Energy and natural resources law

JOINT OPERATING AGREEMENTS (2) By

RICHMOND OSEI-HWERE FACULTY OF LAW, KNUST

Agenda

Introduction Controlling conflict within the JOA

Pass mark Sole Risk Non consent

Default and Forfeiture Assignation and Withdrawal

Introduction

Oil and gas industry is a high risk and high cost industry

To spread the risks and share the costs companies come together to form a joint venture

The vehicle used for the joint venture is the JOA.

An operator is appointed to conduct day-to-day activities in a JOA

Introduction (2)

The operator is supervised by the Joint Operating Committee (JOC)

The JOC has the power to decide whether to conduct projects which are proposed by the operator

Decisions taken by the JOC is based on majority votes

Pass mark

Voting interest of each party is equal to its percentage interest

The pass mark gives the percentage interest share of votes which must be obtained by the JOC to make a binding decision

Pass mark (2)

The size of the pass mark is one of the hardest negotiations in drafting a JOA

Low pass mark gives the largest interest holder a dominant position

Pass mark (3)

High pass mark gives smaller interest holders opportunities to make decisions on the management of the joint venture

Modern JOAs set the pass mark between 50% - 70%SOLE RISK AND NON CONSENT clauses are strongly connected with the pass mark in a JOA

Sole Risk

Sole risk clauses give an option for a project which has failed to obtain a pass mark in the JOC, but which the defeated member(s) nevertheless wish to go ahead.

Parties which conduct operations under sole risk clauses will: Bear all the costs of the operation

Sole Risk (2)

Share all the risks and liabilities arising out of the operations

Have the right to the production resulting from such operations

Sole Risk (3)

Sole risk projects are typically conducted by the operator.

In rare situation where the operator is not involved, the sole riskers will select an operator.

The sole riskers will also form a JOC

Non Consent

Non consent clauses in contrast give an option for some parties to opt out of a project which has obtained a pass mark in the JOC.

ARE SOLE RISK AND NON CONSENT CLAUSES COMPATIBLE WITH THE AIM OF JOAs?

Default and Forfeiture

Members of a JOA are required to provide funds for a project during a cash call.

A co-venturer’s failure to fulfill financial obligations under an AFE constitute a breach of his most basic duty under a JOA.

Default and Forfeiture (2) Such a failure is referred to as default. The standard remedy under a JOA for

default is forfeiture. The forfeiture clause will be invoked after

notice is served on the defaulting party by the operator and the defaulting party fails to remedy the default within a specified time.

Default and Forfeiture (3) Two threats to the validity of

forfeiture clauses:1. They might be struck down as

penalty clause2. They may be held to breach the

general law of insolvency

Forfeiture may be penalty clause

Forfeiture is the negative sanction of loss of property rights.

Liquidate damages/penalty clause is the positive obligation to pay money to the innocent party.

Forfeiture is equated with liquidate damages/penalty clauses.

Forfeiture may be penalty clause (2)

According to Atiyah they have the same economic effect. See par 11.42 of Styles’ JOA See also Jobson & Jobson par 11.43

In Commissioner of Public Works vs. Hills, Lord Dunedin defined the distinction between liquidate damages and penalty clauses: See par 11.43 of Styles’ JOA

Forfeiture may be penalty clause (3)

“Lord Dunedin in Dunlop Pneumatic Tyre Co. Ltd v New Garage & Motor Co. Ltd [1915] AC 79:

a) It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.

b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid. This though one of the most ancient instances is truly a corollary to the last test ... ETC ”

Forfeiture clauses and Insolvency law

It is a common law principle that a private contract cannot thwart the operation of the Law of Insolvency

Forfeiture clauses and Insolvency law (2)

A forfeiture clause might be struck down as an unfair provision which deprives the insolvent co-venturer’s non-JOA member creditors of their right to share in their assets, including his share of production under the JOA. See Whitmore vs. Mason par 11.52 of Styles’ JOA

Assignment and WithdrawalThere are normally restrictions

on the assignation of interest Governmental Restrictions Pre-emption clause

Governmental Restrictions In the UK, for instance, the consent of the

Secretary of State would be required for any assignment or transfer of interest under the license.

In Ghana, Section 8 of the Petroleum (Exploration and Production) Act prohibits the assignment of petroleum interest without the prior consent in writing of the Minister of Energy

Governmental Restrictions (2) The purpose of this restriction is to ensure

that only companies with technical and financial ability participate in petroleum exploration and exploitation.

It is normal practice that governmental consents are not unreasonably with-held

Pre-emption clause

This allows existing licensees to take precedence of third parties in acquiring additional interests if a follow licensee is seeking to reduce or dispose of its holding.

Pre-emption clause (2)

The arguments for pre-emption rights are that: They preserve the identity of the

original groups Can help to keep out undesirable

new joint venture partners.

End

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