entities e and f have carried out exploration programs on separate properties owned 598028

Unitisation¹³⁷

Entities E and F have carried out exploration programs on separate properties owned by each in a remote area near the Antarctic Circle. Both entities have discovered petroleum reserves on their properties and have begun development of the properties. Because of the high operating costs and the need to construct support facilities, such as pipelines, dock facilities, transportation systems, and warehouses, the entities decide to unitise the properties, which means that they have agreed to combine their properties into a single property. A joint operating agreement is signed and entity F is chosen as operator of the combined properties. Relevant data about each entity’s properties and costs are given as follows:

Ownership ratio in the venture is to be based on the relative quantity of agreed-upon reserves contributed by each party (30% to E and 70% to F). The parties agree that there should be an equalisation between them for the value of pre-unitisation exploration and development costs that directly benefit the unit, but not for other exploration and development costs. That is, there will be a cash settlement between the parties for the value of assets (other than mineral rights) or services that each party contributes to the unitisation. This is done so that the net value contributed by each party for the specified expenditures will equal that venturer’s share of the total value of such expenditures at the time unitisation is consummated. Thus, the party contributing a value less than that party’s share of ownership in the total value of those costs contributed by all the parties will make a cash payment to the other party so that each party’s net contribution will equal that party’s share of total value. The agreed amounts of costs to be equalised that are contributed by E and F are:

As a result of this agreement, F is obliged to pay E the net amount of €7,000,000 to equalise exploration and development costs. This is made up of the following components:

(a) €4,800,000 excess of value of exploratory drilling received by F (€16,800,000 = 70% × €24,000,000) in excess of value for successful exploratory drilling contributed (€12,000,000); plus

(b) €3,600,000 excess of value of development costs received by F in the unit (€33,600,000 = 70% × €48,000,000) in excess of the value of development costs contributed by F (€30,000,000); and less

(c) €1,400,000 excess of value of G&G costs contributed by F (€14,000,000) over the value of the share of G & G costs owned by F after unitisation (€12,600,000 = 70% × €18,000,000).