unitization agreements: a primer on the legal...
TRANSCRIPT
Unitization Agreements:
A Primer on the Legal Issues for Unitization of the
Brazilian Pre-Salt
International Workshop on Microeconomics applied to
the Energy Industry at the Graduate School of
Economics of Fundação Getulio Vargas
Rio de Janeiro
December 15, 2011
Andrew B. Derman
Thompson & Knight LLP
© 2011
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Overview
Evolution of unitization
Brazilian law on unitization
Scope and complexities of pre-salt unitization
Unitization issues presented by pre-salt
Concluding thoughts
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3
What is Unitization?
A “field” straddles two blocks
A B
4
Evolution of Unitization
Hydrocarbon formation does not correspond to surface boundaries
Boundary A Boundary B
5
Evolution of Unitization
Separation of ownership of surface and hydrocarbons
(“law of capture”) creates competitive drilling
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Evolution of Unitization
Competitive drilling created unintended
consequences
► Unnecessary wells
► Redundant infrastructure
► Premature depletion of reservoir pressure
Governments responded with “pooling” and
“unitization” regimes
► Pooling is terrain-specific
► Unitization is reservoir-specific
7
Evolution of Unitization
Unitization generally ensures
► Optimum and efficient resource development
► Fair and equitable sharing of costs and revenues
► Best use of available data
► Avoidance of “rule of capture” disputes
8
Brazilian Law on Unitization
“In cases of a field extending over adjoining blocks,
operated by other concessionaires, the parties
involved shall agree on the splitting of the
production.”
Absent agreement, arbitrator determines how rights
and obligations are “equitably appropriated, based
upon applicable legal principles.”Article 27 of Law 9.478/1997
ANP acts as concessionaire for un-awarded
adjacent blocks under which a reservoir extends
ANP opens adjacent tract for bidding
2006 Model Concession Agreement
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Brazilian Law on Unitization
New Regulations
► Pre-Sal Petroleos (PPSA) given authority to contribute
“open” blocks to unitization
► ANP given authority to “force” unitization by canceling a
production contract if contractors refuse to agree upon
unitization terms
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New System
CNPE MME
ANP
NSF
Consortium
PPSA InvestorPETROBRAS
At Least
30%
Blocks
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Unitizing the Pre-Salt
Scope and Complexities
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Scope and Complexities of Unitizing the Pre-Salt
Estimated size
► Some 800 km in length and up to 200 km in width
► Total area of 122,00 km2
Production - 2020
► Double Brazilian production
► Petrobras global production @6MM bopd
Reserves
► 14 billion boe
► 50 to 100 billion boe in Pre-Salt
Pre-Salt Concessions
► 28% of the 149,000 km2 under concession
► 85% success rate
Petrobras Capex Budget to 2020
► $111.4 billion on current pre-salt concessions
► $500+ billion
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Scope and Complexities of Unitizing the Pre-Salt
Effect of recently passed legislation
► New state entity - Pre-Sal Petroleos (PPSA) - will be a party
to new production sharing contracts (PSCs) without any
risk or responsibility
Golden voting share
Effect of proposed legislation
► Introduces PSCs
► Petrobras must have at least 30% interest in future PSCs
Contracted company explores at own risk with
reimbursement of exploratory, development and production
costs
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14
Unit Area
Single Formation
A B
Multiple Formations
A B
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Unit Area
Multiple Formations
A B
Multiple Formations plus future expansions with
communication
A B
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Unit Area
A B
All current and future
formations
A B
Multiple Formations plus future expansions
without communication
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Unitization Issues Presented by Pre-Salt
• Blue dotted line represents the border of the pre-salt
• Nine lettered blocks from A to I
• Four numbered reservoirs from 1 to 4, colored in red
• Reservoirs 1, 2, and 3 have been discovered; Reservoir 4 has not.
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Pre-Salt Unitization Issues
“Unit Area”
► What will be the areal boundary for the area?
► How many units initially will comprise the pre-salt?
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Pre-Salt Unitization Issues
“Unit Interval”
► What depths will be included in the unit?
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Pre-Salt Unitization Issues
•Unitization of Reservoir 3 - overlays Blocks C and F
•Group interest is a party’s respective interest in the joint operating agreements
•Tracts are those portions of the reservoir underlying each block
•40% of the reservoir underlies Tract C and 60% underlies Tract F
•A party’s unit interest = group interest -x- tract interest
Ownership of “Unit Interests”
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Determination of Unit Interests
Alternatives
► Unitized substances in place
► Economically recoverable reserves
► Acre-feet of reservoir rock or pore space (U.S.)
► Surface acreage
► Water depth
► Complex formula with multiple factors may be used
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Unitization - Issues
Common Data Base
Ownership Interest
Joint Marketing
Secondment
► Joint Staffing
Decommissioning
Assignment
Redermination
Expansion
Non-Unit Operations
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Pre-Salt Unitization Issues
Non-unit operations
► To what extent will non-unit operations be allowed to use unit
assets?
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Non-Unit Operations
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Non-Unit Operations
Priority of unit operations
Protection of unit reservoir
Use of unit property where such use does not
interfere with unit operations
► Exchange of value for use?
Takeover of non-producing unit wells for non-unit
operations, or non-producing non-unit wells for
unit operations
► Approval procedure
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Pre-Salt Unitization Issues
Expansion and redetermination of the unit
Expansion addresses changes in the size of the unit area
or unit interval
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Pre-Salt Unitization Issues
Three possibilities for expansion
► Change to the size of the existing unit area or unit interval
Requires unanimous agreement
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Pre-Salt Unitization Issues
Three possibilities for expansion (cont’d)
► Discovery of a reservoir within a group’s contract area that is
in pressure communication with the unitized reservoir
New discovery becomes part of the unit upon written request
after having received approval by the normal passmark vote
under its joint operating agreement
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Pre-Salt Unitization Issues
Three possibilities for expansion (cont’d)
► Discovery of a reservoir outside of the existing unit area or
unit interval
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Pre-Salt Unitization Issues
Redetermination is the process of recalculating the parties’
tract participations and their unit interests
Basis for redetermination
Number of redeterminations (0-?)
Timing of redetermination
Approval of redetermination
Voluntary agreement (unanimous, or near-unanimous)
Expert resolution
“Pendulum arbitration”
Arbitration/Litigation
Penalty for calling frivolous redetermination
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Unitization & Redetermination
Development initiated 1975
Unit production start-up 1978
First redetermination 1983
Second redetermination 1988
Projected field abandonment 1999
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Unitization & Redetermination
64%
36%
Group A Group B
70.7%
29.3%
Group A Group B
56.9%
43.1%
Group A Group B
Initial Unitization Split First Redetermination Final Redetermination
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Unitization Agreement
Separate Unit and Unit Operating Agreements?
► Allows submission of a short, general agreement to the Government
► Unit Operating Agreement amendments may not require Government approval
A single Unit and Unit Operating Agreement?
► One comprehensive agreement
► Looks like a more detailed JOA
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Attachments
Exhibit A - Group Interests, Tract Participations and Unit Interests
Exhibit B -
► Part 1: Unit Area Coordinates
► Part 2: Unit Area Map
► Part 3: Unit Interval Definition
Exhibit C - Unit Accounting Procedure
Exhibit D: - Decommissioning Procedures
Exhibit E: - Redetermination Procedures
Exhibit F - Redetermination Technical Procedures
[Exhibit G: - Contract Amendment - Tract A]
[Exhibit H: - Contract Amendment - Tract B]
Exhibit I: - Pre-Unitization Expenditures
Exhibit J: - Existing Data
Exhibit K: - Existing Facilities
Exhibit L: - Existing Joint Operating Agreement Work Programs and Budgets
Exhibit M: - Existing Joint Operating Agreement AFEs
Exhibit N: - Existing Contracts
Exhibit O: - Unit Development Plan/Draft Work Programs and Budgets
[Exhibit P: - Lifting Procedure [NOTE: A model Lifting Procedure may be acquired from the AIPN]]
[Exhibit Q: - Production Handling Agreement] [NOTE: See Article 3.7]
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Unitization AgreementScope
The development and operations of the blocks
Production, processing and transportation to the Delivery Point
Rules relating to non-unit operations
Possible joint marketing of production
Expansion (and contraction) of the unit
Redetermination
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Unitization Agreement
Operating Committee
Akin to a Board of Directors
Approves Work Program and Budget
Approves Development Plan
Oversight of operations and joint marketing
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Unitization AgreementVoting Procedure
Passmark vote (to be defined)
Unanimous vote (could address the following)
► Termination of Unit and the UOA
► Amendment to the UOA and the Development Plan
► Decommissioning
► Expansion or contraction of the Unit
► Third Party use of Unit Facilities
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Unitization AgreementVoting Procedure
What data should be contributed to the Common
Database?
Approval of Work Programs and Budgets
Expansion of unit
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Unitization AgreementUnit Operator
The Unit Operator has duties, responsibilities and
liabilities similar to a JOA
Interplay JOAs with UOA
► For example, how to handle HSE standards?
Removal and appoint of a successor Operator
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Unitization Agreement
Exclusive Operations
Are non-consent and sole risk (exclusive
operations) permitted?
Generally, not
If so, under what circumstances?
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Unitization Agreement
Non-Unit Operations
Each block has the rights over acreage in the block
that is outside the unit area
Coordinate operations
In the event of a conflict, unit operations prevail
Unit Operating Committee must approve
penetration of a unit field
Use on non-unit property
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Unitization AgreementAssignment
Assignment to include Contract, Unit Property, Unit Facilities and Unit Agreement
Assignment to an Affiliate
Assignment to a Third Party► Party Approval
Security
► Government Approval
► Payment of all transfer fees by assignor / assignee
► Mortgages, pledges and encumbrances allowed
► Preferential Purchase Right
Coordinate with JOA
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Unitization Agreement
Dispute Resolution
Interplay with JOAs
Arbitration
► Venue
► Administrative entity
Governing law
► Texas
► New York
► English
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Pre-Salt Unitization Issues
Governance of the unit
► Unit operating committee
► Role of Pre-Sal Petróleos (PPSA)
► Budgetary controls and rights
► Sole risk operations
► Production sharing contract vs. concession contract
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Concluding Remarks
Unitization is inevitable in the pre-salt
An effective unitization process can further efficient and
cost effective operations which could be worth many
billion of dollars
Parties should begin planning for the unitization process
Andrew B. Derman
1722 Routh Street
Suite 1500
Dallas, Texas 75201
214.969.1307