1. JOINT OPERATING AGREEMENTS (2) By RICHMOND OSEI-HWERE FACULTY OF LAW, KNUST

2.  Introduction  Controlling conflict within the JOA  Pass mark  Sole Risk  Non consent  Default and Forfeiture  Assignation and Withdrawal

3.  Oil and gas industry is a high risk and high cost industry  To spread the risks and share the costs companies come together to form a joint venture  The vehicle used for the joint venture is the JOA.  An operator is appointed to conduct day-to-day activities in a JOA

4.  The operator is supervised by the Joint Operating Committee (JOC)  The JOC has the power to decide whether to conduct projects which are proposed by the operator  Decisions taken by the JOC is based on majority votes

5.  Voting interest of each party is equal to its percentage interest  The pass mark gives the percentage interest share of votes which must be obtained by the JOC to make a binding decision

6.  The size of the pass mark is one of the hardest negotiations in drafting a JOA  Low pass mark gives the largest interest holder a dominant position

7.  High pass mark gives smaller interest holders opportunities to make decisions on the management of the joint venture  Modern JOAs set the pass mark between 50% - 70% SOLE RISK AND NON CONSENT clauses are strongly connected with the pass mark in a JOA

8.  Sole risk clauses give an option for a project which has failed to obtain a pass mark in the JOC, but which the defeated member(s) nevertheless wish to go ahead.  Parties which conduct operations under sole risk clauses will:  Bear all the costs of the operation

9.  Share all the risks and liabilities arising out of the operations  Have the right to the production resulting from such operations

10.  Sole risk projects are typically conducted by the operator.  In rare situation where the operator is not involved, the sole riskers will select an operator.  The sole riskers will also form a JOC

11.  Non consent clauses in contrast give an option for some parties to opt out of a project which has obtained a pass mark in the JOC. ARE SOLE RISK AND NON CONSENT CLAUSES COMPATIBLE WITH THE AIM OF JOAs?

12.  Members of a JOA are required to provide funds for a project during a cash call.  A co-venturer’s failure to fulfill financial obligations under an AFE constitute a breach of his most basic duty under a JOA.

13.  Such a failure is referred to as default.  The standard remedy under a JOA for default is forfeiture.  The forfeiture clause will be invoked after notice is served on the defaulting party by the operator and the defaulting party fails to remedy the default within a specified time.

14.  Two threats to the validity of forfeiture clauses: 1. They might be struck down as penalty clause 2. They may be held to breach the general law of insolvency

15.  Forfeiture is the negative sanction of loss of property rights.  Liquidate damages/penalty clause is the positive obligation to pay money to the innocent party.  Forfeiture is equated with liquidate damages/penalty clauses.

16.  According to Atiyah they have the same economic effect. See par 11.42 of Styles’ JOA  See also Jobson & Jobson par 11.43  In Commissioner of Public Works vs. Hills, Lord Dunedin defined the distinction between liquidate damages and penalty clauses: See par 11.43 of Styles’ JOA

17.  “Lord Dunedin in Dunlop Pneumatic Tyre Co. Ltd v New Garage & Motor Co. Ltd [1915] AC 79: a) It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid. This though one of the most ancient instances is truly a corollary to the last test... ETC ”

18.  It is a common law principle that a private contract cannot thwart the operation of the Law of Insolvency

19.  A forfeiture clause might be struck down as an unfair provision which deprives the insolvent co-venturer’s non-JOA member creditors of their right to share in their assets, including his share of production under the JOA. See Whitmore vs. Mason par 11.52 of Styles’ JOA

20.  There are normally restrictions on the assignation of interest  Governmental Restrictions  Pre-emption clause

21.  In the UK, for instance, the consent of the Secretary of State would be required for any assignment or transfer of interest under the license.  In Ghana, Section 8 of the Petroleum (Exploration and Production) Act prohibits the assignment of petroleum interest without the prior consent in writing of the Minister of Energy

22.  The purpose of this restriction is to ensure that only companies with technical and financial ability participate in petroleum exploration and exploitation.  It is normal practice that governmental consents are not unreasonably with-held

23.  This allows existing licensees to take precedence of third parties in acquiring additional interests if a follow licensee is seeking to reduce or dispose of its holding.

24.  The arguments for pre-emption rights are that:  They preserve the identity of the original groups  Can help to keep out undesirable new joint venture partners.

25. THANK YOU