Joint Operating Agreements. Peter Roberts
2. In the event of any transfer by any party of all or part of its participating interest the participating interests of the parties shall be revised accordingly.
[‘Participating interest’ means each party’s share (expressed as a percentage) of the total shares of the parties in the concession, all joint property and the rights, obligations and liabilities derived from the concession, this agreement and the conduct of the joint operations.]
The participating interests that apply to the parties at the outset of a JOA will be the product of negotiation between those parties but the participating interest is not necessarily determinative of the true economic allocation of rights and liabilities between the parties under the JOA. The true position of a party could be affected by carried interests and exclusive operations (see Chapter 13), but this should not cause a revision of the participating interests as they are recited in the JOA.
A fair legal analogy which can be helpful in defining the true nature of the participating interest is to suggest that if the interests of the parties in the concession (which does not create participating interests between the parties at the concession-holder level) are held as joint tenants (being a collective, unitary interest where each joint tenant is entitled to possession of the whole of an interest that is the subject of co-ownership between a group of parties),7 then the parties sever that joint tenancy through their entry into the JOA, where the interests of the parties in the JOA will be held as tenants in common (being a separate, undivided interest where each tenant in common is entitled to a distinct share in the whole that is commensurate with its defined participating interest).8 Indeed, the CAPL JOA declares9 that the parties intend that their interests in the joint lands and in the joint property will be held as tenants in common.
The point made previously about identifying the parties over the lifetime of the JOA could be made equally in respect of tracking changes to the participating interests, and similarly therefore the participating interests of the parties from time to time might be recited in a schedule to the JOA, with a requirement for the operator to revise the schedule and to distribute the revised schedule to all the parties in the event of any changes to the participating interests.
Where the JOA is constituted by several parties, each with its own individual participating interest, then it may be that one of the parties undertakes a programme of buying out the interests of the other parties as the opportunities to do so arise. This activity will increase the aggregate participating interest of the acquiring party and will reduce the number of the parties in total. Taken to the extreme, this process of consolidation will result in there being one party to the concession, with a participating interest of 100%. The effect of this process of aggregation on the voting control regime in the JOA (see 8.4) should be appreciated.
In the context of North American leasehold interests the manner in which the participating interests of the parties is determined will necessarily be different according to the different constitutional basis for the relevant JOA.
Thus, taking the example of the AAPL JOA by way of illustration, under AAPL JOA Form 610 each party will bear the costs of the joint operations and will own the produced petroleum according to the ratio of its defined leasehold interests10 (but neither of the terms ‘participating interests’ or ‘percentage interests’ is actually used to describe such allocation).
Under AAPL JOA Form 710, each party is expressed to have a participating interest, which is defined as the percentage of the costs and the risks of undertaking an operation which a party agrees to bear.11
Under AAPL JOA Form 810, each party will have what is defined as a participating interest share, which is in turn defined as the proportion (expressed as a percentage) that the leasehold interests of that party that have been pooled in the JOA bears to the leasehold interests of all the parties that have been so pooled in the JOA (unless all of the parties agree to another basis for determining their participating interest shares),12 and all rights, obligations, property and petroleum will be owned by the parties according to their respective participating interest shares.13
Similar provisions apply in respect of the CAPL JOA, wherein a working interest is defined for each party as each party’s percentage undivided working interest in the defined joint lands.14
Despite these differences in the manner of determination of a party’s interest in the JOA, however, the result will be much the same as the manner of determination of a party’s participating interest as outlined above – the parties will agree to allocate the costs and the benefits that are associated with the joint operations between themselves, according to certain pre-defined percentage shares.
(b)The role of the participating interests
A party’s participating interest will define several items under the JOA,15 notably:
•that party’s required percentage contribution to the operator’s cashcalls or invoice requests (see 10.4) and to the costs associated generally with the JOA, which could, however, be qualified by a carried interest or in accordance with the terms of a farm-out agreement (see Appendix 1);
•the percentage interest that that party has in the joint property (see 3.2) and the party’s entitlement to produced petroleum (see 12.3); and
•that party’s share in the liabilities incurred under the JOA (see Chapter 17).
The parties’ participating interests will apply in respect of the joint operations. Where the JOA permits exclusive operations, those exclusive operations will recite their own, individual participating interests as between the participating parties (see Chapter 13).
(c)Carried interests
It may be that a party can secure an arrangement whereby all or part of that party’s share (as defined by its participating interest) of the costs associated with the performance of certain of the joint operations will be met on its behalf (or ‘carried’) by one or more of the other parties, notwithstanding that the carried party is otherwise a full party to the JOA.
Such a carried interest arrangement will typically apply during the exploration and appraisal phases, and is intended to protect the carried party from the risk of incurring exploration and appraisal expenditures without the promise of subsequent petroleum production and revenues which would compensate the carried party for its initial investment.
A carried interest could be held by a private person (such as in accordance with the terms of a farm-out agreement – see Appendix 1), but the principal circumstance to consider in the context of a carried interest is one whereby a state entity elects to exercise a participation right under the concession and the corresponding JOA from the outset (see 4.3).
Whether the carried party will be required to repay the contribution of the parties to that carried interest once petroleum production begins will be a matter for negotiation between the carrying parties and the carried party. Where the carried party does repay the carry, consideration should also be given to whether that repayment should additionally include any element of uplift, so as to compensate the carrying parties for the value of the funding which they have provided.
The phrases ‘hard carry’ and ‘soft carry’ are often used to describe whether a carried interest is intended to be repayable, but this is a dangerous shorthand to rely on, as the terms are used interchangeably in practice. The other point to note, which is sometimes used in order to explain the nature of a carried interest, is that a repayable carry is akin to a loan, whereas a non-repayable carry is akin to deferred purchase consideration. Neither are these particularly accurate as analogues