Oil & Gas Contracts: Part - II

FOX PETROLEUM Before going to learn about what is Petroleum Contract and how it is constituted into an agreement, we must know – THE LIFE & THE TIMES OF A PETROLEUM PROJECST; Petroleum doesn't last forever. It is a non­renewable resource. This fundamentally drives the business decisions of companies, a key part of which is that most petroleum contracts are structured to contemplate the entire life span of a project, it's beginning, middle, and end. The key stages of a project's life (or "petroleum operations") are:- 1. explore to find it in the first place; 2. develop the infrastructure to get it out; 3. produce (and sell) the petroleum you've found; 4. abandon when it runs out and clean up ("decommission").

Let us know these stages in short – Explore - Petroleum is rarely found on the surface of the earth. One is very unlikely (though would be quite lucky) to step into a puddle of oil, though when this does occur it is known as a "seep" which means what one would think it means: oil below the ground has "crept up" from below the surface to "seep out" onto the surface. In the early years of oil discovery, seeps were probably one of the best means to find oil and gas. And oil still does seep to the surface of the earth in many locations across the globe. But a seep does not mean an oil boom. Nowadays, we use much more scientific and data­intensive means of finding petroleum beneath the surface of the earth.

Stage one planning depends on Seismic data or Seismic survey report; today, geological surveying methods is known as seismic studies (or just "seismic") are usually the starting point of any oil exploration effort. The essences of seismic studies are to use sound waves, shot down into the earth; to 'see' what is underground. Although it is often said that one cannot be certain that petroleum is in a given location until a exploration well is drilled, taking seismic surveys help increase one's confidence that drilling ­ an expensive endeavor ­ in a particular location is worthwhile. In other words, seismic helps climb the 'confidence scale'.

Commonly found beneath the earth's surface are various types of rocks, water and salt, all of which react differently when hit with a sound wave. Large amounts of data are captured from this process and used to give an image of what lies beneath the earth's surface. As computer technology has improved, seismic has been able to handle increasingly large quantities and complexity of data, though the cost of gathering and interpreting this incures increasing costs. This is why you will see in some contracts the type of seismic required (eg. 2D vs 3D), how many kilometers of seismic is to be gathered ("shot" in industry jargon) and specifically that it must be interpreted and the results provided to the host government.

Exploration Drilling i.e. If the seismic produces promising results ­ sometimes called a "lead" ­ then the next phase of exploration will typically be drilling an exploration well. Here, an extraordinarily large drill bit is cut into the earth's surface in order to bring up a "core" or a cylindrical sample of that portion of the earth. Even with conducting seismic to help climb the confidence scale, one might need to drill several exploration wells to establish what is in fact below the earth's surface. One commonly used comparison to exploration drilling (particularly in the deep offshore) is trying to stick an extremely long straw in a drinking bottle from the top of a skyscraper and then drink from it. Of course, there are many areas where hydrocarbons are known to exist, though they might not be evenly distributed. In these cases seismic is still needed to increase the chances of 'hitting the target'.    Because most of us use fuel in our cars which we see as a liquid, many of us envision petroleum to be in lake­like pools below the earth's surface.  In fact, it is found in spaces or cracks within rock formations and needs various techniques to extract (relieve pressure, create pressure, etc).  One might picture a glass with a lot of crushed ice and trying to drink a milkshake from it. While there is no standard amount of time one might conduct seismic studies and drill exploration wells in the world, these studies and drilling and the interpretation of the results even on a very rapid schedule takes months at the very lesat and more often around 2­4 years.

Note : We must know – EXCERPT FROM GHANA PETROLEUM WITH TULLOW, KOSMOS AND SABRE MARCH 10, 20016: “Exploration “ or Exploration Operations” means the search for petroleum by geological, geophysical and other methods and the drilling of exploration Well(s) and includes any activity in connection therewith or in preparation thereof and any relevant process and appraisal work. Including technical and economic feasibility studies, that may be carried out to determine whether a Discovery of Petroleum constitutes a commercial discovery.

          Let us assume that, lucky you, you found hydrocarbons while drilling; you have "discovered" petroleum! Is the pay day coming? Most likely, not quite yet. You may have "discovered" hydrocarbons, but the question then becomes, how much did you find? Enough to make it worthwhile, "commercially viable" or economical to develop and produce? What you will need to do next: "appraise" the discovery.

   Appraising entails more drilling and seismic to asses what you have discovered, but to a greater degree of accuracy. It will lead to more detailed geological discovery while also involving assessment and reflection on how to build the necessary infrastructure to produce the petroleum you've found. You will want to know more about: the chemical composition of the various hydrocarbon deposits:- the chemical composition of the various hydrocarbon deposits and the quantity of reserves in the area also how to get these hydrocarbons out of the ground (if the discovery is found to be of commercial significance). Once hydrocarbons have been found in sufficient quantities and with an economically viable extraction cost, the discovery becomes a "commercial discovery". It is important to stress here that a commercial discovery is not a geologic term but a business term. For this reason, the length of time an appraisal takes will likely depend on such considerations as:- the business considerations of the company that has found the oil & the local laws and regulations that determine the process of development;