Understanding petroleum industry JOA in post world financial meltdown (2)
By Felix Anyarouh
Part one of this article reviewed the Association of International Petroleum Negotiators (AIPN’s) model Joint Operating Agreement (JOA) and the need for a revision to reflect current practices and conditions in the industry. Changes to operators’ liabilities and default provision were also discussed.
In a JOA the operator is the party with the largest interest in the production and is responsible to the day to day running of the joint operation. In general, article 4 of the 2012 JOA, increased the standard or quality level of performance expected from the operator. The operator’s expanded duties include a more exacting duty to establish a Health and Safety Plan (HSE) to achieve safe and reliable conduct of petroleum operation. This plan must be in conformity with the relevant laws and in a manner consistent with the standard and procedures generally adopted by the petroleum industry.
The operating committee has a responsibility to revise the HSE plan on a yearly basis. This provision expanded on the 2002 JOA which required a periodic review of the HSE plan only, without establishing a minimum frequency of the review. The 2012 JOA stipulates for alternative provisions regarding the extent to which the operator must conduct the HSE reviews, which is subject to negotiations during JOA drafting.
On the contentious issue of Option of Operator Assignment to Affiliates, the 2012 JOA includes an optional provision allowing the operator to assign operatorship to any of its affiliate’s subject to any necessary consent of the relevant government and that the assignee must have sufficient technical expertise and financial resources to perfume the duties of the operator.
As an alternative, the operator or its other affiliates, having the required technical expertise and financial resources, may provide a guarantee for the benefit of the JOA non-operating parties, guaranteeing the performance of the operator’s obligations. This option may be useful for oil and gas companies that prefer for the operatorship function to be governed by a separate company due to group structuring or tax reasons.
Prior to the 2012 JOA, there were discussions regarding the 2002 Operator Removal Provisions. The 2002 JOA restricted the ability of non-operators to remove an operator for material breach of its obligations where one or more of the non-operators in the joint venture where also affiliates of the operator.
This placed non-affiliated non-operator at a contractual disadvantage position Article 4.10B provided only for an affirmative vote of a contractually prescribed proportion of non-operators be obtained in order to issue the relevant notice of operator breach (pursuant to which, subject to certain conditions, removal of the operator would follow. The 2012 JOA revised this provision by requiring that the above affirmative vote be obtained only with respect to non-operators who are not affiliated to the operator.
The 2002 JOA provisions dealing with Work Programs and Budgets (WP&B) have been revised and expanded to conform to WP&B and Authorization for Expenditure (AFE) with industry practice – Article 6. Under the 2012 JOA, parties will agree in greater detail to the content, sharing and approval of all information relating to the joint operation. This provision is in response to concerns regarding inadequate and untimely information transmission by the operators to non-operators.
Specifically, there are new provisions for work programs and budgets establishing the content to which operators must adhere and setting out how and when operating committee approval must be given to ensure that the operator is in a position to submit work program and budget to the government when required to do so under the host government contract.
Also, this provision allows the operator to present budget to government authority even if not yet approved, if necessary to maintain underlying license or contract. The functionality and modification of WP&B including through the use of supplemental AFE’s is made possible. This article has several optional provisions regarding WP&B provisions that can be modified by parties to reflect their particular circumstance. Concluded