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Discuss why each party to a test-well contribution situation would enter into the transaction.

Discuss why each party to a test-well contribution situation would enter into the transaction.

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Answer #1

There are two parties to a test-well contribution situation – the company that drills a well and another company that owns working interest in nearby acreage.

The company that drills a well will enter into the transaction because it stands to receive money from the other party for the G&G information provided by it. This money helps the company that drills to partially offset the cost of drilling the well. On the other hand the company that owns working interest in nearby acreage enters into the transaction as it stands to receive valuable information and that too without having to incur and pay the cost of drilling. It also does not have to bear the risk that is associated with drilling a well.

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