Upstream joint ventures bidding and operating agreements

exploration, appraisal and development. Amendments, though not rare, are less
common than might be expected for a document with a 30-year lifespan. Joint
operating agreements used not to deal with abandonment of operations in detail,
though this is more common now as the industry adapts to end-of-life and short-life
fields. Joint operating agreements vary in how much they deal with the sale of
production, depending on the environment in which they are to operate, and are
not usually the best place to tackle matters such as unitisation, onshore
developments, transportation or processing. This chapter will focus on the key
features of the joint operating agreement, but there is far more to say about each of
them than can be dealt with here and taking time to read a couple of such
agreements in depth (including the model forms put out by the AIPN and the UK Oil
and Gas Industry Association) will assist when it comes to working with joint
operating agreements in practice.

3.1 Controlling the operator

A joint operating agreement creates a contractual, unincorporated joint venture,
which is expressly not a partnership, though there are examples of joint operating
agreement-type provisions being included in shareholders agreements for
incorporated entities. As you would expect from its title, the control of operations is
a major part of the agreement. One party is appointed as operator with the role of
carrying out the joint operations, representing the joint venture to government and
third parties, and managing the internal affairs of the group, including meetings and
accounting. The operator performs these roles on the basis that it takes no additional
risk and obtains no additional reward for the role (ie, over and above its percentage
interest share). An operator will be an agent of the other participants and is usually
considered to have a fiduciary duty towards its co-venturers. The nature of that duty
and the consequences of breach have been extensively debated and litigated. The
joint operating agreement will set the standard to which the operator should
perform as that of a reasonable and prudent operator and will usually define it by
reference to what other operators would do in similar circumstances. This industry
benchmarking has variously been described as a soft or high standard depending
on the exact terms used and the circumstances of the breach. However, because the
operator functions on a not-for-profit basis, the joint operating agreement will
provide that it is only liable when guilty of wilful misconduct or for failure to
maintain insurances required by the venture. Wilful misconduct is another term
that is carefully negotiated and defined in the joint operating agreement; it usually
includes intentional or reckless acts and the debate will focus on whether to extend
the definition to include gross negligence (which is not a term that has a settled
meaning under English law) and what degree of foresight or seniority of
management is required before wilful misconduct will have been established.
Given this limited liability, many pages are devoted to the control of the operator
and of expenditure. The joint operating agreement will set up an operating
committee with representatives from all participants and delineate which matters
have to be considered at the operating committee and which have been delegated to
the operator. The operating committee will usually create (and a joint operating

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