Back to top
Back to Newsletter List

October 2011

Table of Contents

New Tie-In Agreement Finalized!

18th Annual PJVA/GPAC Joint Conference

JV eStudies

Have You Renewed YOUR Membership?

CHALLENGING AN OPERATOR: How Much Information is Required?

Table of Contents

New Tie-In Agreement finalized!

The Tie In Agreement Committee reached a major milestone this year with the completion of a new PJVA model Tie-in Agreement. The final agreement is now available for download from the PJVA publications online store. The committee reviewed and compared agreements currently in use and delivered a first draft of the model agreement to the PJVA Board of Directors. This was followed by a rollout to membership and an Early Morning Session. The Tie In Agreement Committee met monthly and consisted of the following members:

Joan Lee, Chair - Husky Energy
Dan McCormack - PetroJet Canada
Tracy McKim - Talisman Energy Inc
Suzanne Oliver - ConocoPhillips Canada
John Rothwell - ConocoPhillips Canada
Rose Schellenberg - Encana Corp

Many thanks to the Tie In Agreement Committee members for completing this multi-year project.

Table of Contents

18th Annual PJVA/GPAC Joint Conference Reminder

REFOCUS: Opportunities & Perspectives
Thursday, November 10, 2010
The Westin Hotel
320 - 4th Avenue SW, Calgary, AB

PJVA and GPAC are very pleased to announce that Sasol Canada will be presenting at the joint conference this year. Please join us for this rare opportunity to hear Sasol Canada President Nereus Joubert speak about Sasol's gas to liquids process and their activities in the North American marketplace.

Click here for more information.

Table of Contents

JV eStudies - Up and Running!

We encourage you not only to take advantage of these courses, but to promote JV eStudies in your office... either print or fax the promotional brochure to your associates.

(Please note that these courses do not count toward the JV Certificate Program.)

Table of Contents

Have You Renewed YOUR Membership?

Only a few weeks left to renew for the 2011-2012 year before you are dropped from the list!
Member Renewal Form >>

Table of Contents

CHALLENGING AN OPERATOR: How Much Information is Required?

By Aaron Rogers and Hazel Saffery

Disputes regarding the performance of an operator or the accuracy of its records are common in the oil and gas industry. However, it is relatively rare for a joint operator to challenge operatorship or seek to replace an operator on the ground that it would be able to conduct operations on more favourable terms and conditions. The recent Alberta decision of Diaz Resources Ltd. v. Penn West Petroleum Ltd1 deals with a challenge brought by a joint operator and reaches certain conclusions that may come as a surprise to industry participants.

Basis of the Challenge
Diaz Resources Ltd. ("Diaz") and Penn West Petroleum Ltd. ("Penn West") each held a 50% working interest in certain oil and gas properties, with Penn West serving as operator of the properties pursuant to a 1990 CAPL Operating Procedure (the "Operating Procedure").

Diaz served Penn West with challenge notices (the "Challenge Notices") pursuant to clause 203 of the Operating Procedure, which requires a joint operator to

(a) show that it is "ready, able and willing to conduct operations for the joint account on more favourable terms and conditions" and

(b) provide sufficient detail to "enable the receiving parties to evaluate the nature of the challenge notice and to measure the effect the revised terms and conditions would have on joint operations". In this regard, Diaz simply indicated that it would not charge the joint account for any costs attributable or related to a production or field office or first level supervisors in the field.

Penn West disputed the sufficiency of the Challenge Notices. Diaz then brought a court application for a declaration that Penn West was deemed to resign as operator and that Diaz was now the operator as a result of Penn West's failure to elect, within the time limit provided in the Operating Procedure, to either operate on the terms and conditions proposed by Diaz or resign as operator.

Content of the Challenge Notices
The primary issue for the Court was whether the Challenge Notices contained sufficient information. Despite Diaz's commitment to reduce certain costs, it was held by the Court that there was "no indication of what those costs include and whether the elimination of those costs would impact costs in other areas"2. More significantly, the Court determined that it was not up to Penn West to determine the overall cost impact of the cost reductions proposed by Diaz3, despite that, as operator, it would likely have had the information necessary to do so.

Underlying this finding was the fact that the affidavit filed by Diaz in respect of the proceedings included 9 pages of accounting information with respect to the 36 properties in questions and indicated that Diaz would retain the same contractor currently retained by Penn West, at the same rates. In the opinion of the Court, this information could have been included with the Challenge Notices to permit Penn West to properly evaluate the notices.

Ultimately, the Court took the position that the Challenge Notices "must be able to stand on their own" . The Court essentially accepted the argument of Penn West that the whole point of the Challenge Notice is to enable the recipient to understand the impact that the proposed terms and conditions would have on the joint operations.

Capability of the Joint Operator
A secondary issue for the Court was whether Diaz had the ability to assume the duties of an operator. In other words, was Diaz capable of satisfying the duties imposed upon an operator by the Operating Procedure? In its response to the application by Diaz, Penn West took the position that the Challenge Notices contained no information or discussion regarding Diaz's ability to conduct operations "in a safe, good and workmanlike manner". Although the Court did not find it necessary to make a determination with respect to this issue, it appeared to have some sympathy for the view that a party seeking to replace an operator "must still have the ability to operate in a safe and workmanlike manner" .

Impact of the Decision
The Court's analysis of the Challenge Notices provides some guidance for joint operators seeking to challenge an operator under an operating procedure, specifically a CAPL Operating Procedure. In such circumstances, a joint operator should ensure that its Challenge Notice contains all relevant information and appropriate analyses of the terms upon which it is prepared to operate. The current operator will not be required to conduct the relevant analysis.

The Court failed to conclusively determine whether the ability of a joint operator to adequately carry out the duties of an operator can be raised by an operator as a defence to a challenge by a joint operator. In light of this, smaller, less experienced and less financially stable joint operators would be well advised to be prepared to respond to such an argument.

1Diaz Resources Ltd. v. Penn West Petroleum Ltd., 2010 ABQB 153.
2Ibid., para. 13.
3Ibid., para. 14.

Table of Contents

PJVA was incorporated in 1985 to represent individuals and organizations involved in petroleum joint ventures. JVViews is published to keep members informed about upcoming PJVA and industry events, courses and seminars offered and/or sponsored by PJVA and current projects being facilitated by the Association.