Unitizing oil and gas fields around the world: a comparative analysis of national, laws and private contracts.

Houston Journal of International LawVol. 28 Nbr. 1, September 2005

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International Energy Issue

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Unitizing oil and gas fields around the world: a comparative analysis of national, laws and private contracts.

I. INTRODUCTION: OVERVIEW AND SCOPE OF ARTICLE A. Introduction B. Legal Framework for Unitization: Overview C. Scope and Methodology 1. The Countries in the Survey 2. Methodology: Twelve-Country Survey D. Definitions E. Unitization: A Primer 1. The Unit Concept 2. In the United States 3. Outside the United States II. SURVEY AND ANALYSIS OF COUNTRY LAWS, REGULATIONS, AND MODEL CONTRACT PROVISIONS A. Summary Overview of the Twelve-Country Comparative Analysis B. Absence or Existence of Unitization Provisions C. Circumstances Triggering Unitization D. Voluntary or Compulsory Unitization E. Purposes of Unitization F. Oil versus Gas G. Area, Depth, and Number of Fields H. Factors Determining Unit Interests or Redetermination I. Recognition for Royalty and Fiscal Purposes J. Recognition for Purposes of Perpetuating the Contract K. Consequences of Failure to Unitize or Secure Approval of Unitization Plan L. Procedures and the Approval Authority M. Unique Provisions 1. Appointment of the Unit Operator 2. What the Unitization Agreement Must Contain 3. Joint Exploration and Drilling under a Service Contract 4. Provisions Dealing with International Boundaries N. Conclusions and Best Practices III. OTHER CONTRACTS RELEVANT TO THE LEGAL FRAMEWORK OF UNITIZATION A. Operating Agreements 1. Conduct of Petroleum Operations 2. Operator 3. Collective Decisionmaking B. Farmout and Acquisition Agreements C. Production Sales Contracts IV. DOCUMENTING THE UNITIZATION A. Pre-Unitization Agreements B. Unitization Agreements V. KEY ISSUES IN UNITIZATION AGREEMENTS A. Unit Area 1. Areal Extent 2. Depth 3. Changes in Unit Area B. Unitized Substances 1. Oil versus Gas 2. Other Substances Used for Enhanced Recovery 3. Diluent Used in Heavy Crude Oil Projects C. Effect of Unitization D. Determination of Tract Interests 1. Principal Basis for Tract Interests 2. Conversion Ratios Between Oil and Gas 3. Pre-Unitization Costs 4. Other Factors Affecting Tract Interests E. Determination of Unit Interests F. Redetermination of Tract Interests 1. Basis for Redetermination 2. Number of Redeterminations 3. Timing of Redeterminations 4. Data Used for Redetermination 5. Proposal and Approval of Redeterminations 6. Effects of Redetermination: Production 7. Effects of Redetermination: Costs 8. Effects on Host-Government Contracts 9. Trend Toward No Redetermination G. Unit Decisionmaking H. Nonunit Operations 1. Priorities 2. Drilling Through Unit Reservoirs 3. Joint Use of Infrastructure 4. Relationships with Unit Redeterminations and Expansions VI. CONCLUSIONS VII. APPENDIX I VIII. APPENDIX II I. INTRODUCTION: OVERVIEW AND SCOPE OF ARTICLE

A. Introduction

Unitization is the joint, coordinated operation of a petroleum reservoir by all the owners of rights in the separate tracts overlying the reservoir. (2) Unitization of oil and gas fields is commonplace in the United States where private ownership of minerals has often resulted in fractionalized ownership of the oil and gas in a common reservoir, such that tens, hundreds, and even thousands, of private landowners (who have leased their tracts in exchange for royalty interests) and their lessees (working-interest owners) have interests in the same reservoir. Without unitized operation of the reservoir, the common law "rule of capture" results in competitive drilling and production with consequent economic and physical waste, as each separate owner attempts to secure his or her "fair share" of the underground resource by drilling more and pumping faster than his neighbor. (3) To conserve its petroleum resources, the United States became the "unitization capital" of the world as measured by the enactment and use of domestic (in international terms "municipal") unitization laws.

Outside of the United States, unitization has not been as prevalent simply because it has not been as necessary to the sound development of petroleum resources. Oil and gas resources in most countries are owned by the country, not by private individuals or entities. (4) When a country, as the single lessor or licensor, issues licenses or enters into production sharing agreements or similar contracts with enterprises to develop these resources, (5) the contracts awarded often cover large areas comprised of many thousands of acres. (6) In addition, government agencies may have used seismic surveys to define the license area to cover an entire geological structure or other trap, thus limiting the possibility of competitive drilling by rival licensees awarded adjacent acreage over a common reservoir. (7)

Nonetheless, interest in unitization outside of the United States has been growing in the past three decades for several reasons. First, the 1973 OPEC oil embargo imposed by Mideastern producing nations against many of the industrialized, oil-importing countries, led to a rapid rise in the price of oil. Western nations and their multinational oil companies sought to diversify their sources of oil imports. Exploration proce...

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