In offering an exploration opportunity in a block, the motivation of the government largely is to encourage investment in the form of exploration activities, such as shooting seismic and exploration drilling. The prime objective of the oil company is to discover commercial hydrocarbons from which it can create profits by subsequent development, and it, therefore, considers the prospectivity of the block along with the costs of both exploration and future development.
Parties in an oil field development do necessarily pay attention to securing access to liquid hydrocarbons and natural gas derived from each Exploitation Area in which it participates. Those hydrocarbons are the dominant source of its cash flow and profit from the joint venture; up to the point at which the investing parties separately and individually take custody of their entitlement to hydrocarbons, as it is in the case of Guyana, they rely upon the operator to capture and deliver their entitlement to the Delivery Point.
The section of a lifting agreement which addresses the disposition of hydrocarbon production in the production phase of a commercial discovery is significant because it defines in loose terms one of the two key obligations owed by investing parties (both companies and the government) to each other; save for sending representatives to operating committee meetings, voting and negotiating ancillary documents for the joint venture, non-operators owe only two significant obligations to their counterparties – to pay cash calls and to lift their respective Entitlements to Hydrocarbons.
Whilst the parties’ obligations under Right and Obligation to Take in Kind section of an agreement are limited to disposing of their respective Entitlements, their ability to pay joint venture cash calls is to a greater or lesser extent driven by their ability to market and monetize their entitlement profitably, at least during the production phase of operations. The ability of each party to obtain sufficient transportation and processing capacity to enable them to access hydrocarbon markets is vital to the sustainability of the joint venture. If the relevant Exploitation Area is located in a remote region at some distance from existing transportation and processing infrastructure or, where such infrastructure is available, but it has no spare capacity, such access cannot be taken for granted. If some of the joint venture partners have access or own relevant transportation and processing capacity rights, and other joint venture partners do not, the potential for future misalignment, and in due course for default by joint venture partners lacking such access, should not be ignored by the joint venture as a whole and can be addressed to some degree by the operating agreement and its associated hydrocarbon lifting agreements (Fowler 2018).
That section on the Disposition of Crude Oil of such an agreement must provide a series of options relating to liquid hydrocarbon lifting. These options vary from the simplest – an obligation to negotiate and agree on such agreements prior to the commencement of production – to the most sophisticated, requiring the parties to implement a Lifting Agreement save to the extent they are able to agree to alternative provisions prior to first oil.
It is nearly an impossible task to guess which of these options is most appropriate at the outset of the joint venture when the nature of the hydrocarbon reservoir is scarcely known, even if one exists. Nevertheless, some intelligent questions can be asked when drafting and adapting the Lifting Agreement for use:
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Will the hydrocarbons be lifted by marine tanker or pipeline, and how much of the relevant infrastructure is presently available?
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Given the minimum size of a potentially commercial discovery of hydrocarbons and the rate at which that must be produced to achieve an acceptable return on investment, is there sufficient capacity in the present transportation infrastructure in the region or would new infrastructure have to be built, subject to the impact of that investment on the economics of such discovery?
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Importantly, is it possible to say whether production will be constrained by reservoir pressure and hydrocarbon availability or by the maximum processing capacity of the production facilities?