The 2023 AIEN Model International Joint Operating Agreement
In February 2023, the Association of International Energy Negotiators (“AIEN”) published the latest version of its Model International Joint Operating Agreement (the “2023 JOA”) and related guidance notes (the “Guidance Notes”). Four years in the making, the 2023 JOA has been designed to update the 2012 Model International Joint Operating Agreement (the “2012 JOA”), which has been widely accepted and used as the standard form joint operating agreement (“JOA”) in the international petroleum industry over the last decade, with developments in law, industry practice and key geopolitical events. This includes addressing the transformation in the industry’s approach to the threat of climate change. The updates are generally aligned with the AIEN’s 2020 Model International Unitization and Unit Operating Agreement.
Led by Co-Chairs Shona Walker (Shell USA), Ed Harper (Equinor) and Paul Deemer (Vinson & Elkins), with assistance from Draft Coordinator Nadine Amr (Vinson & Elkins) and specialist input from the drafting sub-committees, the AIEN JOA Drafting Committee (the “Drafting Committee”) set out to revise the 2012 JOA to address the key areas identified by the AIEN membership: decommissioning, economic sanctions, anti-bribery and corruption, human rights, default, and provisions focusing on greenhouse gas emissions. The revision process coincided with key events that profoundly impacted the global community, notably the COVID-19 pandemic and the conflict in Ukraine. Mindful of the impact that these events and the challenges of climate change would have on the industry for years to come, the Drafting Committee has sought to ensure the 2023 JOA is able to rise to these new global challenges.
The revisions to the decommissioning provisions (including to Exhibit E) of the 2012 JOA are among the most significant changes made to the 2012 JOA. The key updates include:
- New alternatives providing that, where fewer than all parties elect to take over joint facilities and equipment or wells drilled during joint operations (“Consenting Parties”), the drafter may either: (a) opt for the Consenting Parties to enter into “good faith negotiations” with the non-Consenting Parties in order to try to agree on the terms that apply to their control over such facilities or wells, or (b) elect for the JOA to allocate responsibility and liability to the Consenting Parties in specified proportions. The 2023 JOA also specifies, in greater detail than was previously the case, how responsibility for decommissioning costs is to be allocated between the Consenting Parties and non-Consenting Parties, including whether the Consenting Parties are liable to make any additional contributions to any existing decommissioning trust fund or escrow account and how security for decommissioning costs will be managed between such parties.
- The revised “Decommissioning Procedures” in optional Exhibit E give the parties greater ability to ensure that decommissioning-related obligations are met on a timely basis. For example, if the operator fails to submit a preliminary estimate of decommissioning costs when required, any non-operator now has the ability to compel the operator to do so, including by referring the matter to an independent expert or requesting an operating committee meeting to deliberate and vote on proposals for such estimate.
- Exhibit E now contains provisions addressing decommissioning of wells that were in production prior to the JOA effective date and continued to produce for the joint account thereafter (“Legacy Wells”), including the allocation of liability and contributions towards any fund to cover decommissioning costs of such Legacy Wells.
The drafting of the economic sanctions provisions contained in the 2023 JOA was completed against the backdrop of the devastating conflict in Ukraine following Russia’s invasion of February 2022, which is still raging at the time of publication. These provisions are largely new and can be summarised as follows:
- The definition of “Economic Sanctions Laws” gives drafters the option of referring to widely-recognized economic sanctions laws of the United Nations, the USA, the European Union and the United Kingdom, in addition to the standard text that defines sanctions laws with reference to the relevant laws of the governmental authority in the parties’ and their direct or indirect parents’ place of organization or principal place of business.
- The operator’s duties now include a requirement to establish and implement policies and procedures designed to facilitate compliance with Economic Sanctions Laws in the conduct of joint operations. Optional wording also requires the operator to introduce an equivalent requirement on any contractors it engages.
- New optional wording requires each party to: (a) warrant, with regard to its operations and activities under the JOA, that it and its affiliates are not sanctioned persons, (b) covenant that those persons will not take actions that are likely to result in violations of Economic Sanctions Laws, and (c) indemnify the other parties against any losses arising from any such violations. Any party that is investigated for alleged sanctions violations must notify the other parties and supply information about the investigation.
- The 2023 JOA clarifies that no party is required to perform any JOA obligation to the extent it violates, or causes a party to violate, Economic Sanctions Laws.
- New optional provisions enable non-operators to remove an operator that has been found to have committed violations of Economic Sanctions Laws.
- The 2023 JOA clarifies that any failure to pay joint account charges does not constitute a default where non-payment is required to comply with Economic Sanctions Laws.
- Recognizing that JOA parties are vulnerable to sanctions risks if sanctioned entities enter the joint venture as a result of M&A transactions, the 2023 JOA prohibits parties from making a transfer that would violate, or cause another party to violate, Economic Sanctions Laws. A party that breaches Economic Sanctions Laws as a result of a change of control will also be treated as a defaulting party until the violation is corrected (which, in practice, may require the change of control to be reversed unless the defaulting party is willing to risk losing its interest in the asset).
- A new optional provision also facilitates withdrawal by a party that has to withdraw from the JOA as a result of the belief that another party is a sanctioned person. In such case, the withdrawing party will not be required to assign any participating interest to the party believed to be sanctioned and will instead be entitled to assign its interest to the other parties only (or if there are none, to a third party that that the transferor reasonably determines following consultation with the non-withdrawing parties).
Anti-Bribery and Corruption
The 2023 JOA builds on the anti-bribery and corruption provisions set forth in the 2012 JOA. Since the publication of that version, bribery offences have continued to be met with strict enforcement action from regulators internationally, while a number of high profile corruption cases serve as a reminder to companies of the importance of thorough anti-bribery and corruption procedures and practices. The 2023 JOA includes the following key revisions:
- The definition of “Anti-Bribery Laws and Obligations” now includes optional references to the U.S. Foreign Corrupt Practices Act of 1977 and the United Kingdom Bribery Act of 2010, which have become widely accepted by many in the industry.
- The 2023 JOA also strengthens and broadens certain of the operator’s obligations with respect to anti-bribery and corruption compliance. Among these are obligations for the operator to establish and implement anti-bribery and corruption policies and procedures and a requirement that, in its due diligence into independent contractors, the operator take into account the proposed contractors’ compliance with Anti-Bribery Laws and Obligations.
- Recognizing that no party should find itself forced to act in a way that could result in it breaching Anti-Bribery Laws and Obligations, the 2023 JOA specifically clarifies that no party is required to perform any JOA obligation to the extent that doing so violates Anti-Bribery Laws and Obligations.
- The 2023 JOA updates and strengthens the provisions established under the 2012 JOA for removal of the operator if: (a) it has admitted allegations that it has violated applicable Anti-Bribery Laws and Obligations in JOA activities, (b) it has been finally adjudicated concerning operations under the JOA that the operator has violated applicable Anti-Bribery Laws and Obligations, or (c) the operator has been finally determined in arbitration to have breached the compliance warranties or covenants.
The concept of human rights did not expressly feature in the 2012 JOA, but the Drafting Committee saw this as a key area that required recognition in the 2023 JOA.
- The “Human Rights” definition is linked to the UN Declaration of Human Rights of 1948 and the ILO Declaration and Fundamental Principles and Rights at Work, together with the principles set out in Part II of the UN Guiding Principles on Business and Human Rights applicable to businesses.
- The 2023 JOA requires all parties to respect human rights principles while performing their obligations and exercising their rights under the JOA.
- When conducting due diligence on prospective independent contractors, the operator must take into account their compliance with Human Rights.
- If a defaulting party fails to remedy its defaults by the 30th day of a default period, the non-defaulting parties may exercise their remedies, which may involve requiring the defaulting party to withdraw from the JOA or transfer its interest to the non-defaulting parties. Because any such transfer will typically be subject to host government consent, the 2023 JOA requires the defaulting party to hold its interest in trust for the benefit of the non-defaulting parties if government consent is not given.1
- The “Withering Interest” provisions, which were introduced into the 2012 JOA, triggered strong opinions among the members of the Drafting Committee. Some urged deletion of these provisions due to their complexity, or simply because they are rarely used, while others felt strongly that they should be retained. The Co-Chairs elected to retain these provisions, but to make them optional.
- The 2012 JOA provides that, if all JOA parties exercise their rights to participate in an operation proposed as an exclusive operation, that operation will be conducted as a joint operation. The Drafting Committee felt there was benefit to adding a new alternative to this provision, which better reflects the voting passmark. Drafters may now select Alternative #2 to Article 7.2.D if their preference is for an operation proposed as an exclusive operation to automatically become a joint operation if parties with combined participating interests equal to or greater than the passmark exercise their rights to participate.
- The 2012 JOA only contains risk-based premia for costs incurred in exclusive operations relating to obtaining G&G data pertaining to a discovery, work in relation to exploration wells that made the relevant discovery and appraisal wells that delineated the discovery in which the non-Consenting Party intends to reinstate its relinquished rights. To address a gap identified by Drafting Committee members, the 2023 JOA includes a new risk-based premium payable by non-Consenting Parties that exercise reinstatement rights in relation to operations involving the determination of a commercial discovery.
Greenhouse Gas Emissions
One of the biggest shifts in the industry since 2012 is the widespread realization that all energy players have a role to play in meeting the challenge of climate change and that a broader energy mix will be crucial to the energy transition. The revisions to the 2023 JOA include the following key clauses addressing greenhouse gas emissions, all of which are optional:
- “Greenhouse Gas” is defined as “the following six gases: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride, or as an internationally recognized body (such as the Intergovernmental Panel on Climate Change (IPCC)) may determine from time to time.”
- The operator must conduct joint operations in a manner designed to either limit or mitigate greenhouse emissions, including by providing for this in the HSE plan. The operator must also utilize available technology and processes for this purpose.
- The operator must report periodically on greenhouse gas emissions data in line with applicable laws or the IPIECA/API/IOGP’s “Petroleum industry guidelines for reporting greenhouse gas emissions” (2d ed. May 2011) and must periodically assess energy efficiency and greenhouse gas emissions abatement opportunities and present them to the operating committee as part of the work program and budget review and approval process.
The force majeure provision has been updated to allow a party that is unable to meet payment obligations as a result of compliance with Economic Sanctions Laws to have the benefit of relief from performance of such obligations. Under the 2012 JOA, force majeure is not available to parties that fail to make payments (regardless of the reason for non-payment). Based on feedback from the Drafting Committee members, the force majeure provision has also been expanded to ensure that government-owned or controlled parties are not entitled to force majeure relief as a result of any change in laws or other governmental action, unless such change or action applies universally to all JOA parties.
The author wishes to thank the AIEN JOA Drafting Committee, including the Co-Chairs and the Sub-Committee members, in particular the Sub-Committee leads Stuart Carter (Keystone Law), Nick Scott (ExxonMobil), Tom Booth (Shell), Mark Beeley (Orrick), Pat Appel (Chevron), Andrew Baxter (Environmental Defense Fund) and Dave Johnson (Vinson & Elkins) for their valuable input and contribution to the development of the 2023 JOA.
1 The Guidance Notes contain guidance on circumstances where trust arrangements may not be appropriate.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.