Joint Operating Agreements. Peter Roberts
the other parties to terminate the agreement in respect of that failing party. However, this is rarely the case in a JOA, where the provisions defining a party’s default are typically written more restrictively (although the AIPN JOA does reference ‘default’ as including the failure of a party to provide security when required in certain circumstances; see 18.2).
(b)Applying collateral support to the JOA
In the initial selection of the parties to a first JOA, when a consortium of co-venturers is assembled in order to perform the requirements of a concession, care will be given to ensuring that those parties have the necessary technical and financial competence to perform the concession and the JOA. The considerations applying in the selection of the parties will also be relevant where the JOA has been preceded by a joint study and bid agreement (see 5.1), and will follow through to the tests for economic capability which condition the approval of a later proposed transferee (see 14.2).
In this instance, an assessment will be made between all of the parties as to their respective creditworthiness. It is generally the case at this stage, however, that if there are concerns as to a prospective party’s creditworthiness then that party will not be invited to join the consortium. It is not typically the case that a consortium would be willing to admit a party that has to be propped up with collateral support from the outset.
Nevertheless, at the point when they first form their joint venture, some or all of the parties could still require the provision of some form of collateral support in respect of their respective obligations under the JOA. Collateral support could be particularly relevant in the case of a company which suffers from relative economic weakness and which holds a relatively small participating interest across a number of JOAs, intent on trying its luck in a wide range of investment opportunities and defaulting upon or withdrawing from what it perceives to be the less lucrative opportunities.
The typical process of negotiation of a JOA rarely tends to place the issue of collateral support in respect of the parties’ obligations near the top of the commercial issues list. In part this may be attributed to the expectation that the parties are and will be suitably solvent and expect to perform fully their JOA obligations, due to their reluctance to risk the adverse impact on their reputation associated with a default or to jeopardise the prospective economic returns from the JOA. Consequently, a discussion about the need for collateral support at this early stage is often regarded as unnecessary.
A party could also argue that the provisions of the JOA that would result in the loss of that party’s produced petroleum entitlements or even in the loss of that party’s interests in the concession and the JOA (see Chapter 18) represent collateral support in their own right and so no further provision will be necessary.
Because of the deficiencies of the JOA default remedies in the phase of the JOA prior to the commencement of petroleum production (see Chapter 18) the JOA could require the parties to post collateral support, so as to give some meaningful protection against a default. The collateral support might be limited so that it applies in respect of the exploration and appraisal phase only, and could be structured so that it is released when the JOA moves into the production phase, on the basis that the entitlement to produced petroleum gives some value to the customary default remedy.
Notwithstanding that a party has procured no collateral support in respect of its commitments at the outset, during the lifetime of the JOA a party’s financial situation may deteriorate, and given the often significant duration of a typical JOA, this is a real possibility. The JOA could provide that in the event of such a deterioration (often summarised as a ‘material adverse change’, which could be determined according to the subjective opinion of any of the other parties or according to an objective test, such as audited proof that a defined financial ratio has been breached or the loss of an independently certified credit rating), the affected party should be required to procure some collateral support (a process sometimes known as ‘re-guarantee’). This is a relatively common arrangement in long-term commercial agreements but rarely, however, does a JOA apply this degree of foresight.
None of the AAPL JOA, the AIPN JOA or the OGUK JOA prescribes a requirement for the provision of collateral support by the parties, although the OGUK JOA does require the parties to commit to an agreement providing security for the eventual costs of decommissioning prior to the submission of a development plan in respect of a discovery.
The CAPL JOA allows the operator to call for the provision of security by a non-operating party in respect of its share of the costs of the joint operations if the operator has concerns about the creditworthiness of that non-operating party. The form of that security is not specified, although reference is made to the possible provision of an irrevocable standby letter of credit.16
The AMPLA JOA contains a series of provisions relating to the provision of what it calls cross-security by the parties as security for their cashcalls and commitments under the JOA.17 This cross-security mechanism has its antecedents in AMPLA’s mining joint venture agreement.
(c)Particular collateral support applications
The provision of collateral support in respect of the JOA is of particular application to several situations.
•Farm-out agreements – the terms of a farm-out agreement (‘FOA’) (see Appendix 1) might require the farming-in party to provide some form of collateral support for the obligations that it is required to perform under the FOA. This is perhaps understandable where a new party is prospectively coming onto the JOA (through the route of being a farming-in party), but this is less obviously tenable where the farming-in party is already party to the JOA and is simply increasing its participating interest and under the terms of the existing JOA there was no corresponding obligation to post collateral support for a work commitment. However, this is often the case under the terms of an FOA in these circumstances, and it represents a creeping collateralisation of the terms of the JOA.
There is also sometimes a temptation for the existing JOA parties to require a farming-in party to provide collateral support not only in respect of the work commitment represented under the FOA, but also in respect of certain further obligations anticipated under the JOA. There is no obvious reason for this, other than the desire of the parties to seek the comfort of collateral support even when it would not otherwise have applied.
Where a party coming into a JOA under an FOA agrees to post collateral support to the existing JOA parties in support of its prospective JOA commitments, that collateral support will usually not extend in favour of any later party that comes into the JOA.
Where a party coming into a JOA under an FOA agrees to post collateral support to the existing JOA parties in support of its prospective JOA commitments, that farming-in party is usually not successful in calling for reciprocal collateral support in its favour from the existing parties. This is so even if the financial covenant of the existing parties is the same as, or is even worse than, that of the incoming farming-in party. As a consequence of the above scenarios, there could be a lack of symmetry regarding the provision of collateral support in respect of the obligations of the parties to the JOA.
•Transfers – collateral support given by, or in respect of, a party must also be considered in association with the provisions of the JOA allowing a party to transfer its interests (see Chapter 14), so that there is certainty as to whether an existing item of collateral support will (or will not) continue to apply after a transfer has been effected. Replacement collateral support might also be required to be provided as a condition of a transfer.
•Decommissioning – the liability of a party to meet its share of the costs of decommissioning the petroleum production, processing, storage or transportation infrastructure used in the performance of the joint operations, and the provision of collateral support in respect of that liability, is considered separately (see Chapter 16).
•Exclusive operations – where a party undertakes an exclusive operation (see Chapter 13) that party will be responsible for all the costs associated with that