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To Dave Wall
Please can you expand on the meaning of a soft farmout.
Also, your terminology of transformational, would be very much appreciated.
In both anticipation and appreciation of your early reply.
Best regards
Steve Goodenough
As of 30th July 2019, China removes restrictions on foreign investment in upstream oil and gas.
Foreign investment can now be 100%, previously it had to be be EQV Equity Joint Venture or CJV Cooperative Joint Venture.
The Negative List 2019, represents Chinese government, new approach to resource sustainability.
Sinopec, playing a large part in this agreement and Rex Tillerson in his previous role.
All bows well for us.
Notes From The Field - An English Law Perspective On The Oil & Gas Market
That there is always some uncertainty of outcome associated with knowing whether a concession interest area contains commercially recoverable reserves of petroleum is one of the few certainties which exists in the business of exploring for and producing petroleum. To be successful, upstream companies must mitigate this uncertainty of outcome to the greatest extent possible.
This article examines the manner in which an upstream company is able to mitigate such uncertainty of outcome by divesting all or part of its interest in a concession or a project through a farm-out agreement.
The farm-out agreement will need to reconcile the competing interests of the farming-out party (which seeks to mitigate the uncertainty of outcome by shifting the risk to the farming-in party) and the farming-in party (which itself seeks to mitigate the uncertainty of outcome by leaving as much of that risk as possible with the farming-out party).
Certainty v. potential
The lifecycle of any upstream petroleum project can be characterised according to three essential phases:
exploration and appraisal (as the petroleum prospectivity of the concession interest is assessed);
project development and petroleum production (assuming that there are commercially realisable volumes of petroleum in the concession interest area); and
decommissioning and abandonment (as the petroleum production and transportation infrastructure within the concession area is removed or made safe upon the permanent cessation of petroleum production from that area).
Each of the three phases described above has a particular level of uncertainty associated with it. The exploration and appraisal phase of an upstream petroleum project will represent the high water mark of uncertainty regarding petroleum prospectivity. The process of exploring and appraising the concession will reduce this uncertainty (although the outcome of those activities may not always be the desired one). By contrast, the petroleum prospectivity of a project during its development and production or decommissioning phases will be much more certain because the project has already demonstrated that it is capable of petroleum production.
The uncertainty associated with a project is not the only factor that changes as it moves through its lifecycle. There are also differing degrees of upside potential associated with a project as it moves from one phase to the next. The upside potential of a concession will be at its highest during the exploration and appraisal phase, because prior to the start of exploration activities there is a zero base level of expectation attached to a concession. As the concession moves into production and then decommissioning that potential generally diminishes.
If the carried costs are so recoverable by the farming-in party then the carry is popularly described as ‘soft’; if the carried costs are not so recoverable by the farming-in party then the carry is described as ‘hard’. A hard carry is akin to a further element of consideration payable by the farming-in party (which ordinarily would not be refundable by the farming-out party), whereas a soft carry is akin to a form of loan by the farming-in party to farming-out party (which ordinarily would be refundable by the farming-out party).