Document 6438370

International Joint Operating Agreements
and Accounting Procedures
Core Course on International Oil and Gas Law Ceylan
InterContinental Hotel | Istanbul,
Istanbul Turkey | March 21 - 25,
25 2010
Presented By
Andrew B
B. Derman
Thompson & Knight LLP
1722 Routh Street
Dallas, Texas USA 75201
214.969.1307
214 969 1307
dermana@tklaw.com
© 2011
Tim Martin
adr.governance.inc
Calgary, Alberta, Canada
+1.403.452.0793
tim@timmartin ca
tim@timmartin.ca
www.timmartin.ca
www.adrgovernance.com
P
Purpose
off Joint
J i t Operating
O
ti Agreement
A
t
„ Granting instrument sets out relationship among
government, NOC and group of oil companies.
„ Oil companies are jointly and severally responsible
f minimum
for
i i
work
k obligations
bli ti
and
d operations
ti
under
d
granting instrument.
„ JOA sets out relationship among group of oil
companies:
● Provides decisiondecision-making process among oil companies
● Provides
P
id for
f conduct
d t and
d funding
f di
off operations
ti
to
t perform
f
obligations under granting instrument
● Provides coordination with granting instrument
● Allocates benefits, costs & liabilities among oil companies
History
Histor of Ind
Industry
str JOAs
„ First Model JOAs emerged 50+ years ago
„ US Model Form 610 JOA in 1956 (AAPL)
„ US Rocky Mountain JOA in 1966 (RMMLF)
„ Ca
Canadian
ad a Model
ode Op Procedure
ocedu e in 1969
969 (C
(CAPL))
„ UK North Sea JOA in 1960’
1960’s (BNOC
(BNOC now UKOOA
UKOOA))
„ Australian JOA in 1984 (APPEA)
„ Model JOA for GoM in 1984 (API)
„ International JOA in 1990 (AIPN)
3
AIPN Joint Operating Agreement
„ More than 2,900 members in 80+ countries
„ Project
P j t initiated
i iti t d in
i 1988
„ Three versions issued: 1990,1995
1990 1995 & 2002
„ Fourth version soon to be issued
„ Reflects industry standards & practices
4
JOA Anatom
Anatomy
„ Definitions
D fi iti
„ Effective date & term
„ Scope of JOA
„ Parties and their
Participating Interests
„ Operator & its rights,
obligations & liabilities
„ Operating Committee & its
g
& obligations
g
rights
„ Work Programs & Budgets
„ Operations
O
ti
by
b less
l
than all Parties (Sole
Risk / NonNon-Consent))
„ Default
„ Disposition of
production
„ Dispute resolution
„ Transfer and
Preferential rights
„ Boilerplate
International JOA Str
Structure
ct re
Participating Parties
Operating
p
g Committee
Operator
Philosoph of AIPN Model JOA
Philosophy
„ Each party should do what it has promised
to do
„ Each party should be able to do what it
wants to do
„ No party should have to do what it has not
promised to or does not want to do
„ No party who does what it has promised to
do, should be harmed if it does not
participate
AIPN Joint Operating Agreement
„ 75% tto 80% - “Boilerplate
B il
Boilerplate”
l t ”
„ 20% to 25% - Negotiated
g
„ General agreement on the concepts
„ Flexible Document
„ Philosophy
● Encourages
g Activity
y ((Exploration/Development)
p
p
)
8
AIPN Joint Operating Agreement
„ Accounting Procedure
„ Affiliate and Control
„ Agreed Interest Rate
„ Business Day
„ Calendar Year
9
AIPN Joint Operating Agreement
„ Completion
„ Cost Hydrocarbons
„ Gross Negligence/Willful Misconduct
„ Minimum Work Obligations
„ Operating Committee
10
AIPN Joint Operating Agreement
„ Participating Interest
„ Petroleum
P t l
Costs
C t
„ Profit
P fit Hydrocarbons
H d
b
„ Reallocation
R ll
ti off Cost
C t Hydrocarbons
H d
b
„ Senior Supervisory
S per isor Personnel
11
AIPN Joint Operating Agreement
„ Effective Date (Article II)
„ Scope
S
(A
(Article
ti l III)
„ Participating
P ti i ti Interests
I t
t and
d General
G
l
Obligations
„ Article 4.3 Secondment - Liability for
Secondees
12
AIPN Joint Operating Agreement
Operator’’s Liability (Article 4.6)
Operator
„ Gross Negligence
„ Senior Supervisory Personnel
● Fails to Address Secondees
„ Three Options to Establish Liability
13
AIPN Joint Operating Agreement
Operator’’s Liability (Article 4.6)
Operator
„ No Liability for Punitive,
Punitive Consequential,
Consequential or
other Indirect Damages
„ Express Negligence
● Conspicuous
„ Insurance
„ Commingling Bank Accounts
14
AIPN Joint Operating Agreement
Operator’’s Liability (Article 4.6)
Operator
„ Removal of Operator
● Bankruptcy
● Liquidation
Li id ti
● Receiver Appointed
„ Material Breach and Vote
„ Reduction of Participating Interest
„ Change in Control of Operator
15
AIPN Joint Operating Agreement
Operator’’s Liability (Article 4.6)
Operator
„ Change of Control
● Sale or Merger of Ultimate Parent Company
„ Without Cause
● Is this the most important provision?
„ Appointment of a Successor Operator
„ 4.12 – HSE Plan – vague and fertile ground
for argument
16
AIPN Joint Operating Agreement
Health Safety and Environment – Article 4.12
„ New provision
„ Industry Reverses Position
„ Agreed to Standards
„ Audits
A dit
● Non
Non--Operators
● Independent Auditors
17
AIPN Joint Operating Agreement
Operating Committee (Article V)
„ One Representative per Party
„ Powers and Duties
„ Binding Votes
„ Subcommittees
18
AIPN Joint Operating Agreement
Operating Committee
„ Voting Procedure
● Alternatives (Majority, Supermajority or Unamimous)
● Too Many Options?
„ Record of Votes
„ Minutes
„ Non
Non--Consent (Article 5.13)
19
AIPN Joint Operating Agreement
Work Programs and Budgets (Article VI)
„ Annual and MultiMulti-Year
„ Minimum Work Obligations
● Form Unclear
„ Casing Point Elections
● Exploration
● Appraisal
20
AIPN Joint Operating Agreement
C t
Contract
tA
Awards
d
„ Matrix
„ New Option – Defer to Operator
„ Limitation on Awards to Affiliates
Authority
y for Expenditures
p
(“AFE
(“
AFE”
”)
„ For Approval
„ For Information
21
AIPN Joint Operating Agreement
O
OverOver
-Expenditures
E
dit
to
t the
th Agreed
A
d Budget
B d t
„ 10% over a Line Item
„ 5% Overall Limitation
„ Penalty for Exceeding Budget?
„ “Pay Now,
Now Complain Later
Later””
22
AIPN Joint Operating Agreement
Article VII - Operations by less than all Parties
„ Sole Risk v
v. Non
Non--Consent
„ Limitations
● Cannot Conflict with Joint Operations
● Not Part of the Minimum Work Obligations
● Must be First Proposed as a Joint Operation
„ Development Plan Alternatives
23
AIPN Joint Operating Agreement
Article VII - Operations by less than all Parties
„ G&G Work
„ Exploration Wells
„ Appraisal Wells
„ Development Wells and Development Plans
„ “Back
Back--in”
in” Rights Payment of “Premium
Premium”
”
„ No “Back
Back--in”
in” PostPost-Development operations
24
AIPN Joint Operating Agreement
Article VII - Operations by less than all Parties
„ Participants Assume NonNon-Participants’
Participants’ Position
„ Premium Paid Cash or Carry
„ Cash “Back
Back--in”
in” Premiums:
● 100% to 200% of G&G Work
p
Wells
● 500% to 1200% of Exploration
● 300% to 800% of Appraisal wells
„ Carry Premium Higher – Cost of Capital
„ Farmout Option
25
AIPN Joint Operating Agreement
Article VIII – Default
„ Each
E h Party
P t is
i to
t Pay
P its
it Share
Sh
off Cash
C h Calls
C ll
as they Become Due
„ Operator (except when it is in Default)
distributes Default Notice
„ Non
Non--Defaulting Parties to Share Cash Call
Amounts Not Paid By Defaulting Party
26
AIPN Joint Operating Agreement
A ti l VIII – Default
Article
D f lt
Defaulting Party Loses Rights to:
● attend operating committee meetings
● propose operations
● vote
● have access to data
● withdraw
● exercise preferential purchase rights
● its entitlement share of production
● participate, consent to and benefits from traded data
27
AIPN Joint Operating Agreement
Article VIII – Default
Additionally
„ Forfeiture Available
● Government Transfer Issue
● Power of Attorney
y
● Assignment Executed and “Recorded
Recorded””?
„ Buy
B -outt Option
BuyO ti
28
AIPN Joint Operating Agreement
Article IX - Disposition of Petroleum
„ Right and Obligation to Take InIn-kind
„ Lifting Agreement
● AIPN Form
● Principles
29
AIPN Joint Operating Agreement
A ti l X - Abandonment
Article
Ab d
t
„ Security
● Parent Company Guarantee
● Letter of Credit
™
125% of the Amount that the Discounted Net Costs
Exceeds the Discounted Net Value of the Petroleum to
be Produced
„ Easier Written than Implemented
30
AIPN Joint Operating Agreement
Article XII - Transfer of a Participating Interest
„ Minimum Interest is usually 10%
„ Consent of Other Parties to Assignee
„ Preferential Purchase Rights
„ Rights of First Negotiation
„ Package Deal Exception
„ Scope
p of Article XII – To Merger
g of Ultimate Parent?
31
AIPN Joint Operating Agreement
Article XIII - Withdrawal
„ Unconditional
U
diti
l and
d Irrevocable
I
bl
„ Continuing Obligations of Withdrawing Party
„ Security
y for Withdrawal
● Abandonment
32
AIPN Joint Operating Agreement
Article XIV - Relationship of the Parties
„ No Fiduciary Relationships
„ Each Party is Responsible for its Own Profit
or Income Taxes
„ Tax Election for US Companies
33
AIPN Joint Operating Agreement
A ti l XV – Confidentiality,
Article
C fid ti lit Venture
V t
Information
I f
ti
„ All Information is to be Held Confidential
„ For How Long?
● Term of Agreement
● Two to five years thereafter
● Usual exceptions to the confidentiality
requirements
„ New Venture Information
34
AIPN Joint Operating Agreement
Article XVI - Force Majeure
„ Alternative
Alt
ti Definitions
D fi iti
● Host Government Contract Definition
● Typical Definition Included
„ Anticipate Imposition of Sanctions
35
AIPN Joint Operating Agreement
A i l XVIII - Applicable
Article
A li bl Law
L
and
d Dispute
Di
Resolution
R
l i
„ Applicable Law
„ Alternative - Courts or Arbitration
„ Single
Si l A
Arbitrator
bit t or Three
Th
Arbitrators
A bit t
„ Procedural Rules
„ Appointing Process
„ Location – Enforcement of Award
„ Language of Arbitation
36
AIPN Joint Operating Agreement
Article XIX - Allocation of Cost Recovery Rights
„ Maximizes Production Sharing Cost Recovery
„ Applies Whenever there are Joint and Exclusive
Operations
„ Joint Operation
p
Cost Hydrocarbons
y
are Allocated
First
„ Favors Joint Operations
37
AIPN Joint Operating Agreement
A ti l XX - General
Article
G
l Provisions
P
i i
„ Conduct of the Parties - FCPA and OECD
„ Conflict of Interest
● affiliates and contractors
● free to compete outside terms of operating agreement
„ Public
P bli Announcements
A
t
„ No Third Party Beneficiaries
„ Joint Preparation
38
AIPN Joint Operating Agreement
N
New
M
Model
d l JOA – Issues
I
Being
B i Addressed
Add
d
„ Respond to changes in industry since 2002
„ Increase operator accountability and transparency
in operations and costs
„ Provide template for NOC carry mechanism
„ Variety
V i t off clean
l
up and
d editing
diti changes
h
to
t conform
f
to AIPN drafting guidelines
39
AIPN Accounting
Acco nting Proced
Procedure
re
„ No
N P
Party
t iis tto G
Gain
i or L
Lose iin Relation
R l ti to
t the
th Other
Oth
Parties
● pay now, complain latter
„ Question,, Audit - Retroactive Adjustments
j
„ Operating Agreement Controls over Accounting
Procedure – In the Event of Conflicts
„ Language of Accounts (Dual Books)
40
AIPN Accounting
Acco nting Proced
Procedure
re
„ Exchange
E h
Rates
R t
● no gain or loss
„ Method of Accounting - Cash or Accrual
„ Operator to Monthly Bill or Cash Call
„ Each Statement to be Related to the Work
Program and Budget
„ Payment
P
t Procedure
P
d
41
AIPN Accounting
Acco nting Proced
Procedure
re
„ Cash
C h Calls
C ll Paid
P id in
i the
th Currencies
C
i Requested
R
t d by
b
Operator
„ Optional Cash Calls Procedure to Collect for
Unforeseen Expenditures
„ Optional Provision – Extraordinary Expenditure
● Collect three Installments per Month
„ Overpayments Credited Against Next Cash Call
or Refunded
R f d d
42
AIPN Accounting
Acco nting Proced
Procedure
re
„ Optional Cash Call for Deficiencies
„ If Cash Advances are Not Requested,
Payments are Due ten days after Billing
„ Late Payments – Agreed Interest Rate
„ Commingled
g
Funds
● option
● interest (tax issue)
43
AIPN Accounting
Acco nting Proced
Procedure
re
„ Operator
O
t Advances
Ad
Funds
F d
● option
● finance charge
„ Non
Non--Operator to Also Pay When Due
„ Audit
● cash calls are conclusively deemed correct unless
exceptions are made within 24 months of year end
● unenforceable in event of fraud or violation of law?
44
AIPN Accounting
Acco nting Proced
Procedure
re
„ Non
Non--Operators
O
may audit Operator
O
for
f any
Calendar Year within 24 months of Year End
„ Audit Costs are Borne by NonNon-Operators
„ Optional provision - Auditing Affiliate Charges
● are affiliates subject to audit?
„ Allocations - Joint Operations and other
Operations
● on an equitable basis
45
AIPN Accounting
Acco nting Proced
Procedure
re
„ Direct Charges by Operator (Section II)
● Contract Maintenance
● Salaries and Benefits
● Employee Relocation Costs
● Insurance
● Offices and Camps
46
AIPN Accounting
Acco nting Proced
Procedure
re
„ Direct Charges by Operator (Section II)
● Materials
™
optional purchasing fee
● Operator Owned Equipment and Facilities
™
not to exceed commercial rates
● Services by Third Parties and Affiliates
™
not to exceed commercial rates
● Damage to Property
47
AIPN Accounting
Acco nting Proced
Procedure
re
„ Direct Charges by Operator (Section II)
● Litigation (Costs and Judgments)
● Taxes
● Environmental
● Decommissioning
Necessary”” for Joint Operations
● Other Charges “Necessary
48
AIPN Accounting
Acco nting Proced
Procedure
re
„ Indirect Charges – Overhead (Section III)
● Contentious
● Sliding Scale Percentage of Direct Charges
● Not
N t paid
id on Bonuses,
B
R t l Guarantees,
Rentals,
G
t
Tariffs, Royalties, Acquisition Costs, etc.
● Option
O ti - Separate
S
t Indirect
I di t Charge
Ch
for
f Major
M j
Construction
● Option
O ti - Minimum
Mi i
Monthly
M thl or Yearly
Y
l Charge
Ch
49
AIPN Accounting
Acco nting Proced
Procedure
re
„ Acquisition
A
i iti off Material
M t i l (Section
(S ti IV)
● Charged at the Net Cost to Operator
™
optional
ti
l - Purchasing
P
h i
Fee
F
™
no warranties given
● New Materials
™
“A” condition – priced at 100%
● Used Materials
™
“B” condition - priced at 75% - no repairs needed
™
“C” condition - p
priced at 50% - needs repairs
p
● Premium prices for scarce materials
50
AIPN Accounting
Acco nting Proced
Procedure
re
„ Disposal
Di
l off Materials
M t i l (Section
(S ti V)
● Threshold Value for Disposal of Materials
™
Procedure to be Followed
● Price for Sale to Parties/Affiliates charges at
Acquisition Price
● Approval
pp
required
q
to sell to a Third Party
y for Less
than the Party/Affiliate Price
● Special Prices Established for Used Materials
Furnished by Operator
51
AIPN Accounting
Acco nting Proced
Procedure
re
„ Inventories (Section VI)
● Performed at Reasonable Intervals
● Option – at Least Annually
● Special Inventory
52
™
acquisition
™
paid by purchaser
AIPN Accounting
Acco nting Proced
Procedure
re
N
New
M
Model
d l Accounting
A
ti Proc–
Proc
P
– Issues
I
Being
B i Addressed
Add
d
„ Reflect current practice & provide clear statement of each alternative
„ Procedures for Non-Operators to audit source documents furnished
by Operator:
●
Direct audit by Non-Operators
●
Audit by internationally recognized independent public
accounting firm (IRIPAF)
●
Combined Non-Operator/IRIPAF audit
„ Restructuring and simplification of audit procedures
„ Incentive for Operator to allow audit is provision requiring charges
not made available for audit to be backed out of Joint Account
53