Joint Operating Agreements. Peter Roberts
be used to explain the concept of a carry.
There is usually also some debate to be had around whether the carried party should be entitled to receive any operational data generally or a vote at the operating committee (see 8.4) for the duration of the period in which the carried interest applies.
It is common to find a voting compact in favour of the carrying party as a condition of a carried interest. One argument in favour of this is that since the carried party is not paying its share of the costs associated with the performance of the JOA, it should have no right to a say at the operating committee (and should certainly not have the ability to render a blocking vote in respect of any proposal which is made to the operating committee), or to know the detail of the operational activities. This is similar to the suspension of rights which applies in respect of a defaulting party (see 18.4). On the other hand, at some point the carried interest might cease to apply and the carried party will return to the mainstream of paying its way under the JOA. At that point, the carried party might have been glad of the opportunity to comment at the operating committee and to have received certain operational data.
The existence of a carried interest, where the carried party surrenders its voting rights to the carrying party for the duration of the carried interest, alters the ostensible balance of the voting control in the JOA.
Where the JOA imports a carried interest arrangement, it might also be provided that the carried interest is personal to the carried party and will not continue to apply if the carried party transfers its interests in the JOA to a third party.
Whether the carried party or an incoming third party should be required to repay the amount of the carry to the carrying parties on a transfer of interests by the carried party will be a matter for negotiation in the JOA. A failure of the carried party to repay the amount of the carry when required might be grounds for frustrating the intended transfer to the third party and could result in an effective right of pre-emption being granted to the carrying parties. This repayment obligation will not bind the third party, since it is recited in a JOA to which the third party is not yet a party, but such a repayment obligation can be expressed to be a condition of the consent of the non-transferring parties to the proposed transfer, which will achieve the same result.
The relationship between the default remedies in the JOA (see Chapter 18) and the carry should be considered carefully. It might, for example, be possible that a default by the carrying party in paying the cashcalls or the invoice requests to which the carry applies could place the carried party in a position of default; in the extreme case this could result in a forfeiture of the carried party’s interests (of which the carrying party could well be a beneficiary), unless the carried party were able to make good the particular default. Although this situation might give a remedy for breach of contract in favour of the carried party against the carrying party (because of breach of the terms of the carried interest arrangement), this would not necessarily protect the carried party against the forfeiture of its interests.
The carry, or any further carry, might be suspended if the carried party has defaulted on a cashcall under the JOA (see 10.4), which could be the case when the carried party is not fully carried.
(a)The meaning of collateral support
‘Collateral support’ is a shorthand term used to describe the procurement by a party to the JOA of some form of additional support for the satisfactory performance by that party of its obligations under the JOA (which may be obligations of payment or of wider performance). That additional support is typically provided by a third party (which may or may not be related to the party required to procure the collateral support), although other forms of collateral support might be applied.
The application of collateral support (in whatever form it takes) in respect of a JOA is intended to allow the continued performance of the JOA by a party, despite the existence of financial difficulties that could inhibit the originally intended manner of performance by that party.
At the heart of the JOA is the expectation that the parties will pay their participating interest-based share of the costs of the joint operations and of any exclusive operations to which they are separately party. Therefore, it will be a key consideration that each party has money (or ready access to money) throughout the lifetime of the JOA.
The JOA will contain detailed mechanisms dealing with a party’s payment default (see Chapter 18) but concerns about the difficulty of recovering a debt from an already impecunious party, and concerns about the efficacy of the remedies suggested in the JOA for the loss of the defaulting party’s interests, suggest that prevention would be very much preferable to cure.
The JOA will set out various mechanisms for dealing with a party’s payment failure but that should not be regarded as a substitute for doing the best that can be done to ensure the initial and ongoing creditworthiness of each party. Hence the interest of the parties in applying various collateral support provisions to the commitments of the parties under the JOA.
The hypothesis that collateral support is not needed because of the JOA’s in-built payment default mechanisms is more tenable when the JOA and the concession are in their infancy, where optimism and the prospects for petroleum production and revenue returns are high, but as the JOA moves through its customary lifecycle (see 1.8), eventually towards governing the end of the useful life of the underlying assets, then it might be more appropriate to consider the need for collateral support more positively. The obligations of the parties to make payments in respect of the JOA will vary over the lifetime of the underlying petroleum project, and from that analysis it will be apparent that the need for collateral support will be at its greatest at any time when the petroleum project is consuming cash, rather than when it is generating revenue.
The terms of the prevailing petroleum law or of the concession could also require the concession-holder to post some form of collateral support in favour of the state in respect of its obligations under the concession.
The posture of the state on the suggested need for the provision of collateral support by the parties in respect of their obligations under the JOA could be variable, however. While this is principally an issue to be considered between the parties to the JOA, enlisting the support of the state entity that is responsible for overseeing the grant of a concession for the provision of collateral support under the JOA as a condition of participation by a party in the concession may be helpful.
As new petroleum provinces emerge and seek to attract investment, or as mature petroleum production provinces decline, there may be a temptation on the part of a state to lower the bar for new entrants in order to attract investment or to maintain production for as long as possible, and imposing stringent collateral support commitments might be inconsistent with such an approach. The reluctance of the state to require collateral support could be evidenced in respect of the approval of the terms of the JOA and also in respect of what collateral support the state might itself require directly from a party in its capacity as the concession-holder.
A party might argue that if it has not, in its capacity as the concession-holder, been asked to provide any collateral support under the terms of the concession, then neither should that party be required to provide any collateral support under the terms of the JOA. However, this convenient argument overlooks the reality that under the concession the liability of the parties together constituting the concession-holder to the state for performance of the obligations will typically be joint and several (see 17.4), and so the state might be more relaxed about the need for the provision of collateral support in respect of any individual party since it has the right to look at any or all of the parties in order to cover any individual party’s failure. Under the JOA, however, the liability of each party will be several and this could prompt a different attitude between the parties.
In most other commercial agreements the failure of a party to meet its obligation to procure collateral support