UNITIZATION OF CONTRACT AREAS: IS IT AN
OBLIGATION DEFEATING THE STABILITY OF
INTERNATIONAL PETROLEUM AGREEMENTS?
Anozie Ikechukwu Awambu*
ABSTRACT: Unitization is an arrangement to jointly develop an oilfield straddling two or more different
contract areas. It is constantly gaining popularity in the Petroleum Sector. The fugacity of oil means that
without supervision, neighbouring operators can engage in competitive drilling by unconventional means,
thereby causing waste. Petroleum Producing Nations therefore require oil companies to unitize, either by
incentives or by compulsion while supervising their work programmes – By regulatory instruments, the Oil
Company could be under an obligation to Unitize. The above derives impetus from the belief that petroleum is a
depleting resource and therefore the realities of geology, the forces of economics and the interests of the
physical environment must reign supreme, such that Blocs ruled by different contracts have to be integrated.
Sound as this reasoning seems, it should be noted that there are existing legal positions that unitization alters,
often generating yet more conflicts. These conflicts may affect not only the stability of existing contract but often
times disrupt Development and Production in the unitized field. This paper focuses on the Risk and Reward
factors in this mix, while balancing the rationale to unitize and the need for stability of contracts.
*
The author is a Legal and Policy Analyst of the Energy (Oil, Gas and Power) industry with strong focus on
Transnational Investments and International Project Finance. Admitted a Barrister and Solicitor in Nigeria, and
about to be admitted a Solicitor in England and Wales. He has experience in transactional practice and is a
prolific advocate in dispute resolution. He is currently a postgraduate student of CEPMLP University of Dundee
Scotland, where he is pursuing an LLM Degree in Petroleum Law and Policy. E-Mail: anozyke@yahoo.com
TABLE OF CONTENTS
ABBREVIATIONS ............................................................................................................. iii
1.0 INTRODUCTION........................................................................................................... 1
2.0 UNITIZATION – DEFINITION AND RATIONALE ................................................... 3
2.1 Intra -State and Inter- State Unitization ........................................................................ 5
2.2
Regulatory Frameworks for Unitization – A Comparative Analysis. ...................... 6
2.2.1 United Kingdom .................................................................................................... 7
2.2.2. Indonesia .............................................................................................................. 8
2.2.3 USA ...................................................................................................................... 8
2.2.4 Brazil And Australia .............................................................................................. 8
2.2.5 Canada .................................................................................................................. 9
2.3 The Unitization Agreement – Substance and Procedure ............................................. 9
3.0 ISSUES AND STRUCTURES OF UNITIZATION ...................................................... 11
3.1 Participation and Redetermination ............................................................................. 11
3.2 Management and Operations. ..................................................................................... 13
3.3 The Relationship and Effects of Unitization on Petroleum Agreements. ..................... 14
4. 0 CONCLUSION .......................................................................................................... 15
BIBLIOGRAPHY ............................................................................................................... 17
ii
ABBREVIATIONS
GIIP
Gas Initially in Place
IOC
International Oil Company
JDZ
Joint Development Zone
JOA
Joint Operation Agreement
PSC
Production Sharing Contract
STOIIP
Stock Tank Oil Initially in Place
iii
1. INTRODUCTION
Petroleum production creates economic rent in a producing nation; generates revenue to
investors and host nations alike but also hazardous to the environment. There are often
competing forces between the fiscal interest of the host nation and the profit motive of the oil
company. The situation becomes more frictional when two or more oil companies engage in
competitive production. A balance for these interests forms the basis for unitization.
A single or continuous petroleum reservoir may extend across an area where different
exploitation rights or contracts exist. The fugacious character of petroleum means that
petroleum can transcend or migrate beyond its initial location, thereby causing a holder or
group of holders of such exploitation right or contract to develop wells at the edge of their
respective blocs or contract areas and drill for oil in a competitive manner in other to capture
as much as they can. The ‘Rule of Capture’ - a property jurisprudence which, in the USA,
was applied to mineral production would allow this competitive drilling1. This Rule of
capture causes waste as companies, in a bid to surpass other companies within range of the
bloc in extracting oil, recklessly undertake horizontal drilling without paying attention to
environmental conservation. Against this backdrop, unitization is somewhat of a prevention
of that waste, forming the basis to integrate the exploitation of the different blocs or contract
areas. The basic rationales are reduction of cost and increase in recovery factor2. By logical
extension it is for the good of the oil companies and the host nation.
1
The rule entitles absolute ownership to anyone who captures wild animal on his land or sea. See note 2. It was
later applied in the American case of Brown v Spillman: “If an adjoining owner drills his own land and taps a
deposit of oil or gas, extending under his neighbour’s field, so that it comes into his well, it becomes his
property”. Source – Professor Peter Cameron, Lecture slides (16/11/2007) CEPMLP VLE.
2
Warwick, E., Unitization Agreements, in Upstream Oil and Gas Agreements, (Martyn R. D., ed., United
Kingdom, London: Sweet & Maxwell, 1996).
1
Even though Unitization is an agreement between oil companies, host governments now have
regulatory frameworks through which unitization is achieved, particularly in this era when
International Petroleum Agreements and Petroleum Legislations create regulatory
mechanisms to supervise oilfield development and work programmes. In some jurisdictions
unitization is either voluntary or compulsory while in others it is just subject to the freedom
of contract. Whichever way, unitization is gradually moving from choice to obligation.
Chapter Two of this paper intends to dwell on this subject by comparing regulatory practices
in some leading jurisdictions.
Howbeit, Unitization is an agreement resting on layers of several other agreements – PSCs,
Licences and JOAs – It may alter legal positions on these existing agreements or disturb their
stability by affecting the parties’ obligation to each other and to host governments. Often
times the authorization or Petroleum Agreement between each of the unitizing blocs and the
host nation are different in character, for instance Bloc A may be a PSC and Bloc B, a
licence. The diagram below is a contract matrix illustrating of Petroleum agreements
surrounding a hypothetical Unitization agreement within one jurisdiction.
2
The next problem is that the concealed nature of petroleum prevents accurate determination
of the reserves at the formation stage of the unitization and this generates yet more disputes,
amongst which is the issue of redetermination. Thirdly, Unitization is merely a Joint
Operating Agreement to which some special features are added3 and so like the ordinary
JOA, the issues of Participation, Operation and Management often evoke conflicts, while the
concept of ‘Sole Risk’ is always likely to arise.
Whilst the rationale for Unitization is obvious, with equal obviousness the need for stability
of its underlying contracts, the avoidance of disputes; cost of settlement and associated
imbalances are important to both the oil companies and host governments. Perhaps, the
advantages of unitization far outweigh these factors. It is therefore the aim of this paper to
consider what factors are driving companies to unitize and the effects Unitization is having
on them and governments. It should however be noted that while this paper acknowledges the
vast issues involved in Unitisation Agreements, the scope shall be within the confines of two
broad heads, namely: (i) Participation and Redetermination and; (ii) Management and
Operations shall form the crux of this analysis to ascertain the effects of unitization on
Petroleum Development Agreements.
2. UNITIZATION – DEFINITION AND RATIONALE
In the simplest term unitization is an agreement to develop and produce petroleum as a single
unit from two or more oilfields for which separate contracts, licences or statutory
3
Tarvene, B., Petroleum Industry and Governments. An Introduction to Petroleum Regulation, Economics and
Government Policies (United Kingdom, London: Kluwer Law, 1999).p.385
3
authorizations exits. It is mostly used to avoid the wastes inherent in the ‘Rule of Capture’ as
discussed above. By geological character petroleum is fugacious, meaning that it moves from
one reserve to another; it is fugitive in character and naturally sparks off a competitive
contest to extract it4. If a single oil reservoir straddles across the boundaries of two or more
areas in respect of which different contracts or authorizations exist, instead of the holders or
group of companies holding the respective rights or contracts to engage in a competitive
drilling, it is economical to integrate their activities. Unitization is the legal framework for
such unit development.
The straddling of an oil reservoir may be the one reason to unitize contract areas across two
or more different state territories but is not the only reason for unitizing oil blocs within a
state. Within the territories of one state, different oil companies to whom the state has given
petroleum development rights can for other reasons such as corporate mergers or for other
strategic horizontal alliance unitize their license or contract
with the host nation create
areas because their contracts
proprietary and alienable legal interests - It is up to them to
decide how to put their prospecting right into function, whether separately or in collaboration.
The limitation will be if any such collaboration is unfavourable to profit motives or will
adversely affect their rights or obligations to their host nation5.
Within a State also,
Unitization may equally be as a result of other regulatory direction of the host state – for
instance, contractors of boundary areas may be required to unitize if after exploration the
reserve on each area is not of commercial quantity but will be commercially viable if both are
developed as a single unit.6
4
Frankel, P. H., Essentials of Petroleum: A Key to oil Economics (United Kingdom, London: Frank Cass,
1968). 4.
5
Tervene, B., Supra note 3, at 384
6
Ibid at 398.
4
The rationale for unitization is appealing from both the IOC and host nation’s standpoint. For
the companies it reduces production cost by avoiding duplicity of infrastructure – corporation
naturally reduces unit input. We have earlier noted that unitization enhances recovery factor7,
therefore to the host nation it means more economic rent hence higher recovery factor means
more fiscal returns. However, the later part of this paper will consider the economics of
unitization in relation to existing legal rights of its parties. A quick example is the time spent
and cost incurred in the determination and redetermination of unitized fields.
2.1 Intra -State and Inter- State Unitization
By Intra- state unitization we mean unitization which integrates two or more contract areas
within the territorial jurisdiction of a single state. Intra –State Unitization can either be
voluntary or compulsory. Modern Petroleum Agreements between states and oil companies,
Petroleum Legislations and Regulatory Guidelines now provide for supervision of the
exploration, development and production stages of the contract area. Current trend is for
nations to require unitization of a straddling reservoir because of the economic advantages
inherent in it. Such unitizations are between the oil companies though the regulatory body
may have to approve of it.
By contrast, Inter-State unitization is the integration of contract areas across different state
territories. A contract area may be partially bounded by a line demarcating the territories or
natural resource jurisdiction of two adjacent, – or if bound by continental shelf, opposite
states. Such a straddling petroleum reservoir falling partly into the two nations may be
unitized with the agreement of the two nations. It had been a subject of International Law
jurisprudence whether or not the rule of capture applied to mineral resources lying in the
7
See note 2
5
subsoil of opposite states on a continental shelf8. Article 77 of The United Nations
Convention of the Law of the Sea, particularly Article 77 (2),9 outlaws the rule of capture on
the continental shelf. However, unlike Intra-State Unitization where oil companies enter into
a unitization agreement, in Inter-State Unitization the agreement is between the states though
they will involve the IOCs. A state would presumably take more interest in this type of
unitization than the one within its jurisdiction because the IOC operating on the other side
pays fiscal returns to the neighbouring state so if it fails to unitize, the ‘take’ or fiscal returns
due it may be lost to another state unlike the intra-state situation where the same state has the
‘take’ from both operators. Notable examples of Inter-State Unitization are bilateral treaties
between the United Kingdom and Norway for the unit development of three oilfields on the
North Sea – Frigg, Statfjord and Murchison, with 60.82 per cent of the resources located on
the Norwegian side of the border, as well as the development of Markham field between the
UK and The Netherlands. Inter-State Unitization is similar to a Joint Development Zone
(JDZ); the main difference is that in JDZ the delineating line between the nations may not
have been determined.
2.2
Regulatory Frameworks for Unitization – A Comparative Analysis.
It has earlier been mentioned that unitization is either voluntary or compulsory. Part of the
task of this paper is to ascertain the factors that drive companies to unitize. The economic
factor of Cost and Geological advantage of Recovery Ratio have been mentioned10 as
fundamental rationales for unitization. The unresolved question is whether unitization is
8
For instance, Tervene, B., An Introduction to The Regulation of The Petroleum Industry. Laws, Contracts
and Conventions (1994) p.154 holds that a state on the opposite side of a continental shelf can exploit
petroleum falling in the territorial economic zone of the other. In contrast, Smith, E. E., et al International
Petroleum Transaction (2nd ed. 2000) p.20 7 argue that the Rule of capture is not applicable in international law.
9
Reprinted in 21 ILM 1261 (1982)(entered into force on 16 November, 1994).
10
See section 1 above and footnote 2.
6
obligatory or not. To attempt this question we must therefore compare different regulatory
frameworks for the unitization of straddling reservoirs within a single jurisdiction.
As a general rule, a contractor or licensee IOC is free to operate the field as it thinks fit
subject to terms and conditions of the contract. The requirement to unitize will not normally
be part of the existing contract because as at the time the prospecting contract is entered,
exploration would not have been done and so no data would show that the reservoir straddles
between that particular field and another. However, petroleum agreements nowadays are
either a PSC or Modern Licence - It will have in it a provision that a regulatory body of the
host nation will approve each stage of operation in that Bloc. This regulatory practice is
commonly called ‘supervision of work programme’. The host nation will also enact
petroleum legislations and guidelines detailing what supervisory measures can be taken.
Such frameworks would often provide that the regulatory authority can compel unitization.
Where it does not provide so, or where the regulator refrains from using its big stick, another
other force capable of pushing an operator to unitize is that any development it wants to make
on its Bloc must be approved. Knowing that the regulator is not likely to approve a
development plan that will result in competitive drilling, operators on the straddling reservoir
will be compelled to unitize. If on the other hand the adjourning bloc has not been contracted,
the regulator is not likely to approve the development plan. These situations gradually permit
the notion that unitization is somewhat of an obligation and not merely a contract that ensues
from volition. We will now compare some jurisdictions.
7
2.2.1 United Kingdom
The legal regime is The Petroleum Licensing (Exploration and Production) (Seaward and
Landward Areas) Regulations 200411. Clause 13 of the relevant provision - Regulation 3(5),
Schedule 4: Model Clauses for Standard Production Licences provides generally that a
Licensee shall not carry on any development work without approval from the Minister, while
Clause 23; a special provision for unit development empowers the Minister to compel
unitization if he thinks that there is a straddling reservoir. However, it did not state the
rationale for his ‘thinking’.
2.2.2. Indonesia
Article 7 (3) of Indonesia’s Law 44 of I960 confers ultimate decision on unitization to the
Director General of Oil and Gas who can compel unitization if he thinks fit. Indonesia’s PSC
contain similar provisions12.
2.2.3 USA
In the USA minerals are generally classified as property rights and so voluntary unitization
does not require state approval but some states may compel unitization or ‘pooling’ for
purpose of environmental conservation13.
2.2.4 Brazil and Australia
Both countries have similar regulations. The operators can voluntarily unitize but if they fail
to agree within a specified period, the regulator will compel them to do so. In Brazil, the
regulatory law goes as far as providing the terms of a Unitization14.
11
Statutory Instrument 2004 No. 352
Smith, E.E., (et al) at p.642, citation at footnote 8
13
Andrew, B.D., Unitization: Find Law for Legal Professionals, at
http://library.findlaw.com/2003/Jan/30/132512.html (last visited on January 14th, 2008.)
14
ibid
12
8
2.2.5 Canada
In the state of Ontario, Canada, petroleum operators can voluntarily unitize but where it
cannot be accomplished the Mining and Lands Commissioner may order unitization15.
Except with the USA, the common denominator of all the jurisdictions compared is that there
is always a regulatory power ready to compel unitization - A premise on which this writer
feels safe to say that unitization in the contemporary global petroleum industry is not merely
an agreement flowing from freedom of contract but predominantly an obligation owed to
petroleum Regulators.
2.3 The Unitization Agreement – Substance and Procedure
Operating an oilfield as a unit involves a whole lot of programmes and detailed
documentations which can be chronicled in succeeding order as: The Preliminary Stage, Pre
–contractual Agreements and the Unitization Agreement. The Preliminary stage will first
involve an Exchange of data between contract groups wishing to unitize. The essence is to
evaluate the proportion of reserves lying in the respective contract areas16. Even though there
are confidentiality clauses as the basis of this agreement, this is to this author’s mind, a
pitfall of the unitization scheme because companies will have to share seismic data through
which they may be disclosing technical or patent secrets. There is often the stage of joint
development of a Well so as to gather more information. The cost of the joint well is often
borne by the party on whose own bloc the work is done17.These processes can take a long
time and parties will keep bringing data that favour them or give them higher share of the
reserve. It must be mentioned that at this stage none of the contract areas is in business; it
15
Oil and Gas Production: Spacing, Pooling and Unitization, Website of Ontario Ministry of Natural
resources, at http://www.mnr.gov.on.ca/MNR/ogsr/publications2.htm, (last visited on January 14th, 2008.)
16
Warwrick, supra note 2, at 101
17
Tervene, supra note 3, at.386
9
may be a period when there is windfall in the oil market and so both companies and
government are losing share of it. Reaching a final decision on the distribution of oil amongst
the blocs could be a problem because there are many parties involved in a JOA of each
contract area; they cannot resort to existing voting patterns because the unitization scheme is
not part of their operating agreements18.
The pre-contractual stage will involve a process to agree on the formula for calculating the
amount of reserve in each bloc – technically called Tract participation - because it is what
determines cost contribution and profit allocation. This is a problematic task because all data
are, as it were, biased estimations constrained by the concealed nature of petroleum. The
quantity and recovery factor of each bloc will be assessed and this implies ascertaining Stock
Tank Oil Initially in Place (STOIIP) or Gas Initially in Place (GIIP)19.This is a source of the
major conflict in unitization because whatever is agreed may be proved wrong during actual
production and this leads to the process of redetermination. The Tract Agreement is therefore
just like an interim agreement designed to generate future disagreements.
The Unitization agreement proper will then be drawn. It is much in substance like an ordinary
JOA just that special features are added20. Such distinguishing features will definitely include
the clauses for Redetermination and a precise definition of the Unit Area which dimensions
should be with reference to the number of contract areas unitizing. Other usual aspects of a
JOA will be provided, like Unit Operator, Management Committee, Sole Risk, Accounting
Procedure and Dispute settlement21.
18
Warwick, supra note 2, at 102.
Tervene, supra p387
20
See footnote 3
21
ibid
19
10
3.
ISSUES AND STRUCTURES OF UNITIZATION
The underlying factor between the legal arrangement called unitization and our discussion is
an analysis of resultant issues which tend to destabilize already existing petroleum
agreements. Every legal agreement or contract in life carries with it inherent difficulties but
unitization is of particular interest mainly because it alters legal positions, and more because
it is usually not a contract that is, as it were, voluntarily entered into. Unitization is geared
towards economic advantages but the realities of its operation often frustrate those
advantages. Being a very complex agreement it is practically impossible for this paper to
explore all the issues. I have therefore taken the liberty to group certain issues under two
broad heads, namely: (i) Participation and Redetermination and; (ii) Management and
Operations. Those two subheads are our terms of reference and shall form
the basis for a
later discussion on the effects of unitization on petroleum development agreements.
3.1 Participation and Redetermination
It must be remembered that the interest groups involved in the unitization process are
investors who had negotiated terms of their petroleum exploration and development
agreement with the host nation (PSC or Licence, etc) on the basis of Cash Flow Analysis,
Payback Timing and Internal Rates of Return. This controversy in determining the division of
reserve amongst them during the unitization process technically referred to as Tract
Participation distorts all that financial projections by causing delays and long leads time. It is
all the more disturbing that the State regulator will not determine the tracts for the companies
but is only waiting to approve their decision however it goes. Unlike the existing petroleum
development contract between the company and the host nation, say a PSC or licence, where
parties would have fixed their interest proportions under a JOA before bidding or contracting
with the host government, proportions of participation in unitization is more of a contest than
11
a negotiation. But this argument seems faulty from the standpoint of the state as it is
dampened by the fact that unitization enhances Recovery Factor and so for the state who
wants to maximize its ‘take’ the delays do not matter, because the petroleum in the ground
remains and can always be produced in future. In the Frigg Field for example, there were
series of disagreements over a long period while the tracts were being determined22.
When the unitizing companies manage to come to terms and production starts, it is often
discovered, due to advancement in geological/seismic technology, that the earlier
determination had been wrongly calculated and so the under-allocated bloc would demand
equity. The unitization agreement often provides for Redetermination to resolve this
imbalance. The Redetermination process is even more worrisome. ‘The typical equity
redetermination process is ambiguous and contentious, often resulting in arbitration and/or
litigation’23. The main problem with unitization is this Redetermination because it is a
process to cure the errors of tract participation when reserves were allocated on the basis of
seismic data which has now been proven wrong by actual development of the reservoir.
Redetermination seeks to re-adjust the proportion of economic returns to which parties had
been allocated either in excess or shortage. A drafting technique has been introduced in many
unitization agreements to avoid the dangers of endless redetermination by; (a) limiting the
number of redetermination; (b) placing a vote range to initiate it (C) providing that existing
participation cannot be re-adjusted except on extreme case and ;(d) imposing cost on the
party requesting it frivolously24.This notwithstanding, unitization costs money and time, and
often ends in long litigation25.
22
ibid
Derman, P. B., Derman A. B., Unitization – A Mathematical formula To Calculate Redeterminations, 12
CEPMLP Internet Journal, Art 6 .
24
ibid
25
Warwick , E., supra p.106
23
12
3.2 Management and Operations.
The management and operation of the unitized field present yet some more complications.
The coming together of these interest groups means a managing pattern and operating system
has to be negotiated. Though similar structures exist in the JOA of the respective blocs, there
is a changed circumstance and now a larger corporation.
As regards management, the underlying problem is that the group to be managed is
essentially unstable. In principle each party has rights and obligations in the unit
proportionate to the subsisting tract determination. The structure would normally be distorted
when a Redetermination is done. Howbeit, operations are normally supervised by a unit
Management committee in which each participant is represented with right to a vote cast26.
The management committee will usually carry out such functions like reviewing work
programme and award of contracts. There is often some politicking in the management of the
unit – minority parties with large interests wanting to avoid being controlled by majority
small interest owners, as against small interest owners fearing to be drawn into capital
intensive programmes27.
The operation of the Unit is equally intriguing. The usual thing is to appoint one of the
participants as a unit operator. It would normally be the responsibility of the unit operator to
make cash calls on the participants according to their percentage in interest. When such call is
made, a programme proposed by a party may be declined due to the difficulty of getting
management pass mark. It is often this situation that allows for a ‘sole risk’ operation by the
unit operator. Sole risk operation in a unitization agreement is much like that of a JOA. The
unit operator may therefore carry out a sole risk operation for any group, within such
26
27
Tervene, B.,supra, p.392
Warwick, E., supra note 2, at 103.
13
group’s boundary, risk and cost, for the purpose of obtaining information upon which a future
Redetermination will be based. We find from the above that instability of economic activities
is almost certain in the management and operation of a unitized field.
3.3 The Relationship and Effects of Unitization on Petroleum Agreements.
In the author’s view the continuity of the prospecting right of each bloc is necessary for the
unitization scheme. A unitization agreement would normally provide that all other
agreements underlying it remain valid. However, reality seldom conforms to this: First, it
should be mentioned that the life span of the contracts empowering the various groups are not
the same, one may lapse while the unitization subsists. Secondly, not all parties of the
existing agreements are made parties to the unitization agreement; for instance a PSC
empowering a contract group is between them and the state or state agency. Such a state
agency is not a party to the unitization and will therefore not absorb such contractor for
failure of its responsibilities or obligation as a result of instability caused by
Redeterminations in the unitized field.
Illustration is given on both intra-state and inter-state unitization:
Scenario 1 – Intra State:
A PSC group unitizes its field with another group. Tract Participation is determined and it
makes capital expenditure or answers cash call in that proportion. Revenue is distributed
accordingly. It shares profit with the host government and pays royalties and taxes in the
proportion of that to that revenue band. Redetermination later shows that its Tract was overallocated. Normally, it will re-adjust equity to other party of the unitization .Query: How
does the host government refund it or re-adjust to it accordingly? Tax refund may be possible
but will it be factored into future cash calls of the company? It will be difficult to say because
14
the government is not a party to the unitization and the PSC would have made provisions for
production sharing and payment of royalties and taxes based on periodic revenue of the
contractor.
Scenario 2 – Inter State:
Two adjourning nations enter into a Bilateral Treaty agreeing to an Inter-State Unitization.
Normally, the treaty is not the unitization but merely a forerunner to it. Therefore licence
holders to both states enter a Unit Operating Agreement (the Unitization). A Redetermination
calls for re-adjustment of equity by the time the companies had paid taxes, royalties and other
fiscal obligations to their respective host country. Query: Will the respective Governments
equally re-adjusted equity to the losing company?
Whether or not the unitization agreement, legislation or regulatory guidelines have made
provision for these circumstances, these issues distort Internal Rates of Return and Cash flow
analysis of the companies and Fiscal projections of the host nation.
4. CONCLUSION
The search for an answer to the question we posed has shown us the meaning and reason for
unitization. A comparative analysis of practices around jurisdiction suggests the inference
that unitization is more of a response to regulation and not merely a contract proceeding from
volition. It is clear to us that unitization is always of economic advantage of the state and
should be to the investor but it often turns a nightmare.
We have seen that there are contractual structures existing before a unitization agreement is
made. The primary aim of those contracts; the ones between companies and Government on
15
the one hand, and those between companies themselves on the other hand, for instance PSC
and JOA respectively, had been to share risks through a careful process of negotiation.
Unitization in contrast seems to integrate risks which the parties will naturally want to share.
The unitizing parties are however caught in between these options because the major factor
determining the level of risk an investor is willing to bear in the petroleum industry is cost.
Cost sharing in a unitization is by Tract Determination which is usually unevenly allocated
due to inaccurate Tract Determinations. Unlike an ordinary JOA where the stakes are agreed
by wilful negotiation and bargaining powers, stakes in unitization are purely dependent on
the geology of the field which by the very nature of petroleum is unpredictable.
This instability inevitably re-echoes the geological uncertainties inherent in the concealed
nature of petroleum which is the very peculiar risk that governments shift to investors and
upon which the profits of the investor is based. This is a natural obstacle to which none of the
parties has control and so unitization agreements will continue to be ruled by disputes and
instability; logically the performance of agreements lying beneath it will continue to be
disturbed.
16
BIBLIOGRAPHY
1.
PRIMARY SOURCES
1.1
Statutes
Indonesia’s Law 44 of I960
The Petroleum Licensing (Exploration and Production) (Seaward and Landward Areas)
Regulations 2004 (U.K) - Statutory Instrument 2004 No. 352
United Nations Convention of the Law of the Sea in 21 ILM 1261 (1982) (entered into Force
on 16 November, 1994)
1.2
Cases
Brown v Spillman - Professor Peter Cameron, Lecture slides (16/11/2007) CEPMLP VLE
2.
SECONDARY SOURCES
2.1 Books
Frankel, P. H., Essentials of Petroleum: A Key to oil Economics (United Kingdom, London:
Frank Cass, 1968)
Smith, E. E., (et al) International Petroleum Transaction, 2nd Edition (USA, Colorado: Rocky
Mountain Mineral Law Foundation, 2000)
17
Tarvene, B., Petroleum, Industry and Governments. An Introduction to Petroleum
Regulation, Economics and Government Policies (United Kingdom, London: Kluwer Law,
1999).
Tervene, B., An Introduction to The Regulation of The Petroleum Industry. Laws, Contracts
and Conventions (United Kingdom, London: Graham & Trotman, 1994).
2.2 Articles
Derman, P. B & Derman. A. B., Unitization – A Mathematical formula To Calculate
Redeterminations, CEPMLP Internet Journal, Vol 12, Art 6
Warwick, E., Unitization Agreements, in Upstream Oil and Gas Agreements, (Martyn R. D.,
ed., United Kingdom, London: Sweet & Maxwell, 1996) .
2.3 Other
2.3.1 Internet Sources
Andrew, B.D., Unitization: Find Law for Legal Professional, at
http://library.findlaw.com/2003/Jan/30/132512.html , (last visited on January 14th, 2008).
Oil and Gas Production: Spacing, Pooling and Unitization, Website of Ontario Ministry of
Natural Resources, at http://www.mnr.gov.on.ca/MNR/ogsr/publications2.htm, (last visited
last visited on January 14th, 2008).
18