September 2011
Table of Contents
September Luncheon & AGMWelcome to our new Board of Directors!
18th Annual PJVA/GPAC Joint Conference
Mount Royal University - Upcoming Courses
JV eStudies - Up and Running!
PJVA Past Events
CLAUSE 605 - CONFUSION OVER APPROVAL OF THE FORECAST
September Luncheon & AGM
How to Rise Above the CrowdHank Blank, Blank & Associates
Today it is imperative for companies and individuals to rise above the crowd. In this economic environment, companies need to be easy to be found to look like thought leaders and innovators when people search for them online. Your 'Elevator Speech' is less important these days... More >>>
Welcome to our new Board of Directors!
Please welcome these new additions to the 2011-2012 board: George Caouette, Martine O'Connor, Marcel Savoie, Teresa Waddington, and Caroline Williams.Click here to read about the 2011-2012 board.
18th Annual PJVA/GPAC Joint Conference
REFOCUS: Opportunities & PerspectivesThursday, November 10, 2010
The Westin Hotel
320 - 4th Avenue SW, Calgary, AB
Click here for more information or visit GPAC for conference updates.
Sponsorships for the conference are available. Contact Erika Rauser-Holter at erikar@associationsplus.ca.
Mount Royal University - Upcoming Courses
Visit this link for course details and schedules regarding the Petroleum Joint Venture Extension Certificate Program.PJVA Past Events
Check out the 2011 Golf Tournament results and view the web gallery.Have a look at the photos from the June 28 pre-Stampede kickoff breakfast.
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.)
CLAUSE 605 - CONFUSION OVER APPROVAL OF THE FORECAST
by Alicia Quesnel and Student-at-Law, Emily Joyce1INTRODUCTION
Clause 605 of the 1999 Petroleum Joint Venture Association ("PJVA") model form Construction, Ownership and Operation Agreement (the "CO&O") deals with Annual Operating Forecasts. Clause 605 requires the Operating Committee to approve the Forecast, which includes all expenditures in accordance with the CO&O. If approval is not received, the Operator must revise the Forecast in accordance with Operating Committee instructions.
The relevant portions of Clause 605 state:
Cl. 605(a) As soon as practicable after the execution hereof, Operator shall submit to the Operating Committee for approval a Forecast for the Forecast Period… If the Operating Committee does not approve a Forecast, or any portion thereof, such Forecast or the portion thereof not approved, shall be revised by Operator in accordance with the instructions of the Operating Committee.INTERPRETATION OF CLAUSE 605
(c) Approval of a Forecast shall constitute approval of all expenditures in accordance with this Agreement, except single Capital Cost expenditures in excess of the single expenditure limit set forth in the Accounting Procedure.
Although Clause 605 is entitled "Forecasts", Clause 605(c) provides that, with certain exceptions, "approval of a Forecast constitutes approval of all expenditures in accordance with the Agreement". The language in Clause 605(c) creates an ambiguity. It suggests that all costs, including those costs in excess of the expenditure limitations in the Accounting Procedure, require specific and express approval. However, it does not specifically address what recourse the the Operator has if a Forecast is not approved. Decisions of the Operating Committee are not subject to the dispute resolution procedures found elsewhere in the CO&O - nor should they be - as development and operational decisions should not be imposed on the joint owners by a disinterested third party. What then is the result?
The intent of Clause 605 is likely to provide a measure of certainty to both Operators and Owners with respect to anticipated expenses for a particular facility for the upcoming 12-month period. However, there has been no judicial consideration of Clause 605, and it is not addressed in the annotated version of the CO&O. Accordingly, its interpretation will depend on how the drafting language is construed and how industry experience clarifies the intentions of the parties.
The word "shall" as defined in Black's Law Dictionary is interpreted in a legal context to mean "has a duty to; more broadly, is required to".2 The word "approve" means "to give formal sanction to; to confirm authoritatively."3 With these interpretations in mind, Clause 605 essentially states that the Operator must submit the Operating Forecast for approval by the Operating Committee and must make any revisions provided by the Operating Committee. However, the Clause provides no guidance with respect to what happens if the Operating Committee does not approve the Forecast, or if the Operator does not agree with the changes suggested, or if the Operating Committee does not suggest any changes. Some Owners, we understand, have refused to pay for their share of Operating Costs incurred by an Operator if those costs have been incurred under a Forecast that has not been approved. It has been argued that this leaves the Operator with two undesirable options - potentially having to shut in production or continuing to operate and paying the costs of operation itself (subject to the PASC accounting procedure and subject to its contractual duties under Clause 401 to conduct joint operations diligently as a prudent Operator would).
While we agree that ambiguity does exist, we do not believe the Operator is entirely without remedy in these circumstances. While clearly, a proposed new operation or activity may not be commenced, there are other mechanisms available to the Operator. Cl 112 of the 1996 PSAC Accounting Procedure (the "Accounting Procedure"), for example, provides that in addition to operating expenditures allowed by an approved forecast, the Operator is required to incur the following expenditures without approval by the owners:
112. Expenditure LimitationsArticle II provides that the Operator "shall charge the Joint Account" with certain costs for salaries and wages of its employees, in support of Joint Operations. Cl. 207 of the Accounting Procedure permits the Operator to charge the Joint Account for services, equipment and utilities required for Joint Operations. Cl. 208 entitles the Operator to charge for repair or replacement of joint property made necessary by damages or loss. Additional provisions exist to enable the Operator to charge for taxes, renewal of surface rights and similar payments, insurance premiums, communication equipment, operation and maintenance of camp facilities and the like. The list goes on. The term "Joint Operations" is loosely defined to include activities resulting in "Capital Costs" and "Operating Costs" "and all other activities taken in connection with the Facility, where such activities are conducted for the Joint Account under the terms of this Agreement." In our view, the term "Joint Operations" as such, includes both activities that require approval of the Owners, as well as activities that do not require the approval of the Owners. For activities that do not require the approval of the Owners, we look both to: (a) clauses such as cl. 112 of the Accounting Procedure, which specifically provides that Owner approval is not required; and (b) clauses that outline the specific mandate and obligations of the Operator under the Agreement, such as C. 401 of the CO&O.
Unless otherwise specified in the Agreement, the Operator shall make or incur the following expenditures for the Joint Account in addition to operating expenditures allocated by an approved forecast, without approval by the Owners:(a) Expenditures including capital expenditures for any single undertaking, the total estimated cost of which is not in excess of _______ dollars ($_____).
(b) Expenditures which the Operator deems necessary in emergencies to protect lives or property. ...
(c) Expenditures for full settlement of each damage claim resulting or arising from Joint Operations not in excess of _________ dollars ($_____).
(d) Expenditures which it deems necessary to remedy a violation of an environmental regulation or law. ...
Cl. 401 of the CO&O provides that in the absence of specific instructions from the Operating Committee, the Operator is required to "conduct or cause to be conducted, all Joint Operations, as would a prudent operator under the same or similar circumstances." An illustrative list of activities follows. In our view, it it reasonable to assume that costs incurred by the Operator in conducting such "prudent" operations, are costs that are properly allocated to the "Joint Account" and are payable by the Owners accordingly, even if they form part of a Forecast that has not been approved. Cl. 112(a) of the Accounting Procedure, for example, no doubt exists to permit the Operator to make capital maintenance expenditures in order to discharges its duties as a "prudent operator". Many of the other types of operating costs highlighted above (employees, services, repair and maintenance, insurance), are costs associated with status quo maintenance of existing operations. Arguably, to the extent costs are associated with status quo maintenance operations, such types of costs are properly charged to the Joint Account and allocable to the Owners, even if they do not form part of an approved Forecast.
CONCLUDING THOUGHTS AND RECOMMENDATIONS
The CO&O is fundamentally a contract that can and should be negotiated to reflect the true intentions of the parties. If Clause 605 is left in substantially the same form, it would be useful to clarify the connection between approval of the Forecast and the ability of the Operator to invoice Owners for Operating Costs.
Outside of the PJVA, it is not uncommon for the Operator to exercise greater discretion in its ability to conduct operations and incur expenses outside of an approved operating and/or capital budget. Many such agreements expressly provide that if the annual budget is not approved, the Operator is deemed to be authorized to continue to expend monies (in an amount equal to the prior years budget or a percentage of it) to complete existing projects and to continue to conduct existing operations and maintenance activities. Although, as we suggest above, this is to a certain extent impliedly contemplated in the CO&O, the scope is unclear. Expressly providing for this result would do much to provide greater certainty to both the Operator and the Owners.
Unless or until such changes are made, an Operator should be cautious when incurring costs that are not part of an approved Forecast and should make every effort, whether on a piecemeal basis or otherwise, to obtain the agreement and/or consent of the Owners to such costs. The Operator should specifically identify for the Owners which costs it considers to "prudent operator" costs or costs incurred under Cl. 112 of the Accounting Procedure.
The current Clause 605 is a legally untested provision in the CO&O. Without modification, the current Clause is unsatisfactory for Operators that are unable to obtain Forecast approval from the Operating Committee. If parties are careful to negotiate and modify the terms of the CO&O to reflect their true intentions, it will be possible to avoid potential impasses. Formal redrafting of the Clause by the PJVA would also help the CO&O to provide more clarity and recourse for parties choosing to use the Agreement as an industry standard.
1With acknowledgement to Sarah Nossiter and Kristen Dick, formerly of BD&P
2Bryan A. Garner, Editor, Black's Law Dictionary, 8th Ed., (West Group, 2004)at page 1407
3Ibid, at page 111.
PJVA was incorporated in 1985 to represent individuals and organizations involved in petroleum joint ventures. PJVA Joint Venture Views is written for you. Inside you will find articles about people active in the Association, articles in the Association, articles about current projects being worked on by the Association, information about coming events in the petroleum industry, courses and seminars offered and/or sponsored by the Association and some for people new to the industry.