QUESTION (ANSWER BOTH QUESTIONS 1 AND 2)

Question 1:

In late 2020,Alpha Ltd, Boris Ltd and CrestaLtd,each small to medium sized oil companies, set up a joint venture (JV) for the exploration and exploitation of petroleum off the coast of Wales with Cresta Ltd acting as operator. During preparation for the bidding rounds, in addition to executing a joint bidding agreement (JBA), the parties drafted a letter of intent (LOI) stating that, should they be successful in their bid, they would use reasonable endeavours to negotiate the terms of a joint operating agreement (JOA).

The venture was successful in obtaining the licence, but no member of the JV broached the issue of drafting a JOA as they felt the JBA was sufficient for their contractual requirements. Soon after the licence was issued, however, Alpha Ltd decided it wanted to shift some of its resources onto another project instead. It therefore sought to sell a significant percentage of its participating interest to Egon Corp.

Egon, being aware of the ventures lack of any JOA, insisted it would only complete the purchase of Alphas interest if the JV executed a JOA substantially in form to Egons standard-form JOA, which it appended to the sale and purchase agreement. Egons standard-form JOA placed heavy restrictions on the operators authority.

Alphas attempts to engage the other JV members in negotiations for the JOA were met with reluctance, especially with respect to the terms laid out by Egons form. Boris, furious at not being offered first rights of refusal of Alphas interest, refused to contemplate any provision which deviated from the initial JBV, even if it was to its advantage. Eventually, the JV executed a JOA similar to Egons version, but after strong opposition from Cresta, the heavy restrictions on the operators authority were not added.

Egon refused to complete the sale to it of Alphas participating interest, alleging that a condition precedent had not been met. As a result, Alpha sought compensation from both Egon for breaching their agreement, and from the other members of the JV, for their breach of the LOI. Alpha also claimed there was an implied requirement to negotiate in good faith, which Boris had not met.

During the appraisal phase of the JV, Cresta,on its own account, engaged in the long-term hire of a drill rig without prior approval from the operating committee (OpCom). According to the JOA, clause 10 stated that no operations may be conducted under this Agreement except as Joint Operations with Joint Operations defined only as operations carried out by the operator pursuant to the JOA, the cost of which was to be charged to the parties.

Crestalater submitted a field development plan (FDI) and work programme, and a budget which showed that the drilling operations were already 25% complete. The OpCom then gave notice of material breach. Cresta believed this was unfair because in their view the JOA did not prohibit parties from taking steps on its own account. Despite the OpCom later retroactively approving the FDI and work programme and budget, they decided to remove Cresta as operator.

Advise the parties of their legal rights and obligations.

QUESTION 2:

Which types of assets might be suitable to act as security within the context of project financing in the oil and gas sector?