Since the end of October 2013, a number of international oil companies have released news of oil discoveries in the Kurdistan region of Iraq. For example, Marathon Oil Plc made an upbeat announcement of total flow rates of around 11,000 bopd, as well as 72 MMcfd coming from its Harir-1 exploration well.
However, the key to transitioning from an exploration to development (and production) periods in an upstream operation is the declaration of a ‘commercial discovery’.
In crude terms (no pun intended), a commercial discovery indicates that there is enough oil in the prospect to cover the millions of dollars invested in exploration and drilling operations as a minimum with a potential to bring profit.
A commercial discovery is an important milestone, which is mentioned in the Kurdistan Regional Government’s (KRG) Model Production Sharing Contract (PSC).
The KRG PSC defines this term as: “a discovery which is potentially commercial when taking into account all technical, operational, commercial and financial data collected when carrying out appraisal works or similar operations, including recoverable reserves of Petroleum, sustainable regular production levels and other material technical, operational, commercial and financial parameters, all in accordance with prudent international petroleum industry practice.”
This definition seems to have been met by some operators recently, as according to news releases, the Akri Bijeel block has been declared commercial by its operator (Kalegran), while WesternZagros Resources is working towards declaring commerciality for the Kuradimir block.
In order to see what this means for operators and other participants in the Kurdistan Region of Iraq, we summarise the key elements of declaring a commercial discovery under the Model KRG PSC.
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The following key elements occur after a discovery is deemed ‘commercial’.
1. “Shout it from the rooftops” – the contractor under the PSC must submit a written statement to its management committee to declare that a commercial discovery has been made. The development period for a commercial discovery of crude oil and any associated natural gas is 20 years which begins on the declaration of such commercial discovery and comes with an automatic right to a 5 year extension.
2. “Read all about it” – a development plan needs to be put together within 180 days of the declaration and should include, amongst others, the following details needed for production, transportation and sales of the resources:
• delimitation of the production area;
• drilling and completion of development wells, water or natural gas injection wells;
• laying of gathering pipelines;
• installation of separators, tanks, pumps and any other associated production and injection facilities;
• treatment and transportation to the processing and storage facilities;
• construction of storage facilities;
• planning for the utilisation or sale of associated natural gas; and
• preliminary decommissioning and site restoration plan.
The KRG and the management committee both need to approve the development plan. If KRG requires modifications, the parties should meet within 60 days to discuss the reasoning for their proposal and any comments. The management committee then has 30 days to approve the modification requests (if they are agreed).
Once the development plan is approved, the development operations for the commercial discovery will begin in accordance with the development plan and practices generally accepted in the petroleum industry.
3. “Show me the money” – within 90 days following the final approval of the development plan, the contractor has to submit a proposed work program and budget for development operations to be carried out.
In order to provide the management committee with sufficient detail to allow it to forecast expenditures, the development work program and budget should contain details of the works to be carried out, the material and equipment to be acquired, the type of service to be provided and the categories of general and administrative expenditure.
4. “What’s mine is yours” – Unlike the exploration stage, during the 20 year development period (or 25 if the automatic extension is used) all equipment and materials acquired and used for development and production operations become the property of the KRG. Title to the equipment passes to KRG upon completion of the recovery of cost by the contractor or at the end of the PSC, whichever is earlier.
Despite the fact that ownership of all of the necessary equipment reverts to the KRG, the contractor has the exclusive right to use it free of charge for development and production operations to which the PSC relates or for any other petroleum operations under agreements in the Kurdistan region.
Ultimately, the declaration of commercial discovery is an important stage that brings relief to management, shareholders and other investors. However, from this point on, the key consideration for most is to ensure that production commences and the infrastructure and downstream arrangements are in place to monetise the prospect.
In numbers
– 11,000 BPD flow rates announced from marathon oil corporation
– 20 year development plan for the KRG fields
