Model Agreements and Principles of JOA’s

By Gizel Thomas-Roberts

Comparison of Model Agreements

The basic structure of the current international JOA owes its beginnings to a model JOA form adopted by the American Association of Petroleum Landmen (AAPL Form 610) and commonly used for the U.S onshore operations. Operators in the early days of the U.S oil industry often entered into joint agreements as a device to raise capital, spread risks over several projects and gain access to downstream markets. This JOA concept spread from the U.S to Canada- and then to the international arena.[1]

Model forms are currently produced by the Association of International Petroleum Negotiators (AIPN) and the UK Offshore Operators Association (UKOOA) now termed as Oil and Gas UK. These forms are much in use and in demand and they have been known to reduce the time and effort involved in reaching a conclusive agreement. There is no level of identity in these forms and they offer numerous alternatives to the parties involved. For the purposes of this article, selective clauses (three in number) of both the AIPN Model and the UK Model will be assessed.

·           The Operators Liability- Oftentimes a contentious issue during negotiations, there is a growing common practice to limit his liability to those acts and omissions that are themselves grossly negligent.

Under the 2002 AIPN Model, the parties must affirmatively select the option of conferring liability for gross negligence and share all losses with the other parties according to their participating shares in the operation:

“Operator shall not bear, except as a Party to the extent of its Participating Interest share, any damage, loss , cost or liability resulting from performing the duties and functions of Operator and the Operator is released from liability to Non-operators for any and all such damages, losses, costs and liabilities arising  out of , incident to or resulting from such performance... even though caused...by the negligence(whether sole, joint or concurrent) gross negligence, wilful misconduct, strict liability or other legal fault of the Operator’.[2]

The AIPN Model JOA defines gross negligence or wilful misconduct as conduct “in reckless disregard of or wanton indifference to, harmful consequences that the operator knew or should have known” the conduct would have on the safety or property of others.[3]

Wilful misconduct is similarly referenced in the 2007 UK Model JOA. It reads thus

‘ “ Wilful Misconduct” means an intentional or reckless disregard by Senior Managerial Personnel of Good Oilfield Practice or any of the terms of this Agreement in utter disregard of avoidable and harmful consequences but shall not include any act, omission, or discretion made in the exercise in good faith of any function, authority or discretion vested in or exercisable by such Senior Managerial Personnel and which in the exercise of such good faith is justifiable by special circumstances, including  safeguarding of life, property or the environment and other emergencies’.[4]

  

·           The Operating Committee- Non-operators have a right to participate in the programme albeit because of the enormous sums that have been invested and at the same time exert some level of control over the operator. The main way of achieving the dual purpose is through the creation of an operating committee (OpCom) under the auspices of the JOA. This committee will comprise representatives of each of the participants to the JOA with the operator’s representative serving as Chair of the Committee. It may very well ensure that the operator does not conduct itself as ‘monarch of all it surveys’ irrespective of the amount of control he possesses. Illustrative of this is the 2007 UK Model JOA which reads thus:

 

         9.            The Joint Operating Committee

                        9.1       Establishment and Powers

There is hereby established a Joint Operating Committee which shall exercise overall supervision and control of all matters pertaining to the Joint Operations. Without limiting the generality of the foregoing, but subject as otherwise provided in this Agreement, the powers and duties of the Joint Operating Committee shall include:

(f) the consideration and determination of all matters in general relating to policies, procedures and methods of operation hereunder with the intent that all such operations should be undertaken in a manner consistent with Good Oilfield Practice and in compliance with best practice standards in respect of health and safety and of the environment; and

(g) the consideration, and, if so required, determination of inter alia the following:

                                                      i.        exploration, appraisal, development and production strategies;

                                                     ii.        contract strategy

                                                    iii.        decisions as to cessation of Production, strategies for decommissioning and the disposal of Joint Property; and

                                                   iv.        any other matter relating to the Joint Operations which may be referred to it by the Participants or any of them(other than any proposal to amend this Agreement) or which is otherwise designated under this Agreement for reference  to it.

(h) the approval of Programmes and Budgets;

(i) the amendment of the monetary limits set out in this Agreement...[5]

Under the AIPN the corresponding language reads thus:

“The Operating Committee shall have power and duty to authorize and supervise Joint Operations that are necessary or desirable to fulfill the Contract and properly explore and exploit the Contract Area in accordance with this Agreement and in a manner appropriate in the circumstances”.[6]

It appears that the AIPN Model has expanded and enlarged the powers of the Operating Committee a bit further than that under the UK 2007 Model.

·           Participating Interests of the Parties and National Oil Companies- One of the essential functions of the JOA is to delineate the interest and other obligations of parties to the agreement. The ‘participating interests’ of each party to the JOA will be expressed in percentages; subject to revisions should a party transfer any of its original shares. These percentage interests are often not set out in the underlying IPA (International Petroleum Agreement)[7]. The 2007 UK Model  provides thus:

‘Subject to the provisions of this Agreement, the Licence , all Joint Property, all Joint Petroleum and all costs and obligations incurred in the conduct of the Joint Operations shall be owned and borne by the Participants in proportion to their respective Percentage Interests…’.[8]

Where the HC (Host Country) through its NOC (National Oil Company) has the option of participating in the IPA, the JOA will contain a provision such as the 2002 AIPN Model JOA:

‘If Government Oil and Gas Company elects to participate in the rights and obligations of the Parties…, the Parties shall contribute, in proportion to their respective Participating Interests, to the interest to be acquired by the Government Oil and Gas Company’.[9]

Whether the NOC decides to participate under the original JOA or a freshly negotiated JOA, it will still be considered as a non operating party. Inclusive with this participation is the right to be ‘carried’ by the other parties for a period until there is commercial discovery. Being carried, the NOC does not have to make any contributory funds to the joint activity since the other parties fund the exploration activity on the NOCs behalf. Where there is little success it means that the NOC has risked no capital in the project. However, where there is a commercial discovery the NOC has the option of participating and will fund the expenses from this point onwards.

TAKING IT HOME

The proponents of JOAs aided their development so as to be of help to companies which wanted to pool their resources together in this hugely capital intensive industry. JOAs are used worldwide and because of this the debate will continue to rage with full force as to whether they are partnerships or just an oil and gas marriage of convenience. My preceding articles may have been insufficient to skillfully argue the fact that they are not partnerships, but this provides future writers with much more fodder for further development. There can be no argument that prima facie JOAs are simply partnerships spelt with three letters, but closer scrutiny may reveal that such a cursory glance must not be paid to their form.

Nutshell:

Through a comparison of selective clauses from the AIPN 2002 Model Contract and the UK 2007 JOA, Gizel has attempted to highlight the similarities and dissimilarities between both models and link that to the question of whether JOAs are partnerships or not. I am happy that – with this 3 part series of articles, Gizel has been able to appropriately JOAs and highlight the critical concepts such as Joint Operating Committees, the varying provisions in the AIPN model compared to the UK 2007 JOA. 

On a final note, I believe strongly that this article written by Gizel will be of tremendous help to lawyers and contract negotiators, OML bidders, farmers out and farmers in- out there who may find themselves yearning for critical information on the key concepts and salient issues that exist in the application of partnerships and joint operating agreements in businesses and ventures alike. There is a marked difference indeed. Let’s run with it.  To view Gizel's professional profile and for more information on this article please click here: -->