CONTRACTS AND LEGAL AGREEMENTS

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Contents

Introduction

The control and management of the ongoing land business functions within an organization necessitate the storage of vital information. Information is an asset; a data model is essential for managing this asset. The PPDM Version 3.7 Contracts Module is a detailed database module designed to allow the capture of business objects as they pertain to land contracts. The data structure of the Contracts Module is broken down into sub-modules that cover:

  • General Contract Details

Valid contract types, general comments, internal contract referencing, specified expenditures, relationships between contracts.

  • Business Relationships

Unique sets of interests determined by the contract, cross-referencing of services provided by other Business Associates.

  • Provisions

Conditions and terms that the fulfillment of a contract depends upon, relationships between provisions, conditions whose interpretation relies on other provisions, exemptions.

  • Management Procedures

Accounting procedures, operating procedures, allowable expenses, producing substance(s) to be marketed, fees and rates.

  • Location

Country, provinces or states, districts, jurisdictions.

  • Associations

Cross-references to land rights, seismic, facilities, wells, property conflicts, mortgages, caveats, liens, etc.

  • Obligations

Financial and non-financial obligations such as rentals, royalties, work commitments, notifications, response requirements, etc.

Business Process Overview

Purpose

Contracts are created between Business Associates to provide mutual benefit from the sharing of revenue and expenses related to the administration and management of the land assets, financial activities, and facilities owned by an oil and gas company, individual, or government body. Contracts are an effective way to manage exploration risk and production development.

Description

Contracts may be negotiated with individuals, companies, consortiums, or jurisdictional bodies such as governments or government agencies. Substantial interaction occurs between contracts and various kinds of land rights, such as lease agreements. Special legislation or the mutual agreement of Business Associates upon terms and conditions affect how the contracts are managed over their lifetime.


Terms and conditions identified in land contracts govern the operations of land rights. These terms define procedures to be used, fees, elections, and rates, ongoing obligations, or the distribution of revenue and expenditures. In addition, they define the working interest of each Business Associate and the role each Business Associate has agreed to provide, such as operatorship.


Spatial exposure, both on the surface and to specified subsurface zones, and access to specific substances are defined in the contract.


Ensuring that all obligations and requirements have been fulfilled over the life of the contract is an essential function of land management groups. Participating Business Associates are required to comply with these terms and conditions during the life cycle of a contract. If compliance cannot be obtained, modification, renegotiation, litigation, or arbitration may be required.


At some point, one or more partners may wish to terminate or relinquish all or a portion of their interest in a consortium or partnership. Requirements to divest interest may be defined by the terms of the contract or in some cases may be legislated.

Key Business Processes

Four key business processes encompass the life cycle activities of contracts. The key business processes for each cycle are detailed below:

Contractlifecycle.JPG

Pre-Acquisition

Pre-acquisition activities primarily involve the strategic planning and research that go into the decision to acquire or enter negotiations to secure a land contract. Organizations within a company contribute different roles in the pre-negotiation cycle. A typical deal is illustrated in this example:

A geologist identifies a “hot play” and initiates a preliminary evaluation. First, the ownership of the land rights must be determined. If the rights are unleased, it may be publicly owned by a regulatory body (Bureau of Land Management in the US, Federal or Provincial Crown in Canada, First Nations, Aboriginal or a Municipality or by a company (EnCana, AmocoBP, ExxonMobil, Railroads) or individual(s). If the rights are unleased and owned by a regulatory body, a posting request may be required to list the land rights for a competitive bidding process; otherwise, a negotiation occurs with the owner. If rights are already leased, a negotiation may be initiated with the current Business Associate lessees.

Fundamentally, companies approach the pre-negotiation phase with more rigor when the researching company is planning to increase their presence or to divest holdings in an area.

Acquisition

Securing a land contract commits the signatories to the terms agreed upon in the pre-negotiation process through the execution of a legal, binding contract. The contract negotiation process includes high-level planning details associated withmaintenance requirements. Contracts can be categorized as exploration and operating contracts, joint interest contracts, marketing contracts, or purchase and sale contracts.


Contract negotiations include detailed handling of time sensitive triggers, determination of rates and fees, requirements for notifications and financial obligations. Certain operating elections such as casing point, the right for disposal of interest and tangibles, and applicable accounting requirements are also agreed upon. Burden bearer encumbrances (royalty) are also identified in the negotiation stage.

Maintenance

Maintenance business processes result from complying with the terms and conditions of the negotiated contract. Compliance is accomplished by meeting all financial obligations quickly and by performing all required duties.


Financial obligations are the payments made for the maintenance of operations on, and production from, the specified lands. Operational payments may include all the costs related to exploit the lands, which includes the costs associated with the exploration for, and the removal, processing, and transportation of petroleum substances. Production payments are the costs allocated to an actual substance that is removed and the division of revenues associated with that substance. These payments include such things as taxes and different royalty types such as production, shut-in, and compensatory.


The performances of duties are the actual actions taken or directed by the appropriate Business Associates in order to comply with the maintenance and operational commitments specified in the contract. Most duties will be the responsibility of the Business Associate whose role is designated as operator. During maintenance, the original terms and conditions of the negotiated contract can be amended or changed. Notices are served and shared amongst the Business Associates during operations. Notifications may include right of first refusal (ROFR), independent operations notices, change of operatorship, or change of ownership. Changes of ownership are administered through documents like division orders, assignments, or transfer orders, and can directly affect a set of business interests.


In addition, relinquishment of a contract or interest required adherence to certain terms to avoid retention of unknown liabilities.


Relinquishment

Relinquishment deals with information related to the research, planning, and execution stages of relinquishing land contracts through natural expiry or early surrender of the land mineral rights, and trades or divestitures.


A trade or divestiture scenario may entail the following: Authorized personnel within an organization identify area(s) as candidates for divestiture. The value of the property is assessed to include reserves, land costs, tangible and intangible assets, and environment liabilities. This vital data is gathered and compiled into sale or trade packages that are accessed by potential purchasers in a data room. Certain terms of the contract must be complied with prior to relinquishment. The methodology involved in this compliance process is known as performing a title review, or due diligence, and can be used to simultaneously gather other information that will be required in the relinquishment process. Necessary notifications are required to relinquish a contract and completely dispose of an interest in land. An example of such notice is the issuance of a Notice of Right-of-First Refusal (ROFR) to offer the area(s) to the existing Business Associates in a contract.


The preparation of release documentation is required to ensure that the ownership, right, or interest in the land contract(s) from one Business Associate to another occurs. These release documents include the purchase, sale or trade agreement, notices of assignments, assignment agreements, transfer documents, division orders, novation agreements, quit claim agreements, or notifications of bankruptcy, dissolution, amalgamation or name change, etc.


A contract can be relinquished only when the Business Associates have met all the required obligations, commitments, and regulations and must use the proper method of disposition to be considered free and clear of any possible liabilities or future interest.


The PPDM Contracts module and associated sub-modules (see Integration) provides oil and gas companies with a method and a data structure to manage and store vital information throughout the life cycle of a land contract.

Tables

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