General Technical Terms

FTC (SSSV)

Understanding FTC (SSSV) in Oil & Gas: Fail to Close on Demand

In the oil and gas industry, complex transactions involve intricate agreements and potential risks. One such term often encountered is FTC (SSSV), standing for Fail To Close on Demand (Specific Sales and Service Volume). This term is crucial for understanding the intricacies of production sharing agreements (PSAs) and their potential implications for both oil companies and host governments.

What is FTC (SSSV)?

FTC (SSSV) is a clause found in PSAs, typically included in the production sharing agreement (PSA) contract between an oil company and a host government. This clause defines the circumstances under which the oil company may "fail to close" or terminate the PSA due to insufficient oil and gas production, specifically relating to the pre-determined sales and service volume (SSSV).

Key Elements of FTC (SSSV):

  • Specific Sales and Service Volume (SSSV): This predetermined volume represents the minimum amount of oil and gas production required to justify continued investment and operations.
  • Fail To Close on Demand: If the actual production falls below the SSSV for a defined period, the oil company can trigger the FTC clause, allowing them to terminate the PSA and withdraw from the project.

Why is FTC (SSSV) Important?

  • Risk Management: FTC (SSSV) provides the oil company with a safety net, allowing them to exit projects that fail to meet the minimum production targets, minimizing their financial losses.
  • Government Incentives: For host governments, FTC (SSSV) incentivizes oil companies to develop fields with greater potential, encouraging investment in projects with higher production prospects.
  • Contractual Clarity: This clause clearly defines the conditions under which the PSA can be terminated, reducing potential disputes and misunderstandings between the parties.

Considerations and Implications:

  • Triggering the FTC (SSSV): The clause usually defines specific criteria for triggering FTC, such as the duration of below-SSSV production or the specific volumes that must be exceeded.
  • Consequences of Termination: The consequences of triggering FTC (SSSV) are outlined in the PSA, which may include penalties, compensation requirements, or the transfer of ownership to the host government.

Overall, understanding FTC (SSSV) is crucial for both oil companies and host governments involved in oil and gas exploration and production. This clause helps mitigate risks, ensure fair contract terms, and promote responsible development of oil and gas resources.

In conclusion, FTC (SSSV) is a vital aspect of PSAs, providing a mechanism for terminating agreements that fail to meet predetermined production goals. It serves as a vital risk management tool for oil companies and incentivizes responsible development for host governments.

Test Your Knowledge

FTC (SSSV) Quiz

Instructions: Choose the best answer for each question.

1. What does FTC (SSSV) stand for?

a) Fail To Close on Demand (Specific Sales and Service Volume) b) Final Termination Contract (Sales and Service Volume) c) Fixed Term Contract (Specific Sales and Service Volume) d) First-Time Closing (Specific Sales and Service Volume)

Answer

a) Fail To Close on Demand (Specific Sales and Service Volume)

2. In which document is the FTC (SSSV) clause typically found?

a) Oil exploration permit b) Production sharing agreement (PSA) c) Environmental impact assessment d) Governmental regulations

Answer

b) Production sharing agreement (PSA)

3. What is the purpose of the Specific Sales and Service Volume (SSSV)?

a) To determine the maximum amount of oil and gas that can be extracted. b) To define the minimum amount of oil and gas production required for continued operations. c) To set a price for the oil and gas produced. d) To measure the environmental impact of the project.

Answer

b) To define the minimum amount of oil and gas production required for continued operations.

4. What is the main benefit of the FTC (SSSV) clause for oil companies?

a) Guaranteed profits regardless of production levels. b) A mechanism to exit projects that fail to meet production targets. c) Control over the entire oil and gas production process. d) Exemption from paying taxes on oil and gas production.

Answer

b) A mechanism to exit projects that fail to meet production targets.

5. Which of the following is NOT a consideration when triggering the FTC (SSSV) clause?

a) Duration of below-SSSV production b) Specific volume levels that must be exceeded c) Market price of oil and gas d) Consequences of termination as outlined in the PSA

Answer

c) Market price of oil and gas

FTC (SSSV) Exercise

Scenario:

An oil company has entered into a PSA with a host government to develop an offshore oil field. The PSA includes an FTC (SSSV) clause with a specific sales and service volume of 10,000 barrels of oil per day. For the past 6 months, production has consistently remained below 8,000 barrels per day.

Task:

  1. Based on the information provided, could the oil company trigger the FTC (SSSV) clause? Explain your reasoning.
  2. What potential consequences might the oil company face if they trigger the FTC (SSSV) clause?

Exercice Correction

1. Yes, the oil company could potentially trigger the FTC (SSSV) clause. The production has been consistently below the SSSV of 10,000 barrels per day for 6 months, indicating a failure to meet the minimum production requirements. The specific conditions for triggering the clause, such as the duration of below-SSSV production, need to be consulted in the PSA. 2. The potential consequences of triggering the FTC (SSSV) clause depend on the specific terms outlined in the PSA. Some possible consequences might include: * **Penalties:** The PSA may specify financial penalties for terminating the agreement. * **Compensation requirements:** The oil company might be required to compensate the host government for any losses incurred due to the termination. * **Transfer of ownership:** The ownership of the oil field might be transferred to the host government. * **Reputational damage:** Triggering the clause could damage the oil company's reputation and hinder future investments in the region.

Books

  • International Petroleum Contracts: Law, Taxation and Development by David M. Eisenberg and David R. Slaughter: This comprehensive text provides an in-depth analysis of various aspects of international oil and gas contracts, including production sharing agreements. It covers the legal and tax implications of different contractual clauses, including those related to fail-to-close provisions.
  • Production Sharing Agreements: A Practical Guide by John D. Bell and Graham R. Scott: This book focuses specifically on production sharing agreements, providing practical guidance on understanding and negotiating such agreements. It includes sections on risk allocation, project economics, and various clauses like FTC (SSSV).

Articles

  • "The Impact of Production Sharing Agreements on Oil and Gas Development" by Robert A. Schuster: This article discusses the evolving role of PSAs in the global oil and gas industry and analyzes their impact on investment decisions, risk allocation, and economic development.
  • "Understanding Fail-to-Close Provisions in Production Sharing Agreements" by Stephen J. Brown: This article provides a detailed examination of different types of fail-to-close provisions in PSAs, including FTC (SSSV), and explores their implications for both oil companies and host governments.

Online Resources

  • Oil and Gas Law and Taxation by Kluwer Law International: This website provides a comprehensive resource for legal professionals and researchers interested in oil and gas law, including articles, research papers, and case studies related to PSAs and contract clauses.
  • The World Bank: Oil, Gas, and Mining This website offers a wide range of resources on oil and gas sector governance, including best practices for drafting and implementing production sharing agreements, along with relevant legal and economic frameworks.
  • International Energy Agency (IEA): The IEA provides reports, analyses, and data on the global energy sector, including information on production sharing agreements, their impact on oil and gas development, and policy recommendations.

Search Tips

  • "Production Sharing Agreement FTC (SSSV)": This will bring up relevant articles and websites discussing this specific clause within PSAs.
  • "Fail to Close on Demand Oil and Gas": This broader search will lead to resources on various fail-to-close provisions in the industry, providing context and understanding.
  • "Production Sharing Agreement Legal Analysis": This will provide articles, research papers, and legal documents that delve into the legal and economic aspects of PSAs, including the rationale behind FTC (SSSV).
  • "Oil and Gas Contract Negotiation": This search will lead to resources on negotiation tactics and best practices for drafting and negotiating PSAs, including understanding and negotiating clauses like FTC (SSSV).

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