JOINT OPERATING AGREEMENTS: WHICH ISSUES ARE

LIKELY TO BE THE MOST SENSITIVE TO THE PARTIES

AND HOW CAN A GOOD CONTRACT DESIGN LIMIT THE

DAMAGE FROM SUCH DISPUTES?

Nkaepe Etteh

ABSTRACT: As with most contractual arrangements, there is scope for disputes to arise

between the parties to a JOA. This Paper examines the issues which are most sensitive to the parties

that could result in disputes. It will also discuss how damage arising from disputes involving these

issues may be limited by a well drafted contract. Tackling these issues through good contract drafting

will greatly limit the scope for disputes to arise later on between the parties of a JV.

The author is an LLM Petroleum Law and Policy candidate at the CEPMLP with an LLB (Hons) in

Law from Kings College, London. She is also a UK qualified lawyer affiliated with the Association of

International Petroleum Negotiators, The Energy Institute, The Society of Petroleum Engineers, The

Law Society and the Young International Arbitration Group.

ii

TABLE OF CONTENTS

ABBREVIATIONS ............................................................................................. iii

1 INTRODUCTION ................................................................................................. 1

2 JOINT OPERATING AGREEMENTS .............................................................. 1

2.1 What Is a Joint Operating Agreement ............................................................. 1

2.2 Functions of a Joint Operating Agreement ..................................................... 2

3 THE PARTIES TO A JOINT OPERATING AGREEMENT .......................... 2

3.1 The Operator ................................................................................................... 3

3.2 The Non-Operators .......................................................................................... 4

4 ISSUES MOST SENSITIVE TO THE PARTIES AND CONTRACTUAL

SOLUTIONS ......................................................................................................... 4

4.1 CONTROL AND DECISION MAKING ....................................................... 5

4.1.1 Joint Operating Committee .......................................................................... 5

4.1.2 Voting Procedure ......................................................................................... 6

4.1.3 Approval of Programmes, Budgets and Expenditure .................................. 6

4.2 ISSUES RELATING TO JOINT-OPERATION ............................................ 7

4.2.1 Sole Risk ...................................................................................................... 7

4.2.2 Non-Consent ................................................................................................ 8

4.3 ISSUES RELATING TO DEFAULT ............................................................. 8

4.3.1 Suspension of Rights ................................................................................... 9

4.3.2 Forfeiture ................................................................................................... 10

4.3.3 Buying Out the Defaulting Party‟s Interest ............................................... 11

4.3.4 Security For Decommissioning Costs ....................................................... 11

5 CONCLUSION .................................................................................................... 12

BIBLIOGRAPHY

iii

ABBREVIATIONS

AFE Approval for Expenditure

AAPL JOA the American Association of Petroleum Landmen Form 610

model form operating agreement 1989

AIPN JOA the Association of International Petroleum Negotiators model

form international operating agreement 2002

CAPL JOA the Canadian Association of Petroleum Landmen operating

procedure 2007

DCPD Decommissioning Cost Provision Deed

HC Host Country

JOA Joint Operating Agreement

JOC Joint Operating Committee

JV Joint Venture

OGUK JOA the Oil and Gas UK standard joint-operating agreement 2007

PI Percentage Interest

PL Production Licence

UK United Kingdom

US United States of America

1

1 INTRODUCTION

“If the Joint Operating Agreement forms an alliance similar to a marriage, it is likely

to have 16 parties: four richer, four poor, four better and four worse. Operating

Committee meetings are likely to be more like a nightmare than a honeymoon.” 1

The

JOA is one of the most frequently used agreements in Oil and Gas law. The parties

enter the contract to conduct joint-operations. They bring with them their different

ideas of how the operations will be conducted. The JOA must provide a set of rules

which will govern the parties for the duration of the JV. These rules must last a very

long time and apply to a vast range of activities.2 The design of the JOA must

therefore address issues that are most sensitive to the parties and which can lead to

disputes which threaten the stability and longevity of the JV. The question posed in

this Paper „Which issues are likely to be the most sensitive to the parties and how can

a good contract design limit the damage from such disputes?‟ is very important as

JOAs are necessary and fundamental to the Oil and Gas industry. If potentially

contentious issues are not addressed at the outset, disputes arising later on could prove

disruptive and may lead to termination of the joint-operations. The author will adopt a

comparative methodology in writing this Paper. The paper commences by describing

the nature and purpose of a JOA. Chapter three will discuss the parties to a JOA. The

fourth Chapter discusses the issues that are most sensitive to the parties to a JOA and

goes on to highlight how modern JOAs have the addressed these issues. The author

concludes in Chapter five.

2 JOINT OPERATING AGREEMENTS

2.1 What Is a Joint Operating Agreement

The basic agreement for a petroleum JV is the JOA. The JOA is usually negotiated

following the award of a PL to joint licensees. The JOA performs the same role as a

partnership agreement or a memorandum and articles of association of a company.3 A

JOA is a contract between two or more parties creating a contractual framework for a

JV between them under which they will conduct petroleum operations. The JOA sets

out the structure of the JV, the allocation of risks and costs and the method for sharing

1 Martyn, D. Upstream Oil and Gas Agreements (1996) at 13

2 Ibid.

3 Taylor, M. and Tyne, S., Taylor and Winsor on Joint Operating Agreements (1992) at xix

2

production and profit.4 Petroleum operations are hardly ever conducted by a single

party. This is because the risk, expense and investment required for such operations

are too great for one company to shoulder alone. Oil exploration is a capital intensive

and risky enterprise with heavy upfront costs albeit one which offers high rewards to

successful parties.5 By entering into a JV oil companies can mitigate these high risks

and share in the costs required for capital intensive exploration, development and

production activities. The JV will also enable cost savings and economies of scale.

The operations can be handled with fewer employees and equipment thereby

promoting greater efficiency.6

2.2 Functions of a Joint Operating Agreement

The JOA serves two main functions:

1) A basis for the sharing of rights and liabilities under the PL. Usually this is

allocated according to each party‟s PI under the JOA. The declaration of PI is

one of the essential provisions in a JOA. All rights and liabilities arising in

connection with the PL will be shared between the licensees in proportion to

their PIs

2) To provide a set of rules for the conduct of operations under the PL. Operation

involves designating one of the licensees as operator for the responsible for

conducting the day-to-day operations subject to the supervision of a JOC

which is representative of all licensees.

The JOA will also deal with important ancillary matters such as default by licensees

in meeting their obligations under the JOA and assignment of interests in a JOA.7

3 THE PARTIES TO A JOINT OPERATING AGREEMENT

There are two classes of party to a JOA. The operator and the non-operators. The

operator is the party who implements the collective will of the JV and is responsible

for day-to-day management of the operations. The other members are known as non-

4 Blinn, K. et al., International Petroleum Exploration and Exploitation Agreements (1986) at 193

5 Oil and Gas Law – Current Practice and Emerging Trends (Greg Gordon et al. eds., 2007) at 265

6 Ibid.

7 Taylor, M. and Tyne, S., Taylor and Winsor on Joint Operating Agreements (1992) at xxiii

3

operators. The „institutional link‟ between the operator and the non-operators is the

JOC on which all the parties to the JOA sit.8

3.1 The Operator

There is usually a single operator and his identity is usually specified in the JOA.9 In

most international JOAs the operator is the party with the largest interest in the PL. It

is usually considered imperative by the parties to a JOA that the operator should have

a substantial PI in the PL. This is because a party with a less substantial interest may

not be willing to commit limited technical resources to the project. Further the non-

operators may doubt the operator‟s commitment to the project and fear that its

motivation arises from a desire to make a profit from its position. As a result the

companies in the JV will expect that the operator is financially sound and technically

capable to carry out the operations. In some countries, the operator‟s appointment

must also be approved by the state agency in charge of overseeing petroleum

operations.10

Usually the operator will not receive remuneration for acting as the operator but will

be entitled to reimbursement of its costs. A fundamental feature of the JOA is that the

operator works gratuitously on behalf of the JV.11

Instead he only takes the profit that

it is entitled to pursuant to its PI. Why then would any member of the JOA choose to

act as an operator? Possibly because of the degree of control that the operator is able

to exert over the project. The reward for being operator is greater power as opposed to

greater profits. The JOA will also contain provisions for the removal of the operator

and his replacement by another party. The operator has the same liabilities as the

other parties to the JOA. When contracting on behalf of the JV, the operator will be

acting as agent for the JV who is the principal. In the case of a typical JOA, the

operator will be simultaneously a joint principal along with other parties to the JOA as

well as acting as agent.12

8 Oil and Gas Law – Current Practice and Emerging Trends (Greg Gordon et al. eds., 2007) at 277

9 Ibid.

10 Taylor, M. and Tyne, S., Taylor and Winsor on Joint Operating Agreements (1992) at 1-3

11 See Greg Gordon et al., supra note 8 at 277-281

12 See Greg Gordon et al., supra note 11

4

The operator will owe a duty of care to the other parties in its capacity as operator. It

is good industry practice to prescribe an objective standard in relation to the duty of

care owed by the operator.13

The standard is usually that the operator will not be liable

for any loss of production or profits or other consequential loss in the absence of gross

negligence and/or willful misconduct.14

3.2 The Non-Operators

The role of the non-operators in the JV is „one of non-operating‟. The most important

duty of a non-operator is to provide a share of the funds whenever there is a cash-call.

However non-operators are active investors and they can have an active say in the

managing of the JV through the JOC. Ultimate responsibility for the management of

the JV is entrusted to the JOC in some JOAs. 15

The JOC is comprised of

representatives of all parties to the JOA. The JOC will supervise and control all

matters related to the joint-operation.16

The JOC arrives at decisions according to a

voting procedure specified in the JOA.17

Voting on the JOC is usually weighted to

reflect each parties PI. The value of any percentage voting right is affected by the

pass-mark laid down in the JOA. The pass-mark is a matter for negotiation between

the parties, dependent on the contractual strength of the parties.18

4 ISSUES MOST SENSITIVE TO THE PARTIES AND CONTRACTUAL

SOLUTIONS

Several complex issues may arise in the context of negotiation a JOA. These issues

may be further aggravated by the financial difficulty currently affecting the world‟s

economy. Operators and non-operators are increasingly demanding that their interests

are adequately protected in the JOA.19

The issues that are most sensitive to the parties

are subjective and non-exhaustive in nature. For the purposes of this paper, the author

has grouped these issues into the following umbrella headings:

13

Daintith, T. and Willoughby, G., Manual of United Kingdom Oil and Gas Law (1984) at 99 14

Philip Weems and Michael Bolton Highlight of Key Revisions – 2002 AIPN Model Form

International Operating Agreement at www.kslaw.com/library/pdf/2002_JOA.pdf at 4 15

See Greg Gordon et al., supra note 12 at 286 16

See Taylor, M. And Tyne, S., supra note 10 at 21 17

See Daintith, T. and Willoughby, G., Supra note 13 at 100 18

See Greg Gordon et al., Supra note 15 19

Howard L Boigon, Joint operating agreement part 1 [1987/88] 11 OGLTR 320

5

4.1 CONTROL AND DECISION MAKING

Oil and gas industry practice is to permit the operator to act on behalf of the JV and to

have full control of day-to day operations within the limits of the JOA. There is need

for a mechanism to control the operator due to the very high costs of operation,

especially off shore. Particularly as JOAs usually exclude any liability on the

operator's part for a failure to act which is anything other than wilful misconduct or

gross negligence,20

and these are particularly difficult to prove.21

Strict and continuing

supervision over the operator‟s activities is necessary and will be a most sensitive

issue .22

If such control is not exerted, the parties to the JOA run the risk of losing

their investment. Such control can be achieved by the following means:

4.1.1 Joint Operating Committee

The principal method of addressing this issue is by making the operator‟s conduct of

the JV subject to the supervision of the JOC. The AIPN JOA provides that the

operator shall “perform Joint-operations in accordance with the provisions of the

Contract, the Laws / Regulations, this Agreement, and the decisions of the Operating

Committee not in conflict with this Agreement.”23

This position is also found in the

OGUK JOA at section 6.1.1.24

However, the operator may prefer to act without the

restriction of JOC supervision. This can be provided for in the JOA. For instance the

AAPL JOA25

provides that the operator has full control of all operations in the

contract area and is not subject to the control of the non-operators. The CAPL JOA26

provides that the operator has freedom to act subject only to the obligation to consult

with the parties and to keep them informed about the joint-operations. Neither of these

JOA‟s refers to a JOC.27

20

Ibid at 321 21

Peter Roberts, Fault lines in Joint Operating Agreements, I.E.L.R 290 (2008) at 3 22

See Daintith, T. and Willoughby, G., Supra note 13 at 100 23

AIPN JOA section 4.2 B(1) 24

See Roberts, P., Supra note 21 at 3 25

AAPL JOA 26

CAPL JOA 3.01A 27

See Roberts, P., Supra note 21 at 2

6

4.1.2 Voting Procedure

As mentioned above, the JOC reaches decisions according to a voting procedure and

the requisite pass-mark specified in the JOA. This is crucial as it determines which of

the parties has the power to veto any proposed activity.28

The party with a large

percentage may seek a high pass-mark so that it can approve or veto any decision.

Parties with smaller interests may seek protection to ensure against the risk of one or

two parties preventing or forcing a cause of action. This issue would be very sensitive

to the parties.29

For example, in the AIPN JOA the voting procedure allows for a

series of alternatives, including a provision that JOC decisions are only validly made

by a pass-mark vote of a certain number of parties.30

The OGUK JOA also provides a

pass-mark voting mechanism,31

together with a list of items in respect of which

unanimous consent is advised. If the operator has the largest percentage share which

meets the threshold of the pass-mark, it can carry the vote. This could make this

provision fail to adequately control the operator. This problem can be avoided by

imposing a requirement for unanimity in respect of certain items in the JOA. However

this could result in deadlock. Most JOAs which provide for the possibility of

unanimity of voting (including the AIPN JOA and the OGUK JOA) do not provide a

meaningful deadlock resolution provision,32

the implication being that the parties

can‟t progress in the JOC until some sort of mutually acceptable position is achieved.

It is possible to not refer JV decisions to a voting procedure. This can be provided for

in the JOA by not conferring control rights on the JOC for example under the AAPL

JOA or under the CAPL JOA.33

4.1.3 Approval of Programmes, Budgets and Expenditure

The operator has authority to execute all approved programmes and budgets. The

approval of such is of utmost importance to the parties in controlling the joint-

operations and their exposure to costs.34

Therefore an effective method of controlling

expenditure is vital. AIPN JOA at 6.7B Alternative 2 and 3 provides for express

approval. The CAPL JOA also has provision that the operator must have an AFE,

28

See Daintith, T. and Willoughby, G., Supra note 13 at 100 29

See Martyn, D., Supra note 1 at 18 30

AIPN JOA 5.9 31

OGUK 9.8 32

See Roberts, P., Supra note 21 33

See Roberts, P., Supra note 21 at 2 34

See Martyn, D., Supra note 1 at 19

7

approved by all the parties, before spending beyond a specified amount can be

incurred in the performance of the joint-operations.35

AIPN JOA 6.7B Alternative 2

allows for approval by conduct where the JOC fails to approve an AFE within the

permitted time period. An operator could side step this mechanism if its PI reaches the

threshold for pass-mark unless the JOA requires unanimity. It may be prudent to

include a similar provision mentioned at Section 4.1.2 above which provides that

pass-mark vote is only attained when a certain number of parties vote in favour.

4.2 ISSUES RELATING TO JOINT-OPERATION

The JOC, voting procedure and pass-mark may not be enough to protect all the

varying interests of the parties. Parties with small PIs may not want to be bound to

activities they do not support or cannot afford. Also, parties with significant interest

may not want to be prevented from developing the particular project36

. In order to

protect these diverging interests, JOA‟s usually permit sole risk and non-consent

operations.

4.2.1 Sole Risk

A sole risk provision allows parties to undertake a project rejected by a majority of

the JOC. The effect of this provision is that all costs and all entitlements to petroleum

from the project costs rest wholly with the sole risk party or parties.37

The clause

recognizes that a project may be considered worthwhile by some of the parties but

may fail to meet pass-mark.38

The AIPN JOA39

provides for what it calls ‘exclusive

operations‟. Under this mechanism, a party can propose an operation (outside of the

agreed joint-operations programme) such that a party may proceed with that exclusive

operation in its own right. The other parties are free to participate or not, as they

prefer. The CAPL JOA40

has a similar provision known as independent operations.

Under this mechanism any party can serve notice upon the other parties of its

intention to conduct a particular operation, whereupon each other party may elect to

participate, or not, in that operation.41

35

CAPL JOA 3.01B 36

Se Martyn, D., Supra note 1 at 22 37

See Daintith, T. and Willoughby, G., Supra note 13 at 106 38

See Martyn, D., Supra note 1 at 23 39

AIPN JOA 7 40

CAPL JOA 10.4 41

See Roberts, P., Supra note 21 at 4

8

4.2.2 Non-Consent

A non-consent clause will provide that no party can be compelled to participate in any

major operation, such as drilling without its consent.42

Where this provision is

invoked the objecting party will be excluded from the particular joint-operation which

will then be undertaken by all of the consenting parties and will be accounted for

separately from the JV.43

Non consent and the sole risk rights represent the possibility that operations can

carried out under the JOA by less than all the parties. However these rights are

incompatible with the intended JOA philosophy which is majority rule. This is

particularly the case with the non-consent right, where the consenting parties are left

with the burden of having to share the particular project costs in proportions which are

greater than the original PIs they had bargained for.44

Therefore such clauses are

controversial.

An operator might be eager to see these rights excluded, or at least greatly limited,

under the JOA. However, a non-consent right is particularly valuable to non-operating

parties in protecting such a party from being forced into an operation which it might

not have the financial ability to pursue.45

4.3 ISSUES RELATING TO DEFAULT

These relate to the long term protection of the parties rights and interests in the JV.

Each JOA is built on the presumption that the burden if financial operations shall be

shared. The operator will issue periodic cash-calls. The most important duty of all

parties to a JOA is to provide funds when they are requested under a cash-call.46

If a

co-venturer breaches its financial obligations, it breaches its most basic duty under the

JOA. Such breach will cause real financial difficulty to the other parties who will

have to make good the shortfall.47

42

See Daintith. T. and Willoughby, G., Supra note 13 at 107 43

See Roberts, P., supra note 21 at 4 44

Ibid. 45

See Roberts, P., supra note 21 at 4 46

Peter Roberts forfeiture 1 47

See Greg Gordon et al., supra note 8 at 289

9

A default situation arises where a party fails to meet its PI share of the expenditure

made on behalf of the JV. When such default occurs one or more of the non-

defaulting parties have to step in the meet the defaulter‟s share of the expenditure.

Provisions should be made in the JOA to protect the operator from having to bear the

burden of funding the default.48

Default is more relevant now as production in the

north-sea matures coupled with the current financial climate. Major operators will be

looking to rid themselves of their less productive assets. This is because there is little

incentive to stay as the PL is no longer an asset but a liability due to impending

decommissioning costs. Where the PL is divested to smaller companies, they are

more likely to go bankrupt than major companies.49

The non-defaulting parties will be

keen to see that default and remediation does not become an established pattern of

behaviour by a party and so the JOA will need to provide a swift and effective

sanction in circumstances of default.50

Default situations can be addressed in the JOA

in the following manner:

4.3.1 Suspension of Rights

The JOA can stipulate that in the event of default some of the defaulting party rights

become suspended. For example, the right to receive information, the right to attend

and vote in the JOC, the right to participate in areas of mutual interest acquisitions or

to receive notices of future well operations. Boigon suggests that legally, it may not

be possible to suspend only some performance while at the same time continuing to

insist on performance of other JOA provisions. As a practical solution, the threat of

selective suspension may prove to be an effective influence against the defaulter51

.

The AIPN JOA provides for a suspension of the aforementioned rights during the

„default period‟.52

If the default is still un-remedied then the ultimate sanction is that

all of the defaulting party's interest in the JV is forfeited to the non-defaulting

parties.53

48

See Daintith. T. and Willoughby, G., Supra note 13 at 103 49

See Greg Gordon et al., supra note 8 at 290 50

Peter Roberts, Fault-lines in the joint operating agreement: forfeiture I.E.L.R. 274 (2008) 2 51

Howard L Boigon, Joint operating agreement part 2 [1987/88] 11 OGLTR 320 at 30 52

AIPN JOA 8.2 53

See Roberts, P., supra note 50.

10

4.3.2 Forfeiture

Forfeiture is basically a forced transfer of the defaulting party's interest. To complete

such a transfer the JOA may also provide that each party irreversibly appoints each

other party as its attorney, for the purpose of concluding such a transfer if the need

arises, rather than having to force the defaulting party to complete the necessary

transfer documents at the time of forfeiture, running the risk of the defaulting party

refusing to do so.54

The AIPN JOA provides an option for forfeiture in the event of

default.55

However such forfeiture may be held to be penal because the amount in

question is “extravagant and unconscionable in amount in comparison with the

greatest loss that could conceivably be proved to have followed from the breach.”56

Roberts suggest that the potential impact of forfeiture can be moderated in the JOA so

as not to constitute a penalty by adopting a „withering interest‟ forfeiture clause.57

Under such a clause the defaulting party‟s interest is decreased in proportion to the

amount by which it is in default. Withering interest clauses are complex to apply and

all they do is to moderate the degree of punishment instead of removing the risk of

penalty.58

Roberts suggests a withering interest formulation is one whereby the

defaulting party can re-acquire the interest which it had forfeited by making good the

amount of the default at a later date. This is attractive for the defaulting party but

unattractive for the non-defaulting parties.59

A further consideration relating to the forfeiture remedy is whether a defaulting party

could claim equitable relief against forfeiture. In practice the risk of a forfeiture clause

being struck down by the courts is small because the only relief which the courts will

be willing to grant is to give the debtor to time to pay his debt. The time period is

arguably provided by most JOAs.60

Another consideration is that such a clause may

be seen to frustrate the operations of insolvency law. In English law especially,

forfeiture may be struck down as an unfair provision which denies an insolvent

defaulting party‟s creditors of their right to share in its assets. There is yet to be a UK

case on the validity of a JOA forfeiture clause. However an Australian court in

54

Ibid. 55

AIPN JOA 8.4(D) Alternative 1 56

Dunlop Pneumatic Tyre Co., Ltd. v. New Garage and Motor, Ltd., [1915] A.C. 79 57

See Roberts, P., supra note 50 at 3 58

See Greg Gordon et al., Supra note 15at 294 59

See Roberts, P., supra note 50 at 3 60

See Greg Gordon et al., Supra note 15 at 298

11

Mosaic Oil NL v Angaari Pty Ltd61

had to consider this particular issue. It was held

that in the event of the defaulting party‟s insolvency, such a forfeiture clause would

not be upheld.62

4.3.3 Buying Out the Defaulting Party’s Interest

Because of the potential problems with the enforceability of forfeiture clauses, the JV

members can completely avoid this issue by including a buy-out alternative in the

JOA. The consideration for such sale would be assessed on the presumption of a fair

market value and with recourse to an independent expert in the event of a dispute

between the parties.63

The AIPN JOA64

includes a buy-out alternative to forfeiture to

allow parties completely ignore forfeiture enforceability issues65

. The CAPL JOA

requires a forced sale of the defaulting party's JOA interest on the open market.66

The

operator is granted a first-ranking lien over each party's interest under the JOA in

order to secure payment by that party of its share of the costs of the joint-operations.

In order to remedy a party's default the operator may take possession of the defaulting

party's interest under the JOA and sell that interest on reasonable commercial terms.

The proceeds of the sale are used to remedy the default and the balance is returned to

the defaulting party. The AAPL JOA67

also has a similar mechanism as an alternative

to forfeiture.68

This sort of clause may be controversial as the non-defaulting parties

may wish to have a say with regard to who buys the defaulting party‟s interest.

4.3.4 Security For Decommissioning Costs

Decommissioning is an issue which is becoming more relevant as existing oil fields

mature. If all the parties to a JOA decide to withdraw they will have to wind up the

JOA in a manner that satisfies the relevant governing laws and regulations.69

Usually

the parties are jointly and severally liable for the costs of decommissioning under the

PL. The parties will be keen to ensure that they bear only that share of

61

(1990) 8 ACLC 780 (NSW Supreme Court) 62

Ibid at 299 63

See Roberts, P., supra note 50 at 3 64

AIPN JOA 8.4(D) Alternative 2 65

See Weems, P. and Bolton, M., supra note 14 at 12 66

CAPL JOA 5.05B(g) 67

AAPL JOA VIIB 68

See Roberts, P., supra note 50 at 4 69

Blinn, W. et al., International Oil and Gas Agreements (2009) at 302

12

decommissioning costs that is proportionate to their PI.70

It is now increasingly

popular for HC laws to require that parties contribute in advance to a

decommissioning fund. This makes decommissioning an important issue for JV

members which if not immediately sensitive to them, should be brought to their

attention during negotiations. No party would want to be saddled with the liability for

decommissioning where the other parties have become bankrupt before the event of

decommissioning.71

To prevent this, most JOAs will authorise several types of security including a

guarantee or a standby letter of credit issued by an accredited bank, an on demand

bond issued by a surety company, a corporate guarantee, or some financial security

agreed on by the parties.72

The AIPN JOA provides an option for „Abandonment

Security‟ which obliges the parties to negotiate a security agreement during the

preparation of the development plan in respect of decommissioning.73

The OGUK

JOA provides for such security by attaching a DCPD to the JOA (ideally to be

executed at the same time as the JOA). The advantage of this is that decommissioning

issues will be dealt with from the outset in the JOA. Clause 3 of the OGUK JOA

confirms that decommissioning is an important part of joint-operations.

5 CONCLUSION

The JOA is indeed one of the most important agreements in the development of oil

and gas resources. In order to answer the question posed by this paper, the paper has

analysed the JOA and the members to a JOA. The JOA is expected to represent an

amalgam of the varying interests of the respective parties to the JOA. As a result it is

not possible to provide a definitive list of issues which are most sensitive to the

parties as such interests and their sensitivity are subjective to the parties. However the

paper provides a detailed analysis of the issues of control and decision making, joint

operations and default which are of great importance to the parties to a JOA. The

consequences of failing to address these issues in the JOA can be detrimental to the

parties and their investment. As a result of comparative analysis of the way these

issues have been addressed by modern JOAs we find that damage as a result of

70

DCPD Guidance at www.oilandgasuk.co.uk/new/events/eventDetail.cfm?frmEventID 71

Peter Cameron Lecture notes 72

See Blinn, W. et al., supra note 69 at 302 73

AIPN JOA 10.3

13

disputes arising from the issue of control and decision making can be limited by

providing for a JOC in the JOA along with a voting procedure and a requirement for

approval of programmes, budgets and expenditure; disputes arising from joint-

operating can be mitigated by providing for sole risk and non-consent operations;

instances of default can be remedied by provisions in the JOA relating to the

suspension of the defaulting party‟s rights, forfeiture of the defaulter‟s PI or

alternatively, buying out of the defaulters PI; and default related to decommissioning

can be avoided by a provision in JOA requiring security for decommissioning costs.

By addressing these issues in the JOA the parties negotiate what is effectively a

blueprint which has the capacity to limit the impact of disputes arising from the

aforementioned issues at a later date.

14

BIBLIOGRAPHY

PRIMARY SOURCES

Judicial Decisions

Dunlop Pneumatic Tyre Co., Ltd. v. New Garage and Motor, Ltd., [1915] A.C. 79

Mosaic Oil NL v Angaari Pty Ltd (1990) 8 ACLC 780 (NSW Supreme Court)

SECONDARY SOURCES

Books

Blinn, W. et al., International Oil and Gas (1986)

Blinn, W. et al., International Oil and Gas Agreements (2009)

Daintith, T. and Willoughby, G., Manual of United Kingdom Oil and Gas Law (1984)

Martyn, D. Upstream Oil and Gas Agreements (1996)

Oil and Gas Law – Current Practice and Emerging Trends (Greg Gordon et al. eds.,

2007)

Taylor, M. and Tyne, S., Taylor and Winsor on Joint Operating Agreements (1992)

Articles

Howard L Boigon, Joint operating agreement part 1 [1987/88] 11 OGLTR 320

Howard L Boigon, Joint operating agreement part 2 [1987/88] 11 OGLTR 320

Martin, P., The Joint Operating Agreement - An Unsettled Relationship? in Vol 50

Institute on Oil and Gas Law and Taxation 91-133 (1999)

OTHERS

Internet Sources

DCPD Guidance at

(www.oilandgasuk.co.uk/new/events/eventDetail.cfm?frmEventID [accessed 12

January 2010])

Peter Roberts., Fault Lines in the Joint Operating Agreement: Decision-Making, at

(https://login.westlaw.co.uk/ [accessed 18 November 2009])

Peter Roberts., Fault-lines in the joint operating agreement: forfeiture I.E.L.R. 274

(2008) (https://login.westlaw.co.uk/ [accessed 18 November 2009])

15

Philip Weems and Michael Bolton Highlight of Key Revisions – 2002 AIPN Model

Form International Operating Agreement at

www.kslaw.com/library/pdf/2002_JOA.pdf

The Association of International Petroleum Negotiators model form international

operating agreement 2002 at

https://my.dundee.ac.uk/webapps/portal/frameset.jsp?tab_tab_group_id=_2_1&url=%

2Fwebapps%2Fblackboard%2Fexecute%2Flauncher%3Ftype%3DCourse%26id%3D

_25521_1%26url%3D (accessed 2 December 2009)