the sale of the minerals
Mineral Rights(MR): The ownership, conveyed by deed, of any mineral beneath the surface
Mineral Interests(MI): An economic interest or ownership of minerals-in-place, giving the owner the right to share of the minerals produced either in-kind or in proceeds from the sale of the minerals
Types of Mineral Interests (MI)
When the owner of the mineral rights enters into a lease agreement or contract, two types of mineral interests are created:
1.A Working Interest (WI)
1.A Royalty Interest (RI)
When the owner of the mineral rights enters into a lease agreement or contract, two types of mineral interests are created:
1.A Working Interest (WI)
1.A Royalty Interest (RI)
Types of Mineral Interests (MI)
Royalty Interest(RI): RI is created by leasing and is retained by the owner of the mineral rights.
RI is retained by the owner of mineral rights when that owner enters into a lease agreement with another party.
RI receives a specified portion of the minerals produced, free and clear of any costs of exploring, developing, or operating the property.
Royalty Interest(RI): RI is created by leasing and is retained by the owner of the mineral rights.
RI is retained by the owner of mineral rights when that owner enters into a lease agreement with another party.
RI receives a specified portion of the minerals produced, free and clear of any costs of exploring, developing, or operating the property.
Types of Mineral Interests (MI)
Working Interest (WI): WI is created via leasing and is responsible for the exploration, development, and operation of a property.
WI owner pays all (100%) of the cost of exploring, drilling, developing, and producing the property
WI’s share of revenue is the amount that remains after deducting the share of the RI and other nonworking interests.
Working Interest (WI): WI is created via leasing and is responsible for the exploration, development, and operation of a property.
WI owner pays all (100%) of the cost of exploring, drilling, developing, and producing the property
WI’s share of revenue is the amount that remains after deducting the share of the RI and other nonworking interests.
Types of Mineral Interests (MI)
Since, RI owner is not responsible for the exploration, development, and production of a property, the interest is referred to as a non-operating or nonworking interest ( non-WI).
Since, RI owner is not responsible for the exploration, development, and production of a property, the interest is referred to as a non-operating or nonworking interest ( non-WI).
Mr. A owns MR
Mr. A leases
Property to Co. B
Mr. A = RI = 1/8
Co. B = WI = 100%7/8 revenue interest
Types of Mineral Interests (MI)
Working Interest
Undivided Interest Divided Interest
When multiple owners share and share alike, according to their proportion of ownership in any minerals severed from the ground
When specific parties own specific acreage, minerals, or equipment
Joint Working Interest
A joint working interest is an undivided working interest owned by two or more parties. Each WI accounts for its proportionate share of revenues and expenses separately ( referred to as proportionate consolidation)
1.Overriding royalty interest (ORI)
2.Production payment interest (PPI)
3.Net profits interest(NPI)
A joint working interest is an undivided working interest owned by two or more parties. Each WI accounts for its proportionate share of revenues and expenses separately ( referred to as proportionate consolidation)
1.Overriding royalty interest (ORI)
2.Production payment interest (PPI)
3.Net profits interest(NPI)
Overriding Royalty Interest (ORI)
An ORI is a non-WI created from the WI either by being retained by the WI when the WI is sold or otherwise transferred, or by being carved out. A carved-out ORI is created when the WI owner sells or transfers the ORI and retains the WI.
An ORI is a non-WI created from the WI either by being retained by the WI when the WI is sold or otherwise transferred, or by being carved out. A carved-out ORI is created when the WI owner sells or transfers the ORI and retains the WI.
Mr. A = MR
Mr. A leases
To Co. B
Mr. A = RI
Co. B = WI
Co. B transfers WI to Co. C
And retains an ORI
Mr. A = RI
Co. B = ORI
Co. C = WI
Example: Retained ORI
Overriding Royalty Interest (ORI)
In the example, if Mr. A leases its property to Co. B retaining a 1/8 RI and Co. B subsequently conveys its interest to Co. C retaining a 1/7 ORI, the costs and revenues would be shared as follows:
In the example, if Mr. A leases its property to Co. B retaining a 1/8 RI and Co. B subsequently conveys its interest to Co. C retaining a 1/7 ORI, the costs and revenues would be shared as follows:
Owner Costs Revenues
RI = Mr. A 0% 1/8
ORI = Co. B 0% 1/7 x 7/8
WI = Co. C 100% 6/7 x 7/8
Production Payment Interest (PPI)
A PPI is a non-WI created out of a WI and similar to an ORI, except a PPI is limited to a specified amount of oil or gas, money, or time, after which it reverts back to the interest from which it was created and ceases to exist. Like ORIs, PPIs are created by carve-out or by retention.
A PPI is a non-WI created out of a WI and similar to an ORI, except a PPI is limited to a specified amount of oil or gas, money, or time, after which it reverts back to the interest from which it was created and ceases to exist. Like ORIs, PPIs are created by carve-out or by retention.
Mr. A = MR
Mr. A leases
To Co. B
Mr. A = RI
Co. B = WI
Co. B transfers WI to Co.
C
And retains an ORI
Mr. A = RI
Co. B = ORI
Co. C = WI
Example: Carved-out PPI
Mr. A = RI
Co. B = ORI
Mr. D = PPI
Co. C = WI
Co. C carves out i.e, sells a
PPI to Mr. D for cash
Net Profits Interest (NPI)
The NPI is a non-WI created on onshore property from the WI.
Offshore, a NPI is the type of interest that the government, as the mineral rights owner, often retains when leasing an offshore block to a petroleum company.
Similar to a RI or an ORI except that the amount to be received is a specified percentage of net profit from the property versus a percentage of the gross revenues from the property.
NPI owners are not responsible for any portion of losses incurred in property development and operations.
The NPI is a non-WI created on onshore property from the WI.
Offshore, a NPI is the type of interest that the government, as the mineral rights owner, often retains when leasing an offshore block to a petroleum company.
Similar to a RI or an ORI except that the amount to be received is a specified percentage of net profit from the property versus a percentage of the gross revenues from the property.
NPI owners are not responsible for any portion of losses incurred in property development and operations.
Net Profits Interest (NPI)
The diagram below illustrates a NPI created onshore from the WI by carve-out:
The diagram below illustrates a NPI created onshore from the WI by carve-out:
Mr. A = MR
Mr. A leases
To Co. B
Mr. A = RI
Co. B = WI
Co. B carves out
A NPI to Co. C
Mr. A = RI
Co. C = NPI
Co. B = WI
Example: Carved-out NPI created from WI
Net Profits Interest (NPI)
The diagram below illustrates a NPI being created offshore when the property is leased by the government to an oil company:
The diagram below illustrates a NPI being created offshore when the property is leased by the government to an oil company:
Government owns MR
Government
leases to Co. B
Government = NPI
Co. B = WI
Example: NPI created from MI
Common mode of doing business in the international oil industryMany companies partner up for large-scale or for high risk venture in order to diversify, viz, good risk managementThere may be joint operations between
Industry partnersGovernment and Contractor, normally referred to as government participation
Need for a Joint Venture
Some contracts provide an option for the NOC to participate in development projectsGovt. participation contract clauses stipulate that the NOC has the right to join in development as a working interest partner sometimes after paying a prorated share of exploration costsUnder most government participation arrangements, the government is carried through exploration
Need for a Joint Venture
The key aspects are:
What percentage participation?When does the government back in?How much participation in management?What costs will the government bear?How does government fund its portion of costs?
Need for a Joint Venture
