Contracts Regulations

Imagine that you are an operator of oil company ..

After looking at possible places where we drill our first wildcat well based on data we gathered, processed and interrupted.
Having located some interesting possibilities in the exploration of sedimentary basins, it’s now time for you as the petroleum engineering operator to lease a track of land that would give you permissions from the owners to actually work on the site.
You’ll need to be able to conduct tests and if signs are positive, you’ll need to be able to develop the area.
The first thing you have to do is to get signed agreements so you’ll be assured of receiving your profits if there are any.

As an operator, you represent three major oil companies:

  1. Imdependent oil and gas company :

    Non-state owned /private/ non-integrated (they receive nearly all their revenues from oil and gas production).

  2. International oil company (IOC) :

    Non-state owned /private/ integrated.
    Together IOC’s control 6% of the world’s oil reserves .
    Examples: Exxon Mobil ,Shell-BP-Chevron ,Conoco phillips-Total

  3. National oil companies (NOC):

    State owned.
    They control 88% of world’s oil reserves.
    Unlike the independent and international companies, they rarely work outside their countries borders.
    Examples: Adnoc –Pemex-Petrochina-Statoil.

Host countries realize that they need the IOC as much as IOC needs the you can say that relation between host countries or NOC’s and IOC’s can be described as:


    Host countries needs IOC’s with its newer technologies for the long term success of oil and gas industry and IOC’s needs the oil deposits of the host.


    meaning better results when working together.
So what are the incentive and offers?

Host countries incentives:

  1. IOC’s technical and managerial expertise.
  2. Access to IOC’s finances to pay for oil profits.
  3. High paying jobs for its citizens.
  4. Social contracts for developing infrastructure.
IOC’S offers:

  1. Technical and managerial expertise.
  2. Risk capital for percentage of profits.
IOC’S incentives:
  1. Permission to display physical presence.
  2. Political stability.
    • The legal requirements to develop a track of land are different in different parts of the world.
    • For example: in USA and some parts of Canada, land rights ((surface and subsurface (mineral rights) )) can be owned by private individuals.
    • In the rest of the world land rights is owned by governments of those lands.
    • So if you plan to drill in USA or some parts of Canada you’ll need to sign leases with owners who can be :
      1. individuals
      2. corporations
      3. governments

    • Elsewhere you’ll need to sign contracts with governments.
Terms and conditions you have to know when signing a contract :
  1. leases for minerals rights imply surface access .this means you are allowed to access to well site and can build roads and do other activities allowing drilling of site.
  2. period of time you’re allowed to drill the well or wells is (primary term).it means you must establish commercial production within that period of time or you’ll lose the lease.
  3. the lease also conveys to you the right to continue production until the well is abandoned.
  4. limit the number of wells to be drilled (drilling obligations).
  5. you’ll pay the owners signature bonus (agreed amount of money at the time of signing).
  6. once the well starts to produce, the owners will receive a royalty (financial return that the owner receives which is a percentage of the revenue of each barrel of oil or cubic feet of gas sold).
  7. if you run out of money and stop work or break the terms of the lease for any reason, the owners can cancel your contract.
  8. the rule of capture insures that you can produce oil or gas even if it crosses the (property line) from other’s land as it migrates into your well.
  9. regulations for slanted holes and offset drilling rule: you can’t drill into other’s property.

  10. you have to insure that health and safety of the workers and people living near drilling site are protected.
  11. you have to follow the rules of some regulatory bodies, these agencies have the right to monitor your drilling activities follow approved government policies and best practices to maximize recovery of hydrocarbons.
Once you recieve the lease there are some financial options:
  1. you can develop the property alone.
  2. if financing it is very high, you can have a partner.
  3. having pressing obligations and can’t devote time to explore this site, you might want to seek a farm-out (let someone else develop the site but you keep financial interest).
  4. drilling funds can also be raised from individuals as limited partners.
There are basically three types of contracts that are currently in use:
  1. Concession Contracts :
    • It has been used over the years throughout the world.
    • In this type of contract, the owners of the land give you the right to explore and produce the field and in return you give them a percentage of the profits.
    • Once you have the concession, no one else can drill the area covered by your concession.
    • As operator, you make all the investment and engineering decision and when production begins you pay a royalty to the owners of the land and mineral rights.
    • A royalty interest in this case is a payment from the operators to the owners of the land from revenues for each sold barrel of oil or cubic feet of gas.
    • The government also imposes taxes on you on your share of profit (are what is left after he has paid all the expenses)
    • Now they are used primarily in USA, Canada and North Sea.

  2. Production-sharing Agreements:

    • It’s favorite in the rest of the world.
    • In this type, you still make investment and engineering decision.
    • Also you must give a portion of the production to the owners; this portion goes directly to the NOC’s companies who need the oil and gas for its own refineries.
    • In other words, once production starts you take agreed upon proceeds until you are paid off your investment costs.
    • Once these are paid, you split the production with the owners according to the terms of agreements.
    • The government can also tax you on your profits.

  3. Service Contracts :

    • In this type, you are hired to perform service only and you are called operating contractor.
    • You have a few decision making powers and you work under a close supervision of an NOC of the host country so you must follow the orders of the NOC.
    • You may offer suggestions but you don’t make any decisions about how the well is explored or drilled.
    • So unlike the two other types of contracts, you don’t make money as much as them but you risk very little and you get paid even if there is no oil or gas.

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