INTERNATIONAL ARBITRATION 1/3LY
SPECIAL REPORT 17
KEEP CALM AND CARRY ON: “DRILL OR DROP” AND CARRY PROVISIONS IN EXPLORATION AGREEMENTS
To survive in the most bearish oil market for decades, E&P companies must cut costs, minimise risks and maximise returns. Exploration activity suffers as a result, but low oil prices do not relieve E&P companies from minimum work obligations in production sharing contracts (PSCs). PSCs typically include “drill or drop” provisions that make the performance of defined exploration activities a condition of keeping the agreement alive. A common solution for E&P companies seeking to diversify their exploration risks is to sell or farm out some of their participating interests in a PSC in return for a promise from the buyer that it will fund all or part of minimum work obligations (a carry). A recent English High Court judgment concerning an exploration block in a major new oil province illustrates how drill or drop and carry provisions can be affected by operational contingencies. As market conditions tighten, oil explorers are more likely to use Carry arrangements. Given the industry’s preference for international arbitration, the case of Adamantine Energy (Kenya) Limited v Bowleven (Kenya) Limited offers a rare insight into how English Courts will interpret drill or drop and carry provisions and provides useful guidance to the industry. To avoid an unnecessary dispute, careful drafting is essential and parties should enter into such arrangements with a clear-eyed view of all eventualities.
BY RICHARD DEVINE, PARTNER, CLYDE & CO
TO SURVIVE IN THE MOST BEARISH OIL MARKET FOR DECADES, E&P COMPANIES MUST CUT COSTS, MINIMISE RISKS AND MAXIMISE RETURNS.
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