Unitization Agreements: A Primer on the Legal …epge.fgv.br/.../15_12_11/.../presentation.rio.university.dec.2011.pdf · Unitization Agreements: A Primer on the Legal Issues for

Unitization Agreements:

A Primer on the Legal Issues for Unitization of the

Brazilian Pre-Salt

International Workshop on Microeconomics applied to

the Energy Industry at the Graduate School of

Economics of Fundação Getulio Vargas

Rio de Janeiro

December 15, 2011

Andrew B. Derman

[email protected]

Thompson & Knight LLP

© 2011

2

Overview

Evolution of unitization

Brazilian law on unitization

Scope and complexities of pre-salt unitization

Unitization issues presented by pre-salt

Concluding thoughts

3

3

What is Unitization?

A “field” straddles two blocks

A B

4

Evolution of Unitization

Hydrocarbon formation does not correspond to surface boundaries

Boundary A Boundary B

5

Evolution of Unitization

Separation of ownership of surface and hydrocarbons

(“law of capture”) creates competitive drilling

6

Evolution of Unitization

Competitive drilling created unintended

consequences

► Unnecessary wells

► Redundant infrastructure

► Premature depletion of reservoir pressure

Governments responded with “pooling” and

“unitization” regimes

► Pooling is terrain-specific

► Unitization is reservoir-specific

7

Evolution of Unitization

Unitization generally ensures

► Optimum and efficient resource development

► Fair and equitable sharing of costs and revenues

► Best use of available data

► Avoidance of “rule of capture” disputes

8

Brazilian Law on Unitization

“In cases of a field extending over adjoining blocks,

operated by other concessionaires, the parties

involved shall agree on the splitting of the

production.”

Absent agreement, arbitrator determines how rights

and obligations are “equitably appropriated, based

upon applicable legal principles.”Article 27 of Law 9.478/1997

ANP acts as concessionaire for un-awarded

adjacent blocks under which a reservoir extends

ANP opens adjacent tract for bidding

2006 Model Concession Agreement

9

Brazilian Law on Unitization

New Regulations

► Pre-Sal Petroleos (PPSA) given authority to contribute

“open” blocks to unitization

► ANP given authority to “force” unitization by canceling a

production contract if contractors refuse to agree upon

unitization terms

10

New System

CNPE MME

ANP

NSF

Consortium

PPSA InvestorPETROBRAS

At Least

30%

Blocks

11

Unitizing the Pre-Salt

Scope and Complexities

12

Scope and Complexities of Unitizing the Pre-Salt

Estimated size

► Some 800 km in length and up to 200 km in width

► Total area of 122,00 km2

Production - 2020

► Double Brazilian production

► Petrobras global production @6MM bopd

Reserves

► 14 billion boe

► 50 to 100 billion boe in Pre-Salt

Pre-Salt Concessions

► 28% of the 149,000 km2 under concession

► 85% success rate

Petrobras Capex Budget to 2020

► $111.4 billion on current pre-salt concessions

► $500+ billion

13

Scope and Complexities of Unitizing the Pre-Salt

Effect of recently passed legislation

► New state entity - Pre-Sal Petroleos (PPSA) - will be a party

to new production sharing contracts (PSCs) without any

risk or responsibility

Golden voting share

Effect of proposed legislation

► Introduces PSCs

► Petrobras must have at least 30% interest in future PSCs

Contracted company explores at own risk with

reimbursement of exploratory, development and production

costs

14

14

Unit Area

Single Formation

A B

Multiple Formations

A B

15

15

Unit Area

Multiple Formations

A B

Multiple Formations plus future expansions with

communication

A B

16

16

Unit Area

A B

All current and future

formations

A B

Multiple Formations plus future expansions

without communication

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Unitization Issues Presented by Pre-Salt

• Blue dotted line represents the border of the pre-salt

• Nine lettered blocks from A to I

• Four numbered reservoirs from 1 to 4, colored in red

• Reservoirs 1, 2, and 3 have been discovered; Reservoir 4 has not.

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Pre-Salt Unitization Issues

“Unit Area”

► What will be the areal boundary for the area?

► How many units initially will comprise the pre-salt?

19

Pre-Salt Unitization Issues

“Unit Interval”

► What depths will be included in the unit?

20

Pre-Salt Unitization Issues

•Unitization of Reservoir 3 - overlays Blocks C and F

•Group interest is a party’s respective interest in the joint operating agreements

•Tracts are those portions of the reservoir underlying each block

•40% of the reservoir underlies Tract C and 60% underlies Tract F

•A party’s unit interest = group interest -x- tract interest

Ownership of “Unit Interests”

21

Determination of Unit Interests

Alternatives

► Unitized substances in place

► Economically recoverable reserves

► Acre-feet of reservoir rock or pore space (U.S.)

► Surface acreage

► Water depth

► Complex formula with multiple factors may be used

22

Unitization - Issues

Common Data Base

Ownership Interest

Joint Marketing

Secondment

► Joint Staffing

Decommissioning

Assignment

Redermination

Expansion

Non-Unit Operations

23

Pre-Salt Unitization Issues

Non-unit operations

► To what extent will non-unit operations be allowed to use unit

assets?

24

Non-Unit Operations

25

Non-Unit Operations

Priority of unit operations

Protection of unit reservoir

Use of unit property where such use does not

interfere with unit operations

► Exchange of value for use?

Takeover of non-producing unit wells for non-unit

operations, or non-producing non-unit wells for

unit operations

► Approval procedure

26

Pre-Salt Unitization Issues

Expansion and redetermination of the unit

Expansion addresses changes in the size of the unit area

or unit interval

27

Pre-Salt Unitization Issues

Three possibilities for expansion

► Change to the size of the existing unit area or unit interval

Requires unanimous agreement

28

Pre-Salt Unitization Issues

Three possibilities for expansion (cont’d)

► Discovery of a reservoir within a group’s contract area that is

in pressure communication with the unitized reservoir

New discovery becomes part of the unit upon written request

after having received approval by the normal passmark vote

under its joint operating agreement

29

Pre-Salt Unitization Issues

Three possibilities for expansion (cont’d)

► Discovery of a reservoir outside of the existing unit area or

unit interval

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Pre-Salt Unitization Issues

Redetermination is the process of recalculating the parties’

tract participations and their unit interests

Basis for redetermination

Number of redeterminations (0-?)

Timing of redetermination

Approval of redetermination

Voluntary agreement (unanimous, or near-unanimous)

Expert resolution

“Pendulum arbitration”

Arbitration/Litigation

Penalty for calling frivolous redetermination

31

31

Unitization & Redetermination

Development initiated 1975

Unit production start-up 1978

First redetermination 1983

Second redetermination 1988

Projected field abandonment 1999

32

Unitization & Redetermination

64%

36%

Group A Group B

70.7%

29.3%

Group A Group B

56.9%

43.1%

Group A Group B

Initial Unitization Split First Redetermination Final Redetermination

33

33

Unitization Agreement

Separate Unit and Unit Operating Agreements?

► Allows submission of a short, general agreement to the Government

► Unit Operating Agreement amendments may not require Government approval

A single Unit and Unit Operating Agreement?

► One comprehensive agreement

► Looks like a more detailed JOA

34

34

Attachments

Exhibit A - Group Interests, Tract Participations and Unit Interests

Exhibit B -

► Part 1: Unit Area Coordinates

► Part 2: Unit Area Map

► Part 3: Unit Interval Definition

Exhibit C - Unit Accounting Procedure

Exhibit D: - Decommissioning Procedures

Exhibit E: - Redetermination Procedures

Exhibit F - Redetermination Technical Procedures

[Exhibit G: - Contract Amendment - Tract A]

[Exhibit H: - Contract Amendment - Tract B]

Exhibit I: - Pre-Unitization Expenditures

Exhibit J: - Existing Data

Exhibit K: - Existing Facilities

Exhibit L: - Existing Joint Operating Agreement Work Programs and Budgets

Exhibit M: - Existing Joint Operating Agreement AFEs

Exhibit N: - Existing Contracts

Exhibit O: - Unit Development Plan/Draft Work Programs and Budgets

[Exhibit P: - Lifting Procedure [NOTE: A model Lifting Procedure may be acquired from the AIPN]]

[Exhibit Q: - Production Handling Agreement] [NOTE: See Article 3.7]

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35

Unitization AgreementScope

The development and operations of the blocks

Production, processing and transportation to the Delivery Point

Rules relating to non-unit operations

Possible joint marketing of production

Expansion (and contraction) of the unit

Redetermination

36

Unitization Agreement

Operating Committee

Akin to a Board of Directors

Approves Work Program and Budget

Approves Development Plan

Oversight of operations and joint marketing

37

37

Unitization AgreementVoting Procedure

Passmark vote (to be defined)

Unanimous vote (could address the following)

► Termination of Unit and the UOA

► Amendment to the UOA and the Development Plan

► Decommissioning

► Expansion or contraction of the Unit

► Third Party use of Unit Facilities

38

38

Unitization AgreementVoting Procedure

What data should be contributed to the Common

Database?

Approval of Work Programs and Budgets

Expansion of unit

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39

Unitization AgreementUnit Operator

The Unit Operator has duties, responsibilities and

liabilities similar to a JOA

Interplay JOAs with UOA

► For example, how to handle HSE standards?

Removal and appoint of a successor Operator

40

Unitization Agreement

Exclusive Operations

Are non-consent and sole risk (exclusive

operations) permitted?

Generally, not

If so, under what circumstances?

41

Unitization Agreement

Non-Unit Operations

Each block has the rights over acreage in the block

that is outside the unit area

Coordinate operations

In the event of a conflict, unit operations prevail

Unit Operating Committee must approve

penetration of a unit field

Use on non-unit property

42

Unitization AgreementAssignment

Assignment to include Contract, Unit Property, Unit Facilities and Unit Agreement

Assignment to an Affiliate

Assignment to a Third Party► Party Approval

Security

► Government Approval

► Payment of all transfer fees by assignor / assignee

► Mortgages, pledges and encumbrances allowed

► Preferential Purchase Right

Coordinate with JOA

43

Unitization Agreement

Dispute Resolution

Interplay with JOAs

Arbitration

► Venue

► Administrative entity

Governing law

► Texas

► New York

► English

44

Pre-Salt Unitization Issues

Governance of the unit

► Unit operating committee

► Role of Pre-Sal Petróleos (PPSA)

► Budgetary controls and rights

► Sole risk operations

► Production sharing contract vs. concession contract

45

Concluding Remarks

Unitization is inevitable in the pre-salt

An effective unitization process can further efficient and

cost effective operations which could be worth many

billion of dollars

Parties should begin planning for the unitization process

Andrew B. Derman

1722 Routh Street

Suite 1500

Dallas, Texas 75201

214.969.1307

[email protected]