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Default and Forfeiture

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A default clause is included in the JOA should one party fail to pay its share of a cash call. Non-defaulters are usually required to pay the amount in default until the defaulter remedies its default or forfeits its rights in the JV. The operator may also provide the finance itself or through borrowing.

The defaulter may remedy its default but would also incur a penalty corresponding to a fixed interest rate. During the default period, the rights of the defaulter over production and within the operating committee are suspended.

Should the default go over a certain period of time, non- defaulters have the right to forfeit and acquire the defaulter's interest. If non-defaulters decide not to acquire the defaulter's interest, operations are abandoned and all parties, including the defaulter, are required to pay their share of abandonment costs.

 

Sole risk operations

 

A project (e.g. drilling of a new well) that fails to reach the passmark may still be undertaken. A sole risk clause provides for the conditions under which sole risk operations may be carried out.

The sole risk parties share the risks, costs and benefits of the project between themselves. The non-consent parties may join later upon the payment of a penalty.

Such a situation usually mirrors disagreement within the JV.

 

Disposal of Production

 

Joint marketing arrangements for the disposal of the petroleum produced are not common in the oil and gas industry. It is indeed usually provided that each party has the duty to lift and separately dispose of its own share set by the percentage interest share. This is consistent with the restriction of the scope of the JOA.


As far as failure to dispose of petroleum is concerned, oil

and gas require different provisions. The case of oil is straightforward and the party that fails to lift its share is obliged to forfeit it to all other parties. Gas lifting is different since gas is transported in a continuous stream through pipelines. A disruption due to a disposal failure may therefore not be tolerated. What can happen though is that one party needs more gas one day to satisfy a sales agreement whereas another may not be able to sell its share. Gas lifting requires appropriate provisions to deal with methods of mutual compensation and accounting mechanisms.

 

Abandonment

 

Removal of facilities is a sensitive issue. A failure to comply with the local regulations may be considered as a criminal offense. Abandonment may be a highly technical process and may entail huge costs. The JOA should therefore specify how abandonment will be handled.

 

Liabilities for abandonment costs are usually shared according to the interests in the JOA. Considering the uncertainties pertaining to the financial position of the parties at the end of the joint operations, it is now common to require that each party provides a security for its share of abandonment costs (e.g. a bank security).

 

Model forms

 

Various regions of the world have produced somewhat distinct forms and practices. First, the national legal environment shapes formulations in order to deal with judicial interpretation and precedent. Similarly, national legal, professional and corporate culture and history influence practices. Last, the technical and economic factors prevailing in a particular region create particular levels of risk and call for situation-specific answers.

Until the American Association of Petroleum Landmen

(AAPL) Model Form Operating Agreement 610 in 1956 – the

1989 version of which is still used today – there was no model form of operating agreement in use. This form had primarily been designed for Texas onshore fields, which were characterized by a fragmented ownership. In 1977, the British National Oil Corporation (BNOC) issued a JOA pro- forma to better address the specificities of North Sea offshore operations.

There is conceptually no need for a standard form of JOA since each company may have its own requirements and concerns when entering a JOA. However, there seems to be today an increasing convergence of the issues raised for negotiation and drafting and often also of solutions. In that case, a model form may help save time negotiating, drafting and reviewing a JOA.

The 2002 revised Model Form International Joint Operating Agreement published by the Association of International Petroleum Negotiators (AIPN) is currently the most noteworthy candidate as an international model.


 


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