An Introduction To Joint Operating Agreements – Part 1

refinery_1It is a well known fact that economic activities such as oil and gas exploration are fraught with high costs and extreme risks. Thus, business vehicles known as joint ventures are the main way by which international oil companies come together to offset costs and to share risks. It is generally recognised that partnerships, limited partnerships, companies and unincorporated contractual associations are some of the various forms by which a joint venture could take. It is also widely regarded that the types of joint ventures generally undertaken with regard to oil and gas exploration are referred to as ‘unincorporated joint ventures’ and the contractual arrangement which gives effect to this particular type of joint venture is known as the joint operating agreement (JOA). With the current divestment activities of multinationals of their percentage interests in working joint ventures in the onshore Niger Delta region, this article gives a brief overview of some of the key features of these contractual relationships and also identifies some of the reasons why oil companies opt for these arrangements.

Key Features of JOA’s

Scope of Agreement

There are several features that characterise JOA’s. The first of these characteristics is the scope of the agreement. Joint ventures are usually created for a specified project and thus, are limited in scope. The JOA essentially takes effect after a licence has been awarded and is based on an initial joint bidding agreement or an area of mutual interest agreement (AMI). This initial agreement covers a specific area within which the parties to the agreement will conduct operations jointly as a group to the exclusion of third parties. Hence, the scope of the JOA is intended to cover all joint activities in this specific area from the licence award to the termination or surrender of the licence. Thus, the JOA will normally include a statement of the scope of the JOA and will formally create the joint venture between the parties in relation to joint exploration and development of resources. This agreement is usually the single source of authority by which the parties derive the rights to undertake certain actions as well as the liabilities in relation to the joint venture.

Lack of Partnership Status

Another feature of the JOA is that in certain jurisdictions the parties do not intend for the relationship to be regarded as a partnership mainly for tax reasons and also to minimise the liabilities of the members of the JOA. As such, the parties include a clause within the JOA stating this position.

Proprietorial Nature of The JOA

The proprietorial nature of the JOA refers to the establishment of a common ownership of assets by the parties, who usually own these assets as ‘tenants in common’. This is created by an ‘interests clause’ and effectively specifies the respective percentage interests of the parties in relation to the license granted and also any property owned by them. Therefore, the production of any assets as well as any other rights or duties arising from the JOA, are held in relation these percentage interests. The clause in effect transforms the collective unitary form of ownership granted by the license into individual ownership of proportions of the property, each having a separate undivided share of the JOA assets.

Furthermore, these undivided interests also form a ‘chose in action’ and can be sold or mortgaged by their owners. The transfer of an interest in a JOA and in a license is done by the process of novation and assignment. However, all and any such trading or transactions in license interests is subject to consent being granted by the Government. It must be noted that conflicts occur as certain parties may wish to transfer interests freely with minimum restrictions; while others feel that the parties’ already established relationship should be protected; preserving a delectus personae. Rights of pre emption, rights of first refusal and consent provisions have been utilised to restrain transfer of undivided interests.

Pre emptive rights effectively allow the co-licensees of the joint venture to maintain control of the venture. This is achieved by having a say in the introduction of new joint venture partners. Existing joint venture partners reserve the right to acquire the participating interest of a selling joint venture partner who wishes to sell before the opportunity is given to an outsider willing to acquire the interest. It is also sometimes the case that the JOA will specify that operatorship of the venture should first pass to existing non operating members of a joint venture for consideration before passing on to an external party wishing to become an operator in the joint venture. However, it must be noted that there are numerous problems in relation to drafting and applying pre-emption clauses as well as the fact that they are increasingly unpopular.

Relationship Between The Parties To The Agreement

The most important feature of a JOA is its functional-relational existence or in other words, the contractual duties of performance between the co venturers. A typical JOA operates on two levels; day to day management of the activities within the venture which is delegated to the operator and overall control and strategic decision making which is through the non operators in their capacity as the joint operating committee (Op-com).

Operator

The operator is usually the party with the largest interest and its appointment is usually subject to Government approval. Furthermore, the operator does not act for profit and recovers its costs only, but due to its large share and position, has the ability to greatly influence the project.

The operator has the day to day responsibility for the conduct of the exploration and development operations. The operator is expected to conduct the joint operations itself, its agents or its contractors under the overall supervision and control of the (Op-com). In recent years there has been a tendency of delegating operating functions to professional contractors who are not members of the JOA. Even when this is the case and the operator does not conduct any of the joint operations itself it shall nevertheless remain responsible for the joint operations as the operator. The major duties of the operator include;

  • The preparation of programmes, budgets and AFEs
  • The implementation of approved programmes
  • The prompt provision to each of the non operators of reports data and information
  • The maintenance of all appropriate insurances
  • The provision of notice to the non operators of any incidents which may give rise to litigation

The JOA will usually provide for the removal of the operator and the views of the operator and non-operators in this context are largely divergent with regard to these provisions. The operator will want to have operator removal provisions that are limited to those requiring good cause, for example default or wilful misconduct. The operator acts as an agent to the other parties to the JOA and as such owes a duty of care referred to as that of ‘a reasonable and prudent operator’ and because this agency is given for free,  it will not want to be liable to the non operators for negligent actions, or even grossly negligent actions. It will only want to be liable for ‘wilful misconduct’ or a failure of its obligation to maintain insurance; it will also not want to be liable for ‘consequential losses. The operator will also want to have provisions which require unanimity among the JOA members, and which allows the operator to veto any attempt to remove it. The non operators on the other hand may prefer to have removal clause which is without cause and based on majority voting of the members. The JOA will also contain clauses allowing the operator to resign and which provide for the selection of a replacement. This is another potential area for tensions over the relevant “pass mark” for making this decision.

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