1. First principles of the JOA
Before undertaking a detailed examination of the terms of a typical joint operating agreement (JOA) it will be useful first to consider some of the conceptual and structural principles that underpin the content and the effect of, and even the rationale for, the JOA.
These principles relate to why joint ventures are an inherent part of the petroleum projects landscape, the form that the JOA might take in structuring a joint venture (including the use of model form contracts) and the relationship that will exist between the JOA and the concession that it underpins.
1.1 The logic for a joint venture
In the simplest case, the state will grant a concession granting the right to explore for and to produce petroleum to a single company as the concession-holder. This has typically been the case for relatively modest petroleum projects, where a low level of technical complexity and/or of financial exposure (found, for example, in respect of any combination of easy exploration, shallow depth drilling, onshore petroleum deposits or crude oil production) means that a single company can hold the concession and can comfortably perform the associated work obligations.
In this situation, therefore, it is not necessary to consider the manner in which a joint venture will be documented, as the sole concession-holder has no other person to enter into a joint venture with in order to perform the concession.
However, where petroleum exploration and production projects become more complex and more expensive (such as where any combination of complex exploration, deep drilling, offshore petroleum deposits or natural gas and liquids production exists) then the associated risk can be spread more widely, across a group of persons that have come together for that purpose.
The concession might therefore be held by several parties,1 that have agreed to act together in a joint venture. They will divide the expenditures incurred in the performance of the concession, and will divide the benefit of any petroleum that is produced under the terms of that concession, between themselves in accordance with pre-agreed shares. Consequently, a JOA will be needed between this group of persons in order to record the terms of their joint relationship (at least if they propose to proceed on the basis of an unincorporated joint venture).
There are several well-rehearsed reasons for entering into a joint venture for the undertaking of a petroleum exploration and production project, which it will be helpful to summarise here.
•Multiple projects participation – participation in a joint venture allows a party to undertake only part of a project, so freeing up that party to devote its unutilised resources to participation in a wider number of other projects. This allows that party to spread itself across several projects simultaneously, rather than to apply itself to just one project entirely, while still achieving the same overall economy of scale.
•Risk sharing – a joint venture allows the parties to share the various risks (principally geological, financial and commercial risks) that are typically associated with the business of petroleum exploration and production, such that no single party is exposed to bearing all of those risks alone. Where the costs of exploration and production can run into hundreds of millions, or even billions, of dollars, few companies are able or willing to bear those costs (and the attendant risks) individually.
•Skill sharing – a joint venture allows the parties to pool their respective skills, expertise and abilities (whether operational, financial or political skills, or simply the accumulation of previous relevant experience) in the manner that best complements their joint venture and avoids unnecessary duplication. It also affords the parties the opportunity to observe and to learn new skills from each other. Getting the chemistry right in this respect partially explains why the parties might thereafter be keen to control the circumstances in which a party can later exit the joint venture and bring in a replacement (see Chapter 14).
•Political risk mitigation – a joint venture can help to reduce the risk of adverse political or regulatory interference that might impact on the petroleum project that the parties have agreed to undertake. Having a widely invested petroleum project, with a joint venture of multiple parties in the concession (especially where one of the parties is a state entity (see 4.1)) might cause the state to think twice about doing anything that might prejudice the interests of that particular project. This could be true up to a point, although it will be less effective as a safeguard against the risk of wholesale re-regulation of the entire petroleum sector that also affects the particular petroleum project on a non-discriminatory basis.
•Managing state participation – the JOA that the parties to the joint venture enter into will provide a protocol for state participation, if that is a feature of the prevailing petroleum law or of the concession (see Chapter 2), and will offer some education to the state on the commercial positions and the operational behaviour that might be expected to be undertaken in return for that participation.
The interests of the various parties in their joint venture should ostensibly be the same: that is, to produce the greatest possible quantities of petroleum on the most cost-effective basis. This alignment of interests will be recognised in the JOA, but there could also from time to time be some misalignment between the interests of the parties, which the JOA will also need to accommodate.
Thus, a party might prefer its interests in another concession to which it is party over its interests in the concession to which the JOA relates; or one party might wish to shut in petroleum production during periods of low petroleum prices while another might not; or a state entity that has become party to the concession and the JOA may have an ambition focused on exploration at all costs, and the production of even marginal quantities of petroleum, solely in order to benefit the national interest, which the other parties do not share. The JOA will need to be able to address all these sorts of tensions within the joint venture that it represents.
(a)The role of the JOA
The examination of the terms of a typical JOA in this book is prompted by the assumption that a concession has been awarded to and is held by a private sector participant in the form of a group of persons that have agreed to act together within some form of collaborative joint venture, rather than to a single person as the sole concession-holder. Under the terms of the concession, that group of persons, as the concession-holder, will be entitled (and will also be obliged) to explore for petroleum, and to produce any petroleum that is thereby discovered, in the defined concession area.
Where it is held by several persons, the concession typically provides that those persons will be jointly and severally liable to the state for the proper performance of the terms of the concession. This