Joint Operating Agreements

Knut Kaasen

Knut Kaasen 2016

1. Presentation of the animal 2. Link to the License 3. Main content of JOA 4. What type of animal is the JV? 5. The cash call system 6. The management committee 7. The operator

Knut Kaasen 2016

Purpose in general - Need to

cooperate

- Just main issues

International basis - Joint ventures

require JOAs

- Recognisable contents

Norwegian flavour - Strong link to PL

- State control

- Standard content

Knut Kaasen 2016

WHY ? The “Holy Trinity”

of Norwegian Petroleum Regulations

The Produc-tion licence (PL)

The Joint

Assets The JOA

HOW ? «The licensees shall … enter into the enclosed: - Joint Operating Agreement Any subsequent supplements to, amendments of or exceptions from these agreements are subject to the Ministry’s approval.»

Consequences?

- Forced marriage - In all respects

binding upon the participants,

even if unanimously want to deviate

Knut Kaasen 2016

WHY ? The “Holy Trinity”

of Norwegian Petroleum Regulations

The Produc-tion licence (PL)

The Joint

Assets The JOA

HOW ? «The licensees shall … enter into the enclosed: - Joint Operating Agreement Any subsequent supplements to, amendments of or exceptions from these agreements are subject to the Ministry’s approval.»

Consequences?

- Forced marriage - In all respects

binding upon the participants,

even if unanimously want to deviate

Knut Kaasen 2016

The JOA in general

The Mangement Committee decides it all

The Operator carries out day-to-day management

Obl. to contribute funds (” sufficient funds to cover all expenses relating to the

activities of the joint venture”)

Joint liability (primarily several liability )

Profits ”in kind” (no joint sales profit)

Budget, plan, decision (extensive provisions)

Relevant carachteristics

Knut Kaasen 2016

The JOA in general

The Mangement Committee decides it all

The Operator carries out day-to-day management

Obl. to contribute funds (” sufficient funds to cover all expenses relating to the

activities of the joint venture”)

Joint liability (primarily several liability )

Profits ”in kind” (no joint sales profit)

Budget, plan, decision (extensive provisions)

Relevant carachteristics

Joint venture on the cost

side, but not on the income

side

Knut Kaasen 2016

The JOA in general

The Mangement Committee decides it all

The Operator carries out day-to-day management

Obl. to contribute funds (” sufficient funds to cover all expenses relating to the

activities of the joint venture”)

Joint liability (primarily several liability )

Profits ”in kind” (no joint sales profit)

Budget, plan, decision (extensive provisions)

Relevant carachteristics Ther duty to

contribute is essential

Joint venture on the cost

side, but not on the income

side

Knut Kaasen 2016

DEFINITIONS I THE JOINT VENTURE II FINANCE III THE ACTIVITIES IV FIELD DEVELOPMENT V SOLE RISK OPERATIONS VI DISPOSAL OF PETROLEUM VII ASSIGNMENT ETC. VII MISCELLANEOUS PROVISIONS

Knut Kaasen 2016

“Less a legal animal than a commercial one”?

Knut Kaasen 2016

Generally: - joint operations for a common objective, - limited in terms of timeframe, legal basis, material objectives

Economically: The level of production is decided, resulting in need for covering investment capital and operations costs, which both are covered by the “cash call” system

(Like in most JVs in extractive industries)

Decisions: - Majority decides, - except field development etc.

Liability: twds. third parties: Joint and several liability for joint operations

Knut Kaasen 2016

“The joint venture established pursuant to this Agreement shall not be considered to be a company, cf. […] (the Companies Act) Section 1-1 fourth paragraph.”

(PL art. 1)

Knut Kaasen 2016

5.1 The main points of the economics of the JV

- Capital basis: No working capital, no joint income by joint sales of product, necessary funds by “cash calls” - Joint assets: “The Holy Trinity

- Profits: Gained by individual “lifting”

- Tax: No “ring fence”, no joint tax levied on JV

Knut Kaasen 2016

5.2 The basis for the cash call

- Generally Decisions by the MC based on rolling budget system - Implies that important aspects are • budget provisions • voting provisions • scope of JOA

Knut Kaasen 2016

5.3 Consequences of default

- non-defaulting parties obliged to advance the defaulted amount

- loss of right to vote in MC (after 5 days) - loss of right to lift petroleum in kind - obligation to pay penal interest - obligation to assign participating interest Knut Kaasen 2016

5.4 Are the default remedies effective?

- tail end production / abandonment phase

- loss of right to vote

Knut Kaasen 2016

“The management committee is the supreme body of the joint venture. Each Party shall contribute to the management and control of the joint venture activities.” - “The management committee itself shall deal with and decide matters pertaining to: […] c) All matters pertaining to co-operation with licensees of other licence areas; […] e) Any other matter being submitted for consideration by any of the Parties; f) Any other matter as specified in this Agreement; and g) Procurement and contract strategy, […]”

(JOA 1.3)

The general role of the MC

Knut Kaasen 2016

«Unless otherwise specified in this Agreement, a decision by the management committee is adopted when at least [y] of the Members representing at least [x] % of the participating interests have voted in favour of a proposal…»

«x» and «y» are decided by the Ministry

based on - likely constellations within group - the group should not become impotent - encouraging opposing views - protecting minority interests reasonably

Knut Kaasen 2016

- removal of operator - limits for exceeding budgets - thresholds for competitive bidding - gas lifting and balancing agreement

Knut Kaasen 2016

WHEN do the voting rules apply: THE SCOPE OF THE JOA

The area where

• the minority may be forced into activity by the majority (the alternative being to withdraw/sell) • The minority may be forced into non-activity by the majority (the alternative being “sole risk”) • the state has the upper hand regarding the rules of the joint venture

Knut Kaasen 2016

WHEN do the voting rules apply: THE SCOPE OF THE JOA

The scope is defined by reference to - time, - place and - subject matter of activities adopted by majority Add up to one important criterion: The point of the JOA is to enable to participants to benefit from the rights provided by the PL and to fulfill the obligations imposed on them by the PL

Knut Kaasen 2016

6.4 Limits within the scope: Issues not subject to majority control

The decision as to whether to develop a proven deposit is not subject to voting at all.

«sole risk operations» allow certain activities to be undertaken at the sole risk of participants that do not constitute a quorum

Knut Kaasen 2016

“ The Operator shall carry out and administer the day to day management of the joint venture activities.” “The activities shall be carried out in accordance with - the terms of this Agreement, - the decisions of the management committee, - the conditions specified in the Production Licence, - applicable law and other resolutions made by the authorities.”

General role in JV

Knut Kaasen 2016

- Appointed in PL - Criterions?

WHO ?

“The Operator shall in its capacity as such neither have profit nor loss through the execution of its duties, unless otherwise provided in this Agreement.”

“NON PROFIT”

Removal / resignation

Partner Forum “The Operator shall establish a partner forum for joint ventures having the same operator.”

Knut Kaasen 2016

- Appointed in PL - Criterions?

WHO ?

“The Operator shall in its capacity as such neither have profit nor loss through the execution of its duties, unless otherwise provided in this Agreement.”

“NON PROFIT”

Removal / resignation

Partner Forum “The Operator shall establish a partner forum for joint ventures having the same operator.”

Knut Kaasen 2016

- better to control premises for decisions than to decide? - detailed insight/control

- experience

Why attractive position?

Knut Kaasen 2016