Jurisdiction - Australia
Reports and Analysis
Asia Pacific – AIPN Releases New 2012 Version Of Its Model Joint Operating Agreement.

30 May, 2012


The Association of International Petroleum Negotiators ("AIPN") has released a new version of its model form joint operating agreement ("JOA"). The new 2012 version ("2012 JOA") will replace the existing 2002 version ("2002 JOA"). Parties will, of course, be free to elect to continue to use the 2002 JA if they wish. The AIPN model form JOA is the most commonly used model form JOA internationally. For this
reason, the release of the 2012 JOA is a significant development for the upstream oil and gas industry.
General observations
Work on revision of the 2002 JOA commenced in early 2008. Some of the changes made represent clarifications and improvements to existing drafting. The 2012 JOA has also been rebranded as the model "international joint operating agreement" – the old title was, somewhat confusing, "international operating agreement". Significantly, some of the revisions also cover a number of substantial issues, which reflect current matters of concern for the petroleum industry, such as compliance by oil and gas companies with anti-bribery and anti-corruption laws. There are also some issues that are visibly absent from the scope of the revisions. Notwithstanding the ongoing debate about the limitations on an operator's exclusion of liability in the post Deepwater Horizon era, the provisions dealing with the limitation of the operator's liability remain substantially unchanged, with the existing carve-outs in cases of gross negligence or wilful misconduct remaining in place. It is clear that while the AIPN model JOA strives to represent a middle ground representative of what is "standard", there will always be some conflict between minority and majority interest holders.
Limitation of the operator's liability
As mentioned above, the provisions dealing with the limitation of the operator's liability have not been substantially revised, despite being the subject of much discussion. The 2002 JOA reflects the generally accepted position that the operator should neither profit nor suffer loss from its role as operator, and is therefore indemnified by the other parties for any liability to them or to third parties. The 2002 JOA provides for only one optional carve-out from the exclusion of liability and indemnity – that is, in the event of gross negligence or wilful misconduct by the senior supervisory personnel of the operator or its affiliates. The relevant provision then provides three further options to determine the extent of the operator's liability in such circumstances: 
  • operator to bear all such damages, losses, costs, expenses and liabilities;
  • operator to bear only the actual damage, loss, cost, expense and liability to repair, replace and/or
  • remove joint property so damaged or lost, if any; or
  • operator to bear only damages, losses, costs, expenses and liabilities up to a specified cap.
Any such liability of the operator is subject to an overall proviso that the operator shall not be liable for any consequential loss or environmental loss.
Any party taking on the role of operator would be very wary of accepting any greater liability than provided in the 2002 JOA. Therefore, it does not come as a huge surprise that the current position stands under the 2012 JOA. However, this is an area that always provokes some friction during JOA negotiations. Other JOA parties, particularly minority interest holders who may, to an extent sit on the sideline in terms of involvement in operational issues, will invariably argue that the operator should take greater responsibility for its decisions and actions. The fact that the JOA


The 2012 JOA also retains existing provisions giving the JOA parties an option to create a reserve fund where a party is in default. Provision is now made for the reserve fund to include an amount equal to the defaulting party's participating interest share of the estimated decommissioning costs (to the extent the defaulting party has not yet provided for decommissioning security under Article 10).
New duty to create health and safety and environmental plan
The 2012 JOA contains a more stringent duty on the operator to prepare and establish an HSE plan designed to achieve safe and reliable conduct of petroleum operations. The 2012 JOA now explicitly states that the operator should plan and conduct joint operations in conformity with the HSE plan and that the HSE plan should be implemented in compliance with applicable laws and in a manner consistent with standards generally adopted by the petroleum industry.
The operating committee has a responsibility to review and approve the HSE plan on an annual basis. This is much clearer now as previously the 2002 JOA prescribed periodic review of the HSE plan only, without specifying the minimum frequency for review.
National Oil Company carry
Some host government contracts grant the National Oil Company ("NOC") a right to elect to participate in joint operations in each exploitation area at the time of declaration of commercial discovery for such area. The 2012 JOA has retained existing provisions dealing with NOC participation, either by the NOC becoming a party to the JOA, or by entering into a separate agreement with the NOC. Provision is also sometimes made for a carry of the NOC's share of the costs of operations, and for a subsequent repayment of those carried costs out of a portion of the NOC's share of cost hydrocarbons. The revised guidance notes to the 2012 JOA (see below) include suggested drafting for an optional provision to deal with such carried costs, where applicable. As an alternative, it is suggested that that the parties may wish to include the relevant provisions in a separate carry agreement.
It will be interesting to see to what extent the new suggested drafting relating to carried costs is followed. Where a carry mechanism in favour of the NOC is intended to be included, it can take various forms, depending on the circumstances. It is common practice to address the carry provisions as part of the granting instrument (i.e. in the host government  contract, such as a production sharing contract). The commercial variations on a carry are numerous and will depend on the outcome of negotiations between the host government and/or state company and the oil and gas companies involved.
Protracted default and withering
The 2002 JOA provided for a number of alternative options for dealing with protracted default. These options have been retained in the 2012 JOA, but they have been expressed to be cumulative, and a new "withering option" has been added. Under the new provision, if a default is not remedied within a specified period, any non-defaulting party has an option exercisable at any time to do one of the following:
  • forfeiture: require the defaulting party to withdraw from the JOA and assign all of its participating interest to the non-defaulting parties in proportion to their participating interests (excluding any non-defaulting party that has notified that it refuses to accept such proposed assignment); or
  • buy-out: require the defaulting party to sell and assign all of its participating interest to the nondefaulting parties wishing to purchase such participating interest; or
  • "withering" option: require the defaulting party, in respect of a default occurring at any time under an approved development plan, to offer to assign a part of the defaulting party's participating interest in the corresponding exploitation area in which it is in default to any non-defaulting party wishing to accept assignment of such part; or
  • enforcement: foreclose its mortgage or security interest against a pro rata share of the collateral provided under the JOA.
Default provisions are always one of the more controversial areas in a JOA. The parties will wish to balance the need to have appropriate remedies in place to deal with default, and in particular any resultant cash-flow problems resulting from payment defaults, together with a need to have a proportionate response to default, which does not disproportionally penalise the defaulting party. It has been argued that forfeiture of the defaulting party's interest may not be enforceable on the grounds that the loss of the whole interest may amount to a penalty under English law. For this reason other options are often considered. A "withering" mechanism allows the non-defaulting parties to acquire a part of the defaulting party's participating interest, based on the relative degree of default. It has been suggested that adopting a "withering" approach to forfeiture of the defaulting party's interest reduces the risk of it beingunenforceable, as it is more proportionate and therefore less likely to be penal.


Leave a Reply

You must be logged in to post a comment.