Good morning Dr, Love your prose through what appears to be a...

Good morning Dr,
Love your prose through what appears to be a first class wine cellar.

Almost all oil JV agreements, especially those with minnows (FAR), have what is called "Sole Risk" provisions. This provides a contractual pathway for a JV party to drill a well on its own. There are lengthy terms and conditions attached to this section in the agreement and can easily run for 20-40 pages. There are many circumstances whereby JV parties disagree on development/target priorities, parties can't afford a program (usually dealt with under interest dilution provisions), or differences in strategy priorities or opportunities. COP with its ORA rig falls under this last one.

All parties can submit proposals to the JV. They are rigorously analysed/debated/negotiated. At the end of the day a proposal must, at the bare minimum a) help meet the commitments of the JV on the block, b) meet the sovereign expectations and guidelines and c) get the minimum vote. But sometimes proponents cant agree and one may want to go its separate way.

So they can put up a sole-risk proposal to the JV to consider. This usually requires a super majority (75-100%) of the other JV parties to agree for it to get up. Its really pure negotiation and quite difficult to pull off with big and expensive programs. In an over-simplification, the proponent says they want to drill a well for $x and if successful, the other parties will pay the proponent 3$x-4$x-$5x or something else within a certain amount of time after results (usually 6-12mths). But this is where most sole risk clauses come unstuck as the definition of success can often fall into a grey legal punch-up. The proponent thinks they have discovered sometime classified as success and demand 3-4-5x pay-back, the non-participant don't.

And then the fight started.

But it doesn't have to be that way. The very well resourced legal dogs at COP can work something out and would have been instructed to put up the contractual framework for such a possibility. Meat and potatoes for these guys really.

I don't have the benefit of reviewing the Senegal JV agreement, but if the sole provision section was amenable enough, I'd certainly give it a shot if I was COP.

But it'll also be COPs internal balance sheet watchdogs that'll be a key player in a sole risk grogram decision. COP is up for US$630k/d (bare boat) or say US$720-740k/d for a hot-hold. Its another US$350-400k/d or so for drilling/support activities. If they decided to park it for 3 months into a hot hold they would 'save' about $35-40m Vs drilling ops. But we must also consider that it is very valuable to keep the ops and support teams together and working. One of the biggest issues in offshore programs is getting all the teams and stakeholders working well and efficiently together. It would appear that there is really great project ops unity in this JV which could now worth maybe $4-7m/mth. And lets not omit an additional $3-5m that would be needed to remob the team in 3 months time. So all-in-all, I estimate that COP's marginal cost to spend 3 months drilling is only about $30m. Yet still, the treasury boys will fight this.

We'll find out in a few weeks.

And I agree that, if a drilling break is voted, that FAR's Djifere block will not be a consideration.

Cheers,