4.0 Joint Operating Agreements

Understanding Oil & Gas Contracts
Presented by:
Olayemi Anyanechi
Partner, Sefton Fross
May 16, 201
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are those of the presenter and do not necessarily represent
those of SEFTON FROSS.
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informational purposes only.
JOINT OPERATING AGREEMENTS
Outline
Definitions
Effective Date and Term
Sole Risk Operations
Participating Interests
Default
Operator
Disposition Of Production
Operating and Management
Committees
Abandonment
Work Programmes and
Budgets
Withdrawal From Agreement
Relationship of Parties and
Tax
Confidential Information
Force Majeure
Notices
Applicable Law and Dispute
Resolution
Relinquishment
Transfer of Interests or Rights
Allocation of Production
Other Minerals and
Substances
Business Policies
Public Announcements
General Provisions
Originals
The Joint Operating Agreement
• Existence and rational for a JOA are based on certain conceptual and
structural principles:
– Petroleum is owned by the State
– Often the State invites private person(s) to exploit for Petroleum by
grant of concessions
• Concession sets out vertical relationship but not the relationship
between concession holders, hence the JOA
• JOA defines the relationship, provides for their rights and liabilities,
funding and sharing of Petroleum
• The following affect the terms of the JOA
–
–
–
–
Concession Area
Term and Duration
Work Programme
Operatorship
Role of the JOA
Petroleum Laws
JOA allows:
Risk sharing
Skill Sharing
Multiple participation
Parties will typically
not incorporate a
separate entity and
JOA will be the
governing
document
State: NNPC
Concession: License/Lease/PSC
Concession
Holder
JOA
Concession
Holder
The Incorporated
JV may be used
where the JVC is
the concession
holder
Model Form Contracts
• These form a starting point for
documentation of the unincorporated joint
venture and is expected to reduce
transaction costs and minimise extensive
negotiation.
• The AIPN JOA is internationally the most
widely used and will form the basis of our
discussion
Essential Terms in the JOA
• Duration will mirror the term of the concession. Starting from
the “Effective Date” until either:
– the Concession terminates;
– property used in connection with Operations have been
disposed of or removed; and
– final settlement has been made.
• Retains some surviving provisions:
– Confidentiality
– Decommissioning
– Indemnity provisions
• Termination does not affect rights and obligations arising in
connection with the JOA which have vested, matured or accrued
prior to such termination e.g Ongoing disputes
Scope of JOA
• JOA typically governs “the respective rights and obligations of
the Parties with regard to operations under the Contract”, This
typically includes:
– joint exploration, appraisal, development, production and disposition of
Hydrocarbons from the Contract Area .
• and excludes:
– construction, operation, ownership, maintenance, transportation
downstream; marketing and sales of Hydrocarbons;
– acquisition of rights to explore develop or produce outside of the
Contract Area except for unitization purposes; and
– exploration, appraisal, development or production of minerals
other than Hydrocarbons.
• These will be done under other contacts, EPC, SPA, CHA etc.
Parties & Participating Interests
•
JOA will state the original parties, new parties will typically join via a
novation agreement, hence definition of parties should include “successors
and assigns”.
•
May require collateral support from parent or affiliate companies
•
State interest of the parties.
•
More or less creates a tenancy in common between the parties.
•
PIs define:
– Contributions to cash calls
– Entitlement to productions
– Share of liabilities
•
Parties may have economic arrangements which may be external to the PI
share in the JOA by way of carry arrangements
Operatorship
• JOA designates the Operator who is mainly responsible for joint
operations.
• Rights and Duties of Operator: Operator has full charge of conduct
of Joint operations and may employ contractors and agents.
•
•
•
•
•
•
•
•
•
Operator will have the right to employ staff and well as secondees
Information Supplied by Operator
Settlement of Claims and Lawsuits
Limitation on Liability of Operator
Insurance Obtained by Operator
Commingling of Funds
Resignation of Operator
Removal of Operator
Appointment of Successor
Role of Operator
Represents the
Parties in claims
and lawsuits and
may compromise
some . Parties
have a right to
participate at their
cost
Conduct Joint
Operations in a
diligent, safe and
efficient manner
JOA Designates
Operator who is
responsible for Joint
Operations
exercise due care
with respect to
the receipt,
payment and
accounting of
funds
Award contracts
and ensure
enforceable
against Opertaor
exclusive right
and obligation to
represent the
Parties
acquire all
permits,
consents,
approvals
Operator
Cannot
comingle
own funds
with Joint
Account
neither gain a
profit nor suffer a
loss as a result of
being the
Operator
preparing and
furnishing such
reports, records
and information
Pay royalties,
taxes, fees and
other payments
Maintain the
Concession in full
force and effect
Limitation of Liability
•
Except as set out in Article 4.6(C)], neither Operator nor any other Indemnitee (as defined below)
shall bear (except as a Party to the extent of its Participating Interest share) any damage, loss, cost,
expense or liability resulting from performing (or failing to perform) the duties and functions of
Operator, and the Indemnitees are hereby released from liability to Non-Operators for any and all
damages, losses, costs, expenses and liabilities arising out of, incident to or resulting from such
performance or failure to perform, even though caused in whole or in part by a pre-existing defect, or
the negligence (whether sole, joint or concurrent), gross negligence, willful misconduct, strict
liability or other legal fault of Operator (or any such Indemnitee).
•
[Except as set out in Article 4.6(C)], the Parties shall (in proportion to their Participating Interests)
defend and indemnify Operator and its Affiliates, and their respective directors, officers, and
employees (collectively, the “Indemnitees”), from any and all damages, losses, costs, expenses
(including reasonable legal costs, expenses and attorneys’ fees) and liabilities incident to claims,
demands or causes of action brought by or on behalf of any person or entity, which claims, demands
or causes of action arise out of, are incident to or result from Joint Operations, even though caused
in whole or in part by a pre-existing defect, or the negligence (whether sole, joint or concurrent),
gross negligence, willful misconduct, strict liability or other legal fault of Operator (or any such
Indemnitee).
»
•
AIPN Model JOA 2002
Article 4.6 (C ) typically contains carve outs to the limitations and are optional
Change in Operator
• Appointment is typically for an indeterminable period
• Operator may resign by giving reasonable notice to the Parties
• Operator may be removed
– if it undergoes the defined insolvency events
– by the decision of the Non-Operators if it commits a material
breach of the JOA and fails to cure the breach.
• Operator may dispute the breach and the dispute resolution
proceedings of the JOA are imitated.
– JOA may attach a minimum PI threshold to Operatorship
– Successor is appointed by OpCo subject to the affirmation of the
relevant government agency and the concession terms
Other Forms of Operators
Contracted
Operator
Split Operator
Incorporated
Operator
• An independent third party appointed to act on the parties’ behalf
• May be subject to the Government’s approval
• May be for a fixed term
• Compensation based on contract
• Liability would typically not excluded but may be limited
• Role of Operator may be divided between the parties e.g if a government Party
develops the competence to Operate
• Appointment of an operator for exclusive operations
• Parties may decide to incorporate a vehicle together to act as operator
Operating Committee
•
The tool by which the Non-operating parties have control over joint operations
–
OpCom is a formal committee constituted by a representative of each party – including the
party which has been appointed as Operator.
»
Peter Roberts ‘Joint Operating Agreements’
•
Voting rights typically corresponds with PIs
•
Any matter which has been approved by the OpCom is typically binding on the
Parties
•
There may be some matters which require unanimity between the Parties.
•
JOA may provide for urgent operational matters where Operator can take decisions
regardless.
•
Most JOA’s tend to shy away from deadlock provisions, the intention being for
parties to make all efforts to agree.
•
Exclusive Operations
• These are operations where the costs are chargeable to less
than all the Parties.
– The terms of the JOA will mostly continue to apply
• JOA may provide for operations that can be conducted as sole
risk operations
• Costs will be borne by the parties involved alone
• Parties undertake to indemnify non-participating parties
• Non-participating parties will have buy-back righst but at a
premium
Default
• A party is in default if it fails to:
– pay when due its share of Joint Account expenses; or
– obtain and maintain any Security required of such Party.
• A Defaulting Party has no right, during the Default Period, to:
– call or attend OpComor subcommittee meetings or vote
– access any data or information;
– Transfer all or part of its Participating Interest, except to nondefaulting Parties
– receive its Entitlement to Hydrocarbon
– withdraw from the JOA
– take assignment of any portion of another Party’s Participating
Interest
Default
• Defaulted Account is allocated to non-Defaulting
Parties proportionately
• Entitlement is sold to recoup amount in Amount
in Default and surplus is paid over to the
Defaulting Party
• Other alternatives include:
– Forfeiture
– Buy-Out of Defaulting Party’s Participating Interest
– Enforcement of a mortgage and security interest on
the Defaulting Party’s PI (subject to the Concession
and the Laws / Regulations)
• JOA provides for no rights of set off
Allocation of Petroleum
• Parties typically have the right and obligation to own,
take in kind and separately dispose of its Entitlement
– But will be subject to any domestic obligations (e.g DGSO)
– For PSC Blocks, allocation of Royalty Hydrocarbon, Tax
Hydrocarbon, Cost Hydrocarbon and Profit Hydrocarbon
• Transportation downstream typically not covered by the
JOA
Transfers
• Identity of parties to a JOA is critical to ensure Financial and
technical capacity hence transfers are very keenly managed
– There would typically be pre-emption rights
– Approval of each Party typically required
– JOA may impose a minimum holding of PIs
– Operatorship may not be transferable with transfer of PIs
•
•
•
•
A transfer of rights and obligations would require a novation
Transfer would typically follow the mechanics provided
Grant of security would typically be allowed (subject to laws)
Change of control provisions would typically also be included
Withdrawal
• This is a surrender of rights in the JOA in
which case its interests is reallocated to other
Parties
– Available to a party not in default
• Withdrawal is without prejudice to accrued
rights or liabilities and is required to provide
security to satisfy this
• If all Parties decide to withdraw, the parties
effective abandon the Concession and
terminate the JOA
Relationship of Parties and Tax
• The rights, duties, obligations
liabilities several not joint
and
• The agreement is not a partnership, joint
venture or association or a trust.
• Each party responsible for its own tax
measured by its profit or income
Confidentiality
• Information from Joint Operations is Joint
Property, and each Party typically has a
right to use it including for its Affiliates
– Except in a default when it is not entitled to
such
• Such information is however confidential
Confidential
Force Majeure
• If a Party is rendered unable, wholly or in part, to carry out its
obligations under the JOA, other than the obligation to pay
any amounts due or to furnish Security, then the obligations
of the Party giving such notice, so far as and to the extent that
the obligations are affected by such Force Majeure, shall be
suspended during the continuance of any inability so caused
and for such reasonable period thereafter as may be necessary
for the Party to put itself in the same position that it occupied
prior to the Force Majeure, but for no longer period.
• The affected Party shall use all reasonable diligence to remove
or overcome the Force Majeure situation as quickly as
possible in an economic manner but shall not be obligated to
settle any labor dispute except on terms acceptable to it, and
all such disputes shall be handled within the sole discretion of
the affected Party
Dispute Resolution
Several Dispute
resolution Options to
choose from
Senior
Executive
Negotiations
Mediation
Arbitration
Expert
Determination
Where a government
entity is involved, a
waiver of immunity is
recommended
Thank You!
Sefton Fross
Block 11 Plot 24, Dr.S.Ezukuse Close, off Kayode Otitoju Street
Off Admiralty Road, Lekki Scheme I, Lekki, Lagos, Nigeria
Tel: +234 (0) 12770762-3
Email: [email protected]
Website: www.seftonfross.com

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