OT30503 | Capital gains: unitisations: unitisation or redetermination adjustment payments

For unitisations and subsequent redeterminations, the methods for calculating the cash adjustments to bring expenditure into line with oil entitlement are normally specified in the agreement. The adjustments normally include some, or all, of the following elements:

1. A reimbursement of historic costs incurred on exploration, drilling, wells, and (for redeterminations particularly) platforms, pipelines and onshore industrial buildings.

2. ‘Interest’, either described as such or calculated by reference to interest rates on the costs in a.

3. A ‘third element’ variously referred to as ‘indexation’, ‘compensation for disproportionate risk borne’ or ‘disproportionate future cost sharing’.

Concepts such as ‘indexation’ and ‘compensation for disproportionate risk borne’ are not entirely clear cut. This written, ‘indexation’ might be seen as an acknowledgement of the purchasing power in money of the day linked to a readily accessible index which can apply to historic as well as future development costs. ‘Compensation for disproportionate risk borne’ might be seen as referring to situations where a risk has been taken on say a complex geological structure, or on say a leading edge development scheme, where the prospects of a failure were high, but which ultimately achieved success.