JOA:Issues Challenges

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JOAIssues Challenges Governance of Inter se
relationship

• By
• J. Sagar Associates
• New Delhi, Mumbai Banglore
• New Delhi, December 10, 2004

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Designates an Operator
Rights/ Duties
JOA
Pools the rights of the Parties
Sets up OC
Authorization of expenditure
Financial security Default
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Outline

• The Context Interse allocation of Rights and
  obligations amongst JOA Parties
• Key JOA Issues
• Joint Operations
• Operating Committee
• Deemed Withdrawal
• Final Thoughts/Key Take Away

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Context

• JOA r/w PSC nominates an Operation to conduct
  Petroleum Operation in the Contract Area on
  behalf of the Consortium
• Operator is akin to the lead project developer
  with certain rights, duties and obligations to
  conduct Joint Operations on behalf of the
  Consortium
• Operator binds the other Consortium members to
  the Petroleum Operations under PSC subject to OC
  and MC approval
• Takes the lead in finalising the Work/ Appraisal
  Programmes and finalises the POD on behalf of the
  Consortium

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• RIGHTS AND OBLIGATIONS OF OPERATOR/NON-OPERATOR

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Rights of an Operator

• Operator shall have exclusive control of all
  Joint Operations.
• To conduct all joint operations in a diligent,
  safe and efficient manner in accordance with good
  and prudent oil field practices including
  carrying out Petroleum Operations as per GIPP.

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Obligations of an Operator

• Perform the duties for the OC and prepare and
  submit to them the proposed work programs,
  budgets and AFEs.
• Acquire all permits, consents etc. that may be
  required under this JOA.
• Allow the representatives of any of the parties
  reasonable access to the Joint Operations and to
  inspect all Joint Property and conduct financial
  audits.

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Obligations of an Operator

• Maintain the PSC in full force and effect.
• To make prompt payment and discharge all
  liabilities etc. in connection with joint
  operations and keep all the joint property free
  from encumbrances etc.
• To make all periodic payments, taxes, fee and
  other payment pertaining to Joint Operations.

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Obligations of an Operator

• To carry out the obligations of Contractor
  pursuant to the PSC.
• To represent the parties in all dealings with the
  Govt. with respect to matters arising under the
  PSC and JOA at MC meetings.
• Furnishing expenses statement of joint operations
  to the Non-Operator(s) and to raise cash calls.
• Give access to the areas of joint operations with
  the right to observe any and all Joint
  Operations.

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Obligations of an Operator

• To defend the Non-operator any and all claims
  etc, relating to Joint Operations.
• Operator to maintain insurance under the PSC and
  other laws.

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Rights of Non-Operator

• Right of reasonable access to the Joint
  Operations and to inspect all Joint Property and
  conduct financial audits.
• Receive expenses statement of joint operations
  from the Operator.
• To receive from Operator various data and reports
  related to the Joint Operations.
• To have access to all other data acquired in the
  conduct of Joint Operations.

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• KEY ISSUES JOINT OPERATIONS/ OPERATING COMMITTEE

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Key Issues Joint Operations

• Petroleum Operations in accordance with GIPP
  HSE compliance
• Transparent Data sharing

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Key Issues Operating Committee

• Conduct of the Parties Active vs Sleeping
• Scope of Petroleum Operations
• Finalisation of Plan of Development

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DEFAULT AND FORFEITURE
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Legal Perspective

• Why should there be a forfeiture provision?
• high investment risk.
• unique requirements of OG industry
• very high initial investment and estimation of
  return at a very late stage.
• requirement to make regular payments made by
  operator to sub-contractors.
• unfair to expect one party to carry financial
  obligation.
• parties receive proportional benefit from the PSC
  hence they should also pay the expenses
  accordingly.
• All investments are already approved by the MC
  having representation from all the parties.

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Legal Perspective

• What does a typical default and forfeiture
  provision contemplate?
• It says Operator shall make cash calls and the
  Non-Operators are obligated to pay the cash calls
  at that time without question. In case of non
  payment of the cash calls or untimely payment of
  cash calls, a defaulting party, may amongst other
  remedies, have to forfeit its participating
  interest and withdraw itself from the PSC and the
  JOA.

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Legal Perspective

• What does the above mean?
• Operator to
• - make cash calls
• - which non-operators are obligated to pay
• - at that particular time
• - without question
• - untimely or non payment may lead to default,
  and
• - the defaulting party may
• - have to forfeit its participating interest
  and withdraw from the PSC and JOA.

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Legal Perspective

• "Equity abhors a forfeiture.
• The object of "Equity" is to render justice more
  completely by affording relief to a party based
  on grounds of fundamental fairness and justice
  where a court acting in law may not be able to
  furnish such relief if the law does not allow it
  to do so.
• Courts do not want to take a property right away
  from a party unless it is unavoidable.
• Party seeking to enforce the forfeiture has an
  uphill battle to have the forfeiture granted.

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Legal Perspective Compensation under Indian law

• Critical provisions are s. 73 and 74 of the
  Indian Contract Act, 1872.
• Law allows liquidated damages but not
  penalty.
• Section 73 Allows compensation for loss or
  damage caused by breach of contract.
• Section 74 Allows compensation for breach of
  contract but this compensation shall not be more
  than the penalty stipulated for in the agreement.

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• Damages payable on breach may be of the following
  kinds
• i. Genuine pre-estimate of liquidated damages
• ii. Liquidated damages based on a definitely
  ascertainable and quantifiable formula
• iii. Liquidated damages far beyond the actual
  injury that would be suffered in the event of
  breach and
• iv. Penalty in the form of overtly estimate
  damages.
• The first two are recognised under Indian law
  but last two are not.

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• Supreme Court has recently held in ONGC versus
  Saw Pipes JT(2003) 3 SC 171
• When parties have expressly agreed that
  recovery from the contractor for breach of
  contract is pre-estimated genuine liquidated
  damages and is not by way of penalty duly agreed
  by the parties, there is no justifiable reason
  for the arbitral tribunal to arrive at a
  conclusion that still the purchaser should prove
  loss suffered by it because of delay in supply of
  goods.

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• However, the above case did not deal with a
  situation when the pre-estimate figure under the
  conract is itself a penalty.

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Conclusion

• Whether forfeiture is reasonable compensation
  or penalty is not very clear.
• Upon default, the defaulting partys interest in
  the PSC and JOA may be withdrawn.

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Final Thoughts

• Transparent Data Sharing w.r.t Well Reports
  Seismic Data Subsurface Analysis.
• HSE Liability
• Non-Operator should play more active role
  (especially non-EP)
• Misrepresentation Material breach issues

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Thank YouAmit Kapur, PartnerVenkatesh R.
Prasad, Sr. AssociateVishnu Sudarsan, Associate