Use and Misuse of Pendulum Arbitration in Expert Redetermination of Tract Participation

Abstract

Over the past two decades, pendulum arbitration has been increasingly incorporated into dispute-resolution procedures for the redetermination of tract participation (equity) for unitized oil and gas fields that straddle domestic license boundaries or international borders. In such cases, the pendulum has been prescribed for use in expert redetermination, ideally so that an expert determines tract participation and then selects the closer submission made by one of the parties. The tract participation of the selected submission then constitutes the expert's final decision. The process can function reasonably well in the originally envisaged situations (e.g., two opposing cases each originating from one of two straddled license areas). It is much more difficult to apply in the more-complex situations to which it has been extrapolated subsequently. These include multiphase reservoirs with separately unitized fluids, several straddled license areas, and the use of the same subsurface model for both field-development and equityredetermination purposes. An analysis of such situations has allowed the further identification of those circumstances for which the pendulum can be applied meaningfully in expert redetermination and those for which it should not be adopted. These additional expectations include a meaningful basis for tract participation in terms of one (equivalent) unit substance, fully prescribed technical procedures leading to a compliant reservoir model, and a single (as opposed to a staged) expert redetermination that post-dates the parties' submissions but allows for rebuttal in the event of manifest error. Case histories illustrate the difficulties that can arise where these principles are infringed. They also reaffirm the overarching message that each straddling field situation differs from others and therefore every redetermination of tract participation must be assessed separately and thoroughly.