Page 22 - Hydrocarbon

CHA P T E R 2

Petroleum Agreements and Bidding

Introduction and Commercial Application: When the host government notifies its intent
to offer exploration acreage, the oil company has an opportunity to gain access.In this
section, we will introduce the form of invitation to bid and the agreement under
which the oil company may compete for and explore that acreage. Two broad types
of Petroleum Agreement exist: Licence Agreements and Contract Agreements.
In a Licence Agreement the Government issues exclusive rights to an oil company
to explore within a specific area. The operations are financed by the licence holder
who also sells all production, often paying a royalty on production, and always paying
taxes on profits. Such a fiscal regime is often called a Tax and Royalty system.The
Government may insist upon an obligatory level of State participation.
In a Contract Agreement, the oil company obtains the rights to an area through a
contract with the Government or its representative NOC. Essentially the company
acts as a contractor to the Government, again funding all operations. However, in
this case, title to the produced hydrocarbons is retained by the Government, and the
oil company is remunerated for its costs and provided a share of the profits either in
cash or in kind (i.e. a share of the produced hydrocarbons). The most common form
of this type of agreement is a production sharing contract (PSC), also known as a
production sharing agreement (PSA), and more detail of this is provided in Chapter 14.

2.1. The Invitation to Bid

As Chapter 1 pointed out, the majority of the remaining world hydrocarbon
reserves lie under the control of NOCs, and usually this will be developed by the
NOC. Exceptions to this may arise for a variety of reasons. The NOC may not have
the local expertise required, the host Government may not have sufficient funds or
manpower or an asset may be unattractive to the NOC. In cases such as these, the
host Government may invite third parties to participate in the region. Such an
opportunity may be posted in the international press, trade journals or by specific
invitation. The following is a typical invitation to bid (Figure 2.1).
The geographic area of interest is divided up into a number of blocks by a grid,
which is usually orthogonal. The size of these blocks varies from country to country
and even from area to area in some cases. For example, UK North Sea licence blocks
are 10 20 km, Norwegian blocks 20 20 km, GoM blocks 3 3 miles and
deepwater Angola blocks approximately 100 50 km (and roughly follow the shape
of the coastline as shown in Figure 2.2).
The Government will decide at its discretion what blocks it wishes to include in
any bidding round, but there is often a geographic progression, from say shallow water
areas into deeper water as time moves on.

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