Friday, September 29, 2023

Features for Guyana’s crude oil sale delivery point

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Bobby Gossai, Jr.
Bobby Gossai, Jr.
Bobby Gossai, Jr. is currently pursuing the Degree of Doctor of Philosophy in Economics at the University of Aberdeen with a research focus on Fiscal Policies and Regulations for an Emerging Petroleum Producing Country. He completed his MSc (Econ) in Petroleum, Energy Economics and Finance from the same institution, and also holds an MSC in Economics from the University of the West Indies. Mr. Gossai, Jr.’s professional experiences include being the head of the Guyana Oil and Gas Association and senior policy analyst and advisor at the Ministry of Natural Resources and Environment.
The Government of Guyana Agreement may identify the Delivery Point or Points, putting the actual location of the Delivery Point beyond discussion. However, the investing parties should also agree to the procedures for measurement and calibration of measurement equipment at the delivery point, any fallback mechanism of measurement, access to the delivery point for inspection and audit rights in respect of measurement records. Ideally, the lifting agreement should also identify the fiscal documents to be issued by the operator, recording the quality and quantity of crude oil passing the delivery point.
If crude oil is to be produced from an exploitation area, the parties shall in good faith, and not fewer than six (6) months before the anticipated first delivery of crude oil, as promptly notified by the operator, negotiate and conclude the terms of a lifting agreement to cover the offtake of crude oil produced under the contract. When there is a Government of Guyana Oil & Gas Company, then it may if necessary and practicable, also be a party to the lifting agreement; if the Government Oil & Gas Company is a party to the lifting agreement, then the parties shall endeavour to obtain its agreement to the principles set forth in the agreed terms of the delivery point(s). Consistent with the development plan and subject to the terms of the contract, the lifting agreement shall make provision for:
  1. The Delivery Point.
  2. Operator’s regular periodic advice to the parties of estimates of Total Available Production for succeeding periods, quantities of each type and/or grade of crude oil forecast to be produced consistent with the projected production schedule approved as part of the approved work program and budget and each party’s entitlement for as far ahead as is necessary for the operator and the parties to plan lifting arrangements taking into account each such party’s stock balance at the beginning of, and scheduled liftings during, each period. Such advice shall also cover, for each type and/or grade of crude oil, the total available production, and deliveries for the preceding period, and overlifts and underlifts;
  3. Nomination by the parties to an operator of acceptance of their entitlements for the succeeding period. Such nominations shall in any one period be for each party’s entire entitlement during that period, subject to overlifting limits, underlifting limits, operational tolerances, and minimum economic cargo sizes or as the parties may otherwise agree;
  4. Timely mitigation of the effects of overlifts and underlifts and any related re-allocation of cost hydrocarbons and profit hydrocarbons;
  5. If offshore loading or a shore terminal for vessel loading is involved, risks regarding the acceptability of tankers, demurrage and (if applicable) availability of berths;
  6. Procedures to make available to each party its nominated quantities of each type and grade of crude oil, and to ensure that each party takes delivery as it is made available in each period its respective entitlement of grades, gravities and qualities of crude oil from each exploitation area in which it participates;
  7. To the extent that distribution of entitlements on such basis is impracticable due to availability of facilities and minimum cargo sizes, a method of making periodic adjustments; and
  8. The right of the other parties to sell an entitlement that a party fails to nominate for acceptance under the terms of the Lifting Nomination or of which a party fails to take delivery, in accordance with applicable agreed procedures, provided that such failure either breaches operator’s, or such party’s, obligations under the contract, or is likely to result in the curtailment or shut-in of production. Such sales shall be made only to the limited extent necessary to avoid disruption in joint operations. The operator shall give all parties as much notice as is practicable of such situation and that a right of sale option has arisen. Any sale shall be of the unnominated or undelivered entitlement (as applicable) and for reasonable periods of time (in no event to exceed twelve (12) months). Payment terms for production sold under this option shall be established in the lifting agreement. If a lifting agreement has not been entered into by the date of first delivery of crude oil, the parties shall nonetheless be obligated to take and separately dispose of such crude oil as provided in terms of the article on Right and Obligation To Take In-Kind and in addition shall be bound by the principles outlined in the article on the Disposition of Crude Oil until a lifting agreement is signed by the parties.
The considerations here begin on the same terms as those option for the Disposition of Crude Oil; it also provides for the Parties to negotiate a lifting agreement, starting six months prior to the anticipated date of first oil. As such, it contemplates the Government Oil & Gas Company being party to the agreement, recognizing that the investing parties will not necessarily succeed in persuading it to join the agreement without some amendment to the principles in the disposing the crude oil or at all (Fowler 2018).
However, instead of imposing a Model Lifting Agreement as the starting point for those negotiations, and as the default agreement to apply from first oil pending finalization of the specific agreement, these features sets out principles on which the lifting agreement should be based. The eight principles above (A – H) are high level and sufficiently abstract to be transposable to almost any crude oil lifting scenario. Therein lies the difficulty – the principles are insufficiently detailed to provide a workable alternative to a lifting agreement. Principle H provides that the parties are obliged to lift their respective Entitlements to Crude Oil even if a final lifting agreement has not been agreed; the implication is that lifting is expected to happen in the absence of such agreement. Principle H goes on to specify that these values will apply to bridge the gap until the lifting agreement is agreed. As with the considerations for the Disposition of Crude Oil, the prospect of an almost inevitable dispute arising from trying to implement these principles in order to manage first oil from each field may be sufficient to compel the parties to resolve their differences and to finalise a specific lifting agreement on time.
In reality, the principles comprise a sensible and balanced list of issues which the lifting agreement must address, without answering the underlying commercial questions they raise. This option sets out specific objectives and principles for the lifting agreement between the investing parties of an exploration and production oil field.
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