LAST week, international media reported that Qatar Petroleum is planning to enter a farm-in agreement with Total for a share of exploration and production rights in the Orinduik and Kanuku blocks offshore Guyana.

Under the terms, Qatar Petroleum will acquire 40% of Total’s existing 25% participating interest in each block. In the Orinduik, Qatar Petroleum will join Total and partners Tullow Oil and Eco Atlantic. In the Kanuku, Qatar Petroleum joins Total, Tullow and Repsol.
Qatar Petroleum’s entry comes just as exploration is kicking off in the Orinduik. Tullow Oil recently began drilling its first exploration well, the Jethro-Lobe, and results are expected shortly. Both the Orinduik and Kanuku blocks are due for additional exploration wells later this year.

Qatar Petroleum’s entry would come in the form of a “farm-in agreement,” a common industry arrangement where the part-owner of an oil and gas lease sells a stake in their block to another company in order to reduce or dilute their own financial risks and get more capital to invest in development.

The new party entering the lease normally has to meet certain contractual obligations, like drilling wells of a certain depth and location within an agreed timeframe. If these conditions are met, the new party gets a share of the block. Farm-in agreements may also require that the well start commercial production for the agreement to actually take effect. This way, the company farming in only receives its share if the well actually ends up producing oil.

A key aspect of a farm-in agreement is that it is built around the rendering of services, rather than a monetary exchange. The leaseholder contracts with the external company so that they can come in to provide technical support or services.

Farm-in agreements are especially common in upstream exploration and production work. This is due to the technical complexity and specialized capabilities required to drill wells and produce oil. Very few companies in the world have the capabilities and resources necessary to do this work on their own. Thus, they often seek support from other companies in exchange for a stake.

Exploration operations are also extremely risky, and even a successfully executed well may yield no results and cost a company hundreds of millions of dollars. Farm-ins provide the added benefit of sharing the risk of failure amongst multiple companies. Because the associated costs are so high, individual companies are often unwilling to assume all of the risk themselves. Partners and farm-ins decrease that risk and create greater interest in exploration.

The Department of Energy Head, Dr. Mark Bynoe, has made it clear that the government will be taking a long, careful look at the agreement before the farm-in is approved. But Qatar Petroleum’s interest is yet another sign of the rising tide of international interest in Guyana and is not limited to operations in the Stabroek Block alone. If the agreement is approved, Guyana can expect to see more activity in the Orinduik and Kanuku blocks in the near future.