Page 26 - Hydrocarbon

Petroleum Agreements and Bidding 13

subsequent nearby blocks can escalate to hundreds of millions of dollars. It is
important to realise that this signature bonus, once paid, is a sunk cost and should be
considered as part of the cost of exploration. It is not a tax-deductable cost against
future revenues.
The offer will have a bid deadline, after which submitted bids will be opened by
the Government, or its NOC representative. This may be done in public or more
commonly behind the closed doors. The winning bids may be publicly announced,
or kept confidential, depending on the country. The criterion by which the bids are
then compared is normally the total value of the bid package – the combination of
the work programme plus signature bonus. Of course, where the combined values of
competitors are close, the Government will need to decide on the relative weighting
it places on work programme versus cash offered in the signature bonus. The
weighting is not always apparent to the bidders. Other considerations that the
Government will take into account will be the bidders’ technical competence,
general reputation, any existing working relationships and any strategic reasons the
Government may have to encourage particular entrants into the region.
The details of the winning bids may be publicly announced and published, which
is both a useful piece of information for future bids and an interesting comparison for
each bidder to make with their own offer. In some cases all bids are announced, in
which case the margin by which the winner succeeded is clear – the winner of
course hopes not to have outbid the next nearest competitor by an embarrassing
sum, thereby ‘leaving money on the table’.

2.3. Block Award

The successful bid will result in award of the block, giving the rights to explore.
Any signature bonus offered will be cashed by the Government. There is often a
prescribed sequence of events that dictate the timing of carrying out the work
programme and declaring a commercial interest in the block – meaning that the
company intends to progress beyond the exploration stage and on to appraisal and
possible development of a discovery in the block. In this case, the company will need
to convert the exploration rights into development rights in the block.
Figure 2.3 shows an example of the provisions in a PSA for converting an
exploration agreement into a production agreement.
The criteria for a commercial well would be based on production rate during
testing of a discovery well, whereas the declaration of a commercial discovery (DCD)
would depend on the oil company demonstrating that an economic development
can be justified – this will need to pass internal economic screening criteria, further
discussed in Chapter 14. In the example, Figure 2.3 below, the Government is due a
bonus payable at DCD, and a further bonus when production from the development
starts. Timeframes are typically imposed on the events, shown above for a PSA
between the oil company and the Government.
In some cases there is a requirement to release only a fraction of the block if
commerciality has not been declared after a specified period of time. Figure 2.4