UK: Optimising The Opcom: A Discussion On Non-Operator Concerns Under The JOA

Last Updated: 3 December 2014
Article by Peter Harris and Glenn Cheng

Summary and implications

The unique relationship between an operator and a non-operator working together on an oil and/or gas project comes into focus most sharply in the operating committee (Opcom) forum.

The Opcom is not only where most of the critical decisions concerning the fundamental purposes and key practical operating mechanics of the project get made, it also serves as a way of regulating the curious relationship between operator and non-operator.

Governed by the procedure agreed between the parties in the joint operating agreement (JOA), the Opcom serves to navigate the "push-me pull-you" dynamics that tend to arise where the non-operators' and operators' interests stray into potentially misaligned areas. For example, Opcom's typically deal with, amongst other matters:

  •  the approval of budgets;
  •  monitoring of project operations;
  •  exploration and appraisal plans;
  •  estimation of reserves;
  •  production rates;
  •  plugging and abandonment of wells;
  •  appointment of third party advisors or project participants; and
  •  change of control.

It follows therefore that the structure and procedure of the Opcom is a critical ingredient of the JOA and one that is worth spending the time and energy negotiating.

Based on our experience of working with clients within the oil and gas industry as well as a survey of relevant authorities and case law, this article considers the importance of the Opcom to non-operators and suggests ways in which it can be used to manage non-operator risks.

Specifically, this article considers how to use the Opcom to:

  • ensure non-operator input into key areas of risk;
  • retain freedom of choice as to which risks the non-operator wishes to take; and
  • maximise non-operator visibility on a project.

Exercising control

The critical function of the Opcom for non-operators is that it provides a (if not the only) practical mechanism by which the non-operator can have a say in project critical decisions. It follows that at JOA negotiation stage the Opcom clause will be hotly negotiated.

From the operator's perspective, it will be focused on ensuring that it has the freedom to make the decisions and take the actions that it wants to without being delayed or restrained by non-operators with a difference of opinion. Conversely, the non-operator will want to be assured that the operator is not able to go off on a frolic of its own and/or be unrestrained in taking actions that harm non-operators' interests and investments.

At the centre of the JOA provisions concerning the exercise of Opcom control are the voting provisions. While most standard forms and actual JOAs we have come across provide for each party to be represented on the Opcom by only one representative, the weighting of votes is usually proportionate to the size of a party's interest. While, in theory, non-operators and operators must vote in accordance with the fiduciary duties they owe to the joint enterprise, in practice, where there is a gulf between the joint and several interests, it is unlikely that the turkeys will vote for Christmas.

Critical for non-operators, as minority stakeholders, will be the pass mark threshold i.e. the percentage of votes required for a matter to be given Opcom approval. As a non-operator, the starting point for negotiations should always be to seek a pass mark threshold that renders its percentage of voting rights effective as a veto.

Recent JOAs we have advised relating to blocks offshore Indonesia and Vietnam have had a pass mark of 60 per cent and 65 per cent respectively. In the former matter our non-operator client had only a 10 per cent interest and so was unable to have any effective veto right over the operator. In the latter our non-operator client was only able to effectively prevent Opcom approval in circumstances where it collaborated with another non-operator.

Given the difficulty in negotiation, if it is not possible to secure a high enough pass mark threshold to enable you, as a non-operator to veto approval it is still worth pushing for as high a pass mark as possible as this may enable cooperation with another non-operator in circumstances where non-operator interests are aligned. It may also assist where it is contemplated that the operator's stake will diminish at some point in time.

Additionally, as we have seen in some cases, it is possible to carve out a number of matters that require unanimous approval. For example, we have seen agreements where a unanimous vote is needed for:

  • voluntary surrender of all or part of the concession area (applicable in jurisdictions such as Indonesia where the interest in the block is granted via a concession under a Production Sharing Contract (PSC));
  • material amendments to the PSC or JOA;
  • changes to the Minimum Work Obligation under the PSC;
  • decisions relating to whether to seek an extension of time for the PSC; decisions on whether to terminate the PSC; and
  • material amendments to the development plan.

While inclusion of unanimous consent provisions (or a very high pass mark) is generally beneficial to the non-operator there is a risk that it paralyses the joint venture and leads to deadlock. In order to anticipate such difficulties it is important to draft provisions for what happens in circumstances where agreement cannot be reached and, if appropriate, inclusion of mechanisms for forcing the issue such as by expert determination or mediation.

Freedom of risk 

In circumstances where the Opcom may be subject to paralysis or tension as a result of misalignment of interest, other contractual mechanisms may come into play which allow an operator or non-operator to move forward with a particular activity without sharing the risks of it. Many JOAs therefore include so-called "sole risk" provisions which define activities which, despite a lack of Opcom approval a party can take but for which they will be solely liable. On the flip side, a "non-consent" provision allows a non-consenting party to isolate itself from the risk of a particular activity without preventing the other parties from going ahead with it.

An example of such provisions can be found in the JOA that was the subject of the English High Court judgement in Ithaca Energy v North Sea Energy [2012] EWHC 1793 (QB). In this case, the contractual mechanisms were neatly summarise by Mr Justice Popplewell as follows:

"The general principle pervading the JOA, consistent with its joint venture nature, is that participants are bound by the decisions of the Operating Committee and bound to share in the costs and expenditure of such activities, as well as sharing in any of the benefits which may result. By way of exception to this general approach, the JOA also provides for two sets of limited and defined circumstances in which a participant who is outvoted may depart from the default position of joint benefit and burden. The first is where a participant wishes to undertake an activity which the Operating Committee has declined to undertake. In the defined circumstances, it may undertake that activity for its own sole risk and account. This is referred to in the JOA as a Sole Risk Project. The second exception arises where a participant wishes not to participate in an activity which the Operating Committee has decided to undertake. In the defined circumstances the participant may opt out of the obligation to contribute to the costs of the activity (and thereby forego the entitlement to share in any benefits which might result, subject to an ability to buy its way back into a share of the benefits by subsequent election to pay a multiple of what its cost obligation would have been)."

In this case, the controversy surrounded the non-operator's non-consent to drilling of a particular well – the claimant operator (Ithaca) claimed that the non-operator (NSE) was not able to use the non-consent provision because the well was an appraisal well as opposed to a development well. Under the terms of the JOA, the non-consent provision was only effective if the well in question was an appraisal well (defined as a "well drilled as part of an appraisal drilling programme") but not in relation to a development well (defined as a "well drilled within the proved area of an oil or gas reservoir to the depth of a stratiographic horizon known to be productive; a well drilled in a proven field for the purpose of completing the desired spacing patter of production".

It is not explicit in the judgement but based on the description of the non-consent provisions as set out in the excerpt above, the non-operator must have objected to the drilling at Opcom (although overall Opcom approved) otherwise it could not seek to rely on the non-consent provision.

Ultimately the court decided that the well in question was a development well and so the non-consent provision did not apply and the drilling activity was held to be at the risk of both parties.

An interesting feature of this case is that Opcom meeting minutes featured heavily in the evidence because the proposals surrounding the well in question had been discussed at the Opcom and the Opcom minutes had referred to the well as an appraisal well. The judge decided that just because the Opcom had referred to the well as such did not automatically make it so (it depended on the purpose of the well), however, he noted that contemporaneous evidence as to what the parties thought at the time was of relevance to how they understood the purpose of the well to be.

Some lessons may be learned here. Non-operators should keep their own records of Opcom meetings and may wish to build in provision to the JOA which allow them to lodge objections to the official Opcom minutes as a matter of record. Additionally, care should be taken that where sole risk and/or non-consent provisions are contingent non-approval at Opcom, the wording of proposals to Opcom is tight enough to resist any challenge to a non-operators use of the sole risk or non-consent mechanism.

If a non-operator is minded to use and rely on the non-consent mechanism it would also be worthwhile to put the operator and other parties on formal notice of its intention to do so, perhaps in the Opcom forum, to flush out any objection at an early stage and potentially allow for an estoppel defence if later challenged.

Maximising visibility via the Opcom

Without eyes, it is difficult to know, understand and guard against the risks you may be facing. Typically, non-operators will gain visibility by including in the JOA a clause requiring the operator to provide all manner of reports, data maps, policies studies and so forth. This is a useful way of obliging the operator to provide a non-operator with the information it requires to monitor the project on a regular basis.

Such a provision can be supplemented through the Opcom procedure as well. For example, the Opcom clause should include an obligation for the operator to provide information relating to all proposals to be considered at the meeting together with the meeting notice. Additionally, the Opcom should have the power to direct further disclosure of such documents as may be reasonably required to direct that further data and/or reports be disclosed by the operator.

The frequency of Opcom meetings will also affect the non-operators ability to see what is actually happening on the ground (or under the sea, as the case may be). A provision requiring the Opcom to meet at regular intervals, for example, once every six months, is therefore prudent. Additionally, non-operators should have the right to request the Operator to call an Opcom meeting.

In our experience it is also advantageous if non-operators contribute to the agenda for Opcom meetings in particular to ensure that they are kept in the loop regarding any potential claim situations, regulatory approvals, changes in the commercial development plan and any potential farm-ins or farm-outs.

Conclusion

In sum, careful drafting of the Opcom provisions in a JOA, together with strategic inclusion of sole-risk and non-consent clauses can assist operators and non-operators in charting a smooth joint venture.

From the non-operator perspective, the Opcom provisions can provide an avenue for the exercise of influence on the projects, managing misaligned interests and improving visibility.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions