Understanding Energy: Relinquishment

PRODUCTION-sharing contracts/agreements (PSCs/PSAs) are complex documents that encompass a wide range of requirements, activities, commitments and schedules across the agreement’s entire lifetime. Understanding Energy has primarily focused on major early production and exploration activities, but this week we take a look at a less well-known aspect of PSAs: relinquishment provisions.

When a petroleum license is granted, the company or companies (contractor) conducting operations agrees that its exploration work will occur within a specific, limited timeframe. These agreements include minimum requirements that the contractor must fulfil in that time.

These obligations usually take the form of a target number of exploration wells to be drilled, a specific amount of seismic surveying activity, or minimum expenditure requirements. Often, there is a combination of all three.

The contractor is obligated to fulfil those requirements and is required to submit financial assurances to the government, which is collectable by the government if the work programme is not completed according to the contract. In addition to requiring the contractor to perform exploratory activities, most agreements also require that a portion of the licence be relinquished periodically. The time frame for relinquishment usually coincides with the end of the exploration phase, at which point the relinquished areas can be repackaged for additional licensing rounds to other companies or held by the government.

The use-it-or-lose-it nature of relinquishment requirements provides governments with a measure of security. If a contractor turns out to be unwilling or unable to fulfil its side of the bargain, there is already a built-in mechanism which allows the government to regain control of the area and find other ways to make it profitable for country and people.

Importantly, the relinquishment mechanism only applies to a portion of the licensed block, not the entire area. In the PSA, this portion is set as a percentage. The contractor then has the right to decide which physical areas it will relinquish. While every situation is unique, contracts usually require that 20-30% of the original exploration area be relinquished if the contractor wants to extend the initial exploration period.

If the agreed-upon period has expired and an operator has decided that it will not be exploring a specific part of the licensed area, that portion will be relinquished. The fact that this is done without having to make alterations to the PSA is important, as it makes the process flexible and prevents any lull in activity that would occur if the PSA needed to be entirely revised for the relinquishment to occur.

There may also be options to voluntarily relinquish any parts of the contract area where a discovery has not already been declared or which are not under appraisal by the end of the exploration phase. This is meant to promote efficiency and speed on the part of the contractor. Contractors must focus on areas that are of interest, and also have an incentive to undertake preliminary work in the entire contract area. If they have made discoveries or are active appraising or producing in an area, the areas are typically not subject to relinquishment.

On the whole, relinquishment mechanisms serve as a driving force in exploration licenses. Contractors are incentivised to fulfil their obligations to the government in a timely manner while enabling them to continue their work on areas they feel have the most potential beyond the initial exploration phase. Governments also receive a measure of security in knowing that unused areas can eventually be repackaged and relicensed so that another contractor has an opportunity to explore for natural resources and generate value for the country.

SHARE THIS ARTICLE :
Facebook
Twitter
WhatsApp
All our printed editions are available online
emblem3
Subscribe to the Guyana Chronicle.
Sign up to receive news and updates.
We respect your privacy.