Unitisation: A real prospect

To date New Zealand doesn’t have any examples of field unitisation. However, PHIL BARRON and DENNIS STICKLEY say that with the increasing intensity of exploration and development in the Taranaki Basin, ‘hot spots’ have emerged where the potential for unitisation is very real.

The one thing that can’t be said about the oil and gas industry is that it is dull. But whether up or down there are just two fundamental drivers – building reserves; and delivering cash.

Recent efforts in New Zealand to build reserves have had mixed results, resulting in one of the biggest challenges for our producers and users of hydrocarbon fuels.  However, where there have been successes, those reserves are being turned into cash through projects such as Pohokura, Kupe, Maari, Tui, Cheal and Turangi.

Our focus in New Zealand has therefore been very much on the conventional E&P cycle of explore, appraise, develop and produce. Our small scale, and somewhat immature infrastructure, means that much of this activity has occurred across a wide geographical area, aided to some extent by the award of quite large exploration licences. 

In other jurisdictions, where permit blocks are smaller, or where fields have been found to extend into more than one licence, the respective rights and obligations of different parties are addressed by a process called unitisation.

The process of unitisation can be either voluntary, according negotiations between the respective licencees, or compulsory under a scheme imposed by a regulatory body.  Under either scenario, the legal regime for petroleum development operates to protect the correlative rights of each party to receive their fair share of production while promoting the public interest in maximising recovery of the resource.

The outcome of the unitisation process is the determination of hydrocarbon reserves attributable to each of the licensees.

In addition to the initial assessment of resource allocation, agreements usually define arrangements for development and exploitation of the resource, along with provision for re-assessment of reserves and reconciliation based on new data (e.g. production or new seismic data). These arrangements are typically embodied in a unit development agreement that is submitted to the regulatory body and a unit operating agreement that defines the relationship between the licencees.

Unitisation requires very careful attention to both technical and commercial detail.  Defining the geological and engineering characteristics of something that is three to four thousand metres below ground is fraught with uncertainty thus monetary value is very sensitive to interpretation and small changes in assumptions. 

Add to this the competing interests of the different parties in terms of operatorship, placement of oil and or gas to market, and possible prior obligations to third parties, one has a potentially volatile mix of dynamics, enriched by legal and technical complexity. Resolution of these tensions requires a careful balance between commercial interest and robust technical interpretation, all of which requires months and often years to achieve.

Under the provisions of New Zealand’s Crown Minerals Act, individual licence holders are required to sort matters out between themselves (with the approval of Crown Minerals), but with Crown Minerals retaining the right to direct a solution if the parties cannot resolve the matter themselves. 

This means that unitisation is a two-track process with regulatory and commercial issues moving in tandem.  While the Minerals Programme for Petroleum offers some guidance on the regulatory aspects, commercial considerations have yet to be addressed by the industry in New Zealand. 

Some particularly contentious issues require discussion.  For example, to what extent can an approved development scheme for a unit vary the conditions of the original licences granted to the unit participants? Furthermore, there is the issue around the process for designating which of the licencees will be the operator for the unit?

Perhaps the most significant issue, from a commercial perspective, is the calculation of the participation formula that is used for the purposes of allocating development costs and sharing either the production or revenue from the unit. 

The responsibility for determining the factors and the weighting given to them in the participation formula is given to a technical committee. Some of the factors are backward looking while some are forward looking. 

The most common factors considered are: current well production, recoverable reserves, productive area, number of wells, productive capacity, gas:oil and/or water:oil ratios, and productive area porosity. 

A key element in most participation formulas is the equalisation of investment between licencees in terms of expenditures on wells, processing plants, gathering lines and storage facilities.  Few of these factors are mentioned in the unit development provisions in the Minerals Programme for Petroleum.

To date New Zealand has not had any examples of field unitisation. However, with the increasing intensity of exploration and development in the Taranaki Basin, ‘hot spots’ have emerged where the potential for unitisation is very real.

In particular, given the proximity and apparent alignment of some of the gas fields in the North Taranaki area (i.e. Mangahewa, Pohokura and Turangi), it would be unsurprising if unitisation issues arose. 

The unitisation of gas fields can present significant differences from oil fields due to joint ownership of pipelines and processing plants as well as the stage of field development when the unit is created.  Often the allocation of production according to the participation formula is reflected in the sales contract with the gas purchaser.

Should such events arise, this will be a more than interesting challenge for the Crown and the respective joint venture participants to address, and one that will undoubtedly provide further colour to our already colourful industry.

• Philip Barron is a petroleum engineer with 28 years of international experience and the managing director of energy industry consultants, Aretê Consulting.
  

• Dennis Stickley is an international legal expert in petroleum law based in Wellington. He is a qualified lawyer in the United States as well as New Zealand and is listed in the "Guide to the World’s Leading Energy and Natural Resources Lawyers".