Joint Operating Agreements: A Practical Guide

Joint Operating Agreements

A Practical Guide Peter Roberts

Joint Operating Agreements A Practical Guide Peter Roberts

Author Peter Roberts Publisher Sian O’Neill Editor Carolyn Boyle Marketing manager Alan Mowat Production John Meikle, Russell Anderson Publishing directors Guy Davis, Tony Harriss, Mark Lamb Joint Operating Agreements: A Practical Guide is published by Globe Law and Business Globe Business Publishing Ltd New Hibernia House Winchester Walk London SE1 9AG United Kingdom Tel +44 20 7234 0606 Fax +44 20 7234 0808 Web www.globelawandbusiness.com Printed by Antony Rowe Ltd ISBN 978-1-905783-31-1 Joint Operating Agreements: A Practical Guide © 2010 Globe Business Publishing Ltd All rights reserved. No part of this publication may be reproduced in any material form (including photocopying, storing in any medium by electronic means or transmitting) without the written permission of the copyright owner, except in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under terms of a licence issued by the Copyright Licensing Agency Ltd, 6-10 Kirby Street, London EC1N 8TS, United Kingdom (www.cla.co.uk, email: [email protected]). Applications for the copyright owner’s written permission to reproduce any part of this publication should be addressed to the publisher. DISCLAIMER This publication is intended as a general guide only. The information and opinions which it contains are not intended to be a comprehensive study, nor to provide legal advice, and should not be treated as a substitute for legal advice concerning particular situations. Legal advice should always be sought before taking any action based on the information provided. The publishers bear no responsibility for any errors or omissions contained herein.

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Table of contents

Introduction

7

Glossary

9

1. First 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8

principles 11 Mineral laws and concessions The role of the JOA The logic for a joint venture Model form contracts North American leasehold interests Incorporated joint ventures Evolution in the JOA The JOA’s economic profile

5. Exclusive operations 5.1 Defining ‘exclusive operations’ 5.2 Exclusive operations mechanics 5.3 Excluding exclusive operations

65

6. The operator 79 6.1 The operator’s advantage 6.2 Selection of the operator 6.3 Role of the operator 6.4 Removal of the operator 6.5 Hybrid operators

2. Duration 33 2.1 Commencement and term 2.2 Surviving provisions 2.3 Pre-JOA arrangements 2.4 Chronology of the JOA

7. The operating committee 95 7.1 The role of the OpCom 7.2 Mechanics of the OpCom 7.3 Subcommittees 7.4 Voting control

3. Parties and participating 43 interests 3.1 The parties 3.2 Collateral support 3.3 Participating interests 3.4 Government participation 3.5 Carried interests 3.6 Illustrative agreements

8. Cost control and 105 contracting 8.1 Work programmes and budgets 8.2 Authority for expenditure 8.3 Contract awards 8.4 In-kind contributions 8.5 Affiliate services contracts 8.6 Federal contracts

4. Scope 55 4.1 Joint operations 4.2 Excluded operations 4.3 Expanding the JOA’s scope

9. Petroleum allocation, lifting and disposal 9.1 Petroleum allocation 9.2 Petroleum lifting 9.3 Petroleum disposal

121

10. Transfers 10.1 Transfers under applicable law 10.2 Transfer mechanics in the JOA 10.3 Pre-emption rights 10.4 Change of control 10.5 Affiliate transfers

129

11. Withdrawal 147 11.1 The withdrawal principle 11.2 Withdrawal mechanics 11.3 Partial withdrawal 11.4 Consequences of withdrawal 12. Liabilities 155 12.1 The operator’s liability to the parties 12.2 Liability of the parties 12.3 Third-party liabilities 12.4 Liabilities and insurance 12.5 Indemnity obligation limitations 12.6 General liability 13. Decommissioning 171 13.1 The decommissioning phase 13.2 The regulatory regime 13.3 Decommissioning security 13.4 Decommissioning and the JOA 14. Default 185 14.1 Definition of ‘default’ 14.2 Reaction to a default 14.3 Remedies for default 14.4 Forfeiture 14.5 Default remedies generally 15. Dispute resolution 205 15.1 Dispute resolution mechanisms 15.2 Dialogue 15.3 Expert determination 15.4 Arbitration and litigation

15.5 15.6 15.7

Jurisdiction Consolidation Sovereign immunity

16. Accounting procedure 215 16.1 Accounting principles 16.2 Contents of the accounting procedure 16.3 Accounting procedure issues 17. Other provisions 223 17.1 Confidentiality and announcements 17.2 Corporate and social responsibility 17.3 Entire agreement and amendment 17.4 Force majeure 17.5 Governing law 17.6 Health, safety and the environment 17.7 Insurance 17.8 Litigation management 17.9 Notices 17.10 Secondment 17.11 Taxation 17.12 Third-party involvement 17.13 Warranties and representations Appendices A. Operator and 243 non-operator perspectives A.1 The operator’s perspective A.2 The non-operating parties’ perspective A.3 Reconciling the operational perspectives A.4 To operate or not B. Partnership and the JOA 251 B.1 Definition and consequences of ‘partnership’ B.2 The JOA as a partnership

C. Farm-outs and the JOA C.1 The purpose of the FOA C.2 Issues with the FOA

257

D. Unitisation and the JOA 265 D.1 The mechanics of unitisation D.2 The UUOA and the JOA E. Sub-divisions of the JOA 277 and concession E.1 Sub-division in principle E.2 The mechanics for sub-division E.3 Separate concessions F. Fiduciary duties 281 and the JOA F.1 Defining and applying a fiduciary duty F.2 Fiduciary duties in the JOA F.3 Managing fiduciary duties in the JOA About the author

291

Index

293

Introduction

The joint operating agreement (JOA) is one of the cornerstone contracts in the petroleum projects world and is often the starting point for further essential agreements relating to the business of crude oil and natural gas production, processing, sales and transportation. The JOA enables long-term, collaborative developments to be undertaken between groups of companies and government interests which have come together (often from diverse legal, commercial, cultural and political backgrounds) to share the high costs and risks that are inevitable in major petroleum exploration and production projects. The JOA establishes common operational standards for application to developed jurisdictions and to emerging markets. The intention of this book is to offer a pragmatic examination of the provisions of a typical JOA in the order in which they customarily appear, to review the key issues that apply to the operation of any JOA and to consider the positions that are taken in the various leading industry model-form contracts. The perspectives of the operator and the non-operator are addressed, along with a consideration of certain domestic and international standards which will apply to any petroleum project. The first part of this book (Chapters 1 to 17) examines the background to why a JOA might be necessary and then considers the essential provisions in any JOA, generally in the order in which those provisions are found. It begins with an examination of when in time the JOA starts and becomes fully effective and how long the JOA thereafter remains in force. Consideration is then given to who the parties are and what their interests in the JOA will be; what the scope of the JOA is; who is appointed to act as the operator and how the interests of the non-operating parties are represented; how the JOA’s activities are effectively controlled and accounted for; how the interests of the parties under the JOA can be transferred; how liabilities will be allocated between the parties to the JOA; and how to deal with any defaults, decommissioning activities and disputes as they arise. The second part of this book (Appendices A to F) contains a series of broader commentaries which are relevant to some of the key issues which beset any JOA and to the position which the JOA occupies in the context of a wider petroleum project. The analysis in this book assumes that the decision of a group of companies to enter into a joint venture in order to explore for and produce petroleum is based on their desire to enter into an unincorporated joint venture, which will be recorded in the terms of the JOA. This book does not focus on the terms of an incorporated joint venture, except by way of illustration of the differences between the two joint venture structures.

7

Introduction

The law as stated in this book is current to December 31 2009. Change is a constant in this area of law and practice, and thus at the date of going to press: the programme of modification in respect of the 2002 issue of the Association of International Petroleum Negotiators (AIPN) JOA and also in respect of the 2004 issue of the AIPN accounting procedure (1-04) is ongoing; the first instance decision in Colour Quest v Total regarding a person’s ability to be indemnified in respect of its own negligence (12-02) is subject to appeal; the UK Bribery Bill (17-02) has yet to become law; and the practical consequences of the implementation of the Rome 1 Convention (17-05) remain to be seen. Finally, this book is dedicated with love to my girls: Tabitha, Christie and Kitty.

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Peter Roberts

Glossary

The following terms are used in this book: AAPL JOA

The model form JOA issued by the American Association of Professional Landmen.

Abandoned mine methane (AMM)

Methane which is released by coal mining operations and resides in worked and abandoned mine workings.

AIPN JOA

The model form JOA issued by the Association of International Petroleum Negotiators.

American Petroleum Institute (API) gravity

The measure, expressed in °, of the weight of hydrocarbon relative to water, which is then applied to grade produced petroleum.

Associated gas

Natural gas which exists in solution with, and is typically produced in association with, crude oil (to be contrasted with non-associated gas, which is produced in its own right).

Bitumen

Crude oil in a semi-solid or solid form which has an API gravity below 10°.

CAPL JOA

The model form JOA issued by the Canadian Association of Petroleum Landmen.

Coal bed methane (CBM)

Methane which is produced by drilling into unworked underground coal seams, sometimes also known as coal seam gas (CSG).

Condensates

Pentanes which exist as a liquid at ordinary atmospheric pressure and temperature.

9

Glossary

10

Crude oil

Hydrocarbon deposits represented by light oil, medium oil and heavy oil.

Heavy oil

Crude oil in a liquid form which has an API gravity below 22.3°.

Hydrocarbon

A generic term for organic carbon/hydrogen compounds which from the basis of all petroleum substances.

Light oil

Crude oil in a liquid form which has an API gravity higher than 31.1°.

Liquids

A generic term for condensates and natural gas liquids.

Medium oil

Crude oil in a liquid form which has an API gravity between 22.3° and 31.1°.

Natural gas

Hydrocarbon deposits occurring naturally as a gas or as mixed gas and liquids, consisting of methane, ethane, propane, butane and pentanes.

Natural gas liquids (NGLs)

Ethane, propane and butane extracted from a natural gas stream.

OGUK JOA

The model form JOA issued by Oil & Gas UK Limited for use on the UK Continental Shelf.

Petroleum UKCS

A generic term for crude oil, natural gas and liquids. The offshore United Kingdom Continental Shelf areas licensed for petroleum exploration and production.

Peter Roberts

1. First principles

Before undertaking a detailed examination of the terms of a typical JOA, it is useful first to consider some of the conceptual and structural principles which underpin the content and the effect of, and even the rationale for, the JOA. These principles relate to the mineral laws which permit private sector participation in the business of exploring for and producing petroleum and the grant of the concessions which will facilitate that participation. These principles also relate to why joint ventures (in whichever form) are an inherent part of the petroleum projects landscape, the form that the JOA might take in structuring a joint venture and the relationship that will exist between the JOA and the concession which it underpins. 1.1

Mineral laws and concessions In most jurisdictions possessed of petroleum deposits there is usually, in broad terms, some form of mineral law by which the ownership of that petroleum will become vested in the state.1 The state can elect to develop those petroleum deposits entirely by itself and for its own account, or alternatively can choose to invite certain participants from the private sector (both domestic and international) to develop at least some of those petroleum deposits on its behalf. In this latter instance the state, acting through its duly appointed government (see below), might grant some form of concession to a private sector participant for the development of a particular petroleum deposit. The concession is effectively the vehicle by which the state’s interests in a petroleum deposit are conveyed to a private sector participant so that the petroleum deposit can thereby be developed. The concession which is granted might be a licence, a production sharing contract, a risk service contract or a hybrid form of any of the foregoing. This book does not examine concessions in detail and does not suppose the existence of any particular form of concession, except that certain terms from the form of licencebased concession which governs the exploration for and the production of petroleum on the UK Continental Shelf (UKCS) are referred to on occasion so as to illustrate a point. The particular position of North American leasehold interests is addressed separately below.

1

In the United Kingdom, for example, this mineral law was represented originally by the Petroleum (Production) Act 1934, which was consolidated most recently by the Petroleum Act 1998.

11

First principles

This book assumes that, in the simplest of terms, the concession will be granted by ‘the government’, which is used as a convenient shorthand for whichever ministerial or government agency has the necessary legislative authority for authorising private sector participation in the exploitation of petroleum reserves which are owned by the state (and which might also exercise a right to become a recipient part of that participation (3.4)). On the UKCS, the entitlement to all petroleum deposits is vested exclusively in the Crown,2 and a licence is granted to a private person for the undertaking of petroleum exploration and production activities for a defined area and for a defined period by the secretary of state for energy and climate change, acting on behalf of the Crown. On the UKCS, ‘petroleum’ is defined as “mineral oil or relative hydrocarbon and natural gas existing in its natural condition in strata”, and excludes “coal or bituminous shales or other stratified deposits from which oil can be extracted by destructive distillation”.3 The detailed terms of the licence are provided by the incorporation of a set of terms (called the ‘model clauses’) which are issued from time to time by way of secondary legislation. The model clauses have been successively updated and reissued over the years. The model clauses which relate to a particular licence are those which applied when the licence was granted, not the most current set of model clauses.4 Several aspects of the concession, which are discussed further in this book, have a bearing on the terms of the JOA: • Concession area – the concession will define a certain physical area in respect of which the concession holder will enjoy certain rights and will be subject to certain obligations. The area to which the concession is expressed to apply could be determined by reference to areal coordinates (ie, according to surface-mapped latitudinal and longitudinal bearings), by reference to certain stratigraphic layers (ie, according to levels of depth below sea level), or by a combination of these descriptions. • Work obligations – most concessions oblige the concession holder to perform a defined series of activities (commonly known as the ‘minimum work obligations’ and sometimes also known as ‘commitment wells’) within the early part of the lifecycle of the concession.5 These obligations will relate to certain exploration and appraisal activities. Thereafter, any wider development and production activities will typically require government consent.6 • Concession phases – the concession which is granted might be a single concession which is intended to govern all of the phases of exploration, appraisal, development, production and decommissioning (4.1), but it may 2 3 4

5 6

12

Section 2(1) of the Petroleum Act 1998. Section 1 of the Petroleum Act 1998. The model clauses which apply to UKCS licences issued in the most recent licensing round for offshore operations (in 2008) can be found in the Petroleum Licensing (Production) (Seaward Areas) Regulations 2008 (SI 2008/225). Model Clause (MC) 16. MC 17.

Peter Roberts

•

be that, depending on the terms of the prevailing mineral law, separate concessions will be granted for different phases of the overall petroleum project. Thus, there may be an exploration and appraisal permit which will apply for a defined period and which will require the performance of a defined series of exploration and appraisal activities, and only upon the expiry of that permit might a further concession be granted for the development of any discovered petroleum deposit. The operator – the concession might identify one of the concession-holding parties to act as the operator for the purposes of the concession7 and this will be replicated through the appointment of an operator under the JOA (see Chapter 6).

The examination of the terms of a typical JOA in this book is prompted by the assumption that a concession has been granted to and is held by a private sector participant in the form of a group of persons that have agreed to act together within some form of collaborative joint venture, rather than to a single person as the sole concession holder. Under the terms of the concession that group of persons, as the concession holders, will be entitled (and will also be obliged) to explore for petroleum, and to produce any petroleum which is thereby discovered, in the defined concession area. The concession sets out the vertical relationship between the government (as the grantor of the concession) and the parties (in their capacity as the concession holders), but does not address the terms of the horizontal relationship between those parties. As a result, it becomes necessary for the parties to define their relationship. Where they have elected to work together through the vehicle of an unincorporated joint venture, the JOA will be the agreement which defines that relationship and which provides for the sharing between the parties of the rights and the liabilities arising in connection with the concession. The JOA underpins the concession and is the accord which records the relationship between the members of the joint venture as the parties that together hold the concession. 1.2

The role of the JOA Where it is held by several persons, the concession typically provides that those persons will be jointly and severally liable to the government for the proper performance of the terms of the concession.8 This means that the government could, if it so wished, look to enforce the terms of the concession against any one of the parties which are together the concession holders. The JOA reallocates this position of joint and several liability between the parties through provision that the parties’ liability inter se will be apportioned according to several predetermined shares (although this several liability could be invisible to a third party which deals with the parties and will also not constrain the government in respect of the concession).

7 8

MC 24. MC 1(2).

13

First principles

The concession is of obvious importance to the joint venture between the parties. This will be reflected in provisions in the JOA whereby the operator will undertake to keep the concession in force (6.3); but the JOA might also impose an obligation on all parties not to do anything which might jeopardise the concession. Any breach by a party of this obligation which leads to loss of the concession (in an extreme case) would ostensibly expose that party to liability to the other parties for breach of contract, but any exclusion of the liability of a party for consequential losses which might exist in the JOA (12.2) would make questionable the real value of such an obligation. The JOA does not operate as a formal conveyance of the individual interests of each of the parties to a single entity. Rather, it is effectively the constitution for the unincorporated joint venture which exists between the parties for the exploration for and the production of petroleum and for the management of the concession, and it provides for how the operations which are required to be performed under the terms of the concession will actually be performed as between the parties. Essentially, the JOA performs the same role between the parties as a partnership agreement performs between partners (although the JOA could go to some lengths to make it clear that it is not intended to be a partnership – see Appendix B). The relationship between the mineral law, the concession and the JOA (other than in respect of North American leasehold interests, which are considered separately below) can be illustrated thus:

State Mineral law Government Concession A Co + B Co + C Co

A Co

B Co

C Co

40%

40%

20%

JOA

The JOA might provide that in the event of a conflict between the terms of the concession and the terms of the JOA, the terms of the JOA (or the concession, depending on what is negotiated) will prevail, but because of the very different nature of the relationships created by the concession and the JOA, the prospects for such a conflict should be minimal. The JOA typically relates to a single concession and applies in respect of petroleum operations in the area which is identified within that concession. There may be a situation where, in consequence of, for example, a successful effort

14

Peter Roberts

by the parties under a joint study and bid agreement (2.3), more than one concession has been awarded to those parties by the government. It is possible that the parties might choose to enter into a single JOA in respect of several concessions, with a single operator (see Chapter 6) appointed in respect of all of those concessions, but this approach might not be ideal. For example, it may be that over the lifetime of the concessions, one party might transfer its interests in one of the concessions to another person but remain in the other concessions, or a party might transfer its interests in all of the concessions to different persons – such that in either case there might be different groups of persons that are recited as the parties in respect of the respective concessions, but that are all variously party to the same single JOA. The position would be further complicated if the party which was appointed as the operator in respect of all concessions later ceased to be the operator in respect of some, but not all, of the concessions, and so the one JOA would need to be interpreted to apply to more than one operator. In the circumstances, therefore, the preferable solution is to have a separate JOA entered into in respect of each concession, despite the initial commonality of the parties. If the parties wish to operate multiple concession interests as whole, the implementation of a programme of unitisation might be the preferable solution, although a general pooling of concession interests might also be possible (see Appendix D). The parties might also consider a more general cooperation agreement (eg, a form of area of mutual interest agreement – see 2.3) in respect of their multiple concession and JOA interests. Whether there might be some advantage in linking the default remedy across more than one JOA and concession is considered separately (14.5). The principal use of the JOA is in the context of exploration for and production of petroleum, both onshore and offshore, where technical complexity and/or economic exposure necessitates the creation of a joint venture. On occasion, the typical upstream JOA has also lent itself readily to adaptation for abandoned mine methane/coal bed methane (CBM) project developments (see below in respect of the American Association of Professional Landmen (AAPL) JOA). There is no reason why the JOA might not also be used as the constitutional basis for any other mining or wider energy sector project where an unincorporated joint venture approach is required, subject to the changes being made to the text of the agreement which are necessary to reflect the nature of the particular project. This possibility will be reflected in part in the scope of the JOA (see Chapter 4). Indeed, one of the Rocky Mountain Mineral Law Foundation (RMMLF) model contract JOAs (see below) is specifically written to govern mineral extraction. 1.3

The logic for a joint venture In the simplest case, the government will grant a concession granting the right to explore for and to produce petroleum to a single company as the concession holder. This has typically been the case for relatively modest petroleum projects, where a low level of technical complexity and/or of financial exposure (eg, found in respect of any combination of easy exploration, shallow depth drilling, onshore petroleum deposits or crude oil production) means that a single company can hold the

15

First principles

concession and can comfortably perform the work obligations. In this situation, therefore, it is not necessary to consider the manner in which a joint venture will be documented, as the sole concession holder has no other person to enter into a joint venture with in order to perform the concession. However, where petroleum exploration and production projects become more complex and more expensive (eg, found in respect of any combination of complex exploration, deep drilling, offshore petroleum deposits or natural gas and liquids production), the associated risk can be spread more widely, across a group of persons that have come together for that purpose. The concession might therefore be held by several parties, which have agreed to act together in a joint venture whereby they will divide the expenditures incurred in the performance of the concession, and will divide the benefit of any petroleum which is produced under the terms of that concession, between themselves in accordance with pre-agreed shares. Consequently, a JOA will be needed between this group of persons in order to record the terms of their joint relationship if they propose to proceed on the basis of an unincorporated joint venture. It also follows that the parties to the JOA that are not appointed as the operator (see Chapter 6) will require a proportionately greater say in the manner of the performance of the JOA where the joint operations envisaged under the JOA (4.1) have proportionately greater levels of risk and cost associated with them. There are several well-rehearsed reasons for entering into a joint venture for the undertaking of a petroleum exploration and production project, which it is helpful to summarise: • Multiple projects participation – participation in a joint venture allows a party to undertake only part of a project, so freeing up that party to devote its unutilised resources to participation in a wider number of other projects. This allows that party to spread itself across several projects simultaneously, rather than applying itself to just one project entirely, while still achieving the same overall economy of scale. • Risk sharing – a joint venture allows the parties to share the various risks (principally the geological, financial and commercial risks) which are typically associated with the business of petroleum exploration and production, such that no single party is exposed to bearing all of those risks alone. Where the costs of exploration and production can run into hundreds of millions, or even billions, of dollars, few companies are able or willing to bear those costs (and the attendant risks) individually. • Skill sharing – a joint venture allows the parties to pool their respective skills, expertise and abilities (whether operational, financial or political skills, or simply the accumulation of previous relevant experience) in the manner that best complements their joint venture and avoids unnecessary duplication. It also affords the parties the opportunity to observe and to learn new skills from each other. Getting the chemistry right in this respect partially explains why the parties might thereafter be keen to control the circumstances in which a party can later exit the joint venture and bring in a replacement (10.2).

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Peter Roberts

•

•

Political risk mitigation – a joint venture can help to reduce the risk of adverse political or regulatory interference which might impact on the petroleum project that the parties have agreed to undertake. Having a widely invested petroleum project, with a joint venture of multiple parties in the concession (especially where one of the parties is a government entity (3.4)) might cause a government to think twice about doing anything which might prejudice the interests of that particular project. This could be true up to a point, although it will be less effective as a safeguard against the risk of wholesale re-regulation of the entire petroleum sector which also affects the particular petroleum project on a non-discriminatory basis. Managing state participation – the JOA which the parties to the joint venture enter into will provide a protocol for government participation, if that is a feature of the prevailing mineral law or of the concession (3.4), and will offer some education to the government on the commercial positions and the operational behaviour which might be expected to be undertaken in return for that participation.

The interests of the parties in their joint venture should ostensibly be the same – that is, to produce the greatest possible quantities of petroleum on the most costeffective basis. This alignment of interests will be recognised in the JOA, but there could also from time to time be some misalignment between the interests of the parties which the JOA will also need to accommodate. Thus, a party might prefer its interests in another concession to which it is party over its interests in the concession to which the JOA relates; or one party might wish to shut in petroleum production during periods of low petroleum prices while another might not; or a government entity which has become party to the concession and the JOA may have an ambition focused on exploration at all costs and the production of even marginal quantities of petroleum solely in order to benefit the national interest which the other parties do not share. The JOA will need to be able to address these sorts of tensions. 1.4

Model form contracts The popular theory is that the generation of a commercial contract from the starting point of using an established model form contract, in any sector, helps to reduce transaction costs and increase transacting efficiency by minimising the scope for protracted negotiation and the need for novel contract drafting. This is not untrue, but neither should the use of a model form contract be used as an excuse for an unthinking adherence to any particular position which that particular model form contract offers. In the upstream petroleum projects sector there are certain model form JOAs which might be considered as a starting point in the documentation of a joint venture for a particular project. As is the case for any model form contract, such model form JOAs represent an amalgamation of the various views which are held by those responsible for the preparation of those model forms. These views will also be defined according to the extent to which either side of the operator/non-operating

17

First principles

parties’ perspective (see Appendix A) has prevailed in the preparation of the particular model form JOA. Thus, when the parties come to draft the JOA which will apply to their petroleum project, they will usually start with a consideration of a model form JOA which they think is the best analogue for their particular situation, rather than drafting a bespoke agreement from a standing start. The model form JOA on which the parties base their discussions will not be perfectly fit for purpose, but it will be (or, at least, should be) negotiated and modified to reflect the nuances of the particular joint venture and the particular petroleum project. It will also need to be modified to fit with the terms of the underlying concession and of the prevailing mineral law (see above). This will inevitably make the terms of JOAs different between different jurisdictions and different projects, although many of the substantive issues which apply across JOAs will be similar. Arguably, it might be less essential to recite at length the dogma which a model form JOA imports between experienced petroleum sector participants that already share similar values. However, the prospect of the initial or later admission of entrants into the joint venture which are not so experienced (see below), or of government entities (3.4), means that the effort of creating a fully termed JOA may be invaluable in establishing the commercial behaviours which those new parties will be expected to observe. The following model form JOAs should principally be considered (and are referenced variously where appropriate in this book): • AAPL JOA – the AAPL JOA is regarded as the earliest model form JOA and is the standard for US onshore and (more recently) offshore operations. It was first issued in 1956 for onshore operations (known as Form 610) and was subsequently revised in 1977, 1982 and 1989. Form 610 was further revised in 2002 (and issued as Form 710) for application to offshore Gulf of Mexico Continental Shelf operations, and was further revised in 2007 (and issued as Form 810) for application to offshore Gulf of Mexico deepwater operations. Addenda for application to CBM projects were also issued in 1982 and 1989. References in this book to the AAPL JOA are to the AAPL JOA 810 unless otherwise stated. The AAPL JOA is available at www.landman.org. • Association of International Petroleum Negotiators (AIPN) JOA – the AIPN JOA is internationally the most widely used model form JOA. It was first issued in 1990 and was subsequently revised in 1995 and in 2002 (with a review of the 2002 form currently underway). The AIPN JOA is also accompanied by a series of related model form agreements, such as an accounting procedure (see Chapter 16) issued in 2004 (and presently also under review), a petroleum lifting agreement (9.2) issued in 2001 and a unitisation and unit operating agreement (UUOA) (see Appendix F) issued in 2006. In 2008 a drafting guide for the use of the AIPN JOA in Australian operations was issued. References in this book to the AIPN JOA are to the 2002 issue unless otherwise stated. The AIPN JOA is available at www.aipn.org.

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Peter Roberts

•

•

Canadian Association of Petroleum Landmen (CAPL) JOA – the CAPL JOA (which consists of a ‘head agreement’ containing details of the parties and their interests, and an appended operating procedure) is the standard for Canadian petroleum exploration and production operations. It was first issued in 1971 and was subsequently revised in 1974, 1981, 1990 and 2007. References in this book to the CAPL JOA are to the 2007 issue unless otherwise stated. The CAPL JOA is available at www.landman.ca. Oil & Gas UK (OGUK) JOA – the OGUK JOA represents the latest version in a long line of model form JOAs used for offshore operations on the UKCS, starting with a model form JOA which was prepared as part of the fifth offshore licensing round in 1977 and with the most recent issue dating from 2009. The OGUK JOA is available at www.oilandgas.org.uk.

Additionally the following model form JOAs might be considered: • Norwegian Petroleum Directorate (NPD) JOA – in Norway, exploration and production operations can be undertaken by private sector participants, subject to the grant of an appropriate licence by the state. Joint licensees are required to cooperate through a form of JOA which is approved by the Norwegian authorities. The NPD JOA is available (in Norwegian only) at www.npd.no. • RMMLF JOA – the RMMLF publishes forms of JOA for use in petroleum exploration and production operations (first published in 1968) and also for mining, mineral extraction and mine operation activities. The RMMLF JOAs are intended for US onshore operations and are available at www.rmmlf.org. Other model form JOAs to consider, for completeness, are those issued by the Australian Petroleum Production and Exploration Association (APPEA) in 1984 and by the American Petroleum Institute (API) in 1984, updated in 1996. The APPEA and the API model forms are both regarded generally as being of historical interest now and have not been kept up to date. The issue of an updated version of a particular model form JOA will not supersede any JOA which has already been drafted and executed on the basis of any earlier version, and the parties will always be free to use such an earlier version as the basis of their JOA if they prefer to do so. Despite the multiplicity of contributors to the drafting, any model form contract might not always be complete, accurate or fair. It will represent a compromise and will need to be modified and applied with care. A model form JOA will also inevitably be coloured by the historical and cultural features of the legal and commercial environment in which it was principally created. Thus, each of the AAPL JOA, the CAPL JOA, the NPD JOA, the OGUK JOA and the RMMLF JOA has its own obvious geographical pedigree. The AIPN JOA is often, perhaps unfairly, regarded as something of a US-centric agreement, but its appeal is more international than that of any of the other model form JOAs referred to above. Despite the variations between the different forms of JOA which are highlighted

19

First principles

in this book, there will be relatively significant commonality between JOA forms wherever they are used. Within a particular country, this commonality can be attributed to the need for government approval of the terms of a JOA (2.1), which will impose a certain degree of consistency in the terms of the JOAs which are used in that country; but such commonality will also arise on a wider scale in consequence of a desire of the parties to apply consistent standards in their JOAs for greater ease of operation and administration. Whether any particular model form JOA has the capacity to become a contract with a truly global appeal remains to be seen. Notwithstanding that different jurisdictions have produced different (and often very distinct) model form contracts, there may be some greater sense of convergence as we see a more harmonised appreciation of the problems, and the possible solutions, which can arise in any unincorporated joint venture for exploration for and production of petroleum. The greater use of a particular model form contract will also help to develop a body of academic and judicial interpretation of that contract, which can help in resolving later disputes concerning any JOA. When it comes to the negotiation and detailed drafting of the terms of a JOA, it should be remembered that the words used in a JOA are there for a reason. The parties should resist the temptation to assume that most of the agreement is standard, boilerplate wording. The object and the effect of the selected wording should be examined in each case – not least since the JOA will need to address the implications and the idiosyncrasies of the mineral law, the concession, the petroleum project and the parties to which it relates. The terms of the JOA might be defined and used in a manner which replicates the terms of the concession, which is generally to be applauded in the interests of applying some consistency across the key petroleum project documents. On the other hand, the terms of the JOA might need to be written in a manner which best fits the needs of the parties and so there is something of a balance to be struck between these competing aims. A practical example of this issue is provided by how a petroleum discovery might be declared to be ‘commercial’ as a precursor to the preparation of a development plan (4.1) – the government’s view of what might be commercial for the purposes of the concession might not be the same as the expectation of the parties under the JOA. 1.5

20

North American leasehold interests The position regarding the interface of concession interests and the JOA is slightly different in the context of North American petroleum production operations and is worth considering by way of contrast to the positions outlined above in respect of how the prevailing mineral law, the concession and the JOA interrelate. The North American position is typified by the application of the AAPL JOA and the CAPL JOA. Under the AAPL JOA, several parties will come together for the purpose of establishing an unincorporated joint venture, which will be represented by the terms of the JOA. Each party will bring to the joint venture a leasehold interest to which it is entitled for the recovery of petroleum (eg, federally granted leases in the case of offshore Gulf of Mexico petroleum deposits), and these various leases will be pooled

Peter Roberts

in order to arrive at a defined contract area. This pooling of interests will constitute the equivalent of the concession area (see above) in respect of which the JOA will apply as between all of those parties. The CAPL JOA adopts a similar posture through the pooling of what are called ‘joint lands’ (each represented by defined title documents). In contrast to the structure outlined diagrammatically above, the position under the AAPL JOA or the CAPL JOA will essentially be as follows:

A Co

B Co

C Co

JOA

• A Co leasehold interests • B Co leasehold interests • C Co leasehold interests

The manner in which the participating interests of the parties in each of the AAPL JOA and the CAPL JOA is structured is slightly different (3.3), but thereafter the content and the application of each of the AAPL JOA and the CAPL JOA will not be too dissimilar to the positions outlined elsewhere in this book. 1.6

Incorporated joint ventures The joint venture formulation on which this book focuses is the unincorporated joint venture and consequently the JOA is the key agreement to examine in order to appreciate the manner in which that joint venture is structured. The critical issue to note in respect of the unincorporated joint venture model is that the parties will not incorporate a separate company as a vehicle which is representative of their interests. Rather, the relationship between the parties is documented only by contract (ie, the JOA). However, an unincorporated joint venture is not the only way to proceed. The alternative structure for managing a collaborative effort in a petroleum project is the incorporated joint venture, in respect of which the usual structure is that a limited liability company (the joint venture company (JVC)) will be incorporated, with an

SA

A Co

B Co

C Co

40%

40%

20%

JVC Concession

21

First principles

issued share capital. The JVC will be the concession holder and the shareholders in the JVC will be the parties that wish to collaborate together. The relationship of those parties (as the shareholders of the JVC) will be governed by the constitutional documents of the JVC and also by a separate shareholders’ agreement. The shareholders’ agreement, while intended primarily to regulate the relationship between the shareholders and the manner in which the affairs of the JVC are conducted, will also contain the key operational elements which are associated with the activities of exploring for and producing petroleum. The terms of the shareholders’ agreement and the JOA will have many similarities and also some key distinctions. These are summarised in the table set out on page 24, but several noteworthy features deserve some additional commentary: • Commitment and fiduciary duties – in the context of the JVC, the shareholders’ agreement usually contains a clause whereby the shareholders commit to use their reasonable endeavours to promote and develop the business of the JVC. The shareholders’ agreement might also oblige each participant, as a shareholder, to undertake not to compete with the business of the JVC in a defined territory during the currency of the shareholders’ agreement and for a defined period after that participant has ceased to be a shareholder. However, these sorts of undertaking are less common in the context of the JOA and the parties will be keen to preserve their rights to undertake competing projects. Whether the parties (in their capacity as the parties or as an operator) will owe any fiduciary duties in respect of the business of the JOA is a topic which is addressed separately (see Appendix F). In the context of an incorporated joint venture, however, the directors of the JVC will owe certain statutory duties to the JVC,9 which will include a duty to promote the success of the company for the benefit of its shareholders as a whole and a duty to avoid having an interest which might conflict with the interests of the company. These are effectively codified fiduciary duties and they will need to be borne in mind by the JVC’s directors when they consider how to run the business of the JVC within the context of any wider corporate group interests which they might have. • Capitalisation of the venture – in the JOA the parties will each contribute their respective participating interest-based shares of the costs of performance of the joint operations (3.3). In the context of the incorporated joint venture, however, the JVC will be capitalised from the cash flows which it generates from the conduct of its business and also by the contributions of the shareholders. This will result in JVC-specific profit and loss accounting. • Ownership of assets – in most incorporated joint ventures the shareholders typically contribute various assets and interests which are essential to the proper functioning of the JVC and which the JVC will own (eg, land, cash, process technology and know-how). In the context of a petroleum project, the principal asset is the concession, which will be held by the JVC. Other assets which emerge over time, such as any petroleum production, 9

22

Sections 170 to 177 of the Companies Act 2006.

Peter Roberts

•

•

10

processing, storage or transportation infrastructure, will also be owned by the JVC. This is in contrast to the JOA structure, where the concession will be held directly by the parties (see above) and the relevant infrastructure will be regarded as part of the joint property (4.1). Competition law considerations – the incorporation of a JVC could in theory trigger the need for consideration of certain competition law matters relating to merger control or the management of agreements which affect competition. These matters are indicated below, but in a purposefully superficial manner and in respect only of English law (and without addressing the wider dimension of any applicable European law considerations – although for completeness, regard should be had also to the provisions of the EC Merger Control Regulation,10 which might also apply where there is an EU dimension). Under English law, the creation of a JVC may need to be looked at in light of the application of a combination of the Competition Act 1998 and the Enterprise Act 2002, if that incorporated joint venture falls within the definition of a ‘relevant merger’ (which will be determined by rules relating to the value of the turnover of the parties combining to form the JVC or the market shares of the relevant parties), and if the creation of that situation has resulted, or may be expected to result, in a substantial lessening of competition within a UK market for goods or services. The practical reality, however, is that the thresholds and the conditions which apply here are so significant that a customary petroleum exploration and production joint venture, structured through the medium of a JVC, would be unlikely to trigger them. Furthermore, the relevant provisions require that the enterprises which have come together have, as a consequence, ceased to be distinct enterprises upon the creation of their joint venture, and this is not typically the case where two or more participants in a JVC use special subsidiary companies to be their shareholders in the JVC. In respect of the unincorporated joint venture model, similar reasons to disapply the relevant provisions are evident. Under the JOA, the parties will remain in existence as such, brought together only by the contract which is the JOA. Transferable interests – the ability of the parties to transfer their interests in the petroleum project in the context of an unincorporated joint venture is considered separately (see Chapter 10). In the context of the JVC, the transferable interest is of a party’s shareholding in the JVC, and with the transfer of that interest will come part-ownership (through the medium of the JVC) of the concession and of any relevant infrastructure. The transfer of shares will usually be subject to some form of pre-emption right in favour of the non-transferring shareholders in the shareholders’ agreement, and the terms of the prevailing mineral law or of the concession might require government approval of any such change.

EC 139/2004.

23

First principles

•

•

•

24

Returns to the parties – in the context of the JOA, each party will have a right and an obligation to lift and to take delivery of its defined entitlement to the produced petroleum at the point of production (9.2). In the context of the JVC, however, all produced petroleum will belong to the JVC and will typically be sold by the JVC, with the net profits from the proceeds of sale to be distributed as dividends between the shareholders, pro rata to the size of their respective shareholdings. Contracting capacity – in the context of the JOA, the operator typically enters into any contracts with third parties which may be necessary for the performance of the joint operations as the disclosed agent of the parties (6.3), such that the parties will be contractually liable as disclosed principals. In the incorporated joint venture, however, the JVC will be the contracting entity and the shareholders will not ordinarily have any direct contractual liability to any person with which the JVC contracts. Termination events – the JOA can be terminated by agreement between the parties if they so resolve, and will (eventually – see 2.1) cease to apply if the concession comes to an end. Similar principles could apply in the context of the JVC. However, the insolvency of a party or the unremedied default of a party as a termination event will typically apply in respect of the party which is the operator under the JOA, and not in respect of any non-operating party (6.4), whereas in the context of the JVC these might be termination events which would apply to any shareholder.

Provision

JOA

Shareholders’ agreement

Project vehicle

Unincorporated joint venture of persons associated by contract.

JVC incorporated by law.

Capacity of the participants

Parties to a contract to operate a joint venture.

Shareholders in the JVC.

Scope

Defined variously by the scope, excluded items and associated undertakings in the JOA.

Defined by the objects of the JVC and by a defined list of applicable matters.

Commitment of the participants

No exclusive commitment to the business of the JOA, subject to the implication of fiduciary duties.

May be some obligation of shareholders to prefer the JVC’s business and may be some exclusivity commitments, and the directors will owe statutory duties.

Peter Roberts

Provision

JOA

Shareholders’ agreement

Funding

Parties fund their individual contributions.

JVC is funded by cash flows and shareholder contributions.

Management and operational control

Single party-operator, subject to operating committee involvement.

Board of directors, subject to shareholder voting for certain reserved matters.

Contracting

Operator contracts as agent for the parties.

JVC contracts in its own right without shareholder liability.

Voting deadlock resolution

Rarely addressed in detail.

Provision for buy-out between dissenting shareholders.

Employees

No JOA-employed staff.

JVC will have employees.

Asset ownership

Parties do not contribute assets to the JOA.

Shareholders can transfer assets to the JVC.

Accounting

Party-operator maintains expense and production accounts, but not joint venture profit and loss accounts.

JVC maintains profit and loss accounting.

Returns to participants

Parties have defined petroleum entitlements.

Dividend returns to shareholders.

Transfers of interest

Party interest transfers subject to transferee approval and possible pre-emption.

Shareholder transfers subject to pre-emption.

Termination

Party resolution or loss of concession.

Shareholder resolution or loss of business purpose.

Termination events for operator insolvency or unremedied default.

Termination events for any shareholder’s insolvency or unremedied default.

25

First principles

Because it is founded on a contract, the unincorporated joint venture is sometimes also called a ‘contractual joint venture’; because it is founded on the basis of a shareholder’s interest, the incorporated joint venture is sometimes also called an ‘equity joint venture’. The relativity of the unincorporated and the incorporated joint venture models is illustrated by any petroleum project where both models are used side by side. Where the parties to the JOA wish to contract for an activity which would fall within the definition of ‘excluded operations’ (4.2), such as the provision of transportation for their respective petroleum entitlements beyond the delivery point (9.2), then the starting assumption is that the parties will each contract on a several basis for the performance of that activity. Thus, taking the transportation issue to illustrate the point, each party might enter into a separate transportation agreement with the owner of an adjacent pipeline for the transportation of that party’s petroleum entitlements from the delivery point to where the petroleum is required. Structuring the transportation function in this manner could expose the parties to fragmentation of the bargaining power which they might otherwise enjoy if they were able to engage en bloc in the negotiation of a single transportation agreement with the pipeline owner. To overcome this, it might be possible (subject to compliance with any prevailing competition law issues) for the parties to contract jointly with the pipeline owner and so allow the parties to aggregate their requirements in a single transportation agreement, which hopefully presents a more attractive commercial position than would be achieved through several separate transportation agreements. Alternatively, and taking this form of collaborative model one step further, the parties might choose to incorporate a JVC to effect the transportation function. Each party would transfer its petroleum entitlements to the JVC at the delivery point and the JVC, which would contract with the pipeline owner for the transportation of the parties’ combined petroleum entitlements through the transportation agreement, would deliver a single, common stream of petroleum into the pipeline at the appropriate entry point. The parties might structure the equity participation in the JVC which is incorporated for these purposes such that the equity held by a party is in the same proportion as that party’s share of the aggregate pipeline capacity which the JVC books. Using the JVC as the vehicle for booking transportation capacity in the pipeline should give the same aggregation benefit as would apply in respect of the joint contracting approach outlined above, but it also allows the capacity booking in the pipeline to be structured such that if a party wishes to transfer its position, it need only transfer its shareholding in the JVC to a third party (subject to compliance with the equity transfer requirements of the shareholders’ agreement); there should be no need to disturb the underlying aggregate pipeline capacity booking between the JVC and the pipeline owner. The parties would remain party to the JOA and would also be shareholders in the JVC. Thus they would be represented in an unincorporated joint venture and in an incorporated joint venture at the same time:

26

Peter Roberts

A Co

B Co

C Co

40%

40%

20%

JOA

SA

JVC TA Pipeline owner

Additionally, some JOAs might require (in consequence of a requirement of the terms of the prevailing mineral law or of the concession) the formation of what is called an ‘operating company’ by the parties in the event of a commercial discovery of petroleum, with the intention that the operating company would be a non-profit making vehicle which would contract for the activities necessary for the performance of the resultant development plan (4.1). The shareholders in this operating company would be the parties; it might also be an option for a government entity (3.4) also to be a shareholder. However, this operating company would ordinarily perform only a relatively limited role and would not displace the wider role of the parties or of the JOA. Any industry participant will have its own opinion as to the optimum joint venture structure and it is not possible to make a simple declaration of whether the incorporated or unincorporated joint venture structure is best. Each formulation represents a different route up the same mountain and only the particular circumstances of an individual petroleum project will indicate which structure might be more appropriate. 1.7

Evolution in the JOA The JOA is (or, at least, should be) a living contract which regulates an active and ongoing relationship for a long term. Care must be taken to ensure that the JOA has the necessary flexibility such that it can evolve and can react to the changing operational, commercial and regulatory circumstances which might arise over the lifetime of the concession. The involvement of the parties with the JOA will not end once the negotiation of the JOA – which is an exercise in its own right – has concluded and the JOA has been signed. Rather, the parties then need to implement the JOA and to apply it across their intended joint operations and for the duration of the concession. Only then will the consequences of the positions which have been negotiated in the JOA truly become apparent to the parties (and in light of this, real joint venture operational experience is an essential tool for the JOA negotiator). Because the relationship between the parties is dynamic and will change over the lifetime of the JOA, as will the external environment in which the JOA resides, the

27

First principles

JOA should reserve sufficient flexibility in its terms to cater for that evolution. The JOA cannot realistically be written upfront so that it is ready to cater for every change of circumstance which might occur over its lifetime, but the architecture of the JOA should be prepared such that it is sufficiently flexible to be able to accommodate the more obvious evolutions. In one sense, the comprehensiveness of the JOA might be capable of being appreciated only towards the end of the lifetime of the underlying petroleum project, when the main body of the JOA and all of the various amendments, supplementary agreements and transfers of interests can be viewed together as a record of how (or, indeed, whether) the petroleum project was properly managed. The following examples are of some of the circumstances which should be addressed in the JOA. (a)

Petroleum reserves The most obvious evolution over the lifetime of the JOA will be the profile of the reserves of petroleum within the concession area. If the reserves which are identified through the exploration and appraisal phase are not sufficiently commercial to merit going forward with a development plan (4.1), then the concession might be surrendered and so the JOA will come to an early end. Over the longer term, if a development programme is undertaken, then the eventual outcome will be the production of petroleum up to the point where depletion of the reserves means that it is no longer economic to continue. At this point, there are several options for consideration which the JOA should address: • to wind down the JOA at that later stage and to enter the decommissioning phase (4.1); • to undertake a reservoir enhancement programme and seek an extension to the concession and so the JOA; or • to recharacterise the JOA for other purposes (4.3).

(b)

Parties Over time, there may be transfers of interests in the JOA (see Chapter 10) or withdrawals from the JOA (see Chapter 11), government participation in the JOA (3.4) or a change in the identity of the operator (6.4). The upshot of all of this is that the persons that together constituted the parties at the start of the JOA could be very different from those there at the end of the JOA’s life. The JOA should contain the provisions necessary to facilitate these alterations and should also be able to respond to the introduction of new parties which might have different operational and economic philosophies from the traditional norm (see below).

(c)

Scope The JOA will be written with a particular purpose in mind, but it may also need to be flexible in respect of the operational matters which it addresses. Thus, the JOA might need to manage the opportunity for the parties to offer the use of their petroleum production, processing, storage or transportation infrastructure to a third party in exchange for a suitable tariff or the introduction of a unitisation programme

28

Peter Roberts

(see Appendix D), in which case the role of the JOA will need to be reconciled with the wider UUOA; or it may be that the parties decide to transform the overall petroleum production project into a quite different form of project (4.3). The JOA will need to be able to respond to the emergence of each of these various phases in the lifecycle of the petroleum project. (d)

Alternative interests The JOA reflects the participation of the parties in joint operations (4.1) in the concession area. Where a party comes to hold an interest in another concession, that party may become interested to exercise its rights and to perform its obligations in respect of that other concession in preference to the concession to which the JOA relates. Thus, the JOA needs to address the reconciliation of a party’s interest in more than one petroleum project, both positively (eg, through an exclusive operations provision (see Chapter 5)), and negatively (eg, through a meaningful default remedy (see Chapter 14)), and also through a wider consideration of the applicable fiduciary duties (see Appendix F).

(e)

Economic conditions The economic perspective which surrounds the concession and the JOA over their respective lifetimes will also need to be kept under constant supervision. As many of the world’s traditional petroleum producing provinces (the UKCS is a good example) move into a pattern of maturity and decline, the traditional private sector participants in those provinces are increasingly looking to focus on their investments elsewhere and thus might be prepared to sell up certain of their asset interests. This transition could open the door to investment by new entrants into those provinces. These new entrants might be smaller, more entrepreneurial energy companies in respect of which several factors must be considered in comparison with the participants of yore: they may be less financially sound than has been the norm; they may be less concerned by the risk of adverse reputational damage consequent upon a failure to perform their obligations in respect of a particular project; and their perception of what is customary in the negotiation and management of the traditional JOA relationship between the parties might be different. This is not to say that any new entrant will lack the capacity to perform its obligations in a particular project, but the aggregation of commitments across a portfolio of projects could be a stretch and so the new entrant might apply some selective ordering as to how (or indeed whether) it chooses to meet all of those obligations. Taken together, these factors represent a risk that a party might at some point fail to perform its obligations in a particular project – a risk which the JOA that relates to such a project will need to address. However, the JOA will not lend itself readily to being a vehicle which will address the risk to the parties of the expropriation of their concession interests. This is a matter which is better dealt with in the concession or under a separate investment protection agreement.

29

First principles

1.8

The JOA’s economic profile The operational lifecycle of the JOA is described in detail elsewhere (4.1), and from that description it might become apparent that the activities of exploring for and producing petroleum have significant associated costs. The cost profile of the operations under the JOA will vary according to the nature of the activities to be undertaken. The expenditure commitments and the revenue inflows over the lifecycle of the JOA can be illustrated thus:

Dev’t Expense

Decomm

E&A Production

Revenue

In the exploration and appraisal phases there will be a significant frontloading of operating expenditure, associated principally with the activities of drilling, testing and conducting seismic surveys. However, there will be relatively little capital expenditure, as the parties will rarely buy capital items at this stage. There will be no revenues from the production of petroleum which the parties can apply against their expenditures. In the development phase there will be no, or very low, operating expenditure and significant capital expenditure, as the necessary petroleum production, processing, storage and transportation infrastructure is acquired, constructed and installed; there will still be no revenues from the production of petroleum for the benefit of the parties. In the production phase there will be the inevitable ongoing operational expenditure incurred in connection with running the petroleum production project, but no capital expenditure (unless further development phase activities are undertaken or any installed infrastructure requires modification). However, during this phase the parties should see the benefit of revenues from the production of petroleum, although these will eventually tail off as the rate of production from the petroleum deposit gradually declines.

30

Peter Roberts

In the decommissioning phase there will be a return to significant operating expenditure as the petroleum production, processing, storage and transportation infrastructure is decommissioned in accordance with the terms of the approved programme therefor. During this phase there will be no revenues from the production of petroleum for the benefit of the parties. The nature and timing of this economic profile should be reflected in the provisions of the JOA dealing with, for example, the operator’s ability to secure timely costs contributions from the parties, the liability of a party for a failure to pay its share of the costs when due and the collateral support to be provided by the parties in support of their payment obligations, all of which are addressed in greater detail later on.

31

2. Duration

In order to govern the inception of the JOA, the JOA will recite the date upon which the JOA is signed by the authorised representatives of the parties, and will also define the date upon which the JOA actually becomes effective and binding between the parties (which might be later than the date of signature of the JOA in certain circumstances). The JOA will have a duration which principally tracks the duration of the underlying concession, although the duration of the JOA can precede and will go beyond the existence of the concession in certain circumstances, and certain of the terms of the JOA might also be declared to have continuing existence notwithstanding the termination of the JOA. Consideration should also be given to the necessity for an agreement between the parties which regulates their relationship prior to the JOA coming into existence. 2.1

Commencement and term Once the business of negotiating the terms of the JOA has concluded, the parties will sign the JOA and will record in the JOA the date which is agreed to be the date upon which the JOA was so signed. This ‘execution date’ will appear in the opening paragraphs of the JOA, but this will not actually be the date upon which the JOA will become effective if there are any conditions precedent to the effectiveness of the JOA which need be fulfilled (see below). Because the business of the JOA is to enable the effective performance of the underlying concession (1.2), the JOA should ideally subsist for as long as the concession is in existence. This will entail the simultaneous signature of the concession and the JOA, such that both documents have the same execution date. If the duration of the concession is extended because of force majeure (17.4) under the concession, the duration of the JOA will be extended accordingly. If for any reason the JOA is not ready to be signed by the parties on the same day that the concession is signed, the parties can always sign the JOA with a later execution date, but record their agreement that the JOA is deemed to have come into force on the earlier date which is the execution date of the concession.1 This approach is possible where the concession is granted to multiple parties at the outset, where those same parties will be party to both the concession and the JOA. This approach might be less appropriate, however, where the concession is

1

CAPL JOA head agreement; OGUK JOA §2.1.

33

Duration

initially granted to a single party and the JOA becomes necessary only later when another party is admitted to the concession. To suggest that the JOA would be deemed to have been effective back to the date on which the concession was originally granted to the first party would be too much of an artificiality and would cause the incoming party to be concerned about the allocation of historical liabilities which might have arisen in that intervening period. The alternative option for timing the execution of the JOA is to provide that the parties will sign the JOA in advance of the award of the concession, and the JOA will recite a condition precedent to its effectiveness (notably, that the concession is granted to the parties, with acceptable commercial terms, and is executed by the government and the parties (as the holders of the concession)). When the concession is granted and is executed, this condition precedent will have been fulfilled and the JOA will automatically become live and effective between the parties. A further condition precedent which might be considered for insertion into the JOA is one which relates to the approval of the terms of the JOA by any government agency which has such responsibility, where the terms of the prevailing mineral law or of the concession so require,2 although as a practical measure the draft of the proposed JOA can be so approved before the JOA is actually signed by the parties such that the condition precedent will not be necessary. The term ‘effective date’ is sometimes used to describe the date on which any conditions precedent to the effectiveness of the JOA have been satisfied (or waived, by the person to whose benefit the condition precedent is expressed to apply), such that the JOA then becomes fully unconditional and effective. Paradoxically, the AIPN JOA defines that execution date as the ‘effective date’ (see below). The insertion of a condition precedent into any commercial agreement inevitably introduces a measure of uncertainty and for that reason the JOA should be careful to limit the number and scope of the conditions precedent which it imports. Once the door has been opened to the introduction of a condition precedent in respect of the execution of the concession, there may be a temptation for the parties to consider inserting other conditions precedent to the effectiveness of the JOA (eg, the securing by a party of any financing which might be necessary to enable that party to meet the costs of performing its obligations under the concession and the JOA, the agreement of outline terms for the sale and/or transportation of any resultant quantities of produced petroleum or the delivery of legal opinions regarding certain aspects of the JOA). These additional conditions should be resisted, not least since they are unlikely also to appear as conditions precedent to the effectiveness of the concession and so they should not appear in the JOA for the sake of consistency. The AIPN JOA makes no provision for the introduction of any conditions precedent to the effectiveness of the JOA. Rather, the AIPN JOA assumes that the parties have already entered into the concession, and that the JOA will have effect from what 2

34

MC 40(5), and the approval so required will be deemed given if the form of the JOA meets the defined minimum standards specified in the Open Permission (Operating Agreements) granted by the secretary of state for energy and climate change (originally effective from December 2002 and reissued in April 2003).

Peter Roberts

it calls the ‘effective date’, which is the date of execution of the JOA.3 Neither does the OGUK JOA include an express conditions precedent formulation. Rather, the OGUK JOA assumes that the concession has been granted to the parties, and that the necessary regulatory approval of the terms of the JOA has been granted.4 Similarly, the AAPL JOA and the CAPL JOA both assume that the necessary leasehold interests have been granted and do not prescribe conditions precedent to their effectiveness. The relationship between the concession and the JOA has been commented on previously (1.2). The JOA will generally not subsist if the concession to which the JOA relates is terminated, since the essential purpose of the JOA (ie, to regulate the horizontal relationship of the parties in respect of the vertical relationship with the concession) will have been extinguished. However, it is possible for the concession to exist without the JOA. The JOA is, after all, an agreement which the parties have agreed to enter into in order to better regulate their inter-relationship and it is advisable, but not compulsory, that the parties enter into a JOA for that purpose. If there is a point at which the concession is extended or renewed beyond its original term, the duration of the JOA should also be extended so as to track that extension or renewal. The voting control regime in the operating committee (OpCom) (see Chapter 7) will apply to determine the basis on which the parties will be entitled to vote in favour of extending or renewing the concession (and so extending or renewing the JOA). Similar principles will apply where there are different concessions for different phases of the joint operations (1.1). Termination of the interests of an individual party under the JOA can be effected where a party transfers its interests in the JOA (see Chapter 10), or withdraws from the JOA (see Chapter 11), or defaults and has its interests forfeited (see Chapter 14); but rarely will the JOA contain detailed provisions regarding the circumstances in which the JOA can be terminated in its entirety by (and in respect of) all of the parties, unless the parties votively elect to take such a step. It will always be an option for the parties to vote to terminate the JOA, which may well be reserved as an item requiring unanimity of voting between the parties (7.4), and they might well resolve to do this where the concession has terminated in accordance with its terms, such that the very purpose of the JOA’s existence has been removed. Such termination by the parties could also be expressed to apply where there has been a prolonged event of force majeure (17.4) which renders impossible the continued performance of the JOA and the concession (but this should be reconciled with the analogous position under the concession). The JOA will also become redundant where a single party has aggregated all of the other parties’ interests (whether by agreement or through the exercise of the forfeiture or withdrawal mechanism), such that it has become the sole party to the concession. In this circumstance there will be no joint operations to be conducted between a group of parties as a joint venture and so no need for a JOA. If there is a subsequent admission of another party to the concession, it will be necessary to

3 4

AIPN JOA recitals; §2. OGUK JOA recitals.

35

Duration

reanimate the JOA for that joint venture. Whether the right of a party to terminate a contract at common law in consequence of a repudiatory breach of contract by another party which deprives the innocent party of substantially the whole benefit of the contract5 might apply in respect of the JOA should also be considered. The English courts have ruled6 that explicit contractual termination clauses will not necessarily operate so as to exclude the implication of the common law termination right, unless the relevant contract was sufficiently clear in evidencing this intention. The relative paucity of express termination clauses in a customary JOA could therefore further emphasise the potential for the application of the common law termination right. The application of such a termination right in respect of the JOA would not result in a corresponding termination of the underlying concession, however, which could lead to an illogical outcome. 2.2

Surviving provisions Where the concession comes to an end in accordance with its terms, the JOA should ostensibly end too. However, most JOAs do not end completely on termination of the concession, because there will be a number of ongoing items which the parties will need to address through the vehicle of the JOA,7 such as the following: • Decommissioning – the most obvious ongoing issue which the parties will need to be involved with, notwithstanding the termination of the concession, is the decommissioning of any petroleum production, processing, storage or transportation infrastructure which has been installed and used in the performance of the joint operations (4.1), and in any exclusive operations (see Chapter 5). The business of decommissioning is addressed in greater detail in Chapter 13, but suffice to say for present purposes that the continuing existence of the JOA will be necessary in order to conclude the decommissioning process8 and any residual liability at law which the parties might have in respect of any of the decommissioned infrastructure.9 However, this will not be an issue if the concession and the JOA are terminated prior to the installation of any such infrastructure. This may be the case, for example, if the exploration and appraisal phase activities do not indicate sufficient quantities of petroleum to justify the introduction of a development plan (4.1), and any exploration and appraisal wells which have been drilled have been properly plugged and require no further decommissioning activities to be performed. • Final accounting – the JOA should continue to exist for as long as may be necessary to enable the operator to complete a final accounting and reconciliation between the parties in respect of their respective petroleum entitlements (9.1), which will include final accounting in respect of joint

5 6 7 8 9

Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26. Stocznia Gdynia SA v Gearbulk Holdings [2009] EWCA Civ 75. AAPL JOA 810 §26.1; AIPN JOA §2; CAPL JOA §1.14; OGUK JOA §2.1. AIPN JOA §2; OGUK JOA §2.1. AAPL JOA 810 §26.1; OGUK JOA §26.4.

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Peter Roberts

operations or exclusive operations and addressing the reconciliation of any underlift or overlift balances (9.2).10 Once again, this will be of less relevance as an issue if the concession and the JOA are terminated before any petroleum is actually produced. Even where the JOA does come to an end, there could still be some individual provisions of the JOA which are expressed to continue in force for some time after termination of the JOA. There is usually a generic provision in the JOA to the effect that termination of the agreement will be without prejudice to a party’s accrued and contingent liabilities,11 but the JOA might also make reference to a series of specific issues where some continuation of individual provisions, despite the termination of the overall JOA, might be suggested: • Confidentiality – the undertakings of confidentiality which have been given by and between the parties in respect of the JOA (17.1) will often be expressed to continue to subsist for a defined period after termination of the JOA.12 • Ongoing disputes and defaults – there may be ongoing litigation or other disputes in respect of the JOA (whether between the parties or involving any third party), which will not conveniently come to an end just because the JOA has terminated. If the operator is performing its obligations in respect of litigation management (17.8), then those obligations (and the obligation of the parties to cover the operator’s costs of doing so) should continue until the relevant disputes have been concluded. The same principle will apply in respect of any unremedied default by a party (see Chapter 14), and that party’s liability for that default.13 • Indemnity obligations – where an obligation of a party to indemnify any other party has arisen in accordance with the terms of the JOA (see Chapter 12), that obligation should not be extinguished simply because the JOA has come to an end.14 • Associated provisions – there are certain mechanical provisions under the JOA (eg, those relating to the selection of the governing law (17.5), the giving of effective notices (17.9) and the general management of disputes (see Chapter 15)) which should also continue to apply if any of the above issues needs to be addressed, notwithstanding the termination of the JOA.15 As a further alternative to a provision which entails the continuation of the JOA in its entirety, notwithstanding the termination of the concession, or a provision which is suggested to apply in its own right as an ongoing commitment in isolation despite the termination of the JOA, the OGUK JOA provides that if there are (in the opinion of the operator) any obligations and liabilities which arise out of the

10 11 12 13 14 15

AAPL JOA 810 §26.1; AIPN JOA §2; CAPL JOA §1.14; OGUK JOA §2.1. AAPL JOA 810 §26.1; AIPN JOA §2. AAPL JOA 810 §7.1; AIPN JOA §15.2; CAPL JOA §18.00; OGUK JOA §19.1. AIPN JOA §8.5. AIPN JOA §2; OGUK JOA §2.1. AIPN JOA §2.

37

Duration

existence of the joint property which are likely to subsist beyond completion of the decommissioning phase and the final accounting between the parties, then the parties will enter into a separate agreement with regard to such obligations and liabilities – failing which such further agreement the whole of the JOA shall be extended and shall continue to apply.16 This solution might apply to govern any general, ongoing liabilities which are to be settled between the parties inter se (eg, any ongoing, residual liabilities for decommissioning which might remain beyond the conclusion of the decommissioning activity), or between the operator and the non-operating parties; but might also apply, for example, to any arrangements made between the parties and any third parties for the use of the joint property (4.3). 2.3

Pre-JOA arrangements The principal intention is that the JOA will govern the relationship of the parties in respect of the period from the grant of the concession. However, this intention does not recognise the reality that in the run-up to the grant of the concession, the parties may well have already been working together in seeking to secure the grant of that concession and in the negotiation of the terms of their JOA. To accommodate this, the prospect of undertaking investment into a petroleum project on a consortiumbased approach might also necessitate the governance of the relationship between the parties during the precursor period. The parties might therefore enter into what is popularly called a joint study and bid agreement (JSBA) to legislate for this initial phase of their relationship, when they will together investigate the basis of a possible application for (‘study’), and actually make their application (‘bid’) for the grant of a concession. The AIPN has published a model form JSBA,17 which is often used by parties as a starting point for their considerations. It is conceivable that a group of parties might decide to proceed with the investigation of the possibility of a collective application for the grant of a concession without any form of formal agreement in place between them. The entry into a JSBA is not a legal requirement, but having such an agreement in place between the parties can provide a useful framework for their collective activity and will also help to tease out some of the likely areas of contention between them if a JOA is subsequently required. The JOA could also, in theory, be entered into for this purpose, but it would need some modification from its standard form and would contain several provisions which would be redundant for the task of preparing a joint bid. The JSBA is essentially a simple form of a joint venture agreement, the principal purpose of which is to govern the joint application of the parties for the grant of a concession (whether that concession is to be awarded as part of a regular licensing round or on an ad hoc basis). Consequently, the JSBA will identify items such as the parties, the particular concession (or concessions) which they plan to apply for, the proportions in which the costs of the bidding exercise will be allocated between the

16 17

OGUK JOA §2.2. Available at www.aipn.org.

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Peter Roberts

parties and the mechanics of how the actual bidding for the concession will be managed between the parties. The JSBA might also recite mutual confidentiality undertakings between the parties where they have agreed to exchange data as part of their study exercise (unless a standalone confidentiality agreement (see below) has already been entered into). The JSBA might also oblige the parties to undertake a commitment of exclusivity to each other in respect of the concession which is to be applied for (such that a party cannot be involved in more than one bid for the same concession); recite a rudimentary voting mechanism for the making of decisions between the parties concerning the bid; and entitle a party to withdraw from the consortium before the bid is submitted, or even to withdraw from the bid if it is successful, but if that party is not satisfied with the commercial terms of the concession which are actually offered (which in turn will depend upon the bidding process for the concession, so allowing such a withdrawal). The JSBA will cease to apply if the parties elect not to make a bid for a concession or if they do make a bid but are unsuccessful in their endeavour, and will most obviously cease to apply if the parties’ bid for the concession is successful and a JOA subsequently comes into force between the parties. Because of the nature of its content, in light of the purpose for which it is principally intended, the JSBA is unlikely to be sufficient also to act as the resultant JOA if the parties are successful in their application for the concession. The JSBA is properly intended to apply to the business of securing, rather than of managing, a concession. Nevertheless, some commentators suggest that if the parties are unable to agree on the form of the JOA, then the terms of the JSBA might be adequate to regulate the relationship between the parties going forward. This approach is adopted in part in the AIPN model form JSBA, where the JSBA will continue to apply as an interim measure so as to govern the relationship between the parties pending finalisation of the JOA (see below). This philosophy may have some merit if the JSBA contains a sufficient amount of detail to be able to govern the joint operations, but the more realistic expectation is that, despite the many similarities of broad principle between the terms of the JSBA and the JOA, for the longer term the parties will need to put in place a JOA which will govern their relationship after the award of the concession. The text of a fully termed JOA might be appended as a schedule to the JSBA, with that JOA to be executed by the parties if they are successful in their application and are granted the concession. This is obviously the best way to go, in the interests of promoting certainty, but it is typically the case that the practicalities of assembling a consortium to apply for a concession do not allow sufficient time also to prepare that JOA. The parties might also be reluctant to commit resources to negotiating the JOA for fear that their application for the concession will be unsuccessful and so the effort wasted. In practice, the effort which the parties might be inclined to devote towards negotiating the terms of their intended JOA will be linked to the confidence which those parties have about the chances of success which they think their concession application is likely to enjoy. Alternatively, therefore, and more commonly, the JSBA might oblige the parties to negotiate the JOA only if their application for the concession proves to be

39

Duration

successful. To assist in this process, the JSBA might identify a model form JOA which the parties agree they will use as the basis for their subsequent negotiations. This approach is taken in the AIPN model form JSBA, wherein if the parties are successful in their application for a concession, they will endeavour to sign a JOA within an agreed number of days after the concession becomes effective. Thus, the JSBA will continue to govern the relationship of the parties pending execution of the JOA. The AIPN model form JSBA suggests that the parties will use the AIPN JOA as the basis for their negotiations, but beyond that no guidance is given as to the content of the JOA. Another alternative to consider, if a fully termed JOA is not appended to the JSBA, is that the JSBA will be supplemented by a term sheet which recites an outline agreement between the parties of the essential commercial elements of their prospective JOA relationship (eg, the identification of which party will be the operator, the respective interests of the parties, a procedure for accounting between the parties and provisions relating to the ability of a party to transfer its interests to a third party). These essential provisions will be part of the JOA, but can also be expressed to apply in the interim in governing the relationship of the parties through the currency of the JSBA. A further formulation which sometimes appears where the parties have been granted a concession and are awaiting government approval of the terms of the JOA is one whereby the parties will attach a fully termed draft JOA to a head agreement which they execute, and under the terms of that head agreement the parties agree, for that interim period, to comply with all terms of the draft JOA as if it were a live agreement, pending government approval. This is an alternative to relying on the terms of a JSBA to regulate the relationship between the parties during that interim period. The JSBA relates to a point at which a group of parties have already made the decision jointly to submit a bid for a particular concession which they have identified, but going back even further in time before that point, those same parties might already have formed a loose affiliation jointly to pursue certain development opportunities which are not specifically defined. This earlier relationship between those parties may be recorded in a very simple form of joint venture agreement which is popularly known as an area of mutual interest agreement (AMIA). The AMIA will do little more than recite the desire of the parties to consider joint development opportunities in certain areas and is unlikely to contain the provisions which would indicate the reality that the AMIA is often the very earliest ancestor of a fully termed JOA. The AMIA might simply recognise that several parties have a generally consistent alignment in some particular regard. Beyond that, the AMIA might deny that it is intended to create any legally binding obligations (other than an undertaking of confidentiality or the commitment to negotiate together in good faith) between the parties, although (depending on what has been agreed between the parties) it is also possible that the AMIA might go to the other end of the scale and impose certain exclusivity commitments. The JOA might provide that its effectiveness will also signal the termination of any pre-existing agreement, such as the JSBA18 (or AMIA), but for the sake of good 18

40

CAPL JOA §1.11.

Peter Roberts

order this trigger event for co-termination should be recorded expressly in the JSBA (or AMIA) – not least since there may be persons that are party to the JSBA (or AMIA) that do not go on to become party to the JOA and that would not be bound by the termination of the JSBA (or AMIA) where that termination is expressed to be effective only through the JOA. Any exchanges of data which take place between companies that might ultimately become parties to a JOA and that in the interim have decided to enter into a JSBA or an AMIA in respect of their relationship should be protected by undertakings of confidentiality between those companies. A JSBA usually contains such undertakings and the terms of an AMIA might contain such undertakings. In the absence of a JSBA or an AMIA, there may be an earlier confidentiality agreement (CA) which has been entered into between the companies, to address this specific issue. Model form confidentiality agreements are widely available in the upstream petroleum projects sector.19 The JOA might provide that the parties expressly ratify all of the actions of the appointed operator which were undertaken in the period prior to execution of the JOA, and additionally might award a measure of compensation to that operator retrospectively in order to cover the costs incurred by the operator in the negotiation of the concession and the preparation of the JOA. Such a provision is useful where there has been a hiatus between the grant of the concession and entry into the JOA. 2.4

Chronology of the JOA The chronology of the JOA (and of any pre-JOA arrangements), and the relationship between that chronology and the existence of the concession, can be illustrated by the following schematic:

Concession award

Exploration Concession:

Pre-award and appraisal phase

Concession end

Development

Decommissioning

and production

phase

JBSA end / JOA start

Joint venture:

19

CA/AMIA

JSBA

Renewal?

phase JOA end

JOA

Renewal?

For example, through the AIPN, the OGUK and the RMMLF.

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3. Parties and participating interests

Essential to the proper working of the JOA is the identification of the persons that will be party to the JOA, and also of any persons that might support the obligations of those parties, and the quantification of each party’s interests under the JOA. The management of the admission of new parties to, and the withdrawal (or even expulsion) of parties from, the JOA is addressed separately elsewhere (see variously Chapters 10, 11 and 14). The JOA might also need to legislate for the possible participation of an entity which represents the interests of the government which has granted the concession, and whether a particular party might be the recipient of a financial carry from any of the other parties. 3.1

The parties The JOA will identify each party as it exists as at the execution date (2.1), through the opening recitals in the JOA. This act will record the initial parties to the JOA, but where during the lifetime of the JOA there are any changes in the identity of the parties, the JOA will not explicitly track such changes. Consequently, the history of changes in the identities of the parties to the JOA will be discoverable only from an analysis of the JOA and the documents which record any later transfers of interests or any changes of name in respect of a party. Where a JOA has been in existence for some time, establishing the chain of title through the parties over the years can be a formidable task. A more certain (but not a common) approach is to require the operator to append to the JOA a schedule of the current parties from to time, and to revise and circulate that schedule to all parties in the event of any changes in the identity of any of the parties. This change might also be recited through a combined novation and amendment agreement (17.3), which will be supplementary to the JOA. The definition of a party should be expressed to include that party’s successors in title and permitted assignees,1 and the JOA should be expressed to transition to the benefit of any such successors or assignees.2 In the latter case, any requirement in the JOA for a novation agreement to condition the transfer of the interests of a party under the JOA to another person (10.2) should ensure that such a transition to an assignee is expressly effected. The reference to successors is intended to ensure that

1 2

AIPN JOA preamble, §20.4; OGUK JOA §1.1. AAPL JOA 810 §26.5.6; CAPL JOA §25.03.

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Parties and participating interests

where a party undergoes any event of merger, amalgamation or other corporate transformation, the JOA will continue to bind that party or any party which is the product of such an event. Because the JOA represents the horizontal relationship between the parties to, and in respect of their interests in, the concession (1.2), the popular expectation is that there will be complete symmetry between the holders of the concession and the parties to the JOA. This is usually the case, but is not always necessarily so: • Non-JOA parties – it may be that there are certain holders of the concession that are not also party to the relevant JOA. This happens, for example, on the UKCS, where a licence which is awarded to explore for and produce petroleum governs more than one operating interest area (or ‘block’). The parties to each particular block will have their own JOA, and any other persons (that are recorded on the licence but are not also participants in the particular block) will not be party to that JOA. • Non-concession parties – it may be that some of the parties to the JOA are not also party to the relevant concession. This happens, for example, where the JOA includes the appointment of a contracted operator (6.5), where any collateral support which has been given by another person in respect of a party’s commitments under the JOA is recited within the terms of the JOA rather than separately (see below), or where one of the parties has entered into an illustrative agreement (see below). One of the parties to the JOA might additionally be agreed by the other parties to act as the designated operator in the performance of the joint operations (6.2). Thus, this party will have two distinct capacities under the JOA – as the operator and as a party.3 The role as operator is quite distinct from the role as party, and undertaking the role of operator should afford no special privileges to the party which does so in its capacity as a party. How this duality of interests operates in practice is demonstrated, for example, by the cashcall or invoice request mechanisms under the JOA (16.2), whereby the operator will cashcall or invoice all of the parties, including itself, for the costs of conducting the joint operations. The parties will be keen to preserve the financial and operational integrity of their joint venture and consequently the ability of a party to transfer its interests under the JOA to a third party will usually be closely controlled within the JOA. This aspect is addressed in detail in Chapter 10. Any nervousness about the identity of a new party to the JOA will abate where a party withdraws from the JOA (see Chapter 11), or commits a default which results in its interests being forfeited (see Chapter 14), as in either case the interests of the departing party are intended to pass to the remaining parties. 3.2

Collateral support The parties will have come together initially in the JOA based on the premise that each is able to meet its respective share of the financial commitments arising under

3

CAPL JOA §3.02.

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Peter Roberts

the JOA. A key feature of the manner in which the JOA is expected to operate is that the parties will make timely payments in respect of the operator’s cashcalls or invoice requests as they fall due (16.2). The JOA will recite a mechanism for dealing with a party’s payment failure (see Chapter 14), but that should not be regarded as a substitute for ensuring the initial and ongoing creditworthiness of each party. At the point when they first form their joint venture, the parties might require the provision of some form of collateral support by each party in respect of its respective obligations under the JOA. There could be an exception to this principle where a particular party has an inherent level of creditworthiness which would obviate the need for such a request, if at the date of execution of the JOA a party is of sufficient financial worth that the provision of some form of collateral support in support of its JOA commitments is obviously not necessary. If this is not the case, some form of collateral support may be required in respect of that party prior to execution of the JOA. Similar considerations will apply where there is a transfer of a party’s interests (see Chapter 10), and the provision of collateral support may be required in respect of an incoming transferee. However, the typical process of negotiation of a JOA rarely tends to place the institution of collateral support in respect of the parties’ obligations near the top of the commercial issues list. In part, this may be attributed to the expectation that the parties are and will be suitably solvent and expect to perform fully their JOA obligations, due to their reluctance to risk the adverse reputational risk associated with a default or to jeopardise the prospective economic returns from the JOA. Consequently, a discussion about the need for collateral support is often regarded as awkward and inappropriate. This hypothesis is more tenable when the JOA and the concession are in their infancy and the prospects for petroleum production and revenue returns are high, but as the JOA moves through its customary lifecycle (4.1), eventually towards governing the end of the useful life of the underlying assets, then an attitude which has a greater appreciation of the need for collateral support might be more appropriate. The obligations of the parties to make payments in respect of the JOA will vary over the lifetime of the underlying petroleum project (1.8), and from that analysis it will be apparent that the need for collateral support could be at its greatest when the petroleum project is consuming cash, rather than when it is generating revenue. The liability of a party to meet its share of the costs of decommissioning the petroleum production, processing, storage or transportation infrastructure used in the performance of the joint operations, and the provision of collateral support in respect of that liability, are considered separately (13.3). The requirement for a party to procure collateral support might be limited to application in respect of the exploration and appraisal phase only (4.1), if the parties are comfortable that the decommissioning phase will bring its own requirements for collateral support (13.3), and that in the production phase the existence of a party’s produced petroleum entitlements (9.1) will give its own remedies to apply in respect of a party’s default (see Chapter 14). Where there is a default by a party, it will be an option for the non-defaulting parties under the JOA to consider making recovery under any form of collateral

45

Parties and participating interests

support which has been put in place in respect of a party’s obligations under the JOA. However, for this to have a realistic chance of application, the parties will need to have focused on getting this collateral support in place for a party simultaneously with (and as a condition of) that party becoming a party to the JOA. None of the AAPL JOA, the AIPN JOA or the OGUK JOA prescribes a requirement for the provision of collateral support by the parties, although the OGUK JOA does require the parties to commit to an agreement which provides security for the eventual costs of decommissioning prior to the submission of a development plan in respect of a discovery.4 The CAPL JOA allows the operator to call for the provision of security by a nonoperating party in respect of its share of the costs of the joint operations if the operator has concerns about the creditworthiness of that non-operating party. The form of that security is not specified, although reference is made to the possible provision of an irrevocable standby letter of credit.5 The reaction of governments to the suggested need for the provision of collateral support by the parties in respect of their obligations under the JOA is variable. While this is principally an issue to be considered between the parties to the JOA, the support of the government agency which is responsible for overseeing the grant of a concession for the principle of constituting the provision of collateral support under the JOA as a condition of participation in a concession may be helpful. However, as new petroleum provinces emerge and seek to attract investment, or as mature petroleum production provinces decline, there may be a temptation on the part of any government to lower the bar for new entrants in order to maintain production for as long as possible, and imposing stringent collateral support commitments might be inconsistent with such an approach. The reluctance of the government to require collateral support may be evidenced in respect of the approval of the terms of the JOA (2.1) and also in respect of what collateral support the government might require from a party in its capacity as a concession holder. A party might argue that if it has not, in its capacity as a concession holder, been asked to provide any collateral support under the terms of the concession, then neither should that party be required to provide any collateral support under the terms of the JOA. However, this convenient argument overlooks the reality that under the concession, the liability of the concession holders to the government for performance of the obligations will be joint and several (1.2), and so the government might be more relaxed about the need for the provision of collateral support in respect of any individual party since it has the right to look at any or all of the parties in order to cover any individual party’s failure. Under the JOA, however, the liability of each party will be several and this might prompt a different attitude between the other parties. Where appropriate, the collateral support which could be provided in respect of a party’s JOA obligations might take the form of a corporate guarantee, a bank guarantee (or similar letter of credit or commitment), or some form of default insurance (where each other party will be named as co-assureds).

4 5

46

OGUK JOA §26.3, and see Chapter 13. CAPL JOA §5.03.

Peter Roberts

The commitment of a corporate guarantor in respect of a party might be recited in the body of the JOA (and that guarantor will be an additional signatory to the JOA – see above), so that the guarantor gives a directly enforceable commitment to each party which is intended to be a beneficiary of that commitment. Alternatively, such a guarantee commitment could be stated in a separate document, outwith the JOA. Notwithstanding that a party has procured no collateral support in respect of its commitments at the outset, during the lifetime of the JOA the party’s financial situation may deteriorate, and given the often significant duration of a typical JOA, this is a real possibility. The JOA might therefore provide that in the event of such a deterioration (which could be determined according to the subjective opinion of any of the other parties or according to an objective test, such as audited proof that a defined financial ratio has been breached or the loss of an independently certified credit rating), the affected party should be required to procure some collateral support (a process sometimes known as ‘re-guarantee’). In most other commercial agreements the failure of a party to meet its obligation to procure such collateral support would trigger an event of default, so allowing the other parties to terminate the agreement in respect of that failing party. However, this is rarely the case in a JOA, where the provisions which define a party’s default are typically written more restrictively (2.1). 3.3

Participating interests Most concessions do not create an individual interest in respect of each concession holder. Rather, the concession will be awarded to all concession holders together, with joint and several liability (1.2). Thus, it will be a responsibility of the JOA to create the individual interests of the parties. As a result, what is sometimes called the ‘interests provision’ in the JOA will recite the participating interest (PI) of each party and each party’s PI will represent the undivided, individual interest of a party (expressed as a percentage of the aggregate of the PIs of all the parties) under the JOA in the totality of the rights and obligations which are derived from the concession.6 The PIs which apply to the parties at the outset of a JOA will be the product of negotiation between those parties. A fair legal analogy is to suggest that if the interests of the parties in the concession are held as joint tenants (being a collective, unitary interest where each joint tenant is entitled to possession of the whole of an interest which is the subject of co-ownership between a group of parties),7 then the parties sever that joint tenancy through their entry into the JOA, where the interests of the parties in the JOA will be held as tenants in common (being a separate, undivided interest where each tenant in common is entitled to a distinct share in the whole which is commensurate with its defined PI).8 Indeed, the CAPL JOA declares9 that the parties intend that their interests in the joint lands and in the joint property will be held as tenants in common.

6 7 8 9

AIPN JOA §§1.48, 3.3(A); OGUK JOA §4. Burton v Camden LBC [2000] 2 AC 399. Cowcher v Cowcher [1972] 1 WLR 425. CAPL JOA §1.05A.

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Parties and participating interests

A party’s PI will define several items under the JOA,10 notably: • that party’s required percentage contribution to the operator’s cashcalls or invoice requests (16.2) and to the costs associated generally with the JOA (which could, however, be qualified by a carried interest (see below) or in accordance with the terms of a farm-out agreement (see Appendix C)); • the percentage interest which that party has in the joint property (4.1) and the party’s entitlement to produced petroleum (9.1); and • that party’s share in the liabilities incurred under the JOA (see Chapter 12). The parties’ PIs will apply in respect of the joint operations. Where the JOA permits exclusive operations, those exclusive operations will recite their own, individual PIs as between the participating parties (5.2). The point made previously about identifying the parties over the lifetime of the JOA (see above) could be made equally in respect of tracking changes to the PIs, and similarly therefore the PIs of the parties from time to time might be recited in a schedule to the JOA, with a requirement for the operator to revise the schedule and to distribute the revised schedule to all parties in the event of any changes to the PIs. This change might also be recited through a combined novation and amendment agreement (17.3). Where the JOA is constituted by several parties, each with its own individual PI, it may be that one of the parties undertakes a programme of buying out the interests of the other parties as the opportunities to do so arise. This activity will increase the aggregate PI of the acquiring party and will reduce the number of parties in total. Taken to the extreme, this process of consolidation will result in there being one party to the concession, with a PI of 100%. The effect of this process of aggregation on the voting control regime in the JOA (7.4) should be appreciated. In the context of North American leasehold interests (1.5), the manner in which the PI of the parties is determined will necessarily be different according to the different constitutional basis for such a JOA. Thus, taking the example of the AAPL JOA by way of illustration, under AAPL JOA 610 each party will bear the costs of the joint operations and will own the produced petroleum according to the ratio of its defined leasehold interests11 (but the term ‘participating interests’ or ‘percentage interests’ is not actually used to describe such allocation). Under AAPL JOA 710, each party is expressed to have a ‘participating interest’, which is defined as the percentage of the costs and the risks of undertaking an operation which a party agrees to bear.12 Under AAPL JOA 810, each party will have what is defined as a ‘participating interest share’, which is in turn defined as the proportion (expressed as a percentage) which the leasehold interests of that party which have been pooled in the JOA bears to the leasehold interests of all of the parties which have been so pooled in the JOA (unless all of the parties agree to another basis for determining their participating interest

10 11 12

48

OGUK JOA §21.1 AAPL JOA 610 §III B. AAPL JOA 710 §§2.29, 8.1.

Peter Roberts

shares),13 and all rights, obligations, property and petroleum will be owned by the parties according to their respective participating interest shares.14 Similar provisions apply in respect of the CAPL JOA, wherein a ‘working interest’ is defined for each party as each party’s percentage undivided working interest in the defined joint lands.15 Despite these differences in the manner of determination of a party’s interest in the JOA, however, the result will be much the same as the manner of determination of a party’s PI as outlined above – the parties will agree to allocate the costs and the benefits which are associated with the joint operations between themselves, according to certain predefined percentage shares. 3.4

Government participation In respect of the relationship between the government and the parties, the conventional formulation is that the government grants the concession to the parties in their capacity as concession holders (1.1), and may have a right of approval of the form of JOA which the parties propose to adopt (1.2). Thereafter, the need for compliance by the parties with any ongoing reporting, audit or approval obligations (in accordance with the terms of the prevailing mineral law or of the concession) will represent the extent of the government’s relatively limited involvement in the JOA. It may be, however, that the government also wishes to participate in the concession as a concession holder and so could become a party to the JOA, with its own defined PI, to reflect that intended participation. The right of such government participation could be recited in the terms of the prevailing mineral law or within the concession, and might be exercised through a government entity which exists for just such a purpose. The principal necessity for such participation is usually expressed to be so that the government can secure a direct share of the produced petroleum for itself at the point of production (9.1), as a consequence of which the overall level of rent which is extracted by the government from the grant of the concession will be increased. Such participation might also be helpful to the government in that it offers a window onto the parties’ activities which might not be open to the government solely in its capacity as the grantor of the concession. This will enable the government to observe first-hand how technical, financial and management decisions are made in the context of a JOA. The government may then be able to apply these observations towards the better development of its own national oil company and to the growth of the indigenous petroleum sector. If the terms of the prevailing mineral law or of the concession oblige the concession holder to provide training, education or employment opportunities to local nationals, the information access which such a right might provide to the government might obviate the need for exercise of the participation right, if the government’s primary motivation is to secure information.

13 14 15

AAPL JOA 810 §2.51. AAPL JOA 810 §1.2. CAPL JOA §1.01.

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Parties and participating interests

Despite being on both sides of the concession, the participation of a government entity as a concession holder, with a position as a party under the JOA, should not arouse too much excitement if the government entity’s respective capacities are made clear. The government entity will ostensibly be, and will behave and be treated as, a conventional party, subject to all of the rights and the obligations which the JOA imports (except that the application of the remedy which the JOA provides in respect of a party’s default (see Chapter 14) might be more difficult to achieve in respect of a government entity). It may be that the government does not assume its position in the concession – and so its interest in the JOA – at the outset, but rather reserves an option (in the concession, and to be recited in the JOA as a reminder to the incumbent parties) subsequently to insert itself into these arrangements at a future date if it so wishes. The terms of the prevailing mineral law or of the concession will usually limit the maximum amount of participation which the government entity can so secure, and this will be reflected in the size of the government entity’s PI under the JOA. In respect of the NPD JOA, the Norwegian government has by legislation a reserved right to participate in the licensed activities through a specified management company. This right will be reflected by a corresponding participating interest in the relevant JOA, but will be applicable and effective only as a preemption right where any party transfers its interests to an entity other than an affiliate.16 If the government elects to so participate, then if there is only one party to the concession at the time of that election, it will be necessary for that party and the government entity to enter into a JOA for the first time. If, however, the concession is already held by more than one party, it will be necessary for the parties to adjust their PIs in the JOA such that the government entity’s participation is accounted for. If there is already a JOA in place, then to accommodate the government entity’s interest each party might be required to surrender a portion of its original PI pro rata to the aggregate of the original PIs17 (unless the parties elect to adopt a different contribution ratio between themselves), such that by an accumulation of those surrendered PIs, the government entity’s PI is thereby created. Typically, the government will not make payment of any consideration to the parties in exchange for the participation of the government entity. The government will typically exercise a later-occurring participation right only after the exploration and appraisal phases (4.1) have ended under the concession and the JOA, and the concession and the JOA have moved into the business of petroleum production and so revenue generation. This is so that the government entity can avoid the risk, uncertainty and expense which is associated with the exploration phase. If, however, the government exercises its participation right before that point, there will usually be a carried interest (see below), so as to protect the government entity from the economic risks of early participation in the JOA. The AIPN JOA expressly considers the prospect of the participation of a

16 17

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NPD JOA §23. AIPN JOA §3.4.

Peter Roberts

government entity in the JOA. The AIPN JOA also applies an optional formulation18 whereby, rather than admit the government entity to become a new party to the existing JOA, a separate JOA is entered into between the parties and the government entity solely in respect of the government entity’s participation. However, implementing such a subsidiary JOA adds another layer of complexity to the operating arrangements (and does little to encourage good relations between the parties and the government). If the real intention behind doing so is to frustrate the government entity’s ability to access production information within the primary JOA, then it overlooks the audit and inspection rights which the government might already have under the terms of the prevailing mineral law or of the concession. For these reasons, therefore, it is generally preferable when considering government entity participation to maintain just one JOA between all of the parties (including the government entity). An alternative formulation, which is sometimes recited, is that government participation could trigger the entry of the parties (including the government entity) into an entirely new JOA. Some commentators have suggested that having a government entity in place as a party to the concession and the JOA might help to reduce the risk of political interference with the concession and the wider petroleum project, on the basis that the government might be less inclined to affect adversely a particular project in which it has some investment. This might be true around the margins in respect of adverse government interference with projects on an individual basis, but it is not a reliable proposition and would do little to protect against government re-regulation across an entire petroleum sector. The JOA is not an investment protection agreement (even if the grantor of the concession is also, indirectly, party to the JOA through a government participation right), and should not be relied on as such. If there are wider regulatory or political issues which adversely affect the interests of the parties under the concession, there is little that the JOA can do to help. Some commentators have also suggested that having a government entity in place as a party to the concession and the JOA might help to secure some advantage in accessing infrastructure for the disposal of produced petroleum (9.3). Again, this might have a grain of truth to it in practice, but it is not a reliable operational proposition. A form of government participation will also be represented by the obligation of the parties to satisfy a domestic market obligation or the requirements of a participation agreement (9.1). 3.5

Carried interests It may be that a party can secure an arrangement whereby that party’s share (as defined by its PI) of the costs associated with the performance of certain of the joint operations will be met on its behalf (or ‘carried’) by one or more of the other parties, notwithstanding that the carried party is otherwise a full party to the JOA. Such a carried interest arrangement will typically apply during the exploration

18

AIPN JOA §3.4.

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Parties and participating interests

and appraisal phases, and is intended to protect the carried party from the risk of incurring exploration and appraisal expenditures without the promise of subsequent petroleum production and revenues which would compensate the carried party for its investment. A carried interest could be held by a private person (eg, in accordance with the terms of a farm-out agreement – see Appendix C), but the principal circumstance to consider in the context of a carried interest is one whereby a government entity elects to exercise a participation right under the concession and the corresponding JOA from the outset (see above). To protect the government entity from the risks which would ordinarily be associated with such participation, each party might (in accordance with the terms of the prevailing mineral law or of the concession) be required to contribute to the carried interest for the government entity’s share of the costs associated with the JOA, with the extent of each party’s contribution determined by reference to its original PI pro rata to the aggregate of the original PIs. Whether the carried party’s carried interest is ‘soft’ (ie, the carried party will not be required to repay the contribution of the parties to that carried interest once petroleum production begins) or is ‘hard’ (ie, the carried party will repay the carried interest from its share of the petroleum production revenues) will be a matter for negotiation between the carrying parties and the carried party. Where the carried party does repay the carry, consideration should also be given to whether that repayment should additionally include any element of uplift, so as to compensate the carrying parties for the value of the funding which they have provided. There is usually also some debate to be had around whether the carried party should be entitled to receive any operational data generally (6.3) or a vote at the OpCom (7.4) for the duration of the period in which the carried interest applies. One argument is that since the carried party is not paying its share of the costs associated with the performance of the JOA, it should have no right to a say at the OpCom (and should certainly not have the ability to render a blocking vote in respect of any proposal which is made to the OpCom), or to know the detail of the operational activities. This is similar to the suspension of rights which applies in respect of a defaulting party (14.3). On the other hand, at some point the carried interest might cease to apply and the carried party will return to the mainstream of paying its way under the JOA. At that point, the carried party might have been glad of the opportunity to comment at the OpCom and to have received certain operational data. Where the JOA imports a carried interest arrangement, it might also be provided that the carried interest is personal to the carried party and will not continue to apply if the carried party transfers its interests in the JOA to a third party. In the case of a carried interest which is held by a government entity, it may be that the carried interest will be transferred to apply to the benefit of a third party only where that third party is another government entity. The JOA will need to address this mechanism with clarity and similar issues to how an affiliate of a party is defined for the purposes of the JOA (see footnote 22 in Chapter 7) might apply in respect of the definition of such government entities. Whether the carried party or an incoming third party should be required to repay

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the amount of the carry to the carrying parties will be a matter for negotiation in the JOA. A failure of the carried party to repay the amount of the carry when required might be grounds for frustrating the intended transfer to the third party and could result in a right of pre-emption being granted to the carrying parties. This repayment obligation will not bind the third party, since it is recited in a JOA to which the third party is not yet a party, but such a repayment obligation can be expressed to be a condition of the consent of the non-transferring parties to the proposed transfer (10.2), which will achieve the same result. The relationship between the default remedy in the JOA (see Chapter 14) and the carry should be considered carefully. It might, for example, be possible that a default by the carrying party in paying the cashcalls or the invoice requests to which the carry applies could place the carried party in a position of default; in the extreme case this could result in a forfeiture of the carried party’s interests (of which the carrying party could well be a beneficiary), unless the carried party were able to make good the particular default. Although this situation might give a remedy for breach of contract in favour of the carried party against the carrying party (because of breach of the terms of the carried interest arrangement), this would not necessarily protect the carried party against the forfeiture of its interests. 3.6

Illustrative agreements It may be that the terms of the prevailing mineral law preclude any foreignincorporated entity from holding a concession interest, instead providing that only a company which is incorporated in the jurisdiction in which the concession area is located can be a concession holder (albeit that such a company might be wholly owned by a foreign-incorporated parent). It was, for example, a condition of the grant of a petroleum production licence on the UKCS before 1976 that any licenceholding company had to be incorporated and resident in the United Kingdom. Where, in turn, the tax regime of the country in which that foreign parent is incorporated allows the deduction of expenses incurred in the exploration for and production of petroleum against wider corporate group profits only in respect of a company which is incorporated in that country, it could be difficult for the company which is the concession holder to so effect the deduction of those expenses. The combination of these factors led to the introduction of a separate agreement into UKCS operations from the early 1960s onwards, known as an ‘illustrative agreement’, by which a foreign-incorporated affiliate of the party which was the concession holder agreed to provide all the necessary funding for, and to discharge all of the duties under, the relevant concession in exchange for all of the concession holder’s produced petroleum entitlements. The result of this illustrative agreement (made between the concession holder and its foreign-incorporated affiliate) was to vest the effective economic interest in the concession in that affiliate, without going so far as to require an actual transfer of the concession to that affiliate. However, the affiliate would be named as an additional party to the JOA (in reflection of its funding obligations and its petroleum entitlements). The concession holder would effectively hold the licence as a nominee, on trust for the affiliate. The concession holder would also remain party to

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Parties and participating interests

the JOA, with a recognition that the illustrative agreement had in practical terms denuded that party of any economic obligations or rights under the JOA. Thus, the terms of the illustrative agreement were made clear to all other parties to the JOA, which in turn recognised the role of the foreign-incorporated affiliate. This was not to the complete exclusion of the concession holder, however, since a default under the terms of the JOA by the foreign-incorporated affiliate would result in the potential for forfeiture of the concession holder’s interests under the concession and the JOA.

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4. Scope

The JOA is the foundation for the performance of the joint operations on behalf of the parties. To make this possible, the JOA must therefore be clear about what does and does not fall within the definition of ‘joint operations’. In the determination of the joint operations, it is essential to ensure that the scope of the JOA is written such that it addresses the execution of all activities which directly and necessarily result from the proper performance of the concession, and that it does not overlook any particular activity which the JOA should address. At the same time, however, the JOA should be written so as to ensure that its ambit does not extend to the inclusion of activities which ought properly to be undertaken by the parties in their individual capacities and not collectively through the medium of the JOA. The scope of the JOA will be determined through the inclusion of a list of identified activities which will constitute the joint operations. To amplify what is permitted under the JOA, there might also be a list of activities which are specifically excluded from the definition of ‘joint operations’. The combined aim of these provisions is to avoid a situation where the parties are in dispute about whether a particular activity should or should not be undertaken collectively as part of the activities of the JOA. 4.1

Joint operations The operational core of the JOA is founded on the performance of the joint operations by the operator (see Chapter 6) on behalf of the parties. Thus, what is meant by the term ‘joint operations’ will require some careful consideration in the JOA, since any activity which is outside of this definition will be excluded from the scope of the JOA. Correspondingly, any activity which is within the scope will be an activity which a party could be compelled to undertake (depending on how voting control is exercised in the JOA (7.4)), and so some of the parties (particularly any party with a minority interest) might also be keen not to see too expansive a scope applied in the JOA. In the simplest sense, the joint operations might be described as those activities which are necessary in order to exercise the rights and perform the obligations which result from the concession, which is reflective of the relationship of the relationship of the JOA to the concession (1.2). This simple formulation at least has the attraction of reducing the risk of the situation occurring whereby an activity is contemplated under the concession but is not recognised by the JOA, which might arise if the JOA adopted a particularly prescriptive definition of ‘joint operations’.

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Scope

This more generalised approach is illustrated, for example, by the AIPN JOA, which initially references the parties’ interests in respect of the concession1 and describes the purpose of the JOA as “establishing the respective rights and obligations of the parties with regard to operations under the concession”.2 The AIPN JOA also recites a definition of ‘joint operations’ as “operations and activities carried out by the operator…the costs of which are chargeable to all parties”.3 This is essentially an economic rather than a technical definition. In the OGUK JOA, ‘joint operations’ is defined to mean the operations which are conducted by the operator on behalf of all parties in accordance with the JOA.4 The OGUK JOA also recites that it is entered into in order to regulate operations under the licence and to define the parties’ respective rights, interests, duties and obligations in connection with the licence, and in connection with the petroleum produced under the licence.5 The AAPL JOA does not contain a specific definition of ‘joint operations’, while the CAPL JOA simply refers to a ‘joint operation’ as being an operation which is authorised and conducted under the terms of the JOA for the joint account.6 Alternatively, the JOA might apply a more technical definition of what constitutes ‘joint operations’. For the sake of analysis, this could be derived by reference to the distinct operational elements of a typical petroleum project which could apply over the lifetime of the concession, which would in turn define the lifecycle of the JOA (although not all of the following activities would necessarily be expressly included within the scope of the JOA): • Exploration – the process of exploring for a petroleum deposit within the concession area (carried out, for example, through a combination of exploration drilling, seismic surveys, core sampling, magnetic and sonic audits and surface area mapping). • Appraisal – the testing of the potential productivity of any petroleum deposit which has been discovered by the exploration activities. • Pre-development – the preparation of a relatively detailed development plan for any petroleum deposit which has been discovered and appraised and which has the appearance of being commercially viable. The development plan may also be required under the terms of the concession as a condition of making a declaration of commerciality for the relevant petroleum deposit, as a precursor to the conduct of petroleum production operations within the concession area. • Development – the readying of the relevant petroleum deposit for the production of petroleum, through the design, engineering, construction, installation and commissioning of any necessary petroleum production, processing, storage or transportation infrastructure (which has been

1 2 3 4 5 6

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AIPN JOA recitals. AIPN JOA §3.1A. AIPN JOA §1.39. OGUK JOA §1.1. OGUK JOA recitals. CAPL JOA §1.01.

Peter Roberts

•

•

•

identified in accordance with the development plan). The reference here to processing, storage and transportation is intended to capture these activities only insofar as they are ancillary to the production of petroleum and not the exercise of these activities as commercial activities in their own right. Production – the period of time during which petroleum is produced from the relevant petroleum deposit, through the ongoing operation of any installed petroleum production infrastructure, and also the application of any processing, storage or transportation infrastructure. Disposal – the physical disposal of petroleum which is produced from the relevant petroleum deposit, through making that petroleum available to the parties for lifting and taking of delivery at a defined delivery point (9.1), and the subsequent transportation of that petroleum. Decommissioning – the decommissioning and removal of any petroleum production, processing, storage or transportation infrastructure used in the production of petroleum, after the production of petroleum from the relevant petroleum deposit has ended.

However, the distinction between these elements is rarely so clear-cut in practice. The exploration and appraisal activities (including any pre-development activity) are typically undertaken as a combined exercise, and the development, production and disposal activities are often applied together. Apart from reflecting the operational realities of the business of exploring for and producing petroleum, this compression of events also mirrors what is customarily recited in the concession, wherein the concession holder’s defined exploration phase obligations will typically include appraisal and pre-development activities and the production phase will include the development and the disposal (and possibly also decommissioning) activities together. Moreover, in the lifecycle of a petroleum project one particular part of the concession area can be explored, appraised, developed and brought into production ahead of another area, which other area then undergoes the same process at a much later point. Similarly, the decommissioning of certain items of infrastructure can take place at the same time as certain new items of infrastructure are being installed elsewhere in the concession area. It is also possible that an exploration well, although it indicates the presence of commercially viable quantities of petroleum, can be plugged and abandoned and only later developed and brought into production. Thus, over the lifetime of a concession the various operational activities recited above may be occurring at varying stages and the JOA will need to cater for such a sequenced approach. The AIPN JOA specifically references the activities of exploration, appraisal, development, production and disposal of petroleum (but not the decommissioning of the relevant infrastructure, except that this is recited as an option in the Australian commentary on the AIPN JOA (1.4)) within the definition of the scope of the JOA.7 7

AIPN JOA §3.1(A).

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Scope

Similarly, the OGUK JOA is described as applying to the activities of exploration, appraisal, development and production of petroleum under the concession, and also to the processing, storage and transportation of petroleum through infrastructure used for the joint operations and to the decommissioning of infrastructure used for the joint operations.8 Furthermore, there are options in the OGUK JOA to include other activities as joint operations which might, in a more conservative JOA, be defined as ‘excluded operations’ (see below). What constitutes the joint operations might also be defined by reference to the nature of the commodity to which the concession, and so the JOA, refers. Principally, this will be petroleum, which can include natural gas, liquids or crude oil of varying degrees of viscosity (including heavy oil). The JOA might specifically exclude itself from application to the commercialisation of any forms of mineral interests other than petroleum (eg, coal or bitumens to be produced onshore by surface or subterranean mining operations), although some model form JOAs expressly countenance this possibility too (1.4). The AAPL JOA adopts a broad definition of its scope, by reference to governing the rights and obligations of the parties, without limitation, to the exploration, appraisal, development, operation, production, treatment gathering and storage of hydrocarbons9 (which in turn are defined as oil, gas, associated liquids and gaseous by-products (excluding helium)).10 In the CAPL JOA, the scope is defined by the operator’s responsibilities in respect of the exploration, development and operation of the joint lands and the construction, installation and operation of any production facilities,11 with a partial exclusion from the scope of the JOA in respect of contracting for any gathering, processing or transportation services.12 The definition of ‘petroleum’ for the purposes of the CAPL JOA includes petroleum (which is undefined), but also natural gas (including natural gas from coal or shale), and any other mineral or substance which the underlying title documents allow to be explored for, developed or produced.13 Particular operational considerations will apply where the JOA is intended to apply to the recovery of coal bed methane (CBM) and/or abandoned mine methane, although the experience of parties that elect to form a joint venture to exploit those commodities is typically to take a conventional form of petroleum JOA and to modify it to suit (note also the existence of the AAPL JOA addenda for CBM projects (1.4)). The scope of the JOA can also be derived from what is permitted and/or required under the terms of the concession (or any other relevant permits or approvals). Thus, if the concession is granted only in respect of the activities of exploration for and production of petroleum (and directly ancillary activities, such as essential petroleum transportation, processing and interim storage), then the scope of the JOA might be similarly limited.

8 9 10 11 12 13

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OGUK JOA §3.1.1. AAPL JOA 810 §1.1 AAPL JOA 810 §2.37. CAPL JOA §3.01. CAPL JOA §6.01 B. CAPL JOA §1.01.

Peter Roberts

However, if other permits have been granted to the parties for other, wider activities (eg, commercial petroleum transportation, processing or storage), the scope of the JOA might be extended accordingly. Another alternative to consider, therefore, is that the scope of the JOA is written to include the possibility of future activities which are not presently permitted under the terms of the concession, but which might be later permitted through successful application for another concession, permit or approval. The JOA might also be used as a vehicle for the management of a pipeline system or a processing facility which is owned by a group of persons. Those owners could appoint one of their own to be the operator of the relevant infrastructure, with responsibility for providing the necessary operational and maintenance services and managing any third-party access arrangements. Such a JOA would necessarily differ from the form of JOA used for petroleum exploration and production activities in that, for example, there would be only operational and decommissioning phases (see below), and no provision for exclusive operations (see Chapter 5). Such an arrangement might also be a candidate for the designated operator to charge a fee rather than operating in accordance with the customary no gain/no loss principle (6.1). There might be a temptation among some of the parties to stretch the scope of the JOA, by judicious interpretation rather than express amendment, so as to encompass commercial activities which were not originally envisaged in the scope. This might be workable where all parties are in favour of such an extension, but if there is any disagreement between the parties about the scope of the JOA, the the integrity of the JOA will be impaired and an express amendment to the scope – or even a fresh collaborative agreement to cover the additional scope – will be preferable. Whether the parties can vote to change the definition of ‘joint operations’ during the lifetime of the JOA will need to be considered. This is potentially an item of such gravity that unanimity of voting might be appropriate (7.4), although the particular JOA might take a different view. It is also possible to say that the scope of the JOA might be defined as much by the ancillary arrangements which the parties have entered into in respect of their petroleum project (eg, any crude oil lifting or natural gas balancing agreements (9.2), decommissioning security arrangements (13.3), and even any collaborative agreements which precede the JOA (2.3)), as by the JOA itself. The joint operations will also result in the creation of what is often referred to in the JOA as ‘joint property’, which will belong to the parties. This definition covers physical infrastructure, materials, data, funds and any other property which is used by the parties in, or generated by the parties from, the joint operations.14 Any award which is made by a government agency in respect of the expenditure to be incurred under the JOA (eg, an incentive scheme to encourage petroleum exploration and production) will be joint property where it is attributable equally to all of the parties, but will be personal to a party where it is made on that basis. 14

AIPN JOA §1.40; CAPL JOA §1.01; OGUK JOA §1.1.

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Scope

Joint property can be disposed of by the operator, subject typically to OpCom approval (7.4) and the net sales proceeds accruing to the parties. 4.2

Excluded operations Beyond defining the joint operations, the JOA might also go on to recite a collection of activities which the parties expressly agree will not be undertaken as joint operations, unless the parties otherwise agree. These ‘excluded operations’ might, for example, include any of the following activities: • Other concessions – any association with the acquisition or the development of proprietary interests other than the concession (or concessions) to which the JOA relates (except where this activity takes place within the context of a unitisation exercise (see Appendix D)). • Downstream infrastructure – the ownership, operation or usage of infrastructure beyond a defined point (eg, downstream of the delivery point at which produced petroleum is made available to the parties for disposal (9.1)). • Third-party access – the facilitation of third-party access to any incremental capacity in any petroleum production, processing, storage or transportation infrastructure which is used for the joint operations. • Joint sales – the joint marketing of petroleum which is made available by the operator to the parties for disposal at the delivery point (9.1), although exceptions might be made to this principle to apply where there is a default under the JOA which necessitates a forced sale of petroleum by the operator (14.3) or where the operator sells a party’s petroleum entitlements in order to prevent an underlift situation (9.2). • Other mineral interests – the exploitation of mineral interests other than petroleum (see above) which have been discovered in the concession area. • Financing – the arrangement of financing on behalf of any party so as to meet the costs to a party of performing the obligations under the concession. The rationale for excluding these items from the scope of joint operations under the JOA is that some of the activities are not sufficiently connected to the fundamental business of exploring for and producing petroleum, or to the management of the interests created by the concession, to be relevant to the JOA (eg, in the case of the first, fifth and sixth items above), or that as activities they are essentially commercial in value to each party; and in each case should instead be undertaken by a party in its personal capacity as such and not collectively by all parties (eg, in the case of the second, third and fourth items above). There might also be competition law concerns associated with the collective performance by the parties of the latter group of items, which would further require that they be undertaken individually. The AIPN JOA lists a number of excluded operations, including the management of infrastructure downstream of the point at which the produced petroleum is made available to the parties; the transportation of the parties’ petroleum entitlements downstream of the same point; the joint marketing of petroleum (subject to some

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exceptions); the acquisition of proprietary interests for the exploitation of petroleum outside the concession area; and the exploitation of minerals other than petroleum.15 Similarly, in the OGUK JOA the list of specifically excluded operations includes joint financing and the joint marketing of petroleum; consideration of the commercial terms for the use of third-party owned infrastructure for the processing, storage or transportation of produced petroleum; and consideration of the commercial terms for the use by third parties of the infrastructure used for the joint operations.16 The only expressly excluded item in the scope of the AAPL JOA is the fabrication or installation of export pipelines.17 Another area which often causes confusion is to the extent to which exclusive operations under the JOA (see Chapter 5) should also be regarded as joint operations. The JOA should make it clear that the definition of the conditions for whether exclusive operations can be undertaken by the parties is a valid candidate for inclusion within the list of joint operations (this is the view taken by the OGUK JOA).18 This thesis is reinforced by a recognition that so many of the terms of the JOA will be deemed to apply to any resultant exclusive operation. Yet once an exclusive operation is underway, it will (rightly) be regarded as an activity which is outside the mainstream of the joint activities under the JOA. There is therefore an obvious (but reconcilable) paradox which emerges through saying that an exclusive operation is not a joint operation, but should nevertheless be included in certain respects within the definition of ‘joint operations’ for the purpose of defining the scope of the JOA. 4.3

Expanding the JOA’s scope As previously noted (1.7), the JOA should be regarded as a living contract which governs the terms of a long-term relationship which will inevitably evolve during its currency. Consistent with this, it is useful to keep a weather eye on what activities properly should from time to time be considered as candidates for addition to (or, possibly, removal from) the list of joint operations. The OGUK JOA represents something of a sea change in the definition of the scope of the JOA. Most JOAs employ a combined definition of ‘joint operations’ and ‘excluded operations’ which limits the interests of the parties to a relatively narrow scheme of petroleum exploration and production activities and in respect of a relatively limited amount of infrastructure, and most JOAs are keen to preclude the possibility that any activities downstream of the delivery point might come within the definition of ‘joint operations’. Certain activities can be cited as excluded activities and will be expected to be managed by each party individually, rather than collectively under the JOA, because of the professed need to maintain clear commercial separation between what are, after all, competing parties, but the high morality of this concern must be reconciled

15 16 17 18

AIPN JOA §3.1(B). OGUK JOA §3.1.2. AAPL JOA 810 §1.1. OGUK JOA §3.1.1.

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with the reality of how the arrangements for the performance of these activities are often implemented. As an example of this, the operating assumption of the typical JOA is that the production of petroleum is the primary joint activity, and that each party will take delivery of its petroleum entitlements at the defined delivery point (9.1) and thereafter will make its own arrangements for the transportation of that petroleum downstream of that delivery point. The practical reality, however, is that there will rarely be multiple means of transporting that petroleum and so all of the parties might well end up using the same transportation infrastructure. Each party can negotiate its own transportation agreement, but this duplication of effort across the parties is wasteful and so the more sensible (and oftenencountered) alternative is that the operator will negotiate the transportation arrangements on behalf of all parties. The resultant agreements might be executed between each party and the relevant third parties as individual agreements (albeit with identical terms) rather than as a joint agreement, but the truth is that a substantial element of the negotiations will have been carried out collectively between, or on behalf of, the parties. The same principles will apply to regulate third-party access to incremental capacity in the infrastructure which is used for the performance of the joint operations. Another practical point is that even if an activity is classified as an excluded activity under the JOA, the parties can nevertheless elect to undertake at least some of the excluded activities together, using separate commercial arrangements outside the vehicle of the JOA. The OGUK JOA has made a modest departure from the traditional JOA construction by providing for the possibility of the parties making an election in the drafting of the JOA whereby the definition of ‘joint operations’ under the JOA can also include consideration of the technical and operational issues associated with the processing, storage and transportation of petroleum through third-party infrastructure (ie, downstream of the delivery point), and also consideration of the technical and operational issues associated with the use by third parties of the infrastructure used for the joint operations.19 This is not a wholesale revision of the traditional JOA position, as the list of excluded operations in the OGUK JOA still includes consideration of the commercial issues associated with such processing, storage and transportation of petroleum, and with the commercial issues associated with the use by third parties of such infrastructure.20 These commercial (rather than technical and operational) issues will therefore still need to be addressed by each party in its own individual capacity, in light of the continuing competition law sensitivities around the joint negotiation of commercial terms (unless the parties decide otherwise). Under the AAPL JOA, the parties may engage in negotiations for the use of thirdparty owned infrastructure for the processing of their petroleum21 and the parties can

19 20 21

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also address the use by third parties of any incremental capacity in the joint property.22 Under the CAPL JOA, provision is also made for the parties to be able to negotiate rights of access to any incremental capacity in any joint property infrastructure.23 The OGUK JOA also introduces a concept24 whereby there could be an agreement which is beyond the ordinary scope of the JOA and which is identified, generically or specifically in a schedule to the JOA, as an ‘associated agreement’. Such an agreement might, for example, govern the use by a third party of the infrastructure which is used for the performance of the joint operations or an agreement which governs the joint use by the parties of any infrastructure which is owned by a third party. If the JOA is applied to such an associated agreement, then it will come within the scope of the JOA such that the costs associated with that associated agreement can be charged by the operator to the joint account, to be borne between the parties in accordance with their respective PIs, and so that the operator can benefit from the exclusion of liability which it typically enjoys under the JOA (12.1) for the operation of the associated agreement on behalf of the parties. However, any constitution between the parties whereby the vehicle of the JOA would be used as a basis for selling incremental infrastructure capacity to third parties for commercial gain, which would then be distributed between the parties, should cause the parties to be nervous of the suggestion that they might thereby be effecting an arrangement which is more akin to a partnership (see Appendix B). Recognising that some of these activities could safely be brought within the ambit of the JOA could improve the usefulness of the JOA to the parties. This approach – which affords some appreciation of the need to recognise that the parties have an eye to the wider commercial opportunities and that there is a world downstream of the delivery point – represents the welcome emergence of an intelligent response to a particular hypocrisy which sometimes manifests itself when the parties draw up the list of excluded items in the scope of the JOA. Consideration should also be given to whether the definition of ‘joint operations’ might also include activities such as review between the parties of proposals for the modification of the concession (both during its lifetime and at the end of its duration, when it might be recast from governing petroleum production to governing petroleum storage), or the implementation of a unitisation programme which involves the concession area (see Appendix D). These are each items which will be of obvious interest to the parties and in respect of which the application of the negotiation mechanics of the JOA could be helpful, and yet they are also items which are often overlooked when the definition of ‘joint operations’ is negotiated within the JOA. Further examples of commercial activities which might be considered as candidates for inclusion in the scope of the JOA (or through separate collaborative

22 23 24

AAPL JOA 810 §14.4. CAPL JOA §14.03. OGUK JOA §3.1.3.

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agreements between the parties) are consideration of the use of the petroleum reservoir, once it has been depleted through production, as a storage sink for carbon capture and injection, and the ability of the operator to trade carbon emissions credits which are attributable to, or required in respect of, the operations under the JOA on behalf of the parties25 to the extent required by applicable law.26 This all depends on the width of the commercial scope which the parties wish to embrace within their JOA. Thus, for example, some JOAs also reference the additional activity of power generation (using the natural gas which is produced under the concession) as part of the JOA’s scope.

25 26

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OGUK JOA §21.3. See, for example, the requirements of the EU Emissions Trading Scheme Directive (2003/87/EC), which was enacted into English law by the Greenhouse Gas Emissions Trading Scheme Regulations 2005 (SI 2005/925).

5. Exclusive operations

As the title of the agreement would suggest, the JOA is intended to be a vehicle by which certain operations will be undertaken jointly between all parties. This expectation goes to the very heart of the JOA. There may be circumstances during the lifetime of the JOA where the parties’ interests might not be aligned, such that they do not all wish to participate in a particular joint operation. Despite this divergence of interests, however, the JOA might also cater for the situation where an operation need not be participated in by all of the parties (and would not properly be a joint operation), but where such participation would still be governed largely by the terms of the JOA. These ‘exclusive operations’, as they are customarily known, represent something of a hybrid between joint operations and the party-specific operations which might fall within the definition of ‘excluded operations’ (4.2). 5.1

Defining ‘exclusive operations’ Because the parties to the JOA will have different PIs and will be of different characters, with different degrees of financial capability and differing views of the importance of the petroleum project to which the JOA relates (both in its own right and in relation to other project interests which they might have), some misalignment of the interests of the interests of those parties over the lifetime of the JOA is inevitable. The JOA might cater for this misalignment by recognising that from time to time the parties might require that their commitment to the performance of the joint operations be tempered through the exercise of certain rights in respect of exclusive operations. The concession typically does not concern itself with the ability of the concession holders to conduct exclusive operations. The concession’s expectations will relate to the performance of the minimum work obligations (1.1) and thereafter to the production of the greatest possible quantities of petroleum, from which the government would expect to benefit. However, in the horizontal relationship between the concession holders which the JOA represents, the undertaking of joint operations and exclusive operations are both means by which the concession’s expectations might be realised. The AIPN JOA applies an essentially economic definition to ‘exclusive operations’, as an operation wherein the costs of that operation are chargeable to the accounts of less than all of the parties.1

1

AIPN JOA §1.27.

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‘Exclusive operations’ are sometimes also defined broadly as any operation which is undertaken by less than all of the parties acting together. This is definitionally correct, if somewhat prolix, and applies equally to non-consent operations and to sole risk operations. ‘Exclusive operations’ are sometimes also referred to variously as ‘sole risk’ or as ‘non-consent’ operations. An examination of the perceived and the actual differences between these two terms might be helpful in better appreciating the true nature of their distinction (if any): • Non-consent – to define the position regarding non-consent operations first, the situation might arise under the JOA where a proposed operation has been duly approved by the OpCom as a joint operation to be undertaken by all of the parties (determined by the passmark for voting at the OpCom (7.4)), where a party had voted against that proposed operation but to no effect, which then results in the reluctant party being voted into a commitment to the performance of a joint operation which that party is unwilling to undertake. If the JOA contains a non-consent provision, then the reluctant party can subsequently elect (within a defined period of time) not to participate in that joint operation, such that the joint operation is undertaken only by the reduced group of parties that do wish to participate and that did not vote in favour of the proposal at the OpCom. This nonconsent right could be a particularly attractive option for a party with limited financial resources or for a party for which investment instead into another (competing) JOA relationship might be a more attractive proposition. A non-consent operation therefore begins its life as an OpCom-approved proposal for a joint operation and then becomes an exclusive operation when any party exercises its non-consent right and elects not to participate. The non-consent election might be made by a party in respect of the submission by the operator of a work programme (8.1), but because that work programme might have insufficient detail to allow a party to make an informed decision about a potential non-consent election at that time, the non-consent election could be made by a party later, at the stage when the operator proposes or seeks approval for a more detailed authority for expenditure (8.2). • Sole risk – to define the position regarding sole risk operations, the JOA might adopt a formulation whereby when a proposal has been made to the OpCom for approval of a joint operation, but has failed to secure the necessary approval of the parties to be conducted as a joint operation (in consequence of either a failure to achieve the necessary passmark for voting at the OpCom or a failure to achieve the necessary unanimity of voting where the JOA so requires (7.4)), any party that nevertheless was in favour of the proposed operation may subsequently elect (within a defined period of time) to re-propose that operation to be undertaken at its sole risk, without the involvement of any of the parties that were originally not in favour of the proposal.

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The common theme between non-consent operations and sole risk operations is that they both start their life as a proposal to the OpCom for the performance of a joint operation. The non-consent operation becomes an exclusive operation if any party elects not to be bound into the approval of the OpCom for that proposal, while the sole risk operation becomes an exclusive operation if it has been rejected by the OpCom but a single party elects to take that proposal forward on its own account (in each case, subject to the JOA allowing such options to be exercised). It could also be the case that more than one party makes a non-consent election or pursues a sole risk proposal, such that the resultant sole risk operation is undertaken, or the resultant non-consent election is represented, by a group of parties, or that at any one time there are competing proposals, which could become competing exclusive operations which the parties might need to select between. Despite the effort which is often expended in negotiating or applying the terms of a JOA in respect of non-consent or sole risk operations, both such operations are simply operations which are undertaken by less than all of the parties. There could be circumstances where what is perceived to be a non-consent operation could equally be classified as a sole risk operation, and vice versa, as illustrated by the following example. In a JOA, where the PIs are held by Party A (60%) and two other parties (B and C, with 20% each), the voting passmark for the approval of joint operations is 60% (with no requirement for a minimum number of voting parties). The OpCom approves a proposal for a joint operation which was voted in favour of by Party A and voted against by Parties B and C. Parties B and C subsequently exercise their non-consent rights in respect of the proposed joint operation and Party A undertakes the proposed joint operation for its own account. Two of the three parties to the JOA have therefore elected to exercise a non-consent right in respect of the joint operation, which becomes akin to a sole risk operation undertaken by Party A. In the same JOA the OpCom later rejects a proposal for a joint operation which was voted in favour of only by Parties B and C. Parties B and C subsequently exercise their sole risk rights in respect of the proposed joint operation. Two of the three parties to the JOA have therefore elected to undertake the sole risk operation, which becomes akin to a non-consent right exercised by Party A in respect of that operation. The essential point to note with any exclusive operation is that despite the participation of less than all of the parties together in that operation, the terms of the JOA will (largely) continue to apply to that operation as if it were a joint operation.2 This position can be contrasted with an excluded operation (4.2), to which the terms of the JOA will not apply. The AIPN JOA provides a mechanism whereby a party can propose an operation which the other parties are then free to participate in or not as they prefer, such that the proposing party may then proceed with that operation in its own right as an 2

AIPN JOA §7.12(A); OGUK JOA §15.2.10.

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exclusive operation if there is not universal support for the proposal.3 This is effectively a hybrid non-consent and sole risk right, as a party receiving the proposal can elect to participate, or not to participate, in that proposal upon replying within a defined period of time (and will be deemed to have elected not to participate if does not so reply), akin to a non-consent provision. If all the parties elect to participate in the proposal, it will be constituted as a joint operation; if they do not, it will be taken forward by the proposing party as a sole risk operation. Under the OGUK JOA, there is a sole risk provision, applicable to any of four different categories of works: seismic works; drilling works (whether exploration or appraisal drilling); testing works; and the development of a discovery.4 In the OGUK JOA, any proposal which is taken to the OpCom, initially as a proposed sole risk operation, and in respect of which a sufficient number of parties have voted up to the requisite passmark, will thereupon become a joint operation, but if the passmark is not achieved then the proposal will be undertaken only by the parties that voted in favour of it, as a sole risk operation.5 There is no non-consent provision, although the guidance notes to the OGUK JOA do offer a draft of a short-form non-consent provision if the parties desire to amend the standard JOA form.6 Under the AAPL JOA, a non-consent right, but not a sole risk right, exists.7 The CAPL JOA adopts a formulation known as ‘independent operations’.8 Under this mechanism, any party can serve notice upon the other parties of its intention to conduct a particular operation, whereupon each other party may elect to participate, or not, in that operation. This might appear similar to the combined non-consent and sole risk provision from the AIPN JOA (see above), but it goes beyond that, since the mechanism can also be used by the operator to propose an operation which can be taken up by all the parties and thereby become a joint operation. The independent operations provision is a combined mechanism by which joint operations are proposed by the operator and can be performed as joint operations, and can be subject to a non-consent election by any party, and by which a sole risk operation might be proposed by any party. Not every JOA will contain a non-consent provision or a sole risk provision (at least, not by reference to the distinct contractual iterations which have been outlined above). These are not universally accepted provisions in the negotiation of JOAs and even if they do exist, their intended manner of application can often prove difficult to achieve in practice. The reality is that exclusive operations provisions in a JOA are more usually used to apply some leverage in the negotiation of proposals at the OpCom than in actual application. That said, however, the likely rarity of the use of an exclusive operations provision should not be used as an excuse for not putting the effort into drafting it properly in the first place where the parties have agreed to insert such a provision into the JOA.

3 4 5 6 7 8

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AIPN JOA §7.2. OGUK JOA §15. OGUK JOA §15.3.4. OGUK JOA §15.9. AAPL JOA 810 §16. CAPL JOA §10.

Peter Roberts

The reality is that the practical application of an exclusive operations provision under the JOA can prove troublesome and complex (not least since such provisions are not always drafted properly), and this could be a disincentive to the parties actually to exercise their rights if such a provision does exist. Consequently, the execution of an exclusive operation remains a relatively rare occurrence. 5.2

Exclusive operations mechanics Any provision in the JOA for exclusive operations should address certain practical issues, which are considered below. These issues will be of equal application to nonconsent rights and to sole risk rights, except where otherwise indicated.

(a)

Permitted and prohibited exclusive operations The JOA might set out a summary of the types of operation which can be undertaken by less than all of the parties9 and will typically prohibit any exclusive operations from being undertaken which might otherwise conflict with any already approved joint operations or exclusive operations10 (such that joint operations take precedence over exclusive operations and exclusive operations are ranked according to the order of their existence). This should be relatively easy to accommodate where the proposed exclusive operation is, for example, the drilling of a discrete exploration well or the undertaking of an entire development, but it could be harder to separate out an exclusive operations activity such as the appraisal of a well which has already been drilled as a joint operation, where it will be difficult to make a fair allocation of any resultant petroleum production between the parties to the original joint operation and those parties that later participated in the exclusive operation. The application of a non-consent right in respect of a high-cost development will also impose a disproportionately large cost burden on the participating parties, which might therefore lead to provision in the JOA that the non-consent right be disapplied for defined major expenditure items. The JOA will usually also specify a minimum series of operations which must be undertaken unanimously by all of the parties as joint operations, in respect of which a party will not have the right to non-consent or to undertake a sole risk operation. These operations will usually correspond with the performance of the minimum work obligations which are required under the terms of the concession (1.1),11 and should also encompass the decommissioning provisions in the JOA (see Chapter 13).

(b)

Allocation of costs and profits The JOA will provide that the costs (including the costs of effecting any necessary insurances (17.7)) of performing an exclusive operation will be borne only by those parties that have elected to so perform that operation, and that any profits which flow from the exclusive operation (in the form of resultant petroleum) will correspondingly be applied only in favour of those same parties, since the exclusive

9 10 11

AIPN JOA §7.1(D). AIPN JOA §7.1(A)(B); OGUK JOA §§15.2.2, 15.2.3. AIPN JOA §7.1(B); OGUK JOA §15.2.4.

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operation is a discrete operation under the JOA which a party which has elected not to participate will not be obliged to contribute to or entitled to benefit from.12 Consequently, it will be apparent that any exclusive operation needs to be defined very carefully and accounted for separately (16.2), such that it can be readily distinguished from the interests of the parties under the joint operations or under any other exclusive operations. This separation of accounting will be a responsibility of the operator (16.2).13 The allocation of costs and profits between the parties participating in the exclusive operation could be made according to whatever basis the participating parties have so agreed between themselves or according to a formula whereby each participating party’s original PI in the exclusive operation will be pro rata to the aggregate of the PIs of all of the parties that are participating in the exclusive operation.14 The principle will also be recited that any default by a participating party in meeting a cashcall or an invoice request in respect of an exclusive operation should lead only to the application of the default remedy (see Chapter 14) by the nondefaulting parties in, and in respect of the defaulting participating party’s interests in, the exclusive operation and not in respect of the wider JOA interest. However, this relatively simple statement masks an operational difficulty which relates to how to effect the forfeiture of the defaulting party’s interests in the concession and the JOA as a whole for a default under a separated exclusive operation. This complexity is rarely addressed in detail in the JOA. (c)

Governance of exclusive operations The JOA usually provides that the terms of the JOA will apply, mutatis mutandis, to any exclusive operation. In practical terms, supervision of the exclusive operation will be effected through a committee of the participating parties (effectively a miniOpCom – see 7.1) That said, exceptions to the complete application of the JOA’s terms might be made in respect of the appointment of the operator for the performance of the exclusive operation (see below), the liability regime which applies in respect of the exclusive operation (see below) and how confidential data which is generated in respect of the exclusive operation is treated (17.1). Some commentators suggest that a separate JOA might be entered into between any group of parties that together are participating in an exclusive operation, solely in order to govern their inter-relationship in respect of the exclusive operation, but this is not widely encountered in practice because of the additional level of contractual complexity which it entails (and particularly through the need to record the manner in which that secondary JOA would be subordinated to the principal JOA and to address how any conflicts between the two JOAs might be reconciled). If the exclusive operation is of an entire development which is taken forward without the buy-back (see below) of the non-participating parties, that development

12 13 14

AIPN JOA §7.4(B); OGUK JOA §15.2.1. AIPN JOA §7.12(C); OGUK JOA §15.2.10. AIPN JOA §7.2(E); OGUK JOA §15.2.1.

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will effectively be a sub-area within the JOA. This development could continue to be managed under and separately accounted for through the JOA, or alternatively there might be some sub-division of interests which is effected in respect of that sub-area (see Appendix E). (d)

Allocation of liabilities The parties participating in an exclusive operation should undertake to indemnify fully all non-participating parties in respect of any liabilities which those nonparticipating parties might incur in consequence of the conduct of the exclusive operation. This bespoke liability regime could be an exception to whatever the customary intra-party liability regime is under the JOA (12.2). Whether this indemnity regime should extend to include a liability of the participating parties to indemnify the non-participating parties for any consequential losses which those latter parties have suffered in consequence of the exclusive operation will be a matter for negotiation in the JOA. On the one hand, it might be fairer to exclude such consequential loss liability on the basis that to do so would be in keeping with the wider liability regime in the JOA and the manner in which that regime deals with consequential losses (12.1). Alternatively, it might be regarded as more equitable that the consequential loss liability should apply, since the non-participating parties might otherwise be exposed to a loss which has arisen through no fault or participation of their own.15 This latter proposition is perhaps more tenable in respect of a sole risk operation, where as a matter of principle the sole risk participants should be fully responsible for all of the losses and the liabilities which their enterprise has generated. In contrast, in respect of a non-consent operation it is perhaps more readily arguable that the non-consenting party should not be so protected in respect of any consequential losses which it suffers because it has benefited from the right to elect not to participate, and it would have been subject to that liability if the JOA had not afforded the luxury of a non-consent election and it had been obliged to so participate in the relevant operation from the outset. As a limited exception to the principle that the participating parties will not be liable for any consequential losses which they cause, if the production of petroleum through the joint property is interrupted in order to facilitate the installation of any facilities which are required in connection with the exclusive operation, then the participating parties might be required to compensate the non-participating parties for the losses which they suffer as a result of that installation.16 Consideration should also be given in the JOA to the reaction to the extreme (and hopefully unlikely) situation of where the manner of the performance of an exclusive operation by the participating parties results in grounds for revocation of the concession by the government arising (depending on the terms of the concession). The extent of the indemnity which might be required by the nonparticipating parties to compensate them for such a loss could obviously be

15 16

AAPL JOA 810 §22.6; AIPN JOA §7.3(A); CAPL JOA §10.18; OGUK JOA §15.2.5. AIPN JOA §7.10.

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significant, and potentially more than the participating parties could bear. Once again, this is a complexity which is rarely addressed in detail in the JOA. By the same token, the costs of decommissioning (see Chapter 13) of the exclusive operation will fall to be borne by the participating party (or parties), and an indemnity in respect of any exposure which the non-participating parties might have to these costs could be appropriate. (e)

Buy-back rights The JOA will usually grant, in favour of each party which has elected not to participate in an exclusive operation, a limited right subsequently to reinstate its interests in that operation through buying back in (and if this right is exercised by all non-participating parties, the exclusive operation will effectively be reconstituted as a joint operation). In essence, the buy-back right is similar to the non-participating party having a hard carried interest with an uplift (3.5), in that the non-operating parties are relieved of the costs of participation, but can later become participants upon repaying the forgone costs, with a premium. Some JOAs seek to make the exercise of a buy-back right more difficult in the case of a non-consent election, or even seek to preclude that right from applying altogether, on the basis that the original dissent of the non-participating party should burden that party for evermore. This is done in the interests of deterring a party from electing to non-consent at the outset and so to help preserve the cohesion of the joint operations. It might be perceived as unfair to the parties which have assumed the risk of participation in an exclusive operation to have the non-participating parties be given an open right subsequently to participate in that exclusive operation when that operation is in hindsight proved to be successful, and two devices in particular might be adopted in the JOA to condition the buy-back right: • Application periods – there may be a discrete and limited number of times that a non-participating party can exercise a buy-back right, notably within defined periods of time when any further steps are taken in the development of the exclusive operation, rather than that there is an open right of a nonparticipating party to buy back at any time during the conduct of the exclusive operation.17 • Buy-back costs – if a non-participating party wishes to exercise a buy-back right, then as a condition of doing so it will have to pay not only its share of the costs which it would have paid if it had participated but which were incurred by the participating parties in undertaking the exclusive operation (such that all of the participating parties and the buy-back party are restored to the position that they would have been in had the buy-back party elected to participate in the exclusive operation from the outset), but also a premium to the costs which were incurred by the participating parties.18 Such a premium can be significant, and it is not unusual to encounter a premium

17 18

AIPN JOA §7.4(C); OGUK JOA §§15.4.6, 15.6.2, 15.6.3, 15.7.6, 15.7.7. AIPN JOA §7.4(E).

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which has been calculated in the hundreds of per cents – sometimes even in the thousands of per cents – of these costs, often with different rates of premium applying between the various categories of work undertaken in pursuit of the exclusive operation. The costs and the premium which are payable by the buy-back party could be met through the payment of cash (whether by lump sum or instalments), by the delivery to the original participating parties of the buyback party’s produced petroleum entitlements, by the commitment of the buy-back party to pay certain of the future cashcalls or invoice requests which would otherwise be due to be borne by the original participating parties, or through any combination of these options. The buy-back premium is sometimes described as a penalty, intended to be reflective of its role as a disincentive to a party’s decision not to participate in an exclusive operation from the outset. However, this is an unfortunate turn of phrase and should be avoided. Upon completion of the exercise of a buy-back right, it may be necessary for the original participating parties retroactively to account in favour of the buy-back party for the allocation of any petroleum which was produced and commercialised during the period of the exclusive operation, depending on what the JOA provides for. Thus, the JOA could oblige the original participating parties to reimburse to the buy-back party such measure of the produced petroleum which equates to the buy-back costs (but not any premium) which have been paid. Alternatively, if the buy-back election is effected prior to the commencement of the production of petroleum from the exclusive operation, then any petroleum which is later produced under the exclusive operation will be allocated between all of the participating parties (both the original participating parties and the buy-back party) from the onset of production. This will all be a matter for negotiation in the JOA. The ongoing decision of a party not to participate in an exclusive operation, which is not remedied by the non-participating party’s election to buy back into the exclusive operation in accordance with the terms of the JOA, will be akin to a partial withdrawal by that party (see Chapter 11), in that the non-participating party will thereafter be excluded from participation in part of the activities contemplated by the JOA. (f)

Data access A non-participating party might require access to certain geological, geophysical and other data which has been generated in association with an exclusive operation, ostensibly in order that it can make a better-informed decision as to whether it might wish to exercise a buy-back right (see above). Therefore, the JOA might provide that a non-participating party has the right to access that data19 (without prejudice to the right, and without connoting an obligation, of the non-participating party to exercise its buy-back right), typically upon payment by that party of its

19

OGUK JOA §15.2.8.

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proportionate share of the costs which were incurred by the participating parties in generating the data (usually without a premium).20 This data access right might be exercisable at any time during the conduct of the exclusive operation or only in certain defined periods when the buy-back right is exercisable (see above), and will apply to currently available data and/or to future data, depending on how the JOA has been negotiated. It might, at least to the original participating parties, seem somewhat counterintuitive to grant relatively generous data access rights to any nonparticipating party, but these rights will be essential to supporting any later buy-back election, which could ultimately benefit the original participating parties through enabling them to dilute the risk of the exclusive operation. (g)

Operator non-participation It may be that the operator (in its capacity as a party to the JOA) exercises a nonconsent right in respect of an approved joint operation or does not support a proposed operation which is then proposed to be undertaken by a party as a sole risk operation. The JOA may provide that, in this circumstance, the operator will still act as the operator (although not as a participant) in respect of the resultant exclusive operation and will be entitled to charge the expenses incurred in doing so to the separate account of the participating parties. Alternatively, the JOA might provide that the parties participating in the exclusive operation should elect an operator among themselves, to apply solely in respect of that exclusive operation.21 This will typically require government approval of the erstwhile operator and could necessitate the introduction of a subsidiary JOA (see above) between the participating parties in respect of their relationship with that new operator, unless the existing JOA is expressed to apply equally in respect of that new operator. That new operator will also effectively be a split operator (6.5). Because of the potential for problems with having two operators in respect of different parts of the JOA, the continuing involvement of the original operator is generally to be preferred. However, the operator may wish to reserve its right to decline to act as the operator in respect of an exclusive operation in which it is not a participant, on the basis that to do so might prejudice its ability to give its full attention to the performance of its duties in respect of any approved joint operations (or in respect of any other exclusive operations for which it is or will be acting as the operator).

(h)

Extent of non-participation In respect of any exclusive operation, the JOA should clearly define the extent to which a party which has elected not to participate in that exclusive operation is excluded from any wider participation in the JOA. The exclusion should properly apply only in respect of the defined exclusive operation, but some JOAs then go on to describe a regime whereby the non-participating party is also excluded from

20 21

AIPN JOA §7.4(A). AAPL JOA 810 §4.2; AIPN JOA §7.12(F); CAPL JOA §10.04; OGUK JOA §15.2.9.

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participation in any defined wider part of the concession area in which the exclusive operation has been undertaken. The popular logic for this wider exclusion is that it avoids the complication of different equity structures and accounting interests in respect of the same area, but this overlooks the reality that such differentiated interest structures should not be unduly difficult to accommodate. In reality, this wider form of exclusion is intended additionally to deter a party from electing not to participate in the proposed joint operation at the outset. (i)

Definition of the exclusive operation When an exclusive operation is underway, the non-participating parties should be careful to monitor what works are undertaken by the participating parties in pursuit of that exclusive operation. Much will depend on the definition of the activities contemplated by the exclusive operation in the original proposal to the OpCom, which then became an exclusive operation (see above). Thus, for example, if the exclusive operation is the drilling of an exploration well, then depending on the wording of the particular JOA, it may be that the participating party is permitted to do all consequent appraisal and development works in pursuit of the exclusive operation, subject only to notifying the nonparticipating parties of the steps which are being taken such that a buy-back right can be exercised. Alternatively, the definition of the exclusive operation might be limited such that a particular work item which is proposed by the participating party ostensibly in pursuit of the exclusive operation in fact constitutes a separate undertaking which of itself should be submitted as a proposal to the OpCom for approval in the ordinary course of events.

(j)

Access to joint property Another issue to consider is the extent to which the participants in an exclusive operation can use any of the facilities, materials or other property which is used in the performance of the joint operations. The JOA might (unless the OpCom, with the recusal of the participating parties (7.2), elects otherwise) allow the participating parties to use or access any of the joint property, as long as such use or access does not prejudice the performance of the joint operations. Such use or access might also be conditional upon payment by the participating parties to all of the parties (which will include the participating parties, to the extent of their respective PIs in the joint operations) of a fair measure of compensation.22 The quantification of this amount might best be left to be determined by the OpCom at the appropriate time, rather than the JOA being too prescriptive about the amount payable, and the temptation of the non-participating parties to use this as an opportunity to make a profit should be approached with caution. In this case the definition of the scope of the JOA which excludes consideration of the commercial terms of third-party access to the infrastructure used for the performance of the joint operations (4.3) might need to be reconsidered, and the distribution of the resultant

22

AAPL JOA 810 §14.4; AIPN JOA §7.9; CAPL JOA §14.03; OGUK JOA §15.2.6.

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profit between the non-participating parties will need to be considered in light of the hallmarks of a partnership (see Appendix B). 5.3

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Excluding exclusive operations The parties might appreciate the certainty of knowing that all parties to the JOA are fully committed to a proper participation in the joint operations which have been proposed to and approved by the OpCom, and that there is no possibility of a subset of the parties being able to engineer their participation in a subset of operations. This is consistent with the idea that operations are joint, in keeping with the overriding philosophy of the JOA, and does not lead to a fragmentation of interests. Thus, the initial reaction of the parties could be that they are keen to see any exclusive operations rights excluded, or at least greatly limited, under the JOA. This sort of restriction already happens – to a limited extent at least – in respect of the circumstances in which the JOA prohibits exclusive operations from being undertaken or closely conditions the performance of those operations (see above). The desire to restrict the scope for exclusive operations might particularly be felt in the case of the non-consent right, where (notwithstanding the proper functioning of the OpCom and the approval of the proposal) the parties that approved the proposal could, through the withdrawal of any non-consenting party, be left with the burdensome prospect of having to share the applicable project costs according to proportionate shares which are greater than the costs which would have applied by reference to the original PIs if the proposed operation had gone ahead as originally envisaged with the participation of all parties. This will be less of a concern in respect of a sole risk operation, since the party that has elected to undertake the sole risk operation will be doing so willingly in the expectation of also undertaking a disproportionate share of the associated costs. The JOA might therefore adopt a strict view that no party should have the right to elect not to participate in what has properly been approved by the OpCom as an approved joint operation, in the interests of preserving the sanctity of truly joint operations under the JOA. However, it may be that a party has a reason for not wishing to participate, such as insufficient funds to meet its share of the costs of the proposed joint operation or a lack of conviction about the likelihood of success of the joint operation, and consequently the JOA might make some allowance for the possibility of approved joint operations subsequently being undertaken by less than all of the parties, through the insertion of a non-consent provision. From the perspective of the potentially non-consenting party, a non-consent right is particularly valuable in protecting such a party from being railroaded into an operation for which it might not have the financial wherewithal (thereby risking a default and potentially the loss of its JOA interest, depending on what the default provision in the JOA says (see Chapter 14)). In the absence of a non-consent provision, the only other options for the party which is reluctant to participate are to transfer its interests (see Chapter 10) or to withdraw from the JOA (see Chapter 11). Each such response is somewhat draconian. Similarly, the JOA might adopt a strict view that no party should, through the sole risk provision, have the right to pursue an operation which has not been

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approved by the OpCom as an approved joint operation. However, it may be that the parties might wish to have a sole risk provision in the JOA, on the basis that it maximises the amount of developmental activity which can be undertaken in respect of the concession. A sole risk right does at least present the possibility that an operational activity might be prosecuted, without being dragged down by a recalcitrant party, thereby allowing at least some of the parties to progress an activity which they are keen to undertake. The existence of a sole risk operation might then benefit all of the parties, in that it could result in the generation of certain geological and geophysical data which leads to an improved interpretation of the wider concession area and which thus in turn gives an improved insight into how the joint operations proposals might be more effectively structured for the benefit of all parties. The initial instinct of at least some of the parties when drafting the JOA might be to exclude the possibility of any sort of exclusive operations in order to promote the rigour that all operations be fully performed as joint operations. After all, exclusive operations are popularly assumed to prompt discord between the parties. However, this gives rise to a paradox in the JOA relationship: despite the aversion to exclusive operations, some of the parties might prefer to see a non-consent right reserved in the JOA so as to get joint operations moving by anything less than all the parties, albeit at the expense of increasing the burden of cost sharing and defeating the fundamental collaborative philosophy of the JOA regarding the performance of works and the sharing of costs. By the same token, the insertion of a sole risk right could be of benefit to the JOA through better promoting the overall prospects for the production of petroleum. In one sense, therefore, the discord which is represented by the risk of an exclusive operation could also be helpful in compelling some later concurrence between the parties.

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6. The operator

The JOA will identify a person to undertake the role of operator. The operator will be responsible for managing the performance of the joint operations on behalf of the parties, in accordance with the provisions of the JOA, such that the terms of the concession are in turn properly performed. The real benefit conferred by the acceptance of such a role will need to be considered by a party which might be considering seeking such an appointment. Apart from appointing the operator and determining the operator’s rights and obligations, the JOA will also determine the circumstances in which the operator will cease to hold that office and the liabilities to which the operator will be subject for any failure to act in accordance with the required standards. The principal formulation under the JOA is that one of the parties will additionally assume the role of the operator, although there are some exceptions to this rule. The comments made in this chapter presume that one of the parties has been appointed to so act as the operator. 6.1

The operator’s advantage The expectation of the JOA (which is sometimes, but not always, expressed) is that where a party has accepted the role of the operator (see below), that party-operator will not make a profit (and will not suffer a loss) in consequence of undertaking that appointment;1 so a party should not view the appointment as operator as an opportunity for gain. This is a theme which manifests itself variously throughout the JOA (and which could in part be reinforced by the application of certain fiduciary duties against the operator (see Appendix F)). That said, the primary vehicle by which the operator might engineer some economic advantage for itself is the accounting procedure (see Chapter 16 and also below), and if the JOA provides that in the event of a conflict between the terms of the main body of the JOA and the accounting procedure the latter will prevail (16.1), then the ostensible prohibition on the operator’s ability to make a gain might thereby be weakened. There are several perceived advantages – and may also be some real benefits – to accepting the role of the operator under the JOA: • Operational reputation – there is a perception within the petroleum exploration and production community that some kudos attaches to being

1

AIPN JOA §4.2(B)(4); OGUK JOA §6.2.2(d).

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appointed to act as the operator. This is partially true and can be more than a matter of mere vanity, as it is sometimes apparent that a party which has proved itself elsewhere to be successful as an operator might enjoy greater recognition by a government when bidding to be granted a concession (particularly as an operator, but also as a non-operating party). Operational control – being the operator will allow a party to drive the agenda for performance of the joint operations and to better control the associated activities. This will be a positive outcome where the party-operator is keen to progress the requirements of the concession, but equally the level of control which is vested in the party-operator could be applied negatively where that party-operator has, for its own reasons, any reluctance to do anything other than the bare minimum which is necessary to perform the concession. Economic advantage – although the very clear expectation of the JOA is that a party which is appointed to act as the operator should not expect to make a profit from holding that office (see above), the reality is that the partyoperator’s ability to lay off some of its wider administration costs to the parties through the general overhead allocation under the accounting procedure (16.2) will be attractive. Furthermore, where the party-operator can procure the services which are required for the performance of the joint operations through any federal contracts (8.6), this can have a tangible benefit (through the economies of scale which those federal contracts are intended to bring) for any petroleum production operations which that party-operator is engaged in elsewhere. Where those services can be procured through any affiliate contracts (8.5), the party-operator’s wider corporate group should also benefit accordingly. If the accounting procedure applies the invoice and funding fee mechanism (16.2), there might also be a temptation for the operator to use that mechanism to its advantage. Information access – it might be said that the party-operator will enjoy a greater level of access to data and information which has been generated in consequence of the performance of the joint operations than might be enjoyed by any non-operating party. However, this advantage will be less apparent if the JOA provides for all of the parties to have equal access to the data associated with the joint operations (see below). Asset value – there may be some perceived additional value to a party in the transfer of its interests under the JOA to another person (see Chapter 10) where that interest is accompanied by the role of the operator, but this will also be subject to the terms of the JOA which govern the transfer of the operatorship (10.2) and it will not automatically follow that the transfer of operatorship will follow the transfer of interests.

Selection of the operator The parties will have an obvious and understandable interest in seeing the proper performance of the joint operations, such that the terms of the concession are honoured and the greatest possible level of cost-effective petroleum production from

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the concession area is achieved at the earliest opportunity. Despite this universal enthusiasm, however, it is simply not a practical proposition for all of the parties jointly to undertake the necessary operational responsibility, and so the conventional model is that the JOA provides for one of the parties to assume exclusive responsibility to act as the operator in the performance of the exploration and production activities, where that party-operator will be appointed to act on behalf of all the parties.2 That party-operator might have been selected through the terms of any joint study and bid agreement (2.3). This party-operator model is the norm, although there are some exceptions to the rule (eg, the contracted operator, the incorporated operator and the split operator (see below)). In respect of the UKCS, there is not actually a requirement under the relevant legislation that the operator must also be a party to the licence. The secretary of state for energy and climate change cannot refuse its consent to the appointment of a person to act as the operator if that person is otherwise competent to discharge the functions in question simply because that person is not party to the licence.3 Consistent with this principle, therefore, the JOA (see below) might make provision for an incorporated operator or a contracted operator, neither of which would be party to the relevant licence. It is ordinarily the case that the party which holds the largest PI under the JOA will be the most obvious candidate to be the party-operator. This assumes that the most heavily invested party will have the greatest incentive to see that the joint operations are properly performed (and correspondingly, therefore, that a party with anything less than the single greatest PI might be tempted to devote something less than its full attention to the benefit of the JOA). This is not a universal truth, however, and there may well be circumstances where a party which holds a relatively minor PI could nevertheless be the best candidate to be appointed as the operator on technical grounds. A practical example of this is provided by the Chinese concession regime, whereby under the usual terms of the production joint venture the relevant Chinese state oil company will have a right to step in so as to assume a majority interest in the joint venture interests at the development phase, but the party appointed as the operator for the performance of the necessary exploration and appraisal activities will be one of the private sector investors. That party will hold a minority interest during the development phase and will continue to act as the operator (unless the Chinese state oil company also steps in to the operatorship). However, the AAPL JOA sets some store by the size of the operator’s PI and provides that it will be grounds for the removal of the operator (conditional upon the parties so voting) if the operator’s PI equivalent is reduced and becomes less than the PI equivalent of any non-operating party.4 The terms of the prevailing mineral law or of the concession commonly

2 3 4

AAPL JOA 810 §4.1; AIPN JOA §4.1; CAPL JOA §2.01; OGUK JOA §5.1. MC 24. AAPL JOA 810 §4.4.1.

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necessitate government approval of the operator under the JOA.5 If the concession itself identifies one of the concession-holding parties to be the operator for the purposes of the concession, then government approval will be especially necessary if any other concession-holding party will be appointed as the operator under the JOA. Any rights of the government to approve the operator under the JOA will apply equally to the appointment of the first operator and to the appointment of any successor operator. 6.3

Role of the operator At the highest level, the role of the operator is to exercise its rights and to perform its obligations under the JOA so as to manage the performance of the joint operations on behalf of all parties, and in doing so to ensure compliance with the terms of the concession and with all applicable laws and regulations.6 In order to better compel the operator’s performance of its obligations under the JOA, the non-operating parties might require that the JOA contain a very detailed recitation of all of the operator’s obligations over the lifetime of the JOA. An express commitment of the operator to its responsibilities in this manner might be helpful to the non-operating parties in seeking some sort of injunctive relief in order to compel the operator to act or in providing grounds for the removal of the operator for its default (see below), and might even be used in an allegation of wilful misconduct (or gross negligence) on the operator’s behalf, so leading to the concomitant liabilities of the operator (12.1). However, as tempting as this might seem to be as a solution to the risk of the operator’s inertia, the reality is that it can be difficult to predict and to make explicit provision in respect of all that the operator might be required to do over the lifetime of the JOA, and so perhaps the best which the non-operating parties can hope for is a very general statement of the behaviour required of the operator (see below). The problem, in turn, with such a generalised statement is that it will make much harder the options for enforcement against the operator which are outlined above. The JOA might recite a statement that the operator is an independent contractor for the purposes of the JOA,7 but the reality of that statement must always be read in the context of the particular JOA and the level of control which the non-operating parties have over the operator’s activities. In the exercise of its role the operator will enjoy various rights under the JOA: • Staffing – the operator has the right to employ such members of staff (whether permanent staff or agency staff) as may be required to enable the performance of the joint operations, and may also retain the services of secondees (17.10).8 • Contracting – the operator is authorised to award contracts to such service providers as the operator deems necessary (which could include letting affiliate contracts and federal contracts), subject to compliance with the

5 6 7 8

MC 24. AIPN JOA §§4.2(A), 4.2(B)(1); OGUK JOA §6.2.2(b). AAPL JOA 810 §5.1; CAPL JOA §3.03A. AIPN JOA §4.3; OGUK JOA §6.4.

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requirements of the JOA regarding contract award approvals (see Chapter 8). Litigation management – the operator has the right to conduct and settle any litigation involving the joint operations or any aspect of the joint property in such manner as the operator sees fit, subject to certain information and participation rights in favour of the parties (17.8). Representation before government – the operator will have the right to represent the parties in all dealings with the government with respect to matters arising under the JOA and the concession. This right is usually expressed to be subject to a corresponding obligation to notify the parties of any prospective meetings with the government, and to allow each party to attend those meetings (solely as an observer).9 However, where a party has an issue with the government which relates solely to that party’s personal interests under the concession and the JOA, that party may have the right to deal with the government on its own, without the involvement of the operator.10 Reimbursement – the operator’s right to be reimbursed in respect of the expenditures which it has incurred on behalf of the parties in the performance of the joint operations is addressed principally through the accounting procedure (see Chapter 16). The operator’s right to reimbursement should be expressed in the JOA to apply to expenditures which have been properly incurred by the operator in accordance with the terms of the JOA and which are within the extent of the operator’s authority. Anything which is done by the operator outwith the terms of its mandate to act might not readily be due for reimbursement.

In the exercise of its role the operator will also be subject to various obligations under the JOA: • Operational requirements – most obviously, the operator will be responsible for the performance of the joint operations and the preparation of all necessary plans, programmes and budgets.11 What is also commonly understood in relation to the manner of operation of any JOA, although it is seldom spelled out explicitly, is that the operator will be expected to take the initiative in proposing joint operations. The operator will also be required to: • keep the concession in full force and effect; • obtain and maintain all permits and consents required for performance of the JOA12 (which might also include surface access rights in respect of onshore operations); • comply with the insurance requirements of the JOA (17.7); • manage the relationships of the parties with government (see above); • manage the health, safety and environmental requirements of the joint operations (17.6); 9 10 11 12

AIPN AIPN AIPN AIPN

JOA JOA JOA JOA

§4.2(B)(11); OGUK JOA §6.6. §4.2(B)(11); OGUK JOA §6.6. §4.2(B)(3)(5); OGUK JOA §6.2.1(a),(b). §4.2(B)(6); OGUK JOA §6.2.2 (c).

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13 14 15 16 17 18 19

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keep the joint property (4.1) free of encumbrances (although this will be subject to the right of each party to encumber its share of the joint property13 (10.2)); and • take such emergency actions as may be necessary to protect the joint operations and/or to preserve property and the interests of the parties.14 Standards of performance – the operator will undertake to act in accordance with the provisions of the concession, the JOA and all applicable laws and regulations, and also to conduct its activities generally in a safe and diligent manner. This latter standard is sometimes extended to require the operator also to act in accordance with what is called ‘good and prudent oil and gas field practice’, or in accordance with what is often referred to as ‘the standard of a reasonable and prudent operator’. These terms will usually be defined in the JOA. In the UKCS, the terms of the licence will also require the operator to act in accordance with such standards15 and so the JOA should be careful to be consistent in respect of the extent of the operator’s obligation in this regard. The operator is obliged to conduct the joint operations under the AIPN JOA “in a diligent, safe and efficient manner in accordance with such good and prudent petroleum industry practices and field conservation principles as are generally followed by the international petroleum industry under similar circumstances”,16 and under the OGUK JOA in a proper and workmanlike manner in accordance with what is referred to as ‘good oilfield practice’ (which in turn is defined as “the application of those methods and practices customarily used in good and prudent oil and gas field practice in the UKCS with that degree of diligence and prudence reasonably and ordinarily exercised by experienced operators engaged in the UKCS in a similar activity under similar circumstances and conditions”).17 Under the AAPL JOA, the operator is obliged to conduct its operations and activities “in a good and workmanlike manner, as would a prudent operator under the same or similar circumstances”.18 Under the CAPL JOA, the operator undertakes to conduct the joint operations “diligently, in a good and workmanlike manner and in accordance with good oilfield practice, including prudent reservoir management and conservation principles”.19 The JOA typically does not prescribe a similar required standard of performance for the non-operating parties (which is understandable, given their relatively inert role), but even the consideration of the need for such a provision in the JOA could lead to a discussion about the behaviours which might be expected of all of the parties, irrespective of the operator/nonoperating party distinction. This wider issue of behavioural standards

AIPN JOA §4.2(B)(2); CAPL JOA §3.05; OGUK JOA §6.3. AIPN JOA §4.2(B)(13); OGUK JOA §6.10. MC 23. AIPN JOA §4.2(B)(2). OGUK JOA §6.2.2(a). AAPL JOA 810 §5.2. CAPL JOA §3.04.

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between all of the parties is considered further in Appendix F. Management of funds and interests – the operator will be subject to the terms of the accounting procedure (see Chapter 16) and general financial management provisions, and will be required to do nothing to jeopardise the concession (which will include making any payments due to the government on behalf of the parties in accordance with the terms of the concession).20 The JOA might also provide for a mechanism whereby the operator is obliged to demonstrate to the non-operating parties that it is meeting its share (in its capacity as a party) of the cashcalls or invoice requests (16.2) as they fall due. This knowledge will be helpful to the non-operating parties in applying the remedies of the JOA which relate to a default by the party-operator (14.2). Recognition of the parties – the operator will be subject to the obligation to allow access to the parties to the joint operations,21 to facilitate certain audit rights in favour of the parties22 and to make certain reports to the parties.23

The JOA should be particularly careful to address whether the operator will act as the agent of the parties in the exercise of its rights and in the performance of its obligations under the JOA, and what the impact of such an agency representation would be. The relevance of whether the operator is acting as the agent of the parties is reflected in issues such as the ability of the third party to enforce its contract against the operator directly and also against all of the parties (as the principals, whether disclosed or undisclosed and with joint and several liability), and reciprocally whether the parties can enforce the contract directly against the third party; and whether the operator’s status as the agent of the parties imposes any fiduciary duties on the operator (see Appendix F). In respect of the operator’s appointment as agent, the AAPL JOA contains24 an express disclaimer of the operator’s potential agency status. The AIPN JOA makes no express reference to the operator’s acting as agent, but it does expressly disclaim the existence of any agency relationship except where the JOA expressly provides to the contrary.25 The CAPL JOA is somewhat opaque on whether the operator is the agent of the parties. The OGUK JOA makes an express reference to the operator’s agency status in respect of the operator’s acting for the parties in dealings with third party contractors.26 The inconsistency of these approaches is not entirely satisfactory. The commercial reality is that under the JOA the operator will act as the agent of the parties (eg, in negotiating and executing contracts with third parties (8.3) and in representing the interests of the parties before government (see above)), and a de facto representation as agent will be valid so as to bind the principals to the third 20 21 22 23 24 25 26

AIPN JOA §4.2(B)(9). AIPN JOA §§4.2(B)(7), 4.4(B); OGUK JOA §7.3. OGUK JOA §7.2 AAPL JOA 810 §§5.7, 5.8, 5.9; AIPN JOA §4.4(A); CAPL JOA §3.12; OGUK JOA §§6.2, 6.8, 6.9. AAPL JOA 810 §5.1. AIPN JOA §14.1. OGUK JOA §6.5.8.

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party notwithstanding the lack of an explicit appointment as such.27 It will be a failing of the JOA if it does not expressly address the capacity in which the operator is acting, and it will be particularly unsatisfactory if the JOA does not address the operator’s agency status because of some nervousness about thereby admitting the existence of, and then addressing, any accompanying fiduciary duty. If the operator does enter into contracts with third parties as the agent of the parties, the operator will effectively have a dual capacity in those contracts – as the agent which enters into the contract (qua operator) and as the principal upon whose behalf the contract is entered into (qua party). A practical issue to be considered where the operator does contract as the agent of the parties is managing the reality that the parties will be jointly and severally liable to the third party with which the operator has so contracted, and that the third party could elect to enforce the contract against any one of the parties. The exposed party would thus have to seek contribution from the other parties and (in consequence of the manner of construction of the JOA in respect of litigation management (17.8) and cross-liabilities (12.2)) the JOA might not be readily suited to effecting that allocation, particularly if that party were other than the operator. Because of the JOA’s expectation that the party-operator will not make a profit from accepting that appointment (see above), the JOA will also typically apply stringent limitations upon any liability which the party-operator, in its capacity as the operator, might have to the parties in respect of any allegation of a failure of that party-operator properly to perform its functions in accordance with the requirements of the JOA. The question of the operator’s liability is considered separately (12.1). Although the JOA has the appearance of appointing the operator to get on with the performance of the joint operations, the extent of the obligations of the operator to the parties which is apparent in the JOA (see above) and the level of control which the parties will seek to exert over the operator’s activities (see Appendix A) could together suggest that the notion of the operator’s freedom as a consequence of that appointment is somewhat superficial. However, there is a fair reason as to why the JOA might be relatively prescriptive in respect of the operator’s role. Following the always commendable principle that prevention is better than cure, it would be imprudent to believe that in any form of commercial contract the existence of a comprehensive provision which punishes a party for committing a breach of that contract is somehow preferable to, or is at least an effective replacement for, reciting in the contract at the outset an exposition of the extent of each party’s rights and obligations under that contract which is so clear and unambiguous that it actively reduces the risk of a breach occurring in the first place. In the light of that logic, in the context of the JOA the customary paucity of the operator’s liabilities for a breach of contract (12.1) would suggest that, in inverse proportion, the JOA should therefore do a lot more to prescribe the required standards of the operator’s performance, and to give a measure of control over the operator to the parties which could be applied so as to limit the scope for a breach of contract by the operator. 27

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Pickering v Busk (1812) 15 East 38.

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The lack of available remedies for the operator’s failure is therefore often cited as at least a partial explanation for the desire of the parties to influence the operator’s behaviour through the various control mechanisms in the JOA and through a very clear exposition of what the operator’s role is under the JOA. 6.4

Removal of the operator The appointment of the party which is designated to act as the operator will be for an indeterminate period, subject to the termination of the JOA or the point at which the party-operator resigns or is removed as such. The operator is usually entitled to resign its position upon giving a reasonable period of notice to all the parties.28 The expectation is that a replacement operator will be appointed as soon as possible after that, but as a practical matter this simply might not be achievable and so the JOA might provide that the incumbent operator’s resignation will not be effective until a satisfactory replacement operator has been appointed. Alternatively, the JOA might provide for the appointment of another party to act as an interim operator, pending the appointment of a permanent replacement. Under the AAPL JOA, the operator may resign at any time on giving written notice to the parties, without a prescribed notice period, except that the operator cannot resign during a force majeure event or an emergency, and in any event the effectiveness of the operator’s resignation is subject to the appointment of a replacement operator.29 The customary situation for the resignation of the operator is where the partyoperator has transferred its interest in the JOA to another party or to a third party (either of which is competent to act as a replacement operator), and in recognition of this the JOA might provide for a shorter period of notice where the resignation of a party as operator is ancillary to a transfer by that party of its interests in the JOA. The JOA will also prescribe a number of circumstances in which the operator can be removed against its will. Any non-operating party may give a notice of the requirement for the operator’s immediate removal if the operator has undergone a defined insolvency event (ie, in broad terms, if the operator is declared insolvent, makes a composition with its creditors, is subject to a court order or a resolution for winding-up or reorganisation, or has a receiver appointed in respect of its assets; in each case the relevant event should have some permanence about it, which may entail the passing of a suitable cure period).30 The exact composition of the insolvency event can be defined by reference to any of the governing law of the JOA (17.5), the law which governs the country of the incorporation of the operator or the law which applies in the country where the joint operations are being conducted. Given that this could lead to the application of a multiplicity of legal doctrines, the usual solution is to define the insolvency events broadly and without reference to any particular body of law, although equally a specific

28 29 30

AIPN JOA §4.9; CAPL JOA §2.04; OGUK JOA §5.2.1. AAPL JOA 810 §4.3. AAPL JOA 810 §4.4.2; AIPN JOA §4.10(A); CAPL JOA §2.02 A; OGUK JOA §5.3.2.

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legislative test of insolvency might be adopted and applied across the board. The OpCom can also vote to remove the operator upon notice. This might happen at any time at the convenience of the OpCom,31 which will be a helpful provision if there has been a general breakdown of trust between the party-operator and the nonoperating parties, or only by reference to the occurrence of certain defined circumstances, such as where the operator has committed an unremedied breach of the JOA, or of the concession (which might in turn be determined by reference to a material breach or by reference to a series of recurrent breaches within a defined period of time),32 or where there has been a change of control of the operator.33 Some JOAs provide that the operator can be removed if the PI of the operator (in its capacity as a party) falls below a defined minimum level (which would capture the situation where that party has sold down its PI in whole or in part, but to below any defined minimum level), or even becomes zero.34 Some JOAs also provide that the operator can be removed if its PI (in its capacity as a party) drops to below the level of the PI of the party with the next-highest PI (see above), and this calculation might also include the PI of any affiliate of the partyoperator. However, this provision assumes that the party with the greatest PI will always be the operating party, which is not always the case (see above). Additionally, the OGUK JOA provides for the right of the OpCom to remove the operator upon immediate notice where the operator has committed an unremedied breach in respect of any of the decommissioning security arrangements (13.3),35 and also where the operator has committed an act of wilful misconduct (or gross negligence).36 However, the customary difficulty of proving wilful misconduct (or gross negligence) in respect of the operator (12.1) will make this latter right of questionable value. If the operator’s status as such is removed by the government in accordance with the terms of the concession,37 this can also trigger an automatic loss of status as the operator under the JOA (although the parties might of course take a different view under the JOA). The JOA will specify the level of voting control at the OpCom (by reference to number of parties voting and/or aggregate PIs) which will be needed to effect the operator’s removal. The party which is the operator, and any affiliate of that party which is also party to the JOA, should be recused from the voting, given the obvious conflict of interests which they would have (7.2).38 The CAPL JOA also includes a provision39 whereby when the party-operator has been in situ for a minimum of two years, any non-operating party may issue what is called a ‘challenge notice’, whereby that non-operating party can claim that it is able

31 32 33 34 35 36 37 38 39

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AIPN JOA §4.10(E). AAPL JOA 810 §4.4.2; AIPN JOA §4.10(B); CAPL JOA §2.02 B; OGUK JOA §5.3.1. AIPN JOA §4.10(D). AIPN JOA §4.10(C); OGUK JOA §5.3. OGUK JOA §5.3.2. OGUK JOA §5.3.2. MC 24. OGUK JOA §5.8. CAPL JOA §2.03.

Peter Roberts

to conduct the joint operations on more favourable terms and conditions than are being offered by the incumbent party-operator. Thereafter, the party-operator will have the right to match the terms of the challenge notice; otherwise, it will resign. Cessation of the operator’s position as such should be without prejudice to any accrued liability (if any – see 12.1) of the operator up to the point of cessation, and should also be subject to the operator’s right to recover its costs and expenses (including any costs and expenses which are associated with effecting the change of operatorship), up to that point.40 Where an operator resigns or grounds arise for the removal of an operator, it will be necessary to appoint a replacement operator. This will typically be one of the other parties to the JOA and such appointment will be subject to approval at the OpCom (where the appropriate voting control, and the recusal of the party-operator and its affiliates from that voting process will apply41 (7.2)), and also subject to government approval.42 The JOA might provide that the party with the next largest PI (after the outgoing operator) will be required to assume responsibility as the new operator, but this might result in the operatorship passing to an unwilling party (which might then resign anyway). It might be preferable, therefore, to have any party be eligible to be considered as the new operator. The JOA should provide that a party cannot be voted in to become the new operator against its will.43 If it ultimately proves to be the case that a suitable replacement operator cannot be found, the parties should move towards surrender of the concession and the JOA,44 on the basis that their continued performance can no longer be effected. This mechanism will be broadly similar to the exercise of the withdrawal provision by all of the parties (11.2). The JOA should provide for an orderly transition and handover between the outgoing operator and the incoming operator.45 The parties may also require the right to audit the joint account46 up to the transition point, and in some JOAs such an audit might be automatic. 6.5

Hybrid operators As an alternative to the conventional route of a party-operator being appointed for the duration of the JOA, consideration might be given to the introduction of some form of hybrid operator arrangement. This could take the form of the appointment of a contracted operator, an incorporated operator or a split operator, each of which is considered below.

40 41 42 43 44 45 46

AIPN JOA §4.11(C); OGUK JOA §5.4. OGUK JOA §5.8. AIPN JOA §4.11(E), OGUK JOA §5.5. AIPN JOA §4.11(A); OGUK JOA §5.5. AAPL JOA 810 §4.5; OGUK JOA §5.6. AAPL JOA 810 §4.7; AIPN JOA §4.11(F); CAPL JOA §2.07; OGUK JOA §5.7. AIPN JOA §4.11(D); OGUK JOA §5.7.

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(a)

47

90

Contracted operator An independent third-party contractor may be appointed to perform the necessary operational services on behalf of the parties, in accordance with the terms of a specific contract to do so. Under this ‘contracted operator’ arrangement, either a party-operator will be appointed in the customary manner and then the third party will be retained under a contract for services, entered into between the partyoperator (on behalf of all of the parties) and that third party, or the third party might step straight into the role of the operator and there will be no party-operator. This latter formulation is less common in practice, so the following analysis assumes that there will be a party-operator in the JOA. The JOA might provide that if there is a contractor which is appointed by a partyoperator for the discharge of certain of the operational responsibilities, then the party-operator shall nevertheless remain fully responsible for the performance of those responsibilities as if it were continuing to perform them itself; this principle could apply equally in respect of a contracted operator.47 If the government retains a right of approval of the operator, the government might be equally keen to approve any contracted operator, or to ensure that the partyoperator has sufficient expertise and resources to be able to supervise the contracted operator so that the overall integrity of the petroleum project is not impaired. The contract to be entered into between the contracted operator and the partyoperator will recite a detailed scope of the services to be provided by the contracted operator, and the fee payable to the contracted operator in consideration of the provision of those services. Several other aspects of the contracted operator’s appointment will differ from the customary party-operator situation: Provision

Party-operator

Contracted operator

Duration of appointment

For the life of the JOA, subject to earlier resignation or removal.

Fixed-term period with a possible option to renew.

Appointing person

Parties.

Party-operator.

Duty holder responsibility

Party-operator.

Contracted operator.

Performance standards

As per law and the JOA.

As per law and the contract.

Authorising person

OpCom.

Party-operator.

OGUK JOA §6.1.2.

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Provision

Party-operator

Contracted operator

Compensation for performance

None beyond the recovery of costs incurred.

Commercially based compensation structure.

Provision of personnel

Party-operator’s staff and possibly also secondees.

Contracted operator’s staff.

Approval of operational expenses incurred

OpCom.

Party-operator.

Approval of retained contractors

OpCom.

Party-operator.

Freedom to undertake competitive activities

Possible unless excluded, subject to fiduciary duties.

Possible unless restricted by contract.

Liability for loss of/damage to joint property

None unless caused by wilful misconduct (or gross negligence).

Liable, subject to limitations.

Liability for consequential losses

None.

Liable, subject to limitations.

Liability for defective service performance

None, subject to risk of removal.

Re-performance at the contracted operator’s expense, loss of compensation, obligation to compensate (subject to limitations), risk of removal.

Suspension of engagement

Not applicable.

Suspension by the partyoperator as per the contract.

Termination of engagement

Subject to OpCom approval, defined circumstances.

Termination by the partyoperator as per the contract.

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(b)

Provision

Party-operator

Contracted operator

Transfer of engagement

Subject to OpCom approval and government approval.

Subject to party-operator approval.

Relationship management

Through the OpCom.

Through the party-operator and contracted operator management committee.

Incorporated operator Another situation which can emerge, somewhere between the existence of an incorporated joint venture (1.6) and the appointment of a contracted operator (see above), is represented by a decision of the parties to incorporate a company in which the parties will be the shareholders (with their interests corresponding to their PIs unless they agree otherwise), to act as the operator for the purposes of the JOA:

A Co

B Co

C Co

40%

40%

20%

B Co

50%

JOA

C Co

50%

Incorporated operator

Thus, in the UKCS the Britannia field is operated on behalf of the parties by a company called Britannia Operator Limited, which is owned jointly by two of the parties that hold the relevant licence. The resultant incorporated operator could be appointed directly as the operator by the parties, or there might be a further contract for services entered into between an appointed party-operator and the incorporated operator. In this latter scenario the position outlined above in respect of the contracted operator would effectively be repeated. (c)

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Split operator It could be that the role of operator is divided between more than one person over the lifetime of the JOA. The presumption is that the party which is appointed as the operator will remain as the operator through every phase of the JOA, but the JOA might be structured so that the mantle of operatorship is rotated between more than one party according to the needs of the joint operations. It may be, for example, that one of the parties has a particular pedigree which suits it to be the operator for the

Peter Roberts

exploration and appraisal phase, but with another party assuming responsibility for the production phase. Similar considerations might apply in respect of the decommissioning phase. Alternatively, if the prevailing mineral law grants a concession by reference to a series of distinct operational phases (1.1), then different operators for each of those phases might be feasible. Where the existence of a split operatorship is a possibility, the role of the operator might be formally transferred between the relevant parties for defined periods; alternatively, one of the parties might be appointed as a sub-operator by another of the parties as the principal operator, with that sub-operator having absolute responsibility for the operation of the JOA in respect of a defined part of the joint operations in accordance with a form of worksharing agreement. The appointment of a separate operator for the performance of a defined exclusive operation (5.2) is also effectively a form of split operatorship.

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The quid pro quo for relinquishment by the parties of exclusive operational responsibility to the party which has been appointed as the operator (see Chapter 6) is that the remaining non-operating parties will, through the JOA, seek to secure some representation of their interests with the operator and possibly also some degree of control over the operator’s performance of the joint operations. This representation (and possibly also control) is engineered through a body constituted under the JOA and known as the ‘operating committee’ (OpCom), otherwise described in some JOAs as the ‘management committee’. Not every JOA will make provision for an OpCom, however. The differences in expectation between the operator and the non-operating parties, and how those expectations must be reconciled in order to produce a workable JOA, are considered further in Appendix A. 7.1

The role of the OpCom The operational essence of the JOA is defined by the willingness of the parties to mandate a person (which is typically a member of their consortium) to act as the operator in the performance of the intended joint operations (6.2). However, the experience of negotiating (or of applying) a JOA sometimes proves that ensuring that the operator is properly empowered to prosecute the joint operations, without the risk of undue influence from the non-operating parties, can be an area which is fraught with difficulty. Given the significant sums of money which are typically expended in exploring for and producing petroleum (and also the attendant risk and uncertainty), it is perhaps not an unnatural reaction for any party to want to have access to a certain level of information about, and even a say in, the manner of the performance of the joint operations. One of the consequences to a party of being appointed as the operator is that the appointment as such gives that party the ability to better satisfy these desires (6.1), and so the real issue here relates to what provision can be made in favour of the other, non-operating parties. The principal vehicle by which the non-operating parties can secure representation of their interests before the operator is the OpCom. This is essentially a formal committee constituted by a representative of each party – including the party which has been appointed to act as the operator, but in its capacity as a party (3.1). However, despite the existence of such a committee, the extent to which the

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ambitions of the non-operating parties can be accommodated in this regard will vary according to the terms that have been agreed in any particular JOA. Thus, at one end of the scale the OpCom (if indeed an OpCom exists at all – see below) might do little more than be notified of the operator’s activities, while at the other end of the scale the operator might be precluded from engaging in any activity without first having secured the OpCom’s express approval. The very concept of the OpCom illustrates another of the great paradoxes in the JOA: while the operator is appointed by all of the parties with the intention that the operator have exclusive responsibility for the performance of the joint operations, the non-operating parties typically try to exert the greatest possible degree of influence over the operator through the OpCom. This tension between the operator and the non-operating parties runs right through the JOA and the OpCom is the stage on which that conflict is played out. Thus, where the JOA authorises the operator to act in the performance of the joint operations, in some JOAs this freedom of the operator is constrained by an explicit statement that the operator is obliged to act under the supervision and control of the OpCom. This proposition is found, for example, in the AIPN JOA and the OGUK JOA1 (the AIPN JOA provides that the OpCom shall be established so as “to provide for the overall supervision and direction of the joint operations”, with “power and duty to authorise and supervise joint operations”,2 while under the OGUK JOA the OpCom is established in order “to exercise overall supervision and control of all matters pertaining to the joint operations”).3 North American JOA forms prefer a position which gives greater obvious latitude to the operator. Thus, for example, the AAPL JOA provides that the operator has full control of all operations in the contract area and is not subject to the control or direction of the non-operating parties, except as to the type of operation which can be undertaken under the JOA4 (see below), while the CAPL JOA provides that the operator has freedom to act as such, subject only to the obligation to consult with the parties and to keep them informed about the joint operations.5 In neither of these North American model form JOAs does the concept of an OpCom make an appearance, and the guidance notes for the CAPL JOA are particularly trenchant on how the introduction of an OpCom mechanism would be incompatible with the rights and the obligations of the operator. The role of the nonoperating party under the typical North American JOA form is that of a relatively passive investor (with a non-consent right (5.1) being the only real protection for a non-operating party), in contrast with a JOA which imports the notion of an OpCom and which can afford a more involved role to the non-operating party. Consequently, the discussions in this chapter regarding the functioning of the OpCom are of relevance only to those forms of JOA which actually reference the existence of the OpCom.

1 2 3 4 5

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AIPN JOA §4.2(B)(1); OGUK JOA §6.1.1. AIPN JOA §§5.1, 5.2. OGUK JOA §9.1. AAPL JOA 810 §5.1. CAPL JOA §3.01A.

Peter Roberts

7.2

Mechanics of the OpCom The basic constitution of the OpCom is that each party (regardless of the size of that party’s PI) is entitled to appoint a single nominated representative to the OpCom, along with a nominated alternate if the principal representative is unable to attend an OpCom meeting.6 This principle of having one representative for each party represents the high-water mark of equality between the parties. The relative ranking of the parties is effected by the principle that at the OpCom meetings each representative shall have a percentage voting interest which corresponds to the PI of the party which that representative represents,7 and so the party with the largest PI will also have the largest vote at the OpCom. The JOA might state that at the OpCom each party is free to cast its vote entirely in accordance with its personal preference, and that there is no obligation on a party to vote in accordance with what might be regarded as the best interests of all the parties. Thus, a party could exercise its voting rights at the OpCom with an eye to affording some preference to a competing project or interest if it so wished. Whether such a provision should also be expressed to apply in favour of the party-operator, in its capacity as the operator rather than as a party, should be considered. The existence of such a provision would be helpful in regulating the potential for the existence of fiduciary duties between the parties (see Appendix F). The JOA usually provides that OpCom meetings can be called by any party (whether the party-operator or a non-operating party), subject to the giving of a specified minimum period of notice to all other parties.8 That minimum notice period can be reduced if all parties consent9 (which would be helpful in the event of the need to hold an emergency OpCom). The operator usually has responsibility for sending out the notice which convenes the OpCom meeting, and which specifies the date, time, location and intended business of the meeting.10 Each party should thereafter be able to raise additional agenda items for consideration at the meeting. At the meeting, each representative (or any alternate) shall attend and shall cast its vote in respect of any proposal made to the OpCom and requiring a vote. The actual level of votes required to approve a proposal is considered in greater detail below. Each party might also be entitled to send a limited number of additional persons to the meeting, but purely in an observational capacity. The operator is responsible for managing the meeting11 (and may appoint itself, or any other person which it so wishes, as the chairman of the meeting for that purpose),12 and the operator may be required thereafter to prepare and circulate to all parties a written record of the minutes of the meeting.13 The operator may also appoint a secretary in respect of the meeting, with responsibility for recording each proposal to be voted on and how the parties’ votes

6 7 8 9 10 11 12 13

AIPN JOA §5.1; OGUK JOA §9.2. AIPN JOA §5.3; OGUK JOA §9.8.1. AIPN JOA §5.5; OGUK JOA §9.4. OGUK JOA §9.4.3. AIPN JOA §5.6. AIPN JOA §5.8. OGUK JOA §9.3. AIPN JOA §5.11; OGUK JOA §9.5.

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are cast.14 The convention is that each representative will sign this voting record at the end of the meeting,15 so as to preclude any later argument as to how the votes were cast. However, this does not preclude later debate between the parties about the accuracy of the minutes of the meeting; to mitigate this, the JOA should provide that the draft minutes which are circulated to the parties after the meeting will be deemed to have been accepted if no dissent is forthcoming within a particular period of time, and that the operator should have the final say in settling the minutes if there is continued disagreement.16 The JOA might also provide for a meeting of the OpCom to be held on paper or even by telephone, whereby any party can submit a proposal to the OpCom for voting by notice without a physical meeting.17 Such a procedure is useful for addressing either non-contentious proposals, for which an actual meeting would be superfluous, or urgent matters (eg, the decision to contract in a drilling rig which is on standby), for which an actual meeting would take too long to convene in all the circumstances. It is inappropriate for a party to cast its vote at the OpCom in respect of any matter in which that party has a personal interest. Examples of this are where: • the OpCom is asked to approve a proposal for the access of certain parties to the joint property for their own commercial purpose (5.2) or a proposal for the removal of the status of operator from the party-operator (6.4); • the OpCom is asked to approve the award of a contract (8.3) to a party, or to a third party in which a party has a direct or an indirect interest; or • the OpCom is voting on the forfeiture of interests of a defaulting party (14.4). In any of these cases the JOA might provide that the interested party (and also any affiliate of that party) is recused from the OpCom, and that only the voting interests of the remaining parties (scaled up proportionately) will be counted towards determining the decision of the OpCom. Similar recusal provisions might apply where a party’s voting rights have been suspended under the JOA.18 The JOA should provide that any proposal which has been properly approved by the OpCom (in accordance with whatever voting control mechanism applies under the JOA) will thereafter be final and binding on all parties.19 In this instance all of the parties will be bound by the decision of the OpCom, including any party which voted against the proposal at the OpCom. The only exception to this principle is where the JOA contains a non-consent right (5.1), such that a party might elect not to be bound by the decision of the OpCom in a particular instance. On the other hand, if a proposal has been rejected by the OpCom (again, in accordance with the voting control mechanism under the JOA), then the decision of the OpCom not to proceed (at least in respect of that proposal as it was formulated) will also be final and binding on all of the parties. The only exception to this

14 15 16 17 18 19

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AIPN AIPN AIPN AIPN AIPN AIPN

JOA JOA JOA JOA JOA JOA

§5.11. §5.10. §5.11; OGUK JOA §9.5. §5.12; OGUK JOA §9.6. §8.2 (A),(B); OGUK JOA §9.8.2. §15.3; OGUK JOA §9.8.4.

Peter Roberts

principle is where the JOA contains a sole risk right (5.1), such that a party might elect to pursue the rejected proposal for its own account. 7.3

Subcommittees Some JOAs permit the creation of certain subcommittees, which are brought into existence under the auspices of the OpCom and which have specific mandates to consider selected financial, accounting, legal or technical matters. Such subcommittees can be used to facilitate the input of the expertise of the nonoperating parties to a greater degree than might be usual under the OpCom, can facilitate greater levels of dialogue between the parties and can relieve at least some of the administrative burden which otherwise falls solely on the OpCom. Within the subcommittee, the voting regime which applies to the making of any necessary decisions can mirror the voting regime within the OpCom (see below), but the subcommittee will usually be expressed to be advisory to the OpCom only and will not have independent authority to bind the parties. The operator might be reluctant to allow the existence of subcommittees with significant non-operating party involvement, due to concern that the subcommittee might be used as a device by which the operator’s ability to exercise control over the performance of the joint operations is somehow subverted. Consequently, the customary compromise is that if the JOA allows subcommittees to the OpCom to exist at all, their role and independence will be closely controlled. Thus, for example, the AIPN JOA provides that the OpCom may establish such subcommittees as the OpCom deems appropriate (and so whichever parties control the OpCom will also control the establishment of the subcommittees), that the functions of such subcommittees shall be advisory only unless all of the parties (including the party-operator) determine otherwise, and that even if a subcommittee does have some decision-making power, those decisions must still be ratified by the OpCom.20 The role of project teams, which can have a function similar to a subcommittee, is considered separately (see 17.10).

7.4

Voting control How the voting control mechanism which applies between the parties is exercised at the OpCom is a critical part of the composition of the JOA and can be used to enable the non-operating parties to exercise some control over the operator’s ambitions. The JOA can be structured so as to give the parties (acting through the OpCom) the ability to vote in respect of certain matters which are essential to the performance of the joint operations, depending on how much latitude towards nonoperating party involvement the JOA wishes to grant. Thus, if the OpCom votes in favour of a particular matter, the operator will be authorised to pursue that matter as part of a joint operation. However, if the OpCom votes against that matter, the operator will ostensibly be unable to so proceed (at least, not until the OpCom eventually votes in favour of the latter, which might be achieved only by that matter being reformulated and re-presented to the OpCom).

20

AIPN JOA §5.4; OGUK JOA §9.7.

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The operating committee

In practical terms, the vote of the OpCom might, depending on how the JOA is constructed, be required in respect of matters such as: • the disposal of joint property (4.1); • the approval of work programmes and budgets (8.1) or authorisations for expenditure (8.2) which have been prepared by the operator; • contracts which the operator proposes to award (8.3); • any plan for the progression of litigation which the operator is managing on behalf of the parties (17.8); or • any other matter which the JOA reserves for consideration by the parties. The mechanics of how the representatives of the parties will cast their votes in respect of proposals made to the OpCom are addressed above. From that, the essential points to note are that each party shall appoint a representative to the OpCom and each such representative shall at the OpCom have a percentage voting interest which corresponds to the PI of that representative’s party. The structuring of the voting control mechanism at the OpCom can be founded by reference to either of the following principal formulations: • that the unanimous affirmative vote of all the representatives will be required if a proposal is to be approved; or • that a proposal will be approved if a defined percentage (which will be something less than 100% and greater than a bare majority) of the total of the percentage voting interests are cast in favour of it. The latter formulation is commonly known as ‘passmark’ voting, where the level at which the defined percentage is set is the passmark for any proposal. A low passmark bestows a dominant position on a relatively high PI-holding party (because of the ability of that party to compel a proposal which it favours), and a high passmark bestows a disproportionately large amount of management influence on a relatively low PI-holding party (because of the ability of that party to block a proposal which it does not favour). In theory, it is possible to set the passmark figure at 100%, if the parties desire to impose a requirement for unanimity within the JOA, but to do so makes no obvious sense if anything other than unanimity of voting is required. Unanimous voting has a simplicity to recommend it in that, since a party will always be able to resist the imposition of a proposal at the OpCom if it so wishes, consensus must (eventually) be arrived at between the parties (through the constant redefinition of unpalatable proposals) if any progress is to be made at the OpCom. Unanimous voting will also obviate the need for a non-consent provision in the JOA (5.1) in order to protect a party which is not in favour of a particular proposal, since that party will always have an effective blocking vote. However, the obvious disadvantage with unanimous voting is that deadlock between the parties is always a possibility, and (taken to the extreme) that deadlock might completely frustrate the performance of the joint operations. It is helpful, therefore, to ensure that if the JOA contains a unanimous voting formulation, the JOA also contains a deadlock resolution mechanism (see below).

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Peter Roberts

Because of the capacity of a unanimous voting requirement to frustrate the operator’s ability to act, such a voting control mechanism could be reserved for application solely for a limited number of major items. These items could be characterised as those items which would have a significant impact on the JOA and the parties, so that all of the parties would simply have to participate in voting on them. Such items might include a decision to surrender any part of the concession area or to seek a modification to, or an extension to the duration of, the concession (1.1), to change the scope of the JOA in any respect (4.3) or to unitise the concession area and enter into a unit operating agreement (see Appendix D).21 A proposal to modify the terms of the JOA in any respect is an obvious candidate for a unanimous voting requirement; but this need not necessarily be reflected in the voting control mechanism in the JOA, as the JOA should contain the customary provision that the terms of the agreement should not be capable of modification except with the prior written consent of all parties (17.3). The decision to withdraw from the JOA and the concession, which might ultimately result in the complete surrender of the concession, might appear to be an item for which unanimous voting would be appropriate, but to make that so would be to preclude the unilateral right of a party to exercise its withdrawal rights in accordance with the JOA (see Chapter 11). Passmark voting could be further structured around either of the following formulations: • a one-stage test, whereby a proposal will be approved at the OpCom if the aggregate percentage of the PIs voted by the representatives is equal to or greater than the defined passmark; or • a two-stage test, whereby a proposal will be approved at the OpCom if a defined minimum number of representatives vote in favour thereof and the aggregate percentage of the PIs voted by those representatives is equal to or greater than the defined passmark. The latter formulation is intended to protect any minority PI-holding parties from having no effective say at the OpCom if there is a single party which has a PI which exceeds the passmark. It might be that the JOA sets out a list of items in respect of which different levels of passmark voting will apply, with that list being determined according to the principle that the more contentious the item or the more significant the likely impact of that item on the parties (eg, the approval of a development plan or the decision to apply for a declaration of commerciality in respect of a discovery (4.1), the award of high-value contracts (8.3) or the decision to shut in petroleum production for as long as it is economically advantageous to do so (9.2)), the higher the passmark will be. Correspondingly, therefore, less significant items (eg, contract awards in respect of relatively low-value contracts (8.3) or the decision to acquire data from third parties (17.1)) might be subject to a lower passmark. If two or more of the parties are affiliates (according to the definition of an 21

AIPN JOA §11.2.

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The operating committee

‘affiliate’ under the terms of the JOA or by reference to the governing law of the JOA22 (17.5)), then because they are likely to vote en bloc, those affiliated parties might be regarded as a single, consolidated party for the purposes of any voting control mechanism which requires the vote of more than one party.23 Whether this process of consolidation should apply to the PIs of those parties and also to the number of those parties will need to be considered. However, it might be that those affiliated parties could want to vote differently in respect of a particular proposal, which possibility would question the viability of such consolidation in the JOA. Consequently, a particular JOA might contain any number of variations on the theme of voting control, as evidenced by the following examples: • “A proposal made to the OpCom is adopted and binding upon all of the parties when one or more parties representing more than 50% of the participating interests have voted in favour of the proposal.” • “A proposal made to the OpCom is adopted and binding upon all of the parties when two or more parties representing more than 50% of the participating interests have voted in favour of the proposal.” • “A proposal made to the OpCom is adopted and binding upon all of the parties when two or more parties representing more than 75% of the participating interests have voted in favour of the proposal.” • “A proposal made to the OpCom is adopted and binding upon all of the parties when all of the parties (regardless of the extent of their respective participating interests) have voted in favour of the proposal.” The JOA might also recite a combined voting control mechanism whereby a certain number of defined items will require unanimity at the OpCom and any other items will be subject to whatever passmark voting regime is prescribed in the JOA. Thus, for example, in the AIPN JOA the voting procedure creates a series of alternatives, including provision that OpCom decisions shall be validly made only by a passmark vote of a certain number of parties (where both the percentage passmark and the number of parties will be negotiated in each case).24 In the OGUK JOA there is also a passmark voting mechanism, together with a suggested list of items in respect of which unanimity of voting by all of the parties should be required.25 Although the AAPL JOA does not countenance the creation of an OpCom, the non-operating parties nevertheless have some measure of control over the operator’s ability to exercise absolute control through the implementation of a voting control mechanism which could afford a non-operating party at least a partial ability to direct the performance of the joint operations. Under the AAPL JOA,26 there is provision for each party to have a voting interest which is equivalent to its participating interest share, with voting to take place by

22 23 24 25 26

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Such as the definition provided by Section 1159 of the Companies Act 2006 in respect of subsidiary companies and holding companies, which is applied in the OGUK JOA. OGUK JOA §9.8.2. AIPN JOA §5.9. OGUK JOA §9.8. AAPL JOA 810 §8.

Peter Roberts

reference to different levels of passmark according to the number of parties that are eligible to vote; certain matters may also require unanimity of voting between the parties. Any party may propose certain operations to be conducted as joint operations in accordance with the terms of the JOA (including the drilling of exploration wells,27 the drilling of appraisal wells28 and the submission of development programmes).29 In the case of each of these proposals the parties will vote according to their interests and a non-consent election (5.1) can be made. Voting at the OpCom is typically set by the requirement for whatever number of parties and votes is required by the JOA, without dilution so as to allow a proposal to be voted on by any lesser number of parties that happen to be present and voting at the meeting. Thus, it could be an option for a party to seek to frustrate the intended operation of the OpCom simply by not turning up (unless the JOA provides, as a counter to such a deliberate lack of involvement, that a party’s failure to attend and/or vote will be deemed to be an affirmative vote). Where the JOA imposes the need for unanimity in respect of certain items, this could result in the spectre of deadlock, where a decision of the OpCom cannot be reached because unanimity is not achieved. The same result will also follow where the JOA contains a passmark voting model and the operator cannot carry the day at the OpCom because of a party’s refusal to vote in favour of a particular proposal. Most JOAs demonstrate an unwillingness to impose a meaningful deadlock resolution provision, the implication being that the parties will keep going back to the drawing board in the OpCom until some sort of mutually acceptable position is eventually hammered out. In this respect a useful comparison can be drawn with shareholders’ agreements in the world of incorporated joint ventures (1.6), where more effort is typically devoted towards recognising the need to resolve such deadlock. In a customary agreement between the shareholders in a joint venture company, the parties will agree that a deadlock situation has arisen and thereafter the relevant issue will be escalated to the senior management of each party for negotiation and (hopefully) resolution. If the deadlock remains unresolved, each party might have an option to serve a notice on each other party offering either to sell its shares to the other parties or to buy the shares of the other parties, in each case for a nominated cash value. If this forced buy-out option is not exercised, the joint venture might ultimately be wound up and its assets distributed between the shareholders. Beyond this, the world of incorporated joint ventures also offers certain forced separation measures (colloquially described variously as ‘Russian roulette’, ‘Texas shoot-out’ and ‘Mexican stand-off’), but the detail of these colourfully termed provisions is beyond the scope of this book. In the context of the unincorporated joint venture it might be a possibility in the deadlock situations described above that resolution can be found through the

27 28 29

AAPL JOA 810 §10. AAPL JOA 810 §11. AAPL JOA 810 §§12,13.

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existence in the JOA of a sole risk right (5.1), whereby a particular proposal can be furthered without the need for the recalcitrant party’s involvement (unless sole risk rights do not exist in the JOA, exist but are not exercised or exist but are disapplied for any reason). Ultimately, the deadlock between the parties can be overcome by the decision of a party to transfer its interests under the JOA (see Chapter 10) or to withdraw from the JOA (see Chapter 11). Otherwise, the JOA might provide that the unwilling party ultimately be bought out of the JOA by the other parties, with the value of that party’s interests to be determined independently. This is effectively a forced withdrawal, but is not a common provision. A mechanism which sometimes appears in a JOA is one whereby if a proposal which is made to the OpCom fails to secure the requisite level of voting support because of competing proposals (regarding the same subject matter) put forward by other parties, then (after a series of repeated attempts to agree the proposal) whichever proposal has secured the greatest level of support, relative to the support for the other proposals and determined according to the aggregate of the PIs which voted in its favour, will be deemed to be approved and the competing proposals will be deemed to have been withdrawn.30 This mechanism might also be applied more widely as a deadlock resolution tool. However, this will be appropriate only to the situation where the deadlock at the OpCom results from an inability to agree between a choice of competing proposals and will be of less obvious assistance where a failure to generate the necessary level of affirmative votes is the problem.

30

104

AIPN JOA §§6.1(D), 11.1.

8. Cost control and contracting

The non-operating parties will be keen to exercise some measure of control over the costs which the operator will incur and how the operator will enter into contracts on their behalf in the performance of the joint operations. This is an area in which the contrasting expectations of the operator and the non-operating parties will be particularly apparent. The JOA will prescribe certain mechanisms by which the operator’s ability to incur expenditure on behalf of the parties, and by which the operator’s ability to commit to contracts with third parties on behalf of the parties, will be determined during the lifetime of the JOA. These mechanisms will relate to the setting of periodic budgets, the preparation of interim expenditure authorisations and the approval of contracts which are let by the operator. 8.1

Work programmes and budgets Despite the appointment of the operator with responsibility for performance of the joint operations (6.3), the operator will not have an unlimited ability to incur expenditure which will be back-charged to the parties in respect of operations under the JOA. The principal device for controlling the operator’s freedom to spend is provision in the JOA for the determination, to be carried out principally (but not exclusively) on an annual basis, of a programme of the works which the operator intends to carry out for the relevant year, along with the operator’s best estimate of the budgeted costs of those works. Together, these activities are typically referenced in the JOA as the setting of the work programme and budget (WP&B). However, the WP&B formulation is not universally adopted within all JOAs. It is found in the AIPN JOA and in the OGUK JOA, but not in the CAPL JOA, where operator cost control is effected primarily through the authority for expenditure (AFE) mechanism (see below). The AAPL JOA adopts a somewhat looser formulation of the annual budget, through a provision that each year the operator will prepare an annual operating plan (split between capital and expense items) for informational and planning purposes, which the non-operating parties are then free to suggest changes to.1 The real control over the operator’s ability to incur expenditure on behalf of the parties

1

AAPL JOA 810 §6.4.

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is evidenced in the AAPL JOA through the AFE provision (see below). A WP&B will be prepared by the operator when necessary and will be submitted by the operator to the OpCom for approval (in accordance with the relevant rules for voting at the OpCom (7.4), and assuming that the JOA imports the notion of the OpCom). Because of the need to submit WP&Bs throughout the lifetime of the JOA, the WP&B can be seen to track the evolution of the JOA through the various phases of the activities which the JOA contemplates (4.1): • Exploration and appraisal – the very first WP&B will identify the exploration (and appraisal) activities which are intended by the operator to apply during the period immediately after the JOA has become effective (2.1), and will apply to the rump of that first year and also to the next following full year.2 This process, which will detail the anticipated exploration (and appraisal) programme, will be repeated thereafter on an annual basis for each year during the duration of the exploration phase. The activities contemplated in the WP&Bs during this phase should, as a minimum, reflect the exploration (and appraisal) aspects of the minimum work obligations which are required to be performed under the terms of the concession (1.1) If at any point during the commission of the exploration activities a petroleum discovery is made, the operator might be required to prepare and submit to the OpCom a further WP&B which governs the intended appraisal of that discovery.3 This will be the case unless the OpCom has previously approved a wider WP&B which governs exploration activities and also any appraisal activities which are reasonably related to any discoveries made in consequence of those exploration activities. • Development – if, in consequence of the exploration activities, a petroleum discovery is made and has been appraised, and it is apparent that the discovery has the capacity to be subject to a declaration of commerciality, then the operator will be required to submit a WP&B which describes a development plan for that discovery.4 That development plan will identify the development phase activities which are intended to apply for the rump of the year in respect of which the discovery was declared commercial and also thereafter for the next following full year (and maybe beyond that – see below). • Production – once the development phase activities have been completed the production phase should begin, and in respect of the production operations a separate WP&B may apply.5 This phase, which is typically the longest of the lifecycle of the JOA, is also the period in respect of which the setting of the WP&B on an annual, rather than an activity-specific, basis will most obviously apply. However, during the production phase there may also be occasions when the operator requires to undertake activities such as the workover of a well, the installation of new petroleum production, processing, storage or transportation infrastructure or the modification of any such 2 3 4 5

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AIPN AIPN AIPN AIPN

JOA JOA JOA JOA

§6.1(A)(B); OGUK JOA §10.1. §6.1(C). §6.2; OGUK JOA §11.1. §6.3; OGUK JOA §12.1.

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infrastructure. Any of these activities – effectively development activities in their own right – might require the submission by the operator of a separate WP&B to the OpCom. Decommissioning – at the end of the production phase the operator will be required to submit a WP&B in respect of the anticipated decommissioning activities (see Chapter 13).6 This WP&B is more likely to apply to the suggested decommissioning activities by reference to their very nature, rather than by reference to any particular periods of time.

The profile and nature of the expenditure which is associated with each of the above phases have been considered previously (1.8). There could be some artificiality in designing a long-term development plan, but then limiting its effectiveness through confining it to a WP&B for only the immediate and the next-following year, so the operator might require that the development plan potentially apply also for the whole of an identified development phase over several years thereafter. This would be effected through the submission by the operator of a multi-year WP&B for the development plan.7 In principle, the same logic might also be applied to setting a multi-year exploration (and appraisal) phase programme (see above). However, the OpCom’s approval of a multi-year WP&B will not give the operator as much freedom from interference as it might suggest. The protection to the parties of being locked in to a long-term WP&B, in respect of which the experience actually gained from the evolution of the relevant activities might necessitate some revisions, is provided through provision in the JOA for the OpCom subsequently to require the revision of an approved WP&B (see below), and also through the AFE mechanism (see below). Moreover, because over the lifetime of a JOA all of the various phases which are described above could be happening simultaneously, the operator’s WP&B activities could also be happening together, with different forms of WP&B being progressed at the same time. The OpCom will be required to convene promptly in order to consider any WP&B which the operator has submitted, such that the relevant activities can be commenced promptly. If the OpCom does not vote in favour of the WP&B which the operator has proposed, the operator will be required to revise the WP&B and to submit the revised WP&B to the OpCom for its approval. This process might need to be repeated several times if there is an ongoing difference of opinion between the operator and any non-operating party as to what is appropriate for the WP&B (and subject ultimately to the mechanics prescribed in the JOA (if any) for the resolution of an ongoing deadlock – see 7.4). It will be apparent that a party which is reluctant to be committed to the activities contemplated by a particular WP&B (or rather, which is reluctant to be committed to having to pay up for its relevant share of the costs of those activities) could use the

6 7

OGUK JOA §13.1. AIPN JOA §6.5; OGUK JOA §11.1.

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OpCom as a vehicle for defeating the operator’s intentions through constant rejection of the WP&B which the operator has submitted (if that party has the requisite level of voting control at the OpCom (7.4)). In the extreme case this course of action might even jeopardise the sanctity of the concession, where the minimum work obligations remain unperformed because of an inability to agree a WP&B. It will also be apparent that the ability of the OpCom to control the operator’s freedom to act through the approval of the WP&B will not be an issue where the operator has effective control of the OpCom through holding the requisite passmark voting level. So that the parties can make a suitably informed decision at the OpCom about the WP&B which the operator is proposing, the JOA typically requires the operator (to the extent that it is able) to provide a sufficiently detailed outline of its intentions through the content of the WP&B. Consequently, the WP&B will usually be broken down so as to recite individual line items of proposed activity and expenditure (by reference to the proposed works and the relevant costs and the intending timings and durations for the commission of those works).8 These line items in the WP&B will go on to be applied in respect of permitted overspends by the operator (see below) and in respect of the grounds for rejection of an AFE in certain circumstances (see below), so care should be taken in their preparation. Although the underlying expectation of the JOA is that the WP&B exercise will be undertaken and applied on an annual basis, it will be apparent that any WP&B which relates to specified exploration and/or appraisal activities will be of a shortterm nature (according to the nature of the particular activity). Similarly, any WP&B which relates to the introduction of a development plan or to specified interim development activities, specified decommissioning activities (see Chapter 13) or any multi-year programme will be an exception to the principle that a WP&B is set solely by reference to the chronology of a year of activities. Aggregating the number and the extent of these exceptions suggests that, on balance, the WP&B activity is perhaps better regarded as an activity-driven, rather than an annualised, process. Once the WP&B has been set for a particular year (or for a particular programme of activity), the operator will hope to be free from further financial control by the parties for that year (or for that programme of activity), at least up to the limit of the relevant budget which is set by the WP&B. However, beyond the WP&B, several other devices in the JOA might be applied as a constraint to the operator’s ability to incur expenditure (notably the AFE mechanism (see below), the procedures for control of the operator’s freedom to award contracts (see below) and any limitations in the accounting procedure on the operator’s ability fully to cashcall or invoice request the parties (16.2)). Furthermore, it will always be an open possibility that the OpCom might wish to revise any WP&B which it has previously approved (through the application of any party to the OpCom).9 If this happens, the operator will be required to revise the WP&B accordingly and to submit that revised WP&B to the OpCom for further approval.

8 9

108

AIPN JOA §6.4. AIPN JOA §6.1(E).

Peter Roberts

In contrast to the idea of close control of the operator’s freedom to incur expenditures, the JOA might also afford some latitude to the operator by providing that certain operational circumstances might dictate a right of the operator to overspend against an agreed budget which has been set within a WP&B. In the extreme case such a right will apply in emergency situations where the operator needs to take steps to preserve life or to protect the joint property. A more prosaic example of this right would be a standing right for the operator to overspend against any particular line item in a budget, up to a defined financial limit. This is suggested, for example, in the AIPN JOA to be up to 10% of the value of the relevant line item, subject to a cumulative cap of 5% of the value of the total applicable budget,10 with similar provisions applying in the OGUK JOA, and subject also to the possible necessity for the operator to advise the OpCom of the fact of that overspend by providing an informational AFE (see below). 8.2

Authority for expenditure The extent of the operator’s authority to incur expenditure which will be back-charged to the parties in respect of each year of operations under the JOA is principally delimited in accordance with the provisions which set the WP&B (see above). However, there may be a further layer of control by the parties over the operator’s ability to incur expenditures, which might be applied through the existence of an AFE mechanism in the JOA. In simple terms, the AFE mechanism will oblige the operator to prepare a relatively detailed summary of any particular expenditure which it proposes to incur and to submit that summary to the parties for their scrutiny through the medium of the OpCom. The extent of the OpCom’s involvement in the AFE mechanism thereafter will be evidenced in one of the following ways (all of which appear, for example, as options in the AIPN JOA):11 • AFEs for information – the operator might be required to submit an AFE to the OpCom, but this will be done only for the purpose of providing information to the OpCom.12 In this sense, therefore, the word ‘authority’ in the term ‘AFE’ is something of a misnomer, since the operator is not actually seeking authority to proceed from the OpCom and is free to incur expenditures in the performance of the joint operations up to the level of the applicable budget, without further authorisation from the OpCom. • AFEs for approval – the operator might be required to submit an AFE to the OpCom for actual approval by the OpCom13 (in accordance with the relevant voting rules at the OpCom (7.4)); without that approval, the operator will be unable to incur the relevant expenditure.14 Under this formulation,15 the OpCom’s ability to reject an AFE, if it votes to do so, will be absolute. The JOA

10 11 12 13 14 15

AIPN JOA §6.8; OGUK JOA §§10.5, 11.4, 12.4, 13.4. AIPN JOA §6.7. AIPN JOA §6.7(B). AIPN JOA §6.7(B). AAPL JOA 810 §6.2; CAPL JOA §3.01 B; OGUK JOA §§10.2, 11.2, 12.2, 13.2. AAPL JOA 810 §6.2; CAPL JOA §3.01 B.

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might also require the operator to provide supplemental AFEs for approval where an overrun against the costings in an original AFE is in prospect (see below). AFEs for conditional approval – the operator might be required to submit an AFE to the OpCom for actual approval; without that approval, the operator will be unable to incur the relevant expenditure, but the JOA will contain a presumption in favour of the OpCom’s approval of the AFE and the ability of the OpCom to reject an AFE will apply only in a limited set of circumstances16 (principally, that the proposed costs in the AFE exceed the corresponding line item in the appropriate budget by more than a defined tolerance; the terms of a proposed contract with a third party which is referenced in the AFE are not fair market terms; or any technical specifications which are identified in the AFE are imprudent or are not reasonably supportable).

If, where the JOA gives the OpCom the ability to reject an AFE, the OpCom does reject it, then the activity which was suggested in the relevant AFE will prima facie no longer be capable of being undertaken as a joint operation. Consequently, at that point the likely reaction is that the operator will re-submit a revised AFE to the OpCom in order to secure the OpCom’s approval. The CAPL JOA illustrates the high-water mark of OpCom control through AFEs by providing that, as a matter of course, the operator must be in possession of an AFE, approved by all of the parties, before any expenditure beyond a defined amount can be incurred by the operator;17 although in defence of the position taken in the CAPL JOA this is the only effective mechanism which that JOA provides for control of the operator by the parties. Several other devices can moderate the impact of the AFE mechanism in the JOA: • Financial limits for application – the AFE mechanism could be expressed to apply only in respect of items of expenditure beyond a defined financial limit which is set in the JOA, so as to protect the operator from being unreasonably obliged to submit AFE requests for de minimis amounts.18 The AIPN JOA also provides for the possibility of different levels of financial limits to be set depending on whether the AFE applies to activities in the exploration/ appraisal, development or production phase.19 A suggested rationale for this differentiation is that a higher threshold should apply during the early phases of the JOA, when the operator will appreciate the greatest degree of freedom to act in undertaking the necessary exploration and appraisal activity and with the least possible option for a nonoperating party to frustrate unreasonably the intentions of the JOA, but another school of thought says that a low AFE threshold should apply so as to protect the interests of the non-operating parties where there is any measurable uncertainty about the accuracy of the predictions of the WP&B 16 17 18 19

110

AIPN JOA §6.7(B). CAPL JOA §3.01B. OGUK JOA §§10.2, 11.2, 12.2, 13.2. AIPN JOA §6.7(A).

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(which would be more likely in respect of exploration and appraisal activities). Excluded items – the JOA might provide that the AFE mechanism is disapplied in respect of certain activities, such as the performance of minimum work obligations (1.1), on the basis that those obligations simply have to be performed by the parties and that performance cannot be jeopardised by the impediment of an AFE mechanism; a similar principle will apply in respect of emergency expenditures (of whatever amount) which the operator must incur.20 OpCom control – the ability of the OpCom to control the operator’s freedom to act through the approval of AFEs will not be an issue where the operator has effective control of the OpCom through holding the requisite passmark voting level (7.4). AFE overspends – the JOA might allow the operator the latitude to overspend against an approved AFE, subject to certain limits (in the same manner as is described above in relation to WP&B overspends).21

The preparation and submission of individual AFEs can help in monitoring the individual costs of performing the joint operations (in particular, where the AFEs are issued to the OpCom for information rather than for approval), but using the AFE route as a means of effecting control over the operator should be less necessary if a budget is properly scoped at the outset, when the budget is set. Where there is an obvious and untenable lack of detail in the budget (eg, when a multi-year WP&B is set, particularly in respect of an activity such as exploration and appraisal, which is usually beset with uncertainty), a form of AFE approval might be acceptable, but this might be regarded as the exception rather than the rule. However, this will not be the case where the cost control mechanism in the JOA is founded predominantly on the AFE mechanism rather than any annual budget cycle, as is the case in the AAPL JOA and in the CAPL JOA. 8.3

Contract awards A key responsibility of the operator under the JOA is to commission the procurement of the various goods and services which are needed in order to perform the joint operations. Several options apply in respect of the manner in which the operator can procure the necessary goods and services: • Provision by the operator – one possibility is that the operator can provide certain services (but less typically goods, although some goods might be supplied by the operator – see 16.2) from its own inherent resources, assuming that the operator has a scale of operation which facilitates this.22 This could happen, for example, in the provision of certain legal, accounting, technical and operational services by the operator. The disadvantage to the

20 21 22

AIPN JOA §6.8C; OGUK JOA §6.10.2. AAPL JOA 810 §6.2.1; AIPN JOA §6.8; CAPL JOA §3.01C; OGUK JOA §§10.5, 11.4, 12.4, 13.4. OGUK JOA §6.5.2.

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non-operating parties of this formulation is that the significant limitations which the JOA typically imposes on what might otherwise be the operator’s liability for a failure (12.1) will afford less protection to the parties than might be on offer where the services are provided by a third-party supplier (see below). The disadvantage of this formulation to the operator is that it might be able to recover the costs of the provision of these services only through the general overhead recovery under the accounting procedure (see Chapter 16), and cannot readily make a specific back-charge to the parties, unless the accounting procedure specifically permits this. Provision by a third-party supplier – the operator might enter into a contract with an independent third party (ie, an entity which is not related corporately to the operator – but which could be any of the non-operating parties or their affiliates) for the provision of certain goods and services. This is the conventional route by which goods and services which are necessary for the performance of the joint operations are procured, and the contracts with such third-party suppliers might be arranged by the operator on a bespoke basis or through call-off under a federal contract (see below). The advantages to the operator of procuring the assistance of a third-party supplier are that the supplier, rather than the operator, will bear any liability to the parties for any failure to perform the relevant contract to the requisite standard and the operator can fully back-charge the costs of the supplier to the parties through the cashcall or invoice request mechanism (16.2). That the parties have contracted with the supplier means that they could claim a loss against the supplier which has arisen in consequence of the supplier’s default. In contrast, if the operator contracts with the supplier for its own account and not as the agent of the parties then, if the supplier defaults, the provisions of the JOA which limit (or even eliminate) the operator’s liability to the parties could mean that the operator has no liability to the parties for the supplier’s default and so the operator arguably has no loss which could be claimed against the supplier (where the relevant contract applies a liability formulation other than liquidated damages). This hypothesis (which might, of course, be applied at the insistence of the defaulting supplier) would apply unless the operator were able to elect to waive the limitations of its liability under the JOA, so that the parties could make their claims against the operator and so that the operator could then make those claims against the supplier. That said, the operator might still argue that it has a loss which results from the supplier’s default, notwithstanding the absence of a liability of the operator to the parties under the terms of the JOA. Provision by an affiliate of the operator – the affiliate contracting model, whereby an affiliate of the operator will be contracted to provide certain goods and services, is considered below. In-kind contribution by a party – the ability of a party to contribute goods and services in kind towards the performance of the joint operations is considered below.

Peter Roberts

The parties will be keen to ensure that the operator procures the provision of goods and services in an open and transparent manner, and also in accordance with any procurement rules which may be applicable (eg, the EU Procurement Directive).23 Furthermore, the concession might require a certain local content level to be met, which will also have the capacity to shape the operator’s procurement philosophy. While the non-operating parties should have little difficulty in appreciating the need for, and the importance of the right of, the operator to contract for the provision of goods and services, the non-operating parties could nevertheless have several concerns in respect of how this right is exercised by the operator: • Form of contract – where provision is made by a third-party supplier, the nonoperating parties will be keen to ensure that the operator utilises a form of contract which is of obvious quality and which affords a fair measure of protection from, and enforceability against, that supplier. In respect of the latter point, the ability of the non-operating parties to compel the operator to take steps to enforce the contract against the supplier will be an issue if the operator demonstrates any reluctance to enforce the contract. The non-operating parties might therefore require (by reservation under the terms of the JOA and also in the relevant contract) a direct right of enforcement of the contract. This might be particularly appropriate in respect of any affiliate services contract (see below) or federal contract (see below), where there might especially be a perception of reluctance on the operator’s part to fully enforce such contracts. • Identity of supplier – where provision is made by a third-party supplier, the JOA might require the operator to award such contracts to the best qualified supplier (determined by reputation and technical competence). The JOA might also oblige the operator to conduct a formal competitive tender process (at least in respect of contracts with a value in excess of a defined financial limit), so as to encourage the emergence of the lowest-cost (but technically competent) supplier (this might also be a requirement of any applicable procurement rules). • Contracting capacity – where provision is made by a third-party supplier, the non-operating parties will be keen to establish the extent of their, or of the operator’s, liability to the supplier under the relevant contract. It may be that the operator contracts solely in its own name and so only the operator will be liable under the terms of the contract to the supplier. Alternatively, the operator might contract expressly as the agent of all the parties,24 so each party will be liable under the terms of the contract to the supplier as disclosed principals in accordance with the customary rules of the law of agency (6.3). If this latter formulation applies, the JOA might mandate the inclusion in each such contract of a form of wording which provides that, notwithstanding that all parties are technically party to the contract, for the purposes of administrative convenience the supplier will look to enforce its

23 24

Directive 2004/17/EC, which was enacted into English law by the Utilities Contracts Regulations 2006 (SI 2006/6). OGUK JOA §6.5.8.

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8.4

rights only against the operator.25 The supplier is unlikely to be willing to accept any variation on this form of words which has the objective or effect of removing the joint and several liability of all of the parties to the supplier under that contract, however. Involvement of the OpCom – perhaps the key issue which typically arises for consideration in the negotiation of a JOA in respect of contracts for the supply of goods and services relates to the freedom of the operator to award such contracts without the need for any prior approval of the OpCom. Such freedom might indeed be reserved to the operator, but the more typical provision under the JOA is that the operator will be required to obtain the consent of the OpCom to the award of any contract which has a value in excess of a defined financial limit26 (or in respect of any series of related contracts with the same supplier which individually might be of a value below that defined threshold, but which in the aggregate would exceed it). This mechanism is intended to apply principally in respect of contracts to be entered into with a third-party supplier, but might also apply in respect of affiliate services contracts (see below) and also the call-off under federal contracts (see below). Affiliate services and federal contracts – the operator’s ability to contract for the supply of goods and services through the use of its own resources or through the use of affiliate services contracts or through call-off under federal contracts, rather than through the use of genuinely independent third-party suppliers, and the extent to which the OpCom might expect to become involved in that process, is addressed in detail below.

In-kind contributions If any of the parties (whether the operator or the non-operating parties) has any goods or services which can be contributed in-kind and directly to the performance of the joint operations, such in-kind contributions may have some advantages over the conventional route of having the operator contract with (and pay cash to) a third party for the provision of those goods or services and then back-charge the costs of such provision to the parties: • Mitigated financial flows – the need for monetary movements from the parties to the operator and then out to the third party through the joint account will be reduced. This will lessen the financial impact on the parties and will also reduce the risk of a party’s default in paying up against its commitments (14.1). • Inventory stock management – the contribution of goods in-kind will allow the contributing party to reduce its accumulated inventory stocks. In-kind contribution by a party for the benefit of the joint operations is effectively a form of barter by that party, where the contribution so made will offset a share of the contributing party’s obligation in respect of the cost of the joint

25 26

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AIPN JOA §4.2(B)(15). AIPN JOA §6.6; OGUK JOA §§6.5.3, 6.5.4, 6.5.5.

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operations, but two key issues will also need to be considered in respect of such an activity: • Fitness for purpose – all parties will have a concern to ensure that any in-kind contributions which are made by a party are consistent with the needs of the joint operations (in terms of quality, availability and value), and that the opportunity for such contributions to be made is not engineered somewhat artificially for the benefit of allowing the contributing party to offload its inventory. • Valuation – any proposed in-kind contributions will require a fair valuation of their worth inherently, and also in comparison with market values which might apply in respect of the provision by a third-party supplier, in order to ensure that the joint venture receives the optimum value. The principle of in-kind contributions does have something to recommend it for the benefit of the parties and their joint venture, but subject to addressing the associated issues. The management of this whole area is also something which lends itself to being the subject of a specific subcommittee to the OpCom (7.3). 8.5

Affiliate services contracts Depending on the particular operator, the operator may have certain in-house resources which it could apply to assist in the performance of the joint operations. These resources might relate, for example, to the provision of accounting, legal, design, technical and engineering services, supply and logistics skills and general administration and management services. These services could be supplied directly by the operator (which could be prejudiced by the issue identified above regarding the operator’s ability to backcharge for these services), by the operator (in the capacity of operator) contracting with itself (in the capacity of service provider), or by a series of companies which are affiliated to the operator (which could be a parent company, a sibling company or a subsidiary company) through a mechanism which is commonly known as ‘affiliate services’. The self-contracting route mentioned above will have much the same issues associated with it as are considered below in respect of affiliate services contracting. The operator’s preference may be to contract for the provision of affiliate services wherever it can, rather than to let a contract to a third-party supplier, on the grounds that the provision of such affiliate services leads to the achievement of greater operational efficiencies through ease of coordination by the operator which can be applied for the benefit of all the parties in the performance of the joint operations. The real advantage to the operator of doing so is that as a condition of providing the affiliate services, the joint account will be charged with the costs incurred by the operator under the relevant affiliate contracts (in the same way as would apply in respect of the costs of a contract with a third-party supplier), but with the added benefit that the net profit from the affiliate contracts will accrue to and will be kept in the corporate group of which the operator and the affiliates are part. In the JOA the operator may therefore seek to afford priority to contracts for the provision of affiliate services in the performance of the joint operations. The

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operator may require that such affiliate services be provided with the greatest possible degree of flexibility and informality, including that the affiliate services contracts be procured outwith any contract award rules which the JOA might otherwise impose. While the provision of affiliate services may well benefit the parties, the nonoperating parties could have some concerns in respect of the affiliate services contracting route. The first concern relates to the cost of the affiliate services. The non-operating parties might argue that this should be translated to a requirement that the amount levied by the operator against the joint account for the provision of the affiliate services be a genuine reflection of only the costs incurred by the affiliate and not include an element of profit, but this overlooks the reality that a third-party supplier would charge a profit element for the provision of the same services. Consequently, the non-operating parties should be more concerned to ensure that the aggregate costs of the affiliate services are not greater than the costs which a comparable thirdparty supplier would have charged for the provision of the same services (including the profit element). To mitigate this risk, the non-operating parties may require a right in the JOA to audit the amounts payable in respect of the affiliate services, and may also require that the affiliate services be subject to the customary contract award rules. There will also be a need to ensure that the general overhead chargeable by the operator under the accounting procedure (16.2) does not double count any amounts which have been charged separately for the provision of the affiliate services. The second concern relates to the standard of the affiliate services. The nonoperating parties may require that the affiliate services which are provided be of a standard at least equal to that which would be forthcoming from a comparable thirdparty supplier. They might also require that the affiliate services to be provided be recorded in a fair and balanced contract between the operator and its affiliate, imposing liability on the affiliate’s part for a failure to perform the particular services to the requisite standard and giving the operator a right to terminate the contract where the affiliate’s failure is persistent or material. However, given that the operator might be reluctant to enforce such a contract fully against its own affiliate, the nonoperating parties might argue that they should have a direct right of enforcement. In certain situations it might be an obvious truth that the operator’s own affiliated resources are preferable to anything which might be on offer from independent third-party suppliers. The non-operating parties will say there is an obvious risk of abuse associated with giving the operator an open and unrestrained right to award contracts on this nepotistic basis, but it is sometimes the case in the JOA that any control mechanism which is suggested for managing this issue errs too far on the side of caution, and could ultimately operate to the detriment of the best interests of the joint operations. The AAPL JOA adopts the formulation that an affiliate of the operator can perform certain works so long as the relevant performance is at competitive rates and the contracting therefor is in accordance with industry standards.27 27

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AAPL JOA 810 §5.3.

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The AIPN JOA recognises the possibility that the operator might call upon its affiliates for the performance of the joint operations, but subject to the proviso that any contract (which by implication would include an affiliate services contract) awarded for a value beyond a defined amount will require approval by the OpCom.28 The OGUK JOA takes a similar line, but with an express reference to affiliate services contracts.29 The AIPN JOA also obliges the operator to undertake to avoid conflicts which may arise between its interests (including the interests of its affiliates) and the interests of the non-operating parties when conducting business in connection with the JOA (albeit with some allowance made for affiliate services contracts which are otherwise made in accordance with the terms of the JOA).30 The CAPL JOA takes the line of obliging the operator to award contracts for the provision of goods and services in accordance with what it calls ‘good contracting practices’, but recognising also that (subject to compliance with that requirement) the operator can award such contracts to itself or to one of its affiliates.31 The operator’s award of contracts to its own affiliates, or even the operator’s inhouse provision of services for the performance of the joint operations, could also expose the operator to claims of breach of certain fiduciary duties which might be owed to the parties (see Appendix F). This possibility, if the fiduciary duties issue is addressed properly in the JOA, could give some comfort to the non-operating parties and could in part displace the need for what might otherwise be a potentially overwhelming range of management devices, although an express contractual entitlement would be preferable to the non-operating parties in comparison with the uncertainty of an action for an alleged breach of an alleged fiduciary duty in order to protect their interests under the JOA. 8.6

Federal contracts It may be that the operator has signed up certain third-party suppliers for the provision of generic services (eg, design and engineering services, supply and logistics skills and general administration and management services) which can be applied by the operator towards the performance of the joint operations. The essential feature of these arrangements (which are sometimes called ‘federal contracts’) is that they can be called off for the benefit of the operator’s activities across several different JOAs and are not contracted specifically for the particular JOA. Thus, in respect of the particular JOA the operator would call off some part of the necessary supplies through such a federal contract. The principal advantage of a federal contracting programme – at least so says the operator – is that through the consolidation of buying power of a big operator with third-party suppliers, the operator can negotiate better commercial terms, which can then be passed on to the parties for the benefit of a particular JOA through lower overall operating costs. Despite this obvious logic, some non-operating parties

28 29 30 31

AIPN JOA §§4.2(A), 6.6. OGUK JOA §6.5.2. AIPN JOA §20.2(B),(C). CAPL JOA §3.03B.

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nevertheless remain suspicious that federal contracts ultimately benefit the operator rather than the joint operations, and that any economies of scale which are generated by such contractual relationships stay vested in the operator and do not fully percolate down so as to benefit the parties at the individual JOA level. Even if the operator were to entertain any suggestion by the non-operating parties that they should be entitled to share directly in the economic gains made by the operator from a federal contracting programme (which is unlikely), the parties should be nervous of the suggestion that they might thereby be effecting an arrangement which is more akin to a partnership (see Appendix B). In the JOA the operator might therefore seek to afford some priority to the provision of federal contracts in the performance of the joint operations. The operator may require that such federally sourced services be provided with the greatest possible degree of flexibility and informality, including that the call-off under any federal contracts be procured outwith any contract award rules which the JOA might otherwise impose. The OGUK JOA recognises the possibility of applying the benefit of federal contracts which have been entered into by the operator, but it also recants somewhat from this progressive stance by importing control through a requirement for OpCom approval for any such federal contract awarded for a value beyond a defined amount.32 The CAPL JOA also recognises the possibility of federal contracting by the operator, subject only to the overriding obligation of the operator to comply with good contracting practices.33 While the provision of federal contracts may well benefit the parties, the nonoperating parties may have some concerns in respect of the federal contracting route. These concerns could relate to the competitiveness of the costs of the federal contract and to the standard of the federal contract, and are similar to the concerns discussed above in respect of affiliate contracts. However, there may be an additional issue to consider, in respect of the enforcement of a right of the operator to terminate a federal contract because of the contractor’s inadequate performance. The operator could be reluctant to see a situation in which poor performance by the relevant contractor in respect of only one particular JOA would result in the need for the operator to terminate the whole federal contract (where such termination could be effected by the operator or by a non-operating party having a direct right of enforcement). The more likely outcome, therefore, is that the operator would be obliged to withdraw the federal contract in respect of the particular JOA and would instead make some alternative provision for that JOA. One consequence of having the operator procure the performance of the joint operations through the appointment of a federal contractor is that the non-operating parties will (if the operator contracts as agent on their behalf – 6.3) be exposed contractually to the entire width of the operator/third-party federal contractor relationship, so the non-operating parties will be keen to ensure that their liability to

32 33

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OGUK JOA §6.5.3. CAPL JOA §3.03B.

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that contractor will be clearly limited in the relevant contract to the business of their particular JOA, as evidenced by the relevant call-off. The non-operating parties might even require that the operator indemnify them against any non-JOA specific claims which the third-party federal contractor brings against them, as a concession to allowing the operator to undertake a federal contracting programme, although the customary limitation on the operator’s liability to the parties in the JOA (12.1) could make this indemnity a remote prospect.

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9. Petroleum allocation, lifting and disposal

The JOA should determine how any quantities of petroleum which are produced in consequence of the joint operations (and any exclusive operations) will be allocated between the parties having any entitlement thereto. The JOA should also make provision for how the parties intend to lift and take delivery of their respective entitlements to the produced petroleum. These lifting arrangements will differ according to whether crude oil or natural gas is being produced, and will recognise the possibility that there may be occasions where a party might need to lift less or more petroleum than the entitlement which is represented by that party’s allocated quantity. Although provisions relating to petroleum allocation and lifting might appear to have an obvious commercial logic of their own, in that the very purpose of entering into the JOA is to produce petroleum for the benefit of the parties, the explicit statement of such provisions in the JOA is necessary (and should always be welcome) in the interests of clarity. At a minimum, these provisions will create the obligation (rather than just the right) of the parties to lift and take delivery of their petroleum entitlements, and will impose contractual limits on any ability of the parties to lift and take delivery of quantities which are different from those entitlements. The parties will also need to make arrangements for the subsequent disposal of the petroleum once they have lifted and taken delivery of their respective entitlements. Allocation, lifting and disposal obligations should also apply separately in respect of any exclusive operations (see Chapter 5), so that they do not prejudice the joint operations. 9.1

Petroleum allocation Concessions which give the concession holders a direct entitlement to the quantities of petroleum which have been produced, rather than a purely economic interest, treat the total quantity of produced petroleum which is attributable to the concession holders as belonging to all of the concession holders jointly, without regard to their individual (ie, their respective PI-based) interests. This is consistent with how the interests of the parties under the concession are generally represented between the parties (3.3). Consequently, once a quantity of petroleum has been produced, it will then be necessary to determine how that petroleum will be allocated between the parties. This allocation will be done principally by reference to the parties’ respective PIs, in recognition of the individual interests which the JOA creates. The allocation procedure will be managed by the operator on behalf of all parties.

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Allocation provisions will vary between JOAs (and might be recited in the JOA or in a separate agreement), but as a simple summary the following principles will typically appear: • Operator’s fuel retention – the operator may wish to retain some of the produced petroleum in order to facilitate the ongoing petroleum production operations (eg, natural gas might be re-injected into the petroleum deposit so as to assist with crude oil lift or might be combusted as compressor fuel). The allocation principles in the JOA might therefore recite a reservation in the operator’s favour to this effect, with the remainder of the produced petroleum to be made available for allocation to the parties.1 • Joint operations production – petroleum which is produced from the joint operations will be allocated between the parties according to their respective PIs. If there is a carry in favour of a party which is to be repaid from petroleum production (3.5), the carried party’s allocated petroleum quantities will, after the point of allocation, be applied to repay the carry. • Exclusive operations production – petroleum which is produced from an exclusive operation will be allocated between the parties that have elected to participate in that exclusive operation according to their respective PIs in that exclusive operation (5.2). • Allocation point – the JOA might identify a point at which the produced petroleum is measured by the operator and at which the allocation between the parties will be deemed to take place. This point could be an identified delivery point on the petroleum production facilities (if those facilities have the necessary measurement equipment in situ), and could correspond to the identified delivery point for the lifting and taking of delivery of petroleum (see below). • Domestic market obligations and participation rights – if the terms of the prevailing mineral law or of the concession oblige the concession holders to make available a certain proportion of the produced petroleum to the government on a priority basis for delivery into the domestic market (often called a ‘domestic market obligation’), or if the government has the priority right to buy defined volumes of produced petroleum (under what are sometimes called ‘participation agreements’), then the JOA could record that the allocation to the parties of their respective petroleum entitlements will be first subordinated to the need to satisfy that domestic market obligation (or participation agreement) from the gross quantity of produced petroleum. Alternatively, each party might receive its allocated petroleum entitlements and only then will each party be obliged to contribute its proportionate share of the petroleum required to satisfy the domestic market obligation (or participation agreement). The allocation procedure will result in each party having its ‘entitlement’ – that is, a distinct share of the overall quantity of petroleum which has been produced 1

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AAPL JOA 810 §15.1; CAPL JOA §6.01A; OGUK JOA §18(a).

Peter Roberts

from the joint operations.2 This entitlement can be used by a party as a bankable interest against which that party can raise third-party debt finance in order to meet its share of the costs associated with the performance of the joint operations. If the concession which underlies the petroleum project is a production sharing contract, then the petroleum allocation provisions might also detail the necessity for the operator to allocate produced petroleum quantities between quantities which will be applied towards cost recovery and profit petroleum, and as between the interests of the contractor and the government, all in accordance with the terms of the production sharing contract.3 9.2

Petroleum lifting The ultimate purpose of the joint operations (and of any exclusive operations) is to produce petroleum. The JOA will entitle the parties to lift and to take delivery of their respective entitlements of the produced petroleum, where the extent of those entitlements will be determined in accordance with the allocation provisions in the JOA (see above). It is always possible that the operator could be tasked with lifting, taking delivery of and selling all of the produced petroleum and accounting to the parties for their respective shares of the resultant sales proceeds (if the scope of the JOA so permits (4.2)). However, this may create taxation issues and competition law issues (through having the operator appointed as the sole marketer and aggregated seller of the parties’ entitlements), and overlooks the fact that at least some of the parties may have a preference for the physical delivery of their own petroleum entitlements. This latter issue will arise, for example, where a party has a downstream operation (eg, a refinery) for which it requires the actual delivery of petroleum. When petroleum prices are low, some of the parties might wish to shut in petroleum production and forgo those low prices in favour of restraining the development of the petroleum reserves until higher petroleum prices return. This is a commercial decision which might be overruled only for valid safety or operational reasons which could thereby compel production to be maintained. This decision will be achievable if all parties are agreeable to the tactic, but some of the parties may have a financial need or an operational need (in the case of a party with refining operations to service – see above) to maintain production, however low the petroleum prices. Whether the decision to shut in production requires unanimity or can be determined by the OpCom through passmark voting will need to be addressed in the JOA (7.4). A preference of some of the parties to shut in the production of crude oil for commercial reasons might also impact on the interests of any parties that have contracted to sell any associated gas entitlements, so the production of petroleum per se may need to be distinguished in respect of its constituent components where necessary.

2 3

AIPN JOA §1.25. AIPN JOA §19.

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Petroleum allocation, lifting and disposal

The conventional formulation under the JOA is that each party will take lift and take delivery in kind of its respective entitlement of the net produced petroleum volumes (crude oil, liquids and natural gas, if all are being produced) at a defined ‘delivery point’ and will thereupon be responsible for the disposal of that petroleum (see below). The JOA will give each party the right to lift and take delivery of its petroleum entitlements, but should also go beyond that and impose an obligation on each party to so lift and take delivery.4 It is necessary to do this because a petroleum deposit which has been developed for production is not principally intended also to be a petroleum storage facility, and a party’s election to leave its share of the produced petroleum unlifted might ultimately jeopardise the continuing integrity of the production operations. Doing so could also lead to later difficulties in accounting for any underlifts or overlifts against a party’s allocated quantity (see below). The right, and the obligation, of each individual party to lift and to take delivery of its petroleum entitlements will also be helpful in dispelling the notion that the JOA might be construed as a partnership (see Appendix B). However, the obligation of a party under the JOA to lift and to take delivery of its petroleum entitlements does not equate to an absolute obligation of the parties to produce petroleum. If the operator or the OpCom resolves to curtail petroleum production operations for a period, whether for commercial or for operational reasons (see above), then a party which does not support that resolution should not look to the petroleum lifting or disposal provisions in the JOA as a means of compelling the continuation of production. Rather, those provisions will apply only in respect of petroleum which has actually been produced. There may be circumstances in which a party might wish to lift a lesser quantity of petroleum than its allocated entitlement (an ‘underlift’) or a greater quantity of petroleum than its allocated entitlement (an ‘overlift’). The JOA might recognise the limited right of a party to engage in either of these activities, at least to a limited extent and for credible operational reasons. The principles of underlift and overlift which are referred to below presume that these rights will be exercised contractually by a party, acting through the intervention of the operator and within certain limits. It is less typically the case that a party will be able to force an underlift or an overlift by its own direct acts. For this to happen, the relevant petroleum production infrastructure must be physically configured in such a way as to make that possible. Thus, for example, where a party’s entitlement to crude oil is being offtaken by a shuttle tanker from an offshore production platform, it could be that the tanker fails to turn up when scheduled to do so, or that the actual tanker which arrives to offtake that crude oil has a cargo capacity which is less than the disposing party’s allocated quantity. In such cases, therefore, an absolute or partial underlift will happen. On the other hand, the tanker which arrives could have a cargo capacity which exceeds the disposing party’s allocated entitlement; to maximise use of the tanker, the disposing party might therefore wish to overlift against its allocated entitlement to the crude oil. In the context of natural gas, a resultant gas sales agreement (where one of the 4

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AAPL JOA 810 §15.1; AIPN JOA §9.1; CAPL JOA §6.01; OGUK JOA §18(b).

Peter Roberts

parties is the gas seller) might contain a right of the gas buyer to modulate its offtakes of gas (both upwards and downwards). If the gas seller is unable either to procure an upward quantity flexibility from elsewhere or to dispose of a downward quantity flexibility to elsewhere, the gas seller might have no option but to overlift or underlift its natural gas entitlements under the JOA in order to satisfy the requirements of the gas sales agreement The desire of a party to underlift principally because of its inability to realise what it regards to be a satisfactory sale price for its petroleum entitlements, or to overlift principally because the market price for petroleum makes attractive the selling of as much petroleum as possible, is a somewhat different matter. The reconciliation of underlift and overlift balances where there have been significant movements in the selling price for produced petroleum could have some awkward consequences, and the parties might wish to preclude such gaming within the context of what is permissible in the lifting provisions under the JOA. One party’s underlift might result in another party’s ability to overlift and vice versa. This symmetry might have an appealing commercial logic of its own, but it might also be an operational necessity and compellable by the operator where the operator needs to maintain the ongoing production of petroleum. The operator might also be able to buy petroleum from a third party in order to make good the deficiency caused by a party’s overlift and to avoid another party being exposed to underlift, with the costs of that exercise to be charged to the overlifting party. If a party’s underlift has the appearance of jeopardising the continuing integrity of the petroleum production operations, then (unless the operator can simply refuse to permit the underlift and can compel a full lifting) as a remedial measure the operator should be empowered to dispose of the unlifted petroleum balances on behalf of the underlifting party, thereafter accounting to the underlifting party for the resultant net proceeds of sale.5 If a default sale is not possible, the JOA might alternatively provide that the underlifting party’s unlifted petroleum balance be deemed to have been lifted by the underlifting party (even though in reality it has not), and that the physical quantity of petroleum (if it has not actually been produced yet) will effectively be reclassified as part of the unproduced reserves, to be returned to and made available to all parties (including the underlifting party, to the extent of its entitlement) for subsequent lifting. One further point should be remembered in respect of any overlift. The quantity of petroleum which is represented by that overlift will effectively be a debt which is due for repayment by the overlifting party to the other parties which have, by their corresponding underlifts, contributed to that overlift. This overlift will be subject to an obligation to effect a rebalance, but an interesting situation could arise if the overlifting party becomes insolvent prior to the rebalancing taking place. If this were to happen, it would become necessary to determine whether the rights of the other parties to be rebalanced would rank ahead of the other (non JOA-based) creditors of the (newly insolvent) overlifting party. For this reason, limits might therefore be agreed between the parties on the right of any party to overlift. 5

AAPL JOA 810 §15.3; CAPL JOA §§ 6.02, 6.03, 6.04.

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Petroleum allocation, lifting and disposal

The detailed mechanics by which a party will lift and take delivery of its petroleum entitlements might be recited in a further agreement, outwith the terms of the JOA. The terms of that further agreement will be different according to whether crude oil or natural gas is being lifted at the delivery point. Crude oil production will typically be managed through what is popularly called a ‘lifting agreement’ and natural gas through a ‘balancing agreement’. It is always a possibility that the terms of the lifting agreement or the balancing agreement may be agreed at the same time as the JOA is negotiated between the parties and may be appended to the JOA.6 On the other hand, the parties might be reluctant to agree the detail of what can be relatively complex agreements at the same time as the JOA is being negotiated, since there will be no guarantee until after the exploration and appraisal phase has concluded that there will be any commercially recoverable quantities of crude oil or natural gas in respect of which the agreements would apply. Consequently, the JOA might impose a requirement upon the parties to agree any lifting agreement or balancing agreement only after a discovery has been made and before petroleum production commences.7 To give some guidance to the parties as to the form of the agreement which they should eventually adopt, the JOA might require the parties to adhere to the terms of a defined model agreement which is already in existence.8 Alternatively, the JOA might require the parties to agree a further agreement which reflects a series of detailed indicative commercial terms which have already been set out in the JOA.9 The essential principles of any crude oil lifting agreement will relate to: • identification of the delivery point (ie, the point at which title to and the risk of loss of a party’s crude oil entitlements pass to that party); • provision for advice from the operator of estimated crude oil production volumes available for lifting by a party (which may also be broken down further by reference to various quality grades of that crude oil); • provision for a party to nominate the amount of crude oil which it wishes to lift and take delivery of at the delivery point in respect of a defined period; • recognition of the possibility of overlifts and underlifts (within defined tolerances); and • reservation in the operator’s favour of the right to compel a forced sale of a party’s entitlement which that party has failed to lift and take delivery of in accordance with the terms of the lifting agreement (and particularly so where that party’s failure risks jeopardising the continuing integrity of the petroleum production operations). The essential principles of any gas balancing agreement will be broadly similar, except that the underlift and the overlift mechanism will be amplified through what is often called an ‘allocation and attribution’ regime. This is the essence of the gas balancing agreement and will reflect the following principles: 6 7 8 9

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AIPN AIPN AIPN AIPN

JOA JOA JOA JOA

§9.2. §9.2, OGUK JOA §18(c). §9.2, and a model form crude oil lifting agreement is available at www.aipn.org. §9.2.

Peter Roberts

•

•

Allocation – this is a mathematical arrangement which provides, in respect of a defined allocation period (which could be annual, monthly, daily or even hourly), for natural gas delivered to a defined delivery point in a commingled stream (ie, a stream which consolidates and represents each party’s entitlements), to be allocated back on a proportionate basis to each party. The allocation exercise can be carried out by reference to any combination of the volume, chemical composition or calorific content of the natural gas to be so allocated and will take account of any changes in the natural gas’s content or composition because of commingling. There is no universally applied regime for allocation and in practice allocation will take place in whichever manner which best suits the particular requirements of the parties. In theory, allocation might be effected by the application of general principles of applicable law which apply to determine ownership interests in inter-mixed goods, but most parties will prefer an explicit allocation mechanism in the interests of greater legal and commercial certainty. Attribution – often otherwise referred to as ‘substitution’, ‘attribution’ is the term given to the exercise whereby a prospective underlift of natural gas (measured against the allocated quantity of natural gas which is available for lifting) by a party at the delivery point is made good through the substitution of that natural gas deficiency from the natural gas entitlements of another party. This is effectively borrowing and lending natural gas between parties, often subject to certain limits and conditions. The existence of an attribution arrangement depends on a specific and enforceable agreement being entered into between the parties.

If allocation can be described as the application of an objective set of mathematical principles to determine delivered quantities of natural gas at the delivery point, then attribution is the subjective product of whatever commercial regime the parties at the delivery point have agreed to institute between themselves in respect of underlifts or overlifts of natural gas which result from that allocation. Allocation defines each party’s actual lifting entitlements, while attribution adjusts and makes good any resultant underlifts or overlifts against that allocated quantity. It is not always the case that an attribution arrangement will exist where there is an allocation arrangement, although more often than not both will appear together. The relatively greater complexity which is associated with producing, processing and transporting natural gas, in comparison with the production of crude oil, means that a balancing agreement will need to be more specifically tailored to whatever the resultant arrangements are for the disposal of natural gas than is the case for crude oil production.10 This explains in part why it is possible to find a model form crude oil lifting agreement, but less easy to find an analogous agreement in respect of natural gas. However, the AAPL JOA does offer up a model form gas balancing agreement.11

10 11

AIPN JOA §9.3. AAPL JOA 810 §15.4, Exhibit D.

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Petroleum allocation, lifting and disposal

9.3

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Petroleum disposal The final piece to consider in respect of the trinity of allocation, lifting and disposal is the physical arrangements which will apply to take the produced petroleum away from the delivery point. Where the delivery point is on an offshore petroleum production platform, crude oil can be transported away from the platform by pipeline or by ship. Natural gas is invariably transported away from an offshore platform by pipeline. A failure of a party to transport away its petroleum entitlement could quickly propel that party into a situation where it is inevitably underlifting against its allocated quantities of petroleum under the JOA (see above). The parties typically do not regard the transportation of petroleum away from the delivery point as falling within the scope of the joint operations under the JOA (4.2), although the consideration of the technical arrangements which are associated with the transportation of petroleum might be part of the scope of the JOA. Consequently, each party will need to make its own arrangements for that transportation, although this might be an opportunity for cooperation between the parties. Beyond transportation, actual contracts for the sale of the resultant crude oil or natural gas will typically be entered into by each party separately rather than jointly (4.2). There might be a temptation to assume that where a government entity has exercised its right to participate in the JOA (3.4), it might be easier for all of the parties to make the necessary arrangements for the disposal of the produced petroleum downstream of the delivery point, since this is a matter which the government might have some say over and the government will be keen to see the realisation of produced petroleum under the JOA. This might be true to a degree in reality, but such a proposition serves only to confuse the capacity of the government entity’s participation in the JOA and should not be relied on.

10. Transfers

The JOA represents a collaborative effort between a group of persons. Each of those persons will have entered into the JOA (whether initially, at the inception of the JOA, or later during the lifetime of the JOA) on the basis that it is comfortable with the capacity (which is principally a measure of financial capacity, but also of technical capacity – and particularly so in the case of the party appointed to act as the operator (see Chapter 6)) of each other person to perform the commitments created by the concession and the JOA. This will be of particular importance given the joint and several liability between the parties which is imposed in respect of the obligation to perform the concession (1.1). The interests of a party in the concession, the JOA and the wider petroleum project which they represent will (or should) together constitute a valuable asset. During the lifetime of a JOA, a party might wish to realise the value of that asset. The principal method of achieving this is for that party to transfer its interests in the JOA (and in the concession and the wider petroleum project) to another person. That other person may be an existing other party to the JOA, an affiliate of the transferor or an entirely unrelated third party. The JOA should be alive to this possibility, which is an inevitable aspect of the evolution of the relationships which the JOA represents (1.7), subject to the principle that a transfer of interests should not be detrimental to the interests of the non-transferring parties. The JOA should therefore manage the circumstances in which a party can devolve its contractual position to another person, whether directly or indirectly and whether temporarily or permanently, and should also be prepared to address any changes in a party’s corporate structure which might adversely affect the continued operation of the JOA. This chapter assumes that a votive transfer of the interests of a party under the JOA will take place. However, a party might cease to be a continuing party to the JOA through a withdrawal from the JOA (see Chapter 11) or in consequence of a forced transfer of interests in accordance with the default provisions under the JOA (see Chapter 14). 10.1

Transfers under applicable law English law prescribes certain mechanisms by which a party to an agreement might seek to transfer its rights and obligations under that agreement to another person. Although, within the terms of the JOA, the position at law is typically expressly modified by further agreement between the parties (see below), it is worth

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understanding the legal starting position. A party (the transferor) could freely transfer the benefit of its rights only in the JOA to another person (the transferee) by bilateral assignment of those rights without the need for the consent of any of the non-transferring parties, subject only to notice of the assignment of those rights being given to the non-transferring parties to be effective as a legal assignment:1

A Co + B Co (non-transferring parties)

JOA

C Co (transferor)

Transfer of rights

Notice of transfer

Transferee

In contrast to the mere transfer of rights, however, the obligations created by the JOA which encumber a party cannot simply be transferred by that party to any other person without the consent of any non-transferring party,2 not least since the nontransferring party might be dissatisfied with the ability of the proposed transferee to perform those obligations. To effect a total transfer of rights and obligations to another person therefore requires an agreement for the novation of the JOA, which must be entered into between the transferor, the transferee and all of the nontransferring parties:

A Co + B Co (non-transferring parties)

JOA

C Co (transferor)

Transfer of rights and obligations

Transferee

The critical difference between an assignment (of rights) and a novation (of rights and obligations) is that under the assignment, the transferor remains liable to any non-transferring party to perform its continuing obligations under the JOA.

1 2

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Section 136 of the Law of Property Act 1925. Tolhurst v Associated Portland Cement Manufacturers Limited [1903] AC 414.

Peter Roberts

Under a novation, the transferor will be replaced completely in favour of the transferee and effectively a new agreement will be created with the consent of all relevant parties.3 For this reason, a party that wishes to transfer all of its interests (ie, rights and obligations) in a JOA to another person will require a novation agreement rather than an assignment, and for this the consent of the non-transferring parties to the proposed transfer (to be realised through the requirement that such parties will execute the novation agreement) will be an inevitable necessity. If the JOA is silent on the ability of a party to transfer its interests (which is most unlikely), then that party will be free to do so as it sees fit within the confines of applicable law, subject only to the practical need to secure the consent of the nontransferring parties where a novation agreement is required. However, rarely will the JOA be silent on this issue and at least some conditions or restrictions on the potential transfer of interests by a party to another person will be expressly prescribed in the JOA. 10.2

Transfer mechanics in the JOA This chapter assumes that an asset transfer will take place between the transferor and the transferee, whereby the interests of the transferor in the JOA are transferred to the transferee. The alternative transfer formulation to consider is one whereby there is a sale of the entire issued share capital of the company which holds the interest in the JOA, such that while the JOA interest remains with the same party, the ownership of that party is transferred to the transferee: Starting point

Parent Co

Asset transfer

Share transfer

Parent Co

Parent Co

Shares

Transferee

Cash

C Co PI%

Shares

Transferee

C Co

Cash

PI%

PI%

C Co

The share sale route will ordinarily be beyond the scope of the transfer provision in the JOA, except that it might be caught by the JOA where the JOA contains a change of control provision (see below). Continuing, therefore, with the assumption of an asset transfer, if a party wishes to transfer its interests in the JOA to a transferee (whether that transferee is an existing other party, an affiliate of the transferor or an entirely unrelated third party), then several matters will arise for consideration.

3

Rasbora Ltd v JCL Marine Ltd [1977] 1 Lloyd’s Rep 645.

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Transfers

(a)

Issues

(i)

Minimum level transfers In the interests of preventing a fragmentation of interests under the JOA, which might thereby render the administration of the JOA unworkable, the JOA might prescribe that a transfer by a party must be of all of that party’s interests (as represented by that party’s PI) under the JOA, and that a partial transfer of that party’s interests (eg, through disintegration of the transferor’s PI to give several smaller PIs) is not possible. The introduction into the JOA relationship of several parties, each having a very small PI, could give any of those parties the ability to derail the functioning of the OpCom where unanimity of voting is required (7.4), could give those parties together the ability to engineer the voting of interests where the JOA requires an aggregate number of voting parties, and could allow each such party to propose a sole risk project (5.1) on the back of a relatively negligible interest in the JOA. On the other hand, a restriction on partial transfers of interests could be regarded as unduly restrictive in respect of a party’s interests, where a sub-division of interests by a party (eg, through a farm-out (see Appendix C)) might be a reasonable operational expectation. Instead, therefore, the JOA could permit the transfer of part of a party’s interests, but based on a halfway house whereby the JOA might provide that a part-interest transfer is possible, but will not be permitted if that transfer would result in the transferor or the transferee holding a PI which is below a defined minimum percentage level (unless it is a zero PI).4 In the case of such a partial transfer of interests, the transferor would remain party to the concession and the JOA (with its reduced PI) and the transferee would become an additional party to the concession. The recording of the parties (3.1) and their revised PIs (3.3) in the JOA would require amendment accordingly.

(ii)

Transfer of operatorship If the party which is appointed as the operator under the JOA (6.2) transfers the entirety of its interests under the JOA, it will cease to be able to continue to perform the role of the operator (at least as a party-operator, although some sort of continuing role as a contracted operator (6.5) might in theory be possible). However, it does not necessarily follow that the incoming transferee will automatically assume the mantle of the operator (despite this expectation often being recited as an advantage of being the operator – 6.1), and so this will be an issue to be managed between the parties, applying the provisions of the JOA which govern the appointment of a replacement operator (6.4). This issue relates predominantly to a transfer of interests to a third-party transferee, but the principles involved should apply equally to the situation where the party-operator transfers its interests under the JOA to an existing other party to the JOA as a transferee, and also to where such a transfer of interests is made to an affiliate of the transferor. Some JOAs prescribe a separate regime for such affiliate transfers whereby the affiliate will automatically become the replacement operator,5 but there is no obvious

4 5

AAPL JOA 810 §24.1.3; AIPN JOA §12.2(A); OGUK JOA §23.1.2. AIPN JOA §12.2(B).

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logic for this as there is no guarantee that the affiliate-transferee will have the necessary technical competence to act as the operator. In any event, the government is likely to reserve a right to veto the new operator in accordance with the terms of the concession (1.1) and this will condition the ability of the transferor to appoint an affiliate of the transferor as the replacement operator. The transfer of operatorship might be recited separately in a formal agreement between the outgoing operator and the incoming operator. The expectation is that the incoming operator will assume the incumbent JOA as it is, but sometimes the incoming operator might wish to replace the existing accounting procedure (see Chapter 16) with its own preferred form of accounting procedure, in the interests of maintaining operational consistency across all of its operational activities, and by the same token might require certain other changes to the JOA. Such a change would require the unanimous approval of all the parties, as it would constitute an amendment to the terms of the JOA (17.3). (iii)

Accrued and contingent liabilities The party which is transferring its interests under the JOA should remain liable for its share of any costs, liabilities or obligations which have been, or which will be, incurred by that party up to the effective date of its transfer,6 but not thereafter. This simple statement of intent often appears in JOAs, but the JOA will rarely contain an express release from any costs, liabilities or obligations in favour of the transferor by the non-transferring parties. Rather, as a practical matter the relationship of the transferor, the transferee and the non-transferring parties in this respect will need to be recited in a novation agreement (see above), whereby such a release will be recited and the transferor will undertake to indemnify the transferee in respect of any pretransfer costs, liabilities or obligations for which the transferee might be made liable, while the transferee will undertake to indemnify the transferor in respect of any posttransfer costs, liabilities or obligations for which the transferor might be made liable. The non-transferring parties might experience some practical difficulty in enforcing a payment obligation (such as the obligation to make good a default – 14.1) against a transferor which has since departed the JOA. While the outstanding payment obligation should attach to the transferee (as the definition of a ‘party’ is expressed to include a party’s successors and assignees (1.1), with the accrued liability of the transferor to pass to the transferee through that succession principle), the nontransferring parties might prefer to protect their position (and not have to rely on transposing their claim against the transferor to the transferee) by requiring that the transfer of a party’s interests under the JOA be conditional on the prior approval of the non-transferring parties (which in reality will be if a novation agreement is required), and this approval will be forthcoming only if the transferor has paid up against its accrued and contingent obligations prior to exiting the JOA. The prospective liability of the transferor for its share of future decommissioning costs should be addressed through specific decommissioning security provisions (see Chapter 13).

6

AIPN JOA §12.2(C).

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Transfers

(iv)

Approval of the transferee At a very minimum, because the terms of the concession impose joint and several liability between the concession holders for the performance of the obligations recited in the concession (1.1), the continuing parties to the JOA will be interested to ensure that any transferee will have a measure of financial capacity to perform the JOA which is at least equal to that of the transferor. The non-transferring parties will usually be given the right under the JOA to approve the identity of the transferee as a condition of the transfer becoming effective (and this in turn will require that the transferor give adequate information about the transferee to the non-transferring parties, such that a properly informed decision can be made). This approval right is personal to each non-transferring party and the approval of the transferee is not an item to which passmark voting control at the OpCom (7.4) should apply. The JOA might provide that the approval of each non-transferring party will be assumed to be forthcoming, unless that non-transferring party can reasonably demonstrate to the transferor that the transferee lacks the financial capability (and possibly also the technical capability) to comply with its obligations under the JOA.7 These requirements might be relaxed where the transferee is an affiliate of the transferor, but often only on the condition that the transferor undertakes to remain responsible for that affiliate-transferee’s performance of its obligations under the JOA.8 However, in such a case the transferor will not have achieved a clean break from its obligations under the JOA, which might be a matter of concern to the transferor. The transferee, as it becomes party to the JOA, will also need to become party to the concession, and in respect of that accession the government (as the grantor of the concession) will typically reserve a right to approve the transferee in its capacity as a concession holder. One view might be that approval of the transferee by the government for the purposes for accession to the concession should be sufficient also to determine the suitability of the transferee to become a party to the JOA. This is true enough up to a point, but it overlooks the fact that the parties to the concession will typically be jointly and severally liable (1.1), and so the government can look at the covenant of the parties to the concession as a whole when assessing the ability of any one of them to perform its obligations. However, the JOA regulates the horizontal relationship between the parties and each party has a several payment liability. Consequently, each non-transferring party will be concerned to ensure that the transferee can meet its share of the obligations under the JOA and this concern might require a comparatively higher level of due diligence than might be applied to the transfer of interests under the concession.

(b)

Transfer mechanics The JOA might recite a series of operational requirements which must be complied with in order that a transfer of interests is made fully effective as between the

7 8

AAPL JOA 810 §24.1; AIPN JOA §12.2(D); CAPL JOA §24.01A; OGUK JOA §23.2. AIPN JOA §12.2(D).

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transferor, the transferee and the non-transferring parties. These requirements might, for example, oblige the transferee to give a written undertaking to the nontransferring parties to perform the obligations under the JOA from the effective date of the transfer; and/or each of the non-transferring parties might be required to evidence its specific written consent to the proposed transfer.9 These points will be catered for in the novation agreement (see above), and the execution of a novation agreement might also be used as an opportunity to reflect any required amendments to the JOA (17.3). Furthermore, the JOA may require that as a condition of any transfer of interests, the transferor ensure that any necessary government consents to a transfer of interests10 have been secured,11 and that any guarantee or other collateral commitment which has been given in support of the transferor’s obligations under the JOA (which might be a general guarantee (3.2) or the security given by a party in respect of its liability in respect of decommissioning costs (13.3)) be replicated in respect of the transferee (unless the parties agree to dispense with this requirement, which will depend on the transferee’s creditworthiness). This will be an obligation which the transferee must satisfy. The JOA might also require that any transfer by a party of its interests in the JOA be accompanied by a corresponding transfer of that party’s interests in any other relevant project documents, so that the chain of title within the overall petroleum project is kept intact. Principally, this requirement will apply to the concession, but it will also apply, for example, to any unitisation and unit operating agreement (see Appendix D) and to any other project agreements. There might also be an industry-wide accord in a particular sector which applies certain mechanical rules which will condition the manner in which a party’s transfer of its interests under the JOA is to be effected. In respect of the United Kingdom, for example, there is a voluntary agreement (which has been adopted almost universally) between all UKCS participants, known as the ‘Master Deed’12 which sets out a routine by which interests in what are defined as ‘petroleum agreements’ (which include licences and JOAs) will be transferred, in accordance with the ‘new transfer arrangements’ as they are defined in the Master Deed, if the transferor and the transferee so elect. (c)

Security transfers A party might wish to assign the benefit of its interests under the JOA (and the concession) as part of a wider package of security for any financing which it might have secured from a lender in order to meet its share of the costs of the underlying petroleum project (although the JOA might not always limit the purpose of such financing to the requirements of the particular JOA). This is ordinarily declared to be permissible under the terms of the JOA13 and it is not treated as a transfer of interests per se. An actual

9 10 11 12 13

OGUK JOA §23.3. MC 40. AIPN JOA §12.2(D); OGUK JOA §§23.3, 23.4. Master Deed dated April 28 2003, available at www.masterdeed.com. AAPL JOA 810 §24.1.1; AIPN JOA §12.2(E); CAPL JOA §24.02; OGUK JOA §23.6.

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Transfers

transfer will become effective only if and when the lender elects to enforce its security interests by taking over the interests in the JOA of the assigning party. An issue which then arises for consideration is the order of priority which is intended to exist between the rights of the other non-assigning parties to the JOA (and notably, the rights of those parties to take over a party’s production entitlements and even that party’s interests under the JOA where there is a default under the JOA (14.3)) and the security interests of the lender – which will also ideally extend to taking over the assigning party’s production entitlements and interests under the JOA if there is an event of default by that party under the financing arrangements. The common expectation here is that the assigning party will have defaulted under the JOA and also under its financing arrangements at the same time such that the need to consider the order of priority becomes imperative, although this will not necessarily be the case. The JOA might declare that the interests of the lender will be subordinated to the interests of the non-assigning parties in these circumstances,14 but the lender (which is not party to the JOA) will not have expressly acknowledged this intended subordination in favour of the non-assigning parties. Thus, the JOA might additionally provide that as a condition of the right of a party to assign its interests under the JOA, the lender must give a written acknowledgment to the non-assigning parties that the lender’s interests are subordinated to the rights of those nonassigning parties under the terms of the JOA. For completeness, there might also be a series of prescribed obligations between the non-assigning parties and the lender in protection of their respective interests in the event that financing is so arranged, such as the obligation of the non-assigning parties to enter into a further agreement (often called a ‘direct agreement’) with the lender in order to perfect the lender’s security interests and the obligation of the lender not to take steps to enforce its security over the JOA in a manner which might adversely affect the interests of those non-assigning parties, at least not without first notifying them. It is unlikely that a lender would fail to review the relevant provisions of the JOA in this regard as part of its due diligence process and so the lender should be fully aware of all applicable requirements of the JOA. (d)

Partial transfers The position in respect of the transfer by dilution of part of a party’s PI has been considered above. Additionally, however, there could be a proposed transfer of interests by a party which applies to the entirety of that party’s PI within a specified part of the concession area according to areal coordinates, to a specified layer of the concession area according to stratigraphic coordinates (1.1) or to a party’s interests in respect of the joint operations but not in respect of that party’s interests in any exclusive operations (or vice versa), in each case subject to the transferor’s maintenance of its PI in respect of the interests which it has not so transferred. In each of these cases the transferor will not withdraw entirely from the

14

AIPN JOA §12.2(E); OGUK JOA §23.6.

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Peter Roberts

concession or from the JOA, as the continuing standing of that party in both of those agreements is necessary in order to facilitate the ongoing participation of that party in the areas or in the activities which the transferor has not transferred. It is possible, therefore, to find provision in the JOA that an undivided interest (ie, a transfer of rights and corresponding obligations, which is less than the entirety of the transferor’s interests) in the concession and the JOA can be transferred by a party. A partial transfer of interests sounds attractive and uncomplicated in theory, but the need to implement a management structure which addresses the resultant fragmentation of interests (particularly in the case of a partial transfer in respect of the physical areas covered by the JOA) might not always be so easy to achieve in practice (see Appendix E). (e)

Costs of transfer The JOA might provide that all of the costs associated with any transfer of interests by a party, including the costs incurred by the non-transferring parties in dealing with the transfer, will be borne by the transferor.15 Whether in practical terms this costs undertaking by the transferor would extend to picking up all of the costs of legal review and management time incurred by a non-transferring party might be debatable, but if this is what the JOA says then the principle should be honoured. The costs undertaking sometimes also makes specific reference to the allocation of liability for any stamp duty which might be incurred in consequence of the proposed transfer (where such stamp duty will usually be for the account of the transferee). The English courts have recognised the right of the parties to a contract to seek to render the interests under that contract as unassignable,16 but this will not automatically operate so as to defeat what would be a defective transfer effected in contravention of a prohibition on, or certain conditions to, a transfer. Any transfer of interests under the JOA which fails to comply with the transfer conditions set out in the JOA will not necessarily defeat the effectiveness of that transfer. The purported transfer of interests by the transferor in contravention of the requirement for the consent of the non-transferring parties (if the JOA contains such a requirement) would be invalid against the non-transferring parties, but such a transfer would probably still be effective as between the transferor and the transferee17 (and would be subject to the transferee’s rights to claim against the transferor – for example, in respect of a breach of any warranty which the transferor has given in respect of the authority of the transferor to so transfer its interests). However, the invalid transfer will give certain rights of action in favour of the non-transferring parties against the transferor for breach of contract (ie, the JOA). This would initially be a claim for damages, but given the prospective difficulty of proving a loss for the purposes of that damages calculation (unless the JOA contains a liquidated damages formulation, which is recognised as an option under the AIPN JOA),18 the non-transferring parties might prefer to seek some form of equitable relief,

15 16 17 18

OGUK JOA §23.5. Helstan Securities Limited v Hertfordshire County Council [1978] 3 All ER 262. Linden Gardens Trust Ltd v Lenesta Sludge Disposal Ltd [1994] 1 AC 85. AIPN JOA §12.1(A).

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Transfers

such as an injunction to prevent the commission of a transaction which is in clear violation of the requirements of the JOA (at least where the purported transfer is still ongoing and has not been concluded), to be brought in enforcement against the transferor and the intended transferee. In practical terms, where the JOA sets out a requirement for the non-transferring parties to give their consent to any transfer of interests (or where a novation agreement is needed), then a prospective transferee will have done its due diligence into the requirements of the JOA and will be unlikely to proceed with a transfer which ignores the clear requirements of the JOA (or which is not founded on a novation agreement). This will reduce the likelihood of a transfer of interests under the JOA being executed which fails to comply with the transfer conditions set out in the JOA. 10.3

138

Pre-emption rights The application of pre-emption rights is often one of the most emotive issues in the management of a JOA and so the principle of whether, or how, pre-emption rights are intended to apply should be considered carefully at the stage of negotiating the JOA. The basic concept behind pre-emption rights is that if a party wishes to transfer its interests under the JOA to any person other than an existing other party to the JOA (and other than in respect of an assignment of interests as security for financing – see above), then the transferor should first offer those interests to the existing other parties to the JOA. Only then, if the existing parties do not wish to exercise their rights to take up the transferor’s interests, should the interests be capable of being offered to any third party as a transferee (which would still be subject to any other conditions which might apply to transfers of interests to third parties (see above)). Pre-emption rights give the non-transferring parties some ability to defeat the potential introduction of a transferee to which they might object, but in respect of which any veto rights under the JOA might not apply, by allowing the nontransferring parties to take up the transferor’s interests (for a price). Pre-emption rights can also be applied to block the situation where more than one party transfers its PI to the same third party and that third party thereby acquires a combined PI by aggregation which exceeds the passmark voting level under the JOA and so gives effective voting control at the OpCom to that third party (7.4). A popular theory is that it is right to include pre-emption rights in the JOA because they reward the courage of the original parties to the JOA in making the investment into the petroleum project in the first place, through bestowing on those parties a preferential right to increase the level of their original investment if they so wish. It is also said that pre-emption rights will help to preserve the culture and the cohesion of the original joint venture. This latter theory is less obviously applicable where the JOA is of an age where subsequent transfers of interests have taken place and many, or even all, of the original parties have long since ceased to be associated with the JOA, and yet the pre-emption rights continue to govern the JOA. Consequently, pre-emption rights might be limited to application to only the first generation of parties to the JOA and could be expressed not to apply in respect of any subsequent transferees that later wish to transfer their interests.

Peter Roberts

It could also be said that pre-emption rights really benefit only the nontransferring parties. The transferor, which must comply with the application of those pre-emption rights, might struggle to see how exactly it is supposed to be a beneficiary of their application. The application of pre-emption rights is often accused of stultifying the free transferability of petroleum project interests, through the implication of extra costs of contracting associated with their exercise, the imposition of delays in the sale process and the injection of stasis as transferees are potentially deterred from bidding because of uncertainty about whether the non-transferring parties will exercise their pre-emption rights. These concerns are sometimes exaggerated, but the existence of pre-emption rights in a JOA could certainly be sufficient to deter a buyer which has more than one investment opportunity to choose from. Consequently, pre-emption rights are not universally popular and host governments have on occasion caused them to be deleted from certain JOAs, in the interests of better promoting the free accession of new entrants into the petroleum sector. Thus, in the OGUK JOA there are no pre-emption provisions, following the indication of the UK government from the time of the 20th offshore licensing round in 2002 that it would exercise its rights not to approve any new JOA if such a JOA contained a pre-emption right (which indication, which was given in the 2002 Open Permission (see footnote 2 in Chapter 2), is applicable to JOAs associated with licences effective after June 30 2002). Furthermore, existing JOAs (ie, JOAs which are effective before July 1 2002) should follow the Master Deed format (see footnote 12) for expedited transfers of UKCS licence interests and associated agreements, under which any existing pre-emption rights will be redrawn to a prescribed form and a timetable for the application of any existing pre-emption rights will apply. This modification of existing pre-emption rights is popularly assumed to allow the economic benefits of a pre-emption right to remain while simultaneously removing the unreasonable levels of delay which the application of such a right could imply. If the wish of the parties is to provide for some form of pre-emption rights in the JOA, consideration should be given to whether these rights will follow one of two principal formulations – ‘matching rights’ or ‘rights of first refusal’ (although any particular JOA might also apply some sort of hybrid of these formulations). (a)

Matching rights formulation In the matching rights formulation19 the following principles will apply.

(i)

Option to match When the transferor has finalised the commercial terms (including the price payable) for the proposed sale of its interests under the JOA to the transferee, the transferor will then be obliged to notify each of the non-transferring parties of those terms, and those non-transferring parties will then have a defined period of time within which they can elect to match those terms. If such an election is made, the non-transferring parties will have a priority right to step in to the proposed sale of the transferor’s

19

AAPL JOA 810 §24.2; AIPN JOA §12.2(F); CAPL JOA §24.01B.

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Transfers

interests, ahead of the transferee (subject to the requirement that the transfer of the interests take place on the same commercial and logistical terms as were originally negotiated with the transferee). What ‘finalised’ actually means for these purposes (whether an agreement in principle or a fully negotiated agreement for sale and purchase between the transferor and the transferee) can be a matter for some debate. If more than one of the non-transferring parties elects to exercise its pre-emption rights on this basis, then the transferor’s interests under the JOA will be allocated between all of the electing, non-transferring parties in the proportion that each electing, non-transferring party’s PI bears to the aggregate of the PIs of all electing, non-transferring parties. (ii)

140

Valuation and mechanics If the consideration which was intended to be payable by the transferee for the transferor’s interests was other than cash (ie, if the transferor was proposing to enter into an exchange of assets with the transferee), the JOA should provide a mechanism by which a cash value can be attributed to the interests to be transferred, such that the pre-emption rights can still be exercised. Usually the transferor will be required to nominate an indicative cash value for the interests to be transferred as part of the notice to be given to the non-transferring parties and thereafter it will be open to any non-transferring party to signal its objection to the validity of that valuation. If the transferor is exchanging its interests under the JOA with a transferee as part of a wider package of non-JOA specific assets, the transferor should be particularly careful to identify the specific interests under the JOA and to ascribe such a cash value to those interests, in order to preclude any inventive suggestion from the nontransferring parties that their pre-emption rights under the JOA have given them a right to match the entire package of assets of which the transferor is divesting. If the transferor and the non-transferring parties cannot agree the validity of the indicative cash value which the transferor nominated, an independent expert (15.3) can be appointed to settle the issue through making its own valuation of the interests to be transferred (which will be a final and binding valuation). The costs of that expert will typically be borne by the transferor if the transferor’s suggested valuation proves to be greater than the expert’s valuation (subject to a certain percentage tolerance so as to allow for slight variables in the valuations). This is intended to disincentivise the transferor from submitting an artificially high valuation in order to dissuade the non-transferring parties from exercising their preemption rights. Correspondingly, the costs of the expert will be borne by the objecting non-transferring parties if the expert’s valuation proves to be (subject again to a certain defined tolerance) in line with the transferor’s valuation (this is intended to disincentivise the non-transferring parties from raising unreasonable objections to the transferor’s proposed valuation in order to slow or to defeat the original transfer process). The non-transferring parties will then be obliged to continue with the acquisition of the transferor’s interests (which will be priced at the expert’s valuation). However, the JOA might provide a get-out provision, whereby if the expert’s valuation proves to be much greater than the transferor’s suggested

Peter Roberts

valuation (and that higher expert valuation replaces the transferor’s own original valuation), the non-transferring parties will have the option not to exercise their preemption rights. Correspondingly, if the expert’s valuation proves to be much lower than the transferor’s suggested valuation, the transferor could prefer to have the option not to proceed with the transfer of its interests (whether to the transferee or to any of the non-transferring parties). The manner of the structuring of these possibilities will be a matter for negotiation in the JOA. (b)

Rights of first refusal formulation In the rights of first refusal formulation20 the following principles apply.

(i)

Option to negotiate The transferor will give notice to each of the non-transferring parties of its intention to seek a transferee for the transfer of its interests, by giving an outline commercial offer for its interests to those non-transferring parties. This offer could include a price component, based on the monetary value which might reasonably be ascribed to the transferor’s interests or on the market value of the transferor’s interests, or the nontransferring parties could be invited to make their best offers for the transferor’s interests.

(ii)

Mechanics Thereafter, any of the non-transferring parties that are so interested shall, for a defined period of time, have an exclusive right to negotiate a transfer of the transferor’s interests in their favour, based on the terms of the transferor’s offer. If more than one of the non-transferring parties is interested in taking up the transferor’s offer, the transferor’s interests will be allocated between all of the nontransferring parties that are so interested in the proportion that each electing, nontransferring party’s PI bears to the aggregate of the PIs of all the interested, nontransferring parties. If, after the defined negotiation period has ended, the transferor and any interested non-transferring parties have been unable to conclude the terms of the deal, the transferor shall be free to seek a transferee outside of the parties. However, to prevent the transferor from offering an artificially unreasonable offer to the nontransferring parties, the JOA usually then goes on to provide that the commercial terms agreed by the transferor with any external transferee cannot be materially different from (ie, more advantageous than) the terms of the transferor’s original offer to the non-transferring parties. Pre-emption rights are often criticised for providing an additional level of delay and complexity, and the rights of first refusal formulation is sometimes also criticised additionally for providing a mechanism by which the non-transferring parties will be used to verify, or even just to set, the sale price for the benefit of the transferor.

20

AIPN JOA §12.2(F).

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Transfers

10.4

Change of control In any long-term commercial agreement each party runs the risk that there might be some deterioration in the creditworthiness and/or technical competence of any other party to that agreement over the lifetime of that agreement, and the same is true for the relationship created by the JOA. Consideration has previously been given to the provision of collateral support in respect of a party’s commitments which (if obtainable) should provide some comfort in respect of a change of circumstances which affects a party’s financial ability to perform its obligations under the JOA (3.2). However, it may also be the case that while a particular party is performing well, that party finds itself (eg, as part of a corporate reorganisation) to be owned (directly or indirectly) by a different commercial entity. Consequently, the JOA might contain a ‘change of control’ provision, which will provide that if a party is subjected to a change of control (as defined), the other parties may take certain actions to protect their interests under the JOA. Notwithstanding that a change of control might have occurred in respect of a party to the JOA, it is perfectly possible that the party which has undergone that change of control will continue to be able to perform its contractual obligations as well as before (and might even be in a better position to do so). After all, the identity of that particular party will not have changed. That said, however, there may still be a demand for a change of control provision in the JOA in order to address the following issues: • Overall detrimental performance – despite a satisfactory continuation of the performance of the JOA in the immediate post-change of control period, there may be a concern that in the longer term a party’s new parent might operate the corporate group imprudently and to the ultimate detriment of the JOA. • Commercial preference – it may be that, for whatever commercial reason, a party is reluctant to be associated (albeit indirectly) with another particular entity through the medium of the JOA. • Re-guarantee protection – it may be necessary to protect the value of a parent company guarantee where there is a re-guarantee provision in the JOA (3.2) on the basis that, because of the impact of a change of control at the higher level, the new parent company might not be as attractive as a prospective guarantor as the old parent company. In respect of the UKCS, the terms of the licence give the secretary of state for energy and climate change a right to revoke the licence if the licensee (or one of the licensees) is a company which undergoes a change of control.21 If the JOA includes a change of control provision, the JOA will also need to define what constitutes ‘control’ for the purpose of triggering the application of that provision. The test for control might be determined as a direct measure of immediate control (eg, by reference to who owns the issued share capital of the party which is subject to the change of control) or through an indirect control test (eg, by reference to the transfer of effective control through the entry into any voting compacts or trust arrangements).22

21 22

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MC 41, MC 42. See, for example, the definition of ‘control’ in Section 416 of the Income and Corporation Taxes Act 1988.

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The parties should also be careful to understand exactly what levels of control are affected and in particular to determine whether the change of control provision applies only to the immediate parent of a party to the JOA or beyond that and further up into a party’s corporate structure. The change of control provision might also be disapplied in respect of purely internal corporate reorganisations which do not entail the intervention of a new external entity. In recognising the proper rationale for the application of a change of control provision, the JOA might preclude the parties from relying on a change of control simply as an excuse for evading a contractual commitment. It may be that the change of control provision will be expressed to apply only where the party exercising the right which that provision gives first must prove that it has a reasonable belief that its commercial interests will be adversely affected in consequence of the change of control, possibly with recourse to an expert (15.3) in the event that the issue is disputed. The AIPN JOA suggests some options for what might happen in the event of a change of control of a party.23 A ‘change of control’ is defined as a direct or indirect change of control (which in turn is defined as the ownership of 50%, or of more than 50%, depending on how this is negotiated in the JOA) of the voting rights in a legal entity of a party. In the event that a party undergoes a change of control, the AIPN JOA requires that party to obtain any necessary government approvals and to furnish any replacement security which the government or the concession might require in consequence of a change of control (but does not provide that the party which is subject to the change of control is required to give notice of that event to the other parties), and then provides for the following alternatives: • Ability to perform the JOA – the party subject to the change of control will provide evidence to the other parties that, notwithstanding the change of control, the party subject to the change of control will continue to have the financial capability to meet its obligations under the JOA and the concession (failing which any other party may require the party subject to the change of control to provide some form of collateral support in respect of those obligations). • Option to match – matching rights in respect of a transfer of interests (see above) could be applied equally in the event of a change of control. Thus, the party subject to the change of control will disclose to the other parties a suggested cash value for its interests, and each other party shall then have an option to acquire the party subject to the change of control’s interests for the same cash value (with recourse to an independent expert if there is disagreement over the validity of the cash value suggested by the party subject to the change of control). • Option to negotiate – rights of first refusal in respect of a transfer of interests (see above) could be applied equally in the event of a change of control. Thus, the party subject to the change of control will invite the other parties to negotiate for the purchase of its interests on a preferential basis for a defined period of time. 23

AIPN JOA §§1.16, 12.3.

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The latter two options referred to above assume that the change of control is structured in a way such that the pre-emption rights suggested would be capable of application, which might not readily be the case. The AIPN JOA does not suggest a formulation whereby the JOA will be terminated in respect of the party which is subject to the change of control, which would effectively be a form of forced withdrawal (see Chapter 11). Rather, in the event of a change of control of a party, the other parties will have certain rights to seek comfort in respect of the continuing financial capability of that party, and may have the right to pre-empt the effects of the change of control through taking over the interests of the party which is subject to the change of control (but only after the relevant change of control has been effected). As attractive as it might be to have provision in the JOA that a party which is going to be subject to a change of control should be obliged to give prior notification of that change of control to the other parties such that they can seek to protect their position accordingly, the wider transaction which would effect that change of control could be subject to obligations of confidentiality which would prevent such a notification from being possible. Under the AIPN JOA, a change of control which is effected in ignorance of the principles of the JOA will give the other parties a right to seek injunctive relief or to claim a pre-agreed level of liquidated damages.24 10.5

Affiliate transfers The JOA might permit a transfer of interests by a party to an affiliate on terms which might be more advantageous to the transferor than would be the case for the transfer of interests to a third party, principally through providing that the consent of the non-transferring parties will not be required in the case of a transfer to an affiliate, or through allowing an affiliate to assume the role of the operator (see above). The JOA will usually recite a specific definition of what constitutes an affiliate (typically by reference to a statutory definition) in order to be clear about how this provision should properly be applied (see footnote 22 in Chapter 7). The JOA might also provide that if, subsequent to such a transfer of interests to an affiliate, that affiliate ceases to satisfy the definition of an ‘affiliate’, the transferor will procure a transfer back of the interests in the JOA which had previously been transferred to the affiliate. This mechanism is intended to prevent a party from transferring its interests in the JOA to an affiliate, thereby relying on the more advantageous transfer terms under the JOA, and then procuring a sale of the share capital of that affiliate to a third party, which would circumvent the intention of the JOA by effectively allowing those more advantageous terms to have been applied to a transfer of the interests so as to give a free transfer to a third party. Another popular formulation in the affiliate transfer provisions in the JOA is to provide that the transferor will remain liable (jointly and severally with the affiliatetransferee) for the obligations under the JOA. This will not give the transferor the clean break from the JOA which it might otherwise have been hoping to achieve.

24

AIPN JOA §12.1(A).

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Ultimately, given the various conditions and restrictions which apply to an affiliate transfer, the transferor might simply prefer to proceed with such a transfer as if the affiliate-transferee were a genuine third party. Indeed, in recognition of this reality, the OGUK JOA makes no distinction between transfers to affiliates and transfers to third parties.25

25

OGUK JOA §23.

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11. Withdrawal

The most obvious solution for a party that no longer wishes to be associated with the petroleum project which the JOA represents is for that party to transfer the entirety of its interests to another person. In this case the transfer provisions in the JOA (see Chapter 10) would apply in order to determine the manner in which that transfer would be effected. However, there may be no other person that wishes to take a transfer of those interests – at least, not on the terms or within the timeframe required by the party wishing to leave the petroleum project and the JOA. The party that wishes to leave the petroleum project will ostensibly be locked in, therefore – at least until a transferee can be found. To overcome this possibility, the JOA might contain a right for that party to exercise a right to withdraw from the JOA and from the concession. 11.1

The withdrawal principle The withdrawal right is effectively a free surrender by a party of its interests in the JOA and the concession, which is exercised by the withdrawing party giving notice of its intention to withdraw to all of the other parties.1 If the withdrawal notice has been given, then (subject to the satisfaction of certain conditions) the withdrawing party will exit the concession and the JOA, and in respect of its interests in the JOA its PI will be allocated between the non-withdrawing parties. Subject to the restrictions which could condition the ability of a party to withdraw (see below), a party might make an election to withdraw in order to avoid the commitment to an exploration and appraisal programme, where an exploration and appraisal programme has been conducted and has resulted in disappointment, as a reaction to or an unwelcome joint operation proposal or simply to preclude a potential default. Other practical examples of where a withdrawal right might be applied by a party are where the prospective economic returns from the underlying petroleum project are simply insufficient to meet that party’s required hurdle rates (which will be a matter for individual determination by each of the parties, such that while one party might wish to withdraw, another might not), or where the imposition of government sanctions precludes that party’s continuing investment in the petroleum project, such that in any of these cases that party wants out as quickly as possible, without

1

AAPL JOA 810 §17; AIPN JOA §13; CAPL JOA §11.00; OGUK JOA §24.

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Withdrawal

even waiting to transfer its interests in the project. The obvious point at which a withdrawal right will be of interest to a party is where the concession is coming towards the end of its commercial life and the decommissioning phase (see Chapter 13) is coming into view. However, a party’s withdrawal from a JOA will usually be without prejudice to that party’s accrued and contingent liabilities (see below), and so withdrawal should not be seen as the easy way out when the JOA is transitioning from being an asset to a liability. If the concession is structured such that it consists of distinct phases, in respect of which the parties are invited to participate (1.1), then some of the parties might elect to withdraw from further participation in the concession (and the JOA) upon the occurrence of one of those phases. There is often some difference of opinion as to whether, as a matter of principle, a right of withdrawal should even be permitted under the JOA. The ostensible ability of a party simply to abandon its rights and obligations to the other parties at its convenience might seem incongruous in a commercial contract which is founded on the principle of commitment to a joint effort for what is intended to be a long term. On the other hand, several points can be made in defence of the inclusion of a withdrawal right in the JOA: • Restricted termination rights – since the JOA does not bestow rights on a party to terminate the JOA, or at least its ongoing participation in the JOA, because of the operator’s non-performance (12.1) or the default of any other party (14.1), as might be the case in other forms of commercial contract, withdrawal might be the only tenable option for a party which is sufficiently dissatisfied in its relationship with the operator or with another party. • Restricted non-participation rights – the withdrawal right will be of particular value where the JOA does not give a non-consent right (5.1) to the parties. In such a circumstance a party which is faced with the prospect of being voted in to participate in a joint operation which it cannot finance, or which it simply does not support, may be glad of the option to surrender its project interests through the withdrawal route, and the other parties might prefer that a party which faces difficulty in funding its commitments under the JOA (or which is otherwise a reluctant participant in the proposed joint operation) has elected to withdraw, rather than to remain in the JOA with anything less than full commitment. • Conditions of withdrawal – the need for compliance with the various conditions relating to the exercise of the withdrawal right, the fact that the withdrawing party will not make a profit from its withdrawal and the imposition of obligations upon the withdrawing party to be responsible for certain future commitments while forgoing future recoveries (see below) will together discourage the suggestion that a withdrawal right gives a freely exercisable option to a party simply to abandon the petroleum project. The reality is that the withdrawal right will not be exercised lightly.

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11.2

Withdrawal mechanics In order to withdraw from the JOA the withdrawing party will be required to give notice of its intention to withdraw to all of the other parties. The notice of withdrawal might be expressed to be irrevocable by the withdrawing party once it has been given, which would help to emphasise further the gravity of the election to withdraw. The consent of the other parties will not usually be required as a condition of the effectiveness of the proposed withdrawal. Rather, the withdrawing party will be free to withdraw, subject to compliance with the requirements of the JOA which condition the right of that party to do so. However, there could be some conditions precedent to the effectiveness of the withdrawal notice (notably in relation to the conditions which the JOA might impose and the need to secure any government consents which might be required in respect of the withdrawal (see below)). If these conditions are not satisfied (or are not waived by the person to whose benefit the condition precedent is expressed to apply), the withdrawal will not be effective and the withdrawing party will be compelled to remain within the concession and the JOA. However, this is not the same as saying that the withdrawing party can revoke its notice of intention to withdraw if it is unable to so withdraw; although the AIPN JOA does apply a construction that the withdrawing party’s notice to withdraw might be capable of later revocation by the withdrawing party if any necessary government approval to the proposed withdrawal is not forthcoming.2 If the withdrawing party is also the operator, the provisions of the JOA which govern the resignation of the operator and the appointment of a replacement operator (6.4) will also apply. The exercise of the withdrawal right will typically be subject to several restrictions, which in practice will condition (and which could even defeat) the intended application of the right: • Prohibited periods – the withdrawal right might be capable of application at any time during the currency of the JOA, or the JOA might prescribe that the right of a party to withdraw might be disapplied for as long as the minimum work obligations remain to be performed under the concession (1.1)3 on the basis that the parties should at least have signed up for this minimum level of commitment when they agreed to enter into the JOA. Alternatively, the JOA might provide that the withdrawal right is applicable only during the exploration phase (except for when the minimum work obligations remain to be performed), when the greatest levels of risk and uncertainty will apply to the joint operations and the need for a party to be able to withdraw from future participation is at its greatest; or that the right to withdraw will be disapplied from operation once a specified development plan (4.1) has been committed to and remains to be completed.4 Under the AAPL JOA, a party

2 3 4

AIPN JOA §13.7. OGUK JOA §24.2.1. OGUK JOA §24.2.3.

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•

cannot withdraw during the currency of a force majeure event or an emergency.5 Correspondence with the other project documents – the withdrawing party has the option to withdraw from both the concession and the JOA together by giving a defined period of notice to the other parties, but for this to be effective it is necessary to ensure that the concession also has a similar withdrawal right6 and to comply with any conditions around withdrawal which the concession might impose. If withdrawal under the concession is not an option, withdrawal under the JOA will not happen either. In this case the withdrawing party has little option but to negotiate a transfer of its interests under the concession and the JOA (see Chapter 10) to another person on whatever terms it can get. As the withdrawing party will cease to be a party to the JOA and the concession, that party should also cease to be a party to any commercial arrangements which that party might have entered into as a consequence of being in the petroleum project (eg, any contracts for the sale or the transportation of petroleum (9.3) or the granting of any rights of access to infrastructure to, or the securing of any rights of access to infrastructure from, any third parties (4.3)). It would be untenable for the withdrawing party to cease to have a position under the JOA and the concession, yet still to be party to such commercial arrangements – not least since some of these commercial arrangements might simply not be capable of being performed by a person which is not also a party to the concession and the JOA. However, it is not always the case that any of these commercial arrangements would contain the right of a party to so withdraw from or terminate the arrangement at its convenience, so a negotiated termination may then be necessary. The difficulty of being able to do this might well jeopardise the effectiveness of the intended withdrawal from the concession and the JOA. The relationship of the exercise of the withdrawal right under the JOA and where there has been a unitisation programme is considered separately (see Appendix F).

The withdrawing party will be obliged to secure any necessary government consents to the proposed withdrawal and consequently the effectiveness of the withdrawal will in practical terms be conditional upon such consents having been secured.7 If those consents are not forthcoming, the purported exercise of the withdrawal right will not be effective (see above). The withdrawal right usually cannot be exercised where the withdrawing party has an unremedied default under the JOA (14.3). This is popularly assumed to be morally correct, because it should not be an option for a defaulting party to

5 6 7

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AAPL JOA 810 §17.3.3. MC 10, MC 11. AIPN JOA §13.7; OGUK JOA §24.3(b).

Peter Roberts

surrender its interests and simply walk away with the default left unremedied; but this overlooks the fact that a similar outcome might result in practice through the application of the forfeiture remedy to a party’s unremedied default (14.4). The JOA might also provide that if the withdrawing party’s interests are subject to any form of encumbrance (eg, a security interest (10.2) or a carried interest (3.5)), withdrawal will not be possible without prior removal of the encumbrance, unless the non-withdrawing parties agree to assume the withdrawing party’s PI subject to such an encumbrance. In this latter case there is then a need to ensure that, in accordance with the terms of the encumbrance, the beneficiary of the encumbrance is not required to consent to the transfer of the encumbered interests to the nonwithdrawing parties.8 The critical issue to be noted with any withdrawal is that the withdrawing party will remain responsible for its share of any costs and liabilities incurred or accruing in the period up to the effective date of the withdrawal (unless otherwise agreed with the non-withdrawing parties). This responsibility extends to include the costs associated with any joint operations (or exclusive operations) to which the withdrawing party has committed prior to the effective date of the withdrawal, notwithstanding that the actual operations might take place after the effective date of the withdrawal. Whether the withdrawing party should also be compelled to contribute to the costs of joint operations which it did not vote in favour of but which were nevertheless approved by the OpCom, a fact which then compelled that party to exercise the withdrawal right, will be a matter for negotiation in the JOA.9 It may be required as a condition of withdrawal that the withdrawing party make payment for, or otherwise post satisfactory security for, those costs and liabilities for which it will remain responsible.10 Critically, this will include the withdrawing party’s liability for its share of future decommissioning costs, which requirement will be disapplied only if such security has already been provided (13.3). These costs will need to be determined, and it may well be that at the point of withdrawal the decommissioning phase is a long way off in time and the costs cannot be readily predicted, such that an estimate will need to be agreed between the withdrawing party and the non-withdrawing parties. The withdrawing party might be obliged to offer a continuing indemnity to the non-withdrawing parties for its accrued liabilities, but whether an indemnity in favour of the withdrawing party from the non-withdrawing parties (in respect of liabilities arising under the JOA after the effective date of withdrawal) might also be appropriate should be considered. However, the withdrawal provisions in the JOA rarely give this possibility much attention. In contrast to the potential liability of the withdrawing party for costs accruing after the effective date of withdrawal (see above), the entitlement of the withdrawing party to receive its share of any produced petroleum (9.1) will cease on the effective

8 9 10

OGUK JOA §24.3(e). AAPL JOA 810 §17.3.1; AIPN JOA §13.4; CAPL JOA §11.03 C, OGUK JOA §24.3(f). AIPN JOA §13.8.

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date of withdrawal, and the withdrawing party’s voting rights at the OpCom and also its rights of access to data generated in connection with the performance of the JOA (6.3) could be suspended from the date upon which it notifies its intention to withdraw11 or from the effective date of withdrawal.12 The JOA usually provides that all of the costs associated with the withdrawal, including the costs incurred by the non-withdrawing parties in dealing with the withdrawal, will be borne by the withdrawing party.13 The practical extent to which this costs undertaking will apply is similar to the considerations expressed in respect of the analogous provision in the transfer provisions in the JOA (10.2). 11.3

Partial withdrawal The principle of withdrawal is best illustrated by the withdrawal of a party from the entirety of the concession and the JOA and the consequent reallocation of that withdrawing party’s interests among the non-withdrawing parties. A more complicated proposition is created where the JOA conceives of only a partial withdrawal by a party. A partial withdrawal could be applied, for example, to a specified part of the concession area according to areal coordinates, to a specified layer of the concession area according to stratigraphic coordinates (1.1) or to specified operational activities within the concession area such as in respect of certain exploration programmes (which, if there is a requirement in the JOA that the right to withdraw be precluded where the initial exploration commitments have yet to be concluded (see above), will apply only in respect of an exploration programme which has been proposed after the minimum work obligations have been completed under the concession), but without withdrawal from the area in which ongoing production activity is underway. The AIPN JOA conceives of a partial withdrawal, through including an option whereby the withdrawing party can withdraw only from exploration activities, but not from any petroleum exploitation activities or discoveries.14 By the same token, a partial withdrawal might be made by a party in respect of the joint operations, but not in respect of that party’s interests in any exclusive operations (or vice versa), and the principle of a partial withdrawal might be applied simply so as to reduce (but not to eliminate completely) the size of the withdrawing party’s PI. In each case the withdrawing party will not withdraw from the concession, as the continuing standing of that party in the concession will be necessary to facilitate the ongoing participation of that party in the activities under the concession which the withdrawing party has not withdrawn from. In essence, a partial withdrawal is similar to the right of a party to make a non-consent election in respect of specified joint operations (5.1). Where there is a partial withdrawal by a party, the operator will thereafter be

11 12 13 14

OGUK JOA §24.3(g). AIPN JOA §13.1(B). AIPN JOA §13.6; OGUK JOA §24.3(b),(d). AIPN JOA §13.2(B).

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required to engineer some separation of accounting, so as to distinguish between the costs accruing and the revenues arising from the joint operations and from any operations in respect of which a partial withdrawal has taken place. Although in principle this separation of accounting should be straightforward to achieve (after all, it should be similar to how the operator accounts for exclusive operations within the context of joint operations (5.2)), the practical reality is that sometimes that the very nature of the joint operations and the complexity of the partial but not complete withdrawal might make that separation of accounting more difficult than the words of the JOA would suggest. Given the complexities of managing and accounting for multiple geographical and/or operational areas which are variously subject to joint or less than joint participation, where there is a partial withdrawal the simplest solution might be to create a new, separate JOA to apply to areas where a partial withdrawal has taken place and in respect of the non-withdrawing parties that are participating in that area. This sounds simple enough, but it will entail all the effort of creating a new JOA and possibly also some form of further agreement to manage the interrelationship of the multiplicity of JOAs which might be spawned from the same concession (see Appendix E). If the party which elects to make a partial withdrawal is the operator, it will become necessary to appoint a replacement operator in respect of the aspects of the JOA from which the party-operator has withdrawn. This would create significant complexity within the vehicle of the ongoing JOA, with more than one operator in place in respect of the withdrawn and the non-withdrawn areas, and so constitutes another reason why the creation of a separate JOA with a newly appointed operator might be the simplest solution (see Appendix E). 11.4

Consequences of withdrawal The withdrawal mechanism bears some similarity to the operation of the transfer provisions in the JOA (see Chapter 10), in that the withdrawing party will exit the JOA but will be liable for certain liabilities which have accrued up to the point at which the exit is effected. However, the essential differences between the withdrawal and the transfer provisions are that in a withdrawal the withdrawing party will not expect to receive any consideration for the interests which it is divesting itself of, and that (through the exercise of the pre-emption right which the withdrawal right effectively entails) the recipients of the withdrawing party’s interests will be preordained as the remaining parties to the JOA. A partial withdrawal also bears some similarity to the exercise of a non-consent election (5.1), in that the partially withdrawing party will decline to participate further in certain defined activities, but will otherwise remain party to the concession and the JOA, and will thereby necessitate the introduction of separated accounting by the operator. In contrast to the non-consent election, however, there will be no buy-back right (5.2) in favour of the withdrawing party. Assuming a total withdrawal from the concession and the JOA, the consequence of a party’s withdrawal is that the withdrawing party will transfer its PI, free of cost, to the non-withdrawing parties. That PI will be allocated between the non-

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withdrawing parties in accordance with the proportion which the PI of each of the non-withdrawing parties bears to the aggregate of the PIs prior to the withdrawal of the withdrawing party, unless the non-withdrawing parties agree on a different allocation.15 The withdrawal of a party could trigger a rush for the door, for it is always an option for any other party also to withdraw,16 rather than be required to increase its PI through acquiring additionally a share of the withdrawing party’s PI. In this case the allocation of the next-withdrawing party’s PI will be repeated as detailed above. Ultimately, if all of the parties elect to withdraw, they will together surrender the concession and terminate the JOA in their respective entireties.17 Decommissioning will then be an issue to consider (see Chapter 13) if there is any infrastructure to be abandoned. It is fair to say that in most cases the provisions of the JOA dealing with withdrawal are somewhat thin on detail (certainly in comparison with the transfer provisions, which are usually more comprehensive). This is perhaps attributable to the relative rarity of the decision of a party to withdraw. There is also a danger that a withdrawal provision might permit a partial withdrawal, but without due regard to the significant complexities (including possibly the need for a new JOA – see Appendix E) which such a proposition might thereby create.

15 16 17

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AIPN JOA §13.6; OGUK JOA §24.3(a). AIPN JOA §13.2(A); OGUK JOA §24.2.1 – whereby each party shall have a 30-day period (running from the date of receipt of any other party’s withdrawal notice) also to elect to withdraw. AAPL JOA 810 §17.2.1; AIPN JOA §13.9.

12. Liabilities

In the liabilities provisions of the JOA, the focus is typically on a consideration of the prospective liability which the operator might have to the parties for any loss or liability which the operator causes in the exercise of its responsibilities, and to how that liability might be limited in the operator’s favour. That issue is addressed in detail below, but the parties should also consider the response of the JOA to the allocation of liabilities between the parties, and the allocation of the liability of the parties to any third parties, which might arise in consequence of the performance of the joint operations (and any exclusive operations). The JOA might also address the more general liability of the parties for a breach of the terms of the JOA (although the JOA is typically less comprehensive on this issue). 12.1

The operator’s liability to the parties This section assumes that one of the parties will have been appointed to act as the operator (6.2). The liability regime which is applicable in respect of a contracted operator (6.5) could be different from the positions which are outlined below. A key expectation of the operator, which is often an essential condition to a party agreeing to take on the role of the operator, is that the operator should incur no legal liability to any of the parties, or to any third party, for acting as such. This is often recited by the operator as being consistent with the principle that the operator will not make a profit or suffer a loss from acting as such (6.1), although the symmetry between these two principles is not obvious (because there are some circumstances where the operator might effectively make a profit (6.1) and/or where the operator might have some liability (see below)). To this end, the JOA typically provides (in what is sometimes called an ‘exculpatory clause’) that the operator will not be responsible for any loss or liability suffered by a party (or by a third party and claimed against the operator or any of the parties) and which results from the operator having exercised (or having failed to exercise) its rights under the JOA, or from having performed (or having failed to perform) the obligations which it has under the JOA. The JOA will usually also express this protection to apply to the operator even if such loss or liability suffered by a party (or a third party) was caused by the fault or negligence of the operator.1

1

AIPN JOA §4.6(A); CAPL JOA §§4.01, 4.02; OGUK JOA §6.2.4.

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Liabilities

To reinforce this protection of the operator, the parties (including the party which is appointed as the operator, in its capacity as a party (3.1)) will also undertake to indemnify the operator (in the proportion of their respective PIs) for any such loss or liability for which the operator might otherwise be responsible.2 Through this combination of disclaimed responsibility and indemnity coverage, the operator is effectively insulated from liability. The operator’s right to indemnification should be expressed in the JOA to apply to actions which have been properly undertaken by the operator in accordance with the terms of the JOA and the extent of the operator’s authority. Anything which is done by the operator outwith the terms of its mandate to act might therefore not readily be due for indemnification. In further support of the protection afforded to the operator, the definition of the ‘operator’ for these purposes might be extended in the JOA to include any affiliates of the operator and any directors, officers or employees of the operator or of those affiliates.3 This extended class of beneficiaries is intended to prevent a party which has suffered loss from circumventing the protection afforded to the operator by instead suing any of the other named persons for a loss or liability for which that party would ideally want to make the operator responsible. This extended class of beneficiaries will be identified so as to come within any protections which are afforded by a modification to the strict rules of privity of contract (17.12). However, the JOA might recite one partial exception to the principle of immunity from liability for the operator. This exception will relate to the situation where the loss or liability which a party has suffered in consequence of any act or omission of the operator is attributable to what is referred to as ‘wilful misconduct’ (sometimes also known as ‘gross negligence’) on the part of the operator (which would need to be determined judicially or by an appropriate arbitral body, rather than simply by the allegation of a party).4 Thus, under the AAPL JOA the operator is declared not to be liable to the nonoperating parties for any losses sustained or liabilities incurred, except where the same result from the operator’s “gross negligence or willful misconduct” (neither of which term is defined).5 A similar position applies under the CAPL JOA.6 However, the CAPL does provide a single, combined definition of “gross negligence or willful misconduct”.7 What constitutes wilful misconduct (or gross negligence) should ideally be defined specifically by the JOA, as these terms are not defined statutorily under English law. Neither does English law offer much in the way of a comprehensive judicial definition of these terms, whether generally or specifically in the case of petroleum projects. For some guidance, regard might be had to the decision of the English courts in Porter v Magill8 which, albeit not in the context of a petroleum project, referenced 2 3 4 5 6 7 8

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AIPN JOA §4.6(B); OGUK JOA §6.2.4. AIPN JOA §4.6(B). See, for example, Stine v Marathon Oil Co 976 F 2d 254, 259-60 (5th Cir 1992). AAPL JOA 810 §5.2. CAPL JOA §§4.01, 4.02. CAPL JOA §1.01. Porter v Magill [2001] UKHL 67, [2002] AC 357 (HL).

Peter Roberts

with approval a test for wilful misconduct from an earlier case of “deliberately doing something which is wrong knowing it to be wrong or with reckless indifference as to whether it is wrong or not”. Although in respect of a contract subject to New York law, The Hellespont Ardent9 also made an attempt to define ‘gross negligence’, through importing notions of conduct undertaken without appreciation of the risks as well as disregard or indifference as to an obvious risk, and suggested that the difference between negligence and gross negligence could simply be a matter of degree. Cases from other jurisdictions such as Texas could also shed some light on how the term ‘gross negligence’ could be interpreted by the English courts, and it would appear from these cases that the standard of conduct or misconduct required for gross negligence may be akin to the standard for wilful misconduct.10 The AIPN JOA adopts a single, combined definition for both wilful misconduct and gross negligence of “any act or failure to act (whether sole, joint or concurrent) by any person or entity which was intended to cause, or which was in reckless disregard of or wanton indifference to, harmful consequences such person or entity knew, or should have known, such act or failure would have on the safety or property of another person or entity”.11 In some JOAs the definition of ‘wilful misconduct’ (or ‘gross negligence’) is modified so as to exclude any acts, or failures to act, which were justifiable by special circumstances (these ‘special circumstances’ are generally not defined), or which were done in good faith (which generally is also not defined). These exclusions will operate so as to reduce the likelihood of the commission of an act of wilful misconduct (or gross negligence) and so will increase the prospects for the operator’s immunity from liability. Thus, under the OGUK JOA the definition of ‘wilful misconduct’ connotes an intentional or reckless disregard of good oilfield practice (6.3), or of the terms of the JOA, in utter disregard of any avoidable and harmful consequences; but an allowance is made for any act or omission which is done in good faith and is justifiable by any special circumstances (eg, safeguarding life, property or the environment or in response to any emergency).12 The existence of the operator’s liability for wilful misconduct (or gross negligence) is also often weakened in the JOA by further provision that such liability will arise only where the act, or the failure to act, which is complained of was committed by a member of a defined class of persons, often referred to as ‘senior supervisory personnel’, in order that the operator will be so liable. This is another term which must be defined specifically in the JOA and this is another area where there is some room for manoeuvre, subject to the overriding principle that the operator will wish to narrow the scope of vicarious liability for the acts of its personnel for which it might otherwise be responsible.

9 10 11 12

The Hellespont Ardent [1997] 2 Lloyd’s Rep 547. See, for example, IP Petroleum Co v Wevanco Energy, LLC 116 SW 3d 888 (Tex App Houston [1st Dist] 2003, pet denied). AIPN JOA §1.36. OGUK JOA §1.1.

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The AIPN JOA offers a series of alternative definitions for ‘senior supervisory personnel’,13 based on a party’s field supervisor, facility manager or senior resident manager and any manager who reports to that senior resident manager. Other JOAs utilise even more ‘senior management’ definitions, such as the OGUK JOA which applies the definition to directors, corporate officers or defined senior managers.14 The point to be drawn from all of this is that if the JOA provides that an act of wilful misconduct (or gross negligence) can be committed only by a person who falls within the definition of the ‘senior supervisory personnel’ group in order to expose the operator to liability, and if the test for what constitutes a member of that group is set so high as to capture only persons who are in practical terms unconnected with the operation of the JOA, then the prospects for the commission of an act of wilful misconduct (or gross negligence) by the operator, and so for the operator to be made liable, will be greatly reduced. Even if the JOA does impose liability on the operator for a loss or liability caused by its wilful misconduct (or gross negligence), the JOA might then impose a cap on the operator’s actual liability to the parties (eg, expressed as a numerical amount, both annual and in the aggregate over the lifetime of the JOA). The test for wilful misconduct (or gross negligence) is typically set by reference to the need for a determination that an act (or omission) which is complained of falls within the relevant definition. However, it may be that the JOA imposes an additional requirement that the party alleging the wilful misconduct (or gross negligence) also have suffered some material loss or incurred some material liability as a direct consequence. This will therefore tie the allegation of wilful misconduct (or gross negligence) to going beyond a merely technical breach which has not actually resulted in any loss or liability. The JOA’s customary prohibition on the operator’s liability for consequential losses will also apply in the operator’s favour so as to limit further the operator’s liability. What constitutes a consequential loss is a topic which perennially vexes the legal community.15 Under English law, ever since the introduction of the two-limb test for remoteness to decide which types of loss caused by a breach of contract may be compensated for by an award of general damages,16 there has been considerable debate in respect of disputed commercial arrangements on where the line would be drawn between direct losses (which would in the ordinary cause of events be recoverable as damages unless specifically excluded by contract) and indirect, or consequential, losses (which would not in the ordinary cause of events be recoverable). Because of the uncertainties of relying on applicable law, what constitutes a ‘consequential loss’ is typically defined specifically in the JOA. Thus, under the AIPN JOA ‘consequential losses’ are defined as “losses or damages relating to reservoir

13 14 15 16

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AIPN JOA §1.54. OGUK JOA §1.1. See, for example, BHP Petroleum Ltd v British Steel plc [1999] 2 Lloyd’s Rep 583, 597 – 2000 for a debate of the issue. Hadley v Baxendale (1854) 9 Exch 341.

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damage, the inability to produce petroleum, loss of income, punitive damages or any other indirect damages or losses”,17 and under the OGUK JOA they are defined as any “indirect or consequential loss, including in relation to delay or loss of petroleum production, loss of use, profit, revenue, bargain or opportunity or any reservoir damage”.18 A similar definition applies in the CAPL, where ‘consequential losses ‘are defined as “extraordinary damages”.19 In the AAPL JOA reference is made to consequential and indirect damages, but without definition of those terms.20 The AIPN JOA contains a formulation whereby if the senior supervisory personnel (as defined) of the operator or of the operator’s affiliates engage in any gross negligence or wilful misconduct (as defined) which causes loss or liability to the parties, the operator will be liable for those losses or liabilities (but only up to a defined capped amount and with no responsibility for any consequential losses (as defined)).21 In the OGUK JOA the operator will be liable to the parties for any loss or liability arising from its wilful misconduct (as defined), except that the operator’s liability for its own wilful misconduct will not apply in respect of any consequential loss (as defined) which a party has suffered in consequence.22 The combination of a relatively high threshold for determining what constitutes wilful misconduct (or gross negligence), with the addition of exceptions for special circumstances and good-faith acts or omissions and the senior supervisory personnel qualification, together with the possibilities of a test of materiality and an overall cap on liability, and also a disclaimer of liability for consequential losses, means that the reality is that under the JOA it can be very unlikely that any meaningful degree of liability will be imposed on the operator. A practical example of the difficulty which the combination of provisions referenced above results in is demonstrated by an alleged breach of the duties of confidentiality under the JOA (17.1) by the operator, where the act complained of has been committed by a relatively low-level employee. The reality is that making liability stick to the operator for such a breach will be almost impossible. However, there may be some limited circumstances under which some liability might be attached to the operator in respect of the operator’s failure with relatively greater ease. Under the OGUK JOA,23 the operator will be liable to the parties for any unreasonable failure to meet the operator’s insurance obligations (17.7). This liability of the operator will still be subject to the operator’s relief from liability for consequential losses, and whether this failure will also afford the right of the parties to remove the operator for a breach of the terms of the JOA (6.4) should be made clear in the JOA. The rationale for treating the operator’s insurance obligations somewhat differently is popularly attributed to the significant losses to which the parties would 17 18 19 20 21 22 23

AIPN JOA §13. OGUK JOA §1.1. CAPL JOA §1.01. AAPL JOA 810 §22.5. AIPN JOA §4.6(C). OGUK JOA §6.2.4. OGUK JOA §6.2.4.

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be exposed if the operator had failed properly to insure their interests and there was an event which exposed the parties to uninsured losses, such that the operator should be exposed to some culpability; but the application of this logic fails to recognise that any failure of the operator, not just limited to the failure to insure, is likely to have a significant impact on the parties. A paradox in the JOA becomes apparent here. Despite a bold statement of the operator’s good intentions towards the parties (6.3), the significant limitations on the operator’s liability to the parties which typically exist in the JOA will make it difficult for the parties to apply any meaningful sanction against the operator. Therefore, consideration might be given to whether the JOA could impose a more realistic sanction for the operator’s failure (eg, an express statement of the fiduciary duties (and the corresponding remedies) owed by the operator to the parties (see Appendix F)), and to whether any greater control over the operator by the nonoperating parties might offer some compensation for the lack of the operator’s liability (see Appendix A). For the sake of good order, the JOA should also make clear that the relief afforded to the operator as described above will not relieve the party which is the operator from its liability as a party under the JOA.24 This rightly reinforces the notion of the party-operator occupying two separate capacities within the JOA (3.1). However, the JOA should also be careful to recognise this distinction of capacities and not to allow unreasonable confusion to arise. The liability of the party-operator as a party, rather than as the operator, might be misapplied. Where, if at all, the operator might be found to be liable under the JOA, the operator might then be able to sustain a claim for force majeure relief (17.4) in order to defray that liability (although this would be likely to be unsustainable in the face of a proven allegation of wilful misconduct (or gross negligence) because of the requirements of the force majeure regime). Notwithstanding that the operator might be able to evade having liability to the parties for a breach of its obligations, such a breach could give the non-operating parties the right to remove the operator from continuing in that role (6.4). It may also be that, in response to the operator’s general failure to perform certain of its obligations under the JOA, the JOA allows the parties to implement an audit of the operator’s failures. The results of this audit will be relevant thereafter to informing a decision about the potential removal of the operator or to requiring the operator to commit to undertaking some form of improvement plan. 12.2

Liability of the parties The parties might wish to consider how the JOA will allocate the liability for any loss or damage which is incurred by a party (in its capacity as a party, and not in its capacity as the operator) through the performance of the joint operations (or of any exclusive operations). Such loss or damage might arise, for example, as a result of an accident on any of the facilities used for the joint operations during a time when a party is exercising its access and audit rights under the JOA (6.3), as a consequence

24

AIPN JOA §4.6(D).

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of which that party might suffer some damage to or the loss of its own property interests, or some injury to or even the death of its own personnel. In respect of the consequences of the joint operations, the JOA might be silent on how liabilities are to be allocated between the parties for loss of or damage to their own property and personnel interests. If the JOA does not expressly address this point, such liabilities will be allocated between the parties according to the general principles of the governing law of the JOA (17.5) Under English law, for example, a person causing loss or damage to another person’s interests will ordinarily be liable to that other person if liability can be established (under tort law for negligence, for example, subject to issues of remoteness, causation and quantum). Alternatively, the JOA might expressly prescribe a regime for the allocation of such liabilities between the parties. Where this is so, the principal model to consider is the ‘mutual hold harmless’ (sometimes also known as ‘knock-for-knock’) formulation. Under this model the parties each assume responsibility for any damage to or loss of their own property and personnel, even where such loss or damage is attributable to the act or omission of any other party.25 Furthermore, each party will undertake to indemnify each other party against any claims made against any such other party by or on behalf of the indemnifying party in respect of such loss or damage. This combination of assumed responsibility and an indemnity effectively creates a circular liability mechanism, whereby the integrity of the mutual hold harmless regime is maintained since the net loss ultimately falls on the party which originally suffered that loss:

Party A’s act causes $1 million loss to Party B’s property

Party B successfully sues Party A for $1 million

The loss of $1 million stays with Party B

Party A recovers $1 million from Party B via indemnity

The difficulty with this circular liability mechanism is that it relies for its successful operation on the creditworthiness of all proponents in the circle. Any breakdown in a party’s ability to make payment under such an indemnity regime will defeat the mechanism. This is another example of the interest which the parties will have in ensuring the creditworthiness of each other party under the JOA, which may require the provision of some collateral support (3.2). The alternative liability allocation model to consider is the ‘guilty party pays’ formulation, under which a party which can be proved to have caused loss or damage to another party is fully liable to indemnify that other party for such loss or 25

OGUK JOA §22.2.3.

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damage. This fault-based formulation will therefore require some closer investigation of all the facts of any event causing loss or damage, so that the blame can be properly attributed and the liability allocation model applied. In respect of the liability of an indemnifying party under either of the liability allocation models referred to above, several points should be borne in mind: • Liability for negligence – under English law, a party can be indemnified by another party against any loss or damage which that first party has suffered, even though such loss or damage has arisen through that first party’s own negligence, as long as the agreed indemnity wording clearly recognises this principle.26 Equally, however, the agreed indemnity can specifically exclude this principle if the parties so desire. Note should also be taken of the application of the principles of the Unfair Contract Terms Act 1977 in respect of the prospective exclusion of a party’s liability for its own negligence (which would effectively apply through a party’s right to be indemnified in respect of its own negligence, and which would apply equally between the parties and to a party in its capacity as the operator). Under the 1977 act, a term of a contract which excludes or restricts the liability of a party for death or personal injury resulting from that party’s negligence will be ineffective,27 and liability for other loss or damage resulting from that party’s negligence can be excluded only insofar as to do so would be reasonable. The application of the 1977 act appears to be strict and it is not apparent that the parties can elect to contract out of that application; but it has been held that these provisions are properly intended to apply to the exclusion or restriction of liability in relation to the victim of negligence and should not extend to regulate a term of an agreement whereby the further allocation of the economic incidence of a claim for losses caused by negligence is agreed between the parties to that agreement.28 Furthermore, Section 27 of the 1977 act provides that where the law applicable to a contract is the law of any part of the United Kingdom only by choice of the contracting parties, and apart from that choice the law of some other country applies, then the relevant sections of the 1977 act do not operate as part of the law applicable to the contract. This provision will be of particular relevance to a JOA which governs joint operations outside of the United Kingdom. • Liability for wilful misconduct (or gross negligence) – what constitutes wilful misconduct (or gross negligence) has been considered above. The obligation of a party to indemnify any other party might be expressed not to apply where the loss or liability in respect of which the indemnity would apply is proved to have arisen in consequence of the wiful misconduct (or gross negligence) of the party to be indemnified. Thus, the JOA might provide that if a party suffers a loss because of its own wilful misconduct (or gross 26 27 28

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EE Caledonia Ltd v Orbit Valve plc [1995] 1 All ER 147, and see also Colour Quest Limited v Total Downstream UK PLC [2009] EWHC 540 (Comm). Section 2(1) of the Unfair Contract Terms Act 1977. Thompson v T Lohan (Plant Hire) Ltd [1987] 2 All ER 631.

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•

negligence), that party cannot expect to be indemnified by another party in respect of that loss. This is consistent with the position described above in respect of the operator’s liability for wilful misconduct (or gross negligence). Indemnity width – the JOA should confirm the intended width of any indemnity which is given. A popular recital in an indemnity is that it will cover losses ‘arising out of or in connection with the performance of the relevant contract’, rather than being wider so as to apply to a relationship between the contracting parties which might go beyond the relevant contract, or narrower so as to apply only to specific tasks under the relevant contract.29 Similar considerations will apply in respect of the definition of ‘personnel’ (rather than distinguishing employees and contractors) and ‘property’ (rather than distinguishing owned, leased or contracted property interests). Whether the exclusion of liability for consequential losses which the operator enjoys (see above) would also apply equally between the parties should be addressed in the JOA.

In deciding which liability allocation model to adopt in the JOA, an assessment by a party of whether that party is more likely to suffer or cause loss or damage may colour that decision. In theory at least, a party which is more likely to cause loss or damage should be drawn towards the mutual hold harmless formulation, while a party which is more likely to suffer loss or damage should prefer the guilty party pays formulation. In reality, however, it is difficult for a party to predict what could happen over the lifetime of the JOA and so which model might be more advantageous. Moreover, while the guilty party pays formulation might have some attraction in certain circumstances, its application could have the unintended consequence of making the party which is the operator liable (in its capacity as a party) for the loss suffered by another party, where that party-operator would not incur that liability in its capacity as the operator. This could weaken the protection afforded to the operator and is an inconsistency which the JOA would do well to avoid. In either of the liability allocation models described above, the definition of a ‘party’ might also be extended to include certain other persons who are related to that party (eg, any affiliates of the party, any directors, officers or employees of the party or of those affiliates, and any contractors retained by a party), such that they also come within the agreed liability model. Under the mutual hold harmless formulation, therefore, an action brought by one party against another party’s contractor for loss or damage which was (as a matter of fact) caused by that contractor will be treated as an action brought against the first party directly, and the assumption of responsibility and circular indemnity mechanism (see above) will apply in the customary manner in order to visit the ultimate loss upon the party which brought the action. Once again, the existence of this extended class of beneficiaries will need to be reconciled with the applicable rules which modify the privity of contract (17.12). 29

See, for example, Campbell v Conoco (UK) Ltd [2003] 1 All ER (Comm) 35.

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A further issue to consider is how the JOA might address the allocation of loss or damage incurred by a party through the performance of any exclusive operations (see Chapter 5). In contrast to the position with the allocation of liability between the parties for loss or damage incurred by a party in consequence of the performance of the joint operations, the JOA is typically more prescriptive on how liability might be allocated between the parties for loss or damage which has been incurred by a party in consequence of any exclusive operations. A party which is not participating in an exclusive operation, but which incurs any loss or damage because of the act or the omission of a party which is so participating, should expect to be fully indemnified in respect of that loss or damage by the participating party. This is usually a customary undertaking within any exclusive operations provision (5.2). This addresses the relationship between the participating and non-participating parties. As between the group of parties that are together undertaking an exclusive operation, the liability allocation regime will be a microcosm of the regime which might apply between the parties in the joint operations, and the options for the allocation of liability as described above (whether the mutual hold harmless formulation or the guilty party pays formulation) will apply equally. 12.3

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Third-party liabilities It may be that a third party (ie, any person other than a party to the JOA and anyone who does not fall within any extended class of beneficiaries (see above)) will make a claim against one or more of the parties in consequence of any loss or damage suffered by that third party arising from the activities contemplated by the JOA. The allocation of liabilities in this regard is typically more clearly managed under the JOA than the allocation of liabilities in respect of claims between the parties. If a claim is made by a third party against more than one party, the allocation of liability between the parties in respect of that claim will be determined in the first instance by the adjudicatory forum where the third party’s claims is brought. Effectively, such liability will principally be borne by the party (or parties) found at law to be responsible for the loss or damage suffered by the third party. As between themselves, the parties might agree a separate regime for contributions in respect of third-party claim liabilities, such that a claim made by a third party which is initially settled on the basis that the guilty party pays is reallocated between the parties. This could be represented by a back-charge which is made by the operator as a cashcall or an invoice request upon the parties (16.2), to be borne according to their respective PIs (3.3) without reference to which party actually caused the third-party claim or which party’s assets or activities might have been implicated in the claim. As an alternative to this principle of collective responsibility, the JOA could instead recite that any liability arising in respect of a claim which is made by a third party be borne by the party against which that claim is made and sustained. Thus, there would be no reallocation of liability from the original guilty party pays allocation. The AIPN JOA provides that the rights, duties, liabilities and obligations of the

Peter Roberts

parties under the JOA are individual and are not joint or collective.30 However, there is also a form of collective responsibility for liability allocation between the parties in respect of third-party claims in the AIPN JOA which provides that if any nonoperating party is sued by a third party, that party may thereafter handle that action, subject to defending or settling that action in accordance with the directions of the OpCom, and that any resultant costs, expenses or damages incurred as a consequence of that defence or settlement which are attributable to the joint operations will be levied against the joint account, so to be allocated between the parties in accordance with their respective PIs.31 Despite what the AIPN JOA says about the individual responsibility of the parties, this is effectively a collective responsibility for liabilities for third-party claims where they can be proved to have arisen as a result of the performance of the joint operations. There might also be a modified form of collective responsibility between the parties, so that a third-party claim is borne between all of the parties according to their respective PIs, except that if that third-party claim was caused by a particular party’s wilful misconduct (or gross negligence), that party will be solely responsible for the third-party claim. This position is adopted, for example, under the AAPL JOA.32 Any claim made by a third party in respect of any exclusive operation will (ultimately by reallocation – the initial claim by the third party could well be made against all of the parties) be borne only by the parties that are participating in that exclusive operation and will not be borne by the non-participating parties. A third party is not party to the JOA and consequently cannot be bound by any inter-party arrangements for the allocation of liabilities. As a result, that third party will be untouched by the application of any contribution or reallocation of liability arrangements between the parties to the JOA, and will be free to sue any or all of the parties (and whether as the operator or as a non-operating party) for the recovery of its losses. A third-party claim which is made against the operator in its capacity as the operator will be dealt with according to the provisions of the JOA which address the operator’s liability. This will be distinct from the party-operator’s capacity as a party, which is dealt with above. The JOA usually reserves to the operator the right to manage any litigation brought against the parties in connection with the performance of the JOA (17.8) and the liability of the parties to contribute in respect of any third-party claim will also be tempered by whatever insurance recoveries can be made (17.7). The terms of the concession might also oblige the parties (in their capacity as the concession holders) to indemnify the government against any claims made by third parties against the government as the grantor of the concession,33 and the parties will then reallocate that indemnity liability between themselves in accordance with the terms of the JOA.

30 31 32 33

AIPN JOA §14.1. AIPN JOA §4.5(B). AAPL JOA 810 §22.5. MC 38.

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12.4

Liabilities and insurance The application of the liabilities regime in the JOA should be considered together with the provisions in the JOA governing the maintenance of insurance coverage in respect of loss of or damage to the joint property. The insurance regime under the JOA is considered separately (17.7). The critical point to note is that the operator will usually arrange a base level of insurance coverage of the joint property for the benefit of the parties, and the operator might also arrange certain further insurances for the benefit of the parties (and the parties can also always arrange their own insurance coverage). Beyond these principles the following additional points should also be noted.

(a)

Insurance recovery as precursor to applying the liability model If any form of guilty party pays liability allocation model (see above) is adopted, the JOA might provide that it will be a condition of the guilty party’s liability under such a model that the party which has suffered loss or damage and which wishes to make a recovery from the guilty party must have first exhausted any potential rights of recovery from its insurers. This could be agreed as a matter of contract, but it is not a compellable proposition at law. The English courts have ruled34 that a contracting party’s liability to pay damages on an indemnity will not be affected by the fact that the contracting party which is claiming the damages could also be reimbursed under an insurance policy, as the obligation under the contractual indemnities will be a primary liability, in contrast to the insurer’s duty of indemnity which is a secondary liability.

(b)

Insurance recovery in preference to commencing an action The ability of a party to make a recovery under a policy of insurance in respect of loss of or damage to its interests may help to underpin the operation of whichever liability allocation model is selected. A party may be more inclined to honour a mutual hold harmless formulation and not to try to overturn such a limitation in the JOA in favour of commencing an action for the recovery of its losses (eg, by alleging wilful misconduct (or gross negligence) by a party) where that party has made a successful insurance recovery. Furthermore, where a guilty party pays formulation applies, a party which can make a successful insurance recovery in respect of the loss or damage which it has suffered may be less inclined to engage in the uncertainty of bringing an action against the guilty party for the recovery of its losses.

(c)

Combining a liability allocation model and insurance recoveries Where a mutual hold harmless formulation is underpinned by the commitment of each party to arrange insurance in respect of the loss of or damage to its interests, the strict liability which is created by a mutual hold harmless formulation can be modified partially by a commitment of a party to indemnify each other party in respect of the deductible component of the insurance coverage which would otherwise fall to be borne by the party suffering the loss of or damage to its interests.

34

Caledonia North Sea Ltd v London Bridge Engineering Ltd [2002] UKHL 4.

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So, for example, where a party has suffered a loss and that party then makes a claim on its insurance in order to recover the costs of remediation, the party which caused that loss could be liable to indemnify the claiming party solely in respect of the deductible component of that party’s loss, with the mutual hold harmless formulation (plus insurance recovery) thereafter applying. 12.5

Indemnity obligation limitations Notwithstanding that the parties may have undertaken to indemnify each other against certain losses or liabilities in accordance with the terms of the JOA, in certain circumstances the principles of the governing law of the JOA (17.5) might impose certain limitations on the extent of the protections afforded by such undertakings. Further limitations might also be imposed by contract in the form of a statement in the JOA of certain circumstances in which the right of a party to be indemnified could be limited or even disapplied, such as the disapplication of the indemnity obligation in the event of the wilful misconduct (or gross negligence) (see above) and also the following items.

(a)

Cap on liability Where there is an indemnity regime between the parties, the JOA might impose a cap on the extent of a party’s liability to indemnify any other party, such that the indemnifying party’s obligation is not unlimited. This cap could be expressed as a fixed monetary amount, to be applied annually in respect of each year of the operation of the JOA or in respect of any occurrence.35 The cap might also be expressed to apply in the aggregate over the lifetime of the JOA, but this might render the liability regime meaningless over a long-term agreement such as a JOA where the aggregate cap has been reached early on, such that the indemnifying party which has the benefit of the cap will no longer have any effective indemnity liability once the cap has been reached. A cap on liabilities under the JOA should be expressed not to apply to the liability of a party to make payments due in the ordinary course of the JOA. Care should be taken when drafting any cap on liability to reconcile that cap with the intended operation of the liability allocation model. For example, the application of a cap on liability to a guilty party pays liability allocation model could have the effect of reversing the intended operation of that model, since the guilty party, upon which the liability for the loss or damage should ordinarily fall in its entirety could evade that liability beyond the cap. Moreover, a cap on liability will apply internally between the contracting parties and will not be readily construed as an indemnity to cover third-party claims.36

(b)

Limitation to contract In all cases the JOA might provide that the liabilities of any party (whether as a party or as an operator) for any breach of the JOA will be governed exclusively by the terms

35 36

AIPN JOA §4.6(C). WesternGeco Ltd v ATP Oil & Gas (UK) Ltd [2006] EWHC 1164.

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of the JOA and that no party can overlook this contractual limitation of liability by commencing an alternative action in tort in order to better recover its losses. Although the JOA might expressly prescribe a regime for the allocation of liabilities between the parties in respect of their failure to perform their contractual obligations and in respect of any indemnity obligations, the position under English law is that a wider duty of care based on the law of tort might also exist concurrently or in the alternative between the parties.37 To prevent the possibility of overlapping claims in contract and tort, therefore, the JOA should provide that the remedies available to the parties should be those expressed under the JOA and that any possibility of alternative tortious liability is expressly excluded. However, there may be circumstances where extra-contractual remedies may be required by the parties (eg, the right of a party to sue for recovery of a debt or the requirement of a party to seek injunctive relief in order to protect its rights and interests under the JOA), and these possibilities should also be recognised within this principle. 12.6

General liability The JOA is a commercial contract and the liabilities clause in the JOA might also consider what liability a party (as a party, and not as the operator) might have for a general breach of the wider, contractual terms of the JOA. To do this will in turn require an understanding of the obligations of a party under the JOA. The obligations of the party-operator are considered separately (6.3), and the liability which might apply in respect of a breach of those obligations is considered above. The principal obligation of a party is to make payment when due of its share of the costs of the joint operations (16.2) and the liability of a party for a breach of that obligation is addressed separately (see Chapter 14). Other obligations of a party relate to the need to maintain confidentiality (and the liability of a party for breach of that obligation is considered at 17.1). Beyond these provisions, the JOA customarily recites little more in the nature of active obligations of the parties in respect of which a breach of contract could be alleged. Consequently, the JOA typically does not prescribe an explicit liability regime which would apply in respect of a party’s breach of its obligations (other than in respect of a party’s payment failure – see above). There is not, for example, a provision which allows a party to terminate the JOA as a response to any other party’s unremedied material default (although a separate regime will apply in respect of the default of the operator (6.4)). Consequently, the liability of a party for breach of its obligations under the JOA will (unless a successful claim for force majeure (17.4) can be made) be the subject of an action for damages where any other party has suffered a loss in consequence of that breach (which in turn will be subject to any limitation of liability provisions in the JOA (see above)). Alternatively, an aggrieved party might seek some form of injunctive relief in order to prevent another party’s breach of the JOA (where the breach can be

37

Henderson v Merrett Syndicates [1994] 3 All ER 506.

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anticipated – such as a breach of confidentiality or the making of an unauthorised announcement), which would be particularly helpful where an action for damages would not be appropriate because of the difficulty to the aggrieved party of proving an actual loss. Whether some of the specific default remedies under the JOA (14.1) can be reworked so as to be made capable of application to a general breach of the JOA might also be considered.

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13. Decommissioning

All good things must come to an end and so the JOA will need to cater for the implementation of the decommissioning phase, as the period in the lifecycle of the concession when any petroleum production, processing, storage or transportation infrastructure used in the production of petroleum is removed. This will happen after the production of petroleum from the relevant petroleum deposit has ended. This is an area where the governing law will shape the contents of the JOA and where meaningful consideration must be given to the institution of collateral support specifically in respect of the parties’ decommissioning obligations. 13.1

The decommissioning phase It is an inevitability that the continued production of petroleum from a petroleum deposit will result in the depletion of that deposit to the point where it becomes no longer economic for the parties to continue to produce any remaining reserves of petroleum. Once this point comes into prospect, consideration will need to be given to the implementation of a plan for decommissioning of the petroleum deposit and of the production, processing, storage or transportation infrastructure which has been used for the performance of the joint operations. However, it might also be that the relevant infrastructure has reached the end of its useful productive life, rather than that the petroleum reserves in the petroleum deposit have been so depleted. This point, in the absence of a plan for the reworking of the infrastructure such that its economic life can be prolonged, will also determine the decision of the parties to move into the decommissioning phase. ‘Decommissioning’ (sometimes also called ‘abandonment’ (eg, see the AIPN JOA and also the Petroleum Act 1998 (see below)), a phrase which has become somewhat out of vogue because of the dereliction of duty which it implies) is the name given to the activity of removing the redundant petroleum production, processing, storage or transportation infrastructure and making good the site of the petroleum production operations. These activities will typically be carried out to a standard prescribed by law (see below). The decommissioning activities will apply to the infrastructure used for the performance of the joint operations and will also by implication signal the effective end of any exclusive operations which rely on that infrastructure for their performance. It is only a relatively recent phenomenon whereby decommissioning has come to be seen as a distinct operational phase within the JOA. In the early days of

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collaborative contracting for the activities of petroleum exploration and production, the need to address decommissioning in anything like the necessary detail was often overlooked and this ignorance might be reflected in the terms of the JOA. However, the modern reality is that decommissioning should, despite its relative lack of glamour, be considered as much a part of the scope of the JOA as any of the activities of exploration, appraisal, development or production. Historically, an assessment of the economic viability of a petroleum project was typically made by reference to a simple trinity of anticipated petroleum reserves, anticipated costs of exploration and production and anticipated sales values of the produced petroleum. Not always would the costs of decommissioning be taken into account at the project inception stage, and this lack of appreciation is apparent from examining the terms of any JOA which has a thin reference to decommissioning provisions. Furthermore, the need to consider the issues associated with decommissioning would often be deferred where a combination of rising petroleum prices and improved techniques for the recovery of petroleum from late-life fields meant that petroleum deposit and associated infrastructure lives could be extended and the decommissioning decision thereby put off. It is also fair to say that a relative lack of experience in decommissioning techniques has meant that a real appreciation of the mechanics of decommissioning and the likely magnitude of the associated costs has contributed to decommissioning being something of an unknown art. It will therefore come as little surprise to learn that the JOA has not always dealt with decommissioning provisions in as much detail as might be desirable. The analysis set out in this chapter presumes that the parties have come to the point of decommissioning the entirety of the operations under the JOA. However, if the parties are considering the proposal to cease production from an individual well, there may be the scope for a particular party to propose to undertake a sole risk programme (5.1) in respect of the continuation of petroleum production operations from that well if that party believes that the individual decommissioning decision is premature.1 It might also be that some of the parties will believe that the proposal to undertake an entire decommissioning programme is inappropriate at the time the proposal is made. Some JOAs suggest that those parties could continue with the petroleum production operations as a sole risk project (5.1), but the more logical solution is that the other parties that do wish to decommission would withdraw from the JOA and the concession (11.2). 13.2

The regulatory regime The decommissioning provisions in the JOA will need to be written in order to address and reflect the provisions of the laws and regulations which govern the process of decommissioning in the jurisdiction to which the JOA relates. The import of these provisions to the mechanics of decommissioning, which could apply relatively punitive positions against the parties, should give the parties a

1

AIPN JOA §10.1(E).

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considerable incentive to agree clear and specific terms for decommissioning in their JOA. The AAPL JOA adopts a relatively simple decommissioning formulation, whereby the operator will conduct any abandonment activities which are required by a government authority and the associated costs will be shared between the parties according to their respective participating interest shares.2 However, this simple recital masks the inherent complexity in any JOA which will relate to the detail of the governing law, the relationships between the past and present parties to the underlying concession and the collateral support which might need to be posted in support of what can be very significant cost commitments. This inherent complexity will be explored in more detail below by reference to the conduct of decommissioning activities on the UKCS. The United Kingdom’s international obligations on decommissioning are set principally by the 1992 Oslo and Paris Convention for the Protection of the Marine Environment of the North-East Atlantic (the OSPAR Convention). The OSPAR Convention in turn has its origins in the United Nations Convention on the Law of the Sea of 1982 (UNCLOS), which entered into force in 1994 and to which the United Kingdom acceded in 1997. Agreement on the regime to be applied to the decommissioning of offshore installations in the areas to which the OSPAR Convention applies (principally, specific sea areas of the Northeast Atlantic, including the North Sea and parts of the Arctic Ocean) was reached in 1998 when the parties to the OSPAR Convention adopted OSPAR Decision 98/3 (effective in 1999), with a central focus on a prohibition on the dumping or the leaving wholly or partly in place of any offshore installations (subject to recognition that there may be difficulty in removing some large installations and so allowing application for a derogation from the principal application of the decision for such installations). At the domestic level, in the United Kingdom the decommissioning of offshore infrastructure is regulated by the Petroleum Act 1998 (as amended by the Energy Act 2008; references to statutory sections in this chapter are to the 1998 act as so amended). Although the 1998 act refers to an ‘abandonment programme’, the preferred and generally accepted term is a ‘decommissioning programme’. In respect of UKCS operations, the terms of the licence will also apply so as to determine the parties’ decommissioning obligations (eg, MC19 provides that a licensee cannot abandon any well without the written consent of the secretary of state for energy and climate change and subject to compliance with any conditions which underpin the granting of that consent). The starting point under the 1998 act is Section 29, under which the secretary of state is empowered to serve notice on certain persons who will thereby be required to submit a decommissioning programme for the infrastructure which is identified in that Section 29 notice. The decommissioning programme which is eventually submitted in response to the Section 29 notice will set out the measures proposed to be taken in connection 2

AAPL JOA 810 §18.4.

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with the decommissioning of the infrastructure and will describe, in detail, the anticipated costs, the anticipated timing and the methods intended to be employed to undertake the decommissioning work. The principal expectation is that a decommissioning programme will be called for towards the end of the life of the petroleum deposit and the relevant infrastructure, after a significant period of operation and depletion. However, in certain circumstances (eg, the early shutdown of the petroleum deposit because production has not reached the requisite levels), the decommissioning programme would be required at an earlier stage. The secretary of state’s practice is to serve the Section 29 notice at the start of the production of petroleum from a petroleum deposit, with the programme to be submitted by a date to be directed later. The Section 29 notice is often preceded by the issue by the secretary of state of a warning letter, intended to put the prospective recipients on notice that the secretary of state is considering issuing a notice under Section 29 and providing those recipients with the opportunity to make written representations if they consider that they should not be given a Section 29 notice. Following this, subject to any representations received, a Section 29 notice may be issued. The recipients of a Section 29 notice will be jointly and severally liable to perform the resultant decommissioning programme. Thus, if any party with a duty to carry out a decommissioning programme is unable to do so, the other interested parties will be responsible for the defaulting party’s burden. Ultimately, this could result in one party being liable for the entirety of the decommissioning costs, and this gives emphasis to the need for adequate decommissioning security between the parties (see below). Section 30 of the 1998 act defines the group of persons that can be made the recipient of a Section 29 notice (and the 2008 act widened the net of persons that could potentially be served by the secretary of state with a Section 29 notice). Critically, this list of persons includes the operator (as the person having responsibility for management of the relevant infrastructure) and any person with the right to explore for or to exploit mineral resources (which effectively covers all holders of the licence) in place at the time when the Section 29 notice is given by the secretary of state. Section 30 also applies to any other person that is party to the relevant JOA (3.1) and to any other person with an ownership interest in respect of a particular item of infrastructure but otherwise than as security for a loan (which is intended to ensure that the decommissioning obligations do not attach to any lender which has taken a security interest over any item of infrastructure in exchange for a loan – see 10.2), and also to any company which is associated (according to a defined test of control) with any company which is otherwise caught by Section 30. This last category is regarded as something of a reserved power, intended to deter a company which owns an associated company which is in turn the holder of a licence from allowing that associated company to become insolvent in order to evade its legal and contractual responsibilities. Notices under Section 29 may also be served on licensees that have transferred an interest in a licence to another party without the prior approval of the secretary

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of state (which such unapproved transfers could nevertheless be effective as between the transferor and the transferee (10.2)) and any persons that might intend to carry on such activities in the future (this latter provision is intended to capture relevant persons before the production of petroleum actually begins). Because of the width of the group of persons that can potentially be made the recipient of a Section 29 notice, the ambit of the decommissioning obligation is effectively limitless. The use of a contractor in the day-to-day management of the relevant infrastructure (6.5) could expose that contractor to the risk of receiving a Section 29 notice. However, the expectation is that the appointed operator will be responsible for management of the relevant infrastructure (for the purposes of Section 30) and so such a contractor should not receive a Section 29 notice. Notwithstanding this expectation, if there is a contracted operator in place then that contracted operator will, as a term of its appointment as such, typically require to be indemnified by all of the parties against any such liability to which the contracted operator might be exposed. The decommissioning programme is made public, so that any interested persons will have the opportunity to comment on the proposals which it contains. Once the decommissioning obligation has been fixed by means of the Section 29 notice, it will remain in place unless it is withdrawn by the secretary of state. If a party disposes of its interests in the relevant concession, JOA and infrastructure, the secretary of state will consider whether to exercise its discretion under Section 31(5) of the 1998 act to withdraw the Section 29 notice in respect of that party. Thus, in the event of a transfer of interests under the JOA (10.2), the transferor would expect to be released from its Section 29 obligations and the transferee would expect to become the recipient of a Section 29 notice by way of replacement. However, there is not an automatic right of the transferor to be released from the Section 29 obligations. Rather, this is a matter to which the discretion of the secretary of state will be applied and this will usually be done after a thorough risk assessment (in respect of the covenant of the transferor, the transferee and the remaining parties) has been carried out. This risk assessment will also be reviewed periodically thereafter. The existence of an acceptable form of security which has been provided by a party for its share of any future decommissioning costs may further help to facilitate the withdrawal of a Section 29 in respect of a prospective transferor (see below). However, even if a Section 29 notice is withdrawn, this does not necessarily mean that the party which is the recipient of the withdrawn notice will have no decommissioning responsibilities in relation to the relevant infrastructure, since under Section 34 of the 1998 act a person may, in certain circumstances and following the approval of a decommissioning programme, be placed under a duty to carry out that programme even though it has previously been released under Section 31(5). Section 34 also enables the secretary of state to do the same with any person on which a Section 29 notice could have been served since the serving of the first Section 29 notice. In the first instance, the secretary of state would expect the current Section 29 notice holders to carry out the decommissioning programme and would use the

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powers in Section 34 only in potential default cases, which might be avoided through the application of any decommissioning security arrangements (see below), since the option of serving Section 29 notices more widely should abate where it appears that a satisfactory decommissioning security programme is in place. Under Sections 33, 36 and 37 of the 1998 act, the secretary of state must be satisfied that any person that has a duty to secure that an approved decommissioning programme is carried out will be capable of discharging that duty. In the event of failure by those given notice to submit a decommissioning programme or to ensure that it is carried out, the secretary of state can effect the work to be done and can recover the cost from those persons that were originally given the Section 29 notice. Where the secretary of state has concerns about the ability of a group of Section 29 notice holders to fund the decommissioning of a project, the secretary of state can initiate a procedure under Section 38 of the 1998 act to require the provision of security to meet the decommissioning costs. Under Section 38, the secretary of state has the right to require a party to provide information about its financial affairs; if the secretary of state is not satisfied that the party will have the ability to carry out any duty to which it might be subject (eg, the duty to carry out a decommissioning programme), the secretary of state might require that party to take such action as the secretary of state shall specify. This action could extend to requiring a party to enter into some form of decommissioning security agreement (see below). Under Section 38A of the 1998 act, any security for the performance of obligations under an approved abandonment programme which has been provided by a person (in any arrangements established after December 2007) is effectively ring-fenced from the application of English law insolvency provisions insofar as those provisions might adversely affect the intended operation of such security. Also, notwithstanding the completion of the works in the decommissioning programme, the parties will remain liable at common law in perpetuity for any residual liability which arises in respect of the infrastructure which was associated with the joint operations. The JOA might recognise this principle of ongoing liability, which will survive the eventual termination of the JOA (2.2).3 13.3

Decommissioning security The risk to any government is that, in relation to any particular petroleum deposit and the ancillary production, processing, storage or transportation infrastructure, the parties to the concession (and the JOA) in situ at the time of the commencement of the decommissioning programme will not be possessed of sufficient creditworthiness to pay for the necessary decommissioning work. In reality, this might be the case in respect of any one party, and the customary principle that the parties will have joint and several liability for the decommissioning costs (see above) should make remote the possibility of a total failure. However, in the worst-case scenario the government might consider itself obliged to arrange for the performance of the decommissioning works at its own expense,

3

OGUK JOA §26.4.

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with the resultant cost then to fall on the taxpayer. This is likely to be politically and commercially unacceptable to any government. In recent years the mature petroleum basins of the world have seen an increase in the number of concession and JOA transfers from large companies to smaller ones, and the appearance of many new entrants. While governments are generally keen to encourage these developments in order to maximise the overall levels of recovery of petroleum, they will also be aware of their duty to ensure that they do not become the payer of last resort of meeting the costs associated with decommissioning. Consequently, most governments will be concerned to see that adequate security for decommissioning costs is maintained on an individual concession or petroleum project basis. In 2005 the insolvency of Tuscan Energy, the operator of the Ardmore field (formerly known as the Argyll field) on the UKCS, left the UK government to pick up the bill for the resultant decommissioning costs. Although the amount in question was relatively modest, the spectre of the insolvency of a licensee without decommissioning security in place, leaving the taxpayer to address the residual liability, caused the government of the day to examine the adequacy of the 1998 act. This resulted eventually in the extensions which were effected by the 2008 act. The interests of the government in ensuring that a party’s ability to meet its share of the eventual decommissioning costs are adequately secured are apparent, but these interests will also be shared by each party to the JOA, because of the joint and several liability of the parties for the costs of the decommissioning programme (see above). Therefore, in order to provide some measure of security in support of a party’s obligations to meet its share of what could be a considerable amount of decommissioning costs, the JOA might oblige the parties to put in place a defined form of decommissioning security at a defined time. This is motivated principally by a recognition that the obligation of the parties to a concession to undertake any decommissioning works will be joint and several and so, as between themselves, those parties will be concerned to ensure that their individual liabilities are effectively limited to a share of the decommissioning costs which relate to their respective PIs. Thus, in the event that a programme of decommissioning works needs to be undertaken (and funded), the decommissioning security which is in place will give comfort to the parties that their liabilities will be measured accordingly, It may be that a company of substantial financial standing can demonstrate its ability to meet all of its potential liabilities without providing any form of security. The particular circumstances of the case and the level of decommissioning costs will determine whether this is feasible and what defines an acceptable financial status. It may also be that the creditworthiness of a company could deteriorate over time, such that at a later period some form of security would be appropriate. This might be addressed by a re-guarantee provision (3.2). Certain key criteria will apply in respect of any security which is provided in respect of a party’s liability for its share of the decommissioning costs obligations. (a)

Forms of security The security could take the form of a cash deposit, an irrevocable standby letter of

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credit or an on-demand performance bond issued by a reputable bank. The letter of credit which is issued might be written so that it is underwritten by a policy of insurance which is issued by a reputable insurance company, rather than by the banking facility of the party which requires to post the letter of credit. In the case of letters of credit or performance bonds, there should be provision for how these instruments will be redrawn when they come to the end of their respective maturity periods, with provision for adequate replacement security if they are not redrawn. A corporate guarantee could also be issued by a parent company or another affiliated company, of a party. This guarantee will be a primary obligation on the part of the guarantor, which can be called by the beneficiary of the guarantee. There is a possibility that the guarantor might dispute the basis on which the obligation in the underlying contract has arisen, which could result in the matter then being litigated in order to enforce the guarantee. This would be a particular issue to avoid where such proceedings need to be brought in a foreign court. For these reasons a cash deposit or a form of on-demand security which has been issued by a third party might be preferable to any form of corporate guarantee. (b)

Value of the security The security should cover the full value of the estimated costs of decommissioning and the resultant clear-up to which the party providing the security will be liable. The calculation of these costs could be based on a relative lack of knowledge and so the calculation might also be subject to an additional risk factor to cover any uncertainties and contingencies.

(c)

Protection of the decommissioning security Any funds which have been set aside to cover the costs of the decommissioning, such as a cash deposit, should be available to cover the decommissioning costs at all times. Thus, if a party becomes insolvent before the decommissioning phase gets underway, the decommissiong security could be triggered and held in trust, away from the reach of the liquidator of that party’s interests.

13.4

Decommissioning and the JOA The decommissioning activities and the involvement of decommissioning security, both as outlined above, will be reflected in several provisions within the JOA.

(a)

The role of the operator and the OpCom The JOA generally obliges the operator to prepare the plan for the decommissioning of the relevant infrastructure and thereafter to be responsible for performance of the decommissioning works. The operator will also be responsible for the preparation of the necessary work programmes and budgets (WB&Ps) (8.1) and authorities for expenditure (AFEs) (8.2) in respect of the decommissioning works. The OpCom (if one exists under the JOA – see 7.1) will be required to approve the decommissioning plan and the associated WP&Bs and AFEs.

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(b)

Exclusive operations The decommissioning works will typically be an activity in respect of which a party’s rights to make a non-consent election (5.1) will not apply because of the unfairness of visiting the burden of the decommissioning costs on the remaining parties. The possibility that a party might propose to undertake a sole risk programme (5.1) in respect of the continuation of petroleum production operations, if that party believes that the decommissioning decision is premature, is not obviously apparent, but is not impossible. The decommissioning of any exclusive operation will be effected in the same manner as would apply to the decommissioning of the joint operations, but the statutory joint and several liability of the parties for the decommissioning obligation (see above) would not recognise the JOA’s distinction between joint operations and exclusive operations and the separation of liabilities which the JOA typically seeks to effect in this regard.4

(c)

Default Any decommissioning programme is likely to have significant costs associated with it, and in contrast with the incurrence of costs associated with the development of the relevant infrastructure at the outset of the JOA, there will not be the prospect of petroleum production (and the realisation of the resultant revenues therefrom) which would make the customary default remedies of the sequestration of produced petroleum (14.3) and the forfeiture of interests (14.4) a meaningful threat. Whether the failure of a party to post the necessary decommissioning security would be a default in the terms of the JOA in its own right is considered separately (14.1).

(d)

Contracting The technology of decommissioning is still in its relative infancy and it may be that the operator (or another party) has created an affiliated company in order to consolidate the decommissioning experience within a single centre of excellence. This company could be contracted to provide decommissioning services for the benefit of the parties, and it could be part of a federal contract call-off by the operator (8.6).

(e)

Withdrawal and transfers of interests The JOA might provide that a party’s transfer of its interests under the JOA (10.2) will be conditional on the transferee first agreeing to assume the relevant decommissioning obligations of the transferor5 (and this might also be recited as a private matter between the transferor and the transferee). If the forfeiture provision under a JOA (14.4) represents the method by which a non-performing party can be expelled against its will from the JOA relationship, then the withdrawal provision (see Chapter 11) equates to the means by which a party can resign its interest in that relationship of its own free will, but (critically) conditional upon the requirement that the withdrawing party will put in place some sort of

4 5

AIPN JOA §10.2. OGUK JOA §23.3(b).

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security for its share of the future liability to decommissioning costs. Where the withdrawing party is unwilling (or unable) to put such security in place, the option of defaulting under the JOA and forcing a full forfeiture of the defaulting party’s interests could be used as a means of arriving at the same point of exit, without the obligation to implement the necessary security. This reinforces the need to have security for decommissioning costs in place as soon as possible in the lifecycle of the JOA. (f)

Timing There might be a temptation to insert within a JOA the provision that the parties will agree the decommissioning costs and provide any necessary security for their respective shares of those costs at the outset of the JOA, but this will not be possible in practical terms as at that point the parties will not know the best technical solution for the decommissioning of the relevant assets and infrastructure, and so what the likely costs of the decommissioning will be. Thus the decommissioning decision and an identification of the decommissioning costs will be deferred to a later date in the chronology of the JOA. Under the AIPN JOA, there is an optional provision whereby the parties will, if the terms of the prevailing mineral law or of the concession require, commit to a security agreement for the costs of ceasing the petroleum production operations at the time when a development plan is being put together in respect of a discovery.6 That security agreement (which anticipates any of a guarantee or a standby letter of credit issued by a bank, an on-demand bond issued by a surety company, a corporate guarantee or other financial security required by the concession or agreed by the parties)7 will be provided in respect of a number of defined contract years from the point when the discounted net value of a party’s prospective petroleum entitlements equals a defined percentage of the discounted net cost to the party of ceasing the petroleum production operations. This formulation (which is effectively the ratio of the net present value of the economically recoverable reserves of petroleum to the expected level of decommissioning costs) also appears in other JOAs. Under the OGUK JOA, the decision of the parties to cease joint operations will be effected through the OpCom,8 whereupon the operator will be tasked with proceeding with the activity of decommissioning in accordance with the agreed decommissioning WP&B (8.1). In terms of the security to be provided, under the OGUK JOA the parties will also agree to enter into what is known as the Decommissioning Security Agreement (DSA), to provide the necessary security.9 The DSA is a model form agreement for use by the parties10 and several features of the DSA, insofar as it relates to the OGUK JOA, are worthy of note.

(i)

Timing Under the OGUK JOA, the DSA is not required to be in place as a condition of

6 7 8 9 10

AIPN JOA §10.3. AIPN JOA §1.53. OGUK JOA §26.2. OGUK JOA §26.3. Available at www.oilandgas.org.uk.

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making the JOA effective, but rather will be implemented at a later stage and so will require the further agreement of the parties. The OGUK JOA recommends that the DSA be entered into between the parties prior to the submission of a development plan in respect of a discovery, while also recognising that so leaving the negotiation of the DSA until the same time that a development plan is being completed could slow down the finalisation of that plan. It is always a possibility that the parties could agree and execute the DSA at the same time as the JOA is entered into, but the parties might be reluctant to commit to the effort of doing so without first having a better idea of whether their exploration activities are likely to be successful such that there will be a development programme and some infrastructure to decommission. (ii)

Role of the DSA The DSA is entered into by the persons who are the present parties to a licence and is intended to be the recital of the arrangements between those parties (and certain other persons – see below) of the arrangements regarding the provision of decommissioning security. The intention is that the DSA will constitute a form of decommissioning security which will be protected against insolvency for the purposes of Section 38A of the 1998 act (see above). The central obligation of the DSA is that each person which is a present party to the licence will (by reference to the size of that party’s PI) place a defined amount of money on trust (with a certain trustee, within certain defined trust deeds) and/or will make alternative provisions (which could be any combination of an irrevocable standby letter of credit or an on-demand payment bond issued by a qualifying bank, or an on-demand payment bond or a guarantee issued by a qualifying affiliate of a party, or any other form of provision which the other parties to the DSA have agreed). The DSA recites the suggested form of the trust deed and the letter of credit (but not of the performance bond or the guarantee).

(iii)

Relationship with the JOA The DSA is separate to the terms of the JOA, and any amendments to the terms of the JOA will not follow through so as to amend the terms of the DSA (and vice versa). The DSA will supplement (and might even, depending on how comprehensive it is, entirely replace) the decommissioning provisions which are recited in the JOA. Any change in the parties to the JOA (eg, through a transfer of interests (see Chapter 10)) should be tracked by a corresponding change in the parties to the DSA. The DSA is also expressed to survive the termination of the JOA. The interfaces between the default provisions in the JOA (see Chapter 14) and a default under the DSA, and also the treatment of a default by the operator under the DSA, are considered separately below.

(iv)

Parties to the DSA Although the holders of the licence are principally intended to be the parties to the DSA, there are certain other persons that might also become party to, or at least might benefit from, the DSA. The DSA includes a definition for what it calls ‘second-

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tier participants’ (which is intended to capture former holders of the licence that remain liable for decommissioning costs since they are still the holders of Section 29 notices), which will be specifically identified and which could become party to the DSA if they so wish. The DSA also references what it calls ‘third-tier participants’ (ie, those persons that might become liable for decommissioning costs under Section 34 but have not actually received a Section 29 notice, and also those persons in respect of which a Section 29 notice has been withdrawn but which are exposed to the risk of a new notice being issued under Section 31(5)), which will not be specifically identified and will not become party to the DSA, but which could nevertheless benefit from the protections afforded by the DSA. It is also possible that the secretary of state might become party to the DSA, for the limited purpose of enforcing the DSA if required and blocking any amendments to the DSA to which the secretary of state might object. (v)

The role of the operator The operator undertakes to deliver to the parties a proposed decommissioning schedule and budget, for approval by the parties to the DSA (which will include the second-tier participants only if the DSA so prescribes). If a party to the DSA objects to the operator’s decommissioning schedule and budget, an independent expert (15.3) might be appointed to help resolve the objection. If the operator defaults in the performance of its obligations under the DSA, that failure is expressed to constitute a breach of the JOA by the operator, which will give rise to a claim for removal of the operator under the JOA (6.4).

(vi)

Transfers and the DSA If any person which is a present party to the licence transfers its interest in the licence and the JOA to any person which is not a present party to the licence and the JOA (10.2), that transferee shall enter into a novation agreement by which it shall become a party to the DSA in place of the transferor. However, if the transfer is made to another person which is already a present party to the licence and the JOA, the rights and obligations of the transferor under the DSA will transfer additionally to that transferee. Any security which has been provided by the transferor under the DSA will be released, in the expectation that a corresponding level of security will have been provided by the transferee. It will also be necessary to ensure that there is consistency between the DSA in this regard and the provisions of any sale and purchase agreement between the transferor and the transferee in respect of the interests to be transferred, and to preclude any double jeopardy against the transferee (eg, through a separate indemnity in respect of decommissioning costs also being given to the transferor by the transferee, along with the provision of decommissioning security by the transferee).

(vii)

Withdrawal and the DSA If a party elects to withdraw from the licence and the JOA (see Chapter 11), the withdrawing party will remain subject to its obligations under the DSA if the JOA

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permits this formulation to apply. Whether the withdrawing party should be obliged to provide decommissioning security where the right of withdrawal is exercised prior to entry into the DSA will depend on how the withdrawal provisions are expressed in the JOA. (viii)

Default by a party under the DSA If any person which is a present party to the licence and the JOA, in its capacity as a party to the DSA, commits a defined act of default (defined in the DSA as a failure of that party to make or to maintain any payment or provision which it is obliged to make or maintain under the DSA, and also including that party’s insolvency or that party’s default under the JOA), the security provided under the DSA in respect of that party can be realised. The default under the DSA might also be expressed to constitute a default in its own right for the purposes of the JOA, which could ultimately lead to the application of the default remediation provisions under the JOA (see Chapter 14), although the JOA might also require some amendment in order to ensure that it is consistent on this point.

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14. Default

Despite the apparent magnitude of the term ‘default’, the customary definition in the context of the JOA is limited to apply to a party’s failure to honour its obligation to make payment when due of the amounts which are required by the operator in order to finance the performance of the joint operations. Any other failure by a party to comply with the terms of the JOA in the wider sense might be dealt with through the general liability provisions of the JOA (12.6), and any allegation of a failure by the party which is appointed to act as the operator will be subject to the operator liability regime (12.1). In this narrow context of a default, the JOA will typically define what constitutes a default by a party and will prescribe a regime (by reference to several forms of remedy) for dealing with that default for as long as it remains unremedied. 14.1

Definition of ‘default’ The principal obligation of each party under the JOA is to fund its share of the costs of the joint operations. In respect of each party, that share will be set by reference to that party’s PI, subject to any modification to the principle which has been agreed between any of the parties (3.3). The operator will issue periodic cashcalls or invoice requests to the parties, for both operational expenditures and capital expenditures, against which each party will be required to make payment by the requisite date (16.2). The failure of a party to comply with the terms of this request for payment will be a default. The fact of the occurrence of a default by a party should be readily known as a matter of fact (at least to the operator – see below for how a default by the operator is treated), and thereafter the provisions of the JOA which address a default will be brought to bear accordingly. The principal definition of a ‘default’ implies the total failure of a party to pay its share of a cashcall or an invoice request by a due date,1 but it might also be that a party’s behaviour is characterised by repeatedly making late payments. These late payments will eventually be remedied each time by the defaulting party, but this pattern will inconvenience the non-defaulting parties, which will effectively be required to act as a form of interim funding facility in order to make good the defaulting party’s late payments. Each such late payment will still constitute a default for the purposes of the JOA,

1

AIPN JOA §8.1(A)(1); OGUK JOA §17.1.

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since a ‘default’ is defined as a failure to make a payment by the due date for that payment. However, the consequences to the defaulting party will be less severe where the JOA provides for an increasing range of sanctions in response to the ongoing duration of the defaulting party’s default (see below) and the defaulting party remedies its default before the more meaningful of those sanctions really start to bite. Consequently, the definition of ‘default’ under the JOA might be written to address both a total failure to make payment and an accumulation of repeated late payments. Thus, for example, in the AIPN JOA there is an option in the default provision whereby a defaulting party which subsequently cures that default will be subject to a defined probationary period, during which the forfeiture remedy (see below) will apply if there is a subsequent default,2 and in the OGUK JOA the forfeiture remedy (see below) will apply in respect of a cumulative period of 60 days of default for multiple defaults over a successive 12-month period.3 The inability of a party to meet its share of the cashcalls or invoice requests, and so the concern about what the most appropriate remedy for a party’s default should be, might vary according to when in the lifecycle of the JOA those costs and the particular defaults arise. The level of expenditure over the lifecycle of the JOA has previously been considered (1.8). During the exploration and appraisal phase, there may be a temptation for a party to cease to pay its share of the cashcalls or invoice requests part way through that phase if that party believes that the prospects of finding commercially recoverable deposits of petroleum are not sufficiently attractive. As a counter to this, the operator might wish to issue a single cashcall or invoice request upfront for the whole for the exploration and appraisal programme costs (but care should be taken to ensure that in doing so, one of the characteristics of the JOA which denies its status as a partnership is not thereby removed (see Appendix B)). During the development and production phase, the parties should be able to reap the benefits of producing petroleum and so will arguably be more inclined to fund ongoing development cashcalls or invoice requests (although the point made in the preceding paragraph could apply equally where there are separate exploration and appraisal activities taking place simultaneously during the development and production phase (4.1)). It is arguable that during the period when petroleum production begins to tail off and the decommissioning phase comes into view, the incentive for a party to default will arguably be at its greatest and the consequence of the loss of a party’s interests under the concession and the JOA through the application of the forfeiture remedy (see below) will be at its most meaningless. Historically, it has been the case that the scope for mistrust between the parties around this possibility results in the implementation of decommissioning security (13.3), so as to mitigate the risks of a party’s payment failure. There is no reason why this philosophy of the provision by a party of satisfactory security for its share of the relevant operational costs might not

2 3

186

AIPN JOA §8.4(D)(2). OGUK JOA §17.6.1.

Peter Roberts

make itself felt earlier in the lifecycle of the JOA. The AIPN JOA also defines a ‘default’ as the unremedied failure of a party to procure any collateral support when it was required to do so in accordance with the terms of the concession or of the JOA.4 The OGUK JOA additionally defines a ‘default’ by reference to the decommissioning security agreement (13.4).5 Some JOAs also suggest that a party’s default under the terms of the concession will constitute a default under the JOA, but there is no obvious logic for this if the breach of the concession does not actually result in any loss or liability to the parties. The more extreme default remedies (notably, those which relate to the sequestration of the defaulting party’s produced petroleum entitlements and the forfeiture of the defaulting party’s interests in the concession and the JOA – see below) are geared primarily to the defaulting party’s payment failure. However, where a party’s default is in respect of any matter other than the making of a payment, consideration should be given to the appropriateness of the remedies which the JOA provides, so as to cater adequately for non payment-based defaults. These remedies might be referenced within the general liabilities provisions in the JOA (12.6). Force majeure relief (17.4) will not ordinarily be available to a defaulting party so as to obviate the application of the liability which arises under the default mechanism since under most JOAs the force majeure provisions will typically be written so as to exclude force majeure relief for a party’s failure to pay amounts which are due for payment.6 However, this exclusion would not ostensibly apply to any other default under the JOA (eg, the failure of a party to procure collateral support), and so an express provision would be required in the JOA if force majeure relief were required to be excluded for any other events of default. 14.2

Reaction to a default The default by a party in making payment when due of its share of a cashcall or an invoice request which has been issued by the operator can have serious consequences. The business of exploring for and producing petroleum cannot simply stop because a party has decided not to pay for its share of the costs of those activities, and ultimately a default might even jeopardise the concession (1.1). The parties should not suppose that one of the functions of the operator is to fund a party’s default. However, it is one of the functions of the operator to take steps to protect the joint venture from the consequences of a party’s default. In the event of a default occurring, the first step under the JOA will be for the operator to issue a formal notice of default to the defaulting party (a copy of that notice will also be sent to each non-defaulting party). Once that default notice has been issued, a defined grace period will begin (which is usually after the passage of a relatively small period of time, typically between two and six days, so as to give the defaulting party a short period within which the default can still be remedied). If the

4 5 6

AIPN JOA §8.1(A)(2). OGUK JOA §17.1. AIPN JOA §16.1.

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default has not been remedied by the end of that grace period, the default period begins and the programme of remedies for default which the JOA provides (see below) comes into play. It is possible that the defaulting party will make good the default within a relatively short period of time, and this is typically what happens where the default is accidental. However, if the default is remedied by the defaulting party at a much later stage, and particularly when certain steps have been taken by the nondefaulting parties towards remedying that default, then consideration will need to be given in the JOA to whether an adjustment in favour of the defaulting party of the remedies which have been applied should also be made. If the joint operations are to be properly funded and undertaken, in order that the obligations required by the concession are performed and the overall relationship between the government and the parties is not jeopardised, then the immediate reaction to a party’s default is that each other non-defaulting party will be required (by the default notice which is issued by the operator) to step in and make good the amount of the default, where the amount to be contributed by such a non-defaulting party will be set pro rata to the proportion of that party’s PI to the aggregate of the PIs of all the non-defaulting parties. Any failure by a non-defaulting party to meet the additional payment obligations which have been generated by the notice of default will constitute a separate default by that party. The JOA might also reserve the right for the operator to make good the default (in whole or in part) through borrowing the necessary funds from a third party and adding the costs of doing so to the amount of the default. Alternatively, the operator can, at its option, finance the amount of the default itself (subject to payment of an interest charge in the operator’s favour, but which should not be set at a rate which enables the operator to make a profit, such that the operator’s no loss/no gain principle (6.1) is not compromised). By these various means, the default will hopefully be fully funded and the operator can proceed with the joint operations. Then the non-defaulting parties will turn to the provisions of the JOA to see how the continuing failure of the defaulting party is to be addressed. The operator’s claim for payment against the defaulting party is effectively subrogated (17.7) to the non-defaulting parties, which then exercise the rights of recovery which are provided by the JOA against the defaulting party. The notice of default which is given in respect of a defaulting party should recite the amount in default, which will principally be the total amount of the payment which the defaulting party has failed to pay when due and the costs of any remediation of that default by the non-defaulting parties. If the definition of ‘default’ under the JOA also includes a party’s failure to procure collateral support, the amount in default could also include any costs incurred or associated with procuring any replacement collateral support in respect of the defaulting party.7 A daily rate of default interest to accrue on the amount in default might also be specified. In defining the amount in default, the JOA might prohibit the right of the 7

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AIPN JOA §8.3(A).

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defaulting party to apply any right to offset any other amounts which might be due to the defaulting party from any of the non-defaulting parties (whether under the JOA or under any wider commercial relationship, and whether in the capacity of setoff between the parties inter se or between the operator and the non-operating parties) in order to reduce the amount in default.8 A right of set-off is implied under English law as an equitable right which applies in respect of amounts which are due and payable under the same, or a closely related, transaction.9 Consequently, the implied right of set-off must be specifically disapplied in the JOA, by clear and unequivocal wording.10 The above comments suppose that the defaulting party is a non-operating party. However, it could be that the defaulting party is the party which has been appointed as the operator under the JOA (6.2). If this is so, then a practical consequence will be that, in the first instance, the fact of the occurrence of that default will not be apparent to the non-operating parties. The reaction of most JOAs to this possibility is simply to suggest that if the operator is the defaulting party, then any of the other parties can serve the requisite default notice and can thereafter apply the default provisions under the JOA.11 In practical terms, however, those other parties might (unless the operator promptly and voluntarily admits that it is in default) come to realise that a default by the operator has occurred only at a time when some harm might have been risked to the integrity of the continued performance of the joint operations and even the concession. To mitigate this risk, therefore, the terms of the JOA might include an obligation of the operator to confirm periodically (and prove, if required) to the non-operating parties that it is acting in accordance with its funding obligations as a party under the JOA. 14.3

Remedies for default The parties should be interested to ensure that the JOA does not allow the prospect for a default by a party to become attractive for use as a credible short-term financing option, and to this end the JOA should recite a series of swift and effective sanctions which will apply to a defaulting party. Over the longer term, the aim of the default remedy should be to balance up the proportionately greater level of financings which have been contributed by the non-defaulting parties with a correspondingly greater level of interests under the JOA and the concession for those non-defaulting parties. The express remedies for default which are recited in the JOA could also be supplemented by the general rights at law of the non-defaulting parties (and indeed, the JOA usually makes clear that the contractual rights of the parties are without prejudice to any wider rights at law and in equity). Thus, the amount in default will be due as a debt owing from the defaulting party to the non-defaulting parties (where the amount of that debt is determined as the

8 9 10 11

AIPN JOA §8.6. Federal Commerce & Navigation Co Ltd v Molena Alpha Inc (The Nanfri) [1979] AC 757 HL. Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 HL. AIPN JOA §8.1(A); OGUK JOA §17.9.

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amount of the default which has been made good by the non-defaulting parties), together with accrued interest. The non-defaulting parties could always elect to sue the defaulting party through the courts for recovery of that debt. Furthermore, if the non-defaulting parties can prove that the payment of damages would not be an adequate remedy, they might consider making a claim for some sort of equitable relief, such as an injunction, to prevent the defaulting party from making payments into any other competing petroleum project at the expense of the JOA, or a decree of specific performance, to compel the defaulting party to fund the JOA going forward, if the default can be predicted and/or is likely to be repeated such that equitable relief would be appropriate.12 The options which will apply to a party’s default under a JOA are typically written so that they will begin on the date when the default period begins (see above), and will thereafter increase in intensity for as long as the default continues to be unremedied. In the initial period after a party’s default, the first range of sanctions to be applied will reflect the fact that by its very default, the defaulting party has broken the social contract between the parties which the JOA represents, and so the defaulting party should be disenfranchised and rendered unable to enjoy certain of the rights which are associated with the JOA.13 Thus, for as long as its default continues unremedied, the defaulting party will lose: • the right to access any data or information generated in relation to the joint operations (6.2); • the right to call, attend or vote at any meetings of the OpCom (7.2); • the right to effect a transfer of its interests under the JOA (10.2); • any of the rights which it might otherwise have in respect of any other party’s transfer under the JOA; and • the right to withdraw from the JOA (11.2). However, the loss of these rights should be expressed to be in the discretion of the non-defaulting parties rather than of automatic application. It may be, for example, that there could be some advantage to allowing the defaulting party to effect a transfer of its interests under the JOA, if doing so would thereby enable the non-defaulting parties to recover the amount in default through such a transfer. Where the voting rights of the defaulting party have been suspended for so long as the default continues unremedied, the voting interest of each non-defaulting party will be set pro rata to the proportion which each non-defaulting party’s PI bears to the aggregate of all the non-defaulting parties’ PIs. Furthermore: • any matter requiring the unanimous vote of the parties will be deemed not to require the vote of the defaulting party; • the defaulting party will be deemed to have elected to exercise a right of nonconsent (5.1) in respect of any proposal for operations which has been made to the OpCom (and so will have to pay a buy-back premium (5.2) if it

12 13

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AIPN JOA §8.4(H). AIPN JOA §8.2(A).

Peter Roberts

•

subsequently cures the default and wishes to participate in that proposal); and the defaulting party will be deemed to have voted in favour of any other proposal made to the OpCom.14

During this first range of sanctions, the defaulting party typically also loses its right to lift its produced petroleum entitlements (9.1) (if any – this sanction assumes that the relevant default has not occurred prior to, or after the end of, the production phase); those entitlements will pass to the non-defaulting parties, to be sold by the operator on behalf of the non-defaulting parties and the resultant proceeds of sale applied in satisfaction of the amount of the default which they have been required to contribute at the outset in order to make good the defaulting party’s default.15 Those entitlements will be sold by the operator for the non-defaulting parties on whatever commercial terms the operator is best able to secure. This mechanism represents a limited departure from the customary reluctance of the JOA to endorse joint sales of petroleum (4.3). The JOA should address whether a later remediation of the default by the defaulting party would result in a reimbursement of the sequestered entitlements to the defaulting party. If a power of attorney is granted to the operator to enable the defaulting party’s interests to be transferred (see below),16 the terms of that power of attorney might also be extended to include the necessary authority to so sell the defaulting party’s petroleum entitlements. Any surplus which accrues from the sale of the defaulting party’s petroleum entitlements could be kept in a reserve account17 and held on trust for the defaulting party, to be used to meet any future cashcalls or invoice requests for which the defaulting party might also become liable. Only if the defaulting party remedies the default and is restored to its original position under the JOA will any remainder of the reserve account then become repayable to the defaulting party. The Australian commentary on the AIPN JOA (1.4) also suggests a mechanism (called a ‘default certificate agreement’) whereby each contract of sale of the resultant petroleum which is entered into by the parties will include a clause allowing the operator to call for a diversion of the purchase price from the purchaser to the operator rather than to the seller where a defined event of default has occurred and the defaulting party is the seller. Thereafter, if the default is still unremedied (or even if the particular default is remedied but represents the latest in a series of persistent defaults – see above), the ultimate sanction is that the defaulting party’s interest under the concession and the JOA may be forfeited to the non-defaulting parties. The forfeiture remedy underpins most JOAs and is considered in detail below. A remedy which might be considered for inclusion in a JOA in respect of a party’s default is one whereby a party will grant a mortgage over its interests in the 14 15 16 17

AIPN AIPN AIPN AIPN

JOA JOA JOA JOA

§8.2(B). §8.4(A); OGUK JOA §17.4. §17.8. §8.4(C).

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concession and the JOA to each other party as security for a potential default.18 Thus in the event of a party’s default the non-defaulting parties can foreclose on the mortgage and exercise that security interest, through appointing a receiver in order to sell the defaulting party’s interests in the concession and the JOA, and the resultant sale proceeds will be applied to cover the defaulting party’s debt, with any excess being returned to the defaulting party. This remedy (which marks a departure from the conventional assignment of interests provisions in the JOA whereby a party can charge its interests under the JOA only for the purpose of raising finance to perform its obligations under the JOA – see 10.2) ostensibly avoids the uncertainties which are popularly associated with the forfeiture remedy (see below), and is also attractive in that in the event of the insolvency of the defaulting party, the non-defaulting parties could have a secured interest which could rank ahead of the interests of any unsecured creditors (if the mortgage interest has been registered). However, several disadvantages with the mortgage remedy should be noted: • Registrability – the mortgage remedy could necessitate registration of the mortgage so that the interest which it creates ranks ahead of the claims of any unsecured creditors of the defaulting party (in whichever jurisdiction is applicable – and it could well be that the relevant jurisdiction lacks a sophisticated system for such registration). • Priority – where the party granting the mortgage has other commercial debt arrangements, some ranking of those debt interests and the mortgage will be necessary (eg, through a deed of priority, involving all of that party’s lenders, which might mean that the mortgage which is held by the other parties is not always going to be first-ranking in that order of priority). The creation by a party of a mortgage without addressing the relationship of that interest with any other debt interests which that party holds might also offend any negative pledge clauses and could constitute a repayment event under those other interests. • Proprietary interests – the creation (and registration) of a mortgage over the concession and the JOA could suggest some greater recognition of those interests as a proprietary or possessory interest in land and so could make it more difficult for the non-defaulting parties to resist the defaulting party’s claim for relief against forfeiture (see below). • Publicity – the registration of the mortgage would entail the public declaration of the JOA (or at least of significant parts of the JOA) as part of that process, which the parties might be reluctant to allow. The existence of the mortgage would also need to be declared on the balance sheet of the party granting the mortgage, which that party might be reluctant to undertake. • Complexity – every party to the JOA is a potential defaulting party and is also a potential non-defaulting party. Thus, were the mortgage remedy route to be pursued, every party would need to grant a mortgage over its interests in favour of every other party and all of those mortgage interests would need to 18

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AIPN JOA §8.4(E).

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be registered by and against every party. This would lead to a multiplicity of mortgages and registered interests. The CAPL JOA adopts a formulation19 whereby the operator is granted a firstranking lien and charge over each party’s interests in the joint property and produced petroleum entitlements in order to secure payment by that party of its share of the costs of the joint operations. In order to remedy a party’s default, the operator may take possession of the defaulting party’s interests and sell those interests at public auction or by private tender on what it believes to be reasonable commercial terms, thereupon applying the proceeds of such sale to remediation of the default and returning any remaining balance to the defaulting party. In this ‘seize and sell’ process no preference is afforded to any of the existing parties to the JOA and the whole process is expressed to be subject to compliance with any required court order. The lien formulation which is outlined above represents something of a combination of the sequestration of the defaulting party’s produced petroleum entitlements (see above) and the mortgage granted by a party over its interests (see above). A similar mechanism appears in the AAPL JOA,20 and in both the CAPL JOA and the AAPL JOA this mechanism appears as a substitute for the conventional forfeiture mechanism. If the JOA adopts the lien formulation as a potential remedy for a default, consideration should be given to the need to register the lien as a charge such that the priority of the lien is thereby preserved and the considerations set out above in respect of the mechanics of registering a mortgage will apply equally. Whichever remedies for default are provided for in the JOA, the JOA should also provide that the rights of the non-defaulting parties and the obligations of any of the defaulting parties or the non-defaulting parties should continue to survive despite the application of the JOA’s default remedies (and even the termination of the JOA interests) in respect of the defaulting party. Where a government entity has exercised a participation right in respect of the JOA and the concession (3.4) and has defaulted on its obligations under the JOA, there might be some political and practical difficulty in enforcing the JOA’s remedies against such a party. Suing a government entity as a party for a debt will require some careful consideration of the extent to which that party might be able to claim sovereign immunity against suit, and the application of the default remedies (15.7) and the ultimate sanction of forfeiting that party’s interests in the concession and the JOA could be difficult to apply where the consent of the government is necessary to allow a party to withdraw from the concession as part of the forfeiture process. Any collateral support which has been provided by a party in respect of its obligations under the JOA (3.2) could also be applied in order to remedy any default by that party.

19 20

CAPL JOA §5.05. AAPL JOA 810 §6.3, Exhibit F.

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The JOA might provide that the defaulting party will be liable to contribute to the non-defaulting parties’ legal and other enforcement costs which are associated with the default.21 However, if the defaulting party is not making any payments in association with the JOA, this further payment obligation is unlikely to be met in isolation and so these additional costs will simply be added to the total amount in default. The concession might also provide for a remedy exercisable by the government (as the grantor of the concession) against the party (as a concession holder) for a default in making any payment when due to the government in accordance with the terms of the concession (although this obviously would not apply in respect of a party’s default against the other parties at the JOA level). Thus, in respect of the UKCS the government has the right to enter upon a defaulting party’s installations used in connection with the licence and to seize, distrain and sell the assets of the defaulting party in satisfaction of the amount in default22 (although the principal remedy of the government in such a situation would be to have regard to the joint and several liability of the parties where the licence is held by more than one person (1.1)). This would at least preclude competition between the non-defaulting parties and the government for the assets of the defaulting party, since the effects of such a default under the JOA would not be felt at the licence level because the government would simply apply its claim against the non-defaulting parties jointly, at least in the first instance). 14.4

Forfeiture The forfeiture remedy, which is widely regarded as the ultimate sanction for a party’s default under the JOA, often arouses significant practical and academic commentary and is worth considering in detail. Under the forfeiture remedy, as it customarily appears in a JOA, if a defaulting party’s default has continued beyond a defined period of time,23 the defaulting party will be required to withdraw from the JOA and the concession, and the defaulting party’s interest under the concession and the JOA will be forfeited (in whole or in part – see below) to the non-defaulting parties.24 The requirement that the defaulting party so withdraw will usually be expressed to be an option of the non-defaulting parties, which could be exercised (depending on how the JOA is drafted) by any non-defaulting party, by simple majority of the non-defaulting parties or by an affirmative vote of the OpCom (depending on the passmark vote and subject to the recusal of the defaulting party (7.2)). The principle behind the imposition of a relatively short period of time for the imposition of the forfeiture provision is that during the exploration phase a shorter trigger period for the forfeiture option will remove a party’s ability to default in respect of its share of the costs of a drilling well but then make good that default,

21 22 23

AIPN JOA §8.4(G); OGUK JOA §17.8. MC 36, MC 37. in the AIPN JOA this is suggested to be 30 days after the date of the default notice (AIPN JOA §8.4(D)); in the OGUK JOA this is suggested to be 60 days after the date of the default notice, reduced to 30 days where the default relates to funding the costs of an exploration well (OGUK JOA §17.6.1). AIPN JOA §8.4(D)(1).

24

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while avoiding the risk of forfeiture, if the well proves to be successful. The non-defaulting parties will inherit the defaulting party’s PI, to be allocated to each non-defaulting party pro rata in accordance with the proportion which each non-defaulting party’s PI bears to the aggregate of all the non-defaulting parties’ PIs, unless all of the non-defaulting parties agree on a different basis for the allocation of the forfeited interest between themselves (in which case some cash adjustment between the non-defaulting parties might be appropriate in order to reconcile the allocation of their respective contributions to the default, and also taking into account any amounts which have been recouped in satisfaction of that default (eg, from the sale of the defaulting party’s petroleum entitlements). If the non-defaulting parties do not wish to assume the PI of the defaulting party, that could evidence some wider dissatisfaction with the petroleum project and it would be an option for any non-defaulting party to exercise its rights to withdraw (11.2). This might in turn lead to a wider surrender of the petroleum project. However, in contrast to the conventional withdrawal right, there will be no obligation on the defaulting party to remove any encumbrances over its interests (11.2) or to procure any decommissioning security as a prelude to the forfeiture. This latter point adds weight to the suggestion that decommissioning security should be provided by the parties sooner rather than later in the lifecycle of the JOA (13.3). For forfeiture to be effective as a remedy under the JOA, there must also be effective provision for the interest of the defaulting party under the concession also to be forfeited.25 If this does not turn out to be the case, the application of the forfeiture remedy could result in the paradoxical situation whereby the defaulting party loses its interests under the JOA, but not the concession. This would make the ongoing governance of the interests of the parties across both agreements a difficult proposition to reconcile. The terms of the concession are unlikely to bestow the equivalent of a forfeiture right directly on the parties, since the concession is concerned more with the vertical relationship between the government and the concession holders than with managing the horizontal relationship between the parties, and because the government has the benefit of joint and several liability among the concession holders (1.1). The alternative solution is therefore to provide in the JOA that a forfeiture of interests under the JOA will also lead to a forced withdrawal of the defaulting party from the concession (which in turn requires that the concession contain such a withdrawal right). The forfeiture remedy is popularly assumed not to constitute a registrable security interest which has been granted by the party which commits to the forfeiture remedy. In the United Kingdom, it is not apparent that the typical forfeiture provision would be regarded as an instrument which would constitute a charge to which the relevant legislative provisions26 would apply, and the relevant registrar of companies has also indicated a view that such a provision would not be so registrable.

25 26

AIPN JOA §8.4(F); OGUK JOA §17.8. Section 860 of the Companies Act 2006.

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The forfeiture remedy could be classified as giving the non-defaulting parties the option to acquire the interests of the defaulting party upon the occurrence of a defined (and unremedied) default event, through treating the remedy as a deemed withdrawal (whereby the defaulting party has elected not to contribute to the costs of the joint operations and that election triggers an automatic withdrawal), which then results in a transfer of the defaulting party’s interests in the JOA (and the concession). The JOA might be written such that the default remedy does not actually recite the word ‘forfeiture’ and instead focuses on the remedy as being a form of withdrawal. However, this might not be sufficient if the substance of the arrangement indicates otherwise (eg, as is the case in determining whether the JOA constitutes a partnership – see footnote 8 in Appendix B), and such an approval should not be relied on as a means of evading the legal uncertainties associated with the forfeiture remedy. Forfeiture of the defaulting party’s interests might be expressed to be in full satisfaction of the underlying default, such that the non-defaulting parties cannot apply any other remedy or make a double recovery in respect of a default (ie, to secure a forfeiture of the defaulting party’s interests and also to sue for recovery of the default amount as a debt). This is laudable in principle, but it overlooks the practical difficulty of what should happen where the value of the forfeited interest is much less than the extent of the amount in default. To complete the transfer of interests which the forfeiture remedy envisages, the JOA might prescribe that each party irrevocably appoint each other party as its attorney for the purpose of concluding such a transfer if the need arises, rather than having to compel the defaulting party to execute the necessary transfer documents at the time of exercise of the forfeiture remedy and taking the risk of the defaulting party’s obvious reluctance to do so. That said, however sensible it might appear to be, this sort of provision is not always encountered in JOAs. The customary tone of the various commentaries on the efficacy of the default provisions under the JOA is to suggest that the forfeiture remedy, while providing a fair measure of protection to all the parties to the JOA and at the same time giving a means of ensuring that they are each properly incentivised to pay their way according to their defined shares, is a powerful tool which must be exercised with great care and responsibility. There are some areas of legal nervousness about the complete efficacy of the forfeiture remedy, which should be considered (see below), but it is difficult to see why a court should refuse to allow sophisticated contracting parties to apply the remedies which they have specifically negotiated and which are intended to apply equally as between all of the parties. Historically, the principal concern around the operation of the forfeiture remedy by the non-defaulting parties has revolved around whether the remedy might be determined by a court to be a penalty in nature and so potentially unenforceable by the non-defaulting parties against the defaulting party. This is based on the principle that under the rules of equity, a provision will be unenforceable if it is imposed ‘in terrorem’ (ie, where it is intended to enforce the performance of a contract rather than to compensate for a breach of contract).27

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In the event of a forfeiture, the defaulting party will surrender certain of its interests (ie, the interests of the defaulting party in the concession and the JOA). This consequence can be contrasted with the application of a conventional penalty obligation, whereby a defaulting party will not give anything up in the same sense but will become the subject of an obligation to make payment of a sum of money. That said, despite the differences of characterisation between giving up an interest and paying out a sum of money, the principles which will arise for consideration in determining whether a particular provision could be impugned as a penalty will be much the same. The principal case under English law on the definition of a ‘penalty’, Dunlop Pneumatic,28 adopts a fourfold test. The key issue to note from this definition for the present purposes is that a penalty might be inferred where the sum stipulated for payment (which, in the context of a JOA, could be read as the interest which is stipulated to be surrendered by the defaulting party) is “extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach”. Following on from this, where a defaulting party is at risk of forfeiting its interests because of a default in respect of a monetary amount which is comparatively much smaller than the value of those interests, the defaulting party might argue that the forfeiture remedy constitutes a penalty and so is unenforceable, because the gravity of the remedy applies irrespective of the size of the default.29 This principle should especially be considered also if the JOA provides for a multi-interest forfeiture remedy (see below). Something of a paradox operates here, in that the parties will want the forfeiture remedy to threaten the risk of the loss by a party of an interest which is greater than the amount which that party has failed to pay, such that the forfeiture remedy has some real meaning and will be effective in deterring a default, but not at the risk of suggesting a lack of proportionality between the breach of the JOA and the applicable remedy, which might indeed suggest that the remedy is a penalty. However, even if the forfeiture remedy were found to be a penalty, that would render the forfeiture provision unenforceable only insofar as it would constitute a penalty – the entire package of default remedies afforded to the non-defaulting parties would not be wholly void. Furthermore, even if the court decided that the forfeiture clause was penal in nature, the remedy awarded by the court might be one of compromise, whereby the court would not treat the clause as void, but rather would defer the application of the clause as it was intended to operate conditional upon an opportunity being given to the defaulting party to remedy the relevant default.30 The customary reaction in the drafting of the JOA to the concern about the

27 28

29

30

Wyllie v Wilkes (1780) 2 Dougle 519. Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 (which should also be read in light of the plea for realistic expectations in respect of the analysis of penalty clauses which was made in Philips Hong Kong Ltd v AG for Hong Kong [1993] 1 HKLR 269). Although the decision in Alfred McAlpine Capital Projects Ltd v Tilebox Ltd [2005] EWHC 281 gives some encouragement to the enforcement of a commercial agreement in the face of an allegation that a penalty exists; see also Nutting v Baldwin [1995] 1 WLR 201. Jobson v Johnson [1989] 1 All ER 621 CA.

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forfeiture provision possibly constituting a penalty has been to reduce the risk of adverse intervention by the courts by moderating the potential impact of the forfeiture remedy in any of the following ways. (a)

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Proportionate forfeiture of the defaulting party’s interests Some JOAs promote a provision whereby a party’s default will result in the forfeiture of a share of its interests which is proportionate to the amount of the default, rather than in the forfeiture of the defaulting party’s entire interests. This so-called ‘withering interest’ provision could be structured by reference to a formula which considers the amount of the cashcall or invoice request which the defaulting party has failed to pay when required in the context of the aggregate of all of the cashcalls or invoice requests which have hitherto been paid by the defaulting party. Depending on how the withering interest formula is calculated in the JOA, it could transpire that a party’s failure to meet the first cashcall or invoice request would result in a total loss of that defaulting party’s PI, whereas a failure to meet a cashcall or invoice request at the end of the life of the project would result in only a fractional loss of the defaulting party’s PI. Implementing this sort of mechanism could therefore give a potentially defaulting party a valuable option towards the end of the concession’s lifetime – to pay its share of the cashcall or invoice request, or to default (and to save the payment) and see its interests scaled down accordingly. The withering interest formulation allows a prospectively defaulting party to calculate the consequences of its default, such that default and forfeiture could be used by that party as a means of managing its interests in the JOA and the concession. A withering interest formulation might be attractive to the prospectively defaulting party to see its interests (and its share of the potential decommissioning costs liability) so reduced, where the underlying petroleum project is coming to the end of its economic life and the concession is starting to become more of a liability than an asset. Conversely, the non-defaulting parties would be reluctant to see their PIs (and their share of the potential decommissioning costs liability) starting to increase towards the end of the lifetime of the JOA through the exercise of the forfeiture remedy (although this particular risk would abate if decommissioning security were provided (13.3)). Where the defaulting party forfeits anything other than the entirety of its interests under the JOA, the defaulting party will still be an ongoing party to the JOA and to the concession. These circumstances would be the equivalent of a partial transfer of the defaulting party’s interests (10.2) or a partial withdrawal (11.3). As a further refinement of the withering interest mechanism, the JOA might also seek to apply different levels of forfeiture (ie, outright forfeiture or forfeiture of a partial interest) according to when, in the lifecycle of the project, the default and the forfeiture take place. It is sometimes suggested that the exercise of the forfeiture remedy will be more exposed to the risk of being declared to be penal in nature where that exercise takes place after the defaulting party has made significant payments in respect of cashcalls or invoice requests already and the production of petroleum has commenced, in contrast to the situation where the default and the forfeiture occur at an early stage in the lifetime of the JOA relationship (eg, prior to

Peter Roberts

full commencement of the exploration and appraisal phase and before the defaulting party has made any real investment into the value of its interests). Thus, in the OGUK JOA the provision for forfeiture of the defaulting party’s interests is modified to the effect that the non-defaulting parties will pay some compensation to the defaulting party if the forfeiture occurs after the exploration and appraisal activities have concluded and a development plan has been approved.31 However, this analysis does not readily sit with the principle expressed in Dunlop Pneumatic that the question of whether a provision amounts to a penalty must be judged as at the time the contract was entered into, and not when the breach later occurred and the remedy was applied (and consequently the alleged penalty issue arose); and so is perhaps too conservative. (b)

Internal sale of the defaulting party’s interests Some JOAs require that, rather than have a forfeiture of interests without recompense to the defaulting party, the non-defaulting parties buy out the interests of the defaulting party. The consideration for such a sale would be a value to be assessed, based on the presumption of a fair market value and with the possibility of recourse to an independent expert (15.3) to assess that value in the event of a dispute between the parties.32 Such a JOA formulation could also apply the deduction of a set percentage (to be defined by negotiation) of the fair market value from the consideration otherwise payable to the defaulting party, as a discount reflective of the fact of the defaulting party’s default.33 This latter addition is something of a contradiction, since it partly reintroduces the principle of penalisation of the defaulting party into a mechanism which was initially intended to ameliorate the penal nature of the forfeiture provision.

(c)

External sale of the defaulting party’s interests Rather than have a sale of the defaulting party’s interests to the non-defaulting parties, the JOA might require a forced sale of the defaulting party’s interests on the open market. This is reflected, for example, in the CAPL JOA’s lien-holder remedy (see above).

(d)

Reacquisition of forfeited interests Another refinement on the forfeiture formulation is one whereby the defaulting party can subsequently reacquire that part of its interests which it has previously forfeited by making good the amount of the default at a later date. This would be an especially attractive option for a party considering its options with respect to a potential default and correspondingly would not be particularly attractive for any other party. A further consideration to be applied to any assessment of the efficacy of the forfeiture remedy is whether a defaulting party which is at risk of forfeiting all or part of its interests could claim relief against that forfeiture by following the analogy of

31 32 33

OGUK JOA §17.6.3. AIPN JOA §8.4(D)(2); OGUK JOA §§17.6.3, 17.7. AIPN JOA §8.4(D)(2); OGUK JOA §17.7.11.

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leasehold interests, where a tenant can apply to the court for relief from a landlord’s action for forfeiture of the lease because of the tenant’s default. Relief from forfeiture is an equitable doctrine, which starts from the expectation that the rights which have been forfeited constitute a proprietary or possessory interest in land. Although the JOA could fairly be seen as a commercial contract which does not grant such an interest, the JOA relates closely to the concession and the concession arguably does create such an interest. However, there is also some authority for the proposition that the interest of a tenant in common (which is, effectively, the interest of a party under the JOA – 3.3) is such an interest in land,34 and beyond this the principle that the equitable doctrine of relief against forfeiture has an application which can go beyond purely proprietary or possessory rights in land has also been proposed.35 On the other hand, there is some precedent under English law for the courts being reluctant to afford relief from forfeiture where the relevant provision has been agreed at arm’s length by commercially minded contracting parties,36 and the English courts have held that a claim for relief against forfeiture would not be available in the case of a commercial agreement where the parties were of equal bargaining strength and had dealt with each other at arm’s length, since that doctrine should properly be restricted to protecting purely proprietary or possessory interests in land.37 This is not an area where the law is settled and the decisions of the English courts are simply not consistent on this point. Even if the courts were to entertain a claim for equitable relief in favour of a defaulting party in respect of a prospective forfeiture, the remedy which would be granted by the court is simply the award to the defaulting party of more time to remedy the underlying default. This is a temporary measure and would not result in the elimination of the forfeiture remedy or of the wider default remedy. In light of this, the relatively significant grace period which the JOA will require to have expired between the date of the notice of default and the forfeiture right arising (see above) should be taken into account by the court in deciding whether equity should grant the relief which is sought. This could help the court to decide that the intervention of equity through affording relief against forfeiture should not be necessary. Because relief from forfeiture is an equitable remedy, the equitable maxims will also apply. One such maxim is that the applicant for relief must come to equity ‘with clean hands’,38 and that the applicant for relief in the context of the JOA must be a party which has defaulted on its clearly defined cashcall or invoice request commitments and which has had significant opportunity to remedy that default. This is something which the court should bear in mind when deciding whether to grant equitable relief.

34 35 36 37 38

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Cooper v Critchley [1955] 1 All ER 520, Elias v Mitchell [1972] 2 All ER 153. Shiloh Spinners v Harding [1973] AC 691 (HL). Jobson v Johnson [1989] 1 All ER 621 CA. Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana (The Scaptrade) [1983] 1 All ER 301, but contrast with BICC plc v Burndy Corporation [1983] 1 All ER 417. Cadman v Horner (1810) 18 Ves Jun 10; D&C Builders Ltd v Rees [1965] 2 QB 617.

Peter Roberts

The other traditional concern about the operation of the forfeiture provision relates to where the defaulting party has also become insolvent and whether such a right in favour of the non-defaulting parties will give them an unfair preference over any unsecured creditors of the defaulting party once the defaulting party has gone into liquidation. This preference would contravene the long-established (but poorly defined) principle of English law that a private contract cannot be used to defeat the application of the general law of insolvency.39 Thus, the traditional forfeiture clause might be struck down as an unfair provision if its application has the effect of depriving the insolvent party’s general creditors of their rights at law to share in that party’s assets or interests (including the JOA and the entitlements which flow under the JOA) through giving a preferential remedy to the non-defaulting parties under the JOA. In the United Kingdom, this particular issue has yet to be addressed specifically, but an Australian court considering the relationship between the forfeiture remedy and the general law of insolvency has determined that the latter would prevail and that the forfeiture provision would not be upheld.40 It is interesting to consider whether the same principles would apply in order to condition the exercise by the government of any forfeiture rights which the government might have under the concession in response to the concession holder’s insolvency. This particular concern might abate where the forfeiture provision obliges the non-defaulting parties to make a payment to the defaulting party in exchange for the interests to be forfeited (see above), since the liquidator will be recovering some value from the forfeiture, but perhaps the better solution here is for the non-defaulting parties to be able to call in any collateral support which has been provided in respect of a party’s default (3.2), which should apply outside of the insolvency of the defaulting party. Consideration might also be given to the wider position of the defaulting party’s insolvency. Under English law,41 a liquidator has the power to disclaim an onerous contract and in light of this it is questionable whether the liquidator might disclaim the whole JOA in reliance on this provision (particularly where the JOA has no future petroleum production in prospect and the defaulting party’s interests under the JOA are worth less than the amount of the default), so evading the application of the forfeiture remedy and indeed any of the other remedies for default. Some JOAs contain an express declaration by all of the parties to the effect that they each recognise the forfeiture remedy to be fair and reasonable, given the extent of their respective agreements, and that the remedy is not a penalty and is not an item to which equitable relief against forfeiture should be awarded. To reinforce this, each party might also expressly waive, to the greatest extent possible under the governing law, the right to object to the application of the forfeiture remedy and to seek judicial protection against the application of that remedy. Such statements should be read in light of the reality that despite whatever form of words is written 39 40 41

Higinbotham v Holme (1812) 19 Ves 88; British Eagle International Airlines Ltd v Cie Nationale Air France [1975] 1 WLR 758. Mosaic Oil NL v Angaari Pty Ltd (1990) 8 ACLC 780 (NSW). Section 178 of the Insolvency Act 1986.

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in the JOA, the court will always have the right to examine the substance of the transaction and to arrive at its own conclusions (see footnote 8 in Appendix B). In summary, while the forfeiture provisions in a JOA will need to be drafted carefully and applied sensibly, they should afford some measure of protection against a party’s default. In defence of these provisions, they are intended to be a legitimate means of protecting the expectation of all the parties under the JOA that all of the parties will contribute their respective shares of the costs of the performance of the petroleum project as they have committed to. They are also intended to apply equally against all of the parties (including the party-operator) in respect of any default and are not intended to be exercisable only to protect, in its capacity as a party, the interests of any one particular party 14.5

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Default remedies generally The risk of a party’s failure to meet its share of a cashcall or an invoice request when due is ever-present within any JOA relationship. Historically, the greatest mitigant of this risk has been a combination of the operational sociology and the commercial logic of the JOA – that the parties to the JOA have been solvent and able to meet all of their cashcall or invoice request commitments; that the character of each party is such that it would do nothing to incur the reputational risk associated with becoming known as a defaulter; and that the parties have had an obvious commercial interest in maintaining their interest in a concession (and a JOA) which relates to a project which has significant prospectivity associated with it. Because of the existence of these factors, the remedies contained in the JOA which would be applied to a party’s default, while important to have in place, have typically played a secondary role in keeping the JOA relationship on track. It has long been an article of faith in the operation of the JOA that the threat to a defaulting party of the loss by forfeiture (at least in part, and possibly completely) of its interests, and the reputational damage which would accompany the embarrassment of such a loss, would generally be sufficient to prevent the failure of a party to pay its share of a cashcall or of an invoice request when due. This has not been an unreasonable expectation, but any change for the worse in the character of the parties to the JOA should necessitate a re-evaluation of this assumption. It may be that a potentially defaulting party might be unconcerned by such a risk of forfeiture, especially where the JOA (and particularly the implication of the attendant decommissioning costs liability) is proving to be more of a liability than an asset. The existence in a JOA relationship of any combination of the presence of a party which has a reduced financial ability to meet its payment commitments across its entire portfolio of interests, or which is less troubled by the risk of reputational damage associated with a default and forfeiture (in whole or in part) of its interests, or the transformation of the nature of the petroleum project to which the JOA relates from one which produces commercial volumes of petroleum to one which is focused on decommissioning and end-of-life issues, could see the emergence of an increasing exposure to the risk of a default. Consequently, what the JOA has to say about how a default is dealt with could come to assume a much greater significance.

Peter Roberts

The trend in drafting default remediation provisions in JOAs has been towards the conservative, which (when read in conjunction with an apparent reluctance to address issues of collateral support for a party’s JOA obligations ahead of the decommissioning phase (3.2)) could leave the JOA lacking when it comes to providing meaningful protection against a party’s payment failure. The forfeiture remedy has some meaning where the concession to which the JOA relates still has some productive capacity left in it. However, where the concession is getting towards the end of its life, the threat to a defaulting party of losing its interests might be of little concern and thus the forfeiture remedy will not serve its intended purpose. The same concern could also be expressed to apply in respect of the remedy by which the non-defaulting parties are entitled to commandeer the defaulting party’s share of the produced petroleum and also in respect of any mechanism under the JOA by which the defaulting party’s interests can be forcibly sold on the open market, since each of these remedies will have little or no value if the production of petroleum from the underlying project has ceased or is about to end. Overall, it should be considered whether the needs of the parties are served best by the recital in the JOA of an ostensibly strong remedy which is possessed of some legal uncertainty over the extent of its enforceability and which might also be of questionable commercial value. One solution which is sometimes suggested in order to give more bite to the conventional range of default remedies in the context of a less-than-attractive petroleum project is to link the default of a party under a JOA to the potential loss of interests of that party under a wider range of identified other petroleum projects. This sounds attractive on the face of it, but at least two issues might be need to be considered in respect of the enforceability of such a multi-interest default provision. First, in the context of the forfeiture remedy the defaulting party’s loss of multiple project interests in response to a single default will need to be reconciled with the characteristic of a penalty which requires that the sum stipulated for payment is not extravagant and unconscionable (see above). Second, the parties to any other concessions and/or JOAs might have little interest in denuding themselves of the remedies for default which might otherwise apply in their own favour, through facilitating a cross-default provision for the benefit of the parties to another petroleum project.

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During the lifetime of the JOA there will invariably be some differences of opinion between some of the parties, and some of those differences might come to be elevated to the status of a formal dispute. This could, in part, be seen as an inevitable consequence of the ongoing evolution of the JOA (1.7). The JOA should provide for how disputes are to be addressed, such that disputes are dealt with quickly and effectively and, as far as possible, do not impede the continuing operability of the JOA (not least since that might in turn jeopardise the continuing operability of the concession). The importance of this area is often overlooked in preparing the JOA and any wider petroleum project agreements, typically with whatever dispute resolution provisions which were used in the most recent agreement which was entered into by any of the parties being applied again and with little attention to the real detail of what might be required. It is only when a dispute arises in respect of the JOA that these provisions come to be properly considered, which could be too late to discover that the dispute resolution mechanisms which have been selected in the JOA might not be ideally suited to the circumstances of a particular dispute. 15.1

Dispute resolution mechanisms A balance must be struck in the JOA between providing an accessible forum for the prompt and effective resolution of disputes between the parties (whether between the parties inter se or between the operator and the non-operating parties), and making it too easy for the parties to elevate every disagreement to the level of a formal dispute, which might be done in order to frustrate the intended commercial purpose of the JOA. An effective limitation on the frequency of recourse to formal dispute resolution might be achieved through any combination of the choice of the applicable dispute resolution mechanism, the relative inconvenience of the chosen geographical location for the determination of disputes and the allocation of the associated costs of the dispute. Disputes could arise in respect of the interpretation of the JOA, the application and the enforcement of the JOA and alleged breaches of the JOA and could relate, for example, to any of the following matters: • Performance of obligations – this principally relates to an allegation by a non-operating party that the operator might have failed to perform its obligations (whether at all or at least to the standard required by the JOA),

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•

•

possibly leading to a claim that the grounds under the JOA for an allegation of wilful misconduct (or gross negligence) by the operator (12.1) or even for the removal of the operator (6.4) might apply; but this could apply equally to a dispute about whether a party has properly performed certain covenants or obligations which the JOA requires a party to perform (including the possibility of a dispute about the status of an alleged default (14.1)). Compliance with terms of JOA – there could be a dispute between the parties as to whether a proposed activity falls within the scope of the JOA or might be an excluded operation (4.2), or whether statements or invoices prepared by the operator are accurate (6.3), a decision of the OpCom has been accurately minuted (7.2), a proposed exclusive operation (5.1) or a proposed withdrawal (11.2) complies with the requirements of the JOA for the same or a notice required to be given under the JOA has been validly given (17.9). Application of force majeure – there could be a dispute between the parties as to whether an event which has caused a party to fail in the performance of its obligations should be treated as force majeure (17.4) or whether any liability which is prescribed by the JOA should apply to that failure.

It is apparent, even from the brief list above, that the nature of a dispute under the JOA can vary between being relatively minor or very serious. This will have a bearing on the choice of the method of dispute resolution which the JOA provides for. Whatever the dispute is about, and notwithstanding whichever method of dispute resolution is provided for, the JOA nevertheless should oblige the parties to continue to perform their respective covenants and obligations to the greatest possible extent despite the existence of the dispute and the currency of a dispute resolution process. The broad options for the resolution of disputes in the context of JOAs are some form of mediated outcome, the appointment of an independent expert to make a determination, recourse to arbitration and recourse to the courts, each of which is considered below. Thus, the AAPL JOA provides for a separate dispute resolution procedure to be appended to the JOA, wherein the parties will select their preferred method of dispute resolution. The AIPN JOA provides for dispute resolution through any of mediation, arbitration or expert determination. The CAPL JOA provides for dispute resolution through any of negotiation, formal mediation or arbitration. The OGUK JOA provides that any disputes will be resolved solely by recourse to court, although there are some circumstances where expert determination is possible. 15.2

Dialogue As a first pass at resolving the dispute, the JOA might provide that the disputing parties’ senior management will meet and will seek to discuss in good faith the issue in dispute with a view to procuring early and informal resolution.1 This process usually happens anyway in the early stages of a dispute, so the parties might query

1

AIPN JOA §18.2(B).

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the need for a provision in the JOA which recites what they might regard as a selfevident proposition. A provision in the JOA for the resolution of disputes through informal dialogue will rarely recite too much operational detail about how that mechanism is to be applied, since to do so would be inconsistent with the nature of such a mechanism. A more formal mechanism for dialogue-based dispute resolution is some form of alternative dispute resolution (ADR). This is mediation-based dialogue within a structured, non-confrontational process, involving a third-party overseer but without an imposed outcome.2 ADR typically does not preclude further recourse to arbitration or litigation (see below) in the event that no settlement is reached between the parties and for this reason is popular. ADR is also generally perceived as being more informal, less expensive and quicker than dispute resolution by arbitration or litigation, and because of its non-confrontational nature there may be a better chance of maintaining commercial relationships during and after the resolution of the dispute. 15.3

Expert determination Some JOAs3 provide that the parties will jointly agree and appoint an independent expert for the determination of certain matters in dispute, with further provision for an independent third party to decide on the appointment of the expert for the parties if they are unable to agree a suitable candidate. The usual topics for expert determination in the context of the JOA include the following: • the establishment of a fair tariff for a party’s use of the joint property for business unconnected with the joint operations (4.3); • disputes regarding the value of a party’s interests where there is a compelled transfer of interests (in the event of a change of control (10.4)4 or a default (14.4));5 • the attribution of cash values to non-cash consideration where a pre-emption right so applies (10.3);6 • disputes regarding the value of any decommissioning security which is required (13.4) or regarding the value of a cashcall or an invoice request which has been claimed by the operator in accordance with the accounting procedure (16.2); and • whether force majeure relief should properly apply in respect of an event for which it has been claimed by a party (17.4). It will also always be open to the parties to a particular dispute to elect to appoint an expert for the determination of that dispute if they so wish, in preference to the application of whatever other dispute resolution mechanism the JOA applies.

2 3 4 5 6

AIPN AIPN AIPN AIPN AIPN

JOA JOA JOA JOA JOA

§18.2(C). §18.3. §12.3(C)(4). §8.4(D); OGUK JOA §17.7. §12.2(F)(4).

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The expert provisions in a JOA will typically recite matters such as the following: • the mechanics for the identification, selection and appointment of an expert; • the requirement for true independence and impartiality on the part of the expert (eg, through not being a previous or current employee of, or contractor to, any of the disputing parties and through not having a significant shareholding or other financial or fiduciary interest in any of the disputing parties); • the timetable and the mechanics for the expert’s determination; and • provision that the determination of the expert will be final and binding on the disputing parties (or the circumstances in which the expert’s determination can be appealed to a competent court). The expert provisions should also offer some guidance to the expert as to how the costs of the expert’s determination are to be borne between the disputing parties. The usual options are that such costs be borne equally between the disputing parties, be borne by the party which is ultimately unsuccessful in the dispute or be borne in such proportions as the expert shall determine. The requirement that the costs of the expert be borne by the unsuccessful party could limit the appetite of a party to bring frivolous claims and so limit the number of disputes which will beset the JOA, but this presumes that the dispute, and the manner of resolution of the dispute, will always result in a clearly unsuccessful party against which such a costs award might be made. An increasingly popular provision in expert-based dispute resolution mechanisms is for the expert to be required to adopt a ‘pendulum procedure’ – that is, the expert will be limited in making its determination to selecting the contention of one of the parties to the dispute and cannot construct a bespoke settlement which represents a compromise between all of the disputing parties’ claims. The rationale for such a provision is that it will encourage the disputing parties to adopt sensible positions from the outset, out of concern that the expert would be reluctant to accept an obviously extreme claim as the basis for a settlement. 15.4

Arbitration and litigation The JOA might contain an arbitration provision.7 ‘Arbitration’ is the summary name given to a procedure whereby the legal rights and obligations of the parties are determined within private proceedings which effectively reflect the role of a civil court of law. Where arbitration takes place in England and Wales, the Arbitration Act 1996 will apply, as will English law as the procedural law to govern the arbitration unless an alternative choice is agreed between the parties. An agreement between the parties to resolve disputes by recourse to arbitration will typically address matters such as the following: • the nature of the disputes to be referred to arbitration (which may be all disputes under the JOA except for those specifically identified to be otherwise resolved, such as by reference to an expert (see above)); • the mandate of the arbitral tribunal to act (at a minimum the arbitrators

7

AIPN JOA §18.2(D).

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• • • •

should be required to decide the matter in dispute according to law and not ‘ex aequo et bono’ (ie, according to what the arbitrators consider to be fair and reasonable)); the applicable procedural law of the arbitration; the venue and the language of the arbitration; the number of arbitrators and the procedure for their appointment; and the selection of an appropriate adjudicatory body if the parties are unable to agree on any aspect of the agreement to arbitrate.

A failure of the terms of the JOA’s agreement to arbitrate to be clear and comprehensive could lead to a danger that the agreement to arbitrate could be declared void for uncertainty (or at least that the arbitral tribunal will not have clear jurisdiction over a particular dispute). The parties should also identify the rules which will regulate the procedure of the arbitration. If no rules are provided for by agreement between the parties, then under the 1996 act it will be left to the arbitrators to decide on suitable procedural rules.8 A distinction is to be recognised between ‘institutional’ (sometimes also called ‘administered’) arbitrations, wherein the arbitration will be conducted under the auspices of and in accordance with the established procedural rules of a recognised arbitral institution, and ‘ad hoc’ arbitrations, wherein the arbitration will be governed by whichever procedural rules the parties wish to select (which could even be their own bespoke procedural rules). Institutional arbitrations and procedural rules which are popularly relied upon are those promulgated by the International Chamber of Commerce’s International Court of Arbitration, the London Court of International Arbitration or the American Arbitration Association. The rules promoted by the United Nations Commission on International Trade Law (UNCITRAL) are not supported by a corresponding institution and consequently are often used in ad hoc arbitrations. Rather than seek recourse to an expert or an arbitrator, the JOA might simply prescribe that any disputes between the parties be settled in court. However, this could be something of a sledgehammer to crack a nut in the case of relatively minor disputes or certain factual, financial or technical disputes for which recourse to an expert would be preferable, and recourse to arbitration might be preferred to litigation for the reasons considered below. Where a JOA provides for the determination of disputes through litigation, there is typically a detailed procedure provided within the jurisdictional rules of the court in which the dispute will be heard which will provide the necessary administrative framework, so the JOA will not need to repeat the procedural principles which would otherwise apply. It is also not incompatible with most sets of arbitral rules that a party will still have the right to petition the court for protective relief (eg, an injunction) prior to or during the conduct of an arbitration in order to protect its position. The factors which are typically considered by the parties when deciding between 8

Section 34 of the Arbitration Act 1996.

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arbitration and litigation as a means of dispute resolution will include the following: • Speed of process and flexibility – the popular assumption is that disputes will generally be determined more quickly by arbitration than by litigation. The 1996 act expressly requires arbitrators and parties to expedite the dispute determination process9 and arbitration typically demonstrates greater flexibility (eg, through the informal resolution of certain issues by correspondence rather than by face-to-face hearings), while litigation would be subject to court lists (over which the parties have no control) and a relatively rigid and time-consuming procedural regime. That said, this position would need to be reconsidered where there is a lengthy arbitral process in prospect and/or a court which is disposed towards the efficient processing of disputes. • Neutrality – where the parties to the JOA are from different jurisdictions, it may be that a party is unwilling to submit to the jurisdiction of the national courts of any other party in the event of a dispute. Arbitration offers neutrality in the choices of venue, procedural rules and composition of the arbitral tribunal. This will be especially advantageous in the context of a JOA which is founded on the premise of an international community of participants and/or petroleum exploration and production operations in a jurisdiction which might be alien to them all. • Confidentiality – litigation is typically conducted in public and proceedings and judgments will be matters of public record. The parties may therefore prefer recourse to arbitration, where most institutional procedural rules provide that arbitral proceedings and awards are to be kept confidential (except that an arbitral award may become published if enforcement through registration becomes necessary). • Cost – since arbitration is (supposedly – see above) speedier and more flexible than litigation, the costs of an arbitration could be less than the costs of litigation. However, this does not mean that the costs of an arbitration will be insignificant, since it will still be necessary to incur the costs of the actual arbitral hearing (including the costs of the venue) and of remunerating the arbitrators. In reality, there could be little to choose between the costs associated with arbitration and litigation. • Expertise – in comparison with the appointment of a judge in litigation, the parties to an arbitration can select an arbitrator or an arbitral panel with particular technical or commercial expertise in the subject matter of the dispute. This could be of particular attraction in the context of a JOA, where a dispute between the parties may have a particular technical or financial complexity which requires a particular expertise. • Finality – in contrast to a judgment at first instance in litigation, which (subject to certain limitations) can generally be appealed, the 1996 act provides10 that, unless otherwise agreed by the parties, an award made by the arbitral tribunal will be final and binding. It is generally not possible for a

9 10

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Sections 33(1) and 40 of the Arbitration Act 1996. Section 58(1) of the Arbitration Act 1996.

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•

party to a dispute which is to be arbitrated to apply to the court for direct relief and the court will be obliged to stay any proceedings which properly fall within the ambit of an agreement to arbitrate.11 However, it will be possible for a party to apply to court for relief against an arbitral award on the grounds that the arbitral tribunal had no substantive jurisdiction over the dispute in question12 or where serious irregularity has affected the arbitral tribunal, the arbitral proceedings or the arbitral award.13 Furthermore, an appeal may be possible to the courts on a question of law.14 Enforceability – several international conventions govern and effect the mutual recognition and enforcement of arbitral awards made in a foreign country, the most notable of which is the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Under the New York Convention, arbitral awards should be recognised and enforceable in all countries which have acceded to the convention, although as a practical matter local enforcement can present difficulties in some jurisdictions. Court judgments are typically harder to enforce abroad (and in some cases a local re-hearing might effectively be required).

15.5

Jurisdiction Notwithstanding that the JOA might provide for the determination of disputes by means other than litigation, the JOA should still specify which country’s courts will have jurisdiction over the JOA. This is so since there could still be some circumstances where a recourse to court might be necessary – for example, for a party to sue for the recovery of a debt, to seek protective relief or to appeal the decision of an expert or an arbitral panel where the circumstances so permit (see above). The JOA should also prescribe whether the court will have exclusive or nonexclusive jurisdiction.15 In the former case the parties will be obliged to bring any actions in the courts of the nominated jurisdiction (and the courts of any other jurisdiction should have no standing to entertain such actions where they are aware of the existence of a provision for exclusive jurisdiction); in the latter case a party may bring an action either in the courts of the named jurisdiction or in the courts of any other country having jurisdiction over the JOA according to their own jurisdictional rules, without first having to bring the action in the courts of the named jurisdiction.

15.6

Consolidation There may be issues which are in dispute between certain of the parties to the concession which could impact on and trigger disputes under the JOA, or vice versa. Examples of such overlapping disputes include where there is a difference of opinion between the government (as the grantor of the concession) and the parties (in their

11 12 13 14 15

Section 9 of the Arbitration Act 1996. Section 67 of the Arbitration Act 1996. Section 68 of the Arbitration Act 1996. Section 69 of the Arbitration Act 1996. OGUK JOA §29.1.

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capacity as the concession holders), and/or between any of the parties to the JOA, relating to the commerciality of a petroleum discovery (4.1), or where a claim for force majeure relief (17.4) has been made which applies across the concession and the JOA. There could also be a matter in dispute which relates to the JOA and any unitisation and unit operating agreement (UUOA), such as whether a further discovery which is made in the concession area to which a particular JOA relates will be regarded as part of the unit for the purposes of the UUOA (see Appendix D). Where there are matters in dispute which are substantially common between multiple agreements, those agreements might provide for the consolidation of such overlapping disputes in order that they be addressed more effectively. In the context of arbitration, the 1996 act specifically recognises the prospect of such consolidation16 and the English courts generally also allow for the consolidation of disputes where disputes are litigated. As a practical measure, the dispute resolution mechanisms across the various agreements which together constitute the petroleum project (including the JOA) would therefore need to be consistent in order to propose such consolidation. Thus, in the context of the UKCS the licence provides for disputes between the government and the licensee to be resolved by a single arbitrator, to be selected and appointed by agreement between the government and the licensee,17 and the dispute resolution provisions in the JOA would need to be broadly reconciled with this provision if consolidation were to happen effectively. 15.7

Sovereign immunity Where any party to the JOA is a parastatal entity, which might well be the case for any national oil company which is a party or where a government entity has exercised a participation right in the JOA (3.4), consideration should be given18 to requiring that party to waive any entitlement which it might have to assert sovereign immunity against any proceedings brought against that party in connection with the proper enforcement of the JOA (eg, proceedings for the recovery of a debt due in respect of a cashcall or invoice request default (14.3), or even a forfeiture of interests (14.4)). Whether the right of a party to assert sovereign immunity will exist is a matter to be determined by reference to the law which applies in respect of that party and the operations in which it is engaged). Under English law, the State Immunity Act 1978 provides for the immunity of a state from the jurisdiction of the domestic courts and for an exception to that immunity to be applied where, for example, the state has submitted to the jurisdiction of the courts,19 has entered into certain commercial transactions20 or has agreed in writing to submit a dispute with a private person to arbitration.21 If a party to the JOA is capable of asserting sovereign immunity and has not

16 17 18 19 20 21

Section 35 of the Arbitration Act 1996. MC 43. AIPN JOA §18.4. Section 2 of the State Immunity Act 1978. Section 3 of the State Immunity Act 1978. Section 9 of the State Immunity Act 1978.

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expressly waived that immunity, then any representations or warranties which have been given in the JOA to the effect that each party is capable of being sued and/or is not entitled to immunity from suit (17.13) will also need to be qualified accordingly.

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16. Accounting procedure

Appended to the JOA as a separate schedule will be a defined accounting procedure, the intention of which is twofold: to establish an operational methodology by which expenditure and income attributable to the activities contemplated by the JOA are allocated between the parties, and to ensure that the expenses properly incurred by the operator in consequence of acting as such are reimbursed by the parties. A pro forma accounting procedure is appended to each of the AAPL JOA, the AIPN JOA, the CAPL JOA and the OGUK JOA (1.4). Other model form accounting procedures which might be considered have been issued by the Petroleum Accountants Society of Canada (PASC)1 and by the Council of Petroleum Accountants Societies (COPAS).2 16.1

Accounting principles The operator will maintain a specified joint account (through which JOA-related currency movements and incoming and outgoing funds will be recorded), and will issue periodic accounts statements (and other relevant data) to the parties. The joint account is usually denominated in a single currency, with a protocol to address the exchange rate applicable to other currency movements through the joint account. A multiple-currency joint account could be agreed between the parties and the terms of the concession (relating to host country currency activities) might necessitate this. The JOA (or the accounting procedure) will address the operator’s ability to commingle its own funds and the parties’ funds in the joint account and also whether the joint account should be interest-bearing. The ability of the operator to commingle the funds which have been contributed by the parties for the performance of the joint operations with the operator’s own general funds through an unsegregated bank account typically causes some debate. The operator will regard this as a simple, mechanical exercise which makes life easier for the operator and which does not actually bestow the parties’ funds upon the operator. The concern of the non-operating parties is usually expressed to relate to what happens in the event of the insolvency of the operator, where those funds could well be lost to the appointed liquidator. Thus, the JOA might provide for the operator to be allowed to commingle, or to be prohibited from commingling, the

1 2

Available at www.petroleumaccountants.com. Available at www.copas.org.

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funds;3 or might allow such commingling at the outset but with a right of the parties to call for later segregation if they wish. Several philosophical precepts are typically recited within the accounting procedure, which are intended to condition its operation: • Equitable operation – the accounting procedure is intended to operate fairly and equitably as between the parties in respect of the attribution of charges and income to the joint account. • Gain and loss – the operator is not to incur a gain or suffer a loss in consequence of acting as such (although this is a key principle which is recited in the JOA (6.1), it is often repeated for good measure in the accounting procedure), and no party should gain or lose in relation to any other party. • Systemic inequality – if any unfairness or inequality between the parties arising from the operation of the accounting procedure becomes apparent, the parties will meet and in good faith endeavour to agree any necessary changes. • Amendment – the accounting procedure can be amended only by unanimous agreement of the parties. This is consistent with the wider principle of how the JOA is to be amended (17.3). • Conflict with the JOA – in the event of a conflict between the terms of the JOA and the accounting procedure, the terms of the JOA might be expressed to prevail4 or the terms of the accounting procedure might be expressed to prevail,5 depending on what is negotiated. 16.2

Contents of the accounting procedure The principal components of the accounting procedure are as follows.

(a)

Maintenance of accounts and records The operator will be required to maintain the joint account and adequate accounting records (by reference to cash movements and produced petroleum), in line with generally accepted accounting practices (which might also include certain defined industry accounting conventions), and also according to any applicable legal requirements for accounts which are required to be maintained by the operator under the terms of the JOA or the accounting procedure. Each party should also be obliged to maintain its own individual accounting records. The accounting procedure will also select an accounting basis, whether the ‘accrual basis’ (whereby costs and revenues are accounted for in the period when they arise, regardless of when they are actually paid or received) or the ‘cash basis’ (whereby costs and revenues are accounted for only when they are actually paid or received).

(b)

Cashcalls or invoice requests The basic premise of the JOA is that each party will undertake to pay its PI-based

3 4 5

AIPN JOA §4.8. AIPN accounting procedure §1.2; CAPL JOA §§1.04, 5.01; OGUK JOA §16.1. AAPL JOA 810 §3.1.

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share of all joint account expenses (3.3). Where any approved joint operation requires the prospective contribution of funding by the parties, the operator will issue a formal demand (or ‘cashcall’) to the parties for their share of the funding, with payments to be made by the parties ahead of the date when the relevant expenditure is required to be made. The operator’s cashcall will then trigger a defined timetable by which payment has to be made by each party. Any failure of a party to make payment when due should trigger the default provisions in the JOA (see Chapter 14). As an alternative to the conventional route of issuing cashcalls ahead of expenditure, the operator might elect to cover the financing requirements of the joint operations through its own resources, and will then back-charge the parties periodically through the issue of an invoice request. Where this happens, the JOA might recognise the operator’s role as a de facto financier through payment to the operator of a defined financing fee. Such a device is helpful to the operator where it is obliged to cover unpredicted expenditures in the performance of the joint operations and will assist the operator in mitigating the risk of a party not fully funding its cashcall obligations (whether wilfully or in accordance with any right under the accounting procedure which allows that party to do so). Thus, under the AIPN accounting procedure, the operator can elect to fund the cost of the joint operations itself by giving notice to the parties of its intention to do so and will later invoice the parties for the costs so incurred in doing so by the operator (together with a defined financing fee). Under the OGUK JOA, the operator’s invoice request and funding fee mechanism are specified as the principal means by which the operator will recover the costs of performing the joint operations. Provision is also made, however, to allow a conventional cashcall mechanism (without a funding fee) to be introduced in place of the operator’s invoice request route if the parties so approve by a vote at the OpCom. Under the AAPL JOA, the operator initially incurs all the expenses associated with the performance of the joint operations and then back-charges the parties.6 Under the CAPL JOA, the operator initially incurs all the expenses associated with the performance of the joint operations and then back-charges the parties,7 but there is also provision for the operator to introduce a cashcall mechanism if the operator so requires.8 The essential difference between the cashcall mechanism and the invoice request route is thus that the cashcall covers prospective costs and the operator’s invoice applies retrospectively in respect of costs already paid. The operator should be required to set the funding fee under the invoice request mechanism at a level which covers the costs of funding to the operator and not at a level which offends the principle that the operator will not make a gain from acting as such (6.1).

6 7 8

AAPL JOA 810 §6.1. CAPL JOA §5.02. CAPL JOA §5.03.

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(c)

Audit and adjustment rights The parties will have rights to audit the operator’s accounting for the joint operations, on reasonable notice and subject to certain reasonable limitations (eg, determined by reference to the frequency with which such audits can be carried out, the period after the end of a defined accounting period within which an audit must be requested (which may be capable of extension where any operator default or misconduct has necessitated concern and a resultant audit), and the amount and the format of the information which the operator is required to make available). A key issue here is the extent of the audit of the operator’s activities which a party can request, and particularly whether the audit right will extend beyond the operator to include an audit of any affiliate of the operator which has been engaged in the performance of the joint operations (8.5). The accounting procedure usually also provides for adjustments to be made between the operator and the parties where the audit has revealed any accounting irregularities.

(d)

Direct charges reimbursement Beyond specific cashcalls or invoice requests (see above), the operator will also require that it can charge the parties for reimbursement of the costs and expenditures which it incurs directly in the performance of the joint operations (eg, to cover items such as the costs of procuring insurance or of managing litigation, obtaining or maintaining any necessary permits or consents, the costs of employing staff, (whether wholly or partially committed to the joint operations), the costs of goods and/or services provided by third parties (except to the extent already charged to the parties within a cashcall or an invoice request) and taxes, duties and charges which are generally attributable to the joint operations). Unless staff are dedicated full time to the performance of the joint operations (in which case their associated costs can be levied completely against the joint account), any of the operator’s staff who work only part time on the performance of the joint operations should be required to complete periodic timesheets, so that their work effort can be tracked and a corresponding proportion of their costs attributed to the joint account. Although the JOA will almost always make an express declaration of the operator’s ability to recover the costs of its so acting from the parties, another point to consider is whether a statutory right of recovery against the parties might also be inferred in the operator’s favour in order to make up any deficiency in the terms of the JOA.9

(e)

Indirect charges reimbursement The operator would also ideally like to be able to charge the parties for reimbursement of any non-specific costs (including the provision of general advice and assistance) which are attributable to its performance of the joint operations. These general overhead costs, which are not capable of specific identification as a

9

See, for example, the Civil Liability (Contribution) Act 1978.

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direct charge, will usually be determined as a flat annual fee, expressed as a percentage of the total amount of the overall expenditure on the JOA for that year (this will often be a sliding scale of percentages relative to the aggregate amount of such expenditure, with lower percentages applying to higher levels of expenditure). Credit will be given for amounts which would otherwise be claimed as direct charges by the operator, so as to avoid duplication. The operator may also require payment of a minimum amount each year, so that the operator still recovers some of its general overhead costs in a year when the direct charges are negligible. Whether these indirect charges are capped each year will be a matter for negotiation in the JOA. (f)

Materials costs Beyond specific cashcalls or invoice requests (see above), the operator will require the joint account to bear the costs of where the operator has procured materials for the performance of the joint operations. These materials could be purchased by the operator from third parties or could be furnished by the operator from its own stocks. In the latter case the accounting procedure usually then classifies (for valuation purposes) such materials according to whether they are new, used but sound and serviceable, used but in need of repair or reconditioning, or scrap (with the price for each category of materials reducing accordingly). The operator typically will not warrant the condition or fitness for intended purpose of such materials (except that the original supplier or manufacturer may have provided a warranty to the operator, the benefit of which can be passed through to the parties). The operator’s provision of materials from its own stocks will be akin to the inkind contribution of goods by a party (8.4). The operator can also dispose of major items from the joint property inventory, although this may require the approval of the OpCom for items beyond a defined value, with the net proceeds of disposal to be credited to the joint account. The accounting procedure will be declared also to apply equally to the accounting associated with the performance of any exclusive operations (see Chapter 5), subject to the separation of such accounting from the accounting for the joint operations.

16.3

Accounting procedure issues On first appearance, the provisions in the accounting procedure may seem sensible enough, but the detail of negotiation of the JOA will reveal some essential differences of opinion between the operator and the non-operating parties. The usual areas of contention in the negotiation of the accounting procedure are as follows.

(a)

Extent of the operator’s cashcalls The parties would ideally like to keep hold of their money for as long as they can and so would prefer to release payments to the operator which are necessary to fund the performance of the joint operations on a strictly as-needs basis. However, the operator’s preference will be for each party to advance its share of the operator’s

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cashcall which is required to fund the joint operations both in the near term and for some time thereafter, with such amounts to be held on account by the operator and released periodically against actual funding obligations. Any interest earned on this money while it is held on account can be attributed to the parties, pro rata to the extent of their respective cashcall contributions. This method of funding relieves the operator’s concern about having to repeatedly chase the parties for their contributions, but it can have an adverse effect on the cash flow of the parties. Under the AIPN accounting procedure, once a work programme and budget has been approved (8.1), the operator may issue a cashcall for its estimate of the amounts which are required to be spent for the succeeding month’s operations and for each month thereafter, with the due date for payment of the cashcall by the parties set at no sooner than the first business day of the month in respect of which the cashcall has been made. The parties might also require the ability to pay their cashcall contributions on an instalment basis, where the operator has made a significant cashcall which they might be unable to meet in whole. The extent to which the operator will make cashcalls to fund the costs of the joint operations as they fall due will also condition the attitude of the parties to provisions in the JOA relating to the operator’s ability to commingle funds in the joint account (see above), and to how interest earned on those funds should be attributed (see above). The longer the period of residence of the parties’ funds in the operator’s account, the more likely that the parties will be concerned about the risk of commingled funds and the ownership of the interest earned. The parties might require the operator to reimburse to them any unused cashcall amounts, although the application of such a reimbursement mechanism could be conditioned by limits as to the minimum amounts which are so reimbursable and/or the duration of the residence of the unused amounts in the operator’s account so as relieve the operator from being unduly troubled. However, the concerns which are expressed above in respect of cashcalls should abate if the JOA adopts the operator’s invoice request mechanism, as the parties’ contributions should be applied forthwith from the joint account towards the immediate reimbursement of the operator and in respect of expenses which the operator has already incurred and paid. (b)

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Extent of a party’s audit rights The operator’s preference might be to prohibit, or at least to restrict, the ability of a party to exercise its rights of audit in respect of any affiliate of the operator which has been engaged in the performance of the joint operations, on the basis that such an affiliate is likely to be engaged in a variety of business activities beyond the JOA. A compromise which might be considered is one whereby the audit of such an affiliate can be carried out on behalf of a party by the operator’s statutory auditor or by an independent third-party auditor, which will confine its investigation to an examination of defined issues related to the JOA. A similar issue arises where the operator has entered into federal contracts (8.6) for performance of the joint operations.

Peter Roberts

(c)

Reimbursement of direct charges Where the charges incurred by the operator relate to contracts entered into by the operator with its affiliates or with any entities associated with the operator (8.5), or are federal contracts (8.6), the parties will be keen to ensure that such charges are comparable with market rates otherwise payable and do not reflect an unwarranted premium payable to the affiliate or associated entity or to the federal contractor.

(d)

Reimbursement of indirect charges The parties may be reluctant to pay a share of the operator’s general overhead costs on the basis that by doing so they are simply subsidising the operator’s costs of carrying on business and may even be subsidising some other project which the operator is engaged in, but where no, or a lesser, indirect charge is so levied. The best protection for a party here is to negotiate the amount of the indirect charges which is payable to the operator down to the lowest possible level. Any right of a party to audit such charges will usually be limited to ensuring that the overhead percentage calculations have been correctly applied and will not go into the detail of what the overhead charges actually are and whether they are reasonable.

(e)

Materials furnished by the operator Where the charges incurred by the operator relate to materials furnished by the operator, the parties will be keen to ensure that such charges are comparable with market rates otherwise payable and do not reflect an unwarranted premium payable to the operator. The parties may require audit rights in respect of this position.

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17. Other provisions

A number of other provisions are essential to make the JOA a fully functioning agreement between the parties. These can be drawn generally from other commercial contracts, but in each case they will need to be tailored specifically to suit the circumstances of the JOA. For the sake of consistency, these general provisions should, insofar as is practically possible, be recited in the manner in which they appear in any of the other petroleum project agreements which are developed from the JOA. The general provisions of the JOA might also, to the extent feasible, be corresponded to the equivalent provisions in the concession. 17.1

Confidentiality and announcements The JOA will contain a confidentiality provision by which the parties (and, critically, the party acting as the operator) will be obliged to keep confidential the contents of the JOA (and, more particularly, any data or information generated under the JOA) which are not otherwise legitimately in the public domain.1 This obligation of confidentiality will subsist for the duration of the JOA and for a defined period thereafter, and will to continue to apply whether the JOA comes to an end in itself or whether a party ceases to be a continuing party to the JOA.2 The particular confidentiality issue to be aware of under the JOA is how the parties protect the various seismic, geological, geophysical and production data which has been generated for, or as a result of, the joint operations (and possibly also the exclusive operations – see below). This data, which will form part of the joint property (4.1), has a real value and could be invaluable to a third party engaged in petroleum exploration and/or production activities in acreage adjacent to the concession area, given that the relevant petroleum deposit might underlie more than one concession area (see Appendix D). A party which has funded the generation of this data through its contribution to the costs of the joint operations will be reluctant to see that data made freely available to such a third party. The AIPN JOA recites an option3 whereby a party can extend the right to use the data to members of other joint ventures in which that party (or that party’s affiliates) is interested, subject to the recipient giving an express

1 2 3

AAPL JOA 810 §7.1; AIPN JOA §15.2; CAPL JOA §18; OGUK JOA §19. AIPN JOA §15.4; OGUK JOA §19.1(e). AIPN JOA §15.1(B).

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obligation of confidentiality, but this might not be welcome in principle and it also reduces the ability of the operator to enter into a data trade (see below) from which all of the parties might benefit. This principle of the confidentiality of the data generated under the JOA should apply equally to a party’s use of that data for activities in another concession area within which that party also has an interest, although it will be difficult for a party which is directly interested in two separate concession areas to disabuse itself of the information which it has learned in respect of one of those areas in relation to its activities in the other. However, where the interests in two concession areas are held between two affiliated (and so corporately distinct) entities, rather by the same entity, a strict separation of interests (and a corresponding maintenance of confidentiality) might more reasonably be expected. The JOA will go into some detail about how the operational data arising from the JOA is defined and is owned and used between the parties. Each party will be entitled to access and to use that data (subject to compliance with the relevant confidentiality provisions in the JOA), and the parties’ rights in this regard should be reconciled with the operator’s obligations to make operational data available to the parties (6.3). The usual formulation of the confidentiality provision is that a party wishing to disclose information relating to the JOA must obtain the prior consent of the other parties (with such consent not to be unreasonably withheld or delayed – and it might well be reasonable for a party to withhold its consent where the proposed disclosure of confidential information by a party is intended to be purely for commercial gain) before that disclosing party can reveal such information to a third party. It may also be a requirement of the consenting parties that the person to which disclosure is made enter into a separate obligation of confidentiality with the disclosing party or even directly with the consenting parties. There is usually a limited set of circumstances in which a party can make a disclosure of confidential information without the prior consent of the other parties, such as: • disclosures required by applicable law, judicial process or the rules of a recognised stock exchange; • disclosures to persons necessary to facilitate the commercial intent of the JOA (eg, to insurers, employees, affiliates and professional advisers); and • disclosures to bona fide lenders and prospective transferees of interests. These permitted disclosures could (wherever possible) be subject to a requirement that the person to which disclosure is made also undertake a separate obligation of confidentiality to the disclosing party or to all of the parties. Despite the desire of the parties to protect the confidentiality of their operational data, it may be that the operator can procure an opportunity to exchange some or all of that data with a third party in order to receive data in return which could be of assistance in the performance of the joint operations. To this end, the JOA might provide4 that the operator can enter into a data exchange agreement, subject to the approval of the parties through the OpCom (7.4). Any data which is so acquired by

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the operator will form part of the joint property, to which all of the parties will be entitled to have access (4.1). The terms of the prevailing mineral law or of the concession may also have something to say about the ownership of data which has been generated by the joint operations, and the rights of the parties under the JOA might need to be subordinated to the rights of the government in this regard. A point of interest to consider is the application of the confidentiality provisions in the JOA to data generated in respect of any exclusive operation (see Chapter 5). The parties that have participated in an exclusive operation might argue that they own the relevant data and that they are unencumbered by the confidentiality provisions in the JOA, which properly relate only to the data associated with joint operations. Thus, the duty of confidentiality in respect of data generated from the exclusive operation will be owed only between the parties that participated in that exclusive operation and will not be owed by those parties to any party which did not so participate. However, the non-participating parties might feel that this argument is inconsistent with the general principle of confidentiality which the JOA seeks to import (and the AIPN JOA’s confidentiality provision is not particularly distinct on this point, as it is expressed to apply to all information in relation to joint operations or exclusive operations),5 and particularly to the right of any non-participating party to access that data (5.2), so the JOA should seek to address this issue with clarity. It might also be that the joint operations generate some form of novel intellectual property, which the JOA might address the ownership of.6 The options in this regard are that this intellectual property might be treated as part of the joint property (4.1), to be owned jointly between all of the parties and controlled through the intervention of the OpCom; or that the intellectual property will be owned by the operator, subject to each party then having an irrevocable and royalty-free licence to use it. Upon any change of operator (6.4), those property rights should be transferred to the new operator. As part of the confidentiality regime, the JOA might also restrict the making of public announcements by a party. The usual JOA formulation is that the operator has sole authority to make public announcements regarding the JOA or the joint operations, subject to approval of any announcement by the OpCom beforehand (wherever possible – there may be some emergency circumstances where securing OpCom approval is not practicable), and with some allowance for announcements which are required to be made directly by a party in accordance with the rules of a recognised stock exchange or by applicable law.7 A practical problem which should be considered in connection with the confidentiality and announcement provisions in the JOA is the liability which a party might have in the event of a breach of those obligations by that party. A breach by the operator (in its capacity as such) would be subject to the provisions of the JOA which customarily limit the liability of the operator to the parties (12.1), although 4 5 6 7

AAPL JOA 810 §7.2, Exhibit I; AIPN JOA §15.5; OGUK JOA §19.2. AIPN JOA §15.2(A). AIPN JOA §15.3; OGUK JOA §27. AAPL JOA 810 §9; AIPN JOA §20.3; CAPL JOA §19; OGUK JOA §20.

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such a breach could give grounds for removal of the operator (6.4), and a breach by a party (in its capacity as such) would be subject to any consequential loss liability limitations which are recited in the JOA (12.1). There might also be some difficulty for a party to prove or quantify an actual monetary loss or liability which it has suffered because of another party’s breach of confidentiality or the making of an unauthorised announcement. In these circumstances, therefore, the value of the undertakings given by the parties might be better reflected in the ability of any affected party to seek some form of injunctive relief in order to protect its interests (at least where a prospective breach of the JOA can be anticipated). The grant of an injunction will be in the discretion of the court and will be made only if damages would not be an adequate remedy. Alternatively, an order might be sought from the court for an account for any profits made by the party which breached the confidentiality obligation, or for the destruction or delivery up of any materials which were used in or which have resulted from such a breach. A breach of the obligation of confidentiality in the JOA might also lead to an allegation of the breach of a fiduciary duty and to the appropriate remedies (see Appendix F). 17.2

Corporate and social responsibility In recent years there has been an increasing trend towards companies declaring that their commercial operations are conducted in compliance with a series of protocols regarding ethical behaviour and social responsibility, sometimes paraphrased under the headings ‘sustainable development’ or ‘ethical behaviour’. Consequently, the JOA could contain a declaration by each of the parties that its performance of the JOA will be undertaken in a socially responsible manner and in compliance with certain protocols. The purpose of doing this is primarily so that a party can disclose the fact of this compliance to its shareholders and the wider stakeholder community, notwithstanding that the JOA will be subject to a duty of confidentiality (see above) and will not be a public platform for that declaration. Thus, regard might be had, for example, to the declarations of the International Petroleum Industry Environmental Conservation Association, the International Union for Conservation of Nature and its joint commitments with the International Association of Oil & Gas Producers, the Equator Principles governing social and environmental issues in project financing and the Voluntary Principles on Security and Human Rights, and this is by no means an exhaustive list. An early ancestor of the corporate and social responsibility declaration, which is a provision in international JOAs of relatively longer standing, is the statement by the parties that they at all times conduct themselves in relation to the JOA in a manner which would not violate any laws or regulations which prohibit bribery, corruption or unethical practices.8 Those laws and regulations might be declared to be the laws and regulations of the country in which the petroleum project is being undertaken, or the laws and regulations of the party’s own country of incorporation, such as the Foreign Corrupt

8

AIPN JOA §20.1; OGUK JOA §22.4.

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Practices Act 1977 in respect of the United States. In the United Kingdom, a new draft bribery bill was introduced in March 2009, intended to replace a collection of bribery and corruption legislation which has been in force variously since 1889, 1906 and 1916. Regard might also be had to any applicable international accords (eg, the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (1997)). The legal status of any of the declarations referred to above can be unclear. A simple statement by a party of an intention to abide by the terms of a particular protocol might not form an actionable commitment whereby a proven breach of that declaration would be capable of being enforced by the other parties against the declarant. However, if the commitment of a party is phrased as a covenant or as a warranty and a representation given by a party (see below), it could be possible for any other party to bring an action to enforce an ongoing commitment or to recover damages for any losses which can be proven to have arisen from a breach. The JOA might even provide that each party undertakes to indemnify each other party in respect of any loss, liability or penalty which any other such party might incur because of a breach by the indemnifying party of any of the relevant protocols.9 17.3

Entire agreement and amendment The purpose of the entire agreement clause is to state that all of the rights, interests, covenants and obligations which exist between the parties in respect of the commercial transaction represented by the JOA are captured in that one contract, such that any accords, understandings or representations which preceded the execution of the JOA are excluded, and that the possibility of the later introduction of any external evidence which might modify the terms of the JOA is also excluded. Thus, the parties will need to satisfy themselves that the JOA (which will include the various schedules or appendices to the main body of the JOA, such as the accounting procedure) is indeed the exclusive statement of the terms of their commercial relationship.10 In the context of the JOA, the entire agreement clause will need to be qualified so that it includes a reference to the various other agreements which together form the overall commercial relationship which is created by the JOA, such as the following: • any warranty disclosure letters and legal opinions (see below); • any data exchange agreements (see above); • any agreements for the secondment of personnel (see below); • any agreements which record any other supplements to or amendments to the JOA (see below); • any collateral support which has been provided by a party in respect of its commitments under the JOA (3.2); • any agreements which have been entered into by the parties for the processing and/or transportation of petroleum downstream of the delivery point (4.3);

9 10

AIPN JOA §20.1. AAPL JOA 810 §26.5.5; AIPN JOA §20.12; CAPL JOA §1.11; OGUK JOA §31.2.

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• • • • • • • •

any ancillary arrangements which have been made in recognition of an exclusive operation (5.2); any provision for a contracted operator (6.5); any petroleum lifting agreements (9.2); any direct agreements or other similar agreements required by a party in connection with the financing of its interests (10.2); any decommissioning security arrangements (13.3); any farm-out agreements (see Appendix C); any agreements which are required in connection with the unitisation of the concession area to which the JOA relates (see Appendix D); and any agreements which are required in connection with the sub-division of the concession area to which the JOA relates (see Appendix E).

The entire agreement clause might also make an express reservation in respect of any pre-JOA arrangement (2.3) which continues to bind the parties despite the existence of the JOA. Thus, it will be apparent that a simple statement that the JOA represents the entire agreement between the parties concerning the subject matter of their relationship could, because of the significant number of qualifications which might require to be made to that statement, be something of a misnomer. In the AIPN JOA, the entire agreement clause refers only to the text of the JOA as reflecting the exclusive agreement of the parties,11 albeit that the definition of that agreement includes any exhibits to the agreement, which in turn will include any crude oil lifting agreement (9.2) and the accounting procedure (see Chapter 16). A similar principle applies in respect of the OGUK JOA,12 wherein the definition of that agreement includes its schedules and so includes any associated agreements (4.3) and also the DSA (13.4). The JOA usually also provides that once it has been executed, it can be amended only by unanimous agreement of all the parties, except that any deemed amendment of the JOA which is effected by the severance of an invalid provision will not require the approval of the parties.13 Amendment of the JOA is not an item which should be open to passmark voting at the OpCom (7.4). If there is a novation agreement which effects a transfer of interests in respect of the JOA (10.2), then because that agreement is executed between all of the parties, it is sometimes also used a vehicle for reciting any amendments to the JOA which the parties might wish to make, resulting in a combined novation and amendment agreement. At a minimum, such amendments could relate to revising the identity of the parties (3.1) and the extent of their PIs (3.3). 17.4

Force majeure The JOA will usually contain a force majeure clause,14 the principal purpose of which

11 12 13 14

AIPN JOA §20.12. OGUK JOA §31.2. AAPL JOA 810 §26.5.5; AIPN JOA §20.9; CAPL JOA §1.09; OGUK JOA §31.3. AAPL JOA 810 §25; AIPN JOA §16; CAPL JOA §16; OGUK JOA §25.

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is to relieve a party from the liability which it might otherwise incur for a failure to perform its obligations as required under the terms of the JOA where that failure is caused by a defined event of force majeure. The actual obligations under the JOA for which force majeure relief is and is not available are considered in more detail below. The definition of a ‘party’ in respect of the force majeure clause should, for the sake of clarity, be expressed to include the parties to the JOA, in their capacities as holders of their respective PIs, and also the operator in its separate capacity as such.15 If anything, it is the operator which is the entity most likely to need to claim force majeure relief. The doctrine of force majeure is a creature of contractual innovation, the precise extent of which will need to be agreed between the parties in the terms of the JOA. Force majeure is not a term of art in English law16 and the JOA will define carefully the parameters of the force majeure relief which is available to the parties.17 What constitutes force majeure might be defined specifically in the JOA, or the JOA might instead apply the same definition as is used in the concession for the sake of consistency (if the concession actually defines force majeure, which is not always the case). The AIPN JOA allows an option for either of these formulations to be applied.18 The fundamental requirement for the definition of a ‘force majeure event’ is that it be an event which is genuinely beyond the control of a party which claims relief. Force majeure relief is often conceived as applying only to operational or technical problems which affect a party, but beyond this force majeure relief could equally be claimed in respect of changes of law, economic hardship or general administrative inconvenience, unless these items are excluded from being claimable as force majeure under the JOA. The conventional formulation in commercial contracts is that force majeure affords relief from any liability which the affected party might have to any of the other parties for a failure to perform an obligation, and that it should not suspend the requirement for performance of the obligation itself. Indeed, in many force majeure formulations the requirement of the affected party to continue to perform its obligations to the greatest extent possible is expressly stated (and rightly so). Despite this, however, in most JOAs the force majeure provision operates principally so as to suspend the obligation of the affected party to perform the affected obligation, rather than to afford relief from any liability attaching under the JOA for that failure. This relatively unorthodox posture in the JOA is perhaps a necessary recognition of the particular way in which the JOA is typically structured, in terms of the obligations and the liabilities of the parties, in that the limitations on the liability of the parties which the JOA applies (and particularly the limitation on the liability of the party-operator (12.1)) means that there will be relatively little in the way of liability to which the relief afforded by the force majeure provision would apply. Where force majeure relief is applied to suspend an obligation of an affected party, it should apply to that obligation only to the extent that the affected party cannot perform that obligation, rather than automatically to the entire obligation. 15 16 17 18

OGUK JOA §25.1. Hackney BC v Doré [1922] 1 KB 431. British Electrical and Associated Industries (Cardiff) Ltd v Patley Pressings Ltd [1953] 1 WLR 280. AIPN JOA §16.2.

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Consequently, an examination of the event giving rise to a claim for force majeure relief will be necessary in order to assess whether a prevention of the intended method of performance of the affected obligation might still permit performance of that obligation by an alternative method. Most force majeure formulations identify certain events or circumstances which are expressly excluded from being eligible for force majeure relief. Key among these excluded items in the JOA is the failure of a party to make a payment which is due, and a lack of funds experienced by a party (for whatever reason) is typically disallowed from being open to a claim for force majeure relief.19 In the context of the JOA, this will preclude a party from claiming force majeure relief where it is unable to pay its required share of the cost of the joint operations through the cashcall or the invoice request mechanisms (16.2). The JOA might also exclude the ability of a party to claim force majeure relief for a failure to furnish any collateral support which might be required under the terms of the JOA (3.2). This formulation is suggested, for example, in the AIPN JOA.20 Making these sorts of obligation absolute and not capable of attracting force majeure relief reflects the essential role of the party under the JOA – to pay up when required, so that the joint operations are properly performed and the integrity of the concession is not jeopardised. This is the principal obligation of the parties under the JOA, which will make questionable the real value of the force majeure provision (at least in respect of the parties). If a claim for force majeure relief is made in respect of the JOA, that claim may need to be synchronised with any corresponding claim for force majeure relief which is made under the concession (and vice versa). Thus, for example, a failure of the parties to perform the minimum work obligations under the terms of the concession (1.1) could lead to a claim for force majeure relief under the concession, and reciprocally the operator might make a claim for force majeure relief in respect of its obligations under the JOA. Any extension to the duration of the concession because of an event of force majeure thereunder (2.1) will also extend the JOA accordingly. The wording of the JOA should also make clear whether the relief which is to be afforded by the force majeure provision will apply retrospectively (ie, back to the date of the relevant event), or only going forward from the date when the affected party has actually declared its claim for force majeure relief. 17.5

Governing law The JOA should state which body of substantive law will apply to govern the JOA.21 The governing law which is selected in the JOA will be the system of law which applies to the interpretation of the content and the effects of the JOA in the event of a dispute. There is also a wider import of what would in practical terms be the governing law in the JOA, in that the obligation of the operator to act in accordance with all applicable laws and regulations (6.3) means that it will become necessary to

19 20 21

AIPN JOA §16.1; OGUK JOA §25.1. AIPN JOA §16.1. AAPL JOA 810 §26.4; AIPN JOA §18.1; CAPL JOA §1.06; OGUK JOA §29.

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consider carefully the true meaning of that commitment. As for the actual choices of governing law in the JOA, local law might be expected to apply to a purely domestic transaction (ie, according to the location of the petroleum project and/or the nationality of the grantor of the concession), but any international parties could be unwilling to apply that local law to govern the terms of their JOA (notwithstanding that the local law may well govern the concession). Thus, it becomes necessary to consider a neutral governing law. English law and New York law are popular choices of a neutral governing law because they are particularly suited to interpreting the nuances of agreements drafted in the English language, as outcomes can be predicted with greater certainty because of the guidance which the substantial bodies of case law and statute law possessed by each legal system provide and because they each recognise doctrines such as separate legal personality, sophisticated security interests, trusts and fiduciary duties (all of which are relevant to the JOA). A popular formulation which applies in the governing law provisions in many commercial agreements is that the conflicts of laws provisions of an agreement’s governing law, which might otherwise apply to allow that agreement to be removed to the application of some other governing law, will be disapplied from being effective in that agreement.22 Another formulation which sometimes appears states that the specified governing law will apply except to the extent that the governing law is incompatible with any applicable principles of international law, whereupon that international law will apply in the event of such incompatibility.23 However, because of the risk of uncertainty over what international law might say, this formulation is less than ideal and should be avoided. In the unlikely event that there is no express choice of governing law in the JOA, a court may decide which governing law to apply to the JOA, to be determined in accordance with the conflict of laws principles of the jurisdiction within which that court resides. Under English law, the courts will in particular be guided by the application of the Contracts (Applicable Law) Act 1990, which enacts the 1980 Rome Convention on the Law Applicable to Contractual Obligations, which applies in respect of contracts entered into during or after April 1991. The Rome Convention has been replaced by a new convention, Rome 1,24 in respect of contracts entered into during or after December 2009 (but not with retrospective effect). 17.6

Health, safety and the environment A key expectation of all the parties is that the joint operations will be conducted in a manner which respects all applicable laws and regulations which relate to the imposition of minimum standards for the protection of health, safety and the environment (HSE). This will be a responsibility of the operator. In the context of petroleum production operations on the UKCS, a person will be

22 23 24

AIPN JOA §18.1. AIPN JOA §18.1. Regulation (EC) 593/2008.

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required to be appointed as the ‘duty holder’, which is a term identified by law25 as the person having responsibility for the preparation, submission (to the Health and Safety Executive) and implementation of a safety case in respect of a defined installation. The presumption is that the operator will be the duty holder for these purposes. The adherence of the parties, through the operator’s activities, to HSE standards should mitigate the chances of an event which might result in litigation concerning the joint operations and will also be a real concern to most petroleum companies, for which the protection of reputation in this regard will be critical. It is therefore usually a requirement under the JOA that the operator establish a suitable HSE plan for the operation of the JOA.26 That HSE plan will be drafted by the operator, with an eye to the standards and procedures which are generally comparably applicable elsewhere in the sector and also to the applicable legal and regulatory requirements (both domestic and international). If the JOA contains provision for an OpCom (7.1), the role of the OpCom in respect of the implementation of HSE provisions will need to be considered. Some JOAs adopt the view that the OpCom’s involvement in the HSE plan should be minimal and that the operator should present it to the OpCom for information only, while in other JOAs the importance to all parties of HSE compliance is recognised through approval rights being given to the OpCom, such that once the operator has prepared the HSE plan, the OpCom might be required to vote for its acceptance and implementation; thereafter the OpCom may be entitled to call for assessments (whether annually or more or less frequently) of how well the HSE plan is being implemented and operated.27 It may also be that external auditors will be appointed to verify the effectiveness of the HSE plan,28 and/or that any non-operating party will have its own similar audit right.29 The operator usually also undertakes to ensure that all of its contractors and any other third parties that are engaged in the performance of the services required under the JOA adhere to the HSE plan.30 As part of the HSE provisions in the JOA, the operator could also be required to establish and maintain a policy which prohibits the unauthorised consumption of drugs and alcohol.31 Despite the rights and obligations of the operator in respect of the determination of the HSE programme, it may be that a non-operating party is keen to see its HSE standards being applied to the performance of the operations under the JOA, and particularly so where that party believes that its standards are better than those which the operator proposes to apply. This is a good example of where a nonoperating party can make a valuable contribution to the performance of the operator’s role (see Appendix A). 25 26 27 28 29 30 31

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Offshore Installations (Safety Case) Regulations 1992 (SI 1992/2885). AAPL JOA 810 §5.10; AIPN JOA §§4.2(A), 4.2(B)(14), 4.12(A); CAPL JOA §3.05; OGUK JOA §6.12.1. AIPN JOA §4.12(B). AIPN JOA §4.12(C). AIPN JOA §4.12(F); OGUK JOA §6.12.3. AIPN JOA §4.12(D). AIPN JOA §4.12(E); OGUK JOA §6.13.

Peter Roberts

The principal option for the non-operating party in this circumstance is to seek to influence the operator’s choice of HSE standards, but if, after that, the nonoperating party is unhappy with the operator’s posture, the ultimate response would be for that party to transfer its interests under the JOA (see Chapter 10) or to withdraw from the JOA (see Chapter 11). 17.7

Insurance Under the JOA, the operator will undertake to effect and to maintain in force (for the duration of the JOA) certain insurances in respect of the joint operations and the joint property, with the costs of such insurances to be back-charged to the parties in accordance with their respective PIs as part of the costs of conducting the joint operations (3.3).32 Similar principles could apply in respect of insuring the property used in any exclusive operation (5.2).33 Where the joint operations have moved into the production phase (4.1), the JOA will rely for its effective performance on the existence of certain production, processing, storage or transportation infrastructure and the existence of insurance coverage in respect of the risk of loss of or damage to such infrastructure (with an obligation to apply any insurance recoveries towards the repair or reinstatement – see below) will help in protecting the underlying value of the petroleum project. There are several points to note regarding the mechanics of how the insurance provision is structured in the JOA.

(a)

Definition of the insurances Which insurances are required and the level of cover under those insurances (to be determined by reference to excluded events, insured amounts and deductibles) might be left to a shorthand such as those insurances which are required in consequence of a combination of the governing law of the JOA, the terms of the concession and which a reasonable and prudent operator (6.3) would procure, with a proviso that the OpCom can also take a view on whether any further insurances are required (or whether any insurances so effected can be dispensed with). Alternatively, the JOA might be very prescriptive about the various insurances and insured amounts which the operator is required to procure. At a minimum, the operator should be required to insure the joint property (see above) and beyond that the operator might seek insurance in respect of the risks associated with the construction of any necessary infrastructure or for more esoteric risks such as business interruption or political interference. The procurement of any thirdparty debt financing in respect of a party’s obligations under the concession and the JOA might result in the lender (or lenders) requiring a full insurance package to be arranged. Beyond a base level of essential insurances (which will be defined in the JOA), it may be an option for a party to decline to participate in any further insurances which the operator is arranging.34 Thus, such a non-participating party will not benefit from

32 33 34

AAPL JOA 810 §21.1, Exhibit B; AIPN JOA §4.7; CAPL JOA §3.11; OGUK JOA §8.1. AIPN JOA §4.7(F). AIPN JOA §8.1.1.

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those further insurances; neither will it be obliged to contribute to their costs. However, it is an option for such a non-participating party to arrange its own replacement insurances35 (which it would do if it felt that it could negotiate a better deal for doing so than the operator could procure). The JOA should oblige any party which arranges its own insurances to ensure that such cover does not prejudice the insurances which have been effected by the operator. In the context of a UKCS JOA, the essential insurance which the operator will be required to procure is insurance against liability for pollution events under the industry-wide OPOL agreement.36 This should be an insurance cost which is borne between all of the parties and from which a party should not be able to recuse itself. (b)

Identity of the insurers The operator’s obligation will be to source the insurances from reputable third-party insurers, but where the operator has access to its own affiliated insurance business, it might seek to place the insurances with that business. This should not concern the parties if the operator’s affiliated insurance business is objectively reputable and the premiums which it proposes to charge are in line with market rates, and the principles which relate to the letting of any affiliate contract (8.5) will apply. If a non-operating party is in a position to offer similar affiliate insurance underwriting cover, the same principle should apply.37 The operator might also be able to procure insurance under a federal contract arrangement (8.6).

(c)

Insured interests The operator might be the only party named as the beneficiary of the insurances and may be obliged under the terms of the JOA to hold those insurances (and any proceeds payable under those insurances) on trust for the parties. Alternatively, each party might be specifically noted on any policy of insurance which the operator has effected as a named co-insured, so that each party can make its own claim against that insurance policy if the circumstances arise.38 In either of the above cases the insurers should be required to procure a waiver of subrogation in favour of each party. Under English law, an insurer which pays out to an insured party has the right (which could be derived from express or implied contractual terms or through the operation of law)39 to step into the shoes of the insured party in order to make a claim for damages against any third party which caused the loss to the insured party which led to the insurance claim, if the insured party would have had a right to make a claim itself against that third party. As a consequence, the insured party’s rights against that third party are said to be subrogated to the insurer, but the insurer’s rights of action will not be absolute in this regard – those subrogated rights will be

35 36 37 38 39

AIPN JOA §4.7(D); OGUK JOA §8.1.3. Offshore Pollution Liability Agreement (September 4 1974); OGUK JOA §8.2. AIPN JOA §4.7(C). AIPN JOA §4.7(G). Yorkshire Insurance Co v Nisbet Shipping Co [1962] 2 QB 300; Esso Petroleum v Hall, Russell & Co Ltd [1989] AC 643.

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defined by reference to any limitations (eg, contractual liability allocations) which would otherwise have applied between the insured party and the third party. The waiver of subrogation is therefore a shorthand term for an express act of relinquishment by an insurer of its rights to so make a claim against a third party which caused that insurer to have to make an insurance payout to an insured party. In the context of the JOA, such a waiver of subrogation would be given to each party (and also to the operator in its capacity as such), although the JOA might also provide little in the way of rights of action between the parties which could actually be subrogated to the insurer. Where any party arranges its own insurances, outwith the operator’s insurance programme, those other insurances should also be accompanied by a waiver of subrogation in favour of the other parties (and the operator in its capacity as such). (d)

Insurance mechanics The JOA should require the operator to supply the parties with copies of the policies of insurance which it has effected on their behalf, and with periodic proof that the insurance premiums have been paid and that the policies are valid and in force. The operator should be obliged to file and diligently to proceed with all insurance claims in the event of a circumstance arising which would necessitate a claim, and to credit any recoveries from the insurers to the parties (according to their respective PIs). The operator might also be required to ensure that any contractors engaged in the performance of works in pursuance of the joint operations maintain their own necessary insurances (and that the parties, and the operator in its capacity as such, will be afforded waivers of subrogation from the relevant insurers).40 Insurance recoveries should be credited to the joint account and thereafter applied (or disbursed between the parties according to their respective PIs) by the operator. There may be some debate about how the parties should be obliged to apply any insurance proceeds which are recovered to the repair or reinstatement of the insured infrastructure in the event of an incident affecting that infrastructure which has resulted in an insurance payout. If the insured incident happens when the JOA is in its relative infancy, there is more of a likelihood that the parties will wish to repair or reinstate the infrastructure in order to continue with the performance of the concession, and so the insurance proceeds will be applied towards that repair or reinstatement. However, if the incident happens towards the end of the lifetime of the JOA, then there is more chance that at least one of the parties might be disinclined to apply the insurance proceeds towards the repair or reinstatement of infrastructure which may have been approaching the end of its useful economic life anyway, preferring instead to take its share of the insurance proceeds for other purposes. This may be an issue which is voted on by the parties. The presumption in the JOA therefore could be towards the application of the insurance proceeds for repair or reinstatement, unless otherwise agreed by the parties in accordance with the applicable voting provisions at the OpCom (7.4).

40

AIPN JOA §4.7(H); OGUK JOA §8.1.5.

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17.8

Litigation management It may be that in the course of the performance of the joint operations, some or all of the parties become the recipient of unwelcome litigious proceedings (or some other notification of a claim) from a third party. That third party might be a private entity (eg, where a person alleges that in consequence of some aspect of the performance of the joint operations that person has suffered damage to its property or commercial interests), or it might be a government agency (eg, in connection with an alleged pollution event involving the joint property). The conventional approach in the JOA is that the operator will have the right (and the obligation) to represent the parties in the defence of such proceedings or claims.41 In doing so, the operator may retain external legal counsel to provide assistance to the operator (with the costs of doing so to be back-charged to the parties through the joint account (16.2)). It makes sense for the conduct of such claims to be managed solely by the operator in the interests of efficiency, although any dispute between the parties inter se, or in respect of the prospective liability of the operator, will need to be addressed differently (see below). In recognition of the operator’s role in the event of such claims, the JOA usually obliges each party to notify the operator of a claim which is received by a party in respect of the joint operations.42 The insurance obligations under the JOA (see above) are also intended to afford protection to the parties against the economic consequences of being sued successfully. Thus, in the event of such claims the respective insurers should be notified promptly by the operator, and those insurers may well thereafter take an active interest in the conduct, and the prospective settlement, of that litigation. When it comes to settling any such claims, there is a balance to be struck. Ostensibly, the operator will have the right under the JOA to settle any claims on behalf of the parties in such manner as it feels to be prudent, but the parties may be nervous of giving such a right to the operator without some sort of limitation, since they will ultimately have to bear the costs of the settlement. Consequently, the JOA might impose a financial limit (to be determined per claim and in the aggregate) on the value of the settlement which the operator can commit to without the prior approval of the parties; beyond that level, the consent of the parties will be necessary.43 The JOA usually also provides that each party may (at its own expense) appoint its own separate legal counsel to act in protection of the interests of that party in the conduct or settlement of any such claims, although this provision should be expressed to be without prejudice to the primacy of the role of the legal counsel selected by the operator to act on behalf of all the parties. The JOA should also make clear that a party cannot settle its share of a claim which is made against all of the parties without first securing the approval of the OpCom. This is intended to prevent the parties being picked off, one by one, in respect of a claim which they should be prepared to defend.

41 42 43

AAPL JOA 810 §22.3; AIPN JOA §4.5; CAPL JOA §20.01; OGUK JOA §8.3.2. OGUK JOA §8.3.3. AIPN JOA §4.5;OGUK JOA §8.3.2.

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The JOA might seek to maintain a distinction between claims made against a party which relate to the joint operations (to which the foregoing analysis will apply), and claims made against a party in a private capacity, not related to the joint operations (in respect of which the affected party shall have sole responsibility for the conduct of the claim). However, it might not always be possible to maintain such a clear distinction in practice, and consequently perhaps the more prudent assumption to make is that a claim made against a party will probably be connected with the joint operations, in the absence of any clear and compelling evidence to the contrary. The JOA might also provide that the conduct of litigation involving an exclusive operation will be effected only by the exclusive operation participants.44 The principal relationship which these provisions in the JOA seek to address is that of a third party versus the parties in respect of the joint operations. However, it may be that behind that relationship there are issues to be addressed relating to the possible liability of the operator to the parties (12.1) or relating to the liability of the parties inter se (12.2). In either of these circumstances the parties will retain their own legal counsel and it will not be appropriate for the operator to retain legal counsel at the expense of the parties. 17.9

Notices The JOA will contain provisions determining the method of giving and receiving notices between the parties.45 These notices might be of a relatively routine nature (eg, the notification of a forthcoming OpCom meeting (7.2) or the provision of an authority for expenditure by the operator (8.2)), or could be notices of relatively major occurrences (eg, the notification by a party of its intention to transfer its interests under the JOA (10,2) or to withdraw from the JOA (11.2), the notices to be issued by the operator in the event of a party’s default (14.2) or the notification of a prospective dispute (15.1)). The notices provision is intended to ensure that notices are properly served on the appropriate person, and that they can be shown to have been delivered and received in a timely manner such that the JOA is operated efficiently and the scope for disputes between the parties about the efficacy of giving proper notices is reduced. This can be a critical area to get right, and it has been held under English law that a failure of a party to comply with the strict requirements of a notices provision will not be excused and that a notice served in any other manner will be ineffective.46

17.10 Secondment The JOA might provide that a non-operating party can locate a limited number of personnel in the operator’s office in order to assist with the performance of the joint operations, in accordance with the terms of a right to effect such a secondment.

44 45 46

OGUK JOA §8.3.5. AAPL JOA 810 §§8.7, 8.8; AIPN JOA §17; CAPL JOA §22.00; OGUK JOA §30. in Mannai Investment Company Limited v Eagle Star Life Assurance Company Limited [1997] 2 WLR 945 Lord Hoffman commented that “if the clause had said that the notice had to be on blue paper, it would have been no good serving a notice on pink paper”.

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For these purposes, the secondee might be a nominated individual or an entire team of personnel which has been brought together for a specific purpose. Thus, the AAPL JOA conceives of the formation of entire teams for the study of the feasibility of certain proposals or for the conduct of a particular project which shall become part of the operator’s resource.47 It is debatable whether a project team is effectively a subcommittee, but without the control which the JOA might typically exercise in respect of a subcommittee (7.3). In respect of JOAs where there is no provision for an OpCom or a subcommittee, a project team might well be the nearest thing to an OpCom, because of the measure of management involvement which the project team mechanism bestows on the non-operating parties. This analogy is particularly apparent in the AAPL JOA, where provision is made for each party which participates in a project team to have a participation right equating to its particular participating interest share.48 The operator will seek to reserve the right to determine the number of secondees and the terms on which those secondees are to be retained,49 and the JOA might limit the involvement of secondees to exceptional circumstances where a certain expertise is required.50 Whether the costs of the secondee should be borne by the seconding party or can be back-charged by the operator to all parties according to their respective PIs (given that the secondee will be acting for the benefit of all the parties)51 will be a matter for negotiation in the JOA. Where such a secondment is in prospect, the seconding party and the operator should enter into a form of secondment agreement in order to record the basic terms of the arrangement. The JOA might prescribe the form of the secondment agreement52 or the text of the agreement might be left to be implemented only if the occasion of a secondment arises. The AIPN has a model form secondment agreement.53 Whichever route is selected, the secondment agreement will address issues such as the identity and the qualification of the secondee, the purpose and duration of the secondment, how the costs of the secondee are to be borne (see above) and the overall mechanics of the secondment exercise. Secondments might not be encouraged by the operator, which might prefer to perform the joint operations using its own staff and without the observation, or even the interference, of a seconded member of a non-operating party. By the same token, therefore, having a secondee in place in the operator’s organisation can give a nonoperating party access to a degree of information about the manner of the performance of the joint operations, or of the operator’s general behaviour, which might otherwise ordinarily not be forthcoming under the terms of the JOA. 47 48 49 50 51 52 53

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AAPL JOA 810 §12. AAPL JOA 810 Exhibit G. AIPN JOA §4.3(B); OGUK JOA §6.11. AIPN JOA §4.3(C). AIPN JOA §4.3(E); OGUK JOA §6.11.2. AIPN JOA §4.3(D). Available at www.aipn.org.

Peter Roberts

Where the JOA contains a government participation right (3.4) and the principal intention of the government when exercising such a right is to secure information about the management of the JOA, the presence of a secondment provision might be of value to the operator if it proves to be more attractive to the government than actual participation in the JOA. The terms of the prevailing mineral law or of the concession might also require the concession holders to provide training, education and employment opportunities to local nationals, which could effectively be realised through a form of secondment agreement. A bespoke secondment agreement which is appended to the JOA can easily be criticised for being overly detailed and too cumbersome in light of the reality that most secondments tend to be agreed on an ad hoc basis, but in the circumstances of seconding a government employee such an agreement could prove invaluable because it indicates to the government the precise extent of the secondee’s rights and obligations and the expectations of the parties. There is usually also a debate to be had about where any liability should be allocated for any loss or damage arising which is attributable to the acts or the omissions of a secondee. One option is for that liability to be borne by the party which is responsible for the provision of the secondee; alternatively, it may be that the liability will be borne by all parties through a back-charge through the joint account. There might also be some formulation to be applied whereby the principles which govern the operator’s liability to the parties (12.1) will apply similarly in respect of that secondee. The OGUK JOA provides, for example,54 that any work which is undertaken by the secondee will be regarded as a joint operation, and so the operator will assume responsibility for that work and will benefit accordingly from the limitations on the operator’s liability which the JOA provides. Under the AIPN JOA, a similar provision applies, but with further options for how the liability for a secondee should be allocated. 17.11 Taxation A key consideration for the parties in their decision to establish an unincorporated, rather than an incorporated, joint venture (1.6) is the tax treatment to which the parties will be subject in respect of their relationship as parties to the JOA. In general terms, the incorporated joint venture model means that all expenditures which are incurred in the prosecution of the petroleum exploration and production activities must be claimed by the project-specific joint venture company and will be capable of deduction only against the revenues which are generated from the profits (if any) accruing to the joint venture in order to arrive at the net corporate income tax liability of the joint venture. Distributions will be made from the joint venture to the individual shareholders by way of dividends and will be taxed accordingly in the hands of the shareholders. In contrast, under the unincorporated joint venture model each party can deduct its share of the expenditures which it incurs against the profits which it makes, and those profits and expenses can accrue to a party from a wider basis than solely the 54

OGUK JOA §6.11.2.

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project to which the joint venture relates. This formulation may be more advantageous to a party and in part explains the preference for reliance on the JOA model in the upstream sector. Each party will, in the unincorporated joint venture model, be responsible for the payment of its own individual tax liabilities (which will vary according to the circumstances of each particular party, but which could be determined by reference to the jurisdiction in which a party is incorporated, the jurisdiction in which a party ordinarily carries on its business or the jurisdiction in which the petroleum project is located and the joint operations are performed), although under the terms of the JOA the operator might assume responsibility for filing certain tax returns on behalf of the parties. The expectation of the parties is that their taxation liabilities will be several and not joint. Consequently, the JOA might recite a provision whereby each party declares that it assumes sole responsibility for its own individual tax liabilities and undertakes to indemnify each other party against any liability which might be levied against any other party in respect of that tax liability.55 In the absence of a specific tax indemnity, the inter-party liability allocation regime in the JOA (12.2) might be applied so as to achieve the same result. The JOA might also contain specific wording which governs election as to whether to constitute a tax partnership for the purposes of the potential application of certain provisions of a defined tax code (eg, the US Internal Revenue Code of 1986) between the parties.56 This wording will be applicable where one of the parties is a US-incorporated entity and will benefit that party. The JOA might provide that any such tax elections will be made by a party which does not expect to benefit from them on condition that the electing party is indemnified (against any risk which it might assume in consequence of making the election) by the party expecting to benefit from it. 17.12 Third-party involvement Most commercial agreements provide that a party can appoint a third party to discharge at least some of that party’s obligations, and under the JOA this principle applies most obviously to the appointment of contractors by the operator (8.3). Such a contractor will be a third party and will obviously not be a party to the JOA, and yet the JOA could have some application to determine the rights and the obligations of that contractor. Where the JOA expressly identifies a third party and by a term of the JOA a benefit is purportedly conferred on that third party, the parties should recognise the effects of the Contracts (Rights of Third Parties) Act 1999, which could allow that third party to enforce the benefit of the JOA which is ostensibly conferred in its favour, notwithstanding that such third party is not actually a signatory to the JOA. In the context of the JOA, the principal example of where a third party could claim a right to enforce the benefit of the JOA is in respect of the liability limitation

55 56

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AIPN JOA §14.2. AAPL JOA 810 §20.1; AIPN JOA §14.3; CAPL JOA §1.13; OGUK JOA §22.3.

Peter Roberts

and indemnity protection provisions (see Chapter 12). Thus, under the customary liability allocation provisions of the JOA, the definition of a ‘party’ will include any contractor which has been appointed by that party, such that the contractor would expect to benefit from any indemnity which has been granted by a party to the party which appointed that contractor. The benefit of the indemnity which is given to the party is extended to the contractor by application of the 1999 act, which specifically recognises that an identified third party might seek to avail itself of terms in an agreement which exclude or which limit liability.57 The parties to the JOA may be nervous of accepting the principle that certain third parties can seek to enforce the benefit of an agreement to which only they and not the third party are privy, unless this is what the parties specifically intended. In the interests of certainty, therefore, the JOA should contain the wording necessary to make it clear that the protections afforded by the 1999 act are not intended to apply in favour of any unintended third parties.58 Furthermore, where the JOA does confer a benefit on a third party to which the 1999 act applies, it is arguable that a novation agreement (10.2), which has the effect of extinguishing the novated agreement and bringing a new agreement into force in a way which could alter the third party’s entitlement (eg, by causing the benefit of the indemnity accruing to the third party to come from the transferee rather than the transferor) will require the consent of the third party under the terms of the 1999 act.59 Consequently, the parties should consider excluding the application of the 1999 act in order to ensure that the JOA can be novated without the need for such third-party consent.60 The 1999 act has an effective date of commencement which means that it applies only to JOAs entered into during or after May 2000, although any novation agreement which has been entered into in respect of any JOA, and the resultant new contract which such a novation will effectively create (10.2), mean that the 1999 act will thereby be brought into application. 17.13 Warranties and representations The JOA might contain a limited set of warranties and representations which are given by each party. The common feature of a warranty and a representation is that they are both statements of present fact made by a party in an agreement (at the time the agreement is executed and which might also be repeated during the lifetime of the agreement). A warranty is a contractual promise which, if breached, will give the party to which the warranty is given a right to sue the warrantor for damages (but, ordinarily, not to rescind the agreement, unless a misrepresentation has been incorporated as a warranty or if the breach of warranty amounts to a substantial failure in the performance of the agreement).61

57 58 59 60 61

Section 1(6) of the Contracts (Rights of Third Parties) Act 1999; OGUK JOA §28.2. AIPN JOA §20.6; OGUK JOA §28.1. Section 2 of the Contracts (Rights of Third Parties) Act 1999. OGUK JOA §28.3. Astley Industrial Trust Ltd v Grimley [1963] 1 WLR 584.

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A representation is a statement that is recorded in the agreement and that induced the entry of a party into that agreement, which if proved to be untrue (ie, the representation becomes a misrepresentation) will entitle the party to which the representation is made to sue for damages or even to rescind the agreement. Thus, for example, within the context of the JOA, each party might warrant and represent that: • it is validly incorporated; • it has the necessary corporate authority to execute the JOA and to perform the transaction represented by the JOA; • it has in place all of the necessary permits and consents; • it has legal capacity to be sued (which might need to be reconciled with a waiver of sovereign immunity where appropriate (15.7); • its interests are not encumbered; and • it is not engaged in any litigation or other proceedings which might adversely affect its ability to perform the JOA. A party’s commitment to principles of corporate and social responsibility (see above) might also be the subject of a separate warranty and representation. These warranties and representations are usually expressed to be given initially when the JOA is executed and certain of them might also be declared to have continuing effectiveness during the lifetime of the JOA. More specific warranties and representations (and a determination of whether those warranties and representations are effective only upon execution of the JOA or on a continuing basis) will be the subject of negotiation between the parties. The warranties and representations given in the JOA will usually be absolute and unqualified. Any qualification to a warranty and representation (eg, where a party wishes to make clear that its assets which are warranted to be free from encumbrances are in fact subject to a lender’s security interests) may be set out in the JOA or in a separate disclosure letter. At the time of execution of the JOA, each party may also be obliged to deliver formal legal opinions which confirm the accuracy of certain of the warranties and representations which are given in the JOA. Alternatively, such legal opinions might be the subject of a condition precedent (2.1) and will be required to be delivered after execution of the JOA.

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Appendix A: Operator and non-operator perspectives The primary constitutional distinction between the parties in any JOA is that which exists between the party which has been appointed to act as the operator and all other parties, which together are the non-operating parties. The comments made in this appendix presume that one of the parties has been appointed to act as the operator (6.2), and that the JOA makes provision for the constitution of an OpCom in order to represent the interests of the non-operating parties (7.1). Although together they are all parties, the operator and the non-operating parties may have differing perspectives about how the joint operations should be conducted under the JOA. These competing philosophies will need to be reconciled if the JOA is to be operationally feasible between all the parties. A.1

The operator’s perspective The concerns of the operator in respect of the management of the JOA relate to the following issues.

(a)

Freedom from undue interference The operator will require the freedom to undertake the joint operations without what it might regard as undue interference from the non-operating parties. In practical terms, the operator will prefer to be obliged to obtain the non-operating parties’ consensus only at the time of setting any relevant work programme and budget (WP&B) WP&B (8.1), without the additional burden of securing ongoing authority for expenditure (AFE) approvals (8.2). The operator will require the greatest possible latitude in its award of contracts for the conduct of the joint operations (8.3), including contracts for affiliate services (8.5) and federal contracting (8.6), and will prefer a voting mechanism at the OpCom which does not give the non-operating parties the ability to hinder unduly the execution of the joint operations (7.4).

(b)

Compellable financial commitments The operator will require that the non-operating parties be able to meet their cashcall or invoice request commitments as they fall due (16.2) and not jeopardise the conduct of the joint operations through a payment failure. To this end, the operator will have an interest in the creditworthiness of the non-operating parties and a need for the provision of collateral support in respect of those commitments (3.2) (although this is an issue which should apply equally between all parties regardless

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of the operator/non-operating party distinction), and in ensuring that the JOA contains a default mechanism which gives a defaulting party a proper incentive to make payments as they fall due (see Chapter 14). (c)

Flexible asset development The operator will require the latitude to develop the concession area (1.1) and the assets which are the subject of the joint operations (both the petroleum deposit and any petroleum production, processing, storage or transportation infrastructure) in the manner which it best believes will maximise the return on those assets (and consistent with the requirements of the concession).

(d)

Manageable information flows The operator typically recognises the legitimate interest of the non-operating parties in receiving information about the planned and actual execution of the joint operations, but will be unwilling to commit to unduly onerous obligations for the provision of such information. The operator will undertake certain limited reporting requirements under the JOA (6.3), and will also direct the non-operating parties towards an appreciation of the information which is made available to the nonoperating parties through the OpCom and other subcommittee meetings (7.2), as well as towards any information made available in consequence of the AFE process (8.2) and the contract award process (8.3).

A.2

The non-operating parties’ perspective The concerns of the non-operating parties in respect of the management of the JOA will relate to the following issues.

(a)

Adequate operational control The non-operating parties will wish to secure a fair measure of control over the operator’s conduct of the joint operations, in order to ensure that such conduct is exercised in a prudent manner. This could be achieved through a package of provisions relating, for example, to: • the operator’s obligation to obtain the non-operating parties’ consensus at the time of setting any relevant WP&B (8.1); • the securing of ongoing AFE approvals (8.2); • control of the award of all forms of contract for the conduct of the joint operations (8.3); and • a voting mechanism at the OpCom which gives the non-operating parties the ability to influence the execution of the joint operations (7.4).

(b)

Manageable financial commitments The non-operating parties will require a reliable forecast of expenditures associated with the conduct of the joint operations to which they will be required to contribute through the cashcall or invoice request mechanism (16.2), so as to ensure that they each have access to funds necessary to meet their respective shares of the cashcalls or invoice requests and are not placed in a position of potential default. In the extreme

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case a non-operating party may be concerned that the operator could make a cashcall or invoice request which is so far beyond the non-operating party’s ability to pay that the non-operating party is placed in default and could lose its interests under the JOA (see Chapter 14). Ultimately, the existence of a non-consent right (5.1) could protect the non-operating parties from being railroaded into a development which could lead to a default (subject to the limitations of the non-consent procedure). In response to these concerns, the non-operating parties should be able to exercise some influence over prospective expenditures at the time of setting any relevant WP&B (8.1), through the ongoing AFE approvals mechanism and through control of the award of all forms of contract for the conduct of joint operations and WP&B and AFE line item overspends. The non-operating parties will also be keen to manage the frequency and impact of cashcalls and invoice requests under the JOA, and to ensure that the penalties for a party’s payment failure are not unduly harsh. (c)

Compellable asset development The non-operating parties will be concerned to ensure that the operator gets on with developing the concession area (1.1) for the benefit of all parties and does not have the ability to allow the concession area to be developed to anything less than its full potential because the operator has a corporate preference for undertaking any other unrelated operations. In practice, the concession typically sets out a timetable for the carrying out of certain minimum work obligations (1.1), and the government will usually have an expectation that its natural resources will be developed expeditiously by its appointed concession holders, both of which could give some impetus to the operator to carry out the joint operations. Beyond this, the non-operating parties might require the operator to make specific work programme commitments in the JOA and the JOA might also be careful to define the extent to which the operator owes a fiduciary duty to the nonoperating parties (see Appendix F).

(d)

Comprehensive information flows The non-operating parties will require a timely, adequate and manageable flow of information from the operator about the planned and actual conduct of the joint operations. At a minimum, this concern will be addressed through the operator’s reporting requirements under the JOA (6.3) and from the information which is made available to the non-operating parties at the point of setting any relevant WP&B, through the OpCom and other committee meetings, under the AFE process and the contract award process. Notwithstanding specific information rights in the JOA, there could also be a general duty of disclosure of relevant operational information between all of the members of a joint venture.1

A.3

Reconciling the operational perspectives There is a balance to be struck in any JOA between managing the interests of the

1

See, for example, “Duties of disclosure and confidentiality in JOAs” – GMD Bean, JENRL 1993 Vol 11 No 2.

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operator (which, broadly, wants to be free to perform the joint operations without constraint imposed by the unreasonable interference of the non-operating parties) and the interests of the non-operating parties (which, broadly, want to be protected from being railroaded into overwhelmingly expensive operational activities by an aggressive operator and which want to exercise a fair measure of control over the operator’s intentions). From the operator’s perspective, the protections which the non-operating parties might seek to engineer in the JOA in order to protect themselves in this situation could in turn expose the operator (and the other non-operating parties) to the risk of abuse by any non-operating party which might have a reason for diverting the proper progress of the JOA for its own purposes. While these competing interests are not without merit, the risk to the operator when faced with new entrant non-operating parties in a tight economic scenario is that the protections which have been historically engineered into the JOA in order to protect the non-operating parties’ legitimate interests are interpreted and applied unreasonably and in a manner which frustrates the intended proper performance of the joint operations. Care will therefore need to be taken when negotiating the JOA to ensure that provisions which are intended to control the operator’s activities are not made capable of application with the object or the effect of improperly or unreasonably inhibiting the operator’s ability to act. The principal forum for the battle of wills between the operator and the nonoperating parties is the OpCom (where the JOA recites the concept of an OpCom (7.1)). The relationship between the operator and the non-operating parties, and the extent to which the non-operating parties can seek to exert control over the operator, can be examined from the language used in certain of the various model form JOAs.

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Model form JOA

Operator

Non-operating parties

AAPL 810 JOA

“Except as otherwise provided, the operator has the exclusive right and duty to conduct (or cause to be conducted) all activities or operations under this agreement. In performing services under this agreement for the nonoperating parties, the operator is an independent contractor, not subject to the control or direction of non-operating parties, except as provided in [voting procedures]” (§ 5.1).

No OpCom.

Peter Roberts

Model form JOA

Operator

Non-operating parties

AIPN JOA

“Subject to the terms and conditions of the agreement, the operator shall have all of the rights, functions and duties of the operator under the concession and shall have exclusive charge of and shall conduct all joint operations” (§ 4.2(A)).

“In the conduct of the joint operations the operator shall perform... in accordance with the decisions of the OpCom” (§ 4.2(B)(1)). “To provide for the overall supervision and direction of joint operations there is established an OpCom” (§ 5.1). “The OpCom shall have power and duty to authorise and supervise joint operations that are necessary or desirable to fulfil the concession” (§ 5.2).

CAPL JOA

“The operator will consult with the parties periodically…the parties delegate to the operator, on their behalf, management of the exploration, development and operation of the joint lands and management of the other joint property… the operator does not have any obligation to initiate or optimise the development of the joint lands” (§ 3.01A).

No OpCom.

“The operator is an independent contractor in its activities hereunder” (§ 3.03A).

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Model form JOA

Operator

Non-operating parties

OGUK JOA

“[ ] Is hereby designated and agrees to act as the operator under this agreement for the purposes of the exploration for and the production of petroleum within the licence area” (§ 5.1).

“Subject to the overall supervision of the OpCom the responsibilities of the operator in relation to the joint operations shall include...” (§ 6.2.1).

“Subject to all the provisions of this agreement the operator has the right and is obliged to conduct the joint operations by itself, its agents or its contractors under the overall supervision and control of the OpCom” (§ 6.1.1).

“There is hereby established the OpCom which shall exercise overall supervision and control of all matters pertaining to the joint operations” (§ 9.1).

Provisions in the JOA which variously impose general limits on the freedom of the operator to act are arguably defensible from the non-operators’ perspective because they impose some discipline on the operator, but there is always a balance to be achieved. This balance can be effected by providing in the JOA that there is no explicit control on the operator in any of these areas, but imposing a general requirement that the operator is obliged to contract in a manner which it reasonably believes to be in the best interests of the parties and the performance of the joint operations (which in turn will be evidenced by a requirement of the operator to show that the costs of such contracting which are to be passed back to the parties for their contributions are demonstrably comparable to objective market rates). It is arguable that the need for operator control mechanisms in the JOA is partly the fault of the operator, since (at the operator’s insistence) the JOA excludes any liability on the operator’s part for a failure to act which is anything other than wilful misconduct (or gross negligence), and even then these are each notoriously difficult levels of default to prove (12.1). Thus, because the JOA has no real remedy to cure the operator’s default, the JOA seeks to focus on prevention rather than cure, but this can open the door to the risk that a combination of certain provisions of the JOA might be used for the micro-management of the operator or even to frustrate completely the operator’s intent where a non-operating party is reluctant to proceed with any aspect of the joint operations for its own reasons. A.4

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To operate or not The JOA will be constituted between the operator and the non-operating parties, and

Peter Roberts

their respective perspectives have been considered above. However, each party should resist the temptation to take too dogmatic a stance, whether as the operator or as a non-operating party, in respect of a particular JOA because in other JOAs, in other circumstances or in another capacity, that party might wish to adopt an alternative position. The principle which is sometimes referred to in the context of JOAs as ‘partner drag’, whereby the non-operating parties should be obliged to follow the operator’s lead in order that the joint operations be properly performed, is a fair operational philosophy in the interests of getting things done, but there can be occasions where a non-operating party’s wish to question or comment on the operator’s proposals and to bring its own experiences to bear could be of some benefit to all parties. There is sometimes a temptation to believe that a non-operating party is just that and nothing else. However, even a non-operating party in a particular JOA could be an experienced operator in its own right in other projects, and that party could have a valuable contribution to make to the project for the benefit of the operator. An example of this situation arises where an incumbent national oil company is appointed as the operator in respect of a particular JOA, but the non-operating parties group is made up of a selection of highly skilled and experienced international oil companies which are all operators elsewhere. These non-operating parties could have invaluable experience which they would be willing to share with the operator and the JOA should be capable of acting as a conduit for such an interface.

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Appendix B: Partnership and the JOA

Notwithstanding that by entering into the JOA the parties commit themselves to a joint venture together, there may be reasons why the parties might wish to ensure that the association is not one which could fall within the legal definition of a partnership. Whether that might be the case will depend on an examination of the characteristics of the particular JOA, in light of the prevailing law of partnership, but it is also worth considering what the consequences of being found to be in a partnership actually are. B.1

Definition and consequences of ‘partnership’ The phrase ‘joint venture’ is not a term of art in English law and is not defined judicially or statutorily. In its ordinary meaning, therefore, a joint venture such as that which is represented by the terms of a JOA could have the appearance of being a relationship which fulfils the definition of a ‘partnership’. On the other hand, English law has created a statutory definition of a ‘partnership’, under the Partnership Act 1890, as “the relation which subsists between persons carrying on a business in common with a view of profit”.2 This relatively simple (and somewhat opaque) statement is then amplified by the application of several statutory rules which are intended to be applied in determining whether a partnership exists,3 of which the most relevant to the position of a JOA are as follows: • Any joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use of any of those components. • The sharing of gross returns does not of itself create a partnership, whether or not the persons sharing such returns have a joint or common right or interest in any property from which, or from the use of which, the returns are derived. • The receipt by a person of the share of the profits of a business is prima facie evidence that such a person is a partner in the business, but the receipt of such a share or of a payment contingent on or varying with the profits of a business does not of itself make a person a partner in the business.

2 3

Section 1(1) of the Partnership Act 1890; Morden Rigg & Co & Eskrigge (RB) & Co v Monks (1923) 8 TC 450. Section 2 of the Partnership Act 1890.

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A partnership need not be specifically constituted or operated as such, and can come into existence inadvertently between a group of persons carrying on business together if their activities can be proved to have met the definition of a ‘partnership’. On the other hand, the parties might actively wish to form a partnership. In this latter case the more common route is that the parties will enter into an express partnership agreement, rather than relying on the implication of the statutory terms of a partnership. The express partnership agreement will recite and modify the terms which are implied by the Partnership Act. Being in a partnership can have some consequences which the parties might be anxious to avoid the implication of into their JOA relationship (although it is also fair to say that sometimes the spectre of casting the JOA as a partnership is raised with an eye to consequences which might be more imagined than real). (a)

Taxation In the United Kingdom at least, under a JOA a party (assuming that party is an incorporated person) will be liable to pay corporate income tax on the revenues which result from the subsequent realisation of the petroleum which is produced, subject to a deduction of the expenses which were incurred by that party in connection with the production of that petroleum. Under a partnership, the individual partners will be taxed on the net profit which they each generate from the partnership’s activities (rather than that the partnership will be taxed as a distinct entity). Thus, the net position may be that there is no material difference from a taxation perspective to a person which is a partner in a partnership or a party to a JOA, and so the concern about the existence of a partnership in this respect should be considered accordingly.

(b)

Contracting limits and liabilities Under a JOA, it is ordinarily the case that the parties will agree that only the operator will have the authority to bind the parties, and that the operator is appointed to act as the agent of the parties (6.3). Thus, the operator will contract in that capacity with third parties (8.3). Each of the parties will be jointly liable as a matter of law to any third party, even if the relevant contract contains a provision which requires that third party to direct its claims against the parties through the operator as a matter of administrative convenience, unless the third party has expressly agreed to limit its rights of action to against the operator only. In a partnership each partner can contract with a third party and each partner can bind the partnership (and the liability of the partners will be joint),4 unless the partnership agreement restricts that authority as between the partners and any third party that deals with the partners knows of that restriction.5 The partners or the parties might also agree (in the JOA or in the partnership agreement, as appropriate) that any liability which they might have in a contract with a third party will be several and not joint, if this can also be agreed with the third party.

4 5

Sections 9,10 and 12 of the Partnership Act 1890. Sections 5 and 8 of the Partnership Act 1890.

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Thus, the liability of the partners or of the parties to any third party could, depending on the terms of that contract, be limited to the liability of one partner or one party, or could be joint or several. What is common to both the partnership and the JOA relationships which are outlined above is that any restrictions on the ability of any partner to bind the partnership or on any party to bind the JOA, or any ordering of liabilities between the partners or the parties, will be internal arrangements and will not affect the ostensible (ie, third-party facing) ability of a partner or a party to contract with a third party in defiance of those internal arrangements. As a consequence, a third party which contracts with a partner or a party and does not have knowledge of those internal arrangements should be able to enforce that contract equally against any or all of the partners or the parties, and will not be bound by their internal allocations of responsibility. (c)

Fiduciary duties The relationship between partners is essentially fiduciary in nature because of the very nature of the mutuality of trust which a partnership imports.6 Thus, the implication of a partnership will lead to the implication of certain fiduciary duties which would then have to be managed (see Appendix F). On the other hand, however, there are other circumstances beyond the existence of a partnership which might give rise to the allegation that fiduciary duties exist in the JOA, so if the JOA is clear about how it addresses the possibility of fiduciary duties, in whichever manner in which those duties might arise, this might be less of a concern. In summary, there might be little real distinction between a partnership and a JOA in light of the various consequences, and the effort which is put into distinguishing the JOA from a partnership could have little practical purpose.

B.2

The JOA as a partnership Most JOAs include a recital that the JOA relationship does not constitute a partnership (whether expressly or by implication).7 However, despite this stout protestation, it is the substance of the relationship which the JOA creates, rather than the form of the JOA and the simple denial that a partnership exists, which must be considered. In Weiner v Harris8 it was judicially noted that “it is not in the least conclusive that the partners have used a term or language intended to indicate that the transaction is not that which in law it is”. The point at issue, therefore, is whether, upon due consideration of the substance of the JOA, the unincorporated joint venture between the parties which is represented by the JOA might in fact constitute a partnership for the purposes of English law. In order to assess whether a JOA constitutes a partnership, it might be helpful to analyse further some of the aspects of a typical partnership and to apply that analysis against the analogous provisions of a JOA.

6 7 8

Helmore v Smith (1886) 35 Ch D 436. AAPL JOA 810 §22.1; AIPN JOA §14.1; CAPL JOA §1.05A; OGUK JOA §22.2. Weiner v Harris [1910] 1 KB 285, per Cozens-Hardy MR, and see also Adam v Newbigging (1888) 13 App Cas 308.

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(a)

Contributions and distributions In a partnership each partner is required to contribute a share of the capital which is then pooled, to be employed in the business of the partnership, and each partner will thereafter expect to receive a distribution of cash out of the profits of the business of the partnership. In the JOA each party will from time to time contribute its PI–based share of the costs which are necessary to allow the performance of the joint operations through the cashcall or the invoice request provisions (16.2), rather than there being an upfront pooling of capital contributions. The distribution which each party receives is one of its net petroleum entitlements in kind at the defined delivery point (9.1), rather than a share of the profits of the business as a whole. However, if the JOA gives the operator the ability to impose a single pre-funded cashcall to meet future expenditure expectations, such that there is effectively a pooling of capital for development purposes, and/or if the JOA allows the operator to sell the produced petroleum on behalf of all the parties and then to account to the parties for their share of the sales proceeds such that there is something like a cash distribution out of the profits of the business, then either of these aspects might be capable of being read as a greater indication of the existence of a partnership.

(b)

Accounting In a partnership accounts will be kept which show the profit and the loss of the business of the partnership. In a JOA, despite the operator having an obligation to keep accounts for the benefit of the parties in accordance with the terms of the accounting procedure (16.1), those accounts will differ significantly in their nature from true partnership accounts. Thus, the parties can examine the accounts which are maintained by the operator under the JOA so as to determine the costs incurred and the petroleum produced in association with the joint operations, but those accounts are unlikely to give an indication of the overall profit (or loss) which has been generated under the JOA for the benefit of all of the parties collectively. There is also legal authority under Australian law for the proposition that the absence of partnership accounts will be indicative of the absence of a partnership.9 However, if the scope of the JOA is extended to generating income from third parties from the use of infrastructure used for the joint operations which is shared among the parties (4.3), or if the JOA employs a construction whereby any profits earned by the operator through a federal contracting programme are declared and shared among the parties (8.6), then in either case this might require a form of accounting to show profits (or losses) accruing to the parties which is more akin to conventional partnership accounts.

(c)

Commitment Each partner has the right to participate in the management of the partnership business,10 which is similar to the participation rights which are granted to the parties

9 10

Beckenham v Port Jackson and Manly Steamship Co (1957) 57 SR (NSW) 403. Section 24(5) of the Partnership Act 1890.

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under the JOA through the operation of the OpCom (7.1) and the parties’ information rights (6.3). Further, similar to the voting control regime at the OpCom (7.4), issues arising in connection with the partnership business can be decided by a majority of the partners, except that changes in the nature of the partnership business will require the unanimous approval of all the partners.11 In a partnership agreement each partner is usually required to devote the majority of its time to the prosecution of the partnership business and for there to be joint effort between the partners. The Partnership Act also provides that if a partner carries on a competing, similar business, it must account to the partnership for the profits made in that competing business.12 The existence of any exclusive operations provisions in the JOA (5.1), by which a party might be able to decline to participate in a proposed joint operation or to propose an operation of its own, is not obviously compatible with this partnership principle. The presence in the JOA of any provisions which recognise the ability of the parties to participate in other, potentially competing business ventures (see Appendix F) is also inconsistent. However, if the JOA does not countenance the possibility of exclusive operations or does not recognise the possibility that a party might have an interest in a commercial venture outwith the JOA, there might be a reduced ability to refute the suggestion that the JOA relationship is a partnership. (d)

Employees A partnership is an entity which has independent legal capacity and is capable of employing persons directly.13 In contrast, in a JOA any employees who are engaged in the performance of the joint operations are employed directly by the operator (6.3) or directly by another of the parties and seconded in to the operator to assist (17.10). The joint venture which is represented by the JOA is not ordinarily an entity which is capable of granting an enforceable contract of employment to an employee.

(e)

Property interests As was identified above, the existence of joint property will not of itself be sufficient to prove the existence of a partnership. This will be of some comfort to the parties to a JOA, where there will often be references to joint property (4.1). A partnership has independent legal capacity and is capable of owing its own property,14 but a partner will not own a divisible share in that partnership property. Rather, a partner’s interest in the partnership property will be capable of realisation only when the partnership is eventually dissolved, the partnership property is sold and any surplus remaining after the liabilities of the partnership have been met is returned to the partners.15

11 12 13 14 15

Section 24(8) of the Partnership Act 1890. Section 30 of the Partnership Act 1890. Beckham v Drake (1841) 9 M&W 79. Section 20 of the Partnership Act 1890. Section 39 of the Partnership Act 1890.

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In contrast, in the JOA, once there is some joint property in the JOA relationship, the parties will be entitled to an undivided interest in that joint property, which will be owned by the parties according to their respective PIs (4.1)). (f)

Liability on transfer Under the JOA, where there is a transfer of interests the usual provision in the relevant novation agreement is that the transferor will, as between all parties, be discharged from any continuing liabilities after the effective date of the transfer of interests to the transferee (10.2). Similar provisions will apply in respect of the retirement of a partner from a partnership by agreement of the partners.16 However, the implication of the continuing responsibility of a party for liabilities associated with the decommissioning programme under the JOA (13.1) confuses this distinction, because it means that the transferor will not enjoy a full discharge from its continuing liabilities.

(g)

Termination Under the Partnership Act, a partnership can be dissolved by any partner giving notice to the other partners of an intention to dissolve the partnership17 or at the option of any partner if any other partner becomes bankrupt.18 In contrast, no such power or right exists in a party’s favour in the termination provisions in a typical JOA (2.1). Furthermore, under the Partnership Act the partnership will also be dissolved if it has been entered into for a single adventure or undertaking and that adventure or undertaking has terminated.19 This approximates to the loss of the concession in respect of the JOA, except that even if the concession terminates, the JOA can continue to subsist in certain circumstances (2.1), and the scope of the JOA might always be modified or extended (4.3). The view of most commentators is that the JOA is not, in substance, a partnership between the parties. Rather, it could be said that the JOA represents a platform for the collation of several separate persons that are all interested in carrying on an individual business for profit, albeit that such a platform will imply some commonality of interests between those persons. Each party has the objective of making a profit from the enterprise which the JOA represents, but that is not the same as saying that there is a joint profit motive between all of the parties together. However, this can be a fine point to make and much will depend on the particular JOA which is being analysed – in particular, the extent to which expenses and produced petroleum are shared by the parties. If that JOA applies at least some of the further refinements which are discussed above, it might be taken closer towards being argued to be a partnership by any person (whether a party or a third party) that might have a reason for doing so.

16 17 18 19

Section Section Section Section

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17 of the Partnership Act 1890. 32(c) of the Partnership Act 1890. 33(1) of the Partnership Act 1890. 32(b) of the Partnership Act 1890.

Appendix C: Farm-outs and the JOA

A farm-out agreement (FOA) is a device – largely unique to the upstream petroleum world – by which the investment of a person into an existing petroleum project may be structured. There is no rigid definition of what constitutes an FOA and the term is often applied indiscriminately to various forms of investment agreement. A JOA will not necessarily make reference to the FOA, but the FOA will always need to be tied back to the terms of a JOA, and both the FOA and the JOA will need to be choreographed carefully so as to define correctly the sequence of events and the scope of the relationship of the parties by which the relevant investment will be structured. C.1

The purpose of the FOA The FOA is intended to be a contract by which one party (the farming-out party) agrees to transfer a defined part of its interests in the concession (and possibly also, but not always, a JOA) to another person (the farming-in party). That farming-in party could be a single entity or a group of persons operating together under some form of joint venture agreement. The FOA is also effectively a form of sale and purchase agreement, and contains many of the provisions which might customarily expect to be found in such an agreement. The transfer of interests is effected in consideration of the farming-in party’s payment of a defined share of the costs of the performance of certain work obligations which are due for payment by the farming-out party, or in consideration of the direct performance by the farming-in party of a defined series of work obligations which are required for performance by the farming-out party, where the payments which are due or the works which are required are defined in accordance with the terms of the concession (and possibly also an existing JOA). A farm-out is intended to allow a party to manage a reduction of its equity in a petroleum project and simultaneously to defray responsibility for a share of certain costs which it would otherwise be liable to incur or for works which it would otherwise be liable to perform. A farm-out benefits the farming-out party in that it defrays part of the farming-out party’s total financial liability while simultaneously enabling the farming-out party to remain as a party to the underlying concession (albeit with a reduced share). A farmout benefits the farming-in party in that it allows a relatively low upfront investment to be made in exchange for what could be a large upside potential (at least, where the concession is at the stage where exploration has yet to move into production). It is often the case that a party simply elects to sell down part of its interests in

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the concession (and possibly also an existing JOA) in exchange for cash, without the farming-in party being tied to the need to incur any defined costs or perform any defined works. Although this situation is simply a transfer of part of a party’s interests in the ordinary manner (see Chapter 10), it is sometimes recorded in what is called an FOA. The AIPN has issued a model form FOA20 which is often used as the starting point for any negotiations regarding a potential farm-out. Model form FOAs have also been issued by the CAPL in 1993 and 1997,21 and by the AAPL in 1984.22 The manner of the entry of the relevant persons into an FOA should be considered by reference to two particular situations. It may be that in the early stages of a petroleum project, a concession has been granted to a single party. When it becomes time for that party to perform the minimum work obligations which the concession so requires (1.1), that party might require some assistance in meeting the costs of that performance, rather than covering the costs from its own resources (if it even can). A failure to perform the minimum work obligations might jeopardise the continuation of the concession. The provision of third-party debt finance could be a solution to that party’s needs, but it will be difficult to secure access to such finance where it is guaranteed for repayment only against the uncertainty of an exploration programme, with no promise of any resultant petroleum production. As an alternative, therefore, that party might choose to farm out part of its interests to another person (the farmingin party) in exchange for the commitment of that farming-in party to meet all or part of the farming-out party’s liability to pay the relevant costs or to perform certain works on behalf of the farming-out party. A variation on this theme comes from the situation where, notwithstanding that the sole party which holds the concession has managed to fund the costs of the minimum work obligations, that party later needs the same sort of financial assistance in order to fund a development programme. This is a similar situation where a farmout could be the solution, although there might be more chance for the farming-out party to secure third-party debt finance if the results of the exploration programme have been encouraging and there is petroleum production in prospect. Beyond the situation where a single party holds a concession, it may be that later, during the lifetime of the petroleum project, a situation arises whereby a party is unable or unwilling to fund its share of the costs of a commitment when required to do so. An example of such a situation is where there are already several parties to the concession and that party becomes bound by a proposal to the OpCom to perform a certain work programme, which has been approved by the OpCom (albeit that the party in question did not vote in favour of the proposal), and in respect of which that party does not have the benefit of a non-consent right under the JOA (5.1) which would otherwise enable it to deflect its liability for its share of those costs. Unless that party wants to exercise a complete transfer of (see Chapter 10) or withdrawal from (see

20 21 22

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Available at www.aipn.org. Available at www.landman.ca. Available at www.landman.org.

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Chapter 11) the concession and the JOA, and assuming that it has elected not to seek third-party debt finance in order to meets its share of the costs, the alternative is for that party to farm out part of its interests to another person (the farming-in party) in exchange for the commitment of that farming-in party to meet all or part of the farming-out party’s liability to pay the relevant costs. This is less obviously a situation where the farming-in party might be able to perform directly certain works on behalf of the farming-out party, since those works will already be contracted to be performed as joint operations in accordance with the terms of the JOA. What is common to both of the above examples is that some form of FOA will need to be entered into between the party which needs the financial assistance which the FOA would bring (as the farming-out party) and the incoming party (as the farming-in party). The FOA is essentially linked to the JOA, in that the FOA will recite the respective PIs of both parties which will apply (and which will be recorded in the JOA, at least in the case of a new JOA which is required as a consequence of the farm-out (see above)) following completion of the farm-out obligation. The FOA might provide that in the event of a conflict between the terms of the FOA and the terms of the JOA, the terms of the FOA (or the JOA, depending on what has been negotiated) will prevail, but because of the very different nature of the relationships which are created by the FOA and the JOA, the prospects of such a conflict should be minimal. A farm-out represents a transfer by a party of its interests in the concession (and in any existing JOA). Despite the specific FOA nomenclature which is used, the application of the provisions of the concession (and the JOA) which relate to government approval (and, in the case of an existing JOA, to minimum level transfers, transferee approval and the possible application of pre-emption rights) in respect of the proposed FOA should not be overlooked. C.2

Issues with the FOA Several structural issues will need to be considered which will apply to determining how the intended farm-out might be structured.

(a)

The need for a JOA What distinguishes the situations described above in respect of where the FOA might be needed is the timing of the existence of the JOA. In the first situation there is no JOA in existence prior to the farm-out, since the concession is held by a single party. It will therefore be necessary to create a new JOA to apply between the farming-out party and the farming-in party. Apart from the form and content of the JOA, in general terms the essential issues to consider with this new JOA will revolve around what the parties’ PIs will be and which party will be the operator going forward. The draft text of the required JOA will usually be appended to the FOA. In the second situation there is already a JOA in existence and so the FOA will not need to trouble itself with the mechanics of introducing a new JOA. Rather, the challenge here is in accommodating the FOA within the structure of that JOA. Thus, if the existing JOA contains pre-emption rights (10.3), care will need to be taken to

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reconcile the interests of the farming-out party and the farming-in party with the application of those rights, such that the intended operation of the FOA is not defeated. As in this situation the farming-in party’s obligation usually takes the form of paying money to the farming-out party, rather than actually performing the farm-out works, the issue of whether such pre-emption rights will apply to any non-cash consideration, such as the performance of the farm-out works, need not be considered. The AIPN model form FOA gives options for participation by the farming-in party into an existing JOA, and for the execution of a new JOA in a form to be appended to the FOA or to be negotiated later in accordance with a series of predetermined principles. (b)

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The farm-out obligation The FOA will define the obligation of the farming-in party which is required to be performed under the terms of the FOA. There are two formulations to be considered here. The first is defined by the expectation that the farming-in party will pay a defined sum of money towards the costs which the farming-out party is otherwise liable to pay. This approach has the attraction of removing any uncertainty between the parties about whether the farming-in party has properly performed its obligations (see below), since whether a payment has been made when due should be straightforward enough to establish. The amount which is payable by the farming-in party to the farming-out party as the farm-out obligation will be defined in the FOA. It could be a defined monetary amount or a defined percentage of whatever costs the farming-out party is otherwise liable to pay. Where a monetary consideration is payable by the farming-in party, several other related issues should be considered: • Some commentators suggest that a farm-out should be equated to the buy-back by a party into an exclusive operation (5.2), and more particularly that the farming-in party should pay a significant premium as part of the consideration for the farm-out. This might happen in practice, through the consideration being quantified also to include some measure of a premium, but it is not common for the FOA expressly to recite a base cost and also a premium component. Rather, the FOA will simply recite the amount payable by the farming-in party. That said, the carried interest and the promote formulations (see below) could be construed as a premium payment mechanism. • The FOA might be structured such that the farming-in party will offer a carried interest (3.5) to the farming-out party in respect of certain other future financial commitments to which the farming-out party will be subject. Whether that will be a soft carry or a hard carry (3.5) will be a matter for negotiation in the FOA. • The term ‘promote’ is sometimes used in order to describe the ratio between the expenditure which the farming-in party will incur and the interest which it will thereby earn from the farming-out party. Where the farming-in party incurs 100% of the intended expenditure and earns 100% of the intended interest, this will be known as a ‘ground floor promote’. Where the farming-

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in party incurs 100% of the intended expenditure and earns 50% of the intended interest, this will be known as a ‘two-for-one promote’, and 100% of the intended expenditure which earns 25% of the intended interest will be known as a ‘four-for-one promote’, and so on. It will be apparent that there is some potential for overlap between the various concepts of premiums, carried interests and promotes as described above. The substance of how these principles are addressed in the FOA will be of more importance than the terminology which is used. The alternative method of defining the farm-out obligation is to reference the obligation of the farming-in party to perform a defined series of work obligations which would otherwise be due for performance by the farming-out party (where the interest to be farmed into would allow this). These work obligations could relate, for example, to the drilling of a well to a defined depth within a defined timeframe. Supplemental formulations – such as the definition of an alternative set of works which might be performed if there is a problem with the primary works, or provision that the works will be deemed to have been performed if a defined amount of expenditure has been incurred by the farming-in party – will be helpful in bringing greater certainty to the definition of the farm-out obligation and giving comfort to the farming-in party that it will not be unreasonably frustrated in trying to earn its interest. The AIPN model form FOA contains such an ‘alternative methods of performance’ formulation. Some FOAs also elaborate the definition of the farm-out obligation by providing for a sliding scale of interests which can be earned by the farming-in party, corresponding to the amount of works which have been done by the farming-in party. Only when a defined cut-off point is reached will it be possible then to assess the amount of work which has been done by, and so the corresponding interest which will be transferred to, the farming-in party (which will then be reflected through the extent of the farming-in party’s PI under the JOA). This work-based formulation is not uncommon, particularly in the United States. In Title 11 (Bankruptcy) of the United States Code there is a statutory definition of a ‘farm-out agreement’ which specifically references the transfer by a person of an interest in a petroleum production right to another person in exchange for the commitment of that other person to perform certain drilling, reworking, recompleting, testing, development or production works.23 The consideration payable by the farming-in party could also be a combination of cash and the performance of work commitments. In the AIPN model form FOA there are suggested alternative methods for structuring the consideration payable by the farming-in party. The first option focuses on the performance of a defined scope of work (including the acquisition and processing of seismic data and the drilling and completion of an exploration well), or the payment of a defined cash amount (based on a contribution to the farmingout party’s sunk costs to date and future costs in prospect, up to a capped amount). 23

11 USC 101 (21A).

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Where physical work obligations to be performed are specified in the FOA, the existence of a force majeure clause (17.4) in the FOA will help to protect the farmingin party in respect of any unexpected impediments to the performance of its obligations, but such a provision should properly operate only so as to regulate the liability which the farming-in party might have for the failure to perform those obligations and should not be relied on as a means of suggesting that the obligations have in fact been fulfilled. (c)

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Timing of the transfer of interests The FOA might be structured such that the interests in the concession (and the JOA) which are to pass from the farming-out party to the farming-in party will so pass upon the execution of the FOA and prior to completion of the performance of the farm-out obligation. However, the practical reality is that the effectiveness of that transfer will be subject to several conditions – notably, the receipt of any government consents to the proposed transfer which might be necessary (particularly since the farming-in party will become a new party to the concession), the execution of the JOA (where a new JOA is needed) and the waiver of any pre-emption rights (in the case of an existing JOA which contains such rights, which if applied might otherwise frustrate the intentions of the parties to the FOA). The customary solution, therefore, is to say that the transfer of interests will take place upon the execution of the FOA between the parties, but that the effectiveness of that transfer will be suspended and made subject to the satisfaction of those items as nominated conditions precedent; upon the execution of the FOA the farming-in party will then proceed with performance of the farm-out obligation. However, if there are no conditions precedent to be fulfilled, the interests will indeed pass to the farming-in party upfront, on execution of the FOA. If the FOA is structured in this way, with certain conditions precedent to be fulfilled, the FOA might require the farming-out party to covenant to the farming-in party that it will not (during the interim period between execution of the FOA and the complete effectiveness of the transfer of the interest contemplated by the FOA) do or permit to be done anything under the concession and/or the JOA which might adversely affect the interests being transferred to the farming-in party. However, this covenant will need to be qualified if the farming-out party has anything less than complete control over the concession and the JOA (which is likely to be the case if a JOA is already in place, and particularly so if the farming-out party is not the operator in respect of that JOA), since decisions might indeed be made in respect of the concession (and the JOA) during that interim period. This structure represents what is widely regarded to be a farm-out in the conventional sense, where there is an upfront (and possibly conditional) transfer of the relevant interests to the farming-in party, ahead of performance of the farm-out obligation. In contrast, ‘earn in’ is the shorthand term which is sometimes used to describe the situation where the farming-in party first performs the farm-out obligation and only then, upon satisfactory completion of that farm-out obligation, does the farming-in party receive a transfer of the relevant interests from the farming-in party.

Peter Roberts

Whether to apply a farm-out or an earn-in might, for example, be determined by the availability of any necessary government consent in respect of a proposed farmout – if that consent is not forthcoming until the farm-out works have been completed (eg, because the government is reluctant to approve transfers of interests conditional upon the necessary works being done), then an earn-in will represent the required structure. This distinction between an earn-in and a farm-out is more meaningful where the farm-out obligation is represented by the performance of an actual work obligation by the farming-in party. Where the farm-out obligation is represented by the obligation of the farming-in party to pay a sum of money, the simpler sequence is that the parties will execute the FOA, the farming-in party will make that payment to the farming-out party and the farming-in party will then receive a transfer of the relevant interests (subject to the application of any conditions precedent). This is essentially an earn-in with a compressed timetable. The contrast between the farm-out model and the earn-in model is best illustrated by the treatment of a default by the farming-in party in the performance of the farm-out obligation. In the case of a farm-out the default will lead to the need to undo the transfer of the relevant interests to the farming-in party, which can (depending on how advanced the actual transfer is) be a difficult exercise to manage. In contrast, in the case of an earn-in the default of the farming-in party means that the relevant interest is never transferred to the farming-in party in the first place. The AIPN model form FOA conceives of the transfer of interests being effective upon the execution of the FOA or, if the parties so agree, upon the satisfaction of a defined series of conditions precedent. (d)

Selection of the operator Where the farming-in party is coming in as only the second party to the concession and the JOA is coming into existence for the first time (rather than there already being a JOA and an operator in existence), it might be the subject of an agreement in principle between the parties that the farming-in party will be the operator in respect of their relationship going forward. This could be effected through the farming-in party becoming a party to the concession and the JOA, and securing a transfer of operatorship (10.2), whereupon the performance of the farm-out obligation takes place, such that the farming-in party can then oversee the performance of the relevant works in the capacity of operator. However, it may be that there simply is not the time available to the parties to structure their arrangements in this manner, or that the government does not give its consent to the farming-in party as the new operator. Consequently, if the intention nevertheless remains that the farming-in party will assume the practical responsibility for management of the performance of the relevant farm-out works, the alternative is that the farming-out party will remain as the operator but the farming-in party will oversee the performance of the relevant works as the appointed contractor of the operator. Only then, after the relevant works have been completed, will there be a formal transfer of operatorship to the farming-in party.

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Appendix D: Unitisation and the JOA

Where there are adjacent concession areas, each of which contains a part of a single petroleum deposit which underlies all of those concession areas, consideration should be given to the introduction of a programme for the exploration for and production of petroleum from that petroleum deposit on the basis of aggregating the contiguous concession areas (and the interests of the parties in those concession areas) to give a single unit, in which all of the relevant parties will have a defined interest. This, in essence, is what ‘unitisation’ means. It is popularly supposed to represent a more efficient means of producing petroleum than would be achieved by undertaking separate exploration and production operations within each individual concession area in respect of the same petroleum deposit. The unitisation of the particular concession areas will result in the aggregation of the management of the corresponding JOAs through and the entry of all the relevant parties into a unitisation and unit operating agreement (UUOA), and will also result in the appointment of a unit operator to act on behalf of all the parties in the unit. The UUOA will overlie (but will not completely displace) each JOA which underpins the unit and its terms will bear many similarities to those of a JOA. Where a unitisation exercise has taken place, the relationship of the UUOA with the unitised JOAs (which will continue to govern the relationship of the parties within each concession within the unitised interest) will need to be properly understood. D.1

The mechanics of unitisation Unitisation relies on the discovery of a single petroleum deposit which is revealed to underlie several contiguous concession areas held by different parties. It allows that petroleum deposit to be developed under a single development plan whereby the resultant production of petroleum from the petroleum deposit will be divided between all parties in the relevant concessions according to pre-determined proportions. In some jurisdictions the term ‘pooling’ is used to describe the aggregation of separate property interests before any petroleum reserves are discovered or developed (in contrast with the customarily applied definition of ‘unitisation’, where such aggregation takes place after such reserves have been discovered or developed), although these two terms are often applied interchangeably. The pooling of interests approach is exemplified by the AAPL JOA and the CAPL JOA, where separate leasehold interests will be aggregated and developed jointly

265

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through the medium of the JOA, but in respect of which there will not be a formal unitisation programme. The pooling of interests at the JOA level effectively dispenses with the need for a unitisation programme in the manner described in this appendix. In part, the likelihood of the need for a unitisation programme will be driven by the size of the concession areas in respect of which concessions have been granted – the larger the individual concession area, the greater the probability that it will encompass a petroleum deposit in its entirety and that correspondingly, ongoing programmes of concession area surrender and sub-division (see Appendix E) will reduce the size of the concession areas and increase the possibility that a unitisation programme will be needed if a petroleum deposit is later discovered. The principle behind unitisation is that it should ensure greater efficiency of development of the underlying petroleum deposit than would be the case if that deposit were developed individually by the parties within each concession area. However, the case for unitisation will be less apparent where there are differences in the quality or composition of the petroleum deposit across its entirety, such that a series of separated development plans might be more appropriate. A programme of unitisation could happen voluntarily by agreement between all relevant parties, or the requirement for unitisation might be compellable under the terms of the prevailing mineral law or of the concession.24 Unitisation can happen in a purely domestic context, but equally might apply to the development of a petroleum deposit which underlies the boundary between two or more countries, where some form of inter-government treaty might also be required in order properly to legislate for such a cross-border unitisation exercise. So, for example, in 1965 the United Kingdom and Norway signed a bilateral delimitation treaty which then led on to three separate cross-border unitisation agreements later signed in respect of the Frigg (1976), Statfjord (1979) and Murchison (1979) fields, and (in 2005) a further framework treaty was signed between the United Kingdom and Norway on cross-border petroleum projects cooperation. The unitisation programme is legislated for in the terms of the UUOA. The UUOA therefore addresses two distinct operational phases – the mechanics of the unitisation (ie, the first ‘U’ in ‘UUOA’) of the relevant concession areas and the subsequent operation (ie, the ‘UOA’ in ‘UUOA’) of that unitised area. These activities can be kept separate, so that there are distinct agreements for the unitisation exercise and for the subsequent operation of the unit, but most unitisation exercises tend to proceed on the basis of a single, combined UUOA. The AIPN has published a model form UUOA25 which takes this combined approach, predicated on the assumption that two production sharing contracts are being unitised. Other model UUOAs which might be considered have been issued by the Petroleum Joint Venture Association of Canada,26 the American Petroleum Institute27 and the Rocky Mountain Mineral Law Foundation.28

24 25 26 27 28

266

MC 27. Available at www.aipn.org. Available at www.pjva.com. available at www.api.org. available at www.rmmlf.org.

Peter Roberts

The parties might also agree to record certain key elements of the intended unitisation programme within a pre-unitisation agreement (PUA), which will be especially relevant if it looks like some time will be taken to negotiate a fully termed UUOA. The PUA will govern, for example, the commitment of all relevant parties to undertake (and to fund) certain exploration and appraisal works which would be helpful in better defining the petroleum deposit to be unitised, and will also be the vehicle by which the final terms of the UUOA will be negotiated and agreed. The PUA is somewhat reminiscent, in content and in principle, of a joint study and bid agreement (2.3). Even before the existence of a PUA, the parties might have agreed to enter into a joint agreement to drill a well or to conduct a seismic survey, the results of which could be instrumental in deciding whether to progress towards a full unitisation programme. Any such agreement will contain basic principles relating to the appointment of an operator for that purpose and the sharing of the relevant costs. As for the timing of the unitisation exercise, the more obvious expectation is that it should be done before any exploration and appraisal activities are commenced in respect of the unit, so that the basis for sharing the costs of those works between all parties is set out in advance. However, it may be that the existence of the single petroleum deposit which underlies the contiguous concession areas is properly revealed (or understood) only after certain exploration and/or appraisal activities (and possibly even only after certain development and production activities) have been undertaken in at least one of the underlying concession areas, and only at that point will the full unitisation exercise be undertaken. If the unitisation exercise happens after any exploration or appraisal (or even development or production) activities have taken place in respect of any of the concession areas, the costs of those activities may need to be the subject of a postunitisation reconciliation, so that they are allocated retrospectively between all parties according to the agreed unit equities. This sounds simple enough, but it can be a complex exercise in practice and may cause some antagonism where a party which is required to make a contribution is dissatisfied with the level of those costs or the manner in which they were incurred by the relevant party. This is another reason as to why the unitisation exercise should be carried out at the earliest possible opportunity. Where the unitisation exercise happens much later in the history of the petroleum deposit, such as where production has already commenced in respect of one (or more) of the underlying concession areas, the parties that have undertaken that production might also feel that they should be recompensed in recognition of the development risk which they originally took. This compensation might be effected through the award to those parties of a commensurately greater equity share in the unit (see below), but it can be a difficult exercise to quantify the equation between sunk costs and assumed risks on the one hand and the corresponding level of unit equity interests on the other. Consequently, any compensation which is agreed to be due could instead be payable through a greater share of the produced petroleum from the unit, a cash payment or

267

Appendices

both. This is similar to the considerations which apply in respect of the payment of a premium on a buy-back right in an exclusive operation (5.2), except that in the exclusive operations provisions in the JOA the amount of the premium which is payable is typically predetermined. How a programme of unitisation typically works might best be illustrated by a simple example which demonstrates the steps in the process. This example assumes that the parties have already finalised the terms of their UUOA, or at least of the PUA, and are proceeding with the implementation of the unitisation programme in accordance with the terms of that agreement. (a)

Identification of the relevant concession areas There might be several adjacent concessions which have been granted to separate groups of concession holders. Concession A A Co – 40% (operator) B Co – 40% C Co – 20% 100%

Concession B D Co – 40% (operator) E Co – 30% F Co – 30% 100%

Concession C G Co – 50% (operator) H Co – 40% A Co – 10% 100%

In this example three concessions have been granted to the parties shown. Within each such concession, the parties have entered into separate JOAs and under each JOA an operator has been appointed. It may also be that a particular party is party to more than one concession (as is the case in the example above for A Co). (b)

Identification of the petroleum deposit It will have become apparent to the government (as the grantor of the concessions) and/or to some or all of the relevant parties that there is a single petroleum deposit which underlies all three concession areas: Concession A

Concession B

Concession C

Consequently, the government requires that the parties unitise their interests in the concessions and in respect of that single petroleum deposit (thereafter known as ‘the unit’).

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Peter Roberts

(c)

Determination of the tract participations The parties will (eventually) reach agreement as to what percentage of the totality of the petroleum deposit underlies their respective concessions (those percentages, applicable to each concession, are known as the ‘tract participations’): Concession A

Concession B

Concession C

35%

45%

20%

The tract participation represents the interest of each group of concessionholding parties in the unit, in much the same way as the PI represents the interest of each party in a JOA (3.3). This is the key part of the whole unitisation exercise for a party, which will be keen to ensure that the concession-holding group of which it is a part secures the greatest possible tract participation and so the greatest possible share of the resultant petroleum production from the unit. Determining the tract participations will inevitably involve some guesswork from all the parties, since they will usually be working from relatively thin amounts of data (possibly enhanced by any exploration or appraisal activity which has taken place (see above)), and will rely on certain industry algorithms which estimate the total amount of petroleum reserves estimated to be in the unit (which might be applied without differentiation as to whether those reserves are recoverable, or alternatively with some allowance for the extent to which the reserves are recoverable). (d)

Determination of the unit equities Once the tract participations have been determined, it will be possible to calculate what interest each party will have in the overall unit so as to give each party a ‘unit equity’. The unit equity of each party will be arrived at by multiplying a party’s PI in the concession which that party holds by the tract participation which has been assigned to that concession (overleaf):

269

Appendices

Party

Concession

PI

Tract participation

Unit equity

A Co

A

40% (operator)

35%

14%

B Co

A

40%

35%

14%

C Co

A

20%

35%

7%

100%

35%

D Co

B

40% (operator)

45%

18%

E Co

B

30%

45%

13.5%

F Co

B

30%

45%

13.5%

100%

45%

G Co

C

50% (operator)

20%

10%

H Co

C

40%

20%

8%

A Co

C

10%

20%

2%

100%

20%

100%

(e)

Appointment of a unit operator One of the parties will (by agreement between all parties, which might not always be readily forthcoming) be selected for appointment as the operator of the unit. From the example which is given above, there could be three primary candidates for this role: the JOA operators of each of the three concessions. However, it need not necessarily follow that the party which has the largest unit equity will automatically be selected as the unit operator. The selection of the operator for the unit will be based on merit, in much the same way as the operator will be selected from between the parties within a JOA (6.2).

(f)

Redetermination of the tract participations The tract participations will have initially been arrived at by agreement between the parties, often based on relatively sketchy amounts of geological and geophysical data (and especially so where the unitisation exercise has taken place before any exploration or appraisal activities have taken place (see above)). It may be that, based on the availability of later data from exploration or appraisal activities, some (or perhaps all) of the parties feel that the initial tract participations should be revised to give a different result. The desire of a party to see some redetermination of its initial tract participation usually manifests itself only where that party believes that it should be the beneficiary of an upward adjustment.

270

Peter Roberts

Such redetermination could result in an enlargement (for some parties) or a reduction (for other parties) of the overall unit, and in a reallocation of the initial tract participations in the unit from the basis on which they were initially agreed to apply to the unit. It could also lead to the reallocation of costs and petroleum production between the parties so that they are each restored to the positions that they would have enjoyed had the redetermination applied from the outset. The redetermination exercise can be a lengthy, expensive, technical activity which proves difficult to resolve, along with the resultant adjustment of costs and production, and it could well result in the reference to an expert (15.3) in the event of a dispute between any of the parties which they are unable to resolve. That expert determination process will only add to the length of the whole redetermination exercise, and there is some case law which evidences the unfortunate truth that disputes between the parties involving the UUOA and the role of the expert are not unheard of.29 The UUOA might provide for a redetermination exercise to apply if any party so requests and might also provide for periodic redeterminations (in accordance with a defined timetable). However, because of the complexity and uncertainty which redetermination entails, there is an increasing tendency for the parties to a UUOA to fix their unit equities – that is, to be prepared to abide by the initial tract participations and not to seek any later redeterminations. Once the mechanics of the unitisation exercise have been completed and the UUOA has been finalised between all parties, the development of the unit will get underway. For a proper appreciation of what that entails, it would be helpful to analyse the key terms of a typical UUOA and how the UUOA interfaces with the JOAs, which will continue to apply to the individual concessions that together make up the unit. D.2

The UUOA and the JOA The UUOA is effectively the JOA for the unit and will supplant many of the provisions of the underlying JOAs. However, the JOAs for each concession will not be entirely displaced, since they will still have an essential role to perform in respect of any operations which take place in respect of the parties’ interests in the concession and the concession area, but which do not relate to the unit. Not all of the petroleum deposits which lie within a concession area (whether by reference to areal coordinates or stratigraphic depth (1.1)) will be subject to the unitisation programme, so any non-unitised petroleum deposits will still be governed at the individual concession level by the particular JOA. Unitisation is principally a mathematical exercise which is carried out by agreement between all parties to the unit and is not intended to result in the amalgamation of all underlying concessions and JOAs into what might be one single contract between the government (as the grantor of the concessions) and all relevant parties. The UUOA will typically make clear that nothing in the unitisation exercise is intended to require any formal transfer of a party’s interests in the concession

29

See, for example, Amoco (UK) Exploration Co v Amerada Hess Ltd [1994] 1 Lloyd’s Rep 330; Shell UK Ltd v Enterprise Oil Plc [1999] 2 Lloyd’s Rep 456; and Neste Production Ltd v Shell UK Ltd [1994] 1 Lloyd’s Rep 447.

271

Appendices

and/or the JOA which relates to that party. The UUOA usually also provides that notwithstanding the completion of the unitisation exercise, each concession group will continue to be solely responsible for the performance of its own concession, and that the UUOA does not create any sense of collective responsibility among the parties to the UUOA for the performance of the underlying concessions. The relationship of the UUOA, the JOAs and the concessions can be illustrated thus:

Grantor

Grantor

Concession

Grantor

Concession

A Co + B Co + C Co

D Co + E Co + F Co

JOA

Concession

G Co + H Co + A Co

JOA

JOA

A Co

B Co

C Co

D Co

E Co

F Co

G Co

H Co

A Co

40%

40%

20%

40%

30%

30%

50%

40%

10%

A Co

B Co

C Co

D Co

E Co

F Co

G Co

H Co

16%

14%

7%

18%

13.5%

13.5%

10%

8%

UUOA

Even if from the very outset, before the relevant concessions have been granted, it is obvious that a petroleum deposit should be developed on a unitised basis, it is preferable to enter into all of the relevant concessions and JOAs and to have a UUOA overlay those arrangements, rather than to move directly to concessions and a UUOA only. The UUOA is usually also expressed not to amend any of the terms of any of the underlying JOAs, unless the parties to the UUOA and a particular JOA otherwise agree, whereupon such agreed amendments to the JOA (eg, in order to make for a more consistent fit with the UUOA) could be recited in the UUOA or in an agreement which is supplementary to that JOA. The UUOA typically provides that in the event of a conflict between the terms of the UUOA and any underlying JOA, the UUOA will prevail. That said, it should be a key aim of the unitisation exercise to ensure that the UUOA is written (both in itself and in respect of the underlying concessions and the JOAs) such that the scope for any such potential conflict is eliminated. The terms of the UUOA can be reconciled with the terms of the underlying JOAs as follows.

272

Peter Roberts

(a)

Duration The UUOA will remain in force for as long as more than one concession area remains party to the unitisation exercise. Thus, if the unit is made up of two unitised concessions and one of the concessions is terminated for any reason, leaving only one concession as the subject matter of the UUOA, the unitisation exercise will not be capable of continued application. However, the termination of one of the underlying JOAs itself will not necessarily be fatal to the continuation of the UUOA, since it could be that a JOA terminates through the aggregation of interests into a single party such that the JOA is no longer needed. The unitised concessions will be unaffected by this situation and the unitisation exercise will not be made redundant. Termination of the UUOA in accordance with its terms should not prompt the termination of the underlying JOAs either. If, for example, the parties to the UUOA have jointly elected to discontinue the unitisation exercise, petroleum exploration and production operations will still be expected to continue at the individual concession/JOA level.

(b)

Scope The scope of the UUOA will be similar to the scope of any typical JOA (4.1), except that the focus of the UUOA will obviously be on the development and operation of the unit rather than on the equivalent of joint operations. Similarly, the UUOA might also reference certain excluded items (4.2) which will not be within the scope of the UUOA. Key within this list of excluded items is the development of petroleum deposits which are outside of the defined unit area, which will apply to ongoing operations at the JOA level but which have not been included within the unitisation exercise. The UUOA might also reference any defined unit property, akin to joint property in the JOA (4.1).

(c)

Selection of the operator One of the parties will be designated to act as the operator in respect of the unit. This appointment will be reflective of the rights, liabilities and duties which flow in respect of the appointment of a party as the operator under the terms of a JOA (6.2). One point which might particularly be considered is the extent to which the unit operator is subject to the potential for a conflict of interests in the performance of that role and in the performance of its role as a party to, and possibly also as the operator of, one of the underlying JOAs. The fiduciary duties which might be owed in this situation (see Appendix F) should also be considered.

(d)

Voting control The UUOA will provide for the creation of a unit-specific OpCom, with a representative from each party. The mechanics of the unit’s OpCom will be similar to how the OpCom functions at the JOA level in order to protect the non-operating parties’ interests (7.4). Voting at the OpCom could be on the basis of a defined passmark, but because of the possibility of a party’s aggregation of interests across the unit, there might be an additional requirement for any proposal to the OpCom to require a certain passmark and the affirmative vote of a defined number of parties, or of at least one different party as a representative of each concession. By a happy

273

Appendices

coincidence, the forms of North American JOA which typically do not reference the role of the OpCom (7.1) also rely on pooling rather than unitisation as a means of aggregating concession interests (see above), which conveniently obviates the need to consider how to reconcile the introduction of an OpCom into a UUOA where the underlying JOAs do not themselves reference an OpCom. (e)

(f)

274

Exclusive operations It is possible that the UUOA will allow any party, or any group of concession holders, to conduct an exclusive operation within the unit area in respect of the concession area which relates to that party or concession group. Such unit exclusive operations will be broadly subject to the same considerations that will apply to the conduct of exclusive operations under a JOA (see Chapter 5). Critically, unit operations will take precedence over unit exclusive operations and the parties undertaking any unit exclusive operation will be required to indemnify the non-participating unit parties in respect of any costs or liabilities which they might incur as a consequence. If a unit exclusive operation is so undertaken, the UUOA will need to create a separate accounting for the costs of (and any resultant production from) that unit exclusive operation. This should be taken into account in the accounting procedure which is appended to the UUOA. Apart from a separate development and production exercise within the unit, something like a sole risk operation might be undertaken under the UUOA, whereby a party could elect to drill an appraisal well so to as to produce data which would support that party’s contentions in respect of any redetermination exercise (see above). The UUOA could provide that the costs of the appraisal well would be recharged to all of the parties (in accordance with their respective unit equities) if the sole risk party’s contentions proved to be true (within certain tolerances). The real issue with unit exclusive operations is an emotive one, however, in that they can represent the emergence of a pattern of exclusive operations in the unit area which could result in the value of the petroleum production operations under the UUOA being unduly diminished, since the production of petroleum on a unit exclusive operations basis would be denied to the wider commercial interests of all of the parties under the UUOA. Unit operations The UUOA will set out a mechanism for the proposal and approval of a work programme and budget in a manner similar to the JOA (8.1), and will contain equivalent provisions in respect of authorities for expenditure (8.2), contract awards (8.3) and petroleum allocation (9.1). Petroleum which is produced from the unit will be allocated to each group of concession holders according to the concession’s agreed level of tract participation and will thereafter be further disbursed within that concession group according to the terms of the particular JOA (9.1). The same principles will apply in respect of how expenditures which have been incurred in the production of petroleum from the unit will be allocated between all of the parties in the unit.

Peter Roberts

(g)

Default It is as much a possibility under the UUOA as it is under the JOA that a party could default in the payment of a cashcall or an invoice request (16.2) which is required in order to fund the unit operations. The UUOA will contain provisions relating to the management of such a default which are similar to the default provisions found in a JOA (see Chapter 14) (particularly in relation to the suspension of voting and data rights and the loss of entitlement to produced petroleum), but the position of a forfeiture of interests across all parties and all concessions and the JOAs which together make up the unit will require more particular consideration. However, it is not obviously the solution that a defaulting party’s concession and JOA interests will be available through forfeiture to all non-defaulting parties in the unit in the same way as the forfeiture remedy applies in the JOA (14.4), so the UUOA could apply the principle that a default which is made good by the parties within the defaulting party’s concession group will be addressed through the application of the forfeiture remedy within that concession group and within the terms of their JOA. However, if the default at the unit level is made by a group of concession holders in its entirety, the forfeiture remedy might be applied to the interests of that concession group as a whole by the other parties to the UUOA.

(h)

Decommissioning The decommissioning of any item of unit infrastructure could be managed at the UUOA level in the same way as is applied in respect of the JOA (see Chapter 13), and the provision of security in respect of the costs of the decommissioning should give rise to similar concerns. However, if petroleum production operations come to an end within a specific concession/JOA and do not prejudice the continued operation of the wider unit, the consequent decommissioning of any relevant infrastructure should be governed by the particular concession/JOA.

(i)

Transfers The UUOA usually provides that a transfer by a party of its interests within its concession and its JOA will primarily be governed by the terms of those agreements (see Chapter 10), subject to a proviso that such a transfer should be accompanied by a corresponding transfer of the transferor’s interests in the UUOA. Correspondingly, a transfer by a party of its interests in the UUOA should include a transfer of its interests in the underlying concession and JOA. As a matter of operational practice, any prospective transferee of the interests of a party is unlikely to seek to accede to only part of the concession/JOA/UUOA package of contracts and so there is every likelihood that a transfer will encompass all of these interests. If the JOA seeks to legislate for a change of control in respect of a party (10.4), how this works through to the interests in the UUOA of the party which has undergone the change of control should be carefully considered. A change of control at the JOA level which forces a transfer of interests should track through to require the (forced) transfer of the corresponding interests in the UUOA.

(j)

Withdrawal The UUOA might recite a withdrawal right, which will not be dissimilar to how such

275

Appendices

a right is written to apply in the JOA (see Chapter 11), where the interests to be so withdrawn from will be the concession, the JOA and the UUOA together.

276

Appendix E: Sub-divisions of the JOA and concession The starting point for the definition of the interests to which the JOA will apply is the granting of the concession to the parties (in their capacity as the concession holders). The entry of the parties into the JOA will thereupon follow in order to create their several interests and regulate their horizontal relationship (1.1). During the lifetime of the concession, there could be some circumstances in which a sub-division of the concession area (through the medium of the JOA) could be beneficial to the parties, and the JOA might provide for, or be ready to accommodate, such a possibility. It could even be that the original concession is itself made the subject of a sub-division. E.1

Sub-division in principle The essential point to note from the grant of the concession is that the concession will define a specific concession area, to which the concession (and the JOA) will relate (1.1). Over the lifetime of the concession and the JOA, there could be certain circumstances in which a sub-division of the original concession area could be effected by the creation of a defined sub-area, to be accompanied by the creation of a new JOA intended to apply solely in respect of the interests of the relevant parties in that sub-area. Such a sub-division might, for example, be regarded as appropriate in the following situations: • Partial transfers – some of the parties might elect to transfer an undivided interest in a part of the concession area to another group of persons (10.2). • Partial withdrawals – some of the parties might elect to withdraw from a part area of the concession area and the JOA (11.2). • Exclusive operations – in consequence of the performance of an exclusive operation in respect of an entire development, there could be a part of the concession area to which only the participating parties are entitled (5.2). The JOA might provide that in the interests of providing more transparent regulation of the interests of all of the relevant parties and any newly involved parties, the interests which are the subject of the partial transfer, the partial withdrawal or the exclusive operation will, by distinction from the original area, be created as a discrete sub-area. This will then result in a separate JOA to apply in respect of such a sub-area, and with steps taken towards reconciling the interests of

277

Appendices

the parties in the original area and the interests of the parties in the sub-area. The OGUK JOA specifically addresses this possibility (see below). In the formulation which is described in this section, the original concession will still apply to govern the interests of the original parties in the original area and also the interests of the parties in the sub-area (except in the case of a partial withdrawal, where a withdrawing party will not be party to a separate sub-area, but the nonwithdrawing parties will be), as the sole statement of their legal interest, and there will not be a different concession granted. However, there will be different beneficial interests in the concession, with the original area parties having a beneficial entitlement in respect of the original area and the sub-area parties having a beneficial entitlement in respect of the sub-area. E.2

The mechanics for sub-division The OGUK JOA sets out a mechanism for the sub-division of a concession area in respect of a partial transfer or an exclusive operation by reference to the following provisions: • Definition – the OGUK JOA defines a ‘new area’, being a part of the original concession area in respect of which a party has made a partial transfer of interests or in respect of which less than all of the original parties are the ongoing participants.30 • Creation of a sub-area – the sub-area will be approved to come into existence (whether by all original area parties acting unanimously or through a vote of the OpCom) and subject to the receipt of any necessary government approvals, and the defined PIs of the sub-area parties will be created.31 • Creation of a new JOA – a new JOA will be drawn up to apply exclusively as between the sub-area parties. That JOA will contain all of the provisions which would be found in a typical JOA, including the appointment of an operator for the sub-area (which would typically require government approval (1.1)).32 • Reconciliation of the original area and the sub-area – the original area parties will make a declaration of trust to the effect that they hold the legal interest which they have in the sub-area on trust for the sub-area parties absolutely, and the sub-area parties will make a reciprocal declaration of trust to the effect that they hold the legal interest which they have in the original area on trust for the original area parties absolutely.33 • Management of decommissioning liabilities – because the government will typically regard all parties to a concession as having joint and several liability for the costs of the performance of any decommissioning obligations (13.2), the government is unlikely to be persuaded of the need to make those liabilities several as between the original area parties and the sub-area parties simply because of some internal division of interests which has been effected

30 31 32 33

OGUK OGUK OGUK OGUK

278

JOA JOA JOA JOA

§1.1. §9.10.1. §9.10.2. §9.10.3, Schedule B.

Peter Roberts

between those parties. Consequently, it may be that the original area parties will undertake to indemnify the sub-area parties for all of the costs of decommissioning associated with the original area, and correspondingly the sub-area parties will undertake to indemnify the original area parties for all of the costs of decommissioning associated with the sub-area.34 Once all of the above arrangements have been made, the structure of the relationship between the various parties will appear thus (eg, where the concession has three existing parties (A Co, B Co and C Co) and those parties have decided to transfer an undivided interest in a defined part area to another two persons (D Co and E Co), which also become party to the concession): JOA

Concession

Trust declaration

Original area: Grantor

A Co

B Co

C Co

40%

40%

20%

A Co B Co

A Co + B Co + C Co

Sub-area: D Co

E Co

D Co + E Co

50%

50%

C Co

D Co E Co

Similar principles will apply where some of the existing parties to the concession undertake an exclusive operation in a defined part area. However, these principles will not so apply where a party exercises its right to withdraw from the concession and the JOA (see Chapter 11), because the withdrawing party will not hold a separate and ongoing interest under the concession and the JOA which will need to be reconciled. E.3

Separate concessions The formulation which is described above presumes that the original concession will still apply so as to govern the interests of the original area parties in the original area and also the interests of the sub-area parties in the sub-area, as the sole statement of their legal interest, and a different concession will not be granted. However, it may be that the government elects to sub-divide the original concession area through the grant of a new concession in respect of the sub-area. If this happens, the structure of the relationship between the various parties will instead appear thus (overleaf):

34

OGUK JOA §9.10.3.

279

Appendices

Grantor

Grantor Concession

Concession

A Co + B Co + C Co

D Co + E Co

JOA

JOA

A Co

B Co

C Co

D Co

E Co

40%

40%

20%

50%

50%

Notably, while there will still be the creation of a defined sub-area (as a new concession area), and a new JOA to apply in respect of the interests of the parties to that new concession, there will no longer be the need for a declaration of trust between the original area parties and the sub-area parties (because they will each have their own discrete legal and beneficial entitlements). Neither will there be the need for cross-indemnities in respect of decommissioning costs liabilities (because the decommissioning obligations should apply severally between each concession).

280

Appendix F: Fiduciary duties and the JOA

The parties should consider the extent to which a fiduciary duty might be said to exist within the context of the JOA, the consequences of such a fiduciary duty and how the JOA might modify or exclude such a fiduciary duty. If proven to exist, a fiduciary duty could have the capacity to alter the balance of the rights, responsibilities and liabilities which have otherwise been crafted specifically within the commercial relationship which the JOA seeks to create. This would be an unintended consequence, so it would be preferable to be as clear as possible in the drafting of the JOA about how potential fiduciary duties should be addressed. F.1

Defining and applying a fiduciary duty A fiduciary duty (if it can be proved to exist – see below) is an equitable entitlement which is derived from the general application of common law to the terms of a particular agreement between contracting parties in certain circumstances. In broad terms, a fiduciary duty will be established where one person undertakes to act in a certain manner on behalf of another person and where the person that so undertakes to act has the ability to affect the interests of that other person. If such circumstances exist, the person that has undertaken to so act could owe a duty (referred to as a fiduciary duty) to protect the interests of that other person. If a fiduciary duty is proved to exist within the context of a contract between persons, there will be two particular features to note: the fiduciary duty could supplement the express package of rights and responsibilities which have been recited in the contract; and the remedy prescribed by law for the breach of a fiduciary duty could be more attractive than the remedies which have been expressly provided for by the contract. In broad terms again, the remedy prescribed under English law for breach of a fiduciary duty is essentially one of damages based on an account for profits, where the measure of the damages payable by the person owing the fiduciary duty will be assessed by reference to the gain which has been enjoyed by that person, rather than by reference to the loss which has been suffered by the person to which the fiduciary duty was owed. A constructive trust might also be implied. Further, the time limit for bringing an action for breach of a fiduciary duty could arguably be set by reference to the equitable doctrine of laches (which could give a more generous allowance than would be determined by reference to any contractual or statutory limitation periods).35 The additional potential cause of action which is generated in favour of the

35

But see Re Pauling’s Settlement Trusts [1962] 1 WLR 86.

281

Appendices

beneficiary of a fiduciary duty is not particularly desirable in a contract which has been the subject of specific negotiation between the contracting parties, particularly in respect of any provisions which limit the liabilities of the contracting parties, because of the uncertainty which is thereby transposed by implication into the underlying commercial relationship. The provisions of the JOA which limit the liability of the operator to the parties (12.1) might arguably not be effective so as to limit the liability of the operator to the parties for an alleged breach of a fiduciary duty (depending on how those provisions are actually drafted). The wording of the limitation of the operator’s liability relates to a breach of the terms of the JOA, and because the fiduciary duty is implied into the relationship of the parties and is not a term of the JOA (which will be particularly so if the JOA does nothing expressly to address the implication of fiduciary duties – see below), it could be difficult to see how the intended contractual limitation of liability would automatically protect the operator. The following recital represents a meaningful attempt at a judicial definition of what constitutes a ‘fiduciary duty’ under English law: A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or for the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary…he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.36 A popular assumption is that the essence of a fiduciary duty is simply that the fiduciary owing that duty must not make a secret profit (ie, a profit which is not disclosed to the fiduciary’s contracting counterparties); but the individual circumstances of any fiduciary relationship, and so the extent of a particular fiduciary duty, must be examined in every case.37 F.2

Fiduciary duties in the JOA Whether a fiduciary duty can be said to exist in a JOA will need to be considered according to the particular circumstances of the relevant JOA, and particularly in light of the legal and commercial relationship which the JOA creates between the parties and the capacities in which those parties appear within that JOA. It is also arguable that fiduciary duties might be implied into any joint study and bid agreement or area of mutual interest agreement (2.3), or even any unitisation and

36 37

Bristol and West Building Society v Mothew [1998] Ch1 16, per Millet LJ at 18. “The phrase ‘fiduciary duties’ is a dangerous one, giving rise to a mistaken assumption that all fiduciaries owe the same duties in all circumstances. That is not the case.” Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, per Lord Browne-Wilkinson at 206.

282

Peter Roberts

unit operating agreement (see Appendix D). There are two principal areas to consider in which a fiduciary duty might be alleged to exist within a typical JOA. The first is the role of the operator. The appointment of the designated operator to act on behalf of all of the parties to the JOA in the performance of the joint operations, where that operator is appointed by selection from one of the parties (6.2), is the first place to look for where a fiduciary duty might come into existence under the JOA.38 The operator might act as the agent of the parties in the performance of the joint operations (6.3), thus necessitating consideration of the fiduciary duties which arise in consequence of the agent and principal relationship. It is clearly established under English law that an agent owes fiduciary duties to its principals, since the agent holds the power to affect the legal relations of those principals.39 The operator might also hold certain property on trust as the trustee on behalf of the parties as the beneficiaries of that trust (eg, where the operator holds the resultant proceeds of sale of a party’s produced petroleum entitlements on trust (14.3) or is expressed to hold any intellectual property rights generated by the joint operations for the benefit of the parties (17.1)), thus necessitating consideration of the fiduciary duties which arise under the trustee and beneficiary relationship.40 The JOA typically recites the principle that the operator shall not make a profit (or incur a loss) in consequence of accepting the appointment as operator (6.1). This is helpful (although it will not be conclusive, as the substance of the matter will always be more meaningful than the form) in reducing the scope for the implication of a fiduciary duty by reducing the operator’s ability to make a secret profit from that appointment. That said, however, the experience of negotiating the terms of a JOA, as a nonoperating party, with the proposed operator will reveal the sensitivity of the discussions around those aspects of the JOA which can give the operator an advantage (eg, the award of contracts to the operator’s affiliates and in-house functions (8.5) and federal contract suppliers (8.6); the overhead recovery under the accounting procedure (16.2); and the application of operator-owned materials to the performance of the joint operations (16.2)). A declaration in the JOA of what the operator will and will not be entitled to recover might arguably reduce the possibility that a secret profit can thereby be earned, but the detail of such a formulation will be key. The extent to which the operator can act freely in the performance of the joint operations under the JOA might be taken as an indicator of whether a fiduciary duty might be owed to the parties. Where the JOA gives the operator much greater scope for decision making, free of the involvement of the non-operating parties (eg, which 38

39 40

There is a considerable body of case law in Canada on the subject of fiduciary duties owed by the operator (eg, see Erewhon Exploration Ltd v Northstar Energy Corp [1993] AJ No 916; Great Northern Petroleum Mines Ltd v Merland Exploration Ltd (1983) 43 AR 128; and Luscar Ltd v Pembina Resources Ltd [1994] AJ No 864); and also in the United States (see Reserve Oil Inc v Dixon 711 F 2d 951 (10th Circ 1983)). Global Container Lines Ltd v Bonyad Shipping Co [1998] 1 Lloyd’s Rep 528. Keech v Sandford (1726) Sel Cas Ch 61.

283

Appendices

is typically the case for North American JOAs (7.1)), it is arguable that the operator must assume a correspondingly greater fiduciary responsibility. This is in contrast to a JOA which conditions the ability of the operator to act by reference to the sanction of the parties through the OpCom in the JOA (eg, as is the case in the AIPN JOA and the OGUK JOA). The second area to consider is the mutuality of interests. The simple fact that all of the parties are jointly engaged in a contract together could be argued to entail some mutuality of interests between the parties which gives rise to a fiduciary relationship between the parties. There might be a more general, collaborative fiduciary duty which exists between the parties to the JOA as a consequence of the essence of trust which is in inherent within their relationship.41 This will be of relevance to determining fiduciary duties which might be owed between all of the parties and particularly to how the non-operating parties, rather than the operator, might be subject to such duties. In the extreme case, the proven existence of a partnership between the parties (see Appendix B) would entail some fiduciary duties accordingly. This fiduciary relationship could in turn imply the requirement that no party should make a secret profit at the expense of any other party. Such a requirement would in principle apply equally between all of the parties and without regard to the operator/non-operating parties distinction, but the common assumption is that it is the operator which is best placed to engineer a secret profit and so such a fiduciary duty would more likely apply to the operator. Another aspect of the mutuality of interests as between the parties which could be argued to give rise to a fiduciary duty is the need to manage the existence of a conflict of interests between the parties. A ‘fiduciary duty’ could simply be defined as the need, in a commercial relationship, for each party to obviate the existence of a possible conflict of interests which might prejudice the interests of another party to that relationship. The JOA contains the scope for a conflict of interests to arise between the parties. Such a conflict is popularly thought to exist between the operator and the nonoperating parties, and is analysed more fully in Appendix A. In recognition of this perceived conflict of interests, the JOA might provide that the operator will undertake to the non-operating parties not to permit such conflicts of interest to exist.42 Another, sometimes less appreciated, tension in the JOA relationship is that between the parties to the JOA (regardless of whether a party is the operator or a nonoperating party), because ultimately each party is a commercial competitor within the same industry and will have its own commercial direction to pursue, notwithstanding that those parties have agreed to form a joint venture for the purposes of the particular JOA There will be a need to reconcile the potentially conflicting interests of the parties to the JOA in the interests represented by the JOA with any other projects in which those parties might be engaged.

41 42

284

Sheldon v Phillips (1854) 15 NSWR (E) 98, 104 [NSWSC]. AIPN JOA §20.2; OGUK JOA §6.2.3.

Peter Roberts

However, the pursuit by a party of an alternative project will result in an alleged breach of a fiduciary duty only where doing so has had some deleterious effect on the JOA. Simply undertaking an alternative project without affecting the JOA should not be a concern, but in consequence of a party’s interests in an alternative project, that party could behave in a manner which could be detrimental to the interests of the parties under the JOA. In the simplest sense, this behaviour might be manifested, for example, by applying confidential data which has been generated under the JOA for the better interpretation of the prospects under another project. At the other end of the scale, this behaviour could be evidenced by the decision of a party to focus its development efforts on another project, at the expense of promoting the joint operations under the JOA, and taken to the extreme, a party might decide deliberately to default on a cashcall or invoice request (16.2), and so face the forfeiture of its interests under the JOA default procedure (14.4) simply to be rid of its ongoing liabilities so that it can focus its attention (and resources) on its other project interests. Any of these behaviours could expose the party in question to the allegation that it owes a fiduciary duty to the other parties, and that it has breached that fiduciary duty and will be liable accordingly. The reality is that a party will always make its commercial decisions based on a perception of what best suits its own particular commercial interests at any given time, taking the particular JOA interest in the context of a wider portfolio of project interests. The CAPL JOA in particular recognises this reality, with the following provision: Each party acknowledges that the parties are engaged in the oil and gas business. Each party is free to conduct its business in such manner as it, in its sole discretion, sees fit, even if it is (or may be) in competition with potential joint operations. Nothing in this agreement restricts a party from making elections or decisions in what it perceives to be its own interest, economic or otherwise.43 The AAPL JOA also recognises the freedom of the parties to act on an arm’slength basis in accordance with their own respective self-interests; similar recognition can be found in the AIPN JOA.44 The OGUK JOA does not specifically address this issue. The JOA might expressly provide that each party can (7.4) cast its votes at the OpCom according to what it perceives to be its own best interests, and that there is no obligation on the part of a party to act in the best interests of the parties as a whole. This reduces the scope for argument that the parties owe fiduciary duties between themselves, and a similar conclusion might be arrived at from the application of any exclusive operations provisions (see Chapter 5). The idea that a fiduciary duty might exist in equal measure between all parties to the JOA, rather than simply by the operator to the non-operating parties, has gathered some judicial support in the United States45 and Canada.46

43 44

CAPL JOA §1.05B, although this provision then goes on to provide that this freedom of the parties is subject to any fiduciary duty imposed at law or in equity or to any duty of good faith or similar duty. AIPN JOA §20.2(C).

285

Appendices

It might be suggested that a possible solution to this conflict of interests would be to have a covenant in the JOA, given by all parties, that they will each prefer their interests in the JOA over the interests which they might have in any other project, but this would raise the spectre of a clear breach of fiduciary duty in any other JOA which would thereby be subordinated to this express primacy, and in any event such a commitment would be commercially unacceptable. The essential issue to consider here is the need to define the agreed position on whether (or to what extent) a party to the JOA can devote its attentions to an alternative project without being accused of having breached a fiduciary duty owed to the other parties within the JOA. Assuming that a provision in the JOA to the effect that across alternative project interests priority will be given by each party to the JOA is not tenable, the preferable option is expressly to provide in the JOA that a party is entitled to be interested in an alternative project (much like the proposition set out in the CAPL JOA – see above), and that any liability for breach of a fiduciary duty which might run counter to this principle is excluded (which is not where the CAPL JOA formulation ends up). However, by doing so it will become imperative to ensure that the JOA contains effective provisions to penalise a party for a failure to meet its obligations under the JOA in such a circumstance. A fiduciary duty might also be equated to a general duty of a party to an agreement to act in good faith, and what this means should be considered (and addressed if necessary in the JOA). English law has expressed the possibility that the accepted list of fiduciary duties might include a duty to act in good faith, albeit on the basis of an obligation not to act in bad faith rather than a positive and openended obligation to act in good faith.47 Such a good-faith requirement should not be confused with the principle, often expressed in the JOA, that the operator will act as a reasonable and prudent operator (which will be defined in the JOA), and/or in accordance with good and prudent oil and gas field practice (which will also be defined in the JOA (6.3)), since these requirements are derived from the express provision of a contract rather than relying on an implication of an undefined duty. The English courts have proved themselves reluctant to imply a duty of good faith into a commercial contract,48 but the wording of the particular JOA on this point should always be considered. The AAPL JOA expressly recognises an obligation of the parties to act in good faith in their dealings with each other in respect of the subject matter of the JOA.49 Both the AIPN JOA and the OGUK JOA are silent on the issue of an obligation to act in good faith. The CAPL JOA adopts an awkward compromise to the effect that the express disclaimer of trust duties or fiduciary duties between the parties is not intended to lessen any duty of good faith (or similar duty) that might otherwise apply to the parties at law or in equity.50

45 46 47 48 49 50

286

Amoco Production Co v Wilson 976 P 2d 941. Lac Minerals v International Corona Resources Ltd [1989] 2 SCR 574. Attorney-General v Blake [1998] Ch 439. Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1988] 1 All ER 348. AAPL JOA 810 §VIIA. CAPL JOA §1.05B.

Peter Roberts

F.3

Managing fiduciary duties in the JOA It is debatable whether, or at least to what extent, a fiduciary duty might exist in the context of a JOA, but there is enough evidence to suggest that – in broad principle at least – this might well be the case. Equity might not interfere so as to imply a fiduciary duty into a commercial contract which has been negotiated at arm’s length between sophisticated parties, but where there is any silence or ambiguity in that contract, there might be scope for the intervention of equity in the form of the implication of fiduciary duties. This thus gives added impetus to the parties to ensure that the JOA is fully comprehensive and expressly addresses all the issues which might otherwise be determined by a fiduciary duty. Once the potential for a fiduciary duty to exist within a JOA has been recognised, it should also be considered how the JOA will respond to that recognition. The JOA is a contract, and it should be appreciated that any express contractual relationship which is brought into existence between persons has the capacity to shape any fiduciary duty which might otherwise arise by implication between those parties: That contractual and fiduciary relationships may co-exist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties.51 It therefore follows that if a contract has the capacity to allow the implication of a fiduciary duty, that same contract should also have the power to modify that fiduciary duty. This very principle will apply equally in respect of a JOA. From the operator’s perspective, the existence of such a duty might be used by a non-operating party to call the operator to account for an alleged secret profit made under the JOA. This needs to be addressed, given that so much of the JOA is devoted to excluding the operator’s potential liability to the parties for so acting (12.1). Historically, something of a Nelsonian eye has typically been applied to this issue by the non-operating parties in the interests of preserving harmony under the JOA (and in other project relationships), but this will always be the case – particularly for the new breed of entrants into petroleum exploration and production operations worldwide, for which maximising cost-effective operations is critical and to which the adoption of a more aggressive stance with the operator might not be a difficulty. Thus, the operator might be keen in the JOA expressly to exclude the potential for the allegation of a fiduciary duty. However, the reaction of the non-operating parties to such an exclusion might be to point out that if the principal economic expectation under the JOA is that the operator should not profit from its position as such, the operator should have no reluctance in reinforcing that expectation by accepting the implication, or even the expression, of a fiduciary duty to that effect in favour of the non-operating parties, and in accepting the concomitant liability for a proven breach of that duty. The possibility of a fiduciary duty owed by the operator to the non-operating

51

Kelly v Cooper [1993] AC 205, per Lord Browne-Wilkinson at 215.

287

Appendices

parties is the typical point of focus in the JOA relationship, but attention should also be paid to the less obvious (but perhaps more prospective) possibility that a fiduciary duty is alleged to be owed between all of the parties, where such a fiduciary duty could be argued for in order to preserve and promote the interests of the JOA ahead of the interests of a party in another project. The treatment by contract of a fiduciary duty which might otherwise apply by implication varies between the different forms of JOA, but as a general point of principle a comprehensive, fully termed JOA which identifies all rights and responsibilities of the parties is more likely to obviate the need for equitable intervention in the shape of an implied fiduciary duty in order better to define the relationships of the parties.52 In particular, if the terms of the JOA apply a more meaningful definition of the potential circumstances in which the operator might be liable to the parties (12.1) or a more meaningful remedy for a party’s default (14.2), or if the JOA gives a meaningful measure of involvement of the non-operating parties in the operator’s activities through the OpCom and other control mechanisms in the JOA, then it should be commensurately less necessary to imply a fiduciary duty as a means of enforcing the JOA. Any deficiency in the provision of express remedies, rights and obligations under the JOA might therefore give a greater inclination towards implying a fiduciary duty. The existence of an entire agreement clause in the JOA (17.3) might be relied upon as evidencing the intention of the parties to exclude the implication of any fiduciary duties, although this is a poor substitute for an express statement of intent. However, a bold statement in the JOA that fiduciary duties do not apply might not be sufficient if the substance of the arrangement dictates otherwise (eg, as is the case in determining whether the JOA constitutes a partnership – see footnote 8 in Appendix B). In respect of fiduciary duties, the AAPL JOA states that the operator is not the agent or fiduciary of the non-operating parties;53 the AIPN JOA also disclaims the existence of a trust or of any fiduciary duties, except where the JOA expressly provides otherwise.54 The CAPL JOA adopts something of a halfway house,55 whereby the parties state their intention not to create any fiduciary relationship between any of them, except in respect of the commingling of funds by the operator, the distribution of the proceeds of sale earned on behalf of a party which does not lift its share of the produced petroleum, and the obligation to preserve information as confidential and subject always (notwithstanding the purported exclusion under the JOA) to the possible imposition of a fiduciary relationship at law or in equity. This latter point is expressed to apply in recognition of the principle that the parties to a contract cannot purport to exclude the jurisdiction of a competent court to make a determination. The OGUK JOA says nothing about the existence of a fiduciary duty, other than 52 53 54 55

288

Boulting v ACTAT (1963) 2 QB 606 at 636. AAPL JOA 810 §5.1. AIPN JOA §14.1. CAPL JOA §1.05A.

Peter Roberts

including losses arising from a claim for a breach of a fiduciary duty within the definition of consequential loss for which the operator will not ordinarily be liable (12.1). Moreover, the provision which sometimes appears in a JOA whereby the parties recognise that monetary damages alone might not be an adequate remedy for a breach, and that equitable remedies could be more appropriate (which is primarily intended to open the door to the right to seek injunctive relief or a decree of specific performance), might arguably also leave that door open for a party to claim an account for profits for an alleged breach of a fiduciary duty.

289

About the author

Peter Roberts Partner, Ashurst LLP [email protected] Peter Roberts is a partner with Ashurst LLP, based in London. He is an experienced upstream energy projects lawyer and has had extensive experience of drafting, negotiating and managing petroleum sector

joint

ventures

in

several

different

jurisdictions. He has worked in-house (with Exxon and with Centrica) and in private practice, including living and working in the Far East between 1997 and 2005. He is the editor of the Journal of World Energy Law & Business (published by the Association of International Petroleum Negotiators (AIPN) and Oxford University Press), the immediate past chairman of the International Bar Association’s Oil & Gas Law Committee and a member of the Association of Petroleum Negotiators

and

the

Society

of

Petroleum

Engineers, and is also an occasional lecturer at

Dundee

Petroleum

University’s and

Mineral

Centre

for

Law

and

Energy, Policy

http://www.cepmlp.org. He is also the author of Gas Sales and Transportation Agreements: Principles and Practices (Sweet & Maxwell, second edition published in 2008).

291

Index

AAPL JOA accounting procedure, and, 215 affiliate services contracts, and, 116 collateral support, and, 46 decommissioning, and, 173 dispute resolution, and, 206 exclusive operations, and, 68 expanding scope of JOA, and, 62–63 farm-out agreements, and, 258 fiduciary duties, and generally, 285–286 managing, 288 generally, 18 joint operations, and, 56 meaning, 9 leasehold interests, and, 20–21 liability of operator to parties, and, 156 mortgage over interests as security, and, 193 operational perspectives, and, 246 operator, and removal, 87 role, 84–85 selection, 81 participating interests, and, 48 secondment, and, 238 selection of operator, and, 81 voting control, and, 102 work programme and budgets, and, 105 Abandoned mine methane (AMM) meaning, 9 use of JOA, and, 15 Abandonment and see Decommissioning generally, 171 Access to property exclusive operations, and, 75–76 Accounting procedure adjustment rights, 218 audit rights extent, 220 generally, 218 cashcalls extent, 219–220 generally, 216–217 contents adjustments, 218 audit, 218 cashcalls, 216–217 direct charges reimbursement, 218 indirect charges reimbursement, 218–219 invoice requests, 216–217 maintenance of accounts and record, 216 materials costs, 219 direct charges reimbursement

generally, 218 issues, 221 indirect charges reimbursement generally, 218–219 issues, 221 introduction, 215 invoice requests, 216–217 issues extent of audit rights, 220 extent of operator’s cashcalls, 219–220 introduction, 219 materials furnished by operator, 221 reimbursement of charges, 221 maintenance of accounts and record, 216 materials costs furnished by operator, 221 generally, 219 partnership, and, 254 principles, 215 pro forma, 215 reimbursement of charges direct charges, 218 indirect charges, 218–219 issues, 221 Accrued liabilities transfer of interests by agreement, and, 133 Adjustment rights accounting procedure, and, 218 AFEs cost control, and, 109–111 decommissioning security, and, 178 Affiliate services contracts cost control, and, 115–117 contract awards, and, 114 Affiliate transfers and see Transfer of interests generally, 144–145 AIPN JOA accounting procedure, and, 215 affiliate services contracts, and, 117 change of control, and, 143–144 collateral support, and, 46 confidentiality, and, 223 default, and, 186–187 dispute resolution, and, 206 entire agreement, and, 228 exclusive operations, and, 65 farm-out agreements, and, 258 fiduciary duties, and generally, 284–286 managing, 288 force majeure, and, 229 generally, 18 government participation, and, 50–51

293

Index

joint operations, and, 57 joint study and bid agreement, and, 40 liability of operator to parties, and, 157 meaning, 9 OpCom, and, 96 operational perspectives, and, 247 partial withdrawal, and, 152 secondment, and, 238 third-party liabilities, and, 164 unitisation, and, 266 voting control, and, 102 withdrawal, and, 149 work programme and budgets, and, 105 Allocation of costs and profits exclusive operations, and, 69–70 Allocation of liabilities exclusive operations, and, 71–72 Allocation of petroleum generally, 121–123 Alternative dispute resolution (ADR) and see Dispute resolution generally, 207 Alternative interests generally, 29 Amendment of agreements generally, 228 American Association of Professional Landsmen (AAPL) JOA accounting procedure, and, 215 affiliate services contracts, and, 116 change of control, and, 143–144 collateral support, and, 46 decommissioning, and, 173 dispute resolution, and, 206 exclusive operations, and, 68 expanding scope of JOA, and, 62–63 farm-out agreements, and, 258 fiduciary duties, and generally, 285–286 managing, 288 generally, 18 joint operations, and, 56 liability of operator to parties, and, 156 meaning, 9 leasehold interests, and, 20–21 mortgage over interests as security, and, 193 operational perspectives, and, 246 operator, and removal, 87 role, 84–85 selection, 81 participating interests, and, 48 secondment, and, 238 selection of operator, and, 81 voting control, and, 102 work programme and budgets, and, 105 Announcements confidentiality, 223–226 API gravity meaning, 9 Appraisal joint operations, and, 56 work programme and budgets, and, 106 Arbitration and see Dispute resolution generally, 208–211 Area of mutual interest agreements concessions, and, 15

294

joint study and bid agreement, and, 40–41 Asset development approach to conduct of operations, and non-operating parties, 245 operator, 244 Asset transfers transfer of interests by agreement, and, 131 Asset value operators, and, 80 Associated gas meaning, 9 Association of International Petroleum Negotiators (AIPN) JOA accounting procedure, and, 215 affiliate services contracts, and, 117 collateral support, and, 46 confidentiality, and, 223 default, and, 186–187 dispute resolution, and, 206 entire agreement, and, 228 exclusive operations, and, 65–67 farm-out agreements, and, 258 fiduciary duties, and generally, 284–286 managing, 288 force majeure, and, 229 generally, 18 government participation, and, 50–51 joint operations, and, 57 joint study and bid agreement, and, 40 liability of operator to parties, and, 157 meaning, 9 OpCom, and, 96 operational perspectives, and, 247 partial withdrawal, and, 152 secondment, and, 238 third-party liabilities, and, 164 unitisation, and, 266 voting control, and, 102 withdrawal, and, 149 work programme and budgets, and, 105 Attribution petroleum lifting, and, 127 Audit rights extent, 220 generally, 218 Authority for expenditure (AFE) cost control, and, 109–111 decommissioning security, and, 178 Balancing agreement petroleum lifting, and, 126 Bank guarantee collateral support, and, 46 Bitumen meaning, 9 Borrowings default, and, 188 Buy-back rights exclusive operations, and, 72–73 Canadian Association of Petroleum Landsmen (CAPL) JOA accounting procedure, and cashcalls, 217 generally, 215 affiliate services contracts, and, 117 authority for expenditure, and, 110

Joint Operating Agreements: A Practical Guide

collateral support, and, 46 dispute resolution, and, 206 duration of JOA, and, 35 exclusive operations, and, 68 expansion of scope of JOA, and, 63 farm-outs, and, 258 fiduciary duties, and generally, 285–286 managing, 288 generally, 19 joint operations, and, 46 liability of operator to parties, and, 156 liens, and, 193 meaning, 9 mortgage over interests as security, and, 193 North American leasehold interests, and, 20–21 OpCom, and, 96 operational perspectives, and, 247 operator, and liability to parties, 156 removal, 88–89 role, 84 participating interests, and, 47 unitisation, and, 265 work programme and budgets, and, 105 Capitalisation incorporated joint ventures, and, 22 Carried interests parties, and, 51–53 Cash deposit decommissioning security, and,177 Cashcalls default, and, 185 extent, 219–220 generally, 216–217 Coal bed methane (CBM) meaning, 9 use of JOA, and, 15 Collateral support decommissioning, and, 171 parties, and, 44–47 Commencement duration of JOA, and, 33–36 Commitment incorporated joint ventures, and, 22 partnership, and, 254–255 Commitment wells concessions, and, 12 Competition law incorporated joint ventures, and, 23 Concession area generally, 12 Concession phases generally, 12–13 Concessions generally, 11–13 Condensates meaning, 9 Confidentiality generally, 223–226 litigation, and, 210 surviving provisions, and, 37 Consequential loss liability of operator to parties, and, 158 Consolidation dispute resolution, and, 211

Contingent liabilities transfer of interests by agreement, and, 133 Contract awards cost control, and, 111–114 Contracting decommissioning, and, 179 operators, and, 82–83 partnership, and, 252–256 Contracting capacity contract awards, and, 113–114 incorporated joint ventures, and, 24 Control operators, and, 80 Convention for the Protection of the Marine Environment of the North-East Atlantic (OSPAR) 1992 decommissioning, and, 173 Convention on the Law of the Sea (UNCLOS) 1982 decommissioning, and, 173 Cooperation agreements concessions, and, 15 Corporate and social responsibility generally, 226–227 Corporate guarantees collateral support, and, 46 decommissioning security, and, 178 Cost control affiliate services contracts, 115–117 authority for expenditure, 109–111 contract awards, 111–114 federal contracts, 117–119 in-kind contributions, 114–115 introduction, 105 work programme and budget, 105–109 Costs default, and, 194 dispute resolution, and, 210 transfer of rights, and, 137–138 Crown entitlement to deposits, and, 12 Crude oil meaning, 10 Damages default, and, 190 Data access exclusive operations, and, 73–74 Decommissioning contracting, 179 default provisions of the JOA, under, 179 security agreement, under, 183 Decommissioning Security Agreement default by a party, 183 generally, 180–181 operator’s role, 182 parties, 181–182 relationship with JOA, 181 role, 181 transfers, and, 182 withdrawal, and, 182–183 exclusive operations, 179 expert determination, and, 207 generally, 171–172 governing law, and, 171 introduction, 171 joint operations, and, 57

295

Index

OpCom’s role, 178 operator’s role provisions of the JOA, under, 178 security agreement, under, 182 provisions of the JOA, under contracting, 179 default, 179 exclusive operations, 179 introduction, 178 OpCom’s role, 178 operator’s role, 178 timing, 180–183 transfer of interests, 179–180 withdrawal, 179–180 regulatory regime, 172–176 Section 29 notices generally, 173–176 recipients, 174–175 security forms, 177–178 generally, 176–177 protection, 178 value, 178 surviving provisions, and, 36 timing, 180 transfer of interests provisions of the JOA, under, 179–180 security agreement, under, 182 unitisation, and, 275 withdrawal provisions of the JOA, under, 179–180 security agreement, under, 182–183 work programme and budgets, and, 107 Decommissioning Security Agreement default by a party, 183 generally, 180–181 operator’s role, 182 parties, 181–182 relationship with JOA, 181 role, 181 transfers, and, 182 withdrawal, and, 182–183 Default costs, and, 194 damages, 190 decommissioning, and provisions of the JOA, under, 179 security agreement, under, 183 definition, 185–187 forfeiture equitable relief, 199–200 external sale of defaulting party’s interests, 199 generally, 194–198 insolvency, and, 201–202 internal sale of defaulting party’s interests, 199 introduction, 191 proportionality, and, 198–199 reacquisition of forfeited interests, 199 relief, 199–200 summary, 202 unfair preferences, and, 201 ‘withering interest’ provision, 198 injunctions, 190 introduction, 185 lien, 193 mortgage over interests as security, 191–193

296

petroleum lifting, and, 191 remedies costs, and, 194 damages, 190 forfeiture, 194–202 generally, 189–194 government entities, and, 193 injunctions, 190 lien, 193 mortgage over interests as security, 191–193 petroleum lifting, and, 191 role, 202–203 sale of petroleum entitlements, 191 ‘seize and sell’, 193 suspension of voting rights, 190–191 response of operator, 187–189 sale of petroleum entitlements, 191 ‘seize and sell’, 193 surviving provisions, and, 37 suspension of voting rights, 190–191 unitisation, and, 275 Default certificate agreement remedies for default, and, 191 Default insurance collateral support, and, 46 Development work programme and budgets, and, 106 Dialogue and see Dispute resolution generally, 206–207 Direct charges reimbursement generally, 218 issues, 221 Disposal of petroleum generally, 128 joint operations, and, 57 Dispute resolution arbitration, 208–211 consolidation, 211 dialogue, 206–207 expert determination, 207–208 introduction, 205 jurisdiction, 211 litigation, 208–211 mechanism, 205–206 sovereign immunity, and, 212–213 surviving provisions, and, 37 Domestic market obligations petroleum allocation, and, 122 Downstream infrastructure excluded operations, and, 60 Duration of JOA chronology, 41 commencement, 33–36 introduction, 33 pre-JOA arrangements, 38–41 surviving provisions, 36–38 term, 33–36 Economic advantage operators, and, 80 Economic conditions generally, 29 Economic profile generally, 30–31 Economic viability decommissioning, and, 172

Joint Operating Agreements: A Practical Guide

Effective date duration of JOA, and, 34–35 Entire agreement generally, 227–228 Environmental protection generally, 231–233 Equitable relief forfeiture, and, 199–200 Equity joint ventures generally, 26 Ethical behaviour generally, 226–227 Excluded operations scope of JOA, and, 60–61 Exclusive operations access to joint property, 75–76 allocation of costs and profits, 69–70 allocation of liabilities, 71–72 buy-back rights, 72–73 data access, 73–74 decommissioning, and, 179 definition, 65–69 exclusion, 76–77 governance, 70–71 insurance, and, 233 introduction, 65 mechanics access to joint property, 75–76 allocation of costs and profits, 69–70 allocation of liabilities, 71–72 buy-back rights, 72–73 data access, 73–74 definition of the exclusive operation, 75 governance, 70–71 introduction, 69 operator non-participation, 74 permitted operations, 69 prohibited operations, 69 non-consent operations, 66–67 operator non-participation, 74 permitted operations, 69 petroleum allocation, and, 122 prohibited operations, 69 sole risk operations, 66–67 sub-divisions, and, 277 unitisation, and, 274 Exculpatory clause liability of operator to parties, and, 155 Execution date duration of JOA, and, 33–34 Expansion scope of JOA, and, 61–64 Expert determination and see Dispute resolution generally, 207–208 Exploration decommissioning, and, 172 joint operations, and, 56 work programme and budgets, and, 106 Exploration licences definition, 12 External sale of defaulting party’s interests forfeiture, and, 199 Farm-out agreements introduction, 257 issues farm-out obligation, 260–262

introduction, 259 need for a JOA, 259–260 selection of operator, 263 timing of transfer of interests, 262–263 meaning, 257 Model forms, 258 parties’ obligations, 260–262 purpose, 257–259 selection of operator, 263 transfer of interests generally, 257 timing, 262–263 Federal contracts cost control, and, 117–119 contract awards, and, 114 Fiduciary duties application, 281–282 definition, 281–282 features, 281 incorporated joint ventures, and, 22 introduction, 281 management, 287–289 operators, and, 79 partnership, and, 253 provisions of the JOA, and, 282–286 remedies for breach, 281–282 Final accounting surviving provisions, and, 36–37 Financial commitments approach to conduct of operations, and non-operating parties, 244–245 operator, 243–244 Financing excluded operations, and, 60 Fitness for purpose in-kind contributions, and, 115 Force majeure default, and, 187 dispute resolution, and consolidation, 212 expert determination, 207 generally, 206 farm-out agreements, and, 262 generally, 228–230 Forfeiture decommissioning security, and, 179 equitable relief, 199–200 external sale of defaulting party’s interests, 199 generally, 194–198 insolvency, and, 201–202 internal sale of defaulting party’s interests, 199 introduction, 191 proportionality, and, 198–199 reacquisition of forfeited interests, 199 relief, 199–200 summary, 202 unfair preferences, and, 201 ‘withering interest’ provision, 198 Freedom from undue interference approach of operator to conduct of operations, and, 243 Fuel retention petroleum allocation, and, 122 Fund management operators, and, 85

297

Index

Governance exclusive operations, and, 70–71 Governing law decommissioning, and, 171 generally, 230–231 surviving provisions, and, 37 Government participation parties, and, 49–51 Gross negligence liability of operator to parties, and, 157 liability of parties, and, 162 Guarantees collateral support, and, 46 decommissioning security, and, 178 Health, safety and environment generally, 231–233 Heavy oil meaning, 10 Hybrid operators contracted operator, 90–92 incorporated operator, 92 introduction, 89 split operator, 92–93 Hydrocarbon meaning, 10 Incorporated joint ventures generally, 21–27 Indemnity obligations liabilities, and cap on liability, 167 contractual, 167–168 general liability, 168–169 introduction, 167 surviving provisions, and, 37 Indirect charges reimbursement generally, 218–219 issues, 221 Information access operators, and, 80 Information flows approach to conduct of operations, and non-operating parties, 245 operator, 244 Injunctions default, and, 190 In-kind contributions cost control, and, 114–115 contract awards, and, 112 Insolvency forfeiture, and, 201–202 Insurance collateral support, and, 46 definition of the insurances, 233–234 exclusive operations, and, 233 identity of the insurers, 234 insured interests, 234–235 introduction, 233 liabilities, and combination of liability allocation and insurance recoveries, 166–167 introduction, 166 recovery as precursor to applying liability model, 166 recovery in preference to commencing an action, 166 mechanics, 235

298

Internal sale of defaulting party’s interests forfeiture, and, 199 Inventory stock management in-kind contributions, and, 114 Invoice requests accounting procedure, and, 216–217 Irrevocable standby letter of credit decommissioning security, and,177–178 Joint operating agreement (JOA) and see under individual headings duration, 33–41 farm-outs, and, 257–263 fiduciary duties, and, 281–289 partnership, and, 251–256 role, 13–15 sub-divisions, and, 277–280 unitisation, and, 265–276 Joint operations decommissioning, and, 57 petroleum allocation, and, 122 scope of JOA, and, 55–60 Joint sales excluded operations, and, 60 Joint study and bid agreement (JSBA) duration of JOA, 38–41 Joint ventures generally, 15–17 incorporated, 21–27 Jurisdiction dispute resolution, and, 211 Knock-for-knock liability of parties, and, 161 Late payments default, and, 185–186 Leasehold interests North America, and, 20–21 Letters of credit collateral support, and, 46 decommissioning security, and,177–178 Liabilities indemnity obligation limitations cap on liability, 167 contractual, 167–168 general liability, 168–169 introduction, 167 insurance, and combination of liability allocation and insurance recoveries, 166–167 introduction, 166 recovery as precursor to applying liability model, 166 recovery in preference to commencing an action, 166 introduction, 155 operator to the parties, of, 155–160 parties, of, 160–164 sub-divisions, and, 278–279 third parties, to, 164–165 Liens default, and, 193 Lifting of petroleum generally, 123–127 Light oil meaning, 10 Liquids

Joint Operating Agreements: A Practical Guide

meaning, 10 Litigation and see Dispute resolution generally, 208–211 Litigation management generally, 236–237 operators, and, 83 Management of funds and interests operators, and, 85 Managing state participation joint ventures, and, 17 Master deed transfer of rights, and, 135 Matching rights mechanics, 140–141 option to match, 139–140 valuation, 140–141 Materials costs furnished by operator, 221 generally, 219 Mediation and see Dispute resolution generally, 207 Medium oil meaning, 10 Mineral laws generally, 11–13 Minimum work obligations concessions, and, 12 Mitigated financial flows in-kind contributions, and, 114 Model form contracts farm-out agreements, 258 generally, 17–20 Mortgage over interests as security default, and, 191–193 Mutual hold harmless liability of parties, and, 161 Natural gas meaning, 10 Natural gas liquids (NGLs) meaning, 10 Non-consent operations and see Exclusive operations generally, 66–57 Non-operating parties approach to conduct of operations adequate operational control, 244 compellable asset development, 245 comprehensive information flows, 245 introduction, 243 manageable financial commitments, 244–245 overview, 248–249 reconciling perspectives, 245–248 introduction, 95 mechanics, 97–99 role, 95–96 subcommittees, 99 voting control, 99–104 Norwegian Petroleum Directorate (NPD) JOA generally, 19 government participation, 50 Notices generally, 237 surviving provisions, and, 37

Novation parties, and, 43 Oil and Gas UK (OGUK) JOA accounting procedure, and cashcalls, 217 generally, 215 affiliate services contracts, and, 117 affiliate transfers, and, 145 cashcalls, and, 217 collateral support, and, 46 cost control and contracting, and affiliate services contracts, 117 federal contracts, 118 decommissioning, and, 180–181 default, and generally, 186–187 proportionate forfeiture, 199 dispute resolution, and, 206 duration, and generally, 35 surviving provisions, 37 entire agreement, and, 218 excluded operations, and, 61–62 exclusive operations, and, 68 expanding scope of JOA, and, 61–62 federal contracts, and, 118 fiduciary duties, and generally, 284–286 managing, 288 generally, 19 joint operations, and, 56 meaning, 10 OpCom, and generally, 96 voting control, 102 operational perspectives, and, 248 operator, and agency status, 85 liability to parties, 157 removal, 88 pre-emption rights, and, 139 secondment, and, 239 sub-division, and, 278 wilful misconduct, and, 157–159 work programme and budgets, and, 105 On-demand performance bonds decommissioning security, and, 178 Operating committee (OpCom) approach to conduct of operations adequate operational control, 244 compellable asset development, 245 comprehensive information flows, 245 introduction, 243 manageable financial commitments, 244–245 overview, 248–249 reconciling perspectives, 245–248 authority for expenditure, and, 109 contract awards, and, 114 decommissioning, and, 178 duration of JOA, and, 35 introduction, 95 mechanics, 97–99 removal of operator, and, 88 role, 95–96 subcommittees, 99 voting control, 99–104

299

Index

work programme and budgets, and, 106–107 Operational control operators, and, 80 Operational reputation operators, and, 79–80 Operational requirements operators, and, 83–84 Operator advantages asset value, 80 economic advantage, 80 information access, 80 introduction, 79 operational control, 80 operational reputation, 79–80 approach to conduct of operations compellable financial commitments, 243–244 flexible asset development, 244 freedom from undue interference, 243 introduction, 243 manageable information flows, 244 overview, 248–249 reconciling perspectives, 245–248 asset value, and, 80 concessions, and, 13 contract awards, and, 111 contracting, 82–83 control, and, 80 decommissioning, and provisions of the JOA, under, 178 security agreement, under, 182 default, and, 189 economic advantage, 80 fiduciary duties, and, 79 fund management, 85 hybrid arrangements contracted operator, 90–92 incorporated operator, 92 introduction, 89 split operator, 92–93 information access, and, 80 introduction, 79 liabilities, and, 155–160 litigation management, 83 management of funds and interests, 85 operational control, 80 operational reputation, 79–80 operational requirements, 83–84 performance standards, 84–85 recognition of parties, 85 reimbursement, 83 removal, 87–89 representation before government, 83 reputation, and, 79–80 role, 82–87 selection, 80–82 staffing, 82 standards of performance, 84–85 Operator non-participation exclusive operations, and, 74 Option to match change of control, and, 143 pre-emption rights, and, 139–140 Option to negotiate change of control, and, 143 pre-emption rights, and, 141 OSPAR (Oslo and Paris) Convention 1992

300

decommissioning, and, 173 Overspends authority for expenditure, and, 111 Ownership of assets incorporated joint ventures, and, 22–23 Partial transfers and see Transfer of interests generally, 136–137 sub-divisions, and, 277 Partial withdrawal and see Withdrawal generally, 152–153 sub-divisions, and, 277 Participating interests generally, 47–49 Participation rights petroleum allocation, and, 122 Parties carried interests, and, 51–53 collateral support, 44–47 Decommissioning Security Agreement, and, 181–182 general principles, and, 28 generally, 43–44 government participation, and, 49–51 illustrative agreements, 53–54 introduction, 43 liabilities, 160–164 non-operating parties, and And see Operating committee introduction, 95 mechanics, 97–99 role, 95–96 subcommittees, 99 voting control, 99–104 operators, and And see Operator advantages, 79–80 economic advantage, 80 hybrid arrangements, 89–93 introduction, 79 removal, 87–89 role, 82–87 selection, 80–82 participating interests, and, 47–49 Partnership accounting, 254 commitment, 254–255 consequences contracting limits and liabilities, 252–256 fiduciary duties, 253 introduction, 252 taxation, 252 contracting limits and liabilities, 252–256 contribution, 254 definition, 251–252 distributions, 254 employees, 255 fiduciary duties, 253 introduction, 251 property interests, 255–256 provisions of JOA, and accounting, 254 commitment, 254–255 contribution, 254 distributions, 254

Joint Operating Agreements: A Practical Guide

employees, 255 introduction, 253–254 property interests, 255–256 termination, 256–257 transfer liability, 256 taxation, 252 termination, 256–257 transfer liability, 256 Penalties forfeiture, and, 197–198 ‘Pendulum’ procedure dispute resolution, and, 208 Performance affiliate services contracts, and, 115 contracting capacity, and, 24 cost control, and, 105 decommissioning, and, 171 default, and, 185 dispute resolution, and, 205–206 exclusive operations, and, 65 federal contracts, and, 117–118 grant of concession, and, 13 in-kind contributions, and, 114 liabilities, and, 155 OpCom, and, 95 operator, and advantage, 79–80 removal, 88 role, 82–86 selection, 80–81 scope of the JOA, and, 55 surviving provisions, and, 36 Performance bonds decommissioning security, and, 178 Performance standards operators, and, 84–85 Permitted operations exclusive operations, and, 69 Petroleum definition, 12 Petroleum allocation generally, 121–123 Petroleum deposit unitisation, and, 268 Petroleum disposal generally, 128 Petroleum lifting default, and, 191 generally, 123–127 Petroleum reserves decommissioning, and, 172 generally, 28 Petroleum UKCS meaning, 10 Political risk mitigation joint ventures, and, 17 Pooling of interests generally, 15 unitisation, and, 265 Pre-development joint operations, and, 56 Pre-emption rights introduction, 138–139 matching rights formulation mechanics, 140–141 option to match, 139–140 valuation, 140–141 rights of refusal formulation, 141

Pre-unitisation agreement and see Unitisation generally, 266 Pro forma accounting procedure, and, 215 Production joint operations, and, 57 work programme and budgets, and, 106–107 Prohibited operations exclusive operations, and, 69 Property interests partnership, and, 255–256 Proportionality forfeiture, and, 198–199 Reacquisition of interests forfeiture, and, 199 Recognition of parties operators, and, 85 Re-guarantee collateral support, and, 47 Reimbursement charges, of direct charges, 218 indirect charges, 218–219 issues, 221 operators, and, 83 Removal operators, and, 87–89 Representation before government operators, and, 83 Representations generally, 241–242 Reputation operators, and, 79–80 Reserves of petroleum generally, 28 Restricted rights withdrawal, and, 148 Retention of petroleum petroleum allocation, and, 122 Returns to parties incorporated joint ventures, and, 24 Rights of refusal pre-emption rights, and, 141 Risk sharing joint ventures, and, 16 Rocky Mountain Mineral Law Foundation (RMMLF) JOA generally, 19 unitisation, and, 266 use of JOA, and, 15 Rome Convention on the Law Applicable to Contractual Obligations 1980 governing law, and, 231 Sale of petroleum entitlements default, and, 191 Scope clause excluded operations, 60–61 expansion of, 61–64 general principles, and, 28–29 introduction, 55 joint operations, 55–60 Secondment generally, 237–239 Section 29 notices generally, 173–176

301

Index

recipients, 174–175 Security decommissioning, and forms, 177–178 generally, 176–177 protection, 178 value, 178 withdrawal, and, 151 Security transfers and see Transfer of interests generally, 135–136 ‘Seize and sell’ default, and, 193 Sequestration and see Forfeiture generally, 179 Set-off default, and, 189 Share transfers and see Transfer of interests generally, 131 Shareholders’ agreements incorporated joint ventures, and, 21–27 Skill sharing joint ventures, and, 16 Social responsibility generally, 226–227 Sole risk operations/project and see Exclusive operations decommissioning, and, 172 generally, 66–67 Sovereign immunity dispute resolution, and, 212–213 Staffing operators, and, 82 Standards of performance operators, and, 84–85 Standby letter of credit decommissioning security, and,177–178 Subcommittees OpCom, and, 99 Sub-divisions introduction, 277 mechanics, 278–279 principle, in, 277–278 separate concessions, 279–280 Subrogation default, and, 188 Surviving provisions duration of JOA, and, 36–38 Suspension of voting rights default, and, 190–191 Taxation generally, 239–240 partnership, and, 252 Term duration of JOA, and, 33–36 Termination events incorporated joint ventures, and, 24 Termination see also Withdrawal generally, 35 partnership, and, 256–257 Third-party access excluded operations, and, 60 Third-party involvement generally, 240–241

302

Third-party suppliers contract awards, and, 112 Tract participations unitisation, and, 270–271 Transfer of interests affiliate transfers, 144–145 agreement between the parties, by accrued liabilities, 133 approval of transferee, 134 asset transfers, 131 contingent liabilities, 133 costs, 137–138 issues, 132–134 mechanics, 134–135 methods, 131 minimum level transfers, 132 partial transfers, 136–137 security transfers, 135–136 share transfers, 131 transfer of operatorship, 132–133 applicable law, under, 129–131 asset transfers, 131 change of control clause, under, 142–144 decommissioning, and provisions of the JOA, under, 179–180 security agreement, under, 182 default, and completion, 196 generally, 190 duration of JOA, and, 35 farm-out agreements generally, 257 timing, 262–263 incorporated joint ventures, and, 23 introduction, 129 issues accrued liabilities, 133 approval of transferee, 134 contingent liabilities, 133 minimum level transfers, 132 transfer of operatorship, 132–133 partial transfers, 136–137 partnership, and, 256 pre-emption rights, under introduction, 138–139 matching rights formulation, 139–141 rights of refusal formulation, 141 security transfers, 135–136 share transfers, 131 unitisation, and, 275 UK Continental Shelf (UKCS) change of control, and, 142 consolidation, and, 212 decommissioning, and generally, 173 security, 177 default remedies, and, 194 economic conditions, and, 29 health, safety and environment, and, 231 incorporated operator, and, 92 insurance, and, 234 introduction, 11–12 operator, and role, 84 selection, 81 parties to JOA, and, 44 pre-emption rights, and, 139

Joint Operating Agreements: A Practical Guide

selection of operator, and, 81 seize and sell rights, and, 194 transfer of interests, and, 135 UN Convention on the Law of the Sea (UNCLOS) 1982 decommissioning, and, 173 UNCITRAL dispute resolution, and, 209 Unfair preferences forfeiture, and, 201 Unitisation appointment of unit operator, 270 decommissioning, 275 default, 275 determination of tract participations, 269 determination of unit equities, 269–270 duration, 273 exclusive operations, 274 identification of petroleum deposit, 268 identification of relevant concession areas, 268 introduction, 265 meaning, 265 mechanics appointment of unit operator, 270 determination of tract participations, 269 determination of unit equities, 269–270 generally, 265–268 identification of petroleum deposit, 268 identification of relevant concession areas, 268 redetermination of tract participations, 270–271 ‘pooling’, 265 provisions of the JOA, and decommissioning, 275 default, 275 duration, 273 exclusive operations, 274 introduction, 271–272 scope, 273 selection of operator, 273 transfers, 275 unit operations, 274 voting control, 273–274 withdrawal, 275–276 redetermination of tract participations, 270–271 selection of operator, 273 transfers, 275 unit operations, 274 voting control, 273–274 withdrawal, 275–276

Withdrawal conditions, 148 consequences, 153–154 correspondence with project documents, 150 decommissioning, and provisions of the JOA, under, 179–180 security agreement, under, 182–183 default, and, 190 general principle, 147–148 introduction, 147 mechanics, 149–152 partial, 152–153 prohibited periods, 149–150 restricted non-participation rights, 148 restricted termination rights, 148 unitisation, and, 275–276 ‘Withering interest’ provision forfeiture, and, 198 Work obligations concessions, and, 12 Work programme and budget decommissioning, and generally, 178 introduction, 107 generally, 105–109

Valuation in-kind contributions, and, 115 Voting control OpCom, and, 99–104 unitisation, and, 273–274 Voting rights default, and, 190 Warranties generally, 241–242 Wilful misconduct liability of operator to parties, and, 157 liability of parties, and, 162–163

303