Joint Operating Agreements. Peter Roberts
under production sharing agreements, the joint venture will have the right to lift and sell a defined proportion of production, termed cost petroleum, in order to recover the cost of its investments in the joint operations, provided that it can show that such costs were properly incurred in accordance with the production sharing agreement and the relevant approved work programmes and budgets. As mentioned in 2.5, the operator is at risk of not recovering its expenditure on joint operations if the relevant expenditure is not recoverable under the terms of the production sharing agreement, and the non-operators may argue that such expenditure was also outside the scope of an approved work programme and budget for the purpose of recovery of that expenditure from them under the JOA.8
The JOA parties should consider carefully whether it is in their interests that joint operations, the costs of which the JOA requires them to share in accordance with their percentage interest shares, should be limited to operations approved by the state as well, for the purposes of cost recovery under the production sharing agreement. It may be more prudent for the JOA to distinguish between approved joint venture costs which it expects to be costs recovered under the production sharing agreement, and costs which it authorises the operator to incur, even though the joint venture does not expect to be compensated for such costs under the production sharing agreement in terms of cost petroleum or at all. The joint venture should expect to encounter several situations where it is unable to agree with the state with respect to certain components of a work programme and budget, but wishes to proceed with work unauthorised by the state nonetheless. For example, the operator may wish to introduce new practices in terms of safety or technology at additional cost, in order to be consistent with good practice in its corporate organisation, as recognised by the joint venture, but the state refuses to approve the associated cost. The JOA and its Accounting Procedure should provide a mechanism by which such costs are approved by the joint venture, reported by the operator and included in the operator’s cashcall mechanism in a transparent manner. At the same time, the joint venture should consider to what extent any parastatal entity in the joint venture should be permitted to participate in approving such non-recoverable costs because it will be commercially unattractive if the state is aware that the joint venture is prepared to subsidise operations in this way.
Under the terms of a tax and royalty concession agreement, the joint venture pays for, constructs and owns the infrastructure and facilities it needs to perform operations, usually deducting the relevant capital costs from its taxable income for profits tax purposes, in line with standard practice for businesses in other sectors operating in the same jurisdiction. In the case of the production sharing agreement and the risk service agreement, the joint venture is compensated in full for such costs by the state, in exchange for which the state, or its nominee, will take title to such assets once their costs have been reimbursed to the joint venture (or earlier under some regimes). Many JOAs applicable to production sharing agreements and risk service agreements fail to address this point and assume that the relevant capital assets are joint property, held by the joint venture parties on an undivided basis in their respective percentage interests. In reality, the joint venture merely has a licence to continue to use such capital assets, after their cost has been reimbursed by the state and title in them transferred to the state, until the assets are no longer needed by the joint venture for operations.
For this reason, the joint venture should review the JOA provisions on insurance to make sure that the state is noted as an additional insured under joint venture insurance policies (see Chapter 17). It would also be prudent to review the clauses on transfer, withdrawal (Chapter 14), default (Chapter 18) and surrender under which one or more joint venture parties disposes of an interest in the joint venture, to ensure that they are consistent with the transfer of a licence to use capital assets, as against the transfer of title in such assets; this may have significant local tax implications. The exclusive operations clause (Chapter 13) may also need to be adapted so that it makes it clear that parties pursuing an exclusive operations option follow the same sequence of investment, cost recovery and transfer of title to the state with respect to the capital assets in which the participating parties invest.
The state’s interest in assets, the cost of which has been recovered pursuant to a production sharing or risk service agreement is also likely to be relevant to the management of intellectual property used and/or developed by the joint venture and also to decommissioning.
The infrastructure which the joint venture puts in place for the production of hydrocarbons under a petroleum production licence or a tax and royalty agreement belongs as joint property to the joint venture. Under a production sharing agreement or risk service agreement, the equivalent infrastructure will belong to the state but the joint venture will remain liable in some form for its decommissioning, either in accordance with the terms of the relevant concession agreement, or under local petroleum laws or both. That liability for decommissioning will apply even after the production sharing agreement or risk service agreement has expired, and even in circumstances where the relevant infrastructure has continued to be operated by a replacement operator on behalf of the state, possibly under a different concession agreement. In the latter scenario, decommissioning is performed by a third party, but the joint venture will be obliged to make a significant contribution to the decommissioning costs, such contribution being proportional to the amount of hydrocarbons produced by the joint venture from the relevant reservoir compared to the aggregate hydrocarbons obtained from that reservoir overall.
The joint venture may manage to negotiate a clean break with the state in respect of its contribution to decommissioning costs, such that its liability for decommissioning costs is fully and finally settled by payment of the relevant contribution when the concession agreement terminates, without recourse to the joint venture by the state for any additional contribution at a later date. If such a clean break is not advisable or possible, the joint venture parties may find themselves exposed to an open-ended liability for decommissioning to be conducted by a third party beyond their control, a scenario which would be both reputationally and financially unattractive. The joint venture may be able to negotiate some degree of ongoing oversight of such decommissioning, in order to control costs, but at the price of having to leave the JOA in place to govern the parties’ sharing of ongoing costs and liabilities, and the operator’s function in representing their interests to the state (and its replacement operator). The terms of the JOA governing its termination and closure of the joint venture should be reviewed with this in mind.
2.9 Information and confidentiality
Information is not treated as property under English law but in the hands of a person that holds it in confidence, it has economic value. Understandably, any information which is obtained by the joint venture with respect to the concession area is of particular value to the state, especially if the state expects to continue with operations in the concession area after the concession agreement has expired. More to the point, if the joint venture has recovered the cost of obtaining such information from the state under the terms of a production sharing agreement or risk service agreement, the state will legitimately treat such information as its own. As with capital assets deployed in operations and costs recovered, the joint venture will retain a licence to use such information but the right to control it is likely to remain with the state. The concession agreement will likely require the joint venture to respect the state’s interest in such information and protect it with appropriate confidentiality precautions. The confidentiality and intellectual property provisions of the JOA should be adapted to reflect this.
Any joint venture