Unitization is the process of developing an oil or gas field that spans multiple license or international boundaries as a single unit. It ensures optimal resource recovery and maximizes value for the involved parties and states. Historically, the "rule of capture" led to inefficient development as individual operators sought to quickly extract resources. Modern unitization agreements establish initial participation shares and include provisions for later redeterminations based on new technical data. They aim to facilitate cooperative development while equitably allocating costs and production among stakeholders.

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2. Doug Peacock
Technical Director
Who Owns the Oil?
The How and Why of Unitization
LIVE

3. 3
Disclaimer
The material and opinions expressed in this webcast are those of the author.
While they reflect what is believed to be informed opinion, they are not
represented as being the opinions of the
SPE/WPC/AAPG/SPEE/SEG/SPWLA/EAGE or the US Securities and Exchange
Commission nor its staff. Readers are urged to obtain independent advice on
any matter relating to the interpretation of reserves and resources definitions and
guidance.
The author is acting in an advisory capacity only and, to the fullest extent
permitted by law, disclaims all liability for actions or losses derived from any
actual or purported reliance on this webcast (or any other statements or opinions
of the author) by any other person or entity.

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Unitization in the News………

5. 5
Presentation Outline
• Unitization: What is it?
• Why is it Done?
• Rule of Capture and History
• Benefits of Unitization
• How is unitization implemented?
• Unitization agreements
• Basis for unitization
• How does redetermination work
• Expert determination
• Alternatives to unitization and industry trends
• Summary and Conclusions
What?
Why?
How?
Can we avoid it?

6. 6
Accumulations straddling boundaries are common
of these accumulations in the Southern
North Sea straddle a block boundary>50%
*Egba et al, 2016
Fields in Nigeria straddle boundaries,
with few formally unitized*
>70
A potential roadblock to getting development
approved, depending on regulatory environment
For governments, to ensure efficient development
and maximize state revenue
May be worth a lot of money
Some companies see it as reputational
Why is it Important?

7. 7
• Unitization should result in optimised, more
efficient recovery
• Legislation in many countries has unitization
provision
• Main purpose of unitization is to maximize benefit
to the state through more efficient development
Unitization is the process by
which development of a field
that crosses one or more
licence (or international)
boundary(ies) can take place as
a single "unit“
Unitization is the process by
which licencees of neighboring
leases pool their individual
interests in return for an interest
in the overall unit.
What is Unitization?

8. 8
Historical Background
Westmoreland case (Pennsylvania,1889)
"Petroleum, like savage animals and unlike other minerals,
has a power to escape without the volition of its owner but
continues to be his property as long as it remains in an area
under his control. However, when it migrates to other lands
under the control of another person, the title of the previous
owner disappears. Therefore, the ownership of the land does
not necessarily involve the ownership of petroleum. If drilling
leads to a common deposit, the petroleum will be the property
of who produces it".

9. 9
Licence A Licence B
• Hydrocarbons become
the property of whoever
recovers them even if
they have migrated from
adjoining lands
• Encourages landowners
to drill and capture
quickly and leads to
inefficient recovery
• Leads to coning,
fingering, premature loss
of reservoir energy
Rule of Capture

10. 10Boiler Avenue, Spindletop, Texas 1903
Lack of regulation leads to ….

11. 11
Paramount Vantage/Miramax
I Drink Your Milkshake!

12. 12
Harry Doherty
Harry Doherty was one of the first to
criticize rule of capture
but……. he wasn’t popular with his
fellow oilmen who wanted to
continue producing as fast as
possible and “get rich quick”
Doherty feared that “extremely crude
and ridiculous” production practices
would prevent large volumes of oil
from ever being produced
Henry “Harry” Doherty (1870-1939)
Oil magnate of the 1920’s and financier
who founded Cities Service and other
companies There must be a better way!

13. 13
Unitised/Regulated
Development
Rule of Capture
In the US, many states introduced legislation based on the principle of “correlative rights” such
that each landowner should receive his or her fair share of oil and gas recoverable from
beneath their land
Various measures including: well spacing rules (e.g. 40 acre), compulsory pooling and
unitization were implemented to prevent rule of capture and allow more efficient development
Regulated Development

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Why Unitize?
To ensure that the State's resources are developed in an optimum
and efficient manner
― Maximise recovery from the field as a whole
― Share and make best use of all relevant technical information
― Reduce development costs and improve project efficiency
Many countries in the world have unitization provision
Note that providing an equitable split between parties is not the main
driver behind unitization, although it may also be a desirable outcome

15. 15
• Developed in the North Sea
• Included both domestic and international
straddling fields
• Frigg agreement 1976
• Statfjord, 1979 (based on a 1976 draft)
• Similar to Frigg but with amendments
• Was amended >20 times up to 2009 to account
for conditions not foreseen in 1976
• Multiple redeterminations (and disputes) with
final one in 1995-97
• From 1980s, many unitizations in North
Sea fields
Modern Unitization Practice
UK Norway
UK Block
Total: 100%
Norwegian Block
Total: 47.13%
Norsk Hydro: 32.87%
Statoil: 20%
New Unit Interests
Total: 67.85 %
Norsk Hydro: 19.99 %
Statoil: 12.16 %
Block Participation
UK: 39.2 %
Norway 60.8 %
Frigg Gas Field

16. 16
How To Unitize?
Licence A Licence B
Unit Area
15%
85%
Company A
Company B
Company C
WI%
50
30
20
UI%
7.5
4.5
3.0
Company A
Company D
WI%
40
60
UI%
34.0
51.0
WI% = Working Interest in Licence
UI% = Unit Interest in the Field
Tract Participation

17. 17
Several Wells in Licence A
Does Licence B need to drill a well to force unitization?
• Usually, a well would need to be drilled in Licence B, which “proved” communication
• But…..can agree whatever you like (but why would A agree?)
• Depends on regulatory regime e.g. in Brazil, may have to unitize with the State
Licence A Licence B
Do you need to drill a well on both sides?
?

18. 18
• A new determination of Tract
Participations (TP)
• Updated estimate based on new
data
• Almost always retroactive
• Often highly contentious
• Adjustments may not be "fair
and equitable"
• May be very expensive
What is a Redetermination?
Time
Example

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Potential Value of Equity Change: Is it Worth It?
0.001 0.01 0.1 1 10
% Interest
0.01
0.1
1
10
100
1000
NPV
50 MMBbl Field 100 MMBbl Field 500 MMBbl Field
IndicativeValues$USmillion
▪ Assuming NPV for a model 100 MMBbl field is US$1 billion (~$10/bbl)
▪ NPV of a 1.00% interest is US$10 MM
▪ NPV of a 0.10% interest is US$1MM
But consider cost, e.g.
• Full team for many
months (years) to
prepare submissions
• Expert cost
• Opportunity cost
• Damaged
relationships?
• Potential litigation?

20. 20
Pre-Unitization Agreement
Redetermination(s)
Reallocation (costs
and hydrocarbons)
Unitization Agreement
When To Unitize?
Appraisal
Production
Abandonment
Discovery
Common
Reservoir?
Expert
I
II
III
Three stages
of unitization

21. 21
• The Unitization Agreement is the contract between the interested parties that
determines their respective rights and obligations towards exploiting a
straddling deposit as a single unit
• Similar to a Joint Operating Agreement (JOA), but with key additions and
differences, including:
• Operational issues
• Initial Tract Participations
• Redetermination process
• Recourse to an Expert
• Adjustment mechanisms
• Any existing JOAs will be subordinate to a unitization agreement
• Can be large (>300 pages), complex documents, and take >1 year to agree
• Requires a multi-disciplinary team (lawyers, economists, subsurface)
• *AIPN also published a “Model Unitization Agreement” (2006/2020)
Unitization Agreements
*Association of International Petroleum Negotiators

22. 22
• Unitization agreements have included various options for unitization including: original
petroleum pore volume (OPPV); petroleum initially in place (PIIP); moveable petroleum
initially in place (MPIIP); economically recoverable reserves (ERR); hybrids
• Most common is in-place: STOIIP / GIIP
• Deviations from in-place are typically only used when there are systematic, monotonic
changes in reservoir quality across a licence boundary
• In these cases, can include parameters that control fluid flow and/or use estimated ultimate
recovery (EUR) or similar e.g. weighting factors
• EUR generally not preferred, unless absolutely necessary, because it adds time and
complexity and introduces a range of hard-to-define/agree factors such as
development plan (number of wells, location, timing), well numbers, location,
development/completion strategy, economic/technical production limits, water and/or
gas injection, history match parameters, etc.
Basis for Unitization

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• Define how the redetermination
will be performed
• Aim is to generate a “most likely”
geological model which will result
in “fair and equitable” Tract
Participations
• Typically written early in field life
based on limited database and
incomplete understanding of field
• May range from completely
undefined to highly prescriptive
• Difficult to find a balance
• Database issues also need to be
included:
• What data to be
included/excluded?
• On what basis?
Technical Procedures
Geology
Geophysics
Petrophysics
Reservoir
Engineering
B
2
4 6
WellTops
C
2
6 8
D
2
4 6
Seismic
WellTie
E
4
6 10
Horizon
Interpretation
A
4
0 4
Common
Database
M
6
4 10
Sw V. H
O
2
4 6
Determine FVF
K
1
6 7
Cartographic Data
Fluid
Contacts
WellCorrelation
N/G Calc
Porosity
Calc
Sw In Wells
Sw v H
Avg Sw
By Zone
P
1
8 9
Q
1
9 10
S
2
10 12
u
2
12 14
R
1
10 11
Avg Porosity
By Zone
F
2
10 12
Horizon Grids
H
2
16 18
Time
Maps
I
4
18 22
Depth
Conversion
G
4
12 16
Fault Interpretation
J
1
22 23 Geological
Model
L
3
23 26
Depth
Structure Maps
V
3
26 29
Isochore
Maps
X
2
29 31
Z
4
31 35
Determine
STOIIP/GIIP by
Field/Zone/Tract
W
2
29 31
Property
Maps
Y
2
29 31
CRITICAL PATH

24. 24
• Terms of Reference for Expert referral should be included in the Unit Agreement
• Typically, Unit Operator will propose updated Tract Participations; if no agreement, can
refer to an Expert
• UOA will typically include procedures for how an Expert is selected
• An Expert will typically be an independent consulting company with sufficient expertise and
resources; likely a short list of companies will be qualified
• Expert will typically be asked to resolve matters in dispute, but using the agreed database
and the technical procedures
• Common methods used:
• Key steps, whereby Expert is required to resolve issues as they arise in a step-wise process
• Pendulum Method, where groups submit their own proposals and Expert performs own technical
analysis and selects proposal closest to Expert’s view
• Constrained Method, where Expert performs own analysis but must fall within range of groups’
proposals
• Unconstrained or “Shotgun” Method, where groups submit proposals but Expert is unconstrained
and may fall outside the range
Referral to Expert

25. 25
SPE-192144-MS • Reserves Assessment in Petroleum Accumulations Straddling Boundaries: The Relationship between Reserves & Resources and unitization • Doug Peacock
Reserves & Resources Unitization and Redetermination
Range of Estimates (Low, Best, High) Single Deterministic Answer
Follows PRMS, SEC, COGEH, etc. Follows technical procedures from UOA
Based on economically recoverable volumes Based on in-place volumes, or similar
Should use all available data
Typically includes data in an agreed
database
Affected by factors such as commerciality,
development planning, prices, costs
Usually no consideration of commercial
factors, development plans, etc.
May be different for each Party Must be same for all parties
Varies with time, e.g. annually
Determined only at fixed times, e.g., initial
unitization plus one or more redeterminations
Tract Participations are the Key Output
Differences between Reserves
Assessment and Unitization

26. 26
• Costs
• Capital – Yes
• Operating – No
• Interest (premium above base rate)
• Repayment period
• Cash call records
• Production
• Hydrocarbons not cash
• Proportion set aside for repayment
• No "interest"/price adjustment
• Repayment period
Adjustments
Tract
Participation
CostsProduction

27. 27
Global Unitization Examples (Old and New)
Modern
unitization
practice was
developed in the
North Sea
Originally “Rule of
Capture” applied but
many states in the
USA adopted
measures such as
compulsory pooling
and well spacing
limits
Offshore Gulf of
Mexico uses
international
unitization
practices similar to
North Sea
2020 Zama Field
Mexico Deadline set
by government for
parties to agree
unitization
2010: Norway-Russia
Agreement signed
2010: Brazil Sub-
salt legislation
enacted requiring
unitization
Eastern
Mediterranean 2018: Brunei-
Malaysia. unitization
Framework
Agreement signed for
several fields
straddling border
2008: PNGLNG
agreement
signed
2020: Ghana:
Afina-Sankofa and
Jubilee (2009)
2015: Mozambique Area 1
& 4 signed UOA between
ENI and Anardarko
2018: Tortue Field
(Mauritania-Senegal)
uses an agreement
based on 1970s Frigg
Agreement from North
Sea

28. 28
Back to the Future….
Tortue/Ahmeyim (Mauritania-Senegal), Feb 2018
The *ICA is informed by industry best practice for the
development of cross-border resources, based on
the landmark Frigg Agreement of 1976 between the
United Kingdom and Norway. The agreement
between Mauritania and Senegal provides for
development of the Tortue field through cross-border
unitization, with a 50%-50% initial split of resources
and revenues, and a mechanism for future equity
redeterminations based on actual production and
other technical data
*Inter-Governmental Cooperation Agreement
Source: Offshore Energy

29. 29
International Issues
• Additional issues to consider
• Requires agreement between countries
• Different regulatory regimes on each side
• Borders may not be agreed
• If borders not agreed, joint development
areas can be set up to allow exploitation
of resources
• Many examples: Malaysia-Thailand,
Australia-Indonesia, Nigeria-Sao Tome e
Principe
• Agreements from North Sea, e.g. UK-
Norway can provide a template
0 25 50 Km
454545454545454545
B-17-01B-17-01B-17-01B-17-01B-17-01B-17-01B-17-01B-17-01B-17-01
A-18 GHAA-18 GHAA-18 GHAA-18 GHAA-18 GHAA-18 GHAA-18 GHAA-18 GHAA-18 GHA
B-17 GHAB-17 GHAB-17 GHAB-17 GHAB-17 GHAB-17 GHAB-17 GHAB-17 GHAB-17 GHA
BERGADINGBERGADINGBERGADINGBERGADINGBERGADINGBERGADINGBERGADINGBERGADINGBERGADING
B-13/38B-13/38B-13/38B-13/38B-13/38B-13/38B-13/38B-13/38B-13/38
BKOTBKOTBKOTBKOTBKOTBKOTBKOTBKOTBKOT
B-12/32B-12/32B-12/32B-12/32B-12/32B-12/32B-12/32B-12/32B-12/32
WIRA
SAMUDRA
MUDA
PM-301PM-301PM-301PM-301PM-301PM-301PM-301PM-301PM-301
PM-302PM-302PM-302PM-302PM-302PM-302PM-302PM-302PM-302
PM-303PM-303PM-303PM-303PM-303PM-303PM-303PM-303PM-303
PM-311PM-311PM-311PM-311PM-311PM-311PM-311PM-311PM-311
ULARULARULARULARULARULARULARULARULAR
B-12/32 BUSSB-12/32 BUSSB-12/32 BUSSB-12/32 BUSSB-12/32 BUSSB-12/32 BUSSB-12/32 BUSSB-12/32 BUSSB-12/32 BUSS
B-15B-15B-15B-15B-15B-15B-15B-15B-15 B-15AB-15AB-15AB-15AB-15AB-15AB-15AB-15AB-15A
B-16B-16B-16B-16B-16B-16B-16B-16B-16
B-16AB-16AB-16AB-16AB-16AB-16AB-16AB-16AB-16A
B-17B-17B-17B-17B-17B-17B-17B-17B-17
BONGKOTBONGKOTBONGKOTBONGKOTBONGKOTBONGKOTBONGKOTBONGKOTBONGKOT
G07/43G07/43G07/43G07/43G07/43G07/43G07/43G07/43G07/43
444444444444444444
464646464646464646
46-0246-0246-0246-0246-0246-0246-0246-0246-02
505050505050505050
515151515151515151
52/9752/9752/9752/9752/9752/9752/9752/9752/97
BLOCK BBLOCK BBLOCK BBLOCK BBLOCK BBLOCK BBLOCK BBLOCK BBLOCK B
CAI NUOCCAI NUOCCAI NUOCCAI NUOCCAI NUOCCAI NUOCCAI NUOCCAI NUOCCAI NUOC
AMARIT
ARTHIT
BULAN
BUMI EAST
BUMI NORTH
BUMI SOUTH
BUNDI
BUNGA KAMELIA
BUNGA KEKWA
BUNGA ORKID
BUNGA PAKMA NORTH
BUNGA RAYA
BUNGA TULIP
BUNGA ZETUNG
DAMAR
JENGKA
JENGKA WESTMALI
NAM CAM
NGOC HIEN
PHU TAN
PIKUL
SENJA
TAPI
TON NOK YOONG
TON SAK
U MINH
THAILANDTHAILANDTHAILANDTHAILANDTHAILANDTHAILANDTHAILANDTHAILANDTHAILAND
MALAYSIAMALAYSIAMALAYSIAMALAYSIAMALAYSIAMALAYSIAMALAYSIAMALAYSIAMALAYSIA
VIETNAMVIETNAMVIETNAMVIETNAMVIETNAMVIETNAMVIETNAMVIETNAMVIETNAM
B-17-01B-17-01B-17-01B-17-01B-17-01B-17-01B-17-01B-17-01B-17-01
B-17 GHAB-17 GHAB-17 GHAB-17 GHAB-17 GHAB-17 GHAB-17 GHAB-17 GHAB-17 GHA
A-18 GHAA-18 GHAA-18 GHAA-18 GHAA-18 GHAA-18 GHAA-18 GHAA-18 GHAA-18 GHA
Padang BesarPadang BesarPadang BesarPadang BesarPadang BesarPadang BesarPadang BesarPadang BesarPadang Besar
ChanglunChanglunChanglunChanglunChanglunChanglunChanglunChanglunChanglun
KhanomKhanomKhanomKhanomKhanomKhanomKhanomKhanomKhanom
Georgetow nGeorgetow nGeorgetow nGeorgetow nGeorgetow nGeorgetow nGeorgetow nGeorgetow nGeorgetow n
SongkhlaSongkhlaSongkhlaSongkhlaSongkhlaSongkhlaSongkhlaSongkhlaSongkhla
* Under the jurisdiction of the Malaysia-Thailand Joint Authority
Malaysia-Thailand
Joint Development Area (MTJDA)
Source: PetroView

30. 30
Producing Field in A (Development Licence),
nothing in B (Exploration Licence)
• Regulatory framework?
• Development sanctioned without unitization?
• Confidence in extension? Is it worth drilling?
SPE-192144-MS • Reserves Assessment in Petroleum Accumulations Straddling Boundaries: The Relationship between Reserves & Resources and unitization • Doug Peacock
Licence A Licence
B
Small
Extension
Field
Determination?
Rule of
Capture?
If no
Production
Licence in B:
Unitise with
the State?
Extensions

31. 31
• Unitization becoming less common in more mature basins like North Sea
• Smaller fields; “size of the prize” much less (e.g. Peik, ~20MMbbl where
fixed equity was agreed)
• Alternatives to unitization include:
• Fixed equity, i.e., no redeterminations
• Shared ownership, e.g., JDAs
• Asset swaps and buyouts
• Whatever can be agreed between parties
• In greenfield areas, large, new discoveries straddling boundaries/international borders often
subject to traditional agreements
• e.g. Tortue in Mauritania-Senegal has an agreement based on the Frigg agreement
• Countries keen to get deals done to allow exploitation
• Unitization of gas fields for large LNG projects is becoming common:
• PNGLNG, Tangguh, Snohvit, Darwin, Gorgon all produce LNG from unitised fields
• Some countries have regulatory provision, but very few formally unitized fields, with a
potentially large backlog of unitizations; how will these be handled?
• Retroactive unitization is becoming an issue (better to do it sooner rather than later)
Alternatives to Unitization

32. 32
• Less likely to go ahead with a costly redetermination?
• “Size of the Prize” is smaller
• Cost of any gain relative to cost of preparing submissions, etc.
• Might even want to “lose” (i.e. reduce) TP share
• Payback in cash now may be more preferable than an uncertain amount of
future production with unclear value
• Are there more redeterminations in future?
• However, for large fields with large potential gain, companies may
still want to fight
What about U&R in a low oil price environment?

33. 33
• During a redetermination of the Balmoral Field in the North
Sea, an Expert (GaffneyCline) was engaged to resolve a
dispute
• Subsequently, the party with an increased TP sued the
Expert on the grounds that they did not properly follow the
technical procedures
• At the prevailing low oil price, the party estimated a loss of
>US$50 million
• The dispute related to technical procedures about seismic
to well ties, which were poorly defined in the UOA
• The High Court supported the Expert and threw out the
case
• The party went to the Court of Appeal who again
supported the Expert
U&R in a low oil price environment?
The Story of Balmoral
Balmoral Castle, Scotland
Balmoral Oil Field, North Sea

34. 34
• Oil and gas fields straddling licence boundaries are common
• Main purpose of unitization is to ensure efficient development of
resources
• Often required in order to proceed with development
• Unitization protocols and common practices have been established
worldwide, based on North Sea practice
• Unitizations exist within the Regulatory Framework and Licence or other
international agreements; many countries have unitization provision
• Alternatives to unitization exist and may be appropriate in some
circumstances
• Often contentious and may have other consequences
Summary & Conclusions

35. 35
SPE Training Course: 29-30th Sep 2020

36. Doug Peacock
Technical Director
doug.peacock@gaffneycline.com
Who Owns the Oil?
The How and Why of Unitization
LIVE