Exploring the New 2023 AIEN Joint Operating Agreement: A Leap Forward for Oil and Gas Joint Ventures
Corporate Commercial / UAE
Yanal Abul FailatSenior Associate,Corporate Commercial
The Association of International Energy Negotiators (“AIEN”), formerly known as the Association of International Petroleum Negotiators (“AIPN”) has recently issued the 2023 Model Joint Operating Agreement (the “2023 AIEN JOA”) and related guidance notes. This marks the first version of the association’s model joint operating agreement since the rebranding of AIPN into AIEN and updates the previous form known as the 2012 AIPN Model Joint Operating Agreement (the “2012 AIPN JOA”), which was an update of the 1995 and 2002 versions.
Whilst there are a number of other model joint operating agreements (“JOAs”) that are adopted in certain jurisdictions (for example, the Offshore Energies UK JOA in the UK and the Energy & Resources Law Association in Australia), the model JOAs issued by AIEN are the most frequently adopted models in oil and gas unincorporated joint ventures in the Middle East and North African region (“MENA”) (e.g. in Egypt, Iraq, and Oman) and globally.
Whilst the AIEN JOAs are principally based on US practice, oil and gas players in the MENA have traditionally opted for English law to govern their joint ventures. We are seeing, however, a trend of having joint operating agreements governed under the law of the Dubai International Financial Centre (the “DIFC”), a common law jurisdiction, or the local civil law governing the underlying concession or other host government instrument.
The 2023 AIEN JOA largely maintains the content of the 2012 AIPN JOA but reflects industry practices developed over the last 11 years and the current international political environment. In this article, we will briefly explore updates to the provisions of the 2012 AIPN JOA and new provisions featured in the 2023 AIEN JOA.
Non-Operator RightsA notable change to this provision is the introduction of an alternative provision regarding the representation of non-operators by the operator in interactions with the government. This alternative provision establishes a higher standard for communication and participation, entitling non-operators to receive notifications and attend meetings discussing “material matters.” This alternative may be suitable in jurisdictions where the operator engages with the government on a day-to-day basis for routine or administrative matters. However, drafters should carefully consider whether this approach is appropriate for their specific situation. If not, there are other ways to address this concern, such as restricting the operator’s duty to notify non-operators and limiting non-operators’ right to attend meetings to those involving government representatives of a certain seniority level.
Operations by Fewer Than All the PartiesOne key modification in the 2023 AIEN JOA is the provision relating to the conduct of exclusive operations. Under the 2012 AIPN JOA, when all parties involved in the agreement choose to partake in an operation initially proposed as an exclusive operation, it will be conducted as a joint operation. Under the revised provision, a proposed exclusive operation will automatically be deemed a joint operation if parties with collective participating interests meeting or exceeding the agreed passmark choose to exercise their participation rights. This modification guarantees that operations are executed in a way that represents the decision-making influence of the involved parties, a crucial factor in joint ventures.
The 2023 AIEN JOA also introduces a noteworthy alteration in Article 7.5 concerning risk-based premiums. Unlike the 2012 AIPN JOA, which only covered risk-based premiums for exclusive operations related to acquiring geological and geophysical data, exploration wells, and appraisal wells tied to a specific discovery, the 2023 AIEN JOA expands this concept by applying a risk-based premium payable by non-consenting parties if they elect to reinstate their relinquished participating interest in exclusive operations.
DefaultThe 2023 AIEN JOA includes some important updates to the default remedies available to the non-defaulting parties in case of default by one of the parties.
At Article 8.4.D, the 2023 AIEN JOA maintains the 2012 AIPN JOA position, namely that in the event that a defaulting party does not rectify their default within the default period’s 30th day, the non-defaulting parties are entitled to take action, which may involve mandating the defaulting party to withdraw from the joint venture or relinquishing their interest to the non-defaulting parties. However, any such transfer may be subject to host government consent, which can cause delays and uncertainty. In order to tackle this problem, the 2023 AIEN JOA mandates that if a party defaults and government consent is not obtained, that party must hold its interest in trust for the benefit of the non-defaulting parties and provides a right to the defaulting party to be indemnified by the non-defaulting parties for any subsequent costs and liabilities incurred by the defaulting party for which it would not have been liable had it successfully withdrawn from the joint venture. This provision provides an additional safeguard for the non-defaulting parties and ensures that the defaulting party cannot hold up the joint venture indefinitely.
The 2023 AIEN JOA incorporates significant modifications, particularly in the decommissioning provisions and Exhibit E, which now offer greater flexibility and expanded choices.
First, it provides two alternative provisions at Article 10.1.C dealing with how responsibility and liability for decommissioning are allocated if one or more (but not all) of the parties elect to assume control of and responsibility for facilities and equipment (other than wells) that were acquired for or contributed to the joint account as an exclusive operation, namely, such parties shall (i) enter into good faith negotiations with the remaining parties to agree the legal and commercial terms on which to assume control over and responsibility for all such facilities and equipment and the ongoing provision of any security under the petroleum host government instrument, or (ii) bear responsibility and liability in proportion to their participating interest under the JOA.
Second, it provides an optional provision in Section 8 of Exhibit E addressing decommissioning of wells that were in production prior to the effective date of the JOA and continued to produce for the joint account (that is, legacy wells) incorporates a mechanism for determining liability and contributions towards a fund intended to cover decommissioning costs associated with legacy wells.
Finally, it includes other revisions to the optional decommissioning procedures in Exhibit E, such as establishing escrow arrangements for decommissioning-related payments.
The updated decommissioning provisions and expanded options in Exhibit E are well-suited to the unique challenges and complexities that MENA-based joint ventures often face. These updates provide a robust framework for parties to address potential issues related to decommissioning and liability allocation, which is crucial in this region, given the diverse range of operating environments and regulatory, or lack of, requirements.
The second update to the default provisions of the 2012 AIPN JOA relates to the withering interest provisions. Under a withering interest provision, the defaulting party’s interest will decrease in proportion to the increase in the amount and the period of default. Whilst this default remedy has been maintained in Article 8.4, it is now optional. The withering interest provisions were introduced in the 2012 AIPN JOA to mitigate the perceived risks of an outright forfeiture clause constituting a penalty in certain jurisdictions. Whilst withering interest provisions can decrease the risk of the default provision being perceived as a penalty clause, the formulas used to apply withering clauses can be complicated, which has made them generally unpopular. Notwithstanding their intricacy, there are benefits to preserving this alternative, particularly for JOAs governed by English law or DIFC law.
The force majeure clause of the 2023 AIEN JOA has undergone revisions to rectify some limitations present in the 2012 AIPN JOA. The updated provision now allows a party hindered from fulfilling payment obligations due to adherence to economic sanctions laws (see below) to receive relief from those obligations. In contrast, the 2012 AIPN JOA made no allowances for parties unable to make payments, irrespective of the cause for non-payment, to invoke force majeure.
Moreover, state-controlled entities can no longer claim force majeure relief in specific situations resulting from changes in law or other governmental actions. The modified Article 16 ensures fair treatment for parties confronted with such scenarios, preventing unjust penalties.
The force majeure clause of the 2023 AIEN JOA has undergone revisions to rectify some limitations present in the 2012 AIPN JOA.
As a result of the increased enforcement of anti-bribery laws across the globe and the prominence of corruption cases in recent years, the 2023 AIEN JOA has been updated to reflect these developments. The 2023 AIEN JOA reinforces the anti-bribery and corruption measures established in the 2012 AIPN JOA by placing greater emphasis on compliance and the involvement of third-party contractors, with the operator assuming a heightened level of responsibility in these areas. Under The 2023 AIEN JOA, parties covenant that they shall not act in a manner that could result in a breach of applicable anti-bribery and corruption laws. The operator is required to establish and implement anti-bribery and corruption policies and procedures (Art. 4.2.B.16) and to conduct due diligence on independent contractors to ensure compliance with applicable anti-bribery and corruption laws (Art. 4.2.B.19).
Additionally, the 2023 AEIN JOA updates and strengthens the provisions for the removal of the operator if it admits to or is found to have violated anti-bribery and corruption laws. This includes instances where the operator has been finally determined in arbitration to have breached the relevant compliance warranties or covenants (See optional Arts. 4.10.B - D).
The 2023 AIEN JOA has brought about several updates and revisions to its key definitions, reflecting the evolving landscape of the energy industry, including:
Reference Rate: reference rate used for calculating interest, which now incorporates SOFR as a replacement for LIBOR. The 2023 AIEN JOA offers the flexibility of either “Average SOFR” or “Term SOFR,” ensuring that parties have the option to choose the rate that best fits their needs.
Consequential Loss: In the 2012 AIPN JOA, the definition was more specific, limiting the types of losses and damages that could be covered. However, the new definition provides a more comprehensive and non-exhaustive concept of consequential loss, allowing parties to have better protection against a wider range of scenarios; and
Delivery Point: The 2023 AIEN JOA introduces a more detailed description of the physical location and processing status of hydrocarbons at the delivery point. This includes the requirement for hydrocarbons to be metered to fiscal standards at the final stage of processing and/or treatment facilities.
Greenhouse Gas EmissionsThe 2023 AIEN JOA now contains optional provisions that address greenhouse gas emissions, reflecting the industry’s increasing attention to climate change mitigation. The new optional clauses require the operator:
to limit or mitigate greenhouse gas emissions during joint operations, incorporating this duty into the HSE plan and utilising available technologies and processes and, in particular, minimise (i) potential fugitive and venting sources, (ii) conduct detection surveys to identify unintentional sources and subsequent repair and mitigation of these emissions, (iii) optimise operational efficiencies, and (iv) eliminate or reduce flaring (see Arts. 4.2.b.2 and 6.6.A);
require contractors to seek to limit or mitigate greenhouses gas emissions resulting from their operations, products, and services, where such operations, products and services are being provided or delivered to or on behalf of the operator (Art. 4.2.B.20); and
periodically report on greenhouse gas emissions in compliance with applicable laws or industry guidelines and assess energy efficiency and emissions reduction opportunities for presentation to the operating committee during work program and budget reviews (Art. 4.4.A.16).
These revisions reflect a significant shift in the industry’s awareness that all energy players must contribute to the energy transition, and a broader energy mix will be critical to meeting the challenge of climate change.
Economic Sanctions The implementation of economic sanctions related to Russia, which have been imposed by international organisations such as the United Nations, as well as individual countries like the United States, the European Union, and the United Kingdom in the past years, has led to parties including sanctions-related provisions in their JOAs, which are now addressed in the 2023 AIEN JOA. The absence of such provisions in earlier versions of the AIEN JOAs resulted in some companies creating their own model provisions, particularly in dealing with national oil companies.
The 2023 AIEN JOA standardises the concept of economic sanctions in various provisions, including the obligation for operators to comply with economic sanctions in the conduct of joint operations and establish compliance policies and procedures (Art. 4.2.B.17), requiring the prohibition of M&A transactions that violate relevant sanction laws (Art. 12.2.E), and the treatment of defaulting parties that violate sanctions as a result of a change of control (Art.12.3.B). The 2023 AIEN JOA also clarifies that no party is required to perform any obligation that violates economic sanctions laws (including payment obligations) (Art.20.2.E) and introduces provisions that allow for the removal of an operator that commits violations of economic sanctions laws (Arts. 4.10.B.2-4). The optional withdrawal provision permits parties to withdraw when another participant has violated sanction laws, and their rights would not be assigned to the sanctioned party (13.3).
Human Rights The 2023 AIEN JOA marks a significant change from its 2012 predecessor by recognising and incorporating human rights principles. The term “Human Rights” and related obligations are defined with reference to the rights set out in the United Nations Universal Declaration of Human Rights (1948) and ILO Declaration on Fundamental Principles and Rights at Work, together with the principles set out in Part II of the United Nations Guiding Principles on Business and Human Rights applicable to businesses. Such obligations, include:
operators and non-operators alike are required to perform their obligations under the JOA in a way that respects human rights and complies with related laws, and this may include compliance with any additional guidelines and requirements of the operating committee relating to Human Rights (Art. 20.3);
the operator is required to manage joint operations and activities under the JOA in a manner that respects Human Rights (Arts. 4.2.B.18 and 6.6.A.7); and
the operator is required to consider human rights compliance when conducting due diligence on potential independent contractors (4.2.B.19).
While the provisions on human rights in the 2023 AIEN JOA are few and general, their inclusion is significant and highlights the importance of respecting and upholding human rights in all aspects of joint operations.
The 2023 AIEN JOA reflects the evolving landscape of the energy industry and the current international political environment and represents a significant step forward for the oil and gas industry, reflecting the evolving global landscape and the need for more sustainable and responsible practices. The revisions and additions to the JOA are crucial for the smooth functioning of oil and gas unincorporated joint ventures, and they will help ensure that the industry operates in a transparent, ethical, and socially responsible manner in the MENA and beyond.
For further information, please contact Yanal Abul Failat.
Published in June 2023
