Oil and Gas Contract Law 3
Recapitulation
In the last article we have had an inside on the most common terms that are present in a JOA as well as the dynamics of the partners and their respective influence taking.
Undivided Fractional Shares
The ownership of the Oil and Gas property may be shared as this will also lead to a mitigation of risk and liabilities towards stakeholders like host governments (HGs) and the resulted compliance with domestic law. In this sense the Oil and Gas Leases are shared among the lessees, who own the leasehold in undivided fractional shares.
Undivided fractional shares signify legal instruments that is assigned to third parties to enable the involvement within the leasehold. In that sense companies and multiple persons can be included to share risks of the leasehold as well as costs of maintenance and administration.
Co-Tenant Problem
While JOAs have a great deal of jointly sharing liabilities and risks, that might go so far as to share the interests in the leasehold, one might think what might happen if the parties of a JOA, would initiate the respective operation without a JOA contract. This is what legal scientists call the so called co-tenant problem. This problem includes the following highlights:
I. There is no agreement about the rights and obligations of the parties in questions of exploration as well as development activities.
II. There is no penalty for autonomous actions without the consent of the other parties, eventually deteriorating the common interest within the project. This case of so called sole-risk ventures for instance is allowed in the jurisdiction of Texas, where production and development without the consent of other partners is regarded as allowed. However in fact there is a great problem with that in lieu of the definition of the shares of the parties after the sole risk project has been carried out. Shall parties that have not been active in the project also be renumerated? What about team work within a consortium, is it still effective if everybody can just do as he pleases in a costly industry like the upstream oil and gas industry with net values of over 100 Mio $? It is with these exemplary questions besides others that parties as the Germans would colequally say pull on each other′s hairs.
III. An operating co-tenant is sensible to risks, meaning that the risk is centrally borne by him. However there is a possibility for the operator to recover costs from the other partners. But without an agreement like the JOA it remains questionable what the conditions of such a recovery shall be. How much shall be recovered? What recovery model shall be carried out? etc.
IV. Lease Agreements (LAs) might govern the size of interest share from production, however they do not do so in lieu of operations. This means that in latter case non-operators literally have no say at all as there is no committee like the JOC to implement their policies on the operator as operations are with or without JOA de facto only in his hand. However a JOA can de jure promote certain restrictions on the operator through the non-operator′s influences.
Conclusion
These points make a JOA precious in light of the assignment and assessment of rights and obligations. JOAs analogically also provide structures for other energy segments especially mining operations and revenue sharing. The share of risk of venture is in the end by counteracting uncontemplated sole responsibility-taking of the partners. In that end the JOA comes in handy to set the rules in order to act as a team with a responsibility of governing assets in the amount of up to 9 digit values.