Joint Operating Agreements. Peter Roberts
include in the JOA conflict of interest provisions, requiring any parastatal entity to abstain from any operating committee vote on a matter which brings the joint venture into conflict or potential conflict with the state under the concession agreement. Such principle might apply to an operating committee vote to serve a notice of force majeure under the concession agreement or to bring or defend proceedings against the state under the concession agreement. It might also go as far as preventing the parastatal entity from receiving the operator’s information in support of such votes. It may be prudent to go further and exclude the parastatal entity from decisions the operating committee may take in selling hydrocarbons to a parastatal entity, or in transporting the state’s share of hydrocarbons.
Sensitive joint venture information may also be at risk if the parastatal entity is allowed to participate in non-operator audits of the operator’s financial records. The concession agreement is likely to provide the state with audit rights for the purposes of verifying the operator’s records for the purposes of taxation and the recovery of the joint venture’s costs as cost petroleum. It would be prudent to prevent the parastatal entity from using joint venture audit rights to duplicate the state’s audit rights for these purposes. Commonly, the JOA confidentiality clause will allow joint venture parties to share confidential information with their affiliates for the purpose of benchmarking and reporting of financial and business results within the participants’ corporate group. It will be unreasonable to interfere with the parastatal’s rights to share information in an equivalent way with its controlling entities within the state apparatus, but it may be prudent to limit the purpose for which such information can be used in the confidentiality clause, without impacting on its usefulness for the other participants and their affiliates.
It will be controversial to negotiate such provisions into a JOA at the outset if the parastatal entity is one of the original joint venture participants. However, even if that is not the case, the concession agreement or local law may grant the state the right to require the joint venture to allow a parastatal entity to participate in the joint venture at a later date, for example following a commercial discovery. In such cases, state participation is foreseeable, and it may be prudent to address these issues in the JOA from the outset, so as to avoid the challenge of negotiating such terms into the JOA when the parastatal entity is on the point of joining.
The point was made in 2.2 that the concession agreement brings into play contractual rules as well as the statutory rules imposed by local petroleum laws. It will contain provisions for the termination of the concession agreement by the state for its breach by the joint venture and the liability of the joint venture parties for its performance, usually on joint and several terms. The joint venture may be obliged to indemnify the state for environmental liabilities and third-party liabilities arising from their performance of the concession agreement, subject to certain financial and/or legal exclusions. It is important for the joint venture to consider whether the JOA should be revised in the light of the concession agreement liability regime.
Three points should be taken into account – first, as a general point, the joint venture participants should recognise that non-performance of the concession agreement by any one of them may put the concession agreement, and their respective investments in it, at risk. Default by a participant in paying a cashcall is not only a matter of a cash flow crisis, temporarily or permanently resolved by the non-defaulting participants in making good the deficit; it is also likely to be a direct breach of the concession agreement. Failure by the operator to perform a programme and budget is not only a regrettable waste of joint venture resources, possibly leading to the dismissal of the operator. Both circumstances put the joint venture at risk of liability to the state under the concession agreement, and ultimately its termination by the state. It may be prudent to include in the JOA an overriding obligation on all the parties to take all necessary steps to maintain the concession agreement in good standing, including approving work programmes and budgets to the extent necessary to perform the minimum required by the concession agreement’s terms. It may also be easier to justify the forfeiture of a defaulting party’s participation as a legitimate form of penalty if it can be shown that the relevant default put the concession agreement at risk and that the non-defaulting parties had a legitimate interest in avoiding the repetition of that risk.7
Secondly, JOAs routinely include a provision excluding each party’s liability for any other parties’ consequential loss. The definition of consequential loss should be reviewed to establish whether it excludes liability to the state for the state’s economic loss arising from a breach of the concession agreement; it might be disastrous for the parties if that was the case, because the clause might then prevent one party, against whom the state could enforce the relevant breach exclusively, from recovering a contribution from the other joint venture participants. The distinction needs to be drawn in the liability provisions of the JOA between the liability to the state in damages for breach of the concession agreement caused by one of the joint venture parties, which may include liability for the state’s economic losses, and the liability of that joint venture party to the other joint-venture parties for their consequential and/or economic losses (see Chapter 17).
Thirdly, the participants should consider to what extent the force majeure provisions of the JOA should reflect the force majeure provisions of the concession agreement (see Chapter 20). It may be apparently attractive for the force majeure regimes in each agreement to be equivalent but this is usually a flawed approach. Often the concession agreement will only permit the parties to invoke force majeure if none of the joint venture parties is able to perform the relevant obligation for reasons beyond the control of any of them; the JOA definition of force majeure is drafted to apply to each joint venture participant, and is particularly relevant to the operator.
In two forms of concession agreement, the production sharing agreement and the risk service agreement, the state is entitled to take, lift and market some or all of the hydrocarbons obtained through joint operations. In the production sharing agreement variant, the state will take and lift its hydrocarbons simultaneously with the joint venture participants. While the state is likely to appoint a parastatal entity or third party to act as its agent for these purposes, it must, directly or through that agent, participate in the lifting agreements and gas balancing agreements governing the allocation, attribution and measurement of its share and the joint venture’s shares of hydrocarbons (see Chapter 12). The joint venture participants will have a choice, whether to invite the state or its agent to be a party to the crude oil lifting and gas balancing agreements, as an additional lifting party, or whether instead to have lifting balancing agreements between the state and the joint venture (acting as a single party), with further lifting and balancing agreements between the joint venture participants only. The advantage of the second option is that it enables the joint venture parties to manage any inability to lift within the joint venture to avoid a situation where an underlift by the joint venture gives the state an opportunity to overlift its share. This may be particularly relevant where the state controls access to downstream transportation and/or hydrocarbon markets.
The concession agreement may require the joint venture to lift and market the state’s hydrocarbon share on its behalf. It may also require the joint venture to oversize downstream transportation and processing infrastructure in order to accommodate the state’s share. Both of these activities may involve the joint venture collaborating downstream of the point at which they lift their hydrocarbon shares, beyond the territorial scope of the JOA (see Chapter 6). The parties will need to consider if they are prepared to extend the scope of the JOA to address these activities or whether a separate JOA should be put in place to govern these activities if the state so requests.
Lastly,