Trinidad and Tobago has a long history of oil and gas production and as a result, there are Joint Operating Agreements (‘JOAs’) dating back to the 1990s that are still governing arrangements between parties to production sharing contracts and licences. There are numerous model form JOAs in existence which are regularly updated. Therefore, parties to older JOAs and those entering into new ones, have multiple approaches available to them when seeking to amend an existing JOA or enter into a new agreement. In this series of notes, we will examine a few of the key areas that such parties need to carefully consider when drafting and negotiating JOAs.
Liability of the Operator
The party appointed as the operator under the JOA, takes on the responsibility of conducting operations on behalf of all co-venturers that are a party to the production sharing contract or licence. One of the main issues to be agreed between the parties is the extent to which the operator may be held liable, separate and apart from its coventurers, for any action taken or not taken by the operator.
The operator will be required to conduct operations in a safe and efficient manner in accordance with good and prudent petroleum industry practices. In doing so, the operator should neither gain advantage nor suffer a loss by virtue of being the operator. The JOA as a general rule, will therefore specifically provide that neither the operator nor its affiliates or those who work for the operator, shall be liable for performing or failing to perform its duties as an operator and the operator’s coventurers will indemnify the operator against such liability. The area to be negotiated and agreed among the parties is to what extent this general rule will be inapplicable, thereby making the operator solely liable for its actions.
The usual practice among coventurers, is that the operator’s limitation of liability will apply even where the operator is found to be negligent, but the limitation of liability will not apply where the operator is guilty of gross negligence or willful misconduct. The operator however should only accept liability for the gross negligence or willful misconduct of a particular group of persons (usually defined as its senior management personnel). This group is generally defined to include the directors and senior management which is broadly appropriate, however, smaller companies with flatter organisational structures may find that more persons within their organisation falls within a general definition of senior management personnel than expected. It may therefore be useful for such companies to seek to replace the traditional definition and specify the job grades or titles which will be considered as senior management.
Post Macondo, non-operators have attempted to make operators solely responsible for environmental liability, but this has been firmly resisted. Parties have however, sought to specifically provide that the operator has a duty to conduct operations in an environmentally responsible manner. This is with a view to arguing that an operator may be solely liable for environmental liability due to the gross negligence or willful misconduct of its senior management personnel.
Given that an operator receives no financial benefit over and above its coventurers for acting as operator, it will be in the operator’s best interests to seek a cap on any potential sole liability. The operator may therefore seek to cap its liability to a fixed dollar amount or to an amount that is ascertainable, such as the cost to repair or replace damaged property. In all circumstances the operator should also seek to include clear provisions, excluding liability for any consequential loss, such as loss of profit suffered by its co-venturers.