JOINT OPERATING AGREEMENTS Sean Rush September 2012 Summary

JOINT OPERATING AGREEMENTS Sean Rush September 2012

Summary • Introduction to JOAs • Model Forms • The Operating Committee • Annual Work Programs and Budgets • Funding • Default • Disposal of Petroleum • Exclusive Operations • Access to Infrastructure • Transfers • Governing Law and Dispute Resolution • Case study • Q&A 2

Functions Two Key Functions • Establish basis that International Oil Companies (IOCs) share rights and liabilities as a Joint Venture under the Permit “all the rights and interests in and under the Contract, all Joint Property, and any Hydrocarbons produced from the [Permit] Area shall, subject to the terms of the [Permit], be owned by the Parties in proportion to their respective Participating Interests” (Clause 3. 2 AIPN) • Provide for conduct of Operations under the Permit “In the conduct of Joint Operations Operator shall. . . neither gain a profit nor suffer a loss as a result of being the Operator in its conduct of Joint Operations. . . ” (Clause 4. 2 AIPN) 3 Introduction to JOAs

Division of Rights & Liabilities Introduction to JOAs Sharing of Rights and Liabilities as a Joint Venture • Joint and several under the Permit • Property acquired is ‘Joint Property’ • JOA divides rights and liabilities by reference to Participating Interests • Relationship with Government defined by Permit remains joint and several • Relationship between Participants defined by JOA Permit Joint and Several Liability Permit Holder IOC Several Liability The Permit describes relationship between Permit Holder (one or more IOCs) and Host Country. IOC If only one IOC no JOA is applicable. 4 Host Country

Conduct of Operations Introduction to JOAs Conduct of Operations • Overall supervision by the Operating Committee • Operating Committee Governance – Empower Operator • Structure the annual work program and budget development and approval process Liable on behalf of JV Operator IOC 5 Several Liability IOC Third party suppliers and contractors

Unitisation and Unit Operating Agreements Introduction to JOAs • Reservoir straddles two or more Permits • Supersedes and supplants JOA provisions in respect of ownership and operations within the Unit Area • Contains additional terms relating to Unitising and Redetermination • See ‘Unitisation and Redetermination: Winning the End Game’ http: //www. memerycrystal. com/uploaded/Articles/other%20 files/Memery%20 Bank%20 -%20 Natural%20 Resources%20%20 May%202010%20 -%20 Unitisation. pdf Permit A Permit B JOA A JOA B Unit Area Boiler Ave, Spindle Top 1903 6

The Contractual Matrix Introduction to JOAs Government Equity/Debt Finance Permit Joint and Several Sponsors (International Oil Co’s) Product Sale IOC + + IOC Several Contractors/ Service Providers 7 3 D Shoot Access Agreement Decommissioning Security JOA Parent Guarantee Operator Product transport to market Drilling Well Services EPC FPSO

Model Forms Many types of Models - Just a starting point • AIPN, AMPLA, OGUK, CAPL, PJVA, Norway……. • Consider who developed your model, the type of production; issues relevant to the draftsperson – Operator draftsman? (UKOOA, AIPN) • Onshore – Historically more control to Operators – ‘Investment’ non - operators • Offshore – Greater costs/liabilities – Less flexibility to access Joint Property – Petroleum company Non - Operators • Maturity of Basin? Expl? Prod? Decom? » Consistency of processes across the portfolio 8

Model Forms Just a starting point • AIPN, AMPLA, OGUK, CAPL, PJVA, Norway……. • Consider who developed your model, the type of production; issues relevant to the draftsperson – Operator draftsman? (UKOOA, AIPN) • Onshore – Historically more control to Operators – ‘Investment’ non - operators • Offshore – Greater costs/liabilities – Less flexibility to access Joint Property – Petroleum company Non - Operators • Maturity of Basin? Expl? Prod? Decom? » Consistency of processes across the portfolio 9

Model Forms Just a starting point • AIPN, AMPLA, OGUK, CAPL, PJVA, Norway……. • Consider who developed your model, the type of production; issues relevant to the draftsperson – Operator draftsman? (UKOOA, AIPN) • Onshore – Historically more control to Operators – ‘Investment’ non - operators • Offshore – Greater costs/liabilities – Less flexibility to access Joint Property – Petroleum company Non - Operators • Maturity of Basin? Expl? Prod? Decom? » Consistency of processes across the portfolio 10

The Operating Committee • Establishment • Scope • Meeting Rules • Passmarks: unanimous, super, general – Fiduciary duty? • General Powers – Appoint/replace Operator – Approve WP&B – Approve Development Plan – Other matters brought by an Owner • Supervise Operator 11

The Operator • Appointment/resignation/removal • Removal – Insolvency – Op. Com Resolutions – Vote – Timing • Standard of conduct • Planning, work programs, HSE plan, contracting • Maintain licence • Insurance • Records/information dissemination ". . . conduct all Joint Operations in a diligent, safe and efficient manner in accordance with such good and prudent petroleum industry practices and field conservation principles as are generally followed by the international petroleum industry under similar circumstances" (Article 4. 2(b)(2) AIPN Model JOA) 12

Operator Liability "In the conduct of Joint Operations Operator shall. . . neither gain a profit nor suffer a loss as a result of being the Operator in its conduct of Joint Operations. . . " (Clause 4. 2 of the AIPN Model JOA) • Neither the Operator nor its Affiliates or employees are liable for losses incurred while carrying out Joint Operations • EXCEPT, where loss or damage caused by Gross Negligence and Willful Misconduct of its Senior Supervisory Personnel • ALWAYS, liable for its share of Participating Interest as a Permit holder » Often contentious - Neither gain nor lose? - Vicarious liability? - Indemnity for negligence? 13

Annual Work Programs and Budgets • Developed by Operator • Approved by Op. Com • Variations between phases: – Geophysical operations – Exploration and appraisal – Pre-development and development – Production – Decommissioning 14

Funding • Joint Account • Cash Calls • Authority for Expenditure (AFE) • Accounting Procedure 15

Default • Structure: – Lose Op. Com Vote – Lose entitlement – Lose interest – Non-defaulting participants fund default amounts • Alternatives – ‘withering’ interests – Mortgage type provisions » Use Care When Drafting Your Default Notices! 16

Disposal of Petroleum • Each Party has the right and obligation to own, take in kind and separately dispose of its Entitlement (PI share of production) • Crude Oil - separate lifting agreement • Natural Gas - principles of Natural Gas agreements with the Government or with third Parties • Joint selling = partnership? (tax, competition) 17

Exclusive Operations Sole Risk/Non – Consent • Permit (several rights) entitles • Resolves inter-company differences • Available during different phases – Exploration/Appraisal wells – Declaration of Commerciality – Development plan Non – Consent Buy back • Traditionally 10 X well value 18

Use of Joint Property • Third party (non-JV) use of facilities subject to unanimity unless stated otherwise • Outside scope of JOA generally, Norway/Denmark have legislated • Moves in the UK to standardise and streamline • See: Access to Infrastructure: The Past, The Present and … A Future http: //www. memerycrystal. com/uploaded/Articles/other%20 files/Access%20 to%20 Infrastructure% 20 on%20 the%20 UKCS%20 -%20 SR%20 -%20 Feb%202012. pdf 19

Transfers • ROFRs (pre-emption rights) • Drag along rights • Asset/package/corporate • - affiliates? • Financial/technical objections • Withdrawal 20

Governing Law and Dispute Resolution • Governing Law • Exclusive jurisdiction? • Forum? • Enforceability 21

Case Study – Sub Sea Tie Back to FPSO 22

Extension of Field 1 • Interests: 60: 20 • Extension approved at Op. Com • Production lifted by each Owner by shuttle tanker • Gas exported to gas pipeline and allocated after processing • Passmark ‘ 75%’ • Fiduciaries? • Interests changed to 80: 10 • Transfer – Financial capability challenge 23

Case Study – New Field 3 • Same Owners as field 1 & 2 but 50: 25 • No Op. Com approval to develop • Sole Risk – Appraisal? – Development? • Pre-emption • 3 rd Party Access to Infrastructure – unanimity 24

Case Study – New Field 4 • Owned by field 1 & 2 Operator 100% • Hard yards were done!! 25

Final Configuration 26

QUESTIONS Q&A 27