Introduction to Upstream Oil and Gas Training I4TH 16TH May 2013, Intercontinental Hotel, Nairobi

Basic concepts of acreage acquisition and legal aspects

Philip M. Tsar
(Petroleum Engineer National Oil Corporation - Kenya)
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Scope

Basic concepts of acreage acquisition and legal aspects: Constituting of exploration groups, Acquisition of exploration acreage (permits, gazettals, open acreage, bidding, work programs, farmins, joint ventures)

Background & Introduction

Background of Legal and Regulatory Framework

Kenya has been exploring for oil since 1937 Current framework (Petroleum Act and Model Production Sharing Contract (PSC)) was developed prior to discoveries; Model PSC is oil-centric 2012 discoveries in Turkana and gas-prone offshore highlighted need to modernize existing framework GoK and World Bank engaged Hunton & Williams and Challenge Energy (Consultant) to review and provide guidance for updating the existing framework

1. Petroleum Sector StructureLicensing/Contract Award

Current ApproachDirect Negotiation

Minister publishes block availability Contractors submit applications First come, first served negotiations with Contractors

Appropriate prior to significant discoveries due to relative lack of competition Recommended ApproachPublic Tendering

Following discoveries, more Contractors have become interested More competitive environment makes public tendering viable Government likely able to secure more favorable terms through competition Recommend direct negotiation still be available in limited circumstances (e.g., failed tender due to lack of bids)subject to safeguards against corruption or the appearance of corruption (e.g., public notice prior to commencement of direct negotiation) Recommend bid parameters include cost petroleum cap and RFactor sharing percentages. Recommend that bidders be required to pass a pre-qualification stage prior to bidding
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2.How exploration groups are put together joint ventures, floats, operators, non-operators

A JV- is a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets. With individuals, when two or more persons come together to form a temporary partnership for the purpose of carrying out a particular project, such partnership can also be called a joint venture where the parties are "co-venturers". The venture can be for one specific project only when the JV is referred to more correctly as a consortium(as the building of the Channel Tunnel) or a continuing business relationship. The consortium JV (also known as a cooperative agreement) is formed where one party seeks technological expertise or technical service arrangements, franchise and brand use agreements, management contracts, rental agreements, for one-time contracts. The JV is dissolved when that goal is reached.

Joint Ventures

2.How exploration groups are put together joint ventures, floats, operators, non-operators

JV Cont.

There are other types of companies such as JV limited by guarantee, joint ventures limited by guarantee with partners holding shares

Floats

Some companies capitalize on lucrative market conditions for a share issue," The money raised is used to fund the capital needs of its exploration and Appraisal arm

2.How exploration groups are put together

joint ventures, floats, operators, non-operators

Operators

It i s common practice i n the oil and gas industry for joint owners of working interests to designate one owner as the "operator" of their properties . For this purpose "operator" is considered to be the person who bears the most responsibility for the management and day to day activities of drilling, completing and operating the wells . Normally, the operator performs his/her tasks and duties in accordance with an operating agreement that all joint owners have endorsed. The operator manages the drilling, completing, and operating efforts on the property; pays all expenses ; and bills each joint owner for his/her share of the expenses .

The operator is usually from one to six months behind in billing to the several joint owners .

2.How exploration groups are put together joint ventures, floats, operators, non-operators

Non Operators

An agency relationship exists between the operator and the non operator, and the timing of the deduction to the non operator is an important item.

How companies acquire exploration acreage

permits, gazettals, open acreage, bidding, work programs, farm ins, joint ventures

Permits

(law) a document that states some contractual relationship or grants some right; licence to exploration block.

Open Acreage

Under this policy, companies can choose any block for offer at any time without waiting for the regular bids rounds and blocks can be awarded based on the best bid at any time of the year. Bidding is an offer (often competitive) of setting a price one is willing to pay for something. A price offer is called a bid. The term may be used in context of auctions, stock exchange, card games, or real estate.
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Bidding

How companies acquire exploration acreage

permits, gazettals, open acreage, bidding, work programs, farm ins, joint ventures

Gazettals

Encouraging petroleum exploration is a high priority for the GoK. The annual release of onshore/offshore petroleum exploration acreage should be key part of the GoKs strategy to further petroleum exploration in Kenyas blocks. The release enables industry to undertake longer term planning, provides certainty in the release process, ensures access to comprehensive pre-competitive geological and geophysical data, and ensures the provision of quality information about issues that may impact on successful applicants.

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How companies acquire exploration acreage

permits, gazettals, open acreage, bidding, work programs, farm ins, joint ventures

Farm ins

The oil industry term for deals where a company, not at present a licensee on a particular licensed area, can acquire an interest from one of the existing licensees. The transfers of interest are generally made in return for exploration or other commitments, for exchanges of licence interests, or for cash". Farming-in is a way of acquiring a licence interest and, conversely, farming-out is a way of disposing of a licence interest

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How companies acquire exploration acreage

permits, gazettals, open acreage, bidding, work programs, farm ins, joint ventures

Joint Ventures

A JV is a cooperative enterprise entered into by two or more business entities. Sometimes the JV creates a separate corporation, ltd liability Co, or partnership. In other cases the individual entities retain their individuality and they operate under a JV agreement. In any case the parties in the JV share in the management, profits and losses, as per the contract. JV ventures are often entered into for a single purpose - a production or research activity but may also be formed for a continuing purpose.

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How companies acquire exploration acreage

permits, gazettals, open acreage, bidding, work programs, farm ins, joint ventures

Work Program s

If the application is for additional acreage for a production licence in the initial phase, the remaining work programme and duration must be given and it must give a short description of completed, ongoing and planned work in the existing production licence, and how the planned work will include the additional acreage. In those cases where there are no remaining work commitments in the existing license which will involve exploration/drilling for resources in the additional area, a work programme must be proposed for the additional acreage which includes a plan for exploration and/or exploitation of the resource.

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Thank you !!

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