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Author interviews

Joint Operating Agreements

What exactly is a JOA and why is it so essential to oil and gas projects?

Modern upstream energy projects are characterised by the huge levels of investment required - many tens of millions of dollars are the basic table stakes, and with the costs of drilling a single well sometimes rising to a $100 million, this is very much a rich man's game. These projects are also fraught with all sorts of regulatory, commercial and practical uncertainties. This unique combination of expense and risk means that energy project participants often share the burden by forming some form of joint venture. The joint operating agreement (JOA) is the constitution for that joint venture; given the size of the investment that is required, the JOA is critical to the success of the enterprise.

So what are the key provisions in the JOA?

In basic form the JOA is very simple: it identifies the project to which it relates, identifies the parties to the joint venture (and their respective equity shares), and picks one of the parties to act as the operator. It also sets out a timetable for each party's contribution to the costs of the joint venture and provides a remedy to address a party's failure to pay its share under the JOA.

This all sounds simple enough, but the devil is in the detail. The fact that a full JOA (with appendices) will run to around 100 pages gives an indication of that detail - all of which must be appreciated if the JOA is to work properly.

Surely the JOA is very much a standard form contract which requires little creative input?

Over the years the upstream industry has developed several well-known model form contracts, but none of these contracts can simply be dropped into a petroleum project without (often significant) negotiation and redrafting.

Every upstream project is different, and every upstream project has a different range of participants, so every JOA will be different. The industry has generated a great set of starting places, but a lot of effort is required to get a JOA to a place where it is ready to make a real contribution to the project.

How have JOAs needed to change over the years, if at all?

Early petroleum project joint ventures were typically undertaken by major oil companies, which had cash in abundance but were neurotic about their reputations. These companies also had the advantage of undertaking projects when significant reserves of oil and gas were in prospect. They would have put a form of JOA in place to govern their relationship, but their inherent commercial behaviour would have done just as much to condition the operation of their project.

However, 30 or 40 years later we find petroleum joint ventures characterised by any combination of a focus on smaller new fields, end-of-life issues for old fields and the participation of a new breed of smaller, more entrepreneurial players which have less cash and which may be less concerned about the reputational risk of a default in their obligations. The JOA must be able to cater for these evolved circumstances, and a first-generation JOA might well be unfit for purpose.

There is also a geopolitical and cultural issue to consider - modern upstream projects are being undertaken in, and are involving joint venture parties from, a wider range of countries, not just the traditional petroleum economies.

To write this book I examined JOAs from all of the various periods in which petroleum projects have been undertaken, and from more than a dozen jurisdictions.

Can JOAs learn from, and be used for, other forms of joint venture?

The upstream JOA is a unique creature. Although there are some similarities with general commercial joint venture agreements, there is a huge danger in assuming that an appreciation of the latter sort of agreement will translate into an understanding of how to draft and apply a JOA. 
Paradoxically, the JOA lends itself to adaption for use in wider energy projects beyond oil and gas exploration and production.

What challenges face the upstream industry today and how does the JOA play its part in tackling those challenges?

It's a popular recital that the days of easy oil are over, but there is some truth in it. Oil and gas is developed from reserves in any combination of physically extreme areas, geopolitical risk zones and high-cost environments. The strains placed on the typical upstream joint venture in coping with these conditions mean that the JOA plays a vital role in holding the parties together so that their interests are properly protected.