OT30132 - Capital Gains

Consideration Other Than Cash. Development Carry.

As explained at OT30022, such arrangements involve the farmer-in agreeing to bear some or all of the development costs relating to the farmer-out’s retained interest, and to recover the costs, usually with an interest element, out of a share of future oil production from that interest. The value of the "carry" to the farmer-out will therefore again depend largely on an assessment of the probability of repayment of those costs to the farmer-in and a comparison of the terms with those of other forms of available financing. When considering this latter aspect, Inspectors’ experience in dealing with financing clearances will give some insight into the terms a bank would look for in providing project finance.

Particularly where reserves are not clearly established and development is uncertain there may be a number of factors capable of influencing the potential value of such a "carry". These would include assessing the profitability of recovery, the carriers preferential right to purchase future crude production and so on. There may be a need to seek a detailed valuation report for careful consideration in support of any figures put to Oil Taxation Office, but see OT30300+.