Читать книгу Joint Operating Agreements - Peter Roberts - Страница 8
Оглавление2. Concession forms and the JOA relationship
This chapter addresses the relationship between the JOA and the concession agreement, the latter being the commercial agreement between the host state and the oil companies engaged in joint operations, by which such joint operations are authorised by the host state. Most model JOAs have evolved from agreements used in the North Sea or the Gulf of Mexico and are adapted to English or US legal regimes, and especially to petroleum operations governed by a licence regime, where the terms are regulated by local petroleum laws. This chapter discusses the distinct differences between upstream joint ventures governed by a concession agreement and those governed by the petroleum production licence. The relevant JOA must be adapted to suit the relevant regime.
For this purpose, the concession agreement can take a wide variety of forms. The concession agreements granted by Middle Eastern countries in the 1930s and 1940s which entitled single or groups of Western oil companies to exploit the oil resources of very large territories, if not entire nations, are no longer in force. They have been replaced by significantly more onerous agreements between the host state and oil company joint ventures, which apply to specific contract areas and have more of the characteristics of the petroleum production licence regime – in that they may be awarded by tender, may be subject to model agreements imposed by the state with limited room for negotiation, and which bind the oil companies to significant upfront expenditure in terms of signature bonuses and minimum work obligations. Modern concession agreements typically can be classified into one of three forms.
•Tax and royalty agreements – whereby the oil companies are entitled to take and market all the hydrocarbons obtainable from the defined concession area, subject to payment of taxes and royalties in accordance with the agreement.
•Production sharing agreements – whereby the oil companies and the state agree to share hydrocarbons obtainable in accordance with a negotiated formula, which allows the oil companies to recover their costs of exploration and production from the sale of the initial tranche of production.
•Risk service agreements – whereby the state retains all the hydrocarbons obtained from the defined concession area, reimbursing the oil companies their costs of exploration and production, together with an agreed service fee.
Chapter 4 deals with specific JOA issues that arise where the state participates in the joint venture, usually through a parastatal entity or national oil company. This chapter addresses the role of the state as the counterparty under the concession agreement, in a sense acting as the client for whom the oil companies act as contractor. The dynamic of the concession agreement is very different to that of an engineering procurement and construction contract, because the oil companies act as investors and are responsible for the costs of exploration, development and production, and are rewarded in kind or in cash only in the event of success.
For the purpose of negotiating a JOA and adapting it to be suitable to the context of the concession agreement, the significant differences between the concession agreement regime and a petroleum production licence regime and their relevance to the terms of a JOA are summarised in Table 2.1. The chapter that follows discusses the implications for the structure and terms of the JOA.
Table 2.1. Differences between regimes and their relevance to JOA terms
| Section 2.2 Applicable terms | Petroleum production licence | Concession agreement | Implications for JOA |
| Standard terms | Uniform regime established by statutory rules for each licensing round | Bespoke regime negotiated between state and contract holders, possibly based on a standard agreement | Consider adapting the JOA to the specific terms of the concession agreement as negotiated |
| Scope of licence/ concession | Scope of petroleum operations limited only by licence terms | Scope of petroleum operations typically defined by scope of concession agreement and subject to approval by the state, via WP&Bs | State acts as an additional approver with an effective veto on WP&Bs. Consider need for iterative process for joint venture and state approval of WP&Bs |
| Targets and controls | Joint venture under no legal obligation to achieve profitability, investment or production targets1 | Contract holders will likely have an obligation to maximise economic production. Contract holders may be required to deliver upon a field development plan, requiring continued investment on a multi-year basis | Consider strengthening provisions to resolve deadlock in approving WP&B and including long-term budget provisions |
| Section 2.3 Operator rights and duties | |||
| Governance | Petroleum operations set by the operating committee, subject only to limited state approvals (eg drilling, development and decommissioning plans) | Petroleum operations finally set and approved by the concession agreement management committee | Reconsider the operator’s mandate to represent the joint venture in negotiations with the state |
| Section 2.4 State participation in governance | |||
| Approvals and decision making | State’s influence is limited to regulatory exercise of statutory discretions; therefore participation in the joint venture of a parastatal entity is less significant | State has significant influence in approving WP&Bs and other critical decisions. Participation by parastatal entity in the joint venture as well will likely give rise to conflicts of interest | Review the JOA terms applicable to confidentiality, conflict of interest, audit rights and management of litigation |
| Section 2.5 Liability | |||
| Basis for liability to the state | Grounds for revocation of licence limited to breach of its terms or applicable law. Liability to state in damages only will be limited to breaches of statutory duties | Concession agreement is likely to include a wider range of obligations, breach of which may lead to termination and/or damages | JOA should mandate operator to take steps to avoid breaches of the concession agreement, to require parties to act consistently with the concession agreement |
| Exclusions of liability to the state | No contractual exclusions or limitations of liability; no force majeure excuse | Specifically negotiated liability regime; force majeure clause | Consider adapting the liability and force majeure clauses; ensure that the operator’s liability under the concession agreement can be cascaded |
| Section 2.6 Disposal of petroleum | |||
| State’s role as lifter of petroleum in production sharing regimes | No state interest in produced petroleum | In production sharing regimes, state will lift (or expect joint venture parties to lift) its production share | JOA should allow for the state to be party to petroleum lifting agreements and for the parties to allocate responsibility for lifting and marketing state share (if required) |
| State’s role as lifter of petroleum in risk service agreements | No state interest in produced petroleum | In risk service agreements, the state lifts and markets hydrocarbons | JOA may not need to address parties’ obligation to lift hydrocarbon shares |
| Cost recovery and cost petroleum | No cost recovery; no cost petroleum | Approved contract holders’ costs are recoverable through the contract holders’ cost petroleum allocation | Consider the need for separate budgets for non-approved/non-cost recoverable costs. Consider operator’s liability for non-recoverable costs. Review JOA accounting procedure |
| Section 2.7 Property and ownership | |||
| Ownership of infrastructure and materials | Joint venture acquires and retains title and the right to dispose of all infrastructure constructed and materials purchased for joint operations | To the extent the contract holders recover the corresponding costs, all infrastructure and materials constructed or purchased for joint operations are transferred into the ownership and ultimately custody of the state | Reconsider JOA language on joint property and insurance |
| Section 2.8 Decommissioning | |||
| Allocation of responsibility for decom-missioning | Joint venture is responsible for the decommissioning and abandonment of joint infrastructure | Joint venture responsible for contributing to the costs of decommissioning, but decommissioning operations may be carried out by the state after expiry of the concession agreement | The JOA may need to remain in force, albeit partly, until infrastructure is decommissioned by the state |
| Section 2.9 Information and confidentiality | |||
| State’s rights to information used or developed by the joint venture | Joint venture may treat as joint property information and know-how derived from joint operations | Information and know-how, the acquisition costs of which are cost recovered, belongs to the state | Reconsider JOA intellectual property and confidentiality provisions, particularly to avoid intellectual property contamination |
| Section 2.10 Duration | |||
| Extension of term | Any extension of petroleum licence is likely to be on existing terms | Extension of the concession agreement may involve with new minimum work obligations and other freshly negotiated terms | The JOA should make it expressly clear whether the operator has the right to represent the parties in extension negotiations |
| Section 2.11 Dispute resolution | |||
| Investment protection | Unlikely on a stand-alone basis to qualify for investment protection | May qualify as an investment contract in respect of which the joint venture is entitled to investment protection | JOA may consider how investment protection rights may be enforced by the parties acting jointly |
| Section 2.12 Exclusive operations and non-consent | |||
| Applicability | JOA is unlikely to permit minimum work obligations to be subject to exclusive operations and non-consent | Exclusive operations and non-consent may apply to obligations owed to the state under the concession agreement | Joint venture should consider JOA terms applicable to protection of non-consenting parties |
This chapter also addresses the complexities for the drafting and management of the JOA which arise when participation in the joint venture changes by reason of transfers or withdrawals in a way which is not recognised by the state under the terms of the relevant concession agreement.
Petroleum licence regimes have a certain predictability because they are governed by a standard set of statutory rules with the intention of creating a level playing field for participating bidders in each licensing round. Those statutory rules govern the process for the tender, as well as the terms of the licence to be awarded. The rules will also set out the cases where the licence holder must obtain state approval for its actions, and may specify the conditions on which such approvals may be granted or withheld. Importantly, the licence is not a contract but an instrument of administrative law. The rights and obligations it grants are not contractual but statutory, and the licence is interpreted in accordance with statutory and not contractual rules of construction. While some production licence regimes provide for dispute resolution by arbitration, it is more usual for disputes to be handled through the administrative courts of the granting jurisdiction. The licence term is likely to be standard, subject to extensions. For the purposes of a JOA, it means that its terms can be adapted to the statutory rules for approvals of work programmes and budgets, decommissioning, drilling, licence extensions and relinquishments of licence areas in a manner which is generally fit for purpose for any licence of any particular licensing round.
The same cannot be readily said about concession agreement regimes because it is impossible to make general statements about their characteristics. Every jurisdiction using the concession agreement regime adopts its own approach for permitting petroleum exploration and production under the terms of the concession agreement. Many regimes offer concession agreements by public tender, against a standard form of concession agreement which is largely non-negotiable. However, where it is necessary to attract foreign investment for more complex projects, a production sharing agreement may be offered on bespoke terms which are negotiated. Myanmar for example grants production sharing agreements by bidding rounds.
The only legitimate conclusion to draw is that the JOA must be adapted carefully to be consistent with the specific concession agreement which the joint venture shall perform. This may involve a two-stage process, whereby the joint venture enters into a JOA to govern its participation in the relevant bidding round, and then adapts that JOA to be consistent with the final form of concession agreement which it signs if successful.
A consistent theme of concession agreements is that the contractor is required to submit work programmes and budgets for approval by a management committee on which the state is represented and routinely has a blocking vote. This may extend to include the right to approve annual work programmes and budgets, separate exploration and appraisal and development programmes and budgets, or both. In this way, the state acts as an additional partner, and a particularly influential one, because the operator is unlikely in practice to be able to conduct petroleum operations without the state’s approval, even if the JOA operating committee is fully supportive of the operator’s proposals. This changes the dynamic of operating committee decisions. Every meeting of the management committee must be preceded by an operating committee meeting at which the joint venture mandates the operator to represent the joint venture’s interests and negotiate its position with the state. The operating committee must be ready to participate in an iterative process, during which the joint venture’s position as approved by the operating committee is proposed to the state, and the state’s counterproposals are taken back to the operating committee by the operator for approval by the joint venture, before a work programme and budget can be thrashed out which meets the requirements of the state and the joint venture. This adds significant time and complexity to the process. Minority partners in the joint venture may exploit the need for state approval in order to raise issues with the state which they were unable to deploy successfully in the operating committee. This may be particularly relevant for national oil companies participating in the joint venture who may be tempted to invite the state to adopt their arguments and positions in the management committee, if they were unsuccessful in the operating committee. The potential for such a conflict of interest is discussed below. Euroil Ltd v Cameroon Offshore Petroleum SARL is a particular example of this problem, where the defendant, CAMOP addressed its concerns to the Cameroon petroleum regulator, despite the obligation in the JOA to allow the operator to act as exclusive representative of the joint venture before the state.2
Commonly, model JOAs such as the AIPN JOA define the scope of joint operations in terms of the operations approved pursuant to the concession agreement. In other words, the operator’s mandate to act on behalf of the joint venture is effectively the same as the joint venture’s mandate from the state under the concession agreement. Accordingly, the operator is not entitled or obliged to perform a work programme and budget approved by the operating committee unless and until the same work programme and budget is approved by the state under the concession agreement. This has attractive symmetry, but may not be appropriate in all cases. It exposes the operator to significant liability, if the state claims the operator acted outside its mandate under the concession agreement, which may in turn encourage the joint venture non-operators to claim the operator is in breach of its mandate under the JOA. This could have very serious ramifications for the operator if it resulted in liability for the joint venture under the concession agreement to which the non-operators may refuse to contribute, arguing that the partial release and indemnity by the operator under the JOA only applies to liabilities incurred in the course of approved operations, meaning operations approved by the joint venture and the state. This might leave the operator with a liability to the state without recourse to the non-operators, even though its actions may not have constituted wilful misconduct or gross negligence, but simply arose from inadvertent exceedance of authority.
Petroleum production licences are exactly that: permits to conduct petroleum exploration, appraisal and ultimately development and production activities. The licence holder owes no duty to the state to pursue any particular plan of action, save for the minimum work obligations; the ultimate sanction for inaction by the state under the petroleum production licence is relinquishment at the end of the appropriate term. Typically under concession agreements, the state’s approval of work programme and budget does not merely grant the joint venture the right to undertake the relevant work, but also imposes the obligation to do so, including the obligation to invest the necessary funds. The concession agreement may also expect the joint venture to agree a multi-year, field development plan and budget, which will likewise impose an obligation on the joint venture to fund and conduct the necessary works. The operator’s failure to perform a work programme and budget is prima facie a breach of the concession agreement. Bear in mind also that each joint venture participant is likely to be a party to the concession agreement, and any default by such participant in paying cashcalls under the JOA may constitute a breach by it of the concession agreement as well as the JOA. Furthermore, concession agreements routinely provide that each participant is jointly and severally liable for the joint venture’s obligations under it. This has significant implications for drafting the JOA default clause.
It also requires the parties to consider carefully the JOA mechanisms by which the operating committee approves the relevant work programmes and budgets. In choosing and amending the relevant model JOA, the parties should consider the following:
•Does the JOA allow the operator to recycle joint venture approval of work programme and budget proposals in a protracted negotiation for state approval of the work programme and budget under the concession agreement?
•Does the JOA allow the operating committee to non-consent work and expenditure required to meet existing obligations under the concession agreement? Should the JOA contain anti-deadlock provisions, enabling the operator to force through a programme and budget in such circumstances?
•Does the operator have the right to continue making expenditures and conducting activity necessary to perform obligations under the concession agreement, notwithstanding any delay or refusal to approve a work programme and budget by the operating committee and/or the state?
•Are the parties under a positive obligation to take all steps necessary to perform the concession agreement, including the obligation to approve the programmes and budgets consistent with it?
The state’s approval of a work programme and budget and the joint venture’s compliance with it are preconditions of the joint venture’s recovery of its costs of investment under a production sharing agreement or a risk service agreement, making these issues particularly contentious.
2.3 Operator rights and duties
The AIPN and OGUK model JOAs contain provisions which appoint the operator as the exclusive representative of the joint venture in relations with the state, although they may reserve the right to a non-operator to address the state on matters unique to that non-operator, and may allow all the non–operators to be represented at any meeting with the state. The role of the operator in representing the joint venture before the state is, in the context of a concession agreement, vitally important.
A clear balance needs to be struck between the representation of the joint venture participants, as parties to the concession agreement, at meetings with the state, and the proper presentation of the joint venture’s approved and agreed joint position. In Euroil Ltd v Cameroon Offshore Petroleum SARL, the operator Euroil was criticised for overstating its authority on behalf of the joint venture, claiming that the relevant JOA clause authorised it to choose whether a non-operator could answer any question raised by the state and on what terms. This encouraged the court to cancel the injunction it had previously granted to the operator to control the non-operator CAMOP’s alleged interference in the state’s approval of a work programme and budget. The State of Cameroon expected CAMOP to attend and participate in the relevant meetings, making it all the more important for all the parties to agree in advance and be bound by a common negotiation strategy.3
In negotiating a JOA, the operator should be warned that English law may expect it to act fairly, reasonably and honestly in the discharge of any discretion it has to represent the non-operators before the state, especially in circumstances where the non-operators have not had the opportunity to be consulted and offer their views.4 Generally, English law will not impose a fiduciary duty of good faith or a duty to act reasonably, fairly and honestly in the performance of JOA obligations by the operator because JOAs are detailed and fully negotiated agreements which the courts expect to set out the entire bargain to which the parties bind themselves, including any such overriding duty of good faith or fair dealing.5 However, an exception to this principle may arise in the context of the concession agreement; the state, not the operating committee, has the final word, or at least shares the final word, in deciding the scope and direction of the joint venture’s operations, and, therefore, the interaction between the state, and the operator representing the joint venture, is critically important for all the joint venture participants. Since the state is not a party to the JOA, and the concession agreement, not the JOA, defines the governance of the management committee and state/joint venture relations generally, the JOA can only control the actions of the operator on behalf of the joint venture in its engagements with the state. English law will generally be more sympathetic to an argument that the operator must represent the joint venture fairly, honestly and reasonably in its interactions with the state if those interactions are likely to have significant implications for the joint venture as a whole, and yet the non-operators have limited opportunity to be consulted or influence their outcome.6 It may, therefore, not be in the interests of the operator to insist that the JOA grants it wide authority to represent the joint venture in meetings with the state. The JOA may better protect the operator if the JOA provides that the operator shares responsibility for representing the joint venture before the state with the other joint venture participants, provided that all the joint venture participants undertake to represent the pre-agreed joint venture position in any engagement with the state.
2.4 State participation in the joint venture
Chapter 4 addresses state participation in the joint venture; the purpose of this section is to discuss the particular implications for the JOA where a parastatal entity participates in the joint venture which is in turn party to a concession agreement with the state which owns or controls such parastatal entity.
The previous sections have looked at the state’s control and influence over joint operations through the terms of the concession agreement. The interests of the state and the joint venture under the concession agreement are likely to be adverse for various reasons; the state will wish the joint venture to maximise production for the lowest possible investment, thereby increasing the state’s take in terms of taxation or production share. This may conflict with the joint venture participants’ investment priorities and the conflict may be fought out in the process for approving the relevant work programmes and budgets. Having a parastatal entity inside the joint venture exposes the other participants to the risk that the parastatal entity may exercise a disruptive role inside the joint venture, representing the interests of the state, instead of a non-aligned participant, in the operating committee.
In this context, the JOA drafters should consider whether to include in the JOA conflict of interest provisions, requiring any parastatal entity to abstain from any operating committee vote on a matter which brings the joint venture into conflict or potential conflict with the state under the concession agreement. Such principle might apply to an operating committee vote to serve a notice of force majeure under the concession agreement or to bring or defend proceedings against the state under the concession agreement. It might also go as far as preventing the parastatal entity from receiving the operator’s information in support of such votes. It may be prudent to go further and exclude the parastatal entity from decisions the operating committee may take in selling hydrocarbons to a parastatal entity, or in transporting the state’s share of hydrocarbons.
Sensitive joint venture information may also be at risk if the parastatal entity is allowed to participate in non-operator audits of the operator’s financial records. The concession agreement is likely to provide the state with audit rights for the purposes of verifying the operator’s records for the purposes of taxation and the recovery of the joint venture’s costs as cost petroleum. It would be prudent to prevent the parastatal entity from using joint venture audit rights to duplicate the state’s audit rights for these purposes. Commonly, the JOA confidentiality clause will allow joint venture parties to share confidential information with their affiliates for the purpose of benchmarking and reporting of financial and business results within the participants’ corporate group. It will be unreasonable to interfere with the parastatal’s rights to share information in an equivalent way with its controlling entities within the state apparatus, but it may be prudent to limit the purpose for which such information can be used in the confidentiality clause, without impacting on its usefulness for the other participants and their affiliates.
It will be controversial to negotiate such provisions into a JOA at the outset if the parastatal entity is one of the original joint venture participants. However, even if that is not the case, the concession agreement or local law may grant the state the right to require the joint venture to allow a parastatal entity to participate in the joint venture at a later date, for example following a commercial discovery. In such cases, state participation is foreseeable, and it may be prudent to address these issues in the JOA from the outset, so as to avoid the challenge of negotiating such terms into the JOA when the parastatal entity is on the point of joining.
The point was made in 2.2 that the concession agreement brings into play contractual rules as well as the statutory rules imposed by local petroleum laws. It will contain provisions for the termination of the concession agreement by the state for its breach by the joint venture and the liability of the joint venture parties for its performance, usually on joint and several terms. The joint venture may be obliged to indemnify the state for environmental liabilities and third-party liabilities arising from their performance of the concession agreement, subject to certain financial and/or legal exclusions. It is important for the joint venture to consider whether the JOA should be revised in the light of the concession agreement liability regime.
Three points should be taken into account – first, as a general point, the joint venture participants should recognise that non-performance of the concession agreement by any one of them may put the concession agreement, and their respective investments in it, at risk. Default by a participant in paying a cashcall is not only a matter of a cash flow crisis, temporarily or permanently resolved by the non-defaulting participants in making good the deficit; it is also likely to be a direct breach of the concession agreement. Failure by the operator to perform a programme and budget is not only a regrettable waste of joint venture resources, possibly leading to the dismissal of the operator. Both circumstances put the joint venture at risk of liability to the state under the concession agreement, and ultimately its termination by the state. It may be prudent to include in the JOA an overriding obligation on all the parties to take all necessary steps to maintain the concession agreement in good standing, including approving work programmes and budgets to the extent necessary to perform the minimum required by the concession agreement’s terms. It may also be easier to justify the forfeiture of a defaulting party’s participation as a legitimate form of penalty if it can be shown that the relevant default put the concession agreement at risk and that the non-defaulting parties had a legitimate interest in avoiding the repetition of that risk.7
Secondly, JOAs routinely include a provision excluding each party’s liability for any other parties’ consequential loss. The definition of consequential loss should be reviewed to establish whether it excludes liability to the state for the state’s economic loss arising from a breach of the concession agreement; it might be disastrous for the parties if that was the case, because the clause might then prevent one party, against whom the state could enforce the relevant breach exclusively, from recovering a contribution from the other joint venture participants. The distinction needs to be drawn in the liability provisions of the JOA between the liability to the state in damages for breach of the concession agreement caused by one of the joint venture parties, which may include liability for the state’s economic losses, and the liability of that joint venture party to the other joint-venture parties for their consequential and/or economic losses (see Chapter 17).
Thirdly, the participants should consider to what extent the force majeure provisions of the JOA should reflect the force majeure provisions of the concession agreement (see Chapter 20). It may be apparently attractive for the force majeure regimes in each agreement to be equivalent but this is usually a flawed approach. Often the concession agreement will only permit the parties to invoke force majeure if none of the joint venture parties is able to perform the relevant obligation for reasons beyond the control of any of them; the JOA definition of force majeure is drafted to apply to each joint venture participant, and is particularly relevant to the operator.
In two forms of concession agreement, the production sharing agreement and the risk service agreement, the state is entitled to take, lift and market some or all of the hydrocarbons obtained through joint operations. In the production sharing agreement variant, the state will take and lift its hydrocarbons simultaneously with the joint venture participants. While the state is likely to appoint a parastatal entity or third party to act as its agent for these purposes, it must, directly or through that agent, participate in the lifting agreements and gas balancing agreements governing the allocation, attribution and measurement of its share and the joint venture’s shares of hydrocarbons (see Chapter 12). The joint venture participants will have a choice, whether to invite the state or its agent to be a party to the crude oil lifting and gas balancing agreements, as an additional lifting party, or whether instead to have lifting balancing agreements between the state and the joint venture (acting as a single party), with further lifting and balancing agreements between the joint venture participants only. The advantage of the second option is that it enables the joint venture parties to manage any inability to lift within the joint venture to avoid a situation where an underlift by the joint venture gives the state an opportunity to overlift its share. This may be particularly relevant where the state controls access to downstream transportation and/or hydrocarbon markets.
The concession agreement may require the joint venture to lift and market the state’s hydrocarbon share on its behalf. It may also require the joint venture to oversize downstream transportation and processing infrastructure in order to accommodate the state’s share. Both of these activities may involve the joint venture collaborating downstream of the point at which they lift their hydrocarbon shares, beyond the territorial scope of the JOA (see Chapter 6). The parties will need to consider if they are prepared to extend the scope of the JOA to address these activities or whether a separate JOA should be put in place to govern these activities if the state so requests.
Lastly, under production sharing agreements, the joint venture will have the right to lift and sell a defined proportion of production, termed cost petroleum, in order to recover the cost of its investments in the joint operations, provided that it can show that such costs were properly incurred in accordance with the production sharing agreement and the relevant approved work programmes and budgets. As mentioned in 2.5, the operator is at risk of not recovering its expenditure on joint operations if the relevant expenditure is not recoverable under the terms of the production sharing agreement, and the non-operators may argue that such expenditure was also outside the scope of an approved work programme and budget for the purpose of recovery of that expenditure from them under the JOA.8
The JOA parties should consider carefully whether it is in their interests that joint operations, the costs of which the JOA requires them to share in accordance with their percentage interest shares, should be limited to operations approved by the state as well, for the purposes of cost recovery under the production sharing agreement. It may be more prudent for the JOA to distinguish between approved joint venture costs which it expects to be costs recovered under the production sharing agreement, and costs which it authorises the operator to incur, even though the joint venture does not expect to be compensated for such costs under the production sharing agreement in terms of cost petroleum or at all. The joint venture should expect to encounter several situations where it is unable to agree with the state with respect to certain components of a work programme and budget, but wishes to proceed with work unauthorised by the state nonetheless. For example, the operator may wish to introduce new practices in terms of safety or technology at additional cost, in order to be consistent with good practice in its corporate organisation, as recognised by the joint venture, but the state refuses to approve the associated cost. The JOA and its Accounting Procedure should provide a mechanism by which such costs are approved by the joint venture, reported by the operator and included in the operator’s cashcall mechanism in a transparent manner. At the same time, the joint venture should consider to what extent any parastatal entity in the joint venture should be permitted to participate in approving such non-recoverable costs because it will be commercially unattractive if the state is aware that the joint venture is prepared to subsidise operations in this way.
Under the terms of a tax and royalty concession agreement, the joint venture pays for, constructs and owns the infrastructure and facilities it needs to perform operations, usually deducting the relevant capital costs from its taxable income for profits tax purposes, in line with standard practice for businesses in other sectors operating in the same jurisdiction. In the case of the production sharing agreement and the risk service agreement, the joint venture is compensated in full for such costs by the state, in exchange for which the state, or its nominee, will take title to such assets once their costs have been reimbursed to the joint venture (or earlier under some regimes). Many JOAs applicable to production sharing agreements and risk service agreements fail to address this point and assume that the relevant capital assets are joint property, held by the joint venture parties on an undivided basis in their respective percentage interests. In reality, the joint venture merely has a licence to continue to use such capital assets, after their cost has been reimbursed by the state and title in them transferred to the state, until the assets are no longer needed by the joint venture for operations.
For this reason, the joint venture should review the JOA provisions on insurance to make sure that the state is noted as an additional insured under joint venture insurance policies (see Chapter 17). It would also be prudent to review the clauses on transfer, withdrawal (Chapter 14), default (Chapter 18) and surrender under which one or more joint venture parties disposes of an interest in the joint venture, to ensure that they are consistent with the transfer of a licence to use capital assets, as against the transfer of title in such assets; this may have significant local tax implications. The exclusive operations clause (Chapter 13) may also need to be adapted so that it makes it clear that parties pursuing an exclusive operations option follow the same sequence of investment, cost recovery and transfer of title to the state with respect to the capital assets in which the participating parties invest.
The state’s interest in assets, the cost of which has been recovered pursuant to a production sharing or risk service agreement is also likely to be relevant to the management of intellectual property used and/or developed by the joint venture and also to decommissioning.
The infrastructure which the joint venture puts in place for the production of hydrocarbons under a petroleum production licence or a tax and royalty agreement belongs as joint property to the joint venture. Under a production sharing agreement or risk service agreement, the equivalent infrastructure will belong to the state but the joint venture will remain liable in some form for its decommissioning, either in accordance with the terms of the relevant concession agreement, or under local petroleum laws or both. That liability for decommissioning will apply even after the production sharing agreement or risk service agreement has expired, and even in circumstances where the relevant infrastructure has continued to be operated by a replacement operator on behalf of the state, possibly under a different concession agreement. In the latter scenario, decommissioning is performed by a third party, but the joint venture will be obliged to make a significant contribution to the decommissioning costs, such contribution being proportional to the amount of hydrocarbons produced by the joint venture from the relevant reservoir compared to the aggregate hydrocarbons obtained from that reservoir overall.
The joint venture may manage to negotiate a clean break with the state in respect of its contribution to decommissioning costs, such that its liability for decommissioning costs is fully and finally settled by payment of the relevant contribution when the concession agreement terminates, without recourse to the joint venture by the state for any additional contribution at a later date. If such a clean break is not advisable or possible, the joint venture parties may find themselves exposed to an open-ended liability for decommissioning to be conducted by a third party beyond their control, a scenario which would be both reputationally and financially unattractive. The joint venture may be able to negotiate some degree of ongoing oversight of such decommissioning, in order to control costs, but at the price of having to leave the JOA in place to govern the parties’ sharing of ongoing costs and liabilities, and the operator’s function in representing their interests to the state (and its replacement operator). The terms of the JOA governing its termination and closure of the joint venture should be reviewed with this in mind.
2.9 Information and confidentiality
Information is not treated as property under English law but in the hands of a person that holds it in confidence, it has economic value. Understandably, any information which is obtained by the joint venture with respect to the concession area is of particular value to the state, especially if the state expects to continue with operations in the concession area after the concession agreement has expired. More to the point, if the joint venture has recovered the cost of obtaining such information from the state under the terms of a production sharing agreement or risk service agreement, the state will legitimately treat such information as its own. As with capital assets deployed in operations and costs recovered, the joint venture will retain a licence to use such information but the right to control it is likely to remain with the state. The concession agreement will likely require the joint venture to respect the state’s interest in such information and protect it with appropriate confidentiality precautions. The confidentiality and intellectual property provisions of the JOA should be adapted to reflect this.
Any joint venture party should take this issue seriously in connection with any technology or know-how which they wish to make available under licence to the joint venture for the purpose of operations. If that party charges the joint venture for the costs of developing such technology or know-how, and those costs are recovered under the terms of the concession agreement, the state will expect at least to acquire a licence to use such technology or know-how, possibly after the expiry of the concession agreement, even though it is not a party to the JOA and not bound by the licence terms the joint venture parties have negotiated between themselves (see Chapter 15).
For the purposes of the JOA, the parties should consider distinguishing between information relevant exclusively to the concession area, of primary usefulness to the state, and technical information which is of portable value, and of primary usefulness to the parties for deployment in other ventures. The prudent course may be for them to cost recover only the cost of acquiring information relevant to the concession area, which they may, by law or by the terms of the concession agreement, be obliged to share with the state, while not cost recovering the cost of acquiring or sharing technical information which they wish to be free to use in their wider operations.
As mentioned above, the concession agreement is likely to provide for the joint venture to pay significant sums to the state, in terms of signature bonuses and bonuses payable on declaration of a commercial discovery. Likewise, the concession agreement sets out the terms on which the joint venture is obliged to invest, by way of minimum initial work obligations, and subsequently in accordance with a field development plan. Such investments are likely to qualify for protection under bilateral or multilateral investment protection treaties which may grant the investors directly enforceable remedies against the host state in the event of nationalisation or breach of the concession agreement.
It may be complicated for the joint venture to enforce such remedies, however, because the available remedies will differ depending on which investment treaty or treaties are applicable; the available investment treaties are, in general terms, those treaties to which each joint venture party’s home state is signatory. Several investment treaties are likely to be relevant to any one international joint venture and orchestrating action under those treaties by the joint venture is complicated because the terms of those treaties differ. For that reason, it would be prudent for the joint venture parties to consider their investment protection options at the outset of the concession agreement and to put in place an agreement for the joint management of their investment treaty rights, and the logical place for this would be the JOA – unless the parties expect a parastatal entity shall be party to the JOA in due course.
2.11 Exclusive operations and non-consent
Exclusive operations and non-consent are discussed in detail in Chapter 13. The key observation for present purposes is that the state is unlikely to agree to amend the concession agreement to release the non-consenting parties from joint and several liability in respect of the sole risk or non-consent operations in which they do not participate. There is no advantage to the state in doing so. The point was made in 2.5 on liability that concession agreement holders are each obliged to the state to make investments and conduct petroleum operations. The concession agreement is likely to be blind to the distinction which the joint venture parties make under the JOA between joint operations and exclusive operations. Under the concession agreement, exclusive operations will form part of the joint venture’s overall work programmes and budgets for which each joint venture party is jointly and severally liable, whether they participate in such operations under the JOA or not.
Chapter 13 discusses the indemnities which the consenting parties grant to the non-consenting parties in respect of such operations. Non-consenting parties have a particular exposure to exclusive operations, because they have no control over these operations but bear the same liability to the state under the concession agreement – on joint and several terms – for those operations as the consenting parties. The joint venture parties should therefore consider whether the indemnity arrangements are sufficiently robust to protect the non-consenting parties and whether the consenting parties should provide security to back up those indemnities.
The joint venture parties should also take into account that joint operations may be delayed by the need for the state’s approval of a work programme and budget where the sticking point in that programme and budget is an exclusive operations component which proves difficult to agree with the state. Likewise, consideration should be given to how the operator is mandated by the operating committee to represent the joint venture in negotiations with the state with respect to exclusive operations. There is a conundrum – the state will expect the operator to represent the entire joint venture in respect of the work programme and budget, whereas the non-consenting parties only wish to approve and be responsible for that component which represents joint operations. This will be particularly difficult if the operator has declined to conduct the exclusive operation (as some model JOAs permit it to do; see Chapter 13), but only the operator is authorised to present the programme and budget under the concession agreement, which must address joint operations and exclusive operations in a combined proposal.
1There are exceptions to this principle. In 2016, the UK government introduced new obligations for offshore infrastructure owners to maximise economic recovery from the UK Continental Shelf (see 16.2 (e)).
2Euroil Ltd v Cameroon Offshore Petroleum SARL [2014] EWHC 12 (Comm).
3Euroil Ltd v Cameroon Offshore Petroleum SARL [2014] EWHC 52 (Comm).
4Richard Hooley, “Controlling Contractual Discretion” (2013) 72 The Cambridge Law Journal 65–90, doi:10.1017/S0008197313000019.
5Ross River Ltd and another v Waverley Commercial Ltd and others [2013] EWCA Civ 910.
6Sheikh Tahnoon Bin Saeed Bin Shakhboot Al Nehayan v Ioannis Kent (AKA John Kent) [2018] EWHC 333, see paras 159–66.
7See also Cavendish Square Holding BV v Talal El Makdessi, Parking Eye Limited v Beavis [2015] UKSC 67 which explains how a penalty may be legitimately imposed to protect a legitimate interest inadequately protected by ordinary contractual damages or other remedies at law.
8It should be borne in mind that each partner will separately lift and sell its entitlement to cost petroleum and profit petroleum with the result that the operator has no access to the cash flow from those sales, as a means of offsetting unpaid cashcalls (see 18.4 (b)).
