Opinion ID: 795095
Heading Depth: 2
Heading Rank: 1

Heading: The Congo's Royalty Interest and SNPC's Working Interest Share

Text: 6 FG Hemisphere sought to satisfy its money judgment against the Congo via garnishment of royalty obligations under which the Garnishees periodically deliver oil that is produced, stored, and delivered in Congolese territorial waters. The royalty obligations arose under a 1979 agreement (the Convention). The parties to the Convention were the Congo, Congolese Superior Oil Company, Cities Service Congo Petroleum Corporation, Canadian Superior Oil, Ltd., and Société Nationale de Recherches et d'Exploitation Pétrolières Hydro-Congo. It appears that the Garnishees are successors in interest to three of these parties, with SNPC being the successor to Hydro-Congo. 7 Pursuant to the Convention, the Congo issued a permit, the Marine 1 permit, allowing the companies to drill for oil in exchange for royalties paid to the Congo. Under the Convention, the Congo has the right to elect to receive royalties in cash or in-kind, but since 1999, the Congo has elected to receive the payments in-kind. The Garnishees and SNPC are the current owners of working interests in the Convention. 8 The rights and obligations of the parties to the agreement are governed by a series of contracts. The Joint Operating Agreement (JOA), a separate agreement among the working interest owners, sets forth their respective proportionate interests and also provides for how the oil production operations are conducted. The parties to the JOA were all the parties to the Convention except the Congo. A related agreement, the Amendment to Lifting Agreement, establishes the logistical procedures to coordinate oil liftings taken by SNPC and the Garnishees. The oil produced pursuant to the Convention is transported via a subsurface pipeline network to an offshore vessel located off the coast of the Congo. 9 A lifting occurs when oil is offloaded from a storage vessel located off of the Congo's coast. The Garnishees take liftings of oil stored on the vessel for their own account and sell 100% of the oil for their own account. CMS Nomeco Congo, Inc. (CMS Nomeco), as operator, calculates the royalty owed to the Congo and the working interest amount owed to SNPC as a result of the Garnishees' liftings. These amounts owed to the Congo and SNPC are called the under-delivered position. CMS Nomeco records the results of its calculations on an over/under statement. Once the combination of the Congo's royalty entitlement and SNPC's working interest entitlement exceeds an under-delivered position of at least 275,000 barrels, SNPC is entitled to take a lifting of oil for itself and for the Congo. Apparently, when SNPC conducts such a lifting, it lifts about 550,000 to 650,000 barrels, at which point it is over-delivered, which is then accounted for in the over/under statement described above. Af-Cap Inc. v. Republic of Congo, ( Af-Cap II ) 1 383 F.3d 361, 365 n. 2, clarified on reh'g, Af-Cap, Inc. v. Republic of Congo, 389 F.3d 503 (5th Cir.2004). SNPC would then not take another lifting until it is under-delivered by 275,000 barrels. In this manner, the SNPC lifting extinguishes the in-kind royalty obligation and puts SNPC into an over-delivered position. The process repeats as the Garnishees take more liftings. 10 The oil production operations entail operating costs that are borne by the working interest owners, which do not include the Congo. Pursuant to the JOA, the Garnishees advance SNPC's share of the operating expenses. These advances are reimbursed by allocation of a portion, 75%, of SNPC's 50% working interest share of the production. Accordingly, SNPC takes only 25% of its 50% share of the production, 12.5% of the total production. The remaining 75% of SNPC's share, or 37.5% of the total production, is lifted by the Garnishees to reimburse themselves for the amounts paid to cover SNPC's share of the operating costs. Through these various agreements, the working interest owners established a procedure for the lifting of the Garnishees' share of the oil as well as the lifting of SNPC's working interest share, which it takes at the same time it takes the Congo's royalty oil. 11