Considerations for an oil and gas lifting agreement for Guyana
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:
Will the hydrocarbons be lifted by marine tanker or pipeline, and how much of the relevant infrastructure is presently available?
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?
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?
This latter point is vital – if maximum production is capped by the maximum processing capacity of the production facilities, any failure to lift by one of the joint venture parties will have a significant impact on all the joint venture Parties because it may result in deferral of production until the first available ullage in the production facilities capacity, possibly years later, significantly deferring income. If on the other hand, the operator can respond to a failure to lift simply by increasing production levels as soon as the defaulting party is able to lift, the impact on other joint venture parties may be minimal and the overall cash flow for the joint venture scarcely impaired. These and other factors should influence the investing parties in selecting the drafting options when agreeing to the disposition of hydrocarbon production in the production phase of a commercial discovery.
If the terms of the disposition of crude oil are treated as providing drafting starting points, it serves a proper purpose. Unfortunately, the alternatives also purport to stand in for a lifting agreement in the event one has not been agreed by the time of first oil. This element tries to demonstrate that this is not realistic. In a sense, it might create false comfort for drafters encouraging them to believe that the alternatives are acceptable and fit for purpose to enable first oil to take place whilst lifting agreement negotiations continue. If the lifting agreement negotiations continue beyond first oil, then the implications are clear – the negotiations started too late to address the difficult issues involved.
Perhaps one alternative consideration could be for the investing parties to agree to the lifting principles at the time that they approve the appropriate Development Plan. After all, that Development Plan will inevitably describe the chosen transportation options for the delivery of crude oil to international markets. That, in turn, will define many of the key terms for the lifting agreement, enabling the Parties to refresh whatever terms are set out in the operating contract and to put in place specific principles relevant to the chosen transportation mechanism, which can, in extremis, stand in for a fully termed lifting agreement. In relation to the Disposition Of Natural Gas, this is exactly what should be proposed for the agreement on crude oil to be produced from an Exploitation Area, in that it shall be taken and disposed of in accordance with the rules and procedures set out in the disposition clauses. Effectively, the parties in Guyana’s offshore development should begin negotiating the fully termed lifting agreement one year prior to expected first oil, from each field development.
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