Joint Operating Agreements. Peter Roberts
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).
2. 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.