OVERVIEW

Equity determination becomes necessary when part of an accumulation extends across a boundary and becomes subject to different conditions. Such a boundary may be a result of (a) different ownership of the acreage, such as occurs in the North Sea, where different groups of companies control different blocks, or (b) international boundaries. In either of these cases, it becomes necessary to determine the relevant amounts of hydrocarbons lying on either side of the boundary. Typically, following an equity determination there will be a unitization agreement, whereby a single commercial unit is formed with the aim of optimizing the total recovery of the field.

Equity denotes the share of this controlling unit held by the various parties. Ahigher equity will involve a greater share of the profits, but also a greater share of the costs and liabilities. Since the parties involved will want to make the most profit from the field, there will usually be an attempt by each party to maximize its own equity. The process whereby an agreement is reached on how the equity is divided is called an equity determination.

Especially where international boundaries are concerned, equity determinations may take many months or years to conclude and may involve significant deferment of the hydrocarbon production. Recognition of this fact, together with a tendency for field sizes to become smaller, has led to a more pragmatic approach in recent years. However, the costs of the technical work are still sizable. When a field is first discovered...