CHAPTER 5 ANATOMY OF OFFSHORE PLATFORM SHARING AGREEMENTS, PLATFORM HANDLING AGREEMENTS AND PRODUCTION HANDLING AGREEMENTS
| Jurisdiction | United States |
(Oct 1998)
ANATOMY OF OFFSHORE PLATFORM SHARING AGREEMENTS, PLATFORM HANDLING AGREEMENTS AND PRODUCTION HANDLING AGREEMENTS
Andrews & Kurth L.L.P.
Washington, D.C.
I. Introduction
Due to technological advances, new exploration and development activity in the Gulf of Mexico Outer Continental Shelf ("OCS") has in recent years been the mainstay of oil and gas reserve additions in the United States. An increasing number of operators are advancing new exploration and production projects and building new facilities throughout the Gulf of Mexico OCS1 as a result of being able to drill and complete wells in steadily deeper water, the promise of higher prices for gas and oil in the future, larger domestic drilling budgets, the need to drill a growing number of primary leases before expiration, and declining production elsewhere in the United States.
The keys to success for the Gulf Coast OCS petroleum industry over the next decade will be: (1) the ability to add production and reserves at low unit cost; (2) constant attention to cost control; (3) operating profitability on the basis of conservative price forecasts; (4) maintenance of leading edge technology; and (5) maintenance of an aggressive and skilled exploration organization during a time of depressed energy prices. In order to accomplish these objectives, petroleum companies are employing new operating practices and entering new types of relationships including partnering alliances.
A partnering alliance is a cooperative arrangement between two or more companies where: (1) a common strategy is developed in unison and a win-win attitude is adopted by the parties; (2) the relationship is reciprocal with each partner sharing specific strengths with the other; and (3) there is a pooling of resources, investment and risks for mutual rather than individual gain. Alliances work best when there are strategic gaps in critical capabilities that are too expensive (or will take too long) to develop internally. These collaborations cover a wide spectrum of non-equity, cross-equity and contractual arrangements.
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Most corporate partnering deals in the offshore petroleum industry are done in the form of a purely contractual relationship. Occasionally, it may be advantageous to create a formal partnership or separate corporate entity for tax, accounting, cultural or liability limitation reasons, but creation of a separate entity is usually dictated more by the desire to ensure management and operational independence. In fact, except where the parties intend to create a truly independent business, separate entities are generally more trouble than they are worth.
A wide variety of partnering alliances and contractual arrangements are necessary for survival in the fast moving highly competitive global environment of today, because no single firm possesses the full range of necessary technical skills or financial resources. Collaborative efforts in the offshore petroleum industry present the opportunity for reducing risk and achieving substantial savings in operating and administrative costs associated with such facilities as pipelines, oil and gas separation facilities, tanker forms and other staging areas. The offshore petroleum industry can no longer afford custom-made support service for each platform, if it is to compete with generally lower production costs onshore. Instead, petroleum companies are now frequently sharing platform space, gathering systems, pipelines, tankers, supply boats, helicopters and warehouses, as well as purchasing, geology, engineering and marketing operations. In order to support and facilitate these new types of arrangements, the offshore petroleum industry has entered into an unprecedented number of partnering alliances and developed new forms of offshore platform sharing agreements, platform handling agreements, and production handling agreements. This outline focuses on some of the most important common characteristics of these new alliances and contract agreements.
II. The Growing Role of Alliances and Collaborative Activities in the Gulf Coast OCS
Joint ventures and corporate alliances are not new business strategies. As far back as the early nineteenth century the shipping industries relied heavily on joint ventures.2 Since the 1980's, however, significant increases in partnering alliances have occurred in many industries, including the offshore petroleum industry, primarily because of the rise of technology, the globalization of markets and relentless pressure on cost structures. Other factors which have encouraged more alliances and new types of contracts in the offshore petroleum industry are the spreading of risk associated with large capital expenditures, the need for a more efficient sharing of expensive management resources and skills, the tightening of venture capital markets, and the importance of economies of scale in hydrocarbon exploration and production activities.
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Alliancing3 has proven to be a successful strategy in the Gulf Coast OCS. There are several ways in which companies participating in the offshore petroleum industry may form partnering alliances. Alliances can be as simple as a contractual agreement or as complex or as intertwined as a full scale joint venture. Alliances are typically goal-specific and created to achieve medium-to-long-term objectives subject to time frames and termination dates. Once the objectives of an alliance or a contract have been achieved, the alliance is typically disbanded or the contract is terminated.
III. The Evolution of Partnering Alliances and Multiple Party Contracts in Gulf OCS Operations
The number of alliances in the United States is surging — more than 20,000 new alliances were formed between 1987 and 1992 compared with 5,100 between 1980 and 1987, and 750 during the 1970's. In all industries, including petroleum, many of these alliances have been between competitors. Alliances have been particularly popular in the petroleum industry because of rapid technological innovation, globalization and intensifying competition. Alliances typically leverage existing investments in the partners' capabilities to access incremental opportunities. They can be a powerful tool, particularly in today's world, due to the need to build differential capabilities in more areas than a company has resources to develop. Unlike acquisitions, which bring to the acquirer full control of all parts of the acquired entity — both strengths and weaknesses, alliances match strength to strength and balance control with collaboration.
IV. Factors to Consider in Deciding on the Form of a Partnering Alliance or Contract
Several factors that should be considered when choosing an appropriate structure for an alliance or a contract with a competitor:
A. Simplicity. Use the simplest structure capable of meeting the partners' needs. For example, do not form a corporation if a conventional written contract will do.
B. Number of Partners. If the number of partners is three or less, and the alliance will probably not last for more than three to five years, a simple partnership or a written contract is likely to be sufficient.
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C. Expected Longevity and Limited Scope. Alliances intended to last only a few years and of limited scope are probably better advised to use the written contract or partnership form, whereas long-term ventures are best served when they use the corporate form.
D. Tax Considerations. If significant tax sheltering is desirable, particularly for technology development where large losses or research and development ("R&D") investment tax credits are anticipated, a tax lawyer should be consulted for specific advice regarding the ways to maximize use of the tax shelter.
E. Ease of Management. Alliances that do not require a high degree of integration of planning, decision-making and operational integration over the long haul can use the written contract or partnership form effectively.
Structuring an alliance or entering into a...
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