OT18360 - PRT: unitisations and re-determinations - development carry

As part of the farm out arrangements whereby the increasing interest party agrees to bear some or all of the exploration and development costs of another participator on a field development prospect, the increasing interest party may also stipulate in the agreement that he recover his costs, usually including an addition representing simple interest, out of production relating to the reducing interest party’s licence interest. When his costs are recovered this is referred to as payback. This arrangement is known as a development carry and the reducing interest party is referred to as having a carried interest.

Such an arrangement is generally adopted in circumstances where the reducing interest party would otherwise have difficulty raising the finance needed to meet his share of development costs and might otherwise have to dispose of his interest. Occasionally it is restricted purely to such financial arrangements with the “reducing interest party” not actually disposing of any of his interest in the field at the “pay back” date. More commonly however a carried interest will arise on a farm-in with the carry arrangements forming part of the consideration for the acquisition by the increasing interest party of an interest in the licence.