Page 137 - Well Logging and Formation Evaluation

Equity Determinations 127

how much actual production arises from the different sides of the
boundary. The relative contributions will necessarily be a function of
the development strategy and positions of the wells.

The technical teams working in each company will typically make their
own estimate of equity on all of the above bases. Having determined which
one is most favorable, they will try to propose that basis to the other parties.
Needless to say, one party will likely propose a particular method only
because it suits it, not out of any genuine desire to “keep things simple.” In
all equity determination I have been involved in, the final basis has been
on BOE. This is usually the most logical basis for determination.

9.2 PROCEDURES/TIMING FOR
EQUITY DETERMINATION

As stated above, at the early stages of field development, the senior
managers of each company will often get together and agree on a deemed
equity to allow development to commence. An initial deemed equity that
is low will mean that the cash contribution required for the development
will be less. Therefore, it might be considered advantageous to minimize
one’s deemed equity. It may often be the case that the final equity does
not differ much from the deemed equity. Some companies are thus wary
of pegging their deemed equity at a low value because they believe it will
tend to result in a lower ultimate equity.
During the deeming phase, parties may not necessarily share the same
data or make well data they have acquired on their side of the boundary
available to other parties if they feel it will be detrimental to their case.
The managers also have to agree on who will operate the field and the
infrastructure. In some cases, sunk well costs might be shared between
the parties if they can be used for development purposes. All these con-
siderations will be incorporated within a joint operating agreement
subject to an interim unitization agreement.
Generally speaking, the deemed equity will remain in place during the
development drilling until some time around first oil (or gas). At that point
there will be a provision for one or all parties to request a full equity deter-
mination. Note that it is not essential that this ever actually occur. Each
party will consider how much it is likely to gain (or lose) from such a
determination, also bearing in mind the costs of it. It might be that all
parties, rightly or wrongly, do not consider it to be in their interests to call
a full equity determination, in which case the deemed split may remain in