Where a number of parties contemplate submitting an application for the award of a new licence on a consortium basis, the Joint Study and Bidding Agreement ("JSBA") is intended to govern the relationship between them and the terms upon which their consortium application will be made. The JSBA acts as a precursor to the fully termed joint operating agreement ("JOA") in that it governs the relationship of the parties prior to the award of a licence whilst the JOA governs the relationship of the parties after the award (if the application is successful).

It is common (and recommended) for the JSBA to set out the high-level terms which will govern the consortium following the award of the licence. Agreeing those terms in the JSBA allows possible contentions between the consortium members to be identified early and addressed before the licence is issued. Investing time in the content of the JSBA helps avoid a fractious consortium and costly inefficiencies later.

Although the JSBA appears to be a straightforward, short-term agreement1, the importance of its content and purpose should not be underestimated. The following considerations will be key:

1. Prior to Entry

Prior to the commencement of the negotiation of the JSBA, the parties should assess what they each offer to the consortium (and also what they expect the others to offer). These discussions invariably involve the disclosure of commercially sensitive information, thus necessitating the entry by the parties into a confidentiality agreement prior to having detailed discussions. It may be that a certain party brings significantly more value to the consortium than the others if it is in sole possession of certain high value information. In order for it to disclose such information to the consortium it may seek a higher level of comfort in respect of the maintenance of its confidentiality than is the norm in a standard confidentiality agreement by, for example, seeking certain indemnities from the parties. Parties should therefore consider that there may be some debate in the negotiation of the confidentiality agreement, and parties with less (or no) confidential information to share will accordingly be less concerned about the confidentiality aspects of their relationship.

Additionally, the parties should be aware that there could be area of mutual interest agreements ("AMIAs") already in existence which bind potential consortium members. The effect of these preexisting arrangements on the composition of the intended consortium will need to be considered carefully.

2. Commencement without Agreeing the JSBA

It is not uncommon that due to time pressures, whilst still negotiating the JSBA a consortium could find itself at the point of making a licence application without the agreed JSBA in place. In this circumstance there is the risk that a party might not act in the spirit of what the parties are attempting to agree in the JSBA, for example, by focusing its resources on another potential application in the licence round or by not taking certain actions prior to an intended deadline. This will waste time and deflect attention from the matters in hand. In reality therefore there is no substitute for agreeing the JSBA as soon as possible.

3. Delay in Agreeing the JOA

Conceptually, as the precursor to the JOA, the JSBA is a short-term agreement intended to operate in the period between the licence being awarded and the JOA being finalised. However, it is not uncommon for the negotiation of the JOA to take considerable time and be subject to lengthy contention, particularly if the parties are from different jurisdictions and have varying degrees of experience in dealing with the UK continental shelf ("UKCS"). A prolonged negotiation of the JOA will result in extending the duration of the reliance of the consortium on the JSBA as the vehicle for governing their joint venture. This can be an alarming proposition for the consortium if the JSBA does not anticipate this possibility. 

The content of a JSBA is always a product of the time available prior to the submission of the licence application (which is usually 90 days from the launch of the licensing round in the case of the UKCS). The JSBA is typically drafted with a premature finish line in mind – the licence award. Instead, the parties should agree in the JSBA sufficient detail such that it can be used to operate the joint venture between the consortium members until when the JOA is agreed.

Consideration should be given to the inclusion in the JSBA of terms relating to each of the following:

  • the role of the operating committee;
  • grounds for removal of the operator;
  • the voting pass-mark;
  • the thresholds for approval of expenditure;
  • the consequences of default;
  • withdrawal and relinquishment;
  • non-consent and sole risk;
  • decommissioning; and
  • force majeure.

4. Exclusivity

It is common for the JSBA to prohibit the consortium parties from making a licence application outside the consortium in respect of the block which the consortium is considering under the JSBA. Consideration should also be given to prohibiting the parties from making an application for any other block in the licensing round unless it is made with the members of the consortium under the JSBA.

A situation may arise where a party to a number of consortia focuses more resources on its most preferred application resulting in its commitment to other applications being lessened. In the worst case, it may be that such a party has merely been 'tyre-kicking' various consortia and will only agree to progress that application which it most favours, resulting in that party attempting to withdraw from all but one application. Such a scenario leaves the consortium with a number of potential issues which can become troublesome if not properly managed in the terms of the JSBA, some of which are dealt with below in point 6.

Prospective applicants should be aware however that the exclusion of consortium parties from making other applications could present competition law problems, depending on how the exclusion is structured. Care therefore must be exercised when considering and drafting the exclusivity provisions in the JSBA.

5. Voting and Dissenting Parties

The JSBA should contain a voting mechanism for the making of decisions between the consortium members. It is important that the voting procedure is made bespoke such that it considers the key dates and milestones in the licensing round and it provides for decisions to be made sufficiently in advance of such key dates. 

Careful consideration must also be given to provisions to manage any dissenting parties. It is common for the JSBA to provide for a period in which a dissenting party can withdraw from the consortium before the licence application has been submitted if the terms of a proposed bid have been agreed by the other consortium members but do not appeal to the dissenting party. In the event of withdrawal from the consortium, the JSBA may make provision for the withdrawing party's interest to be allocated amongst the rest of the consortium members, or for the introduction of a third party to acquire that interest. 

Given that the technical and financial competence of a third party can be anywhere in the range of highly competent to unproven, the criteria for the introduction of a third party must be carefully considered in order to minimise the risk of dissatisfaction amongst the remaining consortium members in the event a third party joins the group. The JSBA should set out the criteria required in order to be eligible to enter the consortium and should deal with the process for approval of a third party by the remaining consortium members (including the requirement for unanimous approval). It is also recommended to make provision for the requirement for the effective novation of the JSBA to bring in a third party. This could be done by appending a deed of accession to the JSBA, and securing a power of attorney to act on behalf of the departing party.

6. Withdrawal

In some cases, the consortium members might not be able to reach unanimous agreement as to which block (or blocks) they wish to apply for jointly and on the terms of the intended licence application. In such an event, it is common for the JSBA to provide a process which results in a proposal being made, but where any parties not supportive of such proposal can elect not to participate. Where less than all the parties participate, the participating interests in the proposal will require recalculation and each participating party will normally be allocated a greater participating interest than that which it had originally contemplated at entry into the JSBA, save for where third parties are introduced to the application (see above) in place of the non-consenting parties so as to avoid the remaining parties increasing their respective stakes. The parties to the JSBA should recognise that it is possible that they may finish the bid process holding a greater participating interest than they originally did. A party wishing to avoid such a situation must pay careful attention to the recalculation formula and should negotiate the JSBA to protect against this.

The timing of the ability of a party to exercise a right of withdrawal is an important consideration. Where a party wishes to withdraw from the JSBA in the period prior to the closing date for the licence application, it is normally important to keep that party bound by the restrictions imposed upon it in relation to making other applications during the licensing round and in relation to confidentiality.

Caution must be exercised around the inclusion of withdrawal provisions in the JSBA. Some model agreements, such as the AIPN model form Study and Bid Agreement (2006), provide for a party to withdraw from the agreement with an obligation on the withdrawing party not to enter into a concession interest covering all or any part of the area which the consortium considered for a period of one year post-withdrawal. It would be preferable in most circumstances to extend this obligation to prohibit the withdrawing party from making any application in the relevant licensing round for the reasons mentioned in point 4 above.

7. Remedy for Default

The default provisions under the JSBA should operate such that if a member of the consortium defaults in the performance of the JSBA, that default does not jeopardise the intended licence application for the other members of the consortium. In most cases, the default provisions are not dissimilar in effect to those which are found in a standard JOA, but it is prudent to adjust these so that in the event of a default prior to closing of the licensing round, the defaulting party is obliged to remain a party to the JSBA, to support any application being made by the consortium, and to do all things required to support the award of the licence to the consortium, since it could be that the defaulting party is essential to the success of the consortium's application in the eyes of DECC. It is therefore sensible to draft the default provisions such that only after the licensing process will the defaulting party then forfeit its interest to the other consortium members. This will also be without prejudice to a claim for damages suffered in consequence of the acts or omissions of the defaulting party.

8. Many Blocks, Many Operators

A consortium could consider applying for multiple blocks. In such circumstances, the consortium could decide to appoint different operators to different blocks, based on considerations of location, expertise and economic efficiency. In this case, the JSBA draughtsman will have the challenge of crafting a JSBA which satisfactorily identifies that different operators are appointed to different blocks, with possibly different rules applying in respect of bidding for different blocks, with different operational terms applying until such times as the relevant JOAs are agreed, and applying different accounting procedures. This will not be an activity devoid of complexity.

9. Warranties and Indemnities

Warranties and indemnities are generally minimal in a JSBA. It is however desirable to include in the JSBA a warranty given by each consortium member that the acreage being considered by the consortium does not conflict with preexisting AMIAs or with any other contractual arrangements which that member has outside the consortium. This could be backed up by an indemnity in favour of the consortium members against claims made by third parties (who hold offended AMIA interests). 

A further desirable warranty relates to anti-bribery and corruption. Each party to the JSBA will warrant that it has not engaged in bribery in relation to the matters which are the subject of the JSBA. It is common to back this warranty up with an indemnity such that each other party is indemnified by a party which is in breach of the warranty. This could also be an event which necessitates consideration of a termination provision.

10. Agreeing the JOA at the Outset

Although not always possible due to the time constraints imposed by the licensing round timetable, it is preferable to agree the JOA at the time of the negotiation of the JSBA and to have the agreed form appended to the JSBA. Such an approach provides a degree of certainty about the purpose of the JSBA and allows the consortium members to fine tune the content of the JSBA and the JOA. It also allows the consortium members to better understand each other's contentions before a commitment is made to become a co-licensee. If such contentions arise at the outset, the consortium members have an opportunity to leave the consortium before any licence has been awarded. Exiting at this stage will be easier than trying to exit later as a licensee.

Conclusion

On analysis of the considerations above, it is evident that the importance of the content and purpose of the JSBA should not be underestimated. As is common in many situations that arise in the oil and gas industry which require contractual arrangements to be memorialised, model forms of JSBA are in existence which make a reasonable but incomplete attempt at engaging with the key issues, and in certain respects fail to deal with the nuances of the UKCS, with key desirable provisions missing. In order to underpin a successful joint application and the subsequent joint venture in the UKCS, there is no real substitute for a bespoke JSBA and timely advance preparation.

Footnote

1 A model form JSBA is published by the Association of International Petroleum Negotiators and is available at www.aipn.org.

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.