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Оглавление1. First principles of the JOA
Before undertaking a detailed examination of the terms of a typical joint operating agreement (JOA) it will be useful first to consider some of the conceptual and structural principles that underpin the content and the effect of, and even the rationale for, the JOA.
These principles relate to why joint ventures are an inherent part of the petroleum projects landscape, the form that the JOA might take in structuring a joint venture (including the use of model form contracts) and the relationship that will exist between the JOA and the concession that it underpins.
1.1 The logic for a joint venture
In the simplest case, the state 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 (found, for example, 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 concession and can comfortably perform the associated 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 (such as where any combination of complex exploration, deep drilling, offshore petroleum deposits or natural gas and liquids production exists) then 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,1 that have agreed to act together in a joint venture. They will divide the expenditures incurred in the performance of the concession, and will divide the benefit of any petroleum that 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 (at least if they propose to proceed on the basis of an unincorporated joint venture).
There are several well-rehearsed reasons for entering into a joint venture for the undertaking of a petroleum exploration and production project, which it will be helpful to summarise here.
•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 to apply 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 geological, financial and commercial risks) that 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 (see Chapter 14).
•Political risk mitigation – a joint venture can help to reduce the risk of adverse political or regulatory interference that 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 state entity (see 4.1)) might cause the state to think twice about doing anything that 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 that also affects the particular petroleum project on a non-discriminatory basis.
•Managing state participation – the JOA that the parties to the joint venture enter into will provide a protocol for state participation, if that is a feature of the prevailing petroleum law or of the concession (see Chapter 2), and will offer some education to the state on the commercial positions and the operational behaviour that might be expected to be undertaken in return for that participation.
The interests of the various parties in their joint venture should ostensibly be the same: that is, to produce the greatest possible quantities of petroleum on the most cost-effective 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 state entity that 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 all these sorts of tensions within the joint venture that it represents.
(a)The role of the JOA
The examination of the terms of a typical JOA in this book is prompted by the assumption that a concession has been awarded 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-holder, will be entitled (and will also be obliged) to explore for petroleum, and to produce any petroleum that is thereby discovered, in the defined concession area.
Where it is held by several persons, the concession typically provides that those persons will be jointly and severally liable to the state for the proper performance of the terms of the concession. This means that the state could, if it so wished, look to enforce the terms of the concession against any one (or more) of the parties that are together the concession-holder. The JOA reallocates this position of joint and several liability between the parties through provision that the parties’ liability among themselves will be apportioned according to several predetermined shares. This several liability could be invisible to a third party that deals with the parties and will also not constrain the state in respect of the concession.
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 (see 7.3) and the JOA might also impose an obligation on all of the parties not to do anything that might jeopardise the concession. Any breach of this obligation that leads to loss of the concession would ostensibly expose the party in default to liability to the other parties for breach of contract, but any exclusion of liability for consequential losses that exists in the JOA (see 17.1) would make questionable the real value of such an obligation.
The concession sets out the vertical relationship between the state (as the grantor of the concession) and the parties (in their capacity as the concession-holder), but does not address the terms of the horizontal relationship between those parties.
Therefore it could become necessary for the parties to define their relationship. There is no obligation on the parties to enter into a JOA, and they could hold the concession without a JOA in place. It is, however, advisable to impose a JOA upon their relationship, for reasons that will become apparent.
Where the parties have elected to work together through the vehicle of an unincorporated joint venture, the JOA will be the agreement that defines that relationship and 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 that records the relationship between the members of the joint venture as the parties that together hold the concession.
The JOA is effectively the constitution for the unincorporated joint venture that 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 that are required to be performed under the terms of the concession will actually be performed as between the parties. The JOA establishes a consistent and predictable business foundation between the parties, and promotes best practices for the execution of the joint operations. 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 1.5).
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 of 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, and care should be taken to address the potential conflicts.
A somewhat elliptical question that is sometimes asked relates to the nomenclature of the JOA, and specifically to the extent to which (despite the title of the document) the JOA truly entails joint operations between the parties.
On one hand the JOA does not truly connote joint operations because there is only one appointed operator, rather than all of the parties having operational responsibility, and because the concept of exclusive operations (see Chapter 13) runs counter to the idea of joint operations.
On the other hand, however, there are several joint aspects of the relationship between the parties that the JOA creates, such as voting control (see 8.4) and default cover (see 18.4), which makes for an agreement in which the parties are jointly interested.
Perhaps the best way to characterise the JOA therefore is as an agreement for jointly coordinated operations, but not for the appointment of a joint operator.
The Association for International Petroleum Negotiation (AIPN) 2012 model form JOA revision (see 1.7) sought to emphasise the joint nature of the relationship that is created between the parties to the JOA through a change in the title of the agreement from ‘Model Form International Operating Agreement’ to ‘Model International Joint Operating Agreement’.
(b)The JOA and multiple interests
The JOA typically relates to a single concession and applies in respect of petroleum operations in the area that is identified within that concession.
There may be a situation where, as a consequence of, for example, a successful effort by the parties under a joint study and bid agreement (see 5.1), more than one concession has been awarded to those parties by the state. 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 7) appointed in respect of all of those concessions, but this approach will 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 that 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 a 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 3). The parties might also consider a more general cooperation agreement (such as a form of area of mutual interest agreement; see 1.6) 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 (see 18.7).
Where separate concessions are granted for the separate activities of exploration and production (see above), a separate JOA might also be entered into, specific to those particular concessions and their defined activities.
(c)The JOA and other activities
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, and in 2014 the AIPN issued a model form JOA for use in unconventional petroleum projects (see Appendix 2).
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 that 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 6).
1.3 The incorporated joint venture
The principal vehicle by which consortium-based petroleum exploration and production activities is undertaken is the unincorporated joint venture, which is represented by a 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 issued share capital which is held by the parties. The JVC could 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 shareholder agreement. The shareholder agreement is similar to, and is also quite distinct from, the JOA.
The parties could elect to incorporate a JVC in order to conduct all or only part of the overall petroleum project activities. It is possible that a petroleum project could be structured with incorporated and unincorporated joint ventures side by side. 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.
An incorporated joint venture and the use of a JVC could be particularly beneficial for a petroleum project in a number of circumstances.
•Operator selection – the incorporated joint venture allows the JVC to be the operator, which could be helpful where the parties are unable to agree which one of them is best-qualified to be the party-operator under a JOA.
•Involvement – the JVC could give the parties more shared involvement (including wide measures of secondee participation and clearly-identified multi-party roles and responsibilities) than is ordinarily afforded by the JOA’s operator/non-operating parties dichotomy.
•Liability ring-fencing – the liabilities to third parties to which all of the parties would ordinarily be exposed under a JOA are replaced by the single point responsibility of the JVC (being an entity with independent legal personality, ordinarily distinct from that of its shareholders).
•Cash generation – the JVC could be used as a vehicle to raise third party financing for petroleum project development costs, on the basis of no or limited recourse to its shareholders.
•Concession fit – the JVC could be of particular attraction where the terms of the concession are such that it is expressed to be incapable of being held by multiple parties – such that those multiple parties would instead incorporate a joint venture company, which will be the sole holder of the concession. An incorporated joint venture project structure is found for example in Russia, where a concession is typically granted to a single company which is owned by the project parties. As a practical matter it is also easier for the parties to transfer their interests in the project by transferring their shareholdings, rather than transferring a direct interest in the concession.
Because it is founded on a contract, the unincorporated joint venture is sometimes called a contractual joint venture; because it is founded on the basis of a shareholder’s interest, the incorporated joint venture is sometimes called an equity joint venture.
(a)The shareholder agreement
The shareholder agreement, while intended primarily to regulate the relationship between the JVC’s 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 shareholder agreement and the JOA will have many similarities and also some key distinctions. These are summarised below, but several noteworthy features deserve some additional commentary first.
•Commitment – in the context of the JVC, the shareholder agreement usually contains a clause whereby the shareholders commit to use their reasonable endeavours to promote and develop the business of the JVC. The shareholder 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 shareholder agreement and for a defined period after that participant has ceased to be a shareholder. However, these sorts of undertakings are less common in the context of the JOA, where the parties will be keen to preserve their rights to undertake competing projects.
•Fiduciary duties – 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 7.8). In the context of an incorporated joint venture, however, the directors of the JVC will owe certain statutory duties to the JVC, 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 (see 3.2). 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 then own (such as 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, 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 and the relevant infrastructure will be regarded as part of the joint property (see 3.4).
•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. The practical reality is that the thresholds and the conditions which typically apply in respect of potentially notifiable mergers 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.
•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 14). 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 shareholder agreement, and the terms of the prevailing petroleum law or of the concession might require state approval of any such change.
•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 petroleum entitlement at the point of production. 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 (see 7.4), 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 which the JVC contracts with.
•Termination events – the JOA can be terminated by agreement between the parties if they so resolve, and will (eventually – see 5.4) cease to apply if the concession comes to an end. Similar principles could apply in the context of the JVC. The insolvency of a shareholder or the unremedied default of a shareholder as a termination event will typically be an event of default in respect of the context of the JVC, and will be of equal application to each of the shareholders. However, the insolvency of a party or the unremedied default of a party as a termination event will typically apply only in respect of the party which is the operator under the JOA, and not in respect of any non-operating party (see 7.5).
(b)Combined incorporated and unincorporated structures
There are certain circumstances in which an incorporated joint venture and an unincorporated joint venture structure could be used together.
Where the parties to the JOA wish to contract for an activity which would fall within the definition of excluded activities (see 6.2), such as the provision of transportation for their respective petroleum entitlements beyond the delivery point, 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.
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 quantity of petroleum for which the JVC books pipeline capacity.
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 interests in the petroleum project, it need only transfer its shareholding in the JVC to a third party (subject to compliance with the equity transfer requirements of the shareholder agreement) and there should be no need to disturb the underlying aggregate pipeline capacity booking between the JVC and the pipeline owner.
It is generally preferable to keep the shareholder agreement and the JOA separate and distinct. The provisions relating to the governance of the JVC should be left to the shareholder agreement and should not be repeated in the JOA.
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. Where this does happen the key issue to consider is the potential interface between the shareholder agreement and the JOA. The list which follows contains the relevant aspects.
•Cross-default – sometimes the parties provide that default in the shareholder agreement automatically leads to default in the JOA, and vice versa. There is no need for this, and often it jeopardises existing arrangements unnecessarily. There could be a perfectly valid reason for a default in respect of one agreement, which should not automatically trigger a cross-default. Furthermore, there might not be perfect symmetry in the interests of a party between the two agreements which would readily facilitate a balanced cross-default remedy.
•Voting control – sometimes the parties provide that voting in the shareholder agreement must be in line with voting in the JOA, or vice versa. There is no need for this, and it can devalue voting interests where they do not have to be consistent.
•Symmetrical equities – sometimes the parties provide that the interests of the parties in the shareholder agreement and the JOA must always be the same across the two documents, and a transfer of interests in one agreement must be matched by a transfer of a corresponding interest in the other agreement. This is not compulsory though, and the opposite position could be applied: a party can have different equities in the two aspects of the overall project. Insisting on symmetrical equities could make it difficult for a party to reduce its participation levels in the petroleum project in the future.
The concession could recite a hybrid concession/JOA structure, which would seek to legislate for the horizontal relationship between the parties (but to which the grantor of the concession would be party, and which the grantor would be able to observe directly). This could dispense with the need for a separate JOA, since many of the typical provisions of a JOA will be recited within the terms of the concession,2 but there could also be a separate voting compact that is entered into between the parties other than the grantor in order to address matters that those parties might prefer to retain for their personal consideration.
A structure along these lines applies for example in Argentina, where a Union Transitoria de Empresas (UTE) agreement allows several companies to form a joint venture, and also applies in respect of a production sharing contract that establishes what is sometimes called a joint operating committee or a joint operating body. Petroleum projects in Qatar can be represented by an incorporated contractual joint venture entered into between the state and an investor, with a shareholder agreement. That company would then be the holder of a particular form of concession and the benefits which result from the activities conducted under the concession pass to the company and back through to the shareholders.
The essential point to note from this section is that even where there is a JOA between the parties that document might not be the exclusive statement of the operational relationship between the parties.
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 that they have is not one that 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.
(a)The definition and the consequences of partnership
The phrase ‘joint venture’ is not a term of art in English law and is not defined judicially or statutorily. 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”.3 This relatively simple and somewhat opaque statement is then amplified by the application of several statutory rules that are intended to be applied in determining whether a partnership exists,4 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.
In its ordinary meaning, therefore, a joint venture such as that represented by the terms of a JOA could have the appearance of being a relationship that fulfils the legal definition of a partnership.
A partnership need not be specifically constituted or operated as such, and a partnership can come into existence inadvertently between a group of persons carrying on business together if their activities can be proved to have met the necessary definition. 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 that are implied by the Partnership Act.
Being in a partnership can have some consequences that the parties might be anxious to avoid the implication of in 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 that might be more imagined than real).
•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 resulting from the subsequent realisation of any petroleum that is produced, subject to a deduction of the expenses 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 that they each generate from the partnership’s activities (rather than that the partnership 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 that 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.
•Contracting limits – 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. Thus, the operator will contract in that capacity with third parties (see 7.8). Each of the parties will be jointly liable as a matter of law to any third party, unless the third party has expressly agreed to limit its rights of action so that it may proceed against the operator only. The third party might also agree that if it has rights against all of the parties, their liabilities to the third party will be several and not joint (see 17.4). Each partner can contract with a third party and each partner can bind the partnership (and the liability of the partners will be joint),5 unless the partnership agreement restricts that authority as between the partners and any third party that deals with the partners knows of that restriction.6 The partners might also agree that any liability that they might have in a contract with a third party will be several and not joint, if this can be agreed with the third party. What is common to both the partnership and the JOA relationships outlined above is that the liability of the partners or of the parties to any third party could, depending on the terms of the contract with the third party, be limited to the liability of one partner or one party, or could be joint or several. The allegation of the existence of a partnership between the JOA parties might be attractive to a third party that has contracted with the operator without the benefit of, or a direct right of recourse to, the non-operating parties. The liability position to which the partners in a partnership are subject could be used as a means of delivering the joint and several liability of all the parties in favour of that third party.
•Fiduciary duties – the relationship between partners is essentially fiduciary in nature because of the very nature of the mutuality of trust that a partnership imports.7 Thus, the implication of a partnership will lead to the implication of certain fiduciary duties which would then have to be managed. Under the JOA there are circumstances which might give rise to the allegation that fiduciary duties exist (see 7.8). If the JOA is clear about how it addresses the possibility of fiduciary duties, in whichever manner those duties might arise, this might be less of a concern (but the JOA is often deficient in this regard).
In summary, there might be little real distinction between a partnership and a JOA in light of the various consequences, and the effort that is put into distinguishing the JOA from a partnership could have little practical purpose.
(b)The JOA as a partnership
Most JOAs include a recital that the JOA relationship does not constitute a partnership (whether expressly or by implication).8 Despite this it is the substance of the relationship that the JOA creates, rather than the form of the JOA and the simple denial that a partnership exists, which must be considered. It has been judicially noted9 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 careful consideration of the substance of the JOA, the unincorporated joint venture between the parties that 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 in order to illustrate certain similarities and differences.
•Contributions and distributions – in a partnership, each partner is required to contribute a share of the capital, which is then pooled and is to be employed in the business of the partnership. 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 participating interest-based share of the costs necessary to allow the performance of the joint operations through the cashcall or the invoice request provisions (see 10.4), rather than there being an upfront pooling of capital contributions. The distribution that each party receives is one of its net petroleum entitlements in kind at the defined delivery point (see 12.2), rather than a share of the profits of the business as a whole. However, if the JOA does not inhibit the ability of the operator to impose a single pre-funded cashcall to meet future expenditure expectations, such that there is effectively a pooling of capital for development purposes, 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 indicative of the existence of a partnership.
•Accounting – in a partnership, accounts will be kept showing 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 (see Chapter 9), those accounts will differ significantly in their nature from true partnership accounts. Thus, the parties can examine the accounts 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) that 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.10 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 then shared among the parties (see 6.2), 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 (see 11.4), then in either case this might require a form of accounting to show profits (or losses) accruing to the parties that is more akin to conventional partnership accounts.
•Commitment – each partner has the right to participate in the management of the partnership business,11 which is similar to the participation rights granted to the parties under the JOA through the operation of the operating committee (see 8.1) and the parties’ information rights (see 15.3). Further, similar to the voting control regime at the operating committee (see 8.4), 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.12 In a partnership agreement, it is usually required that each partner 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 business13 (and in many partnership agreements the idea of a partner being allowed to carry on a competing business is simply unthinkable). The existence of any exclusive operations provisions in the JOA (see Chapter 13), 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 expressly recognising the ability of the parties to participate in other, potentially competing business ventures 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.
•Employees – a partnership is (acting through its partners) capable of employing persons directly.14 In contrast, in a JOA, any employees who are engaged in the performance of the joint operations are employed directly by the operator (see 7.3) or directly by another of the parties and seconded in to the operator to assist (see 20.9). The joint venture represented by the JOA is not an entity capable of granting an enforceable contract of employment to an employee.
•Property interests – a partnership is capable of holding property,15 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.16 In the JOA, once there is some joint property in the JOA relationship then the parties will be entitled to an undivided interest in that joint property, which will be owned by the parties according to their respective participating interests (see 3.2).
•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 (see 14.2). Similar provisions will apply in respect of the retirement of a partner from a partnership by agreement of the partners.17 However, the implication of the continuing responsibility of a party for liabilities associated with the decommissioning programme under the JOA (see Chapter 16) means that the transferor will not enjoy a full discharge from its continuing liabilities.
•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 partnership,18 or at the option of any partner if any other partner becomes bankrupt.19 In contrast, no such power or right exists in a party’s favour in the termination provisions in a typical JOA (see 5.4). 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.20 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 and the scope of the JOA might always be modified or extended (see 6.3).
The view of most commentators is that the JOA is not, in substance, a partnership between the parties. In the JOA the operator essentially conducts business on behalf of all the parties, whereas in a true partnership all of the partners are supposed to contribute their effort equally.
The JOA represents a platform for the combination of several separate persons that are all interested in carrying on a business for profit, where that platform will imply some commonality of interests between those persons – each party has the objective of making a profit from the enterprise that 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 upon the wording and the management of the particular JOA being analysed; in particular, the extent to which expenses and produced petroleum are shared by the parties. If that JOA applies to at least some of the further refinements as 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 wanting to do so.
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 consortium-based approach might also necessitate the governance of the relationship between the parties during the precursor period.
(a)Preliminary agreements
The parties might 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 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 that 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 that are not specifically defined. This earlier relationship between those parties may be recorded in a very simple form of joint venture agreement 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 that would indicate the reality that the AMIA is often the very earliest ancestor of a fully termed JOA. At the time of going to press the AIPN is in the process of settling a model form AMIA.
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 extensive exclusivity commitments.
The JOA might provide that its effectiveness will also signal the termination of any pre-existing agreement, such as the JSBA21 or any AMIA, but for the sake of good 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 that 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 that 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.22
(b)The joint study and bid agreement
The ostensible sequence of events is that the JSBA governs the relationship of the parties prior to the award of a concession, while the JOA governs the relationship of the parties after the award (assuming that the application is successful).
It is common for the JSBA to set out the terms which will govern the behaviour of the consortium running up to the award of the concession. Agreeing those terms in the JSBA allows possible contentions between the consortium members to be identified early on and addressed before the concession is awarded. Investing time in settling the content of the JSBA helps avoid a fractious consortium and costly inefficiencies later if a JOA is subsequently required.
The content of a JSBA is always a product of the time available prior to the submission of the concession application. The JSBA is typically drafted with a premature finish line in mind – the concession award. Instead, the parties should agree in the JSBA sufficient detail such that it can be used to operate the joint venture between the consortium members until when the JOA is agreed and becomes effective.
A consortium could consider applying for several different concessions. In such circumstances the consortium could decide to appoint different operators to different concessions, based on considerations of location, expertise and economic efficiency. In this case the JSBA draughtsman will have the challenge of crafting a JSBA which satisfactorily identifies that different operators are appointed to different concessions, with different rules applying in respect of bidding for different concessions, with different operational terms applying until such times as the relevant JOAs are agreed. This will not be an activity devoid of complexity.
Prior to the commencement of the negotiation of the JSBA, the parties should assess what they each offer to the consortium (and also what they expect each of the others to offer). These discussions invariably involve the disclosure of commercially sensitive information, thus necessitating the entry by the parties into a confidentiality agreement before the making of detailed disclosures.
It may be that a certain party brings significantly more value to the consortium than the others if it is in sole possession of certain high value information. In order for that party to disclose such information to the consortium it may seek more comfort in respect of the maintenance of its confidentiality than is the norm in a standard confidentiality agreement (by, for example greatly limiting the circumstances in which permitted disclosures can be made and applying indemnity, consequential loss liability and account of profit provisions for losses arising from a proven breach). The parties should therefore consider that there may be some debate in the negotiation of the confidentiality agreement, and the parties with less (or no) confidential information to share will accordingly be less concerned about the confidentiality aspects of their relationship. Additionally, the parties should be aware that there could be AMIAs (see above) already in existence which bind potential consortium members. The effect of these pre-existing arrangements on the composition of the intended consortium will need to be considered carefully. It is not uncommon that due to time pressures, while still negotiating the JSBA, a consortium could find itself at the point of making a concession application without the agreed JSBA in place. In this circumstance there is the risk that a party might not act in the spirit of what the parties are attempting to agree in the JSBA, for example, by focusing its resources on another potential application in the concession award round or by not taking certain actions prior to an intended deadline. This will waste time and deflect attention from the matters in hand. In reality there is no substitute for agreeing the JSBA as soon as possible. A more detailed analysis of JSBAs and their role as a precursor of the JOA is provided in 5.1.23
A popular theory in the international oil and gas industry is that the generation of a commercial contract from the starting point of using an established model form contract helps to reduce transaction costs and increases transacting efficiency by minimising the scope for protracted negotiation and the need for novel contract drafting. This is not untrue, but neither should reliance upon 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 that 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 held by those responsible for the preparation of those model forms. Which of these views are represented in the model JOA will depend on which side of the operator/non-operating parties’ perspective has prevailed in the preparation of the particular model form JOA.
Thus when the parties come to draft the JOA that will apply to their petroleum project, they will usually start with a consideration of a model form JOA that they think is the best analogue for their particular situation, rather than drafting a bespoke agreement from a standing start.
The model form JOA that the parties base their discussions on 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 petroleum law (see Chapter 2). This will inevitably make the terms of JOAs different between different jurisdictions and different projects, although many of the substantive issues that apply across JOAs will be similar.
Arguably, it might be less essential to set out in detail preferred approaches to substantive issues in a JOA 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 that are not so experienced or of state entities (see 4.1) means that the effort of creating a fully termed JOA will be invaluable in locking in the commercial behaviours that those new parties will be expected to observe.
The release of an updated version of a particular model form JOA will not supersede any JOA that has already been drafted and executed on the basis of any earlier version, and the parties will always be free to use all or part of such an earlier version as the basis of their JOA if they prefer to do so.
Despite the variations between the different forms of JOA that are highlighted 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 state approval of the terms of a JOA in certain jurisdictions (see below), which will impose a certain degree of consistency in the terms of the JOAs that 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 worldwide 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, that 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 any model form 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 petroleum 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 that 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 that 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; the state’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.
(a)Model form contract options
Certain model form JOAs have been promulgated by various trade and industry associations and educational bodies:
•American Association of Professional Landmen (AAPL) – the AAPL JOA is regarded as the earliest model form JOA and is the standard for US onshore and offshore operations. It was first issued in 1956 for onshore operations (known as Form 610 and subsequently revised in 1977, 1982, 1989 and 2015). Form 710 was issued for application to offshore shallow water Gulf of Mexico Continental Shelf operations in 1998 (and revised in 2002 and 2007). Form 710 also applies separate exhibits for US coastal states subject to common law and the Napoleonic Code. Form 810 was issued for application to offshore Gulf of Mexico deep-water operations in 1996 (and revised in 2000, 2007 and 2015). 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 Form 810 unless otherwise stated. The AAPL JOA is available at www.landman.org.
•American Petroleum Institute (API) – a model form JOA was published by the API in 1984 (as API MF 5U05), and reissued in 1996. It has not been kept up to date since then, and was effectively taken over by the AAPL JOA forms (see above).
•Association of International Petroleum Negotiators (AIPN) – 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 and most recently in 2012 (and is presently under review with a view to a possible reissue in 2021). The AIPN JOA is also accompanied by a series of related model form agreements, such as an accounting procedure (most recently issued in 2012), a petroleum lifting agreement (see 12.3) issued in 2001 and a unitisation and unit operating agreement (most recently updated and re-issued in 2020). In 2008 a drafting guide for the use of the AIPN JOA in Australian operations was issued. In 2014 a JOA specifically tailored to unconventional petroleum operations was issued. References in this book to the AIPN JOA are to the 2012 issue unless otherwise stated. The AIPN JOA is available at www.aipn.org.
•Australian Mining Petroleum Law Association (AMPLA) – in 2011 AMPLA issued the first version of its model form petroleum JOA, which is described as intended for use in non-complex oil and gas projects principally onshore in Australia, with the possibility of use for offshore projects. AMPLA has also previously issued a model form joint venture agreement for use in mining joint ventures. The AMPLA JOA is stated to be intended for use in a three-party joint venture, at least as a starting point for further amendment. The AMPLA JOA is available at www.ampla.org.
•Australian Petroleum Production and Exploration Association (APPEA) – a model form JOA was published by the APPEA in 1984. It has not been kept up to date since then.
•Canadian Association of Petroleum Landmen (CAPL) – 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, 2007 and 2015. 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) – the OGUK JOA (issued in 2009) 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 prepared as part of the fifth offshore licensing round in 1977 and issued by the British National Oil Corporation (BNOC). The OGUK JOA has been issued and updated in 2003 and 2009, with amendments and guidance notes in 2011 and 2013, and is available at www.oilandgas.org.uk.
•Rocky Mountain Mineral Law Foundation (RMMLF) – the RMMLF publishes forms of joint operating agreements 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 use in US onshore operations. The RMMLF JOAs are available at www.rmmlf.org.
It is also the case that in certain jurisdictions the prevailing regulatory authority mandates a form of JOA for use in that jurisdiction:
•Brazil – the Brazilian upstream regulatory agency ANP mandates a particular short-form consortium agreement for entry between consortium members where a PSC is granted. This is a registrable document. A more conventional full-length JOA will also be entered into separately between those persons to record the terms of their joint venture. The consortium agreement is available at http://rodadas.anp.gov.br/arquivos/Oferta_Permanente/Edital/contrato_op_blocos.pdf.
•Denmark – in Denmark the government, acting through the Danish Energy Agency (DEA), has a prescribed form of JOA for use locally. Nordsøfonden (The Danish North Sea Fund) is the mandatory state partner in licences granted for the exploration for and the production of petroleum in Denmark. There is also a prescribed form of accounting procedure (see Chapter 9). These documents are available at www.ens.dk.
•Greenland – in Greenland the government (Naalakkersuisut), acting through the Ministry of Industry and Mineral Resources, has a prescribed form of JOA for use locally. A state-owned entity, Nunaoil A/S, is a mandatory participant. Model form JOAs have been prescribed for each Greenland licensing round since 2002. There is also a prescribed form of accounting procedure and a split operator co-operatorship agreement (see 7.6). These documents are available at www.govmin.gl/petroleum.
•Norway – in Norway, petroleum 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 approved by the Norwegian Petroleum Directorate (NPD). There is also a prescribed form of accounting procedure. These documents are available at www.npd.no.
1.8 JOA evolution and economics
(a)JOA evolution
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 that 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 that 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 JOA should reserve sufficient flexibility in its terms to cater for that evolution. The JOA cannot realistically be written so that from the outset it is ready to cater for every change of circumstance that 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 at 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 whether the petroleum project was properly managed.
The following list includes some of the circumstances of possible evolution that should be addressed in the JOA.
•Petroleum reserves – the most obvious factor in the evolution over the lifetime of the JOA will be the profile of the reserves of petroleum within the concession area. If the reserves that are identified through the exploration and appraisal phase are not sufficiently commercial to merit going forward with a development plan, then the concession might be surrendered and so the JOA will come to an early end (see 5.4). 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; to undertake a reservoir enhancement programme and seek an extension to the concession and so the JOA; or to re-characterise the JOA for other purposes (see 6.3).
•Parties and interests – over time, there may be transfers of interests in the JOA or withdrawals from the JOA (see Chapter 14), state participation in the JOA (see 4.1) or a change in the identity of the operator (see 7.5). 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 that are there at the end of the JOA’s life. The JOA should contain provisions necessary to facilitate these alterations, and should also be able to respond to the introduction of new parties that might have different operational and economic philosophies from the traditional norm (see below). The participating interests of the parties in the JOA (see 3.2) could also change over time. This evolution could happen because of a party’s withdrawal, transfer, default and forfeiture or simply the aggregation of interests by one of the parties.
•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 that 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 (see 6.2) or the introduction of a unitisation programme (see Appendix 3), in which case the role of the JOA will need to be reconciled with the wider unitisation and unit operating agreement. Alternatively, it may be that the parties decide to transform the overall petroleum production project into a quite different form of project (see 6.3). 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.
•Alternative interests – the JOA reflects the participation of the parties in joint operations in the concession area. Where a party comes to hold an interest in another concession, that party may become interested in exercising its rights and performing its obligations in respect of that other concession in preference to the concession to which the JOA relates. Therefore, the JOA needs to address the reconciliation of a party’s interest in more than one petroleum project, both positively (such as through an exclusive operations provision; see Chapter 13), and negatively (such as through a meaningful default remedy; see Chapter 18), and also through a wider consideration of the applicable fiduciary duties (see 7.8).
•Economic conditions – the economic perspective that 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 therefore 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 could be quite different. This is not to say that any new entrant will lack the capacity and/or the commitment 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 that the JOA that relates to such a project will need to address. The JOA will not lend itself readily to being a vehicle that will address the risk to the parties of the expropriation by the state of their concession interests. This is a matter that is better dealt with in the concession or under a separate investment protection agreement.
(b)JOA economics
The operational lifecycle of the JOA is described in detail in the following Chapters of this book, and from that description it should 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. 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 procure capital items at this stage. There will also be no revenues from the production of petroleum that 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 start to flow, although these revenues will eventually tail off as the rate of production from the petroleum deposit gradually declines.
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 (see Chapter 16). During this phase there will be no revenues from the production of petroleum for the benefit of the parties.
The nature and the 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 (see 3.3).
Finally, it should be remembered that the lifecycle of the JOA could be represented by the simultaneous performance of all of the activities which are specified above (with their corresponding economic profiles), as different parts of the concession area are explored and developed over time. The JOA’s lifecycle might appear as a continuum, and often it is, but it can just as easily take on a more circular appearance.
1Whether from the date of its grant, or subsequently through a series of farm-outs: see Appendix 1.
2Notably: participating interests and commitments to fund joint operations; operator appointment and behaviour; meetings, voting, budgets and authorisations; default; exclusive operations; and an accounting procedure.
3Section 1(1) of the Partnership Act 1890.
4Section 2 of the Partnership Act 1890.
5Sections 9, 10 and 12 of the Partnership Act 1890.
6Sections 5 and 8 of the Partnership Act 1890.
7Helmore v Smith (1886) 35 Ch D 436.
8AAPL JOA §22.1; AIPN JOA §14.1; AMPLA JOA §3.4; CAPL JOA §1.05A; OGUK JOA §22.2.
9Weiner v Harris [1910] 1 KB 285, per Cozens-Hardy MR, and see also Adam v Newbigging (1888) 13 App Cas 308.
10Beckenham v Port Jackson and Manly Steamship Co (1957) 57 SR (NSW) 403.
11Section 24(5) of the Partnership Act 1890.
12Section 24(8) of the Partnership Act 1890.
13Section 30 of the Partnership Act 1890.
14Beckham v Drake (1841) 9 M&W 79.
15Section 20 of the Partnership Act 1890.
16Section 39 of the Partnership Act 1890.
17Section 17 of the Partnership Act 1890.
18Section 32(c) of the Partnership Act 1890.
19Section 33(1) of the Partnership Act 1890.
20Section 32(b) of the Partnership Act 1890.
21AMPLA JOA §25.1; CAPL JOA §1.11.
22For example, through the AIPN, OGUK and the RMMLF.
23A model form JSBA has been published by the AIPN (available at www.aipn.org) and by the AAPL (available at www.landman.org).
