The Control Power of the Operating Committee

A Joint Operating Agreement (JOA) creates a contractual duties of performance of unincorporated joint ventures. There is difficult long term relationship between operator and non-operator which is not a partnership. Therefore, the performance of the joint operations by the operator on behalf of the parties, non-operating participants through the JOA seek to secure their interest and have some degree of control over the operator’s performance of the joint operations. This article considers the control power of the Operating Committee (Opcom) and identify the contractual control mechanism of non-operators to the operator.

The Opcom is the ‘brain of the joint venture’,governing the relationship between the operator and non-operators in connection with control and authorise all joint operation. The concept of Opcom is committee of nominated representative of non-operators which sits above the operator. The operating committee is established to “exercise overall supervision and control of all matters pertaining to the Joint Operations”. However, not every JOA recognise the idea of the OpCom such as US model form JOAs like CAPL and AAPL.

The role of non-operators are involving in financial part of production to contribute when faced with pro rata for cash-call which is payment for operational expenditures. Non-operators are ‘passive investors’ so Opcom is controlling and monitoring formation by non-operators. The position of operator and non-operator are much more balanced where the operator has dominant role in the past. It is obvious the reason that “the operator is usually the participant with the largest interest. The rationale behind this is that the participant with the largest interest will incur the greatest expenditure and greater commitment will be generated in matters of co-ordination and conduct of the Operations.”

One of the most significant duty of Opcom is that carry out the work programme required by the government authorities. Regard to the operator’s daily duties and exploration and development activities, the voting mechanism under Opcom allows non operators to create control power over the operator’s attacks.  The representative’s percentage of votes represent their interests under the JOA, with decisions being taken by a voting control procedure. The Opcom reach binding decisions when the passmark (also stated as affirmative vote) which laid down in the JOA, not less than the stated percentage. In other word voting interest of each representative parallel to percentage of affirmative vote. To manage activities and operations in the joint venture, the participants need to get majority portion of the votes in the Opcom. In other words, it necessary to get minimum passmark to compose. Generally, the passmark is between 50% - 70% in JOA’s. The higher passmark gives control on governance the joint venture to the minor interest holder. The benefit of the lower pass mark, the largest interest holder gets more power to continue the work. However, the agreement depends on the joint ventures. For non-operators to work in collaborate will give power against the operator.

In circumstances where the Opcom may be exposed to pressure as a result of dispute between the participants. Other contractual mechanisms create opportunity for the operator and non-operator to progress with a particular operation without jointly allocating the risks. Thus, many JOAs therefore include ‘sole risk’ and ‘non-consent’ clauses play significant role to solve conflict where voting mechanism deficient to protect a party’s interests. Non-consent provision gives a party can opt out from a particular operation or segregate itself to not participate in an activity which has been already accepted by the Opcom and succeed in getting the passmark. Therefore, the remaining parties who going ahead with it have more interest sharing of the costs and risks. On the other hand, sole risk clause provides opportunity to undertake a project or activity when failed to obtain the pass mark. Thus, the sole risk members who will be solely liable and share all the costs, risks and liabilities of the activity.

There is contractual right for non-operators to request information and audit the account. Therefore, another way to monitor the operator via work programmes, budget which prepared by operator on annual basis through the authorisation for expenditure (AFE) which provides control over the operator. The non-operators request it any time when the operator exceed the budget under such as inspection clause of the AIPN.The work programme describe operation of the joint venture will carry out in detail and the cost of those operations is determined in the budget. Nevertheless, from a non-operator’s view, an elaborate budget, work programme and AFE simplify monitor over the activities and operations. Therefore, the operator obtains less impact authority. To prepare work programme and budget in co-operation together with operator and non-operator creates less possibility of rejection of the work programme and budget or deadlocks. It is possible to say those provisions are significant guard for the non-operators but it is variable that some of the JOA do not have these control mechanisms such as American AAPL JOA. In comparison of OGUK and AIPN JOA models, OGUK model is the only way to hold under control of the work programme and budget provision over Opcom. On the other hand, AIPN model provides more power regard to costs.

Accounting procedure which attached to JOA, is another way to monitoring the operator expenditure under the ‘no gain no loss’ procedures which defined under AIPN 2002 schedule A.1.2. as; “The purpose of the Accounting Procedure is to establish the principles of accounting which shall truly reflect the Operator's actual cost to the end that the Operator shall, subject to the provisions of the Agreement, neither gain nor lose by reason of the fact that it acts as the Operator.”The audit the accounting is great opportunity for non-operators regard to inspect the operator. It is essential to limit the conduct such as expenses under the JOA.

The operator has right to enter into contract with third parties for type of activities and works. Parallel to this, there is some limitation to control the operator through approving, reviewing or managing mechanism under the JOA. During the formation of contract, the non-operator has right to enforce such contract under the conditions of JOA to eliminate problematic situations between the contractor and obstruct to enter into poor quality contract. Another significant point to consider for non-operator to review the wording in the contract. Depends on the name on contract, parties might jointly or solely liable. The situation is different in affiliate contracts, where the operator might give priority instead of third party contracts. The reason for that, the way of charging the cost. Therefore, the non-operators need to be careful for overcharge to eliminate the operator’s possibility of gain the profit from joint account between the operator and the affiliate contractor. Under the JOA, the non-operators can utilize the contractual right of audit the affiliate works expense where such as under AIPN JOA s.6.2.3 the operator oblige to avoid the conflict of interests between parties and contractors.

Another significant contractual right for non-operators is under ‘removal clauses’ which gives right to remove operator of operator from the party-operator if the operator defaults in its duties or obligations.The operator has to “good and prudent one” which gives less flexibility to operator. As in s.3.3.2 of the OGUK 2009; ‘the Operator has the right and is obliged to conduct the Joint Operations by itself, or through its Affiliates, its agents or its contractors, under the overall supervision and control of the Operating Committee. If the Operator does not conduct all or any of the Joint Operations itself, it shall nevertheless remain responsible for such operations as Operator.’

The question is whether the position of the operator creates fiduciary duty towards non-operators. The operator is an agent for the other participants. As a result of business relationship between parties, there is no implied fiduciary duty. However any breach by the operators of its fiduciary duties it has to be express clearly in the JOA otherwise joint ventures do not owe fiduciary duties. All parties are jointly liable unless there is no wilful misconduct or gross negligence by operator. In this manner the operators have to be transparent and clear. The definition of wilful misconduct has been given by Lord Alverstone CJ in Forder v Great Western Railway summarise as “reckless or deliberate action resulting in loss” The narrow definition of wilful misconduct creates difficulty at the point of proof. The operator should perform ‘prudently, diligently and reasonably’.

In conclusion, it is significant for participants to have ‘more balanced agreement’for clear and fluent progress in joint venture. This can be possible by cautious formed of the rights in a JOA. It is arguable that these controls over operators create irony between operator’s duty and control demands of non-operators. Therefore, well negotiated JOA neither eliminate the operator’s capacity of risk to participants can be taken by operator during the joint operations or limit the operator’s operational duty. The contractual control mechanisms and also the Opcom give an oppurtunity for the exercise of impact on the activities and expanding visibility to the non-operatoers. Unbalanced clause give possibility to the non-operators to request defence or relief form court.

The information and opinions which this article contains are not intended to be a comprehensive study, nor to provide legal advice and should not be treated as a substitute for specific advice concerning individual situation.