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INTERNET OIL & GAS PRIMERTM

INTERNATIONAL JOINT OPERATING AGREEMENTS

Copyright © 1996 by Lewis G. Mosburg, Jr. All Rights Reserved.

Author's Note

Last month, Charles Moerbe discussed the contracts which international oil companies

enter into with foreign governments to permit the conduct of operations for the discover and development of oil and gas reserves within those countries.1 Mr. Moerbe also

discussed some of the factors that distinguish and complicate international operations from those conducted within the United States.

Just as domestic joint operations require a "joint operating agreement," so do international joint operations. And just as domestic joint operating agreements are most commonly conducted pursuant to a "model form" developed by an industry association, international joint operating agreements frequently use as their point of departure the Model Form International Joint Operating Agreement developed in 1991 (and subsequentlyrevised in 1995) by the Association of International Petroleum Negotiators (the "A.I.P.N.").

This Primer will discuss international joint operating agreements, with particular emphasis on the AIPN Model Form.
 

 PART ONE: INTRODUCTORY CONCEPTS

In General. All operating agreement, of whatever type, have certain elements in common. First, if different companies own interests in different, segregated tracts, the agreement will need to pool the rights of the parties.2 Second, the agreement must set out a method for the conduct of the joint operations: who has the authority to make what decisions, and under which circumstances. Third, the agreement must contain a formula for participation in costs, production or revenues, and ownership of property and materials.3 Finally, the agreement for operational practicality should designated an "Operator" who, at a minimum, will control day-to-day activities, and should specify that Operator's powers, duties, compensation and replacement.

The international joint operating agreement must take into account the special circumstances involved in international operations. First, since the operating agreement is intended to implement the Government Contract, it should track its requirements and conform to its provisions: the international joint operating agreement is always subordinate to the Government Contract, not vice versa. The other attributes that are unique to operations in a foreign country in general, and to operations in this foreign country in particular, should also be taken into account.4 Finally, if the terms of the Government Contract require participation in the operations by a Government Oil Company, the operating agreement must take this into account.

Types of International Joint Operating Agreements. As was true domestically prior to the adoption of its "Model Form Operating Agreement Form 610" by the American Association of Petroleum Landmen, each major oil company that operates internationally will have its own preferred general form of operating agreement for international operations. These forms generally tend to grant greater authority and flexibility to the "Operator," which does not represent the preferences of the smaller companies. Accordingly, as the result of a cooperative effort by a number of companies, large and small, and of consultants, law firms, etc., the Association of International Petroleum Negotiators ("AIPN") has developed a Model Form International Operating Agreement.5

Several characteristics mark the AIPN Model Form. First, it tends to reduce the Operator's authority and discretion, giving more power and approval authority to the "Operating Committee"6 and the individual Parties. Second, it contains a large number of alternatives and options concerning how the operations may be conducted, so that the agreement terms can be tailored to suit the preferences of the particular parties to the agreement.

Where, as is normally the case, major companies are to be involved in the international joint operations, the AIPN Model Form is frequently still used as a point of departure for the operating agreement for the particular operations.7 However, the majors will normally insist that the form be modified, and the options/alternatives be exercised, so that the Operator's broader authority and flexibility is restored. Even those companies which insist upon the use of their own forms when they are to be Operators frequently have revised those forms to track the general format and wording of the AIPN form.

Tax Considerations. International operations subject the participating companies to multiple taxation, first from the country within whose borders the operations are being conduct, and second from the country of origin of each participating company. Thus, if Company A (a U.S. company), Company B (a U.S. company), and Company X (a French company) were all participating in the development of oil and gas reserves pursuit to a Production Sharing Agreement granted by the country of Somewhere:

  • All three companies would be subject to taxation by Somewhere concerning these operations.

 

  •  Company A and Company B would also be subject to U.S. tax laws concerning such operations.

 

  •  Company X would be subject to French tax laws concerning such operations.

As a result, Companies A and B might wish to see certain provisions contained in the contract which would not be needed - or even wanted - by Company X.

As we will see later in this Primer, United States companies will normally wish to see provisions in the international joint operating agreement relating to taking production in kind and United States tax elections. Some foreign companies may be particularly concerned about this latter issue, fearing that it might subject the company to U.S. tax obligations which would not otherwise exist for it. While such fears seem unfounded, the U.S. companies desiring such provisions may agree to indemnify the foreign companies against any increased tax burdens resulting from the provision.

The differing tax consequences to the various companies to the operating agreement may also provide an opportunity for "win/win" structuring, by permitting one company to agree to a provision which has no adverse impact on it, but may have considerable benefit to another company which is subject to different tax consequences.

Next month:"An Overview of the AIPN Model Form"

1See Moerbe, "International Operations: Contracts with the Government and Basic Concepts of International Operating Agreements,"November, 1996 Issue (Vol. 1, No. 1), hereinafter referred to as Moerbe.

2For a discussion of segregated ("divided") versus concurrent ("undivided") ownership, see Lewis Mosburg's Internet Oil & Gas Primer™ on Mineral Title Examination (Part Two): "Multi-Party Ownership of Mineral Rights: Co-ownership," contained in this same issue.

In most instances in international joint operations, the participating oil companies will own undivided interests under the Government Contract, so that pooling may be unnecessary.

Not all operating agreements pool the rights of the parties throughout the Contract Area. See, e.g., the Rocky Mountain "Divided Interest" form.

3For both business and tax reasons, most operating agreements involving companies subject to United States federal income tax laws will provide for a sharing of production in kind rather than a sharing in revenues. The "whys" of this result will be discussed later in this Primer.

4A number of these special circumstances are discussed in Moerbe.

5The original 1990 version of the AIPN Model Form is now being replaced by a 1995 version. The Model Form is published by Barrows Company Inc., 116 East 66th Street, New York, N.Y. 10021, (212) 288-7242, fax: (212) 772-1199.

6In international joint operations, operations are normally "supervised," on a broad sense, by an "Operating Committee," which will set (or at least approve) the basic policies concerning the conduct of the operations.

The respective roles of the Operator and the Operating Committee will be discussed later in this Primer.

7Remember that, in any event, the form must be modified to conform to the provisions and requirements of the related Government Contract.

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Copyright © 1997, 1998, 1999, and 2000 by Lewis G. Mosburg, Jr. and Ogden, the Invisible English Sheep Dog

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