Setting Guyana’s hydrocarbons production forecasts for lifting agreements

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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.
Production forecasts are a workmanlike description of the forecasting and reporting activities which must be performed by the operator under the lifting agreement. The lifters will require adequate notice of the expected quantity and timing of their entitlements; typically, a trunk pipeline will require at least a forecast of capacity usage one year ahead, whereas oil tankers can normally be chartered on the spot market two or three weeks in advance of loading.
In their capacity as investing parties to the joint operation, the lifters will have some control in the operating committee over the projected production schedule and may be able to adjust the production profile to suit the availability of transportation. However, the contract is likely to encourage maximum production and the host government may have preferential access to transportation capacity, enabling it to set the pace for production and evacuation of crude oil.
It is essential that the production of each type or grade of liquid hydrocarbons is separately tracked because they will be transported and marketed separately in order to preserve their commercial value. For the same reason, the operator will need to track and record each lifter’s lifting of each type and grade, because any underlift by a lifter of one type or grade will need to be compensated with an increased share of the same type or grade at a later date.
It will often be attractive for the joint venture to invest in oil storage at the relevant terminal or entry to the trunk pipeline. This will give the parties a buffer against unexpected reductions in reservoir production rates, interruptions in pipeline capacity and delayed arrival of tankers, and in some cases, the opportunity to adjust loading windows to take advantage of fluctuating market prices. Recalling that with the Right And Obligation To Take In-Kind agreement, the parties lift their entitlements separately and are competing sellers in the relevant oil markets; therefore, any storage or line pack to which the joint venture has access must be accounted for separately, per lifter, especially if the storage or line pack is located downstream of the delivery point. However, by tracking each party’s usage of that storage or line pack accurately, it will be possible for the operator to allow for overlifting and underlifting and adjust lifting schedules for unforeseen circumstances without having to change any other lifter’s scheduled lifting (Fowler 2018).
The profile and agreement on the Production Forecasts must be drafted so it applies to all hydrocarbons, crude oil, and natural gas. That article should be detailed, at least in relation to forecasts of production; it should also address the reporting of previous periods’ production for fiscal purposes. In reality, the operational requirements for production forecasting for crude oil and natural gas are likely to be different; most downstream natural gas transportation and marketing procedures would expect lifters to report a day ahead natural gas volumes, whereas crude oil pipelines and marine terminals will usually finalise lifting schedules one month ahead, with provision for real-time adjustments as necessary.
The Production Forecasts
  1. No later than the first day of the calendar month preceding the calendar month in which production operations are scheduled to begin, and afterwards, on the first day of each calendar quarter, the operator shall provide the parties with a production forecast. A “Production Forecast” shall consist of the estimated average daily rate of production of hydrocarbons of each type and grade for each calendar month during each of the next succeeding two calendar years and, if there are multiple delivery points, the estimated quantities to be delivered to each delivery point.
  2. If at any time the operator becomes aware that a change has taken place or will take place that in operator’s judgment has caused or will cause a variance of ten percent (10%) or more from any figure appearing in the latest production forecast, the operator shall promptly notify each party of the following:
  • the reason for such variance, its estimated magnitude, the date, and time the change is expected to begin, and the estimated duration thereof; and
  • the operator’s revised production forecast for the period covered by the current production forecast based on such variance, along with all other requirements for a production forecast under condition A above.
  • The production forecast delivered under the agreed terms of development and the production forecasts under this article are only estimates. actual production may vary based upon reservoir performance, variations in well deliverability and the composition of the produced substances, actions of the government and other third parties, maintenance and repair obligations and force majeure, among other factors.
These conditions of the production forecasts are for all types and grades of hydrocarbons. It requires the Operator to provide a medium to long-range forecast, reaching up to three calendar years, and providing a month by month estimate of production by type, grade, and delivery point.
It is easy to confuse the Production Forecasts the operator provides under this article and the estimate of Total Available Production in relation to crude oil and natural gas. The estimates of total available production are short to medium-term and intended to enable the lifting parties to program liftings by oil tanker or rail car and book the entry capacity into a downstream gas transmission system. The Production Forecasts provided can be mid to long-term forecasts which enable the parties to take strategic decisions on the amount of transportation capacity they wish to commit to and book, bearing in mind that the relevant transportation systems are likely to require payment in advance and/or operate on ‘ship or pay’ terms.
The forecast is given in units of average daily production per type of hydrocarbon, assuming a flat rate of production in every month; to some degree, the operator will, therefore, provide a profile over the next two calendar years, reflecting the state of the production profile in the overall life of the reservoir.
The operator must issue a revised production forecast if it considers that circumstances have or will change its latest production forecast by 10% or more. that revision must also explain the reason for the change in production forecast, its magnitude and how long it will last.
Given the potential financial commitment each party makes in booking downstream transportation, it is important that the production forecast remains up-to-date and accurate within the mentioned 10% tolerance. if the downstream transportation market is tight for capacity and ship or pay commitments are significant, the parties will want an early warning if the reservoir’s expected production will be reduced so that the parties can find other uses for transportation capacity they have paid for and mitigate any ship or pay charges. The operator is required to explain any significant variance; this is essential for the parties to take a view as to whether the variance will increase or decrease or be in some way postponed.
As noted above, the parties make significant commercial commitments in the light of the operator’s production forecasts and the parties can incur substantial losses by booking and paying for transportation capacity they are unable to use. Further, without making the point specifically in terms of an exclusion of liability, that the operator cannot be held responsible if the forecasts prove not to be accurate because of the reasons listed and many others. It would enhance the clarity of the agreement if it expressly excluded the operator’s liability for the Production Forecasts.
It is worth pointing out that many joint operating agreements will provide that the hydrocarbon production profile is in any event proposed by the operator and approved by the operating committee as part of the annual work program and budget process. The production profile will be used by the parties as the basis for the negotiating strategy for natural gas sales, because it will help them decide how much natural gas they are prepared to commit to sell to their buyer on a firm basis and the volume of natural gas they wish to sell on an interruptible basis, taking into account the reliability of the production profile. Again, it is essential that each party understands that the commercial risks it takes in reliance on the production forecasts are theirs alone and cannot be ‘socialised’ to other parties by invoking the operator’s liability for any inaccuracy in the forecasts.
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