GSPC has weak case against GGR over KG payment

Vol 11, PW 9 (06 Sep 07) Exploration & Production

Only now is it becoming clear that GSPC has a weak case against Canadian company GeoGlobal Resources (GGR) in the dispute over exploration costs at KG-OSN-2001/3.

The dispute became public on August 16th when GGR told shareholders that GSPC is demanding $44.68m towards 10% of the exploration expenses. GGR’s stake in the block is 10%, â€کcarried’ by GSPC during exploration.

GSPC insists the â€کcarry’ is limited to 10% of $60m - the originally budgeted cost of the Phase-I work programme and is not unlimited as GGR assumes. But the Carried Interest Agreement signed by both companies on August 27th 2002 indicates that GGR is on strong ground, unlike GSPC.

Clause (b) says: “GSPC shall advance and pay for the joint account of the parties, all costs and expenses which are made by GSPC pursuant to the terms of this agreement including, without in any way limiting the generality of the foregoing, all costs and expenses of whatever nature or kind for exploration phase carried out on the said block, for development of an operations on the said block for the discovery and recovery of petroleum substances.â€‌ Clause (c) makes it clear that, “after deducting all royalties payable under the said block, GSPC shall be entitled to recover all such costs and expenses out of the production if any from wells drilled by GSPC on the said block.

â€‌ The next clause categorically says that, “GGR shall not be entitled to receive any share of production of petroleum substances until GSPC has recovered GGR’s share of the costs and expenses that were paid by GSPC as aforesaid and after such costs and expenses have been recovered.â€‌ This clause is clear that GSPC’s â€کcarry’ of GGR is not an indefinite subsidy or handout during the life of the PSC but merely a â€کsuspended’ payment mechanism for the exploration period.

“Once production begins, 10% of all the money totally spent by GSPC will have to be paid by GGR from its share of the hydrocarbons produced,â€‌ we hear.