Joint Operating Agreements and International Oil Production Law - Essay Example

? Joint Operating Agreements and international oil production law Joint Operating Agreements and international oil production law The oil and gas industry has particular frameworks, which have been carefully crafted and instituted as well accepted agreements and are often referred to as JOAs (joint operating agreements). The traditional perspective of the parties to a joint venture held the operator with a high regard as the one performing the consortium’s operations while the non-operator as a mere financial contributor. In a consortium, it is necessary that one identify the different roles played by either party in order to avoid confusion that would result to increased litigation risk as well as uncertainty of jeopardizing the purposes of such a consortium. Joint ventures are common among the operators within the oil and gas industry in order to tray and minimize operation risks as well as technical challenges often faced while in the normal operations in the industry. Companies involved in exploration of oil and gas, general exploitation of the same as well as appraisal and production activities are in recent times being not executed by single companies but through collaboration by many companies. These joint ventures therefore share in towards contributing for expenditures and other costs incurred and share the proceeds realized in the exploration and exploitation of the commodity according to individual company’s contributions. Joint ventures operate on the platform of sharing on capital investments as well as skills and expertise, which necessitates one company, which would lack such to benefit from the partner(s) in the venture. Joint ventures within the oil and gas industry enjoy such privileges as being unincorporated and hence they are not taxed and cannot sue or are sued for the reason of not having distinct legal personality. The terms of licensure of operations by joint ventures imposes some liabilities on them as stipulated by the governing authority, which the joint operating agreement purposely addresses. The JOA therefore have particular roles in regulating the obligations, relationships as well as the rights that govern the parties in a joint venture. Normally, the agreement is binding over lifetime or until the joint operations ceases because of completion of a task or otherwise as would be determined in termination of a contract. It stipulates the funding procedures as well as the voting procedures and has other stipulations on mechanisms to address corrective measures instituted in the event that a partner fails to act in accordance to the agreement. Therefore, the general infrastructure of the legal framework guiding the joint operating agreements is binding and well laid out. The parties therefore undertake a critical outlook into the structure of the JOA regarding any unforeseen eventualities, which would occur in the future. However, it is worth noting that the formulation and adoption of a JOA framework must be based on an existing legal structure such as the English law, which then stipulates the institutional framework that would govern the running of the agreement between the parties engaged in the joint venture (Jensen and Failat, 2013, p. 1-13). National governments as well as foreign companies interact in the industry of oil and gas through consent through negotiated contracts. NOC (National oil companies) normally gets involved in the exploitation of and exploration for oil through signing into contracts such as concession agreements, service contracts, joint venture contracts as well as production sharing agreements, which involves collaborating with other external companies in the oil and gas deals. Nevertheless, the operations of such contracts involving the national oil companies as well as other external companies necessitates the operation-ization of a structure that would be instrumental in outlining the operations of the agreement and this is formalized through the JOAs. The evolution of legal structures that govern the operations of companies in joint ventures within the gas and oil industry dates a long way back. However, the operations of joint operating agreements are a relatively new concept in the field of exploration and exploitation of oil as well as gas. The main difference notable between the modern day joint ventures and the traditional joint ventures lay in the manner of operations where traditional joint ventures had distinct roles. Exploration and discovery of the oil and gas was separately done by some ventures while the actual exploitation and processing was designated to a different joint venture as would be constituted in the process. This ensured equal distribution of risks as well as sharing of returns realized in the process of exploration. On the other hand, the modern joint ventures as governed by the JOAs carry out almost all work with the advantage of sharing the risk and assets owned. Modern day joint ventures equally get formed through three main ways which are the partnership, contractual joint ventures as well as corporations but are all regulated through the joint operating agreements (Al-Emadi, 2010, p. 645-660). For example, a recent move by the oil dependent republic of Nigeria to adopt sharing of contracts in oil production within the country as against the joint operating agreements have received increased attention especially by the scholars in the field of oil and gas exploration. In one such study, Ameh undertook a study to investigate the repercussions or benefits accruing to players in the new dimension of contract sharing where the national oil company becomes a party to the contracts. He points out that the main oil explorers within the country are the multinational companies which are under direct control by the NNPC (Nigerian National Petroleum Corporation) acting as an oversight authority on behalf of the national government. The study found out that the initial procedures adopted and followed in exploration/production of oil were the JOAs while recent emergence of production sharing contracts are seen to be slowly taking over the sector. The history of the country as an oil producing country shows that though Nigeria have been a member of OPEC, it has predominantly not partisan to having all control of oil and gas production vested upon the NOC as other country members would have. On the contrary, Nigeria allowed multinational oil companies to participate actively under the JOAs through which the national government of Nigeria and the participating companies interacted. Many multinational oil companies therefore actively participated in the industry within the country under the frameworks of JOAs. This therefore explains the dominance of these multinationals in the industry in Nigeria up to date and the JOAs actively participate and accounts above 90% in total production of oil in the country (Ameh, nd, p. 3). The Nigerian JOAs involve the NNPC, which represents the government as well as the multinationals, which operate in varying capacities and participatory interests as stipulated by the agreements. The main purposes of the JOA are to govern participating parties’ relationships, budget supervision as well as approval, lifting and sale of crude oil as well as provision of funds to the partners. In association to the working of JOAs in Nigeria, an MOU is drafted whose role is to govern revenue sharing by the partners, as well as stipulating the mechanisms of payment of taxes, industrial margins as well as the royalties. Nevertheless, JOAs face particular challenges in operation, which include the constraint of funding, where the difference in capacity by the different partners to contribute equally would lead to such a constraint. Besides, the participation of the government as represented by the NNPC in financial matters is restricted in the resource constraint faced through pressure of existing resources as shard among many needs of national interests. This therefore translates to reduced operations as well as reduction in revenue gains from oil exploration. Moreover, overhead operation costs are faced by the JOAs whenever the communities around the oil production zones require social amenities and such support from the oil producing companies (Ameh, nd, p. 7; Hollimon, 2005, p. 6-11). In the US, the recent past has seen an increased effort of oil and gas exploration and exploitation adopt the joint ventures as opposed to individual company oil exploitation. Among associated reasons have been that the industry is capital intensive thus often posing a challenge for an individual company to raise the required money for such processes as production and processing of oil. The industry equally poses high risks and as such, companies fear to take full exposure to such a risk. The exploitation of gas and oil require technological advancement, which would pose a challenge to individual companies hence the advantage of joint ventures. Besides, the joint ventures are easy ways of accessing resources which are necessary for the exploitation of the commodity and which would present a challenge for an individual exploring company. Other joint ventures also invest in processing and are active along the supply chains for optimization of gains in supply. Moreover, in order to realize the regulatory requirements and market positioning, majority of firms operating in the industry within US opt to work in joint ventures which aids in pulling together of assets. Joint ventures as also viewed as effective tools to avoid or escape the political influence within the industry hence most preferred within the oil producing US regions (Ernst & Young, 2011, p. 1). It is worth noting that just as is the case with other contracts, joint operating agreements often face challenges of disputes between parties involved, which has the potential of translating to great losses. Etteh undertook a study to analyze the occurrence of such disputes and the issues that are likely to result to these disputes among parties to a JOA. Well-drafted agreements are among other tools that are pointed out by the study to be most appropriate in avoiding such disputes between the member parties to the JOA. Fundamentally, the paper states that the JOAs have become fundamental necessities within the oil producing industry all over the world. However, the event that proper drafting of the agreements are not ensured, there is an increased tendency of disputes arising and this implies that it is very fundamental that all contentious issues revolving such joint operations must be addressed in the onset of agreements. Most important issues that need be addressed while drafting such an agreement include the need to have stipulated control in decision-making, well-structured and appropriately selected joint operating committee as well as well stipulated mechanisms of voting. Moreover, there is increased need to have budgets as well as other expenditures approved in transparent and well-represented manners in order to have consent by all parties involved. The operation agreement drafted requires to be very detailed in among other issues the issues of party compliance and participation to the joint venture’s activities, the issues of defaulting or violation of the terms of agreements as well as the general legal procedures that would be pursued in the event of such occurrences (Etteh, nd, p. 1-8). On the other hand, the analysis of operations of foreign companies and the national oil companies reveals that the FOCs invests in the risks involved in oil exploration as well as exploitation through agreements that stipulates the sharing method to be followed after oil is extracted. Many of the JOAs involve stipulations of the proportions of the oil produced that the FOCs benefit from as payment of the risks and costs incurred in exploration as well as in extraction processes. Nevertheless, it is worth noting on the outstanding difference between PSAs (Production-Sharing Agreements) as well as other such agreements in that while agreements may involve at least some form of compensation even in such an event that exploration fails to secure oil, the case with PSA is different. Under the production sharing agreements, the exploring company is only bound to benefit in the event that the exploration manages to discover the substance. The FOC is mandated to do entire exploration thus carrying entire risk, which I the event of failure to discover oil, then the company is not compensated. On the other hand, the government through the NOCs owns both the installations as well as the resource at hand and thus has absolute power over such processes of exploration as well as exploitation (Bindemann, 1999, p. 1). There has been active participation in drafting as well as adopting of international instruments through which the environmental impact by oil and gas exploration is addressed. These instruments vary depending on types of environmental impacts caused by the exploration and exploitation practices by within the countries. For instance, there have been in existence legal provisions against marine pollution by use of spillage of oil and such related effects. Lengthy procedures in implementing the national general environmental procedures are blamed on inefficiencies noted in addressing the issue. Drilling of oil, gas as well as the accompanying fluids holds a great threat especially through contributing to seaborne pollution. Among other legal frameworks developed are those concerning environmental conservation. This therefore requires countries to observe all possible ways of ensuring the environment remain unpolluted especially through such pollutants as the oil and gas materials. Other legal frameworks address the issues of neglecting of individuals who are the direct victims of such an environmental pollution as involving oil spills. The international legal frameworks therefore work to ensure that sound policies are made and imposed concerning the law and environmental management practices (Lyons, 2011, p. 1-5). In a specific case study involving environmental degradation and pollution by oils spills as well as gas flaring within the Niger delta, it is the observation of Benedict, the researcher that the operations involving the exploration of oil within the region lacks proper legislation to address the pollution matters. Transport process of oil from the region of Niger Delta is known to be resultant of much spillage, which is responsible for environmental pollution within the area. The evaluation of the social economic problems associated with oils exploration within the Niger delta shows that frequent conflicts often rock the area and thus the area suffered underdevelopment. This would be highly blamed on the poor institutionalization of environmental conservation legislations, which would ensure that the region develops favorably without the hazards posed by environmental pollution, by oil spills and gas flares (Benedict, 2011, p. 200-208). In conclusion, gas as well as the oil laws is basic tenets that any government must consider wherever prospects of exploring the oil and gas are thought of. This is because production of oil has associated social economic as well as legal implications which such frameworks would effective in addressing. Environmental pollution through such processes as oil spillage is blamed n causing adverse effects in not only the particular country or region but also globally by extension. There are however international legal frameworks under which the effects of pollution of environment by oil producing activities are evaluated and possible corrective measures taken by the international community. Nevertheless, international companies have been increasingly advised to observe best practices while in the business of oil extraction in order to minimize the effects of pollution as would result from uncontrolled practices. This policy has had great significance in the developing economies, which to large extents relies on multinational oil companies for exploration of oil. Oil exploration and exploitation have been shown to be a capital-intensive process, which has evolved gradually over the last years. A more new procedure noted among oil producing countries is the formation of joint ventures through which member companies share expertise, resources and spread on risks while undertaking the exploration processes. Besides, under the JOAs, the companies are in a position to institute guiding frameworks, which are binding on matters of sharing risks and gains realized in the exploration processes. The governments are often represented by the NOCs, which forms critical constituents to such agreements. Bibliography Ameh M. O. nd. The shift from joint operating agreements to production sharing contracts in the Nigerian oil industry: any benefits for the players? Available at:< http://search.mywebsearch.com/mywebsearch/GGmain.jhtml?st=sb&ptb=7D6132DF-BF5C-4DE2-BF46-D8281F5A12D4&n=77fc7109&ind=2013032713&p2=^Z7^xdm189^YY^ke&si=jenya&searchfor=The+shift+from+joint+operating+agreements+to+production+sharing+contracts+in+the+Nigerian+oil+industry%3A+any+benefits+for+the+players%3F++Ameh> (Accessed on 19 November 2013) Al-Emadi T., 2010. Joint Venture Contracts (JVCs) among Current Negotiated Petroleum Contracts: A Literature Review of JVCs Development, Concept and Elements. Geo. J. 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Joint operating agreements: which issues are likely to be the most sensitive to the parties and how can a good contract design limit the damage from such disputes? Available at:< http://www.dundee.ac.uk/cepmlp/gateway/?news=31272> (Accessed on 19 November 2013) Hollimon S. C., 2005. Joint operating agreement. Available at:< > (Accessed on 19 November 2013) Jensen B. and Failat Y. A., 2013. Oil and Gas Joint Operating Agreements: Default Provisions, A Dilemma by Default. Available at:< http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2317172 > (Accessed on 19 November 2013) Lyons Y., 2011. Offshore oil and gas in the SCS and the protection of the marine environment. Available at:< http://cil.nus.edu.sg/wp/wp-content/uploads/2010/10/OG_SCS_CIL-Part206oct2011-1.pdf> (Accessed on 19 November 2013) Read More