CWI (contract)

Understanding CWI in Oil & Gas: Carried Working Interest Explained

In the complex world of oil and gas exploration and production, various financial arrangements are employed to share risks and rewards. One such arrangement is the Carried Working Interest (CWI), a crucial term often encountered in contracts and agreements.

What is a Carried Working Interest (CWI)?

A CWI is a contractual agreement where one party (the carried party) receives an interest in a project without initially contributing to the upfront costs. This is often used in situations where one party (the carrying party) has the expertise and financial resources to fund the initial development and exploration phases of an oil or gas project.

How does it work?

The carrying party covers the costs of developing and exploring the project, including drilling, seismic surveys, and other necessary expenditures. The carried party, in return, receives a share of the production from the project but is not obligated to contribute financially until the carrying party has recouped its initial investment.

Key Features of a CWI:

• Non-contributing interest: The carried party does not contribute financially during the initial exploration and development phases.
• Share of production: The carried party receives a share of the produced oil or gas based on their agreed-upon interest.
• Repayment of costs: The carrying party is entitled to recover its initial investment from the production proceeds before the carried party starts receiving their share.
• Carry period: The agreement outlines a specific timeframe during which the carrying party covers the costs. This timeframe is known as the carry period.

Advantages of a CWI:

• Reduced upfront costs: The carried party benefits from not having to contribute financially upfront, allowing them to pursue projects with limited capital.
• Sharing of risks and rewards: The CWI agreement allows both parties to share the risks and rewards of the project, with the carrying party assuming the initial financial burden.
• Access to expertise: The carrying party often possesses the technical expertise and resources necessary to develop and explore the project, providing the carried party with access to valuable knowledge.

Disadvantages of a CWI:

• Limited control: The carried party may have limited control over project decisions during the carry period as the carrying party has the primary control.
• Repayment of costs: The carried party may not see any financial returns until the carrying party recoups its initial investment, potentially delaying their profits.
• Potential disputes: Disputes may arise regarding the terms of the agreement, including the carry period, cost recovery mechanisms, and production sharing.

Example:

Imagine two companies, A and B, are interested in developing an oil field. Company A has the capital but lacks the drilling expertise. Company B possesses the drilling expertise but lacks the necessary funds. They enter into a CWI agreement where Company A funds the initial exploration and drilling activities. Company B, in return, receives a 25% working interest in the field. Once Company A has recouped its initial investment from the production, Company B starts receiving its 25% share of the profits.

Conclusion:

The CWI arrangement is a powerful tool in oil and gas finance, allowing companies with different resources and expertise to collaborate and share the risks and rewards of developing valuable oil and gas projects. Understanding the mechanics and implications of a CWI is crucial for both carrying and carried parties to ensure successful collaboration and maximize the potential of the project.