Document 43067
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
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