A Unitization Strategy Of General Significance
Authors: Rose Walter 
Published: December 2007

Historically, it has been pragmatism more so than logic that has provided the basis for unitizing petroleum properties. The reason for this derives petroleum properties. The reason for this derives from the fact that the background of uncertainty usually is very high at the onset when binding unitization agreements are needed most. Consequently, the working interest holders are tempted to strike any bargain that meets their respective economic interests or seems to with minimal risk so that a return on investment will not be delayed unduly.

The present paper outlines a new philosophy and a new approach to unitization. The key idea is to establish an equity rule based on logic rather than convenience. Although information may be lacking to justify fully the rule when agreement to it is first achieved, a "rough justice" application of it still can be made with the proviso that adjustments thereafter will be made periodically. Accordingly, accounts can be balanced in ways that take into consideration the present value of money.

Specifically, a scheme is outlined in the paper that utilizes hindsight information progressively to adjust by successive approximation for any earlier misappropriation of cost obligations and profit sharing to the respective parties. A reservoir simulation model with a Lagrangian-based subroutine, for example, is all that is required for the identification of the party entitled to each unit of the commingled production and therefore responsible for the cost obligations pertaining thereto. Avoided in this way are those ordinary redeterminations that are based on the perpetuation of arbitrary participation rules adopted before the realities of the situation were appreciated fully.

Introduction

When there is more than one party with a legal entitlement* to produce and profit from the hydrocarbon reserves of a single petroleum property (say, because of the fact that the property is partitioned into two or more parcels), the otherwise competing parties may be compelled by statute or persuaded by parties may be compelled by statute or persuaded by mutuality of economic objectives to join together in the implementation of a cooperative field development. By this is meant usually that there is to be a free exchange of information that would be proprietary if the field development were to be proprietary if the field development were to be competitive, and that there would be a pooling and sharing of management and engineering expertise, together with a collaboration in the procurement of necessary services and material.

Unit field development, unitization, pooling, and other like terms are examples of contractual and regulatory arrangements aimed at cooperative field development where costs and earnings are shared according to some agreeable formula. The historical and technical differences between the various modes of cooperation will not be dealt with here, however. Instead, the focus will be on exposing the logic of a strategy that can be applied under quite general conditions.

Specifically, the object here is to disclose a scheme for equity-sharing especially designed to invite and secure cooperation between the adversary parties who otherwise would be competing for parties who otherwise would be competing for commercial advantage in the development of fields that at the onset happened to be split into divided interests. The scheme, as will be seen, is built around a straightforward definition of the term "equity" in order to have a broad relevance to generally encountered situations.

Given that the subject has been dealt with for a half century at least, it is remarkable all the more that the basic issues are not settled yet even though they seem to be understood widely.