Help
Options
Didn't know it?
click below
click below
Knew it?
click below
click below
Don't Know
Remaining cards (0)
Know
retry
shuffle
restart
0:00
Embed Code - If you would like this activity on your web page, copy the script below and paste it into your web page.
Normal Size Small Size show me how
Normal Size Small Size show me how
(11) Well Trade Rev
AAPL CPL Chapter 11 Well Trades
| Question | Answer |
|---|---|
| What is the general concept behind Well Trades? | When we are about to drill, its important that we own, control, or get support from adjacent acreage owners. |
| Why would an operator want to enter into a well trade? Why would a lease owner? | 1.) Tie up interests owned by others in the prospect. 2.) Obtain partner to reduce risk/cost. 3.) Share costs bc limited fund. 4.) Secure follow-up drill sites. 5.) Trade into additional opportunities. |
| What is the meaning of a 70-30 drill to earn deal? | 70% to Farmee and 30% to the Farmor, once the Back-In provision has been completed (Reversionary Clause). |
| What are other typical earning percentages? | 75% and 25% |
| What is the typical minimum NRI generally required by the operator? | 35% to 40% |
| What is a Checkerboard Trade? | Farmee agrees to drill well(s) to earn a spacing (drilling) unit in the contract area. Drill sites are typically 40-160 acres and the agreement provides that farmee may drill and earn alternating (checker board) drill sites. This eliminates need for JOA. |
| What is the "Contract depth?" | To earn the well, MUST be drilled to the contract depth. |
| What is a Substitute Well? | Allows Farmee a second well if certain conditions are encountered, or if first well didn't reach total depth for reasons beyond Farmee's control. |
| Can the Farmer drill deeper and earn deeper than the contract depth? | Generally yes, unless restricted. |
| Who pays the drilling costs? | Generally the Farmee pays all costs to a certain point to earn the rights under the agreement. |
| What is meant by a Reversionary Interest? | Convert reserved ORRI into Working Interest. Can be described as "a back-in after payout as provided in a farmout agreement. Conveyed to an entity when a specific event occurs. |
| What is a Bottom Hole Contribution? (Support Agreement) | An agreement whereby a party owning a lease(s) agrees to pay the drilling party a specified amount of money (generally $/ft drilled) if a well is drilled to a specified depth at a specified location (not on the subject lease) even if well produces. |
| What is a Dry Hole Contribution? (Support Agreement) | An agreement whereby a party owning a lease(s) agrees to pay the drilling party a specified amount of money (generally $/ft drilled) if a well is drilled to a specified depth at a specified location (not on the subject lease) and the well is a dry hole. |
| What is a Seismic Farmout Agreement? (Support Agreement) | Agreement where party shooting seismic receives a farmout agreement covering all or a portion of the lessee's OGL's within the seismic shoot area. In exchange for the assignment, the party shooting seismic shares data covering lessee's leases. |
| What is a Farmout? | Most common for of well trade agreement where the owner of a lease NOT interested in drilling at a time (farmor) agrees to assign the lease or some portion to company interested in drilling (farmee). The party earns acreage and ORRI by drilling. |
| What is a Farmout Option? | Agreement where one party drills a well to an agreed upon depth or formation, and for providing the well information, an offset owner agrees to give the drilling party a farmout agreement. |
| What is a Term Assignment? (Support Agreement) | Assignment of OGL's delivered prior to drilling well. In the assignment, the Assignor usually reserves an ORRI. Assignment requires that the well be commenced prior to a specific time, or leases revert back to Assignor. |
| What is a Acreage Contribution? (Support Agreement) | Agreement where parties owning a lease(s) agrees to assign certain working interests to a drilling party if the well is drilled at a certain location to a certain depth not on that party's lease(s). |
| What is a Promoted Deal? | The most common arrangement of a promoted deal is a third for a quarter deal. Where an operator sells 1/4 of the working interest, who will pay 1/3 of the cost of drilling a well. Reduces the risk, while retaining an interest in the well for the operator. |
| How do you calculate the after casing point interest other than the interest offered under a third-for-a-quarter deal (say 50 percent)? | (50%) / (100% - 25%) = 66.66667% |
| On exploratory drilling prospects, we MUST have the adjacent acreage "tied up" or we will not have the right to reap the economic reward of our successful exploration well. | True |
| SUPPORT FROM ADJACENT ACREAGE OWNERS: | 1) "Own it" - Have a lease or own minerals. 2) "Control it" - Have option to drill (after we drill our test well) 3) "Support it" - Receive dry hole money, bottom hole money, or direct acreage contribution for drilling. |
| Difference between a Farmout vs. Farmin? | A.) Basically the same thing. The party giving up the acreage its a farm out. B.) To the drilling party its a Farmin. |
| Farmout Notes | Typically subject to a ORRI (5%) by the farmor, which at payout has the option to convert the reserved 5% ORRI for a working interest, typically a 25%, proportionately reserved. |
| Back-In Provision | Convert reserved ORRI into Working Interest. Can be described as "a back-in after payout as provided in a farmout agreement. |
| Carried Interest | Typically an interest carried free of costs to casing point, the tanks, or other defined point. |
| ORRI is often expressed as a percentage of 8/8ths. 5% of 8/8ths; or just 5% | True |
| What is a Seismic Option Farmout Agreement? | Party shooting seismic receives a farmout covering all or portion of the Lessee's OGL's within the seismic shoot area. In exchange for the farmout, party shooting seismic agrees to share with lessor. In order to earn assignment, seismic co. MUST DRILL. |
| Why Well Trades? | 1.) Tie up interests owned by others in the prospect. 2.) Obtain a partner to reduce risk and cots. 3.) Share costs because of limited drilling funds. 4.) Secure follow-up drill sites. 5.) Trade into additional opportunities. |
| Examples of Support Agreements: | 1.) We bought a lease from "I" before contacting the other lessees 2.) Negotiated 70/30 farmout with A 3.) Buy a lease for $100/ac and a 5% ORRI with B. 4.) Make a deal for dry hole money $10/sq ft with C. 5.) Get bottom hole support from D. |
| To drill exploratory wells without proper ownership, control and support will, without doubt, lead to economic suicide. | True |
| Reasons a LEASEHOLDER may "Support it" rather than participate in the well (direct acreage contribution for drilling)? | 1) Economic restrictions. 2) Well too risky. 3) Well inconsistent and wrong area. 4) Lease Expirations or demands. 5) Want to encourage a well to test primate acreage. 6) Don't like geology. |
| In order to deliver a 75% NRI deal, the reserved ORRI may be stated as "the difference between existing burdens and 25%. | True |
| Farmee - The party earning the acreage. Earn after full satisfaction of the earning and requirement provisions of the agreement. The party drilling. | True |
| 1) Farmout to Earn Spacing Unit | A) Farmee agrees to drill the well to earn the spacing unit. B) Farmor reserves a back in at payout well 5% ORRI convertible to 30% WI at payout. C) After payout and back in payout, well(s) operated under terms of JOA. |
| 2) Farmout plus option to Earn Outside Acreage | A) Farmee agrees to drill the well to earn the spacing unit AND a Back-In at payout. B) Farmee has an option to drill additional wells to earn additional spacing units. For each well drilled, Farmee earns acreage. C) Then terms of JOA. |
| 3) Option Farmout Agreement (1 of 2) | An agreement where one party drills a well to an agreed objective depth and/or formation, and in enhance for reaching depth AND sharing WELL INFO, an offset owner agrees to give drilling party FARMOUT in the offset lands and leases. |
| 3) Option Farmout Agreement (2 of 2) | Basically the drilling party (FARMEE) earns nothing until successfully completing the initial well - and then drills additional wells on the outside acreage. AND receive WELL INFORMATION from the initial well. |
| 4) Checkerboard Farmout Agreement | A) Farmee agrees to drill the wells to earn a spacing unit in the contract area. B) Farmee earns 100% ORRI of each drillsite, subject to reserved ORRI. C) Drill site is typically 40-160 acres. D) Farmee may drill and earn checkerboard drill sites. |
| Working Interest Unit | Large units formed under a JOA for the purpose of the sharing of costs and risks of drilling of exploratory wells among all owners that join the unit. Each owner has the right to participate with the ownership interest it is credited with any drilling. |
| Common Provisions of Well Trade Deals | 1) Well Location. 2) Formation and depth requirement. 3) Commencement and completion deadlines. 4) Reports and information required: (daily reports, mud logs, electric logs, well test results). 5) Coring and Testing Requirements. |
| Well Trade Agreement Checklist - Well Obligation | This is the KEY PROVISION under a TRADE. What are the EXACT OBLIGATIONS of the parties? Does acceptance firmly obligate to drill? Drill Well of pay penalty? Commencement date stated? "Commence" or "actual drilling?" |
| Well Trade Agreement Checklist - Contract Depth | A) Generally a minimum depth - may go deeper. B) Depth to earn (100' below Niobrara). C) Depth or max expenditure. D) Is there a stop depth? E) Does production at lesser depth entitle completion? NO! |
| Well Trade Agreement Checklist - Information | A) KEY REASON TO DO A WELL TRADE! B) Drilling, testing, logging, completion forms, production, drilling reports. C) Testing requirement. D) Audit and reports. |
| Well Trade Agreement Checklist - Substitute Well Provision | A) Allows a Farmee to commence a 2nd well if the first well is lost before reaching TD for reaching TD for reasons beyond Farmer's control. B) 2nd well for any reason whether or mechanical problems. C) Impenetrable Substance, salt domes, salt flow. |
| Well Trade Agreement Checklist - Costs | Generally, the FARMEE PAYS ALL COSTS to a certain point to earn the rights under the agreement. To Casingpoint; Through Xmas Tree, Into the Tanks, Is there recoupment? Drilling cost? Completing Cost? Operating Cost? |
| Well Trade Agreement Checklist - Titles | Generally the FARMEE clears title. But may ask the FARMOR for title and file information available. Access to files, Resonanabilitly for curative. |
| Well Trade Agreement Checklist - Area of Mutual Interest | Are there opportunities for additional acquisitions in the area around the well? If so, the parties may want to include an AMI to protect their interests. Is area reasonable and clearly defined? |
| Well Trade Agreement Checklist - Calls on Production (Preferential right to purchase production) | A) Many companies delete this provision. B) Does it include: Oil, Gas (including casinghead), Processing Rights |
| Well Trade Agreement Checklist - Damages or Penalty Provision | Failure to Commence or Perform (Loss of rights, other relief or remedy, liquidated damage clause) Surface Dameges - Farmee should pay? |
| What gas sales and/or other contracts affect the leases? | 1) Gas Committed at a low rate could be a dealbreaker. 2) Never assume that a low price can be renegotiated. |
| Well Trade Agreement Checklist - Extensions | 1) Extensions are rarely granted to parties with NO MONEY! 2) Rig availability, title problems, or funding problems. |
| Promoted Drilling Deal | The most common is a "third for a quarter" deal, where an operator or promoter sells one-fourth of the working interest to a promotee, who will pay one-third of the cost of drilling the well. The promoter reduces risk while retaining an interest in well. |
| Promoted Drilling Deal Notes | Generally, the promoter, or party generating the prospect, insures certain costs to establish the prospect and to acquire the acreage and needs further to help to drill the well, and hopefully recoup some of the prospect generation costs. |
Created by:
MrCPL