By Felix Ayanruoh

Joint Operating Agreements (JOA) is the engine that drives petroleum exploration and development around the world. It is axiomatic that major international petroleum companies depend on JOA to provide services and technology which drives petroleum development and production both onshore and offshore.

The JOA has two main purposes.  First, it establishes a legal framework for the parties to allocate risks and costs amongst themselves. Generally, costs and risks are shared according to each party’s production interest in the contract area.  Second, the JOA sets out the rules and procedures governing the relationship between the Operator and non-Operators in connection with operations in the contract area.

After 20 years of pre-eminence and general usage the Association for International Petroleum Negotiators (AIPN) JAO has become the grundnorm for petroleum joint venture arrangement internationally, particularly in emerging economies like Nigeria. Due to its importance and acceptability in the upstream petroleum industry and with recent trends in the industry, the AIPN revised Its 2002 International Operating Agreement, to “current-day realities” of international oil & gas projects.

The revised 2012 JOA updates the 2002 JOA, which was first issued in 1990 and subsequently revised in 1995, and 2002. Several recent significant events that redefined the industry’s approach to doing business, includes the 2008 meltdown of the financial markets, the 2010 Deepwater Horizon oil spill and the 2010 introduction of the UK Bribery Act.

The drafting committee grappled with these new realities in adapting the model JOA in a way that addressed the risks inherent in the changing global industry but still reflects current int
ernational practice.

The revised 2012 JOA include changes and additions to provisions related to (i) Operator rights and duties, (ii) limitations on Operator liability, (iii) removal and replacement of Operators, (iv) revisions to Work Programs, Budgets, and AFEs, (v) decommissioning, (vi) the consequences of Exclusive Operations, (vii) default, (viii) conflicts of interest, and (ix) Bribery compliance.

The provisions dealing with the limitation of the operator’s liability was not substantially revised, notwithstanding the fact that experts in the field advocated for an overhaul of the provision. The

2002 JOA reverberate the long established position that the operator should neither profit nor suffer loss from its role as operator, and hence indemnified by the other parties of the agreement for any liability to them or to third parties – shared on a pro-rata basis between the interest holders, including the operator.

Furthermore, it provides for carve-out from the exclusion of liability and indemnity – that is, in the event of gross negligence or willful misconduct by the senior supervisory personnel of the operator or its affiliates. The operator’s liability does not cover any consequential or environmental loss.

With the Deepwater horizon oil spill saga, the issue of the inclusion of senior personal in the definition of willful misconduct becomes imperative – in practice it is difficult to prove willful misconduct due to the narrow definition in the 2002 model agreement and show of involvement of senior personnel.

However, the 2012 JOA does not include any suggestive changes pursuant to the concerns raised on the issue of operator’s liability. The reason for sustainability of the limitation of operator

liability is the need to encourage parties to take on the role of the operator, suffice it to state that any party taking on this role may be perspicacious of accepting any greater liability than provided for in the 2002 JOA. However, this provision will typically lead to heavy negotiations JOA drafting. In light of the post deepwater horizon saga parties – particularly minority interest holders will argue that the operator should take greater responsibility for its decision and actions.

The issue of defaults in JOA’s has always been a contentious one in negotiating the consequences of default – failure by one party to satisfy cash call. Forfeiture, which was held as a default remedy under both the 2002 and 2012 JOA’s may be overreaching and unenforceable in certain jurisdiction – amounts to penalty under English Law.

However, the 2012 JOA provides for remedies in the event of default, non-defaulting parties may now avail themselves of a new “withering” remedy, in addition to the remedies contained in the 2002 JOA. Under the withering provisions, the non-defaulting party shall have the option to require the party in default to offer to assign a part of the defaulting party’s participating interest in the corresponding exploitation area.

As a remedy, the “withering” clause is more proportionate than a complete forfeiture because it is measured against the extent of the default, and therefore tries to avoid the enforceability concerns with the “disproportionate” remedies. This remedy also provides continuity by enabling the defaulting party to remain in the rest of the project. felix.ayanruohlaw@gmail.com