Joint Operating Agreements. Peter Roberts
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