05.07.2009

When a company buys an interest in a block and takes upon itself all or part of the financial undertakings for drilling the exploration well.

Farmin, farmout process at exploration stage: It is usually done this way:

Normally farm-out recognizes the advantageous position of the license holder and often the farminee carries the license holder to some degree.
Thus if company A has 100% of the rights in an exploration license, Company B that farms-in may pay 50% of the past and certainly of the future costs to get 40% and Company C might pay 50% of the past and certainly of the future cost to get 40%, so that the license holder remains with 20% and is carried by the two other companies.

This carry would go on until a commitment exploration well has been drilled.

After that if there is a discovery each side would pay its own pro-rata share.

Oil exporting countries such as many within OPEC talk about a “fair” price for oil, rather than what the market is willing to pay. Saudi Arabia has put a fair price tag at about $75 a barrel. Venezuela’s President Chavez has set a fair oil price at between $80-$100. Algeria is believed to require a price of $75-80 to finance its $80 billion budget without having to tap into reserves, borrow or raise taxes. GCC countries have much lower break evens prices, ranging from <$20 (Qatar) to $40 or so (Saudi Arabia) with the others in between. In fact, many believe that Saudi Arabia is content with the current (2009) low cost of oil and that it is in the GCC’s long term economic interest to see lower prices to spur economic growth and petroleum demand. The Saudis seem willing to protect $40 and to limit price increases to $75. On the other hand, there are those who believe that it is not only OPEC that thinks that depressed oil prices may be setting the globe up for another price shock when the economy rebounds: the IEA and the US Department of Energy are among the believers as well, reasoning that crude at such low levels (end of 2008 prices) can lead to a massive pullback on investments in new projects and supply sources. OPEC has recently stated (Dec. 2008) that the bottom price below which the barrel should not drop is between $70-90. Oil prices need to be at levels to help sustain economic growth, by supporting longer-term energy industry investments across the board. Each energy source, each technology, and each project, has a price when it is viable; and a price when it is not. Low oil prices inevitably mean less investment. The cost of developing new oil-production capacity in the Middle East is not more than $10/bbl. However, the economies of the oil-producing countries remain so dependent upon oil revenues that, for many of them, there is little or no money left to invest in new capacity after meeting the costs of running the country when oil prices are at $50/bbl. The Arab Petroleum Investments Corp. concluded that a fair price for oil 'lies at the confluence of oil companies' investment options and oil-producing countries' fiscal needs', implying that it has little or nothing to do with the actual cost of extracting conventional oil in the high reserves countries. >

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