Joint operating agreement

The first context is where there are multiple parties involved, with common operating agreements and rights (Black, Alexander and Hew, 22). The parties must be willing to carry out the operations for legal reasons. In some states, there are rules in place which discourages a single partner or co-owner from drilling the oil without the consent of the rest of the players. The law however may allow them to extract as a single co-owner if they have accomplished to protect the joint estate. The operating agreement provides a guide for all the operations since it contains all the terms and conditions of the operation. The second context is where there is need for separately owned adjoining oil tracts are combined (Ashong, Marcia, 14). Sometimes it may apply to leases and configurations that require to pool.

The goal of this scenario is to ensure that all parties involved in the oil extraction actively participate in the exercise. Also, the features of the tracts may attract parties that are identical to bring together their separately owned properties together. The combination of the parties helps them to spread the risks of operation across the parties. The methods of securing payments and the limitations of an operation are also stipulated in the agreement. There is no standard operating agreement in an oil lease because the parties in this industry have varying needs that must be adhered to. Therefore, there are provisions made for specific parties that are inherent to their transactions. However, most of these agreements have similar provisions. The similarity made it easy for the development of model forms that have beenwidely accepted in the oil industry.

Also, the JOA only bounds the parties temporarily. It has no implications in the long run, because the arrangement is required to last within a specified time period. Since the oil parties are working together for a common objective, they come together and combine resources. Also, the costs of operation as well as the risks are shared across the parties, making it easy to execute the operation. Lastly, JOA guarantees financial growth and the general business growth. The second key function of a Joint Operation Agreement is to identify the common conduct of operation for the parties under the license. The clauses are developed to guide the conduct of operations for the parties. Clauses such as sole risk and that of operators and non-operator and identified to make it clear the party that is liable to risk in case it occurs at some point in the course of the project.

The JOA brings together the participants economic interests for the success of the project. The operator under the agreement The good faith business judgment rule has been very helpful in the operation agreements in the oil industry in the past years (Libecap, Gary and James, 530). The standard does not account for practical uncertainties has not yielded great results in the industry. The major reason why the standard has not been successful is the exclusive managerial power. This managerial power has direct influence on the decisions that involve the agreement relationship. This exclusive managerial power in a joint party has been assigned with a relatively higher standard of conduct. Fiduciary standards are also commonly applied where the agreement relationship has been litigated. Control of joint operations In UK, the oil and petrol is controlled by the Crown pursuant which gives the Secretary of State for Energy to permit the search and drilling of the oil.

The licenses issues are contractual and it is executed in the form of deeds. The party given the license id granted the permission to extract and drill the oil from the sea bed of just the relevant block. The license can however carry out some other significant regulatory functions. The licensees are referenced in singular, even though the entity might have several co-licensees (Fendler, Frances, 245). In 2006, the El Paso court of Appeals made a ruling on the Tipperary case. The case involved Tri-star Petrol Company, who was the original operator. Tipperary complained that the original operator had failed in undertaking their primary duties as indicated in the JOA. For instance, the operator had charged the joint account and failed to provide proper billing adjustments. Other complains were the loss of meeting production requirements and loss of acreage.

An operator may be replaced in case of bankruptcy or when his interest held falls below 10%. Also, if he defaults on his duty or fails to rectify his mistakes can also lead to his removal. In a case study where the Texas Supreme Court reversed the Texarkana Court of Appeals, the court ruled that an operator must be served with a notice of change of operator in 30 days. On this basis, the court ruled in favor of Valence. The court however established that the agreement does not stop an operator from starting work before the end of the notice period. But in normal circumstances, a non-operator may not prevail in challenging AFE costs. Sole risk and consent The sole risk clauses are formed under the non-participation principles, where one of the participants does not participate in an oil operation.

The principles are incorporated in the joint operations agreement to avoid non-divergence issues among the participants. The applicability of the clauses may vary across committees. An oil project is said to be sole risk when it is presented to the operating committee but does not pass the vote of becoming a joint operation. The agency law addressees most of the questions that arise in the relationship between the operator and third parties, and it offers results which states that the agreement parties can sue or be sued. The doctrine of privity cannot be enforced all the time hence enhancing the suing option. In normal circumstances an operator cannot escape civil liability. The nature of the agreement requires the operator to be held responsible for the extent of the respective share. Liabilities to non-operators There is also another complex concern about the extent at which the operator can be held liable to the non-operators (Pereira, Eduardo G.

The policy faced a lot of challenges and criticism because it could not be applied against other creditors linked to the defaulter. Also, the policy did not have guidance on what to be done in a scenario where oil production had not commenced. The agreement was then manipulated to include a provision for forfeiture for default clause, which was accepted in the current agreements at no registrable charge. The clause was designed to insure that it’s only an outright forfeiture that can protect the non-operators and the defaulters. In some states, such as Australia, outright forfeiture can be attacked as a penalty or just as interference. This however does not make the agreement void. There is a legal argument that exists if the clause is treated as a penalty, that the amount defaulted might be less than the defaulters interest.

The court may want to establish whether the forfeiture is deemed as a mortgage or a security for money lent (Ocheje& Paul, 223). In some countries like the UK, the Registrar of Companies discourages the clause to be deemed as a security or mortgage, and the provisions in their joint agreements may not be recorded as charges for the companies. However, courts provision may vary across courts depending on the oil company legislation. The amount should not dissuade the debtor from defaulting. Many joint operational agreements have provisions for a clause that may be deemed void or unrealistic. This move prevents the whole agreement from being voided. For instance, the UK court ruled whether the default clause to the sale and purchase of SPA was penal or not (Holdings BV v Makdessi [2015] 3 WLR 1373).

An innocent party was entitled to withhold the deferred considerations. Allain-LeBreton Co. hereinafter, Le Breton Case), the Texas court of appeal ruled that the pre-emption rights only applied to sales. It therefore means that if a party exchanges interests concerning obligations to other parties, this should not be considered as a sale. Also, if there is an exchange of interest in one partnership to another partnership, this should not be treated as a sale too, and therefore in this case, there are no pre-emption rights triggered. Aitor (2017) supported these claims in his book "Development trends in the Azerbaijan oil and gas sector: Achievements and challenges. The civil law traditions were founded on rational and intellectual processes during the renaissance period. The scholars developed a set of codes which can be applied any numerous situations to help in the judiciary interpretations.

The judiciary did not have much control because they had no power. The legislators were endowed with more powers as the power within the governments separated. If the legislation was unclear, the judges could not interpret the statute. The judicial law was distinct, and the judicial decision was not static, but the law was formed through reasoning depending on the nature of the case at hand. This process made the judicial participation paramount, unlike the limited role that the civil law tradition had. Models that considered both the civil law and the common law systems were concerned with the source of every law as well as the role it plays in the law-making process. In the modern systems, the scholars do not overlook these features either. This forms a basis of comparing the systems and the result is minimized derived similarities.

Some transactions such as the transfer of mortgage to a third party are allowed in some states, and it benefits the oil investor in many ways (Spokas, 578). For instance, the investor can use it as a security for loans or to obtain more financing. This practice is common in the Latin America and it is widely used. For a transfer to be approved, the government must be aware. The daily oil rights under both laws seem to be similar with minute variances. Common laws are advantageous because they do not require a complete abolishment of the codes for it to work in the oil industry. The common law only perfects certain points that are supplemented by existing case laws. Summary Joint operating agreement binds two parties that are operating on a joint properties and development operations.

In an eventuality that one of the parties fail to pay the sum of money required as per the “cash call “ this may call for legal approach that is found in the default clause to settle the same. This is an essential clause which determines the parties’ relationship to the joint operating agreement. Ameh, Madaki O. The Nigerian oil and gas industry: From joint ventures to production sharing contracts. African Renaissance 2. Ariweriokuma, Soala. The political economy of oil and gas in Africa: the case of Nigeria. Resources &Envtl. L. Coale, Margarita TB. Stabilization Clauses in International Petroleum Transactions. Denv. Development trends in the Azerbaijan oil and gas sector: Achievements and challenges. Energy Policy 40 (2012): 282-292. Duncan, William D. Joint ventures law in Australia. Federation Press, 2012. Gómez Picañol, Aina. Transfers of interest in Joint Operating Agreements: The risks associated with pre-emption rights: from a contractual, legal and political perspective.

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