UK: Affected Petroleum Agreements In The Master Deed: Where To Draw The Line?

The UK Continental Shelf ("UKCS") has long been a basin which is widely regarded as being mature; production has peaked and exploration potential is in decline. In order to encourage M&A activity and attract investment, a collaborative industry and government working group developed the Master Deed which was designed to address concerns regarding an unduly complex transfer framework and variable preemption provisions which were regarded as inhibiting the marketability of UKCS assets. The Master Deed became effective on 28 April 2003 and implemented a voluntary regime which was designed to, amongst other things, expedite and simplify the process of interest transfers in the UKCS encouraging new entrant investment.

Although the Master Deed has, by and large, been viewed as a success for reducing administrative barriers and introducing model form documentation, it has been criticised for failing to accelerate interest transfers as efficiently as its proponents had originally envisaged. Delays are often attributed to protracted negotiations regarding the form and content of the execution document ("Execution Deed") and in particular, which interest documents should be classified as affected petroleum agreements ("APAs") that need be novated as part of a transfer.

The Execution Deed is regularly overlooked during the preparation of the purchase agreement as it is commonly perceived to be an ancillary completion document which has little consequence to the commercial terms of the transaction and is thus usually only properly considered once the purchase agreement has been signed. The Execution Deed process can, however, be an expensive and time-consuming part of a transaction and failure to give adequate consideration to the implications and construction of the Execution Deed at an early stage of the transaction can lead to unexpected costs and delays. The primary cause for cost and time overruns in Execution Deed preparation continues to be the erroneous identification of the APAs which is subsequently challenged by third parties. Incorrect identification of APAs can be avoided with comprehensive due diligence and proper analysis of the underlying interest documents, discerning which agreements should be APAs and need novating and those which are not.

Defining an APA

APAs are agreements which need to be novated to the transferee in order to effect the legal and beneficial transfer of an interest; on execution of the Execution Deed all APAs listed therein are novated to the transferee. LOGIC (the Master Deed's de facto administrator) relies on the transferring parties to identify all relevant APAs which will need to be transferred to ensure that title to, and the commercial benefit of, the interest are properly transferred. Although there is no categorical definition for APAs in the Master Deed, LOGIC has stated that APAs are:

"... the licence, the JOA and the various agreements that must be novated to the buyer to transfer ownership in, and the rights and obligations relating to, the asset being sold" 1

At first glance, defining what constitutes an APA appears straightforward. As with any interest transfer, in order to effect the transfer all agreements where the transferor has legal or beneficial rights need to be novated. Novation of the licence, operating agreement(s) and any agreements which contain rights, where the transferee is a direct counterparty, logically must be novated and thus clearly fall into the classification of an APA. The definition becomes more difficult when the transferee is not a direct counterparty to an agreement but that agreement contains beneficial rights relating to the interest (for example, in an operator to operator agreement).

An agreement which contains beneficial rights may, or may not, depending on the nature of the agreement, require novation. In order to determine if such an agreement is an APA, the transferring parties should carry out a detailed review of the agreement's provisions determining what rights and obligations the transferor may have which ought properly to be novated.

Identifying an APA

In order to identify whether or not an agreement which contains beneficial rights, but does not include the transferor as a direct counterparty requires novation, the transferring parties must first determine whether or not the agreement can, or needs to be, transferred. Any review of transfer rights should begin with identifying the capacity which the transferor is recognised under the agreement and what assignment/novation rights are contained therein. If the agreement is an operator to operator agreement, does the operator enter into the agreement on behalf of the non-operator parties and if so, are there operative assignment/novation provisions which the non-operators can enforce? If the answer is yes, then the agreement will need to be novated. If not, then further investigation might be required.

If the agreement does not contain assignment rights which the transferor can invoke, attention should be given to how the transferor is defined (if at all) in the agreement. If the transferor is not referred to in (or identified by) the agreement, it is unlikely that it will be an APA, because, as a matter of law, the transferor would have no legal nexus in such an agreement; it cannot novate the agreement as it has no locus under it. If, on the other hand, the agreement does refer to the transferor (in name or by definition, e.g. as part of an owner group), and such definition includes successors and assignees, it is likely that the agreement would not require novation as the inclusion of successors and assignees in a definition is forward looking and anticipates future changes to the identity of the transferor party. In such a case, the rights will automatically transfer to the transferee when it assumes the role of the transferor's successor/assignee. A separate novation would not be necessary.

Other factors which should be considered are whether there are any other operative provisions in the agreement which the transferor can invoke and whether the Contracts (Rights of Third Parties) Act has been excluded or not. If there are no operative provisions and/or the Contracts (Rights of Third Parties) Act has been excluded, it is unlikely that the agreement will require novation as the transferor does not have rights in the agreement; its rights are enforced by the party which has contracted on behalf of the transferor.

It is important to note that every agreement is different and although the above highlights issues which may be indicative as to whether or not the agreement in question needs to be novated under the Execution Deed it is by no means an exhaustive list and each interest document should be assessed on a case-by-case basis.

Applying the right methodology

APAs are less likely to be erroneously included or excluded by transferring parties who allocate sufficient time and resources in the preparation of draft Execution Deeds. A focus on speed and deliverability rather than precision can lead to instances where first drafts are prepared using a broad brush approach, where all interest documents are listed as APAs regardless of whether the transferring party has the right or ability to novate agreements, and/or a reliance on past precedent, where the form and contents of a previous Execution Deed is adopted with the assumption that the APAs had been correctly identified and remain in force. The perceived efficiencies of applying such logic fails to consider the potential timetabling impacts of producing a draft which may be challenged by third parties or require subsequent rectification.

As the administrator will only execute an Execution Deed once it has received consent notices from all Master Deed signatories which are party to the transfer, it is vital to anticipate third party challenges which could delay approval and ultimately impact the transfer timetable. Preparing a comprehensive first draft of the Execution Deed which has been verified using thorough legal analysis can pre-empt such challenges. Additionally, failure to correctly identify APAs may, in the case where a misidentification is discovered post completion, require rectification. Allocating appropriate time and resources to reviewing the terms of interest documents at an early stage of the transfer process can prove to be time well spent, since it can reduce the risk of delays and expedite execution of the transfer documents.

Concluding remarks

It will be to the benefit of all UKCS participants, and in particular the Master Deed signatories, if transferring parties apply a consistent legally supported methodology regarding the interpretation of APAs and construction of Execution Deeds. The fact that the Master Deed signatories continue to apply varying methodologies, which are not always grounded in legal principles and contractual analysis, has, and continues to be, one of the reasons why the Master Deed has had a limited impact on the speed of interest transfers. The sooner Master Deed signatories start applying the same well-reasoned approach in the preparation of their transfer documents, the sooner we can expect to see a shift towards quicker transfer times and greater liquidity in the UKCS.

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.

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