CENTRE FOR ENERGY, PETROLEUM AND MINERAL LAW AND

POLICY

STATEMENT OF ORIGINALITY

FOR RESEARCH PAPERS

NAME OF STUDENT: Zaid Mahayni

MATRICULATION NUMBER: 009943036

PROGRAMME: LL.M. in Petroleum Law and Policy

TITLE OF THE RESEARCH PAPER:

The Redetermination Provisions: A Proposed Draft for more

Equitable and Industry-Efficient Consequences

ABSTRACT OF THE RESEARCH PAPER:

The redetermination process involves significant costs and risks. When deciding on

the legal framework governing the redetermination process, the parties involved must

be able to reconcile their various interests and provide equitable solutions. This paper

will offer suggestions for the drafting of redetermination clauses. It is vital to realise

that some details in this matter, if neglected or omitted, might end up costing the

parties large amounts of money. The parties must therefore be careful in the choices

they make and must take for a model the experience of the industry.

WORD COUNT: 4,029

PRESENTED TO: Professor Stephen Dow

TITLE OF THE COURSE: UK Oil and Gas Law

I, Zaid Mahayni, have read the Code of Practice regarding plagiarism contained in the

Students’ Introductory Handbook. I realise that this Code governs the way in which

the Centre for Petroleum and Mineral Law and Policy regards and treats the issue of

plagiarism. I have understood the Code and in particular I am aware of the

consequences, which may follow if I breach that code.

Signed:________________

Date:__________________

1

Table of Contents

Table of Abbreviations -------------------------------------------------------------------- 2

1. Introduction ------------------------------------------------------------------------------ 3

2. Redetermination: A Definition -------------------------------------------------------- 3

2.1 Unitisation, Tract Participations and Unit Interests ------------------------------ 3

2.2 Geological and Geophysical Information ------------------------------------------ 4

3. Redetermination: The Problem ------------------------------------------------------- 6

4. Redetermination Clauses within the Unitisation Agreement --------------------- 7

4.1. Timing and Number of Redetermination ----------------------------------------- 7

4.1.1 Timing of Redetermination -------------------------------------------------------- 7

4.1.2 Number of Redetermination ------------------------------------------------------- 8

4.2 Basis for Redetermination ----------------------------------------------------------- 8

4.3 Redetermination Procedures --------------------------------------------------------- 10

4.4 Settlement of Dispute Mechanism ------------------------------------------------- 10

4.4.1 General Issues ----------------------------------------------------------------------- 10

4.4.2 The Redetermination Expert ------------------------------------------------------ 11

4.4.3 Pendulum Arbitration -------------------------------------------------------------- 12

4.4.4 Guided Owner Process ------------------------------------------------------------- 13

5. Consequences of Redetermination --------------------------------------------------- 13

5.1 General Concepts ---------------------------------------------------------------------- 13

5.2 Adjustments in Cash ------------------------------------------------------------------ 13

5.3 Adjustments in Production ---------------------------------------------------------- 15

6. Alternatives to Redetermination ------------------------------------------------------ 16

6.1 Possibility for Fixed Equities -------------------------------------------------------- 16

6.2 Minority Group Sell Out or Possibility of Net Profit Interest ------------------ 16

7. Conclusion ------------------------------------------------------------------------------- 17

Bibliography -------------------------------------------------------------------------------- 18

2

Table of Abbreviations

DTI ------------------------------------- Department of Trade and Industry

HCPV ---------------------------------- Hydrocarbon Pore Volume

IGIP ------------------------------------ Initial Gas in Place

JOA ------------------------------------ Joint operating agreement

OGLTR -------------------------------- Oil and Gas Law and Taxation Review

OGFA ---------------------------------- Oil and Gas Finance and Accounting

ORR ------------------------------------ Original Recoverable Reserves

PRT ------------------------------------ Petroleum Revenue Tax

STOOIP ------------------------------- Stock Tank Oil Initially in Place

UK ------------------------------------- United Kingdom

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1. Introduction

The redetermination provisions represent one of the most crucial points in the

negotiation of a unitisation agreement. In a conference on UK Oil and Gas Law,

presented in St. Andrews in September 1998, Mr. Brian Rossiter stated that:

“I doubt that anybody knows the true costs of conducting a redetermination. Obviously,

there is the cost of geologists, geophysicists and reservoir engineers. On average across

all disciplines and owners probably about 12 people for two years. Fully costed that

amounts to about 2 million pounds, though this is spread between the owners. Other

disciplines, in particular tax could add another half a million pounds.”1

Therefore, redetermination clauses have to be drafted in the way that will incur

the least costs possible to the parties. Not only is the process of redetermination is in

itself very expensive but its potential consequences can be disastrous on the excess

parties. Moreover, a potential dispute may create added tensions between the parties

and may prove to be hideously expensive.

This paper will offer suggestions and alternatives in the drafting of the typical

redetermination clauses.

Following an explanation of the concept of redetermination, each one of the

typical redetermination clauses will be examined in detail. This will include the

following points:

- The number and timing of redetermination;

- The basis for redetermination;

- The redetermination procedures;

- The settlement of dispute;

- The methods of readjustment.

2. Redetermination: A Definition

2.1 Unitisation, Tract Participations and Unit Interests

In order to understand the meaning of redetermination, we must first define

the notions of unitisation, tract participations and unit interests. We must then, under a

second title, explain the impact of certain geological and geophysical concepts.

4

Unitisation assumes the presence of an oil or gas reservoir underlying two

separate licence blocks. Unitisation will aim for the development of this deposit as if

it was beneath one single unit.2

Each licence block involved in the unitisation agreement will have specified

rights on the hydrocarbons extracted. These rights are determined according to what is

called the tract participation of each licence group.3

Moreover, in the advent of unitisation between two blocks, it is important to

understand that often, many sub-parties will be involved. Indeed, each licence block

will often be composed of a group of licensees. Each one of these licensees will own

certain interests in both their licence block and in the unitised field as a whole.

Interests in the unitised field are referred to as unit interests or unit participations.4

Hence, the unit participation of a licensee is calculated by multiplying the

percentage interest of this licensee in his or her licence by the tract participation of the

whole licence group.5

Now, before defining redetermination, let us examine the geological and geophysical

concepts that give significance to the term.

2.2 Geological and Geophysical Information

First of all, when a decision to unitise is made, the parties involved often only

have a limited amount of information on the field. The geological and geophysical

information at this point in the life of the project does not allow the exact evaluation

1 B., Rossiter, Determination, presented to, UK Oil and Gas Law Seminar, (St. Andrews,

Scotland: CEPMLP, 21-25 September 1998), par. 9. 2 For a more detailed definition, please refer to R., Paytuvi, Unitization: Salient Aspects, pp.

12-13. 3 M. P., Taylor, Unitisation, in MacDougall D. and Wälde T., (eds.), European Community

Energy Law: Selected Topics, p. 224. 4 Ibid. 5 Ibid.

5

of the dimensions and limits of a reservoir. Therefore, it is still unknown at this stage

how much of the reservoir underlies each of the blocks.6

Secondly, petroleum is a fluid material. Because of its tendency to migrate and

to move around in a reservoir, it becomes hard to accurately evaluate each licence

group’s share of the hydrocarbons. Indeed, petroleum may, at various stages of

production, flow from one licence block to the other.7

Moreover, modern technology does not permit, at the present time, the

accurate determination of the total amount of hydrocarbons contained in a reservoir. It

is only at the end of production, once the maximum amount of hydrocarbons have

been extracted, that the parties to a unitisation will better estimate the volumes they

were entitled to.8 Actually even then, knowing the total recoverable reserves does not

necessarily determine the amount of reserves recovered from each licence area. More

factors, such as migration, water drive and so on, need to be considered in the

formula.9

As development drilling is carried out, the geologists and geophysicists are

supplied with additional information on the characteristics of the field. The exact

boundaries of the reservoir become clearer and the parties may realise that they were

entitled to more or less hydrocarbons.10

Consequently, the parties may choose to re-evaluate or redetermine the initial

tract participation for each licence. Redetermination can be then defined as the re-

evaluation of tract participations as a result of the availability of additional

6 P., Deemer, Unitisation Agreements, presented to, UK Oil and Gas Law Seminar, (St.

Dundee, Scotland: CEPMLP, 8-12 September 1997), p. 5. 7 C., Robson, Transboundary Petroleum Reservoirs: Legal Issues and Solutions, in, Blake, G.

H., et al. (eds.), The Peaceful Management of Transboundary Resources, p. 5. 8 R., Paytuvi, supra note 2, p. 25. 9 G., Hewitt, Unitisation Agreement, presented to, UK Oil and Gas Law Seminar, (Dundee,

Scotland: CEPMLP, 8-12 September 1997), p. 2. 10 P., Deemer, supra note 6, p. 5.

6

information on the field. It basically aims at providing a more accurate answer to two

essential questions: What is the size of the cake? Where is the cake?11

3. Redetermination: The Problem

As we said in the Introduction of this paper, redetermination may be very

costly.

“With three redeterminations, during the average 300 barrel field, one can very easily

spend between 6 and 8 million pounds moving the same oil back and forth between

owners and creating a lot of friction in the process”.12

According, Dr. I. W. Gareth Hughes, company unitisation specialists often lack

the expertise to evaluate the costs of redetermination. Too often, they do not even

consider alternatives to redetermination. This is because they often have too little

experience in such things as the buying and selling of acreage. They lack budgetary

responsibilities and hence, ignore the costs of geologists, geophysicists, geophysicists

and reservoir engineers.13

Doctor Hughes further argues that conversely, the managers who do have

budgetary experience are not in position to question a decision to redetermine. In

general, they also do not have the technical background to suggest a redetermination

method in favour of another.14

As Doctor Hughes admits:

“We too frequently see a company going down a ‘standard’ unitisation /

redetermination path by default. No one has evaluated the alternatives and chosen the

most cost effective path or decided it is the best way to go. What has happened is that

no one combines sufficient of a ‘helicopter view’ with technical know-how to be able

to question the slippery slide towards a unitisation / redetermination path.”15

Another point that needs to be stressed is the potentially ruinous effects of

readjustments following a redetermination. For instance, the excess party could

11 I. W. G., Hughes, Unitisation of Oil and Gas Fields: The Department of Energy Views, 6: 3

OGFA 131, p. 136. 12 B., Rossiter, supra note 1, par. 9. 13 I. W. G., Hughes, The DTI’s Efficiency Scrutiny and Unitisation, 8:4 OGFA 209, pp. 218-

219. 14 Ibid. 15 Ibid.

7

become insolvable when readjustment obligations arise. It could also be already

insolvable at this point in time.

On the legal side of the issue, it could be thought that notions such as unjust

enrichment apply when redetermination sets new tract participations. This statement

is said assuming that the excess party produced and sold petroleum that belongs to the

deficient party. Under such a qualification and assuming readjustments in production

are not possible, the deficient party would be able to enforce, by action, the remedies

specific to unjust enrichment.16 This could include the restitution of the petroleum,

sold by the excess party, from the hands of a buyer that was aware of the possible

defect in the title. However, it is important to underline that such a view would be

legally false since the now excess party did in fact hold proper title over the

petroleum sold. Therefore, unjust enrichment remedies are not open to a party that

becomes deficient. The transaction between a third party and the present excess party

is considered valid under the law.

Essentially, it is crucial that the redetermination clauses provide the buyers of

oil or gas from a unitised field with contractual security. Otherwise, the risk

associated with a sales transaction would indeed justify a much lower price, and hence

much lower company profits.

4. Redetermination Clauses within the Unitisation Agreement

4.1 Timing and Number of Redetermination

4.1.1 Timing of Redetermination

There are two main alternatives as to the timing of redetermination. The

provisions may provide for either redetermination based on development drilling or

specified time periods.17 Alternatively, redetermination may either be automatic or

triggered by a time period or certain field events.18

16 D. M., Walker, The Law of Contracts and Related Obligations in Scotland, Third Edition,

p.585. 17 P., Deemer, supra note 6, p. 7. 18 G., Hewitt, supra note 9, p. 6.

8

Scholars have suggested many practical solutions as to the timing of

redetermination. Daintith and Willoughby suggest that the provisions must establish a

certain time limit between the end of one redetermination and the beginning of the

other.19 Also, no redetermination should be allowed after the production of a certain

percentage of recoverable reserves. This is because, late in the life of a field, the

reservoir is unable to yield enough production to enable ‘make-up’ adjustments.20

Brian Rossiter suggests that predetermined dates should be avoided and that

instead production “milestones” should be used.21 According to Rossiter, the best

solution is often to specify a certain number of wells to be drilled before the

commencement of a redetermination. Additionally, Rossiter favours redetermination

upon request rather than automatic redetermination, since they give the chance to take

a conscious decision.22

4.1.2 Number of Redetermination

Due to the high costs and decreasing marginal utility of redetermination, the

unitisation agreement should limit the number of redeterminations.

It has been advanced that there should be no more than two redeterminations,

regardless of the size of the field.23

4.2 Basis for Redetermination

The unitisation agreement will establish in advance the basis on which

redetermination will be calculated.24 Many different calculation methods are

available. In general, one of the following methods will be used:25

- Stock Tank Oil Initially in Place (STOOIP)

- Initial Gas in Place (IGIP)

- Hydrocarbon Pore Volume (HCPV)

- Original Recoverable Reserves (ORR)

19 T., Daintith and G., Willoughby, United Kingdom Oil and Gas Law, Third Edition, p. 1184. 20 Ibid. 21 B., Rossiter, supra note 1, par. 1. 22 Ibid. 23 Ibid. 24 P., Deemer, supra note 6, p. 7.

9

Other calculations exist but they are simply an adaptation of the above

methods. It is important to note, that the more complicated the calculation method

gets, the more time the redetermination process will require.26 Interestingly, the

calculation method that seems to be used most in the business is STOOIP or a

variation of it.27 According to Taylor and Winsor, this method is relatively easy to

estimate and agree upon. It is rather unlikely to change once development drilling has

been completed. However, it does not distinguish between the reserves that will be

produced from those that will be left in the reservoir.28

Furthermore, Taylor and Winsor argue that there are also disadvantages in

using recoverable reserves as a basis for calculation. First of all, the estimation of

recoverable reserves before the end of production generally suffers from a large

margin of error. Secondly, the recovered reserves may originate from any one of the

unitising blocks and hence, parties will be competing for the maximal recovery of

petroleum from their own block. Such a practice would certainly be against the spirit

of unitisation. Finally, this calculation method does not take into account that non-

recovered reserves generally do contribute, through drive mechanisms, to the

extraction of the recovered reserves.29

One equitable method in the calculation of new tract participations would be

to use moveable oil, even if not produced in reality. Another suggestion would be to

adopt the STOOIP method but with a readjustment in case one unitising block

disproportionately contributes in displacing recoverable reserves to the surface.30

At last, it should be noted that if a disagreement arises on a particular part of

the chosen calculation method, the operator might be enabled to proceed anyway

through the system of ‘Operator Over-ride’.31

25 B., Rossiter, supra note 1, par. 2. 26 Ibid. 27 P., Deemer, supra note 6, p. 8. 28 M. P., Taylor, and S. M., Tyne, Taylor and Winsor on Joint Operating Agreements, Second

Edition, p. 115. 29 Ibid. 30 Ibid. 31 B., Rossiter, supra note 1, par. 2.

10

4.3 Redetermination Procedures

The unitisation agreement may select the operator as the responsible person in

the conduction a redetermination. Habitually, in this case, the operator will need to

report periodically to a ‘redetermination committee’ composed of all the parties to the

unit agreement. Similarly, the relevant provisions can assign the ‘redetermination

committee’ itself32 or a third party consultant33 with the responsibility to conduct the

redetermination.

In an attempt to avoid delays, the unitisation agreement will often impose time

limits on the data gathered in the redetermination process. Consequently, data after

the specified ‘Cut-off Date’ will not be admitted, unless all parties agree

unanimously.34

Moreover, the redetermination provisions should restrict the data used to that

originating from within the unit area. Data originating outside the unit area should

only be used with the consent of all the parties to the unit agreement. The reason

behind such a restraint is to allow, through added participation, a more efficient

control of the input data.35

The unit agreement can also impose time limits on the redetermination process

as a whole. If the redetermination is not completed by the deadline, the parties can

then choose to maintain the tract participations as they were prior to the

commencement of the process or they can decide to restart the process again.

Extensions could also be granted. The main aim here is to restrict the time and

expense associated with the redetermination process.36

4.4 Settlement of Dispute Mechanism

4.4.1 General Issues

32 Ibid, par. 3. 33 M. P., Taylor, and S. M., Tyne, supra note 28, p. 117. 34 B., Rossiter, supra note 1, par. 3. 35 Ibid. 36 P., Deemer, supra note 6, p. 8.

11

It is important to establish in advance the procedure to be followed in case of

disagreement. First of all, if a disagreement arises on the new tract participations, one

suggestion would be to maintain the existing equities until a decision is made. This

will avoid commercial and legal uncertainty. The parties could provide for

readjustments retroactive from the day a decision finally settles the dispute to the date

on which the new tract participations where determined.37

If the disagreement persists beyond a certain amount of time without being

referred to an expert, the redetermination process should be aborted and the existing

equities should prevail.38

However, more importantly, it is essential to determine what is required to

form a valid objection. Who can form an objection? What circumstances can justify

an objection? The requirements for the formation of a valid objection need to be strict

in order to ensure commercial efficiency.

4.4.2 The Redetermination Expert

The unitisation should establish a procedure for the selection of an expert that

will resolve potential disputes between the parties. The parties may propose a list of

experts, ranking them in order in order of preference. In practice, unitisation

agreements will often require the expert to be a member of a professional society or a

“competent and qualified consulting firm”. In any circumstance, it is essential to

ensure that the expert chosen is not in conflict of interest with respect to the object of

dispute.39

Also, the unitisation agreement should delimit the matters that can be the

object of referral and restrict in time such referrals.40

In practice, the expert usually does not calculate new tract participations.

Instead, he or she will simply provide the parties with more clarity on the calculation

37 B., Rossiter, supra note 1, par. 4. 38 Ibid. 39 P., Deemer, supra note 6, p. 9. 40 B., Rossiter, supra note 1, par. 5.

12

method. On the other hand, the agreement could very well require the expert to

personally compute the revised tract participations. The parties must instruct the

expert on the procedure to be followed.41

The parties should have the right to make representations to the expert on the

matters that have been referred and on any finding of significance to the final

outcome.42

Furthermore, it is important to restrict the deliberations of the expert to the

matters submitted by the parties.43

Finally, it should be noted that the courts do not automatically award the

expert with the status of an arbitrator. The parties will therefore be unable to appeal

the decision of the expert. This is probably a good thing since appeal will involve

intolerable delays and costs. However, one considerable disadvantage is that the

parties do not have a body of law, the Arbitration Acts for example, to fall upon if the

expert procedure fails.44

4.4.3 Pendulum Arbitration

There is a notorious tendency for parties involved in a dispute to plead

extreme positions in their allegations. As a result of this tendency, viewed by the DTI

as being unprofessional, experts will often react by adopting a ‘middle-ground’

judgment.45

In an effort to obtain more reasonable allegations, the DTI has suggested the

use of pendulum arbitration. This basically obliges the expert to choose between the

submissions of one party or the other instead of opting for a ‘middle-ground’

solution.46

41 P., Deemer, supra note 6, p. 9. 42 B., Rossiter, supra note 1, par. 5. 43 Ibid. 44 M. P., Taylor, supra note 3, p. 231. 45 Ibid, p. 232. 46 Ibid.

13

4.4.4 Guided Owner Process

The guided owner process has been newly adopted by the industry. It aims at

saving time by implicating the expert as early as the first negotiations on the data. The

presence of the expert throughout the negotiations ensures that he or she witnesses all

technical meetings and settles potential disagreements before they magnify.47

The guided owner process may fix a system of ‘key-step determination’,

according to which all participants have to agree on a specific point before addressing

another. The expert will assist the parties in case of a deadlock and will help them

move on to other issues.48

5. Consequences of Redetermination

5.1 General Concepts

Once a redetermination process is completed, the parties have to readjust their

positions according to the new tract participations. They must reorganize everything

as if the new tract participations prevailed since the outset of production. As Paul

Deemer writes:

“The unitisation agreement will normally provide a mechanism for reallocation or

rebalancing (i) past capital expenditures for the field, (ii) operating costs for the field

incurred prior to the production commencement date, and (iii) past production of oil or

gas.”49

Therefore, the excess party will have to compensate the deficient party in

accordance with the new tract participations. The redetermination provisions might

impose a certain swing level in the ownership for adjustments to take place. The

provisions might also limit the adjustments in amount so that significant changes in

equities do not cause intolerable commercial difficulties to the excess party. As we

will see, adjustments may be either in kind (e.g. production) or in cash.

5.2 Adjustments in Cash

It should be noted at this point, that the industry draws a distinction between

capital costs and operating costs. First of all, since capital costs are shared on the basis

of equities, they should be readjusted when new equities become available. On the

47 Ibid. 48 Ibid.

14

other hand, operating costs are generally shared according to liftings. Therefore, they

will be rather adjusted consequently to the readjustments in the production

entitlements.50

Once the new tract participations have been calculated, a party that turned out

to have over-invested in capital expenditures must be compensated by the under-

investors. The redetermination provisions must set a time limit in which readjustment

payments have to be made. According to Mr. Rossiter, the limit should be positioned

between 30 and 60 days following the introduction of the new tract participations.51

Usually, payments made to the over-investor must include an interest factor.

This would allow the over-investment to earn some form of return. Usually, the added

interest is fixed at 1% over a pre-determined published interest rate.52

It is imperative that the parties keep detailed accounting records since the very

beginning of the project. The parties should agree on the values to be used before the

calculation of new equities.53

The evaluation of cash readjustments can either be according to the monthly

expenditures or according to cash calls. It is advised to use cash calls since they are

easier to determine and agree upon.54

Finally, it is important to mention that when interest accompanies any

readjustment payments, tax must be deducted from the interest element at the standard

rate of income tax. This was decided in the case Chevron Petroleum (UK) Limited vs.

BP Petroleum Development Limited 55 and motivated by the fact the recipients should

recover the amounts deducted by an offset against their corporation tax liabilities.56

49 P., Deemer, supra note 6, p. 10. 50 G., Hewitt, supra note 9, p. 7. 51 B., Rossiter, supra note 1, par. 6. 52 Ibid. 53 Ibid. 54 Ibid. 55 Chevron Petroleum (UK) Limited vs. BP Petroleum Development Limited [1981]

STC 689. 56 M. P., Taylor, supra note 3, p. 233.

15

5.3 Adjustments in Production

Following a redetermination, the deficient party is entitled to receive make-up

oil or gas from the excess party. To prevent undue commercial disadvantage to the

excess party, the make-up quantities will be phased out over a specific period of time.

If the rebalancing of production cannot be achieved within the period of time initially

established, an extension of that period or increase of the make-up quantities can be

made possible.57

The scholars have suggested different ways to achieve adjustment in

production. First of all, if ownership is even between the parties, then the deficient

member should be allocated a percentage of gross production. However, if the

ownership involves rather small companies with small percentage interests, then a

percentage of gross production may exceed the entitlements of the excess parties.

Therefore, in this scenario, it is preferable to use a percentage of the excess parties’

entitlement. This percentage may have to be quite a large figure (possibly 60 % or

80%) to constitute a successful make-up rate.58

When the entire share of the excess party’s production is unable to compensate

the deficient party, then the redetermination provisions should impose additional cash

payments. However, this will lead to problems when assigning a value to the

petroleum deficiency. Should the parties use the current price of oil or the one at the

time of unbalanced production? Should an interest factor be added? Are there any tax

considerations on the sums paid? 59

One suggestion for money payments is to price oil by reference to PRT

reported values at the date the excess party lifted it. Interest is then added from the

date of each lifting. This should effectively transfer to the deficient party the value

obtained by the excess party. However, this calculation is rather complex and involves

the examination of each single lifting.60

57 T., Daintith and G., Willoughby, supra note 19, p. 1185. 58 B., Rossiter, supra note 1, par. 8. 59 P., Deemer, supra note 6, p. 11. 60 A.W., Baker, Unitisation: Legal problems, 2:3 OGLTR 50, p. 52.

16

In brief, the redetermination provisions will have to conciliate the interests of

the parties. Adjustment in production should be achieved in a reasonable time and

with the least harm possible to the excess party.

6. Alternatives to Redetermination

6.1 Possibility for Fixed Equities

Several recent unitisation agreements have been contracted with fixed tract

participations. One argument in support of fixed equities is that, with the current

technology, fewer wells are needed to detail the field and seismic readings yield more

accurate results of recoverable reserves.61 Another advantage of fixed equities is that

they might reduce delays in the development of marginal fields.62

Actually, fixed equities constitute a usual business practice in the case of gas

fields. Indeed, since gas fields are characterized by long-term, multiple gas buyers, the

risks of a party loosing a share of its gas entitlement through redetermination will

devaluate the price of gas.63

Interestingly, in both the Miller and Britannia fields, the parties involved opted

for fixed equities.64

6.2 Minority Group Sell Out and Possibility of Net Profit Interest

In the North Sea, it is common to see a major field buying adjacent acreage

with comparatively small interest or exchanging it for another acreage.65

This practice, encouraged by the DTI, offers advantages for both sides of the

equation. First of all, the minor interest holder will no longer be concerned about

unfair treatment or putting in technical expertise. Second of all, as Dr. Hughes puts it:

“[t]he major interest holder no longer has this minor holder as the thorn in the

flesh coming to operators meetings, having their concerns, asking for more copies of

data, asking for different ways to go ahead and so forth.”66

61 I. W. G., Hughes, supra note 13, p. 216. 62 M. P., Taylor, and S. M., Tyne, supra note 28, p. 116. 63 Ibid. 64 T., Daintith and G., Willoughby, supra note 19, p. 1184. 65 I. W. G., Hughes, supra note 13, p. 216.

17

Another alternative advanced by Brian Rossiter is for the majority interest

holder to offer a net profit interest to the minority group. This solution should avoid

uncertainties associated with redetermination. The minor interest holder will be

guaranteed a share of the pie while the majority interest holder gains more control on

the decisions made.67

7. Conclusion

In conclusion, the redetermination provisions must be constructed in the way

that will involve the least costs and risks possible. In order to achieve this, the parties

must first minimise the costs of conducting a redetermination. One obvious and

efficient solution is to reduce the number of redeterminations in the life of a field.

Actually, redeterminations will yield less marginal utility as they are increased in

number.

A second way to minimise costs is to reduce the risks of disagreement. The

redetermination provisions must establish effective dispute resolution and dispute

avoidance provisions.

Thirdly, adjustments in cash or production must be equitable to both the

excess and deficient parties. The deficient party must be successfully compensated in

accordance to its increased equities. Similarly, the excess party must not be faced with

unreasonable financial difficulties when making this compensation.

Finally, it is important to underline that redetermination is not a suitable

solution in some cases. Indeed, for any redetermination to be worthwhile, there must

be a possibility of substantial swings in the ownership or significant oil or gas at

stake. If the parties believe that fair equities where established since the beginning,

then it is advised for the parties to work with these same tract participations

throughout the life of the field.68

66 Ibid. 67 B., Rossiter, supra note 1, slide 13. 68 I. W. G., Hughes, supra note 13, p. 216.

18

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(London, England: Graham & Trotman: 1995).

Daintith, T. and Willoughby, G., Manual of United Kingdom Oil and Gas Law,

(London, England: Sweet & Maxwell, 1984).

Daintith, T. and Willoughby, G., United Kingdom Oil and Gas Law, Third Edition,

(London, England: Sweet & Maxwell, 2000).

English, Warwick, Unitisation Agreements, in David, M. R., (eds.), Upstream Oil and

Gas Agreements, (London, England: Sweet & Maxwell, 1996).

Laitos, Jan, G., Natural Resources Law: Cases and Materials, (Saint Paul, Minnesota:

West Publishing Company, 1985).

McDonald, S. L., Petroleum Conservation in the United States: An Economic

Analysis, (Baltimore, Maryland: The John Hopkins Press, 1971).

Robinson, C., and Morgan, J., North Sea Oil in the Future: Economic Analysis and

Government Policy, (London, England: Billing & Sons, 1978).

Robson, C., Transboundary Petroleum Reservoirs: Legal Issues and Solutions, in,

Blake, G. H., et al. (eds.), The Peaceful Management of Transboundary Resources

(London, England: Graham & Trotman: 1995).

Salter, J. R., UK Onshore Oil and Gas Law, (London, England: Sweet & Maxwell,

1986).

Shell International Petroleum Company, The Petroleum Handbook, (Amsterdam, The

Netherlands: Elsevier Science Publishers, 1983).

19

Taylor, M. P., and Tyne, S. M., Taylor and Winsor on Joint Operating Agreements,

Second Edition, (London, England: Longman Group, 1992).

Taylor, M. P., Unitisation, in MacDougall D. and Wälde T., (eds.), European

Community Energy Law: Selected Topics, (London, England: Graham & Trotman,

1994).

Turner Kenneth Brown, Alternatives to Litigation in the UK, (London, England:

Customer Satisfaction Surveys, 1993).

Walker, D. M., The Law of Contracts and Related Obligations in Scotland, Third

Edition, (Edinburgh, Scotland: T&T Clark, 1995).

Zimmermann, E. W., Conservation in the Production of Petroleum: A Study in

Industrial Control, (Binghamton, New York: Yale University Press, 1957).

2.2 Articles

Baker, A.W., Unitisation: Legal Problems, 2:3 OGLTR 50.

Campbell, G., Unitisation: A UK Government Perspective on UK and Median-Line

Fields, 2:1 OGLTR 5.

Chatterjee, S. K., Unitisation: Certain Policy Issues, 5:12 OGLTR 309.

Davidson, A., Unitisation of Oil and Gas Fields: Tax Issues, 6:3 OGFA 172.

Hughes, I. W. G., The DTI’s Efficiency Scrutiny and Unitisation, 8:4 OGFA 209.

Hughes, I. W. G., Unitisation of Oil and Gas Fields: The Department of Energy

Views, 6: 3 OGFA 131.

2.3 Graduate Thesis

Choe, K., International Unitisation of Petroleum: Rules and Practices, (Dundee,

Scotland: Centre for Petroleum and Mineral Law Studies, 1985).

Paytuvi, R., Unitization: Salient Aspects, (Dundee, Scotland: Centre for Petroleum

and Mineral Law Studies, 1984).

Risk, R. N., Problems in International Unitised Fields in the North Sea, (Dundee,

Scotland: Centre for Petroleum and Mineral Law Studies, 1980).

2.4 Internet Sources

20

Alexander’s Gas and Oil Connections, Redetermination of Interests in Licence of

Troll in North Sea, 5:4 Company News Europe, March 9, 2000.

(http://www.gasand oil.com/goc/company/cne01010.htm, Last Visited on November

26, 2000).

2.5 Conferences

Deemer, P., Unitisation Agreements, presented to, UK Oil and Gas Law Seminar, (St.

Dundee, Scotland: CEPMLP, 8-12 September 1997).

Hewitt, G., Unitisation Agreement, presented to, UK Oil and Gas Law Seminar,

(Dundee, Scotland: CEPMLP, 8-12 September 1997).

Huxtable, A., Pre-Unitisation Agreements, presented to, UK Oil and Gas Law

Seminar, (London, England: CPMLP, 5-9 September 1994).

Morris, R., Area Developments, presented to, UK Oil and Gas Law Seminar, (St.

Andrews, Scotland: CEPMLP, 21-25 September 1998).

Rossiter B., Determination, presented to, UK Oil and Gas Law Seminar, (St.

Andrews, Scotland: CEPMLP, 21-25 September 1998).