INTERNATIONAL ARBITRATION 1/3LY
SPECIAL REPORT 17
KEEP C ALM AND C ARRY ON : “ DRILL OR DROP ” AND C ARRY PROV I S IONS IN EXPLORAT ION AGREEMENT S
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 fromminimumwork 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 farmout some of their participating interests in a PSC in return for a promise from the buyer that it will fund all or part of minimumwork obligations (a carry). A recent English High Court judgment concerning an exploration block in amajor new oil province illustrates howdrill or drop and carry provisions can be affected by operational contingencies. Asmarket conditions tighten, oil explorers aremore 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 howEnglish 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 DE VINE, PARTNER, CLYDE & CO
TO SURV I VE IN THE MOS T BE ARI SH OIL MARKE T FOR DEC ADES , E&P COMPANIES MUS T CUT COS T S , MINIMI SE RI SKS AND MAX IMI SE RE TURNS .
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