Table of Contents Introduetion 1. Australian Petroleum Law, Chapter I, Tina Hunter 2. Energy law in Europe: Comparison and conclusions, Redgewell, Roggenkamp, Ronne, Guayo Continental Shelf 1. A Legal Regime for the Outer Continental Shelf? An Inquiry as to the Rights and Duties of Coastal States within the Outer Continental Shelf, David M. Ong 2. Article 76 of the LOSC on the Definition of the Continental Shelf Questions concerning its Interpretation from a Legal Perspective, Alex G.O. Elferink Licensing system 1. Access to petroleum under the licensing and concession system, Tina Hunter 2. Regulation of the Norwegian upstream petroleum sector, Est Nordtveit 3. The Offshore Petroleum Regulatory Frameworks of Australia and Norway,Tina Hunter 4, The UK petroleum Production Licence ~ Is it a Contract or Regulation and Does it Matter?, Omon Anenih Organisation of petroleum activity, Joint Operating Agreement 1. Scope of Joint Operating Agreement in Norway, Knut Kaasen 2. Joint Operating Agreements, Scott Styles Product Sharing Agreements 1, Partnership in oil and gas production-sharing contracts, Nutavoot Pongsiri Regulation of Petroleum: 1. World Petroleum legislation: Frameworks that Foster Oil and gas Development, Onorato & Park 2. Australian petroleum law Chapter 5, Tina Hunter 3. Between Market and Public interests — Organization and Management of the Norwegian System for Sale and Transportation of Natural Gas, Ernst Nordtveit Investment issues 1. The politics of petroleum and the Energy Charter Treaty as an effective investment regime, Philips Andrews-Speed 2. The pursuit of stability in international energy investment contracts: A critical appraisal of the emerging trends, A.F.M. Maniruzzaman 1. The Russian oil industry between public and private governance: obstacles to international oil companies’ investment strategies, Catherine Locatelli Environmental and safety issues 1. Offshore Safety: The European Commissions’ legislative inititatives, Greg Gordon 2. Environmental Regulation of Oil and Gas Exploration in Uganda, Emmanuel B Kasimbazi@ —_TRIMSIZE: 152x 241mm Chapter 1 Introduction to Petroleum Seope of the Book 1 ‘What Is Petroleum? 2 Petroleum Vale Chain 6 Upstream sector 7 Exploration 7 Appraisal 7 Development 7 Production 8 ‘Abandonment 8 Midstream sector 8 Downstream sector 9 Petroleum Geology ° Petroleum Reserves 10 Governments, Oil Companies and Licensing “ ‘Concession agreements 16 Service contracts 7 Licences 18 Global Market for Petroleum, 20 Petroleum Investment Decisi 2 Ownership of Pettoleum and the Rule of Capture 7 Scope of the Book 14 Overthelastcentury petroleum has grown inimportanceasa source of. energy. That growth isset to continue, with global energy demand projected to increase by 40 per cent by 2035,? much of that growth stemming from the rising living standards of the people in the region in which Australia is located. The increase alone will be greater than all the energy that the world 1 century ago, petroleum — what we call oil — was just an obscure commodity, today ii almost vt io human exitnce as water a quotation alibuted to the Bris Author mes Buchan, 2 Internationa Energy Agen Are We Entering a okie Age of Gest Special Report 2011, hsp vwinwienorg> 1@ — TRIMSIZE: 152 x 241mm 44 Petroleum Law in Australia consumed in 1970? Australia is well placed to met in from the region, particularly through the supply_of liquefied natural. gas, TENG). At the same time new opportunities are presenting themselves for inereasing production by conventional means, but also from shale andl coal, With these opportunities come increasing challenges in Australia. ‘These range from environmental iated_wit ic_fr of thal le, dev facilities in as tot 8 decommissioning old facilities, and increasing safety. There is also an ‘ongoing debate in Australia regarding the extent to which the people of Australia should share in the value generated by petroleu 1.2 [This book aims to provide an understanding of petroleum law and policy as it applies to the exploration and production of petroleum in Australia| It analyses the special requirements for the regulation of petroleum and how these have been dealt with in Australia, It considers the common legal issues that petroleum companies face; these include not only licensing and permitting issties but also health and safety, native title, environmental law and contractual arrangements between joint venturers. 1.8. ‘The world of petroleum is a special world with its own terminology and commercial context. Chapter 1 world the understanding of which is essential for petroleum lawyers and academics. Itis also the foundation on which the discussion and analysis in the following chapters of key legal, policy and regulatory issues is based. Our aim is to provide the reader with a clear picture of the legal and policy ramifications in Australia, particularly given the opportunities and challenges that are presenting themselves, With the advent of new recovery techniques that combine horizontal drilling with hydraulic fracturing, the recovery of petroleum in Australia from coal and shale is forging ahead. ‘Therefore, this book is about the law and policy regulating the exploration for petroleum and its production in Australia’s onshore environment, as, ‘well as the recovery of petroleum offshore. What Is Pets 4.4 The authoritative petroleum dictionary, the Schlumberger Oilfield Glossary, defines petroleum as a:complex mixture of naturally occurring hydrocarbon. compounds found in rock, ranging from solid. to. gas. |A hydrocarbon is an organic chemical compound where hydrogen and lcarbon are bound together in a variety of different ways. A hydrocarbon »mpound in its simplest form is methane (four hydrogen atoms bound to lone carbon atom), which isa gas at atmospheric conditions. As the number f carbon (and hydrogen atoms) increases, a hydrocarbon will become eavier and will generally change state from a gas to a liquid and then to solid. Starting from methane, & general progression would be to heavier leum? 3. Dern, The Ques, Penguin Books, 2011, p 713. 4 Schlutbeages Of Gsary 2012, chuipufwwrglosarylfeldslh.com>, sete stan e a 2 as@ — TRIMSIZE: 152 x 241mm Introduction to Petroleum 17 fase (ethane, propane butane), then fo iquids (hexane, octane) and then to a solid (bitumen or asphalt, which are used interchangeably). It is th hydrocarbons which provide the energy content which is normally teleased in the form of heat through combustion, whether in the engine of your car ora power station producing electricity. 1.5 Inthe underground strata at pressures and temperatures greater than surface atmospheric conditions, petroleum usually exists in a liquid or a gaseous form, The industry uses a lot of terms interchangeably, which can be confusing, If petroleum is liquid in the subsurface, it is typically known as oil. When the oil is produced from the subsurface to the surface, it separates into liquid and gas (similar to taking the top off a soft drink boitle whereby gas bubbles out of the liquid). The liquid at the surface is typically known asl (the same term as for the subsurface) or crude. When 2 gasis produced from the subsurface to the surface a similar thing happens in that liquids drop out of the gas. The liquids from gas are typically known. ‘as condensate or natural gas liqui ‘This book will generally use the word ‘petroleum’ as an expression to mean both oil and gas. ‘To describe one or the other specifically, the expression ‘oil’ (or ‘crude’) or ‘gas’ will be used. In this book, the terms [peor ‘or‘gasoline’ will describe the refined petroleum product that is used 4 transport fuell 4.6. The three main petroleum products that_are_produced_in_the upstream phase are,oil, condensate and. ‘of hydrocarbons and require f products. In the midstream phase (see Figure 1.1 below) ethane, propane, liquefied petroleum gas (LPG), LNG and gas may be refined and ad to cstomers tn the downstream phase technaly complex eincties” I, condensate and gas into a vast array of petroleum products 1.7 An important point is that petroleum will require the application of, a_process before it ca ‘treatment at a refinery in the downstream phase to produce diesel, petrol, jet fuel and other products such as feedstocks for the petrochemical and plastic industries, Not all crudes are the same. So its quality can be described with terms like sweet,” sour, light and heavy. Natural gas is ‘These are lr ight Hid hydeocarons that ace wed to make chemicals and ther high-value product including LPG, Sommer condense’ isa word given toany laud coming om wg eld or fom the procesing of aturalgasthat s pentane (CH, or sir ight gs igi 66. This isthe way that istypeally described in petroleum leilation. Section 7a) of the Ofshore evolu and Gren Gt erage ct 206 (Cb) (OPGGSA) detest ay satay ‘curing hydrocarbon, whether 7. Crude see iF ow in sul ‘commonly referred to are Bret Crade and Wet Texas Intermediate Cre which are tided fon markets. The Been blend comes from the North Sea andi ight crude ol, conning ppconimately 0.37 per cea sulphur, dasing taba sect crude of suitable for production of petroland middle dailies Accordingly hihly sought alter eis nota sweet x Wet Tex Intermediate Crude. Taps ere sa Malysan crude used asa pricing benchmark in Singapore, and acoedingly often referred ton Austra. heavy cde asa lower proportion ofthe more 3 ee eeeeee eee oo olL ONL | (Role coavpcOuieT {transient Argo sedeln the case of crude ofl this wil involve(vox2 0% Twifor,| @ — TRIMSIZE: 152 x 241mm oO < yw Petroleum Lave in Australia {2 mainly methane, but it can contain a number cs US are usually extracted before it is put into a pipeline or used for heating or % converted into LNG. These can include sulphur and inert gases which are 8 ‘of no heating value, and also those gases which are, ike ethane, propane J and butane. Most of these processes occur in what is described as the downstream phase, However, there are some initial processes that have to be carried out earlier, such as the,removal of sand and water immediately after the petroleum comes out of the well. 4.8 One quality of petrol that is very important to bear in mind, and which means thai une oe replaced son} isis high eneray density? It is this density which enables a car to run with a relatively small petrol Ithough battery technology is improving, and hybrid cars have been ~ around for a while, the energy density of petrol gives it a significant strategic edge.” This is notwithstanding a buraing i my producasarbondiaxide and other environmentally sensitive 4.9. The competitive position of gas would at first appear to be inferior | to petrol, It has a much lower enengy density and, because of ts volume, it is more difficult and expensive to transport, except in a comp: ‘ted forms” CAE GE clot ena anwar cece {gas using its cryogenic technology, and thereby reduces its volume, making it cheaper to ship. For example, there are no pipelines linking the North ‘West Shelf (NWS) of Western Australia to its major LNG markets of China, ® Japan and Korea. Accordingly in 1984 an LNG plant was completed near Karratha in Western Australia to process gas from the NWS for export. ‘This plan has sine ben expande-The significant cost of bulding these sla fas meant tht in Austaliathey_havs bsorcally been asocated esrb lighter hydrciebons, aking es aluble han ight crude. I crude i sour, the $ljphar may have tobe reduced se many countries have etictons onthe amount of slp The chemical formula for methane & CH, This makes i the siplest, smallest and lightest, Inyocarbon th atti of hydrocrion to carbon atoms pe molecule of 1. heavy oi wil have more carbon stom giving arto of sound | Te stuctre ofthe hydeocaros molecule wlletrmine things ke the spect ray, visosiy, volatility heat content an energy dens, tilof which will haves bearing on its chemical properties and commercalsation potitial | 9, Energy outputs measured i Bets sdferat fuels Hnengy density ithe ‘count. The lationship between ol ana natural ga on an energy equivalence ass sabout 6. “Thiemeane that one brel of el (42 US gallons) wil prodace te sameamoun of heat enegy 1 600 cub et of ntl gs. The energy content of at sal in Asta wally measured {nterajoules, One terjoule e100 ggajoules One ppsoae 1000 rcgaoules, The amount of ‘nergy in any given volume of gs so expressed in megajoues per cubic mete. 10, Fora comparison, sce the information produced by the US Hoey Infomation Administration a cit gowtodayinencegy™ 11, For the outlook for enetgy a5 tated o energy dens see The Outlook for Bery a 12, Thisienotithstanding it maybe lower in cos. assuming apie of natural gas of $3.80 per Met (@housand eabic fet) and a price of lo $82.00 pee bare natural gsi much cheape than ol ‘onan energy hati Ar those prices, one could purchase 21.6 Met of as forthe cost of one bare ‘of which world yield 3 tes moe energy rere hc peeled@ —_ TRIMSIZE: 152x 2441mm Introduction to Petroleum 444 ‘would be too risky to make the huge capital investment required to build the plant and associated infrastructure. 4.40. This raises another point of compat 2 spot market for crude oil of the right quali i an LNG on between oil and gas. There transport. So crude 5 requires. pipeline market. For countries “itis much easier to a-market price!” Where gas is inva remote ie, such as Western Australia in the 1980s, location with creating or accessing a market is more difficult. Ifthe gas is converted to. (G for sale, much of itwi the reasons just described. Hence a spot market for shipments of LNG is only. in the early stages of development. . “Try thing technology of compressing.and liquefying. gas isimproving.all the re eaanshegy’ time, so that is becoming economic to produce compressed natural gas “and ENG in smaller quantities. In some parts of the world faxis are run on -compressed.natural gas, It is possible to build mobile LNG plants. If those “can. produce LNG economically, they_wi challenge the use of diesel as the preferred fuel, or back-up fuel, for generating electricity at emote mine sites in Australi and also for rond transport of heavy goods, 1.11 Petroleum can be described as ‘conventional’ or ‘unconventional’ Conventional petroleum is that which is extracted from carbonate and sandstone reservoirs, Unconventional petroleum takes many forms, and a definition can be elusive. The Oilfield Glossary defines unconventional petroleum resources as follows: .--an umbrella term for oil and natural gas that is produced by means that do not meet the criteria for conventional production. What has qualified as unconventional at any particular time i a complex function of characteristics. the_available_exploration_and_production_technologics, the economic environment, and the scale, frequency and duration of ‘orlustion from the tesqnece." UNBORN! ‘The term,‘unconventional’ in relation to petroleum stems not from the > yp eeyfskio\ TO unconventional nature of the gas — it is methane, exactly the same as the exKOU ML ‘gas extracted from conventional petroleum, Rather, the unconventional yy CCHS relates to the source rock — usually shale or coal formations, rather hy than sandstone or carbonate formations where conventional petroleum eT formations are found, However, it should be pointed out that this view — GO* #6 t is not universally accepted, with different bodies emphasising the source NADRAN. To rock, the extraction method or other factors."* *LoKee (OOhy (Car 13, Foreaample the Henry Hub pric in the United Stats of Ametics, Heney Hub sa diseibution hub onthe natural gas pipelite system in Eat, Louisa ls name suse forthe pricing point for natural as atures contest radeon the New York Mercantile Exchange (NYMEX). 14, See Schumberger Old Glaser, stim the petroleum. Directional drilling is also becoming much more common, in the extraction of conventional petroleum. 1.43 Finally, in discussing petroleum one needs to keep in mind how easy it is to confuse units of measurement. Energy is measured in BTUs or ‘erajoules, For oil, volume is usually measured in barrels, a barrel consisting of 42.US gallons or 158.984 litres. For gas; volume is measured in cubic feet, although cubic metres-can be used ‘energy terms one barrel of oil is roughly equivalent to 6000 cubic feet of natural gas), Petroleum Value Chain 414 ‘The development of petroleum resources into products for use by consumers is characterised by three distinct sectors, as illustrated in 16, BIA, Schematic Goology of Netra Gas Resources, Shale sand tght asare both produced from rately Itppermeable rock See L26 17, HAabowen 16 18, The as only released after he water is removed from the oa. 19, twas only wen Mitchell Energy and Development Corporatio, having experimented daring the 18805 apd 1980s, achieved commercial production atthe Bnet Shale in Nowth-Centea “Texas that eer companies began to allow 20, Onectlbc metre in35315 cub feet. Setinarindchede-Aerinmtorn hina ies Aas@ —— TRIMSIZE: 162x 241mm Introduction to Petroleun 41.418 Upstream sector ‘The upstream sector compromises five distinct phases of activities. Exploration 1.45 Theexploration phase ischaracterised by the search for commercially viable hydrocarbon reservoirs»'The focus is on exploring the geology of the region, including aerial tracking, seismic surveying and the drilling | of exploration wells. In Australia, Commonwealth, state and Northern ; ‘Territory governments have each developed and maintained a publicly | available database. These databases include petroleum occurrences, data concerning other minerals and natural resources, geological data, and ; tenement boundaries. Under Australia’s petroleum legislation explorers are required to contribute data to these geological databases, 4.46 This phase is also denoted by a heavy reliance on expensive specialist drilling rigs. In the offshore environment these rigs vary, and can include OCU YUR | floating platforms, jack-up rigs, drilling ships and semi-submersible vessels, While the characteristics of the marine exploration rigs may differ, there is cone constant — these rigs are expensive, whether to hire, build or operate (OOS rer mre eer eeyret for drilling rig capacity to undertake the new phase of unconventional peice melon and ‘production that is taking place in Australia (particularly the east coast) at present. Up to 40,000 wells are expected to @ be drilled in Queensland in the next 10 years, Appraisal 117 Appraisal is the process of confirming the size and quality, and therefore the commercial potential of a discovery. This is usually done by drilling more appraisal wells near the exploration wels. Production tests will, test the reservoir press (es. Geochemical and petrophysical analyses give inform: “hydrocarbons (eg., viscosity and chemistry) and the porosity of the In some countries a necessary SAVe. CONES, step in the appraisal process i it body. This can Development | 4.48 This phase is characterised by the declaration of the commercial | viability of field, the subsequent planning process to commercially exploit the underlying petroleum resources, and the engineering and construction. of production facilities, When planning the development, the developer has many facets to consider. They include the depletion of the reservoir mn of going on to the development phase. ites_of prod roduction facilities and_pipelines, including sign and engineering, environmental conditions, safely, and community and_work force issues. Then there are economic considerations, including capital and production costs, taxation and royalties. In Australia, asin many countries, before production can commence the government will have to 7@ — TRIMSIZE: 182x 2441mm 1.18 Petroleum Law in Australia approve a detailed field development plan setting out the plans for the development. The developer will have to prepare this, The final step taken by the developer prior to starting construction is usualy called the final. investment decision. This is the formal commitment to spend the required ‘money to develop the project and commence engineering, procurement and construction. ‘This phase can take from one to 10 years, depending on the size of the ficld and the technical, economic, commercial and regulatory hurdles, Production 4.19 During the production phase petroleum, commences flowing, with the rate of flow depending on she geology of the field and the requirements, of the field development Pind paconcpct cof a well is no reached gradually as new production wells are slowly brought on-stream) From there production increases until peak production flow and period is_ reached. Initially wells will often flow under their own pressure. However, as the field loses pressure, enhanced oil recovery techniques, often characterised by gas or water injection, are usually requjred. This phase can last many years, ‘often up to 40 years for large fields. Major costs during this phase are associated with the development of techniques to improve recovery from a ‘well and the drilling of further wells to enhance production. Abandonment 4.20. ‘The abandonment of a field is characterised by the cessation of production, the plugging of wells and the decommissioning of field structures where required. This is relatively easy onshore, where production wells are easily accessible, The decommissioning and removal of offshore structures is more complicated due to their location and attachment to the seabed, The expression ‘decommissioning’ is growing in acceptance. Abandonment is more suggestive of disposing of, or just leaving, old installations. Midstream sector 4.21 The midstream phase involves the transport, storage‘and marketing. Of petroleum, Both oil and gas can be transported by pipeline. However, they cannot be transported in the same pipeline. Pipelines are utilised to transport petroleum to a processing facility or to a tanker terminal for transport to a port which has a processing facility. Processed gas is also transported through pipelines to consumers. Both oil and gas can require storage during these processes. In the case of oil this is usually in tanks. Gas can be stored in converted into compressed natural gas ng. The transport of petroleumalso includes transport by ships. idstream operations are often taken to include some elements of the downstream and upstream sectors such as the natural gas processing plants and the sale of gas, 8 sneer Bd i@ @ —_ TRIMSIZE: 152 x 241mm Introduction to Petroleum 1.25 Downstream sector 1.22. The processing of petroleum and the marketing and distribution of products produced from petroleum characterises the downstream phase, Such activities include: oil refining to. process crude oil into different products; processing of gas and condensate to remove water, sulphur and other impurities; transportation of the refined products to end users; and ‘retail sales of the refined: products. Examples of downstream activities are the refining of oil to produce diesel and petrol and their retail sale in petrol stations, Petroleum Geology 1.28 Commercial amounts of conventional petroleum are found in sedimentary_basins (usually confined to sandstone and carboniferous ;eologies). The accumulation of carbon-based sediment over millions of years in these basins is essential to create petroleum. Sedimentary basins {end to form at continental margins in response to plate tectonics, and. ‘within continents where large lake systems previously existed. In simple terms, over millions of years the xemains_of plants. ito sedimentary rock. Under heat "new layers posited, the organic matter Tes leas a result of this presure ot other geological forces, ‘the resulting hydrocarbons migrated in sufficient quantities from this source rock into porous rocks, ‘suchas andétone id limestone ina reservoir wheretheybecametrapped,” commercial amount troleum would be , Australia’s largest producing sedimentary basins to datehavebeen the offshore Carnarvon and Gippsland basins, and the onshore Cooper-Eromanga basin. 1.24 Atypical petroleum reservoir will have a foundation of impermeable bbase rock (which may also be the source for the petroleum which migrates ino the reserve). will aso have aJares ofcap sock which forms the top of the reservoir, and acts asa seal, leer ng cap rocl the petroleum wil not be conta n the reservoir, and will dissipate 1 Tate he neg geology. Petroleum is located in the pore spaces of porous rock within the reservoir, It may be separated into oil and gas. The reservoir may also contain water, 4.25 The significance of the gas cap is that it pressurises the reservoir. What this means is tht when the cap ck is Hist pu a sping ino a highly permeable ol srata that of. willbe under pressure.” ‘This pressure is what caused the ‘gusherseen in very old photographs 21, There are several kinds of reservoir formation. They include antlines domes, structural taps sand teatigraphic taps, 22, Presse ca alo arte through the water in the reser Alo the diagram the gas water apd ol can be in solution. 25, So there are two important properties tht rock can have ia thie context: ‘porosity’ and “permeblity: Rocks may bave oles or void spaces them (poroity), but if these hoes do not er than being separated asin ras suns LOY@ — TRIMSIZE: 152 x 241mm 1.25 Petroleum Law in Australia ‘and Hollywood films as oil escaped to the surface{ Modern oil extraction technology is intended to prevent and control this through the proper sealing of the well and managing the flow into the well, This pressure, the - permeability of the rock and the viscosity of any oil are very important COAL REISS factors in determining how easy it will be to extract petroleum, oN 4.26 In contrast to conventional gas reservoirs, nal Iso be ES “found in coal beds (CSG), shales (shale gas), low quality r (tight WHALES o~) gas) ot as gas hydrates. Unconventional gas accumulations are ones where conventional reservoir hi |. Shale gas and CSG are {ots SORTS : ‘examples where the natural gas is still within the source rock, not having, agteavon, © (ent AQ) cs. Gas hydrates are naturally occurring i ich water molecules trap gas molecules in deep-sea sediments in and below the permafrost soils of the polar regions. ‘ayyhslech 1.27 The particular problems that have to be overcome with shale gas and splest-Co be aie tight gas arefthe small pore spaces of the rock and the lack of permeability oN, 298 UNE yg Of the rockin contrast to a relatively permeable conventional reservoir, tt Where petroleum under pressure will naturally move to a well puncturing » ve el the reservoir and then to the surface, shale gas and tight gas have to be co} (tig) stimulated and even then vail flow shorter distances. lence thete is a need = bacnio” {silts F multiple wells, horizontal drilling and fracture stimulation to release Pas some, TU the petroleum and give it a path to the surface. ® Petroleum Reserves 41.28 Iti difficult, if not impossible, to measure in advance how much petroleum a reservoir will produce, Not only is it located underground, but the petroleum isin pore spaces in rock, and the strata containing the, 1m may not be corisstent and may have low permeability, meaning that iis difficul Tor the petroleum to flow to a well. The reservoir may have leaked because of faults in the sealing rock. So geologists can, and do, form different opinions about reservoirs. This is not like measuring the oil in your car’s engine by using a dipstick. b usp), 1429. The threshold question is the amount of petroleum that:can-be AIA P PARI. Pe Mi commercial rom eteservoiz™ This i the fundamental aepect TWOL Gat be Peaseec Apt the test for whether there are reserves, ‘Reserves are the key measure Gods} ALON which companies; countries and agencies reporteftis implicit in this that cere & petroleum which cannot be recovered commercially, for example because oaehetWON it is too expensive to recover at that time, cannot be included in reserves.) connec, the permeability an be drastically reduced, Perecabiity allows theo and gas to flow ‘hough the rock, 24, Reserves are generally hose quantities of hydsocarbons which are anticipated tobe commercially recovered from known accumulations fom agen date forwatd These reserves are discovered, {coverable, commercial and rerining within the sedimentary stuctures. See B hoses, Reserves on Resouces Etination and Reporting Worl, paper pesented atthe Excelence Ia Upscenm Energy Conerence Sy, 31Jul-1 August 2006, 9 10 serarconte rasetestonn es Ae eineprice or loan value of a p Resources Management Syste @ — TRIMSIZE: 152x 241mm Introduction to Petroleum 431 hy (6 the Te 1.90 Before we look at how this test is applied and what the other ys, Hanestont 2 important expression ‘resources’ means, we should look at why this is iportant. First, an accurate picture of the structure and characteristics of = i and, the amount of | ea it are essential to working out recovery of ihe petroleum. Second, itis portant tobe abl to value the petroleum — in a reservoir, which is essentially about applying a price and discount rate to an estimated amount of petroleum. This is necessary to decide whether developing the resource is commerciall in the first place. It is also aezesnry for reporting ifs value, or planning and deciding a sale, purchase — ae ‘There are two important factors in doing this fhe first is that the more exploration and appraisal work is done, the more accurate the assessment will be,}Initially through seismic work and then the tests associated ith exploration and appraisal wells, such as taking core samples of the oil-bearing strata, information about the reservoir can be collected and mapped. The second is that there will be assumptions involved in the assessment and some degree of uncertainty. For example, any valuation will require an assumption to be made about the oil price at which the petroleum can be sold. 1.31 Even allowing for the fact that this is an uncertain exercise, without ‘a consistent standard that can be used to assess petroleum reservoirs it would be possible, or even more likely, that companies would take very different views of their worth. Jt would also be more difficult for banks to. .d money on the security of petroleum projects. The latter provided the impetus in the 1960s for The velop, such a standard, This has be ce then leading 10 to that society and the World Peroleum Council jointly approving petroleum Dore horp reserves definitions in 1997. In 2000 these were updated as the Petroleum, petroleum industry in Australi ‘was not mandatory to do so, From I December 2013 changes to the Listing Rules applicable to oil and gas companies listed on the Australian Securities °' ye 25, The Society of Petroleum Enginers describes it ike this ‘stimatin of eserves is done under conditions of uncertainty-Themethod of estimation called deterministic asnglebestetinate fof reserves is made based on known geologial, engineering ad economic dts The method of ‘timation is alle! probabilistic when the known geologel engineering and economic data teed to generate rnge of eimate nd thelr sociated pbb, entiying eervet proved, probable and possible as been the most fequentcasificaton method and gives an lication ofthe probability of recovery Because of potent difeencesin uncertainty ction should be exercived when aareatngreervs of diferent csifcations’ This taken fom the 2007 Pecleun Resource Management Systm, See chpwspecig>.Copyeght 2007 Society of Petrleurs Engines. 26, The sponsors apart rom SPI were the Word Petroleum Council the American Association of Petroleum Gcologsts and the Society of Petroleum Evaluation Fgincers. Sc the SPE website -hupulewwspesrg> for details of PMS andthe 2011 Guidelines and updates. " seme nents ha oc =The Reovil f n PRMS, but it YLanotds Ws a? va S \PRALBEAINE ONIN SL AELEAUES, @ — TRIMSIZE: 152 x 241mm 431 Petroleum Law in Austral [Exchange (ASX) will mean that when those companies report petroleum to the PRMS.” contingent resources and. prospective resources. Tf you view this as a hierarchy, you start at the bottom with prospective resources. Prospective resources are at the exploration stage before a discovery is made. Once a discovery has been made, the resource can be upgraded to a ‘contingent , resource? From the point of discovery on, the critical question becomes one of the probability of commercial recovery. Estimated recoverable quantities from a discovery are. classified as contingent resources until such time as @ defined project can be shown to have satisfied all the criteria necessary to lassify some or all of the quantities as reserves. The total of the estimated petroleum in a reservoir is referred to.as ‘total petroleum — initi resource base. prospective resources are given in millions of barrels of oil equivalent and us sub-categories,” How the categories fit together : PRMS classification framework Pmogoraruary ‘Onpsason Tegan ato pong Devon ear erp 27, This wor he postion aa | Janasry 2013. See media rdeae dated & November 2012 from the ASK Group. The media release and updated ASX Listing Rules are avaiable at . Copyright 2007, Society of Pevoleum Engler. Reproduced with the permission of SPE, Further reproduction prohibited without permission. 12 eee eee Oar i@ —_ TRIMSIZE: 152x 241mm Introduction to Petroleum 1.95 s, for example, adjacent to existing <§ capacity, and a’ gommercally viable mmediately evident (i.e. by tying the discovery wel into the available infrastructure), the estimated recoverable quantities classified as reserves immediately. More commonly the estimated recoverable quantities for a new discovery will be classified as contingent resources while further evaluation and appraisal is carried out.” : 1.84. The distinction between the three asses i based onthe definitions.“ CAAA of ‘discovery! and ‘commerciality.” The evaluation of the existence of , COMMERANUAY, a discovery is always at the level of the accumulation, The assessment of v ‘potentially recoverable quantities from that discovery must be based on ‘project that has been defined, atleast conceptually. The assessment of can only be assessed at the project level For projects that ™ satisfy the requirements for commercialty, reserves may be assigned, and 3 the recoverable sales quantities are designated as 1P {(proved), 2P (proved plas probable), and _3P (proved plus probable plus possible) reserves. The equivalent categories for projects with contingent resources are 1C, 2C, and 3C, while the terms low estimate, best estimate, and high estimate are used for prospective resources. 4.95. ‘The amendments to Ch 5 of the ASX Listing Rules will impose a numberof requirements on a listed oil and gas entity to report estimates of petroleum reserves and resources. These inchid + Resources, reserves and unrecoverable petroleum m accordance with PRMS. + In elation to reserves, the entity igh degree of confidence Jin the commercial produeibilty ofthe reservoir. + The term eserves’ must only be used commercially recoverable qua eu + Petroleum reserves_must_be categorised _and reported in the most specific category that reflects the degree of uncertainty in the estimated quantities of recoverable petroleum, that i 1P,2P or 3P.Ifan estimate of 3P is reported, estimates of 2P and IP must also be reported infrastructure be classified in © with estimates of 30, Soclety of Petroleum Engineers, Guidelines for the Application of the Peralewn Resources Management Sst, November 201, [23], SL. Seether Society of Petroleum Engineers, above n30. 32, Apiojectiseommercia if the degre of commitment issuch that the acumulation sexpeted to tedeveloped und plcedon production within a reaonabe ine frame. A reasonable ine frame forthe ination of development depends onthe specie cicumstances btn general shoul be limited to around 5 years, Sethe deinton of commercial Glayof Terms Used Petroleum Reservesesources Dfntions, chip winners 38, Society of Petroleum Engineers, above m3, SK Anat! January 2013, there amendments were to take eet on | December 2013, Concerning the [ASK Listing Rules, sce further “itp wwassgroup.comau>. 13 pts CoP aaa@ —_ TRIMSIZE: 152 x 241mm 1.95 Petroleum Law in Australia + Estimates of petroleum reserves, contingent resources and prospective resources must be prepared by, or under the supervision of, a qualified petroleum reserves and resources evaluator who must give his or her prior written consent as to their form and the context in which they are present 4.36 ‘Themain definitions in PRMS are proved reserves,probable reserves, possible reserves, contingent resources and prospective resources."* There appears to be a trend towards getting a greater degree of consistency in the measurement of reserves and this is driven significantly th ment community. However these rules will not necessarily appl vernments which may have a different agenda in reserves estimation Aso ‘they are estimates and sometimes they are wrong." Governments, Oil Companies and Licensing 4.87 Petroleum exploration and production (together known as petroleum exploitation) are the result_of a complex interplay of law and policy between two main_participants: the government that owns the petroleum resources; and the oil_companies.that explore for, and produce, petroleum. There are two main reasons why governments need the participation ofeicompanis. Th rt that sas equenty nk the iskeapial to explorer petroleum vhich generally expensive | risky, or a a matter of thei @ Spend that capital on’ “expertise to do it. This willbe the case particularly at the start ofthe journey to develop petroleum resources, and it may change as they progress. 41.88 ‘This relationship has many tensions. Unless a government wants to {go it alone and develop its own petroleum resources, it will need to attract, oil companies. Hence a iment in the exploitation of petroleum is to establish a le regulatory regime that encourages the explora first instance, and then encourages petroleum production, A suitable regulatory regime needs to. manage the tensions in the relationship by balancing access to the petroleum and the consequences of develo ment, with attracting sompanies which have the technical financial capacity to develop + the petrole! burces. This involves the allocation of risk-and reward between the government-and these companies: One main tension is that QX) {R52 » the ofl company needs adequate return on capital for taking exploration : Se pilreaey and development risk, and the government wants fo maximise -risk AR SME AISA producti A) B. EXBUERETICN DENCACPHENT PA - tre. eli HK 35, These definitions ae all taken from Society of Petroleum Engineers, Glsmey of Terms Used in Rho HAs ‘rok Reserves Define Se ipulwneapeog> fr crrent detnions yuurtd to eae the pubcy In 200 aatoclatd wit Sls Gowagrae fh weteres. Se 1, NO AUR RON clehetemesatansl nab laa» and heron comsl io. ‘tenn e739589500 momo ROXIE, 14 - eee ae ent@ —_ TRIMSIZE: 152 x 241mm | Introduction to Petroleum sao 4.39 Traditionally the most sigi ceasonties. Jaxteod tics intrmaonl ol companics most of which now tse capial, 5 Seen te through having their scurteslised onasecuriesexchangeasvellasdebt” — GehyrGe an, finanee™. This hasbeen because of theit size and capacity and inlemational well 8 REBT ‘each, If these companies are integrated, they also need petroleum aso yy the raw material for their businesses, However, some governments have rejected the use of foreign capital for ideological reasons. Others have either nationalised the petroleum assets owned by those companies or bought them out, Goverame also created their own. of the eee regime, some invest in overseas petroleum projects and some may do all of jams sm are a very powerful force.” So, in modern times the expression {international oil companyl® includes those national oil companies which.. ‘gage in-out nvetinent Some start life as entirely government- owned and end up being privatised. There are many other companies which are international oil companies, ranging from the large to the quite INTEANDTLON AL small One important factor which needs to be kept in mind is who they_ areaccountable to and their primary motivation. Those companies listed on a stock exchange will b daccordingly ‘Will be run on a comm vil companies \\X(LON\L ‘cannot be categor od by the stat imnominrerns srimary motiva ‘be imposed by the state. In some cases though, the state will require the tional oil company to be run on commercial lines.” 4.40 Almost all nation claim rights to the petroleum located wih their borders. This is notwithstanding their having different ownership and development systems. There are three main systems that can be identified. ‘The first is the ‘regalian’ systena, where the state owns any minerals but leases rights to exploit these resources to private firms under set conditions. The 37. Through e proces of merger the number of super-major integrated international ol companies has reduced to fours ExxonMobil, Royal Dutch Sel, ChevronTexaco and BE, all of which are Tine 38, _Aitinctioncanbe drawn betwoen exploration nd potion companies (or & Pcompanies) ‘which focus only on exploration and production, and the integrated companies Which take the etroeum prodaced, refine adsl refined prodacts 38, Atleast af the gest 0 ol companies the world are national ol companies 40. You wil frequently see 1OC used as short form of international oll company. Sometimes Interbatinal Oil Company alias capitis tters This does net appea to have any pater significance 41, Forevample, the former Bish Ntinal Oi Corporation. There area number of ways of pata Dpvasation: such a bringing in external shareholders (eq, Stata) or ising subidiary feg,cN00O). 42, There are approximately 140 enticed onthe ASK under the GICS Cod thi iso a ad consumable ics, About half of tee have thei ea ofc n Western Australia. 43, Seethehistory of Sttllatchupefwovwstto.cos> A. Mining Industry Comenision, Mining and Minerals Processing in Ausra, Report No 7,191, Canberra, 15 eee hn i@ TRIM SIZE: 152x 241mm 1.40 Petroleum Law in Australia 9) second, usually called the ‘domania? systems where state ownership of minerals is inalienable and where resources are developed either directly by, a state-owned authority or by private firms under contract.” The third is 3) a system where mineral ownership is tied to ownership of the land above, “This is also called the accession: principle and is seen in many common aw countries like England. It gives the owner of-the. surface of land rights to what lies below the surface and above it. However, most of those ‘common law countries subsequently passed legislation making petroleum. the property of the state.” This is the position in relation to petroleum onshore in Australia.” This kind of nationalising legislation does not exist in the United States, where there is still significant private ownership of petroleum. Most other states either have outright ownership of petroleum or the right to control its exploration, production and ultimate ownership. ‘The latter is generally the case in relation to petroleum under the seabed up to 200 nautical miles (nm) from the baselines from which the territorial sea is measured, and in some cases further than that.” Kote tol _ iat ishesto confer sghson third paris suhasinternationl WX oil co develop is petroleum resouress,particulacy if wishes WOKS to COPE teat prvatecpil il need arene that provides for AOKI ON TU ‘These regimes can be broken down into two main categories: “ROBT NEEDY S>+ concessions (including ences) and S>+ service contracts (including production-sharing contracts). Con 4.42 Aconcession agreement has been described as consisting basically in the granting of certain mineral or mining rights to an individual or entity n agreements 45, For example, daring the Middle Ages feudal lords generally cimed ownership of minerals within the boundaries the conte. With the passage of time hi right as bee teasferred 0 the Ciowa and then the sovereign ste, This isthe ee in Rusa, Other earls based on the ame principle ae Mesico, Cle, brazil and Argentina See K Blin, C Duval, H Le Lewch and [A Parteo, international Petrol Exploration and Development Agreement, Euromoney 986, p24 This ial the portion n many Mash countis, See Bl Mall Mra estat nde {he Shara Law, Graham and Tiotman, 1993, p20 46, Whatwathe case ofthis In elation to Bean, Bunter cals itamiguided nationalisation driven by the shortages exerenced dering the Fast and Second World Wats. The extinguishment of Private rights was a nalts of convenience and an at censing, See M Bunter, The Promotion {tnd Lessing of Peta Praspetve Acreage, Kuwer La Totrhationl, 2002. The desirability ‘continuing private comerhip was dacssed by the Mining Indsty Commision, Ming and ‘Mineral roesng Auras Report No 7,193, Canbere. 47, Serf example, eteceutn and Geothermal Energy Resources Act 1967 (WA) 39. 4B Subject to various exceptions thi generally the lw watermark (WM), Article 77 of the United Nation Convention on the La ofthe Sea 1982 (UNCLOS)peovdesthat'the coastal State ‘criss oer the continental shel sovereg rights or the purpose of exposing and explting its natural sources: Article 76 defines the continental shel of x onsale 3 comprising the sex-bed an sub ofthe submarine areas that extend beyond sterile throughout the ‘ata prolongation of is land tersitory tothe oer ede of the continental argo toa ‘isan of 200 rata ies from the lines rom which he breadth ofthe Lretorl sai ‘named where the outer edge ofthe continental margin does not extend up to tat distance: 49, Forexample, Australia contnental shelf extends beyond 200 am, See further Chapter 4 16 ceva niet nnncis a iaIntroduction to Petroleun 1.45 authorising him or it;to explore for and; in case of discovery, to produce: and exploit, the minerals the object of the concession" Those rights include the ownership of the minerals found and, in some cases, the ownership Sf the series ithe round The main return of the host country in the classic form of concession is a royalty and tax, usually income tax on profite earned: 4.43. The characteristics of a classic concession agreement are: (1) the’ award of mining rights over a vast area of acreage; (2) for a relatively long, period; (3) providing to:the company extensive control over the schedule and manner in which the mineral reservesare developed; while (4) reserving, few rights to the Sovereign except for the right to receive payment based on production (a royalty).” Such a concession system does not include any competitive elements. An example of a classic concession is that obtained by William D'Arcy from the Shah of Persia in 1901. For a $100,000 bonus, $100,000 in stock in his oil company and a 16 per cent royalty, D'Arcy received exclusive oil rights to 500,000 square miles of Persia for the next 60 years. 4.44 In a number of cases a classic concession system has. gradually ye pf bbeen_supplemented_with a licensing system. Apart from the degree CC" of formality which accompanies such a change, it can also it competiti 28 requiring bidding, seater government Licences have been here in the category of concessions mainly be n ® However, conceptually they a licences which give th as ownership of petroleum. This depends on the form of the ees ‘would otherwise be unlavwful.® Australia uses a licensing system and this is the position in relation to licences granted under the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (OPGGSA). Various labels can be applied to concessions and licences. They can be described as concessions, permits, licences or leases. ‘The crucial point is that the legal nature of each hhas to be looked at carefully. Service contracts tewweoant* geo 1.45. A service contract is different in two important respects. First, itis a ies contract between the host country (or a departmentor agency of it) and the center petroleum company, which is usually given the title of ‘contractor'-which 50, K Blinn, C Duval, H Le Leuch and A Partial, otrnational Puro Exploration amd Development Agromens, Baromoney, 1986, p 4 S51, MRoggenkanp, Energy Lain the Neheslds in M Roggentamp et Buergy Law in Bape, Oxford University Pres, 200, p68. 52, Forexample the Netherinde Sc alo Roggencamp, above m5 53. G Gordon, Petzleum Licensing’ in G Gordon, Paterson and E Usenmes (ds, Oiland Ges Law = Ginvent Practice and Bimering Trends, Dundee Univesity Pes, 2011, 67; and T Daiatith, {G Willoughby and A Hil United Kingdom Oil and Gas La, ed, 200, loss, [1-302, 7 Co eG oe@ —_ TRIMSIZE: 152x 244mm 1.45 Petroleum Law in Australia Seis out the righis and obligations ofthe contractor. Second the contractor does not necessarily obtain any ownership rights in the petroleum until itis produced, and then it_may only be a share calculated after taking i ;.'The most common form is the production- sharing contract which is used in numerous countries. The essence of this arrangement is thatthe contractor bears the cost and the rsk of exploration ina defined area nd is ened o reooe is cots out ofthe production After recovery the balar Saas and ie conn factor. Production-sharing contracts were used im Bolivia a carly a the 1950s, but they fist became popular in Indonesia in the 19605: 4.46 A modern licensing regime involves a number of processes which have been described as follows: negotiation of t {for evard) consistent wih thi petrleum prospect national interest! ‘ype of petroleum operation, ‘A licence will be granted for a spe usually for exploration or production. twill f ‘granted fora specific area {the lienos ates) and ford specie period, Pxploration ecreage is often offered in licensing rounds which are discrett acts of licensing which take place on a regular sequential basis, often separated by a number of years, and which offer a certain defined area or acreage) ‘This system is designed to assist the state by broadening the market so that the largest number of oil, companies is able to bid competitively for -age on offer. The bidding can take the form of a program of work or jount, or both, In Australia, work pr to improve usually no longer than 10 years, although this is discretionary in some states. Often they can be renewed. It is a usual condition of exploration licences that at certain intervals part of the original licence area SETurne fo th sate. This often coi $3, gypsy, indonesia, Malaysia andthe Philippinesamong others. 58. Kiln, C Duval, H Ze Leuch and A Partizio, nerational Peroeum Exploration am Development Agreements, Eacononey 1986, 67 ‘6, MBuater Tle rometin an Lien Pala Prospective Acreage Ker Law Iterations, 2102, pa S57, This isthe system usd in Australia andi considered in detail in Chapter 4. In some states there ‘may abo beam informal ceasing system, where the sale may not define The specifi area for Teensng but theo company approaches the rights holder informally aed del is rade This is sometimes cae an ‘over te counter ester, 18 sieintomte neseninteartc Bas fe@ —_ TRIMSIZE: 152 x 241mm Introduction to Petroleum area is generally required to be of a shape and siz reoffering as exploration acreage. The point is that compani acreage which they consider less prospective. This will give other companies an opportunity to explore it. t needs to be borne in mind that technology and exploration techniques are changing all the time, and one company ‘may find what another company has missed, 4.48 Exploration licences tend to be dominated by. obligatory: work programs, the details of which vary between exploration licences, and will generally form part of the bidding process for a licence. Obligatory work programscan include seismicsurvey and the rillingof one or moretestwells. Licences generally provide for some form of sanction when the obligatory work program is not fulfilled. Often the defaulting licensee is required to pay ‘monetary compensation to the licensing authority for the value of the non- fulfilled program.* Failure to complete the obligatory work program is also ‘grounds for the cancellation of an exploration licence(although this is often ORS cere partied) 1.49 With production licences, there is often an initial period, with one or more extensions. Often the total period comprises 30 or 40 years. Production licences often have lesssignificant obligatory work requirements, Where a commercial discovery is made, made subject to the development of a work plan and corresponding work schedule. This work plan needs to be submitted to state authorities for approval, and work is only able to proceed once work plans and schedules have been approved. ® This can be done through a field development plan setting out in_detail _how the field will be developed, including the required structures, reservoir “management, enevironmental and safety plans. In this way the state retains control over the development and. production of its natural resources. 4,50__Depending_on_the regulatory framework governing the regime, ee LT licence is valid, and subject to certain conditions, the licensee is authorised to exercise the rights conferred in the licence against third parties, Generally, , non-exclusive licences can be conferred for geological and geophysical prospecting, while an exclusive licence is usually conferred for exploration, work that involves drilling, as well as for production operations. 4.51 A licensing regime is often utilised in countries with relatively low reserves and high costs associated with offshore oil exploration and \duction, Countries that utilise the modern licensing regime include the United Kingdom, Norway, Australia and the Netherlands. For countries ‘which are relatively unexplored or where exploration is expensive and risky, as is typically the case offshore, licensing offers the advantage of passing. the exploration risk to the licensee, nal oil ‘When petroleum is known to exi mand production SHB Thverne Peroleum, Dudusry and Governnenss Ax Durodaton to Peau Reultion, egos and Govern! Pos, 2d ed, Wolters Kluwer, 2008, p 125. 19 sisearandcrcta-ratstantan nasties Bhs v0 enone ore@ — TRIMSIZE: 152 x 241mm Petroleum Law in Australia. sharing arrangement can seem more 1.52 In most countries using a modern licensing regime, the licensee is free to dispose of the production, since transfer of title and therefore ‘ownership occurs when the oil slifted (ie., enters the wellhead). There may bbe some restrictions on the sale of the pettoleum to the domestic market, ‘often requiring producers to sella certain quantity of their production back to the domestic market Global Market for Petroleum: 1.53. Petroleum is a commodity which has to be found, produced, sold, transported and consumed for value to be captured by a petroleum producer. The demand for petroleum and the price which will be obtained on sale ate ‘basicdiversof whether companies will conductexploration to find petroleum and then produce jt. In addition to these drivers and their prospectivity for petroleum exploration, governments setting policy to attract companies need to consider where their country fits into the global marketplace. 4.54. There is currently a clear distinction between those countries which are the main consumers of petroleum and those countries which are the main producers. The large consumers have been the OECD eountries, such as the United States and Europe. In 2010 the ORCD countries consumed 42.5 per cent ofthe world’s energy total final consumption." This was down from 60.3 per cent in 1973. The difference is mainly caused by the rise of ‘Chinese and other Asian economies. In 1973 they accounted for 7.9 per cent and 6.3 per cent respectively of the world’s energy consumption. By 2010 they accounted for 17.5 per cent and 12.3 per cent. 4.65 As will be seen from Table 1.1 below, the:bulk of the-world’s petroleum reservesareiin the Middle Bast. In 2011 the Middle East produced 32 per cent of the world’s crude oil: ‘The next largest producer was the OECD at21-4:per cent. Consequently there is a very significant trade in petroleum between the producing countries and the consuming countries. In 2011 the daily amount of petroleum imported by consuming counties, ‘was 54,580 thousand barrels of oil a day." ‘9, These percentages are taken from the Key World Bnery Stier 2012 published by the International Energy "Agency. See chtpliwencen ony/publcationaeepublatons! publctonikwesl 0, Soe Key Weld Fnegy Sais 2012 plished by the International Energy Agency. Sce , p12. 61, Beth eeu, BP Statice Review of World ery, 2012, 18 seat tine Bi ney ®152 x 244mm, Introduction to Petroleum 1.87 ‘Table 1.1: Total proved oil reserves by continent 4.56 Global_proved_reserves_are_distributed throughout _the_six continents of the world, }e_Middle Fast dominating. Howeven, as Table 1.1 demonstrates, while total reserves have grown over the last 20 years, the geographical distribution has altered markedly. In 2011 the idle Hast Fel the greatest percentage (48.1 er cent) of total proved reserves, although this was down from 64 per cent in 1991, In 2011 South. and Central America (19.7 per cent) and Africa (8 per cent) increased their percentage over 2001, with South and Central America being the biggest mover, North America’s percentage was 13.2 per cent in 2011 as against 18.2 per cent in 2001. The Asia-Pacific region is poorly endowed with petroleum resources, accounting for only 2.5 per cent of the global proved petroleum reserves in 2011.8 4.87 orate econ ar Sun cu gas changes these percentages over the next decade JA number of countries have the potential for significant uncofventional gis reserves, notably the United States of America and China ‘The International Energy Agency. projects that by 2035 global energy vill. grow by 40 per cent, and 90 per cent of that growth will occur in developing economies, particularly indiaand China. The report suggested that gas could for 25 percent ‘of world energy demand by 2035.*'A report by the US Energy Information Administration estimates a global recoverable shale gas resource of 5760 trillion cubic feet, of which 1069 is in North America, 1404 in Asia 162, Statistics rom British Petroleum, BP Saisie Review of World Energy, 2012,p 18. 68, Bellh Pevoleum, BP Stari! Review of World Energy, 2012p 7. GH, ternational Energy Agency above m2 ee eee ae ee@ —_ TRIMSIZE: 152 x 241mm 187 Petroleum Law in Australia and 396 in Australia.® This is a huge amount. If the United States is able to produce a lot of cheap unconventional gas, this should significantly reduce the amount of petroleum that it imports, and could allow it to export ING to Europe. This could profoundly affect the economic position and strategic importance of the Middle East, and also Russia, It could also have a significant impact on the price of petroleum. 1.58 The Australian Government believes that Australia is well placed to cement a role as a leading energy supplier to the Asian economies to assist their economic development.®” Australia’s energy exports tripled from $24 billion in 2004-2005 to $69 billion in 2010 when they accounted for a third of Australia’s commodity exports. This made Australia the world’s ninth-largest energy producer. Bear in mind that these figures include coal of which Australia is a large exporter. Nevertheless, Australia expects to become the world’s second-largest exporter of LNG, which will see it move up from sixth-largest. At the same time large fields containing crude_oil_are_ becoming increasingly hard to find. Hence, more exploration is being conducted “offshore in.deep water. Ifthe fields are in deep water, the oil is more risky ~and expensive to produce, Some would argue that we have passed the time when global peak oil production occurs. Every year petroleum companies use up reserves through production and face the ongoing challenge of replacing them. It is becoming increasingly hard for them to do that. Petroleum Investment Decision 1.50, As is mentioned above, governments-setting-paliyta-altrct ympanies need_to consider shere their country_fits i ‘market place This is one asped ofa country’ attractiveness fr petroleum exploration. It relates to the likely markets for petroleum discovered there, the demand for petroleum in that market and thecost of gettingiitto market. However, this is not the only factor affecting the attractiveness of a country within the group of those open for investment. Bear in mind that countries ‘may not be open for investment for two main reasons. First, the country jing external investors, or indeed actively discouraging them. Second, if a company cannot insure its people or equipment there, say. because itis in a war zone, the country is effectively closed to that company. 4.60 So what are the factors that will affect a company’s decision to invest in one country rather than another? What will make one country attractive as opposed to another? Clearly the likelihood of finding petroleum is a (65. US Energy Information Adminstration, Wild Shale Gos Resources An lata Asessment of 114 Regions Ouse the Uriel States, 201, chp ea gow aati wordshles> (66. Beth Perla, RP Statin! Review of Work! Ene, 2012, 206, p21 shows exiting ttl bal server of psa 2084 Willon cubic metes (7599.64 TCP) 467. Scethe Department of Revoores, Energy and Turis comment on Energy White Paper 2012, “Austaia’ Energy Transformation,

68 Seeahovene7 eee eestor Or ey@ —_ TRIMSIZE: 152x 241mm Introduction to Petroleum 1.61 00d start. A country which has stronger geological potential for petroleum {xploration and production i going to be more attractive. However if That country is politically unstable or has a history of expropriating foreigners’ _assets, those factors. will be offset against its geological potential at least to-some extent. It is risk and possible return which are the significant underlying factors here. ‘The balange between risk and reward is very difficult to define but is ustially driven by the perceived geological prospectivity of the relevant country. Generally the higher the persived geological prospectivity, the >wer the expected financial reward for exploitation is: The uncertainty in perception of prospectivity narrows as exploration in a country matures. Problems can arise when a host government initially has an overinflated view of its country’s prospectivity, puts in place tough terms for exploration and exploitation, and is then disappointed at the lack of interested participants. 1.61 As commercial enterprises, oil companies are intent on building wealth for their owners. The end point they want to arrive at is having rofitable projects. So they will evaluate each project on the basis of the ill provide and at what risk. They will conduct an econoinic evaltiation. Typically they will do so using a number of measures, including: + Net present value (NPV) is the value of a project, taking the cash inflows and outflows over its life and discounting them to give a present value. This is a measure of the market value of the project and can be ‘compared with its cost, thus showing how much value is created by an investment, Only projects with a positive NPV are normally considered. ‘The rate used for the discount calculation is normally the rate of return that could be earned in the financial markets on an investment with a similar risk. Riskier projects will have to have potentially higher positive cash return to achieve a positive NPV. + Internal rate of return (IRR), in a simple sense, is the annualised effective compounded return. rate of a project.® It is commonly used as an alternative to NPV, Most companies will have a minimum hurdle rate of return, which may also be adjusted for a country’s risk factors, + Payback is the time taken for the project to return the investment made. Making these calculations will require detailed financial models which can only be developed over time as the costs and cash flows ofa project ca clarified. xplpration there willbe no defined _as nothing has yet marek wane ge roe its Many Patent roe less robust estimates of what may be discoverable Nevertheless companies ‘will stil try to estimate that using comparable gedlogical data and projects. ‘They will also take into account broader criteria such as gorporate strategy, ‘geological potential, risk and a comparison of available opportun . he ae at mas thn pea a oa cs ows (bath piv and aga) om ‘a picticalrinvestnent ol 0. 23 soteretomte nent Bas ie €& Etonic. EMAIL@ — TRIMSIZE: 152x 244mm 1.62 Petroleum Law in Austral 4.62 For a considerable period of time the oil company will be spendin money — initially on exploration and appraisal and then on development. It is only when production commences. that it.can start to derive a flow of cash which will give it the prospect of a return. Accordingly most oil companies will have internal processes that they will go through before committing part of their exploration budget to an_area or deciding to__ develop _a project once a_commercial_ discovery has-been made. ‘These processes will ake into account the required investment and the likelihood and timing of payback (as explained above), 4.63 At the exploration stage it will usually be a case of management mittee or head. geologist that. an opportunity is worth pursuing. ‘That opportunity could take a number of forms: entering into an agreement with another company to investigate an area or potential bid for a licence or service contract;” actually bidding for a licence or service contract ona government release; farming- in" to an existing licence or contract; or negotiating a separate arrangement with a host country. Fach of these will have different financial consequences for the company, with an investigation agreement or the preparation of aid at the lower end,Oncea bid is successful, the financial consequences become more significant as there ‘will be expenditure commitments, These increase significantly when seismic exploration has to be conducted or exploration wells drilled. 4.64 At the project level these processes will involve feasibility studies,” including the consideration of applicable risks” and front-end engineering and design. Once the technical, commercial and financial robustness of a project has been tested, the final step is usually called the final investment decision when the company.commits.to spend the money. to.deyelap. By this stage the company should have a well-defined financial model of the ‘project from which itcan calculate its NPV and IRR. 1.65 In the petroleum industry the expression ‘prospectivity’ describes @ country’s potential attractiveness. This isa key factor in deciding whether to invest in a country, whether for exploration or production. This is an expression which some view as restricted to geological potential. One commentator has defined prospectivity more broadly as follows: . the term used to describe a geographical region, a country, a geological basin, or a particular arca within a geological basin, as attractive for exploration for petroleum by reason of its technical attributes (having the likely petroleum geological ingredients of source rock, reservoir, cap rock 70, ‘Tse are wey calle joint bidding wrcement or area of mutual incers prements 71, Farmvins are dele with in Chapter 9. They usualy involve cerning an intrest by meeting ‘xpenditarecommmiteneats fa party oa leehce or contact. ‘72. Onedefnition of anit sty n'a eh and nancial study of project suicient eve ‘of scuracy and dealt allows dein ato whether the projet should proceed’ V Rudeano, Te Mining Valuation Handbook, 2d ed, Wrghtboks, 2004, p 402. Doing al easily study isexpensie Accordingly eommpanies wil usally move to that through a numberof preliminary sages such as coping study aap feasibly 7, There area nar of standard rks tht ae wll considered, They include resourceeseves rid completion sk operating le crrency sk mathe risk envionment isk and plc isk 24 wmeetcuae reamenrmen es ia 3@ — TRIMSIZE: 152x 241mm Introduction to Petroleum 1.69 and favourable structure or structures) as wells favourable legal and fiscal structure so as to generate a commercial return in addition to lying within 4 favourable geopolitical environment. 4.66 Michael Bunter, from whose book this quotation is taken, looks at these in terms of four attribut aud fiscal. host government eying to atc the ik capital of foreign companies will have to have ‘the prospectivity of its petroleum ‘resources ii this broader sense. [he end point is {he ability ofthe investor ‘to make a commercial return on its investment. Another approach is to use the terminology of risk and consider the commonly-used resource investment risks: political risk, resources/reserves risk, completion risk, operating risk, currency tisk, market risk and environmental risk. 4.67 At the core of the exploitation of petroleum is the technical prospectivity or geological potential of an area. It denotes the presen: ‘or absence of the physical co i explore and exploit t terrain, physical conditions, petroleum exploitation, 4,68 Geopolitical or political risk is the risk that an investment’s returns. could suffer as a result of politica a country or }- In Bunter’ view this is really about security. So he poses a number ‘questions including: Is my investment secure? Are the boundaries of my e ‘contract area secure? Is my potential market secure? Is my export route secure within and without the national territory?” For example, if country is offering exploration acreage in an area subject to a boundary dispute its neighbour, with a recent history of armed conflict over the border and the need to build a pipeline through a country controlled by bandits if a discovery is made, this will represent a high degree of political risk, 4.69. Another expression that is closely associated with this area is ‘sovereign risk, ‘This can be regarded as a category of political risk. In | simple language itis the risk that the host country will ‘change the rules of the game’ to the disadvantage of the oil company. The host country can do this in a number of ways: by expropriating the resource; reducing the profits which can be repatriated; incteasing taxation; or changing licence terms, The examples of this are numerous and spread across all countries. The oil company will look at ways to protect itself against sovereign risk There are a number of possible approaches to this, including entering into What is called a stabilisation arrangement with the host country which may provide for security of ttle and agree that there will le resource. 1e geology, ‘accessibility and climate that are suitable for 7A. MBuntersThePromosiow and Licesingof Petroleum Pasectve erage KhwerLaw Intemational, 2002938. 75, Bune abore n 74, 75 | 76. Sovelled developed euntse are not immiene rom thie. So for example, Australia has changed its resoure tration regime at eas twice. Fis by introducing the Pevoleum Resource Rent Tak in 987 and then the Mineral Resource Ren Tain 2012. Mor extreme exanples ane epesented Dy thas cutee which have expropriated pteleum sets, sch as Mex, | 25 ichnical, geopolitical, legal/contractual__ ®@ — TRIMSIZE: 152 x 241mm 1.69 Petroleum Law in Australia bbe no change to the revenue and tax position. Having an internationally acceptable dispute resolution mechanism is an important element of an effective stabilisation arrangement. Another approach is for the oil company to take out insurance against sovereign risk. Increasingly oil companies are looking at the sustainability of their operations and their social licence to operate. These can take into account relations with the people of the host country and can be an important factor in stabilising arrangements with the host country. 4.70 Legal prospectivity (or legal risk) refers to a country’s respect for the cule of lav.” An oil company onduct resource exploration and exploitation within a legal framework. Petroleum. resource legislation has been described as having three purposes: to determine the ‘ownership of the resource before and after its extraction; to regulate the conduct of petroleum operations; and to determine, in conjunction with, fiscal legislation, the sharing of petroleum revenues and income between the state and the licensee or contractor on the other.” ‘The more’stable the legal regime governing the exploration and exploitation of resources, the, jgreater the legal prospectivity of a country or region. 4.71 Fiscal prospectivity is the requirement _of a company to_make a. commercial return on an investment consistent with its risk, to pay. cre and to repatriate a commercial return ina comvertible currency to the country of incorporation.” This fiscal prospectivity is generally look: the host country: royalty and income tax principally for a concession-based regime; and the fiscal terms of the contract in a service contract regime, An cil company will usually factor these issues into its financial model when it comes to an NPV or IRR calculation. A large oil company with a range ‘of possible projects will compare the returns available to it in deciding whether to commit to a project in a country, So host countries need to consider their relative fiscal attractiveness carefully.” 1.72 _ Australia, with its stable government, low inflation, steady economy and effective legal regime, has been regarded asa country with low political riskand high legal prospectivity. The Australian Government has recognised the importance of this, So in introducing its annual release of offshore petroleum acreage, the Australian Department of Resources, Energy and ‘Tourism comments: 77. Bunterabove n 74, pi 78. B Taverne, Petru, Industry and Governments An Inroducion 10 Perleum Regulation, Beomomies ad Goverment ols, 2d dy Welters Kluwer, 2008 9137 79. M Banter, ’© New Approach to Petroleum Licensing’ (2003) (1) Oi Gas and Energy Law Intaligenss chpliwwrgtandol.conogeVsamplesesridesroundup-iS;him> at 29 March 2007 0, Bunter noes number of ators which all fiscal schemes shoul have in commons for example, providing early revenue othe government while rewarding te ol company frit allowing the company to recover he cont quickly ee, See M Bunter, The Pomovion and Licsng of role Prospetve Areage,Kluer La Internationa 7002, 61 weteensonar ren pment Ba eee@ — TRIMSIZE: 152 241mm Introduction to Petroleum 1.78 ‘The Acreage Release is underpinned by Australias stable economic environment and a well-established, objective-based regulatory framework, which secks to balance environmental, social and economic considerations in the development of Australia’s natural resources." However, recent changes to mining taxation, onshore and offshore petroleum regulatory frameworks in Australia and increased community concern relating to onshore unconventional gas exploitation have had an adverse effect on this. Australia is also generally regarded as an expensive place to do business. Its labour and manufacturing costs are high. In looking, at Australias relative attractiveness, however, one thing is clear and that is that circumstances change and with them the risks of doing business in a country and prospectivity. Ownership of Petroleum and the Rule of Capture 1.78 ‘The physical characteristics of petroleum are different from_the hhard rock minerals, such as gold and iron ore, in one important respect. Petroleum is fluid in nature and will travel towards low pressure created bya production well. This is irrespective of property lines on the surface. For those countries which own the petroleum or control its ownership of petroleum through a licensing or contract system, this would seem to be less of a problem. This is because they can determine ownership of the. petroleum, either when itis prodiiced at the wellshead or when itis still underground. Obtaining clear title to petroleum covered by its licence or contract is going to be a significant issue for any oil company seeking to invest in a county. 4.74 It is more of a problem in theory in those countri ‘ownership is tied to ownership of the land above. In the early days of the petroleum indi the United States in the nineteenth century® this created problems when, for example, a well was drilled close to a property boundary on the surface, draining petroleum in the reservoir under the ground below the neighbour’ land. Ownership of the surface also carried with it ownership of what lay beneath the surface,® so the neighbour would own the petroleum under his or her land. How should courts deal with this situation, which could be viewed as the owner of the well taking his neighbour's property? where mineral 1.75. The answer that the courts came up with was the so-called ‘rule of capture, The rule of capture as developed in the courts of the United States is that the owner of land acquires title to the oil and gas which he produces 81, See chuipshwnset govau/esouresupsteam_petoleum>. 482, Thetirt commercially successful wll as del at Tcl, Pennsyvani in 1859 ‘83. In English aad Astaian ay thsi cle the acesion’ principle Te owner ofthe land owns everythingalbove and beneath the surface In Australia this subject two hing fst in sme ‘casey minrals were eservd from the feo tie oo is vigil grants and send egiaion ‘es pated later in some sates giving the sate ownership of petroleum. a ee paler@ — TRIMSIZE: 152.x 241mm Petroleum Law in Australia from wells drilled on hisland*"Thisis one practical solution to the problem, ‘one which has significant implications. It has been described by a number ‘of writers as being of critical importance to the early development of the oil industry in the United States, although it has been encountered in other countries.” First, it clarified title to the petroleum produced from a well Second, it encouraged first. movers to extract as much petroleum from, a ir as quickly as possible, Thus it assisted the rapid developme the fledgling petroleum industry. However, it also encouraged inefficient production, as it resulted in too many wells being drilled, often spaced too close together and the rapid production of easily extracted petroleum instead of the full depletion of the reservoir. ‘The main way in which property owner whose petroleum was being captured by a well on his, neighbour's land could respond was by drilling offset wells on his side of the boundary. The purpose of these offset wells was to protect the owner's Tine by extracting the pet Id the neigl _wells. Of course it Contributed to too many wells being drilled. The rule “pf capture became qualified in the United States by the recognition of reerrelative rights, meaning that the landholders of a common reservoir had rights and duties depending on each other, so it would not be lawful to Jdamage the reservoir by negligent drilling or wasting gas.” 4.76 ‘The principle that the holder of the necessary licence obtains title to petroleum produced from. “his licence area is als Australian petroleum legislation.** ‘This can be viewed as a statutory form of the rule of capture. The impact of this rule has been lessened in Australia in modern times because there is no petroleum in the ground in private ‘ownership, and because of the regulation of its extraction by government in Australia which would not generally permit the drilling of multiple wells, However, it is certainly something that still afects the behaviour of petroleum companies seeking to protect their discoveries or get fitst-mover advantage in relation to a common reservoir. For example, a company ‘which has a well in production is going to think carefully about securing, exploration acreage becoming available next door in case the reservoir extends into that acreage and can be drained by the incomer. Ifon the other hand the company discovers a reservoir crossing boundaries, it may seek to get into production as quickly as possible. ‘The permits and licences required to explore for petroleum and then ‘move into production are examined in Chapter 4. ‘See Brow» Humble Ol Co (1935)126 Tex 296 at 305; Barnard ¥ Monongahela Naural Gas (1907) 216 Pa 658 B10; and PUG Texon Dring (1948) 196 Tex 575. Fora deuiled ueatment ofthis sceT Dantth, Paes Keepers Howth Law of Capture Shapes ‘he Word Oi use, REE Pes, 2010. See BU Texan Dring (1948) 146 Tex 57. (Oko Oi Co v Indiana (1900) US Se for example, OPGGSA 52852) and Chapter 4 BESE ae ene at oor