Due diligence and warranties in oil and gas M&A transactions
Produced in partnership with Giulia Carloni

The following Energy practice note produced in partnership with Giulia Carloni provides comprehensive and up to date legal information covering:

  • Due diligence and warranties in oil and gas M&A transactions
  • Due diligence
  • Due diligence areas
  • Share acquisition
  • Oil and gas due diligence and warranties
  • Warranties—some practical considerations

Due diligence and warranties in oil and gas M&A transactions

Due diligence

In common with mergers and acquisitions (M&A) transactions generally, prior to executing an acquisition in the context of the oil and gas sector, a buyer will want to ensure that it has undertaken satisfactory due diligence on the relevant assets (and/or entity in the event of a share purchase). Any relevant findings will provide the buyer with the opportunity to negotiate certain specific warranties and/or indemnities. However, the nature of the assets being acquired in the oil and gas sector and the business environment which applies means that there are a number of sector-specific areas of due diligence. This Practice Note includes particular focus on these sector-specific areas. For content on M&A transactions more generally, see: Due diligence and disclosure (share purchase)—overview and Due diligence and disclosure (asset purchase)—overview.

The key documents typically encountered at the early stage of the due diligence process are as follows:

  1. a ‘teaser’

  2. a confidentiality agreement

  3. an information memorandum; and

  4. a first draft of the acquisition agreement provided by the seller

The due diligence process usually begins with the seller issuing a ‘teaser’ in respect of the oil and gas transaction. This document may vary but it usually contains the following snapshot information:

  1. maps/acreage of the area in which the relevant assets are located

  2. production data in respect of the oil

  • or gas being produced by the relevant assets

  • reserve data (ie estimates of the amount of crude oil/natural gas located in a particular area)

    1. marketing data (ie data regarding the production, lifting and disposal of crude oil/natural gas)

  • The teaser should be sufficient to let a prospective buyer decide whether visiting the data room is justified.

    Prior to being granted access to the data room, it is common to negotiate and execute a confidentiality agreement—this is normally where lawyers get first involved. It is important to carefully review this agreement, in particular certain aspects such as its duration, the definition of buyer/seller, the definition of ‘confidential information/data’ and applicable exclusions and others, in order to fully appreciate the scope of the obligations being undertaken and impact of any potential breaches (for more general information on confidentiality agreements, see Practice Note: Confidentiality—asset purchase or Confidentiality—share purchase).

    Once the confidentiality agreement has been executed, the buyer will be granted access to the data room—this will contain the same type of data and information as those in the teaser, but in far more detail and will include more sensitive data which could not have been disclosed prior to buyer entering the confidentiality agreement.

    An information memorandum is then typically provided in the data room—this forms the baseline document which a buyer (and its lawyers) should refer to in order to ascertain the bidding procedure and timeline for the transaction.

    At these early stages, lawyers should also consider undertaking some general informal investigations, mostly by reviewing any publicly available information, eg news articles, press releases, annual reports. If the seller is a smaller/private company, it may prove more challenging to find public information; in this event, it may be useful to obtain a credit report or look into the seller’s principal owners to try and ascertain if it is indeed a ‘creditworthy’ seller.

    The data room often also contains a first draft of the acquisition agreement (in the form of a share purchase agreement or asset purchase agreement depending on how it is envisaged the transaction will be structured) provided by the seller and usually the information memorandum instructs prospective buyers to provide any comments on the acquisition agreement at the time of the submittal of their bid offers. A buyer should avoid this if possible, particularly if it is a non-exclusive arrangement. If the buyer does provide comments to the draft agreement, it should do this as generally as possible at that stage and reserve the right to make further amendments to it and subject to further due diligence being undertaken.

    Importantly, the first draft of the acquisition agreement prepared by the seller shall be carefully examined by the buyer and its legal advisors in particular, as it will directly impact on the scope of the due diligence required and any particular aspects which may require more consideration. Importantly, it will also confirm and enshrine the ‘Effective Date’ for the acquisition—that is the date upon which the buyer will assume its share of liabilities and at the same time also be entitled to its share of the production and revenue. Almost invariably, this is a date in the past and the financial team will be reviewing historical accounts as of that date to ensure that all profits and expenses have been properly allocated and accounted for as this will impact the valuation process.

    The acquisition agreement will further set out any purchase price adjustment mechanisms which may be due, eg to preferential rights or others—these adjustments look at the ‘interim period’, that is the period of time between execution of the agreement and closing.

    Due diligence areas

    Engineers/commercial personnel are involved at the very early stages of due diligence, reviewing all material information to arrive at a final purchase price for the relevant assets. This is an ongoing process which is constantly reviewed all the way up to closing.

    They are often also responsible for determining the allocation of the purchase price among the assets—these will be detailed in a separate schedule to the acquisition agreement. Purchase price allocation is also a way to address valuation issues relating to: (i) casualty loss; (ii) title/environmental defects; (iii) preferential rights.

    Preferential rights typically cause most concern to prospective buyers as they may lead to disputes with third party holders of the right(s) in question over the allocated purchase price and/or any sale of the interest in question (see further below under Oil and gas due diligence and warranties).

    Engineers will also assist with fully understanding the operational valuation of the assets and their facilities, including by reviewing how oil/gas is produced, processed, transported and ultimately sold. They will often inspect the facilities to verify that all major machinery and equipment are in good state of repair and inspect inventory levels where possible. They will further typically review and discuss the impact of any asset retirement obligations (that is, those obligations which arise in relation to the abandonment of a given asset)—these need to be carefully understood in order to avoid making incorrect assumptions which would inevitably have a negative impact on the economics of the deal.

    It is essential that any issues are promptly flagged up to other team members as they come to light (also, if relevant, to the legal advisors) since they may give rise to an adjustment to the purchase price or alternatively be a breach of a warranty (or indemnity provision).


    The title due diligence will typically review all available data in relation to each asset and can be quite time-consuming. A title report will generally include information such as:

    1. asset geographical identification and legal description

    2. operator’s/operators’ details

    3. basic terms of any joint operating agreements (JOAs) and underlying licences (for more on these, see Practice Notes: The purpose and the principles of the joint operating agreement and Understanding upstream petroleum agreements—concessions, production sharing contracts and service contracts

    4. seller’s working/net revenue interests

    5. material contracts (eg farm-outs, crude oil/gas sales agreements etc), including summary of relevant key terms. For more on these types of contracts, see Practice Notes: Farm-out agreements—key terms and Upstream Oil and Gas Agreements on the UKCS

    6. litigation details

    7. any defects as to title

    It is also of paramount importance to check any regulatory requirements at an early stage—these vary significantly depending on the applicable jurisdiction and it may be also necessary to engage local counsel to fully understand their impact upon the overall transaction (eg any applicable antitrust approval for the transaction to occur and likely timeline). It is also important to understand and verify what permits are required to run the business and confirm that they are all still valid and in force and not due to expire—overlooking these regulatory issues may well delay closing and cause the transaction to come to a halt.


    Another key aspect of the due diligence relates to the financial/accounting area. The buyer’s financial advisers will conduct their own separate due diligence, in particular enquiring about the following:

    1. net revenue receipts

    2. royalty payments (typically these are payments made by the lessee to the lessor under the applicable lease, and are a percentage of the lease payments less what was reasonably used in the lessee’s production costs or overriding royalty interests (ORRIs) (a fractional, undivided interest with the right to participate or receive proceeds from the sale of oil and/or gas, which is not an interest in the minerals, but an interest in the proceeds or revenue from the oil and gas minerals))

    3. working interests expenses (ie amounts owed as working interest owners in respect of the cost of leasing, drilling, producing and operating the relevant well or unit)

    4. gas imbalances (that is, any discrepancies between a transporter’s (pipeline owner’s) receipt and deliveries of natural gas for a shipper (the holder of the oil/gas concession))

    5. production and severance tax payments; and

    6. well payout status (ie an assessment of how much costs of leasing, exploring, drilling and operating have been recovered from production of a well or wells as defined by contractual agreement)

    The financial due diligence should be carried out at the same time as the legal due diligence and it is important that both teams directly liaise with one another, since many findings on the financial due diligence will be important both to the drafting of the due diligence report but also fundamentally to a meaningful markup of the draft acquisition agreement (eg the financial advisers will also typically recommend the inclusion of specific warranties in relation to any issues as highlighted in their own separate due diligence report (they will for example assist the legal team in drafting the financial statement warranty relating to the equity value upon which the buyer has based its overall valuation) and/or their review may have a bearing on what purchase price adjustments should be included).


    The commercial personnel will be checking any imbalances/inventory positions, as well as work on identifying any existing or potential liabilities associated with existing transportation, storage, processing and resale/marketing arrangements. Typically these contracts are susceptible to be terminated within short timeframe (30/60/90 days’ notice). However, if longer terms are in place this may be an issue to a prospective buyer, especially where they commit to high/unfavourable rates or redeterminations/escalators, since this type of resale agreements may well negatively impact the overall economics of the deal.


    Another key area to investigate during an oil and gas transaction is environmental due diligence. This area has grown in importance in the last decades due to stricter environmental laws following oil spill disasters, such as the Deepwater Horizon incident. For example, in the UK the regulators now work much more closely to ensure compliance with safety duties and environmental protection duties through inspections and in relation to enforcement. For more information, see Practice Note: Health and safety in the oil and gas sector—Environmental Impact Assessments and Environmental Permits.

    Naturally, the scope and level of due diligence required will depend according to the nature of assets being acquired—mature oil assets will necessarily require more scrutiny and caution than newer gas assets. In practice, it is important therefore to also get familiar with the type of operator for the relevant assets as this will inform the buyer on how to shape its due diligence in this respect, eg whether it is a well-known and reputable operator in the industry with longstanding experience of the type of assets in question and a proven safety track record for similar previous operations.

    Environmental review may also include a physical inspection of the assets; interviews with management and engineering personnel having direct knowledge of the assets; reviewing existing environmental documents for the assets (including all relevant permits) and any governmental actions or notices which may have been issued at any stage to the operator of the assets. Generally, there should be an emphasis on uncovering the presence of any hazardous material.

    Share acquisition

    Some oil and gas transactions are structured as the acquisition of the relevant corporate entity as opposed to purchasing the assets only, typically as a share purchase. In this event, the due diligence will vary slightly and in addition to the areas highlighted above, it will also include a review of the entity’s ownership and control; structure and employment practices.

    Specifically, it will be important to ascertain the company’s good standing, the applicable jurisdiction (also in terms of where it is entitled to conduct ordinary business); reviewing the articles of incorporation/bylaws; reviewing the minutes for the last five years; identify company’s directors/officers; review any organisational charts and understand any existing relationship with any parent/subsidiary companies.

    In terms of ownership and control, the buyer should examine the statutory books, change of control agreements and also copies of shareholder agreements, transfer restriction agreements, right of first refusal/pre-emption agreements—this is essential because once the review is complete it may transpire that it is not in fact possible (or it would in any event prove rather difficult) to structure the transaction as originally envisaged.

    With regards to employment, lawyers should review all pensions, share bonuses, health plans, as well as employment contracts, material consulting arrangements, severance agreements, non-compete provisions. They should also obtain copies of the employees’ handbook and identify current or potential employment disputes.

    Oil and gas due diligence and warranties

    While the specific circumstances of each deal need to be reviewed on their own, there are certain common issues to consider when undertaking due diligence in respect of an oil and gas transaction which will then also inevitably impact the scope of the specific warranties sought to be included in the acquisition agreement:

    1. type of assets—what type of assets is ultimately being acquired? Whether a buyer is acquiring oil or gas assets will also ultimately impact the scope of any environmental warranties (and indemnities) which buyers and sellers will seek to negotiate (oil pollution being a major concern in terms of risk allocation, as opposed to gas assets)

      Type of assetsWarranty
      Upstream/exploration and production (E&P). Examples of assets in this area include: offshore oil/gas production facilities and wells, and drilling rigs.Seismic/Geological data—Seller to confirm that it has given copies of all reserve reports, seismic, geophysical, geological and other technical data to the buyer. Further, buyer will want the right to use such data while operating the acquired business/assets.

      Well/Platform conditions—this warranty is equivalent to a ‘sufficiency of assets’ warranty, buyers will typically want schedules setting out the status of all wells and platforms. It may further contain separate lists for wells or platforms that are non-producing, offline, or producing at rates not detailed in reports. Lastly, a buyer may request a statement concerning the specific obligations of the seller to plug or abandon a specific existing well as well as certification of production data.
      Midstream. Examples of assets in this area include: transportation pipelines, terminals, gas processing and treatment.Take-or-pay arrangements—This warranty typically includes a statement that the seller has not entered into any forward sale or take-or-pay arrangements committing the buyer to make deliveries of gas after closing without receiving full payment for such deliveries.

      Imbalances—This warranty discloses imbalances in gas volumes received and delivered and any material miscalculations under any natural gas processing, or treating contract.
      Downstream. Examples of assets in this area include: refineries, petrochemical plants, pipelines and retail fuel platforms.Inventories—Buyers typically wish to include inventory information to verify asset values and to ensure ongoing operations.

      Condition of assets—Particularly important in the downstream context, this warranty typically includes a statement that all tangible assets are in working order and operating condition.
    2. licence duration and minimum work obligations—what are the terms of the underlying licences? Are there any outstanding working commitments? Consideration should be given to whether any licence extensions may be required and, if so, the procedure for obtaining this and how it would impact the overall timeline. The buyer will want to include a warranty stating that the target holds all licences to operate the business and is not aware of any circumstances which may give rise to any licences being revoked

    3. work program and budget (WP&B)—it is essential that the WP&B is disclosed as early as possible and that each item is carefully examined by both the accountancy and the legal advisors. The buyer will want to obtain appropriate warranties (often included within the financial statements warranty) to ensure that no other liabilities have been incurred other than those within the scope of the applicable WP&B

    4. enhanced due diligence—within the context of oil and gas transactions, meaningful due diligence should extend to consider issues which may have a material reputational impact on the organisation, such as any allegations of corruption across the chain (see Oil and Gas Whitepaper: Drilling Down to Important Details). A buyer may seek to address any such consideration through the inclusion of relevant warranties related to, for example, the Bribery Act 2010 and/or in respect of any transactions involving prohibited persons or territories

    5. political context—particularly in a climate of low oil prices, there may be an increased willingness on the part of governments to expropriate assets to make up for their losses of oil and gas revenues. Therefore, it would be advisable to also include provisions in the acquisition agreement to ensure that there is a neutral jurisdiction to which the parties can refer any dispute (as opposed to pursuing any issues in local courts, where it could be challenging seeking to enforce any contractual rights vis-à-vis a state-owned company or a significant local player). A prospective buyer should also assess whether it may be appropriate to include provisions protecting it against any changes in the applicable regulatory laws. Lastly, buyers should consider structuring the transaction in a way which ensures that they can take full advantage of any available bilateral or multilateral investment treaties to reduce the risk of political interference. For more information, see Practice Note: Investment treaty arbitration—an introduction

    6. material contracts—what are the most significant third party relationships and contracts for the business to carry on as normal? This must be considered when defining the material contracts warranties—in particular, such warranty should state that true and accurate copies of all material contracts (concessions, JOAs, farmout agreements, petroleum contracts, E&P contracts and all other agreements, licences/permits which are reasonably necessary to own, operate, develop and maintain any of the Oil and Gas Properties) have been disclosed to the buyer and that they are in full force and no breach/default of any such contract has occurred. For an introduction to these types of agreements/licences, see Practice Note: Understanding upstream petroleum agreements—concessions, production sharing contracts and service contracts

    7. compliance with laws—a buyer should negotiate the inclusion of appropriate warranties regarding a seller’s compliance with applicable laws (including environmental laws), for example: ‘The Oil and Gas Properties are currently, and to Seller’s Knowledge, have been, owned and operated in Material compliance with all applicable Laws, including Applicable Environmental Laws’. Environmental warranties may be heavily negotiated if the buyer is seeking to acquire mature oil assets

    8. third party/regulatory consents—what third party/regulatory consents are necessary for the transaction to be valid? How does this impact the overall timeline for the transaction? Do antitrust issues arise? Where present, these issues will necessarily feed into the acquisition agreement, most likely in the form of condition precedents which, if not satisfied, will prevent the transaction from closing. It is also advisable to include specific warranties as to the target holding all required permits to operate the business, such permits being valid and in full force and non-appealable and transferable to the buyer as well as not being aware of any circumstances which may give rise to any permits being revoked

    9. pre-emption/preferential rights—what procedures apply to the transfer of the assets, ie are there any pre-emption/preferential rights arising out of any joint venture (JV) agreements in place? If so, buyers must ascertain applicable notice periods and whether seller has already discussed this in any way with the other co-venturers. It is essential to identify early on whether the other JV partners are likely to exercise these rights as this may

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