Legal Definitions - bottom-hole agreement

A bottom-hole agreement is a specialized contract used in the oil and gas industry. In this arrangement, one company (the contributing party) agrees to provide a cash payment to another company (the drilling party). This payment is contingent upon the drilling party successfully drilling an oil or gas well down to a predetermined depth, regardless of whether commercially viable oil or gas is actually discovered.

In exchange for this financial contribution, the contributing party receives valuable geological and drilling information gathered from the well. This data can include well logs, core samples, seismic interpretations, and other technical reports. Bottom-hole agreements allow companies to share the financial risk of exploratory drilling while gaining access to crucial subsurface information that can inform their own future drilling decisions in the area.

Here are some examples illustrating a bottom-hole agreement:

• Example 1: Neighboring Leaseholder Seeking Data
  Apex Energy holds an oil and gas lease adjacent to a property where Frontier Drilling plans to drill an exploratory well. Apex Energy is interested in understanding the geological formations beneath their own lease but wants to avoid the significant cost and risk of drilling their own well immediately. Apex Energy enters into a bottom-hole agreement with Frontier Drilling, promising to pay $75,000 if Frontier successfully drills its well to a depth of 10,000 feet. In return, Frontier Drilling agrees to provide Apex Energy with all the well logs, core analysis, and drilling reports once that depth is reached. This allows Apex Energy to gather critical subsurface data without having to incur the full cost of drilling.

  Explanation: Apex Energy is the contributing party, paying Frontier Drilling (the drilling party) a sum of money. The payment is conditional on Frontier reaching a specific depth, and in exchange, Apex receives valuable geological information to aid its own exploration strategy.

• Example 2: Regional Exploration Strategy
  Global Petroleum, a large exploration company, is assessing the potential of a vast, underexplored basin. A smaller independent company, Desert Sands Exploration, has secured a lease and plans to drill a deep, high-risk exploratory well in a part of the basin that Global Petroleum is also interested in, though not directly adjacent to Global's current leases. Global Petroleum offers Desert Sands Exploration a bottom-hole agreement, agreeing to pay $250,000 if Desert Sands drills its well to 18,000 feet. If Desert Sands reaches this depth, Global Petroleum receives all seismic data, drilling reports, and formation test results. This helps Global Petroleum build a more comprehensive understanding of the regional geology, de-risking future investments across the entire basin.

  Explanation: Global Petroleum acts as the contributing party, providing funds to Desert Sands Exploration (the drilling party) upon the completion of drilling to a specified depth. The benefit for Global is the acquisition of crucial regional geological data, which helps them make informed decisions about their broader exploration efforts.

• Example 3: De-risking Future Development
  Coastal Gas Co. is considering developing a new gas field but needs more information about the pressure regimes and fluid characteristics at a specific depth across the area. Another company, Deepwater Drillers, is already planning to drill an appraisal well nearby to evaluate an existing discovery. Coastal Gas Co. enters into a bottom-hole agreement with Deepwater Drillers, agreeing to contribute $100,000 if Deepwater Drillers drills their appraisal well to 14,000 feet and provides Coastal Gas Co. with detailed pressure data, fluid samples, and reservoir characteristics from that depth. This information helps Coastal Gas Co. design their future production wells more efficiently and accurately estimate reserves.

  Explanation: Coastal Gas Co. is the contributing party, paying Deepwater Drillers (the drilling party) for specific technical data that will help them de-risk and optimize their own development plans, contingent on the well reaching the agreed-upon depth.