Mosburg Primer IJOA7 4-12-99-2a

Lewis Mosburg's
INTERNET OIL & GAS PRIMER™

INTERNATIONAL JOINT OPERATING AGREEMENTS

PART SEVEN: THE GOVERNMENT OIL COMPANY AS A CO-VENTURER

Article III of the AIPN International Operating Agreement does more than spell out the scope of the agreement and the participation of the parties in the rights and obligations created by the Contract. It also addresses the mechanics of dealing with the Government Oil Company ("GOC") when, under the terms of the Contract or the petroleum laws of the host country, the GOC is to be a co-venturer in the conduct of the Joint Operations.¹

It would seem to be "good news" for the industry parties to the Agreement that the Government has enough faith in its country's mineral deposit potential that it would be willing to join in the costs of exploring for those resources. Unfortunately, exploring for the minerals at its own expense, even partially, is not what the host country usually has in mind. Instead, "participation" by the GOC is simply a means of permitting the Government to take a bigger piece of the pie. Thus, the terms of the Contract normally will either limit the GOC's participation to the exploitation phase of the operations, or the Contract will require the industry partners to "carry" the GOC during the exploration phase.²

If the GOC is to bear, even on a "carried" basis, some portion of the costs of the Joint Operations, there needs to be an operating agreement in effect between the GOC on the one hand and the industry parties on the other. Certainly, the position of the Operator vis-à-vis the GOC needs clearly to be spelled out.

But should the industry parties "bear all" by including the GOC as a party to their operating agreement?

At one time, there was considerable concern, particularly among the Majors, as to the wisdom of having the GOC as a party to the industry JOA. Instead, the industry parties would enter into one operating agreement; then, a separate operating agreement would be negotiated with the Government Oil Company.

Today, the fears of having the GOC "know all" are less severe. Experiences of the industry in working with GOCs have frequently been quite good.³ And it is to be expected that the Government will often insist that a copy of the operating agreement among the industry parties be filed with it. If this is the case, how much sense does it make to negotiate a separate operating agreement with the GOC, rather than having it become a party to the more inclusive agreement among the industry members?⁴

What solution is provided in the AIPN Model Form? It probably comes as no surprise that the Model Form provides for alternatives.⁵ Under Alternative No. 1 of Article III, §3.4, if the Government Oil Company elects to participate in the rights and obligations of the working interest owners pursuant to the provisions of the Contract, it becomes a party to the same operating agreement signed by the other participants. Under Alternative No. 2, the GOC is to sign a separate operating agreement "with respect to the rights and obligations of Government Oil Company, on the one hand, and the Parties on the other."

Section 3.4 also provides that the Parties (i.e., the industry participants) will contribute proportionately to their Participating Interests the interest to be acquired by the GOC and shall execute whatever documents are necessary to effect such transfers. Payments received for such transfers are to be credited to the Parties in the ratio of their Participating Interests.

Next issue: "The Operator – In General"

¹The pros and cons of Government Oil Company participation under the Contract are discussed in Charles Moerbe's article on "International Operations: Contracts with the Government and Basic Concepts of International Operating Agreements," in the "Archives" section of this Newsletter under "International Operations." This article is hereinafter referred to as "Moerbe".

²For a discussion of the various types of arrangements to be found under typical Contracts with the host country, see Moerbe, op. cit. n. 1. See also the upcoming article by John Gustavson on "Types of International Petroleum Contracts" in John's ongoing series for this Newsletter on "An Introduction to International Petroleum Contracts."

³Obviously, there have also been some real horror stories!

⁴National petroleum law, the Contract, and economic and political realities will dictate some significant differences as to the treatment of the GOC vis-à-vis the remaining "Non-Operators."

⁵Of course, since it is not sure that the host country will have a GOC, or that the Contract will provide for its joinder as a participating party, §3.4 of
Article III – the "Government Participation" provision – is itself an optional provisions.

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