Oil and Gas Contract Law 5
Recapitulation
In the last article we have had an inside on the benefits and risks of a JOA. Now we will shortly focus more on the roles of each party of the Joint Operation Agreement.
Short example of a JOA Case
Prior to the establishment of JOAs Chevron held an interest of 39 % in a project in Angola, which was through the establishment of subsidiaries like Cabinda Oil Company Ltd. Within the exploration and exploitation of oil in Mafumeria, Chevron acted as the operator while other partners like SONANGOL, Total and ENI acted as co-tenants.
The operator′s role in a JOA
The JOA is as discussed in the previous episodes similar to a Joint Venture agreement a contractual framework for the consortium however with the necessity of assimilating the legal personality.
It includes the day-to-day management of the operations made by the operator who is usually a single party with the highest interest in the project.
However it is not uncommon that some operators are acting as minor interestholders while some non-operators hold the higher interest on the occasion of political, reputational or financial power.
It must also be noted that the operator also usually does not receive any remuneration despite his full control over the operation.
This is especially regulated explicitely in some JOAs. The operator thus carefully plans the activities in order to increase profitability of the operations.
The operator is not solely liable for losses of production or revenues in result of its′ decisions, for the liability is shared with the operators who are most commonly experts in risk, crisis and insolvency management, supporting the operator accordingly.
However in case of gross negligence or willfull misconduct, the operator will as a penalty of neglecting the obligation of a reasonable and prudent operator take all the liabilities.
The non-operators role in a JOA
Non-Operators do answer cash-calls for the support of the operator in the manner that the operation requires. Their decisions and strategy of procedure is jointly decided upon in the Joint Operation Commitee (JOC) in which all parties of the consortium are participating.
The JOC overseas the operation conducted by the operator and enables voting rights as per the interest of the participants or other consensual references.
The JOC which is present in mainland Europe thus enables a balance of power between the operator and non-operator which differs from the north American Tradition.
In latter tradition it is the operator′s rule that as per jurispudence has received an acknowledged dominance on which occasion the JOA is termed as operating agreement (OA) branding the JOA as a single party framework under the direction of the dominant operator.
Structure of a JOA
Despite the previous general list of details of a JOA, the following is a more concrete anatomic framework of the JOA contract, including the following provisions, organized in Articles:
I. Duration of the Agreement This includes the term of operation as well as post-contractual obligation inter partes, especially in light of confidentiality rights as well as compensational rights.
II. Parties of the Agreement Both parties the operator and non-operators are defined and their special interests and fields of activities are mostly detailed in the next article.
III. Parties Participating Interests In this article the parties responsibilities and motives are detailed. Furthermore the treatment of interests of the parties are explained and further interests of parties in Costs and production as well as subsequently created interests are regulated in this provision.
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IV. Scope of Work The cope of work entails the operators and non-operators responsibility in a more detailed dimension with a vivid inside in the procedures activities carried out by both parties.
V. Exclusive Operations Exclusive operations or sole risk exposures are such operations that are carried out by a party in a standalone manner without the integration of the other partners. In there damage claims can be made against the exclusive acting party, who might have damaged integrity rights of the partners to operate jointly and not independently in a certain project. Furthermore this clause entails the calculation of the damage claim of a party that regularily exceeds the amount of 300 % of the initial operational costs of the sole risk exposure paid from the production.
VI. Designated Operators In this clause the operator is designated exclusively. In contrast to the Parties of the Agreement clause, latter does not necessarily determine who is acting as an operator. Many JOA Models have an exclusive provision about the designation of the Operator, where further provisions on his resignation are also included.
VII. JOC The Joint Operation Comitee is as mentioned above an important body for overseeing the operator′s activities and in that sense balancing the operator′s interest with that of the -mostly- equal non-operators. In this provision procedural regulations on the JOC in light of metings, veto rights and further powers given to the JOC are regulated.
VIII. Cost Control and Contracting This clause entails regulations on outsourcing certain activities and duties to external consultants and controlling activities made by in-house accountants. Latter activities can self-understandingly be carried out by the first on which occasion it makes sense to join both cases in one provision.
IX. Hydrocarbon Allocation This clause deals with the shareholding in the production. In case a jointly established SPV is designated as the operator, this clause will technically be a Shareholder Agreement within the JOA. The latter case gives reasons to pursue differential activities to conduct the allocations in such a manner that it does not resemble a shareholder agreement.
X. Hydrocarbon Lifting and Disposal This clause deals with the operational activities of lifting hydrocarbons which entails special technical regulations to be considered.
XI. Transfer of interests This clause deals with the assignment of interests within the parties as well as for third parties. These interests are also regarded as undivided fractional shares that can also be subject of assignment for third parties to strategically enable involvement of external partners for support.
XII. Withdrawl from JOA This provision entails regulations for the parties to terminate their responsibilities that mainly also includes damage claim provisions that can rise in case the withdrawl penetrates certain rights of the other partners. Such rights are mostly the damage of integrity interests like trust in carrying out governmental activities by an operator or funding by a non-operator.
XIII. Liabilities This clause is the masterpiece of the JOA next to the designation of the operator as this clause deals with the intended allocation and share of liabilities. It is in this clause where the risk management facette of the JOA manifests.
XIV. Decomissioning regulations This provision is a cross-section to a DSA in which JOA regulations can also be found. Basically the parties responsibilities will be defined in case of a decomission.
XV. Default Default similar as to withdrawl clause entails in concreto the provisions on any damages made inter partes or by or against a third party. In there calculations can be defined and rights to claims be risen based on common tort law.
XVI. Dispute Resolution (in concreto arbitration) This clause entails the parties will to hold arbitration. Although claims can be defined in an agreement, there is asignificantly little amount of litigational activities carried out in light of JOAs. In lie of the intense capital that a JOA deals with, disputes are mostly resolved through arbitration rather than litigation.
XVII. Accounting Procedures Accounting procedures entail general rules of controlling that can be expressed in a standalone manner.
XVIII. Miscellaneous Additional clauses like statue of law or governmental activities etc.
Conclusion: Statistics and Factors
Despite structuring the organization, JOAs mention the balance between the 3 variables of underlying hydrocarbon assets:
Only 37 % of Oil and Gas Companies do consider JOAs with a risk of the remaining Oil and Gas non-contractual joint cooperations fading away after maximally 5 years.
This statistical inside shows how much JOAs are essential in maintaining the easement of tensions and enablement of veto rights.