Unitization: concepts, agreements and Brazil

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

Overview



Evolution of unitization



Brazilian law on unitization



Scope and complexities of pre-salt unitization



Unitization issues presented by pre-salt

What is Unitization?



A “field” straddles two blocks

Evolution of Unitization

Hydrocarbon formation does not correspond to surface boundaries

Evolution of Unitization

 Separation of ownership of surface and hydrocarbons

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

Evolution of Unitization



Unitization generally ensures

► Optimum and efficient resource development

► Fair and equitable sharing of costs and revenues

► Best use of available data

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

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

New System

CNPE MME

ANP

NSF

Consortium

PPSA PETROBRAS Investor

At Least 30%

Unitizing the Pre-Salt

Scope and Complexities

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

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

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Unit Area

Single Formation

A

B

Multiple Formations

A

B

Unit Area

Multiple Formations

A

B

Multiple Formations

plus future expansions with communication

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16

Unit Area

A

B

All current and future

formations

A

B

Multiple Formations

plus future expansions without communication

Pre-Salt Unitization Issues

 “Unit Area”

► What will be the areal boundary for the area?

Pre-Salt Unitization Issues

 “Unit Interval”

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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

Determination of Unit Interests

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

► Surface acreage

Unitization - Issues



Common Data Base

Ownership Interest

Joint Marketing

Secondment

Decommissioning

Assignment

Redermination

Expansion

Non-Unit Operations

Pre-Salt Unitization Issues

 Non-unit operations

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

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

Pre-Salt Unitization Issues

 Expansion and redetermination of the unit

 Expansion addresses changes in the size of the unit area

Pre-Salt Unitization Issues

 Three possibilities for expansion

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

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

Pre-Salt Unitization Issues

 Three possibilities for expansion (cont’d)

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

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

Unitization & Redetermination

 Development initiated 1975  Unit production start-up 1978  First redetermination 1983  Second redetermination 1988  Projected field abandonment 1999

Unitization & Redetermination

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

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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]]

Unitization Agreement

Scope



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

Unitization Agreement

Operating Committee



Akin to a Board of Directors



Approves Work Program and Budget

Approves Development Plan

Unitization Agreement

Voting 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

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Unitization Agreement

Voting Procedure



What data should be contributed to the Common

Database?



Approval of Work Programs and Budgets

Unitization Agreement

Unit Operator



The Unit Operator has duties, responsibilities and

liabilities similar to a JOA



Interplay JOAs with UOA

► For example, how to handle HSE standards?

Unitization Agreement

Exclusive Operations



Are non-consent and sole risk (exclusive

operations) permitted?



Generally, not

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

Unitization Agreement

Assignment



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

Unitization Agreement

Dispute Resolution



Interplay with JOAs

Arbitration

Venue

Administrative entity

Governing law

Texas

New York

English

Pre-Salt Unitization Issues

 Governance of the unit ► Unit operating committee

► Role of Pre-Sal Petróleos (PPSA) ► Budgetary controls and rights

► Sole risk operations

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