28 October, 2015
This is a notable case because of the legal and commercial issues it highlights, and also because it is very unusual for resource joint venture disputes to lead to Supreme Court proceedings and published court decisions.
Introduction and background
The Supreme Court of Western Australia has recently considered circumstances in which a joint venture participant was entitled to apply for removal of the Operator of the joint venture. The case concerned the Spar Joint Venture; a project between subsidiaries of Apache Corporation and Santos Limited for the development of the Spar gas field off the North West Coast of Western Australia. It is a notable case because of the legal and commercial issues it highlights, and also because it is very unusual for resource joint venture disputes to lead to Supreme Court proceedings and published court decisions.
The dispute centred around the work program and budget for development of the Spar-2 well. Specifically, it concerned whether the Operator (Apache Oil) had materially breached the principal governing agreement for the Spar Joint Venture (the Spar JOA) by conducting development activities in respect of the Spar-2 well at its own expense and without prior approval of the decision-making body for the Joint Venture (the Operating Committee). A material breach would allow removal of Apache Oil as Operator.
Summary of events leading to the dispute
The Spar Joint Venture was formed in respect of a production licence held over an area of the Spar gas field. Apache Oil and its related companies held a 55% interest in the joint venture. The other participant, Santos Offshore, held the remaining 45%.
In late 2010, the Spar Joint Venture drilled, tested and completed the Spar-2 well. The target reservoir demonstrated very high productivity. At that stage, the plan was to tie the Spar-2 well back to a development on the adjacent Halyard gas field in order to transport the gas to Varanus Island for processing.
Between 2011 and 2013, Apache Oil conducted on its own account the following activities related to developing the Spar-2 well, without prior sanction of the Operating Committee.
- Engaging its parent company to manage the Spar project on its behalf.
- Completing front end engineering design for the project.
- Completing a process of identifying, tendering and evaluating long lead items.
- Awarding contracts for major items of equipment.
- Corresponding and engaging with regulators with respect to the project.
Apache Oil was motivated to undertake these activities without seeking prior approval in order to achieve perceived efficiency advantages (both as to time and cost). The dispute came to a head when, in mid-2013, Apache Oil obtained approval from the Operating Committee for preparation of a field development plan and a work plan and budget and then submitted those materials for committee approval. The documents identified the work that Apache Oil had done on the project, and that it was (by then) already 19% complete. Santos Offshore responded by giving Apache Oil notice of material breach of the Spar JOA and, following expiry of the cure period, informed Apache Oil that it intended to remove Apache Oil as Operator. Apache Oil then sought a court declaration that Santos Offshore could not remove it as Operator.
Before the dispute had been resolved, the Operating Committee approved the field development plan and a work plan and budget submitted by Apache Oil. In voting in favour of approval, Santos Offshore reserved its rights in relation to the alleged material breach by Apache Oil.
Main issues in the case and findings of the Court
The Spar JOA provided for two types of authorised operations: "Joint Operations" and "Exclusive Operations". A Joint Operation was an operation conducted by the Operator on behalf of all parties with the approval of the Operating Committee. An Exclusive Operation was an operation by fewer than all parties. An Exclusive Operation could only be pursued in limited circumstances, after the Operating Committee had rejected a proposal for an analogous Joint Operation.
Apache Oil argued that, even though it had conducted the development operations mentioned above without approval as a Joint Operation or an Exclusive Operation, the Spar JOA did not prohibit a party taking steps on its own account for the development of a discovery. It also argued that Santos Offshore had waived, or cured, any breaches by approving (as part of the Operating Committee) the field development plan and work plan and budget related to those activities.
The Supreme Court rejected Apache Oil's arguments, finding that:
- the Operator could not, under the Spar JOA, undertake development activities which were neither Joint Operations or Exclusive Operations, and without prior Operating Committee sanction – the JOA did not contemplate any other type of allowable development – and Apache Oil's unauthorised development was a material breach because it deprived other venture participants of having influence or input on budgets, contract awards and project timing;
- Santos Offshore had not cured or waived the breaches, even though it voted to approve the field development plan and work plan and budget related to the activities, because: (a) there was no inconsistency in Santos Offshore choosing to progress the development of the Spar-2 well while also maintaining its contention that Apache Oil was unsuitable for remaining Operator of the venture due to its earlier conduct; (b) Santos Offshore had expressly reserved its rights against Apache Oil at the time it voted.
As a result, the Court found that Santos Offshore was entitled to remove Apache Oil as Operator under the Spar JOA.
What are the lessons for resource joint venture participants?
While primary attention must always be given to the governing agreements and factual context, there are some general lessons from Apache Oil v Santos Offshore decision.
First, contractual procedures for obtaining sanction of the decision-making body for venture development activity should be commercially efficient. Close attention should be given, when governing documents are being drafted, to their practical workability. The more cumbersome venture sanction procedures are, the greater the incentive for Operators, particularly if they are aligned with a substantial percentage of venture participants, to bypass formal approval processes in the interests of efficiency. Second, joint venture documents should be explicitly clear about whether, and (if so) when, a party may take steps on its own account for the development of a discovery. Problems in either respect create fertile ground for inter-venturer disputes.
Third, if joint venture governing agreements do not clearly authorise development activities by individual venturers without sign-off from the formal decision-making body, it is likely to be a risky strategy for Operators to undertake such activity simply due to a belief in the advantages of that approach (whether as to cost and time savings, or otherwise). Even if co-venturers ultimately accept what has been done, that may not prevent a finding that unauthorised activity renders the offending Operator unsuitable to continue to hold the position.
For further information, please contact:
Lucas Wilk, Partner, Ashurst
lucas.wilk@ashurst.com
