INTERNET OIL & GAS PIMER™
on
INTERNATIONAL JOINT OPERATING AGREEMENTS
PART EIGHT: THE OPERATOR – In General
A committee could not have painted the Mona Lisa. And while, unlike domestic operations, international joint operations are supervised by an "Operating Committee,"1 the authority to conduct operations on a day-to-day basis is vested in a single "Operator" under the AIPN agreement. In addition, that Operator is given much broader authority under the Model Form: while the Operator may not be the "500-pound gorilla," that sleeps wherever it wants, at time it does seem to be that gorilla's only slightly smaller brother.
The general authority of the Operator is spelled out in Article 4 of the AIPN Model Operating Agreement.
Section 4.1 of the Model Form designates the Operator and contains the Operator's agreement to act as such. Unlike domestic operations, where it is understood that the largest working interest owner normally will serve as operator, in theory this is not the case in international operations. Instead – again, in theory – the company with the most experience in international operations, and in operations of this type and/or in this country, will serve as Operator.
Certainly, such experience should be the basis for designation of the Operator. Unfortunately, in practice the same rule that applies in domestic operations applies internationally: the largest working interest owner usually insists on being Operator.
Another factor affects the designation of the Operator. The host country has a major stake in the outcome of these operations. Accordingly, it is common for the Government Contract to provide that the Government will have a right of approval as to who is to serve as Operator.2 And, in practice, the Government will have a major – if not the controlling – say as to which company will serve in this position.
A new trend in the conduct of international operations is the use of an Operating Company – a no-profit, no-loss entity that is formed for the sole purpose of conducting the particular operation.3
There are perceived advantages, and very real disadvantages, to the "Operating Company" approach. In theory – and often in practice – use of an Operating Company will lessen or eliminate the need for each major player to maintain its own (duplicative) staff. And since the Operating Company will be staffed by representatives of all of the working interest owners (or at least those "major players"), plus any Government Oil Company, there is an opportunity to appoint the best person to each particular job, rather than being limited to selecting among the Operator's employees.4 The fact that the staff will be coming from each participant in the venture also permits a placating of the various parties, including the Government Oil Company. Thus, while the largest working interest owner will normally insist upon designating one of its employees as "Chief Executive Officer" of the Operating Company, the "Assistant Chief Executive Officer" may be a representative of the Government Oil Company, the "Executive Vice President" may come from the next largest working interest owner, etc.
What are the disadvantages of the Operating Company? First, the largest interest owner will have less control over the conduct of the operations than it would have had as Operator. With millions at stake, this is an important consideration – particularly if one company owns the majority interest in the project.
Secondly, in many instances the "Operating Company" approach, with that company's personnel provided by a number of organizations, simply doesn't work smoothly (if at all). The complications, the different agendas, the personality and culture conflicts, and (often) the paranoia, all take their toll.5
Use of Operating Companies seems a growing trend in international joint operations. From the Government's standpoint, this may give it significantly greater control, through the Government Oil Company's representatives on the staff of the Operating Company, than would be the case if a traditional, single-company "Operator" were in charge of the operations. However, some of the initial enthusiasm concerning the "Operating Company" approach has lessened as the realities of such an operation emerge.
Next issue: "The Operator – General Rights and Duties"
1The role of the Operating Committee is addressed in Article V of the AIPN Model Form. This role will be discussed in subsequent articles in this Primer.
2This right of approval normally extends in addition to the designation of a successor Operator upon the resignation or removal of the initial Operator.
3The Operating Company is not a "for profit" entity: its sole reason for existence is to "run" the joint operations. Thus, it differs from a consortium – or a joint venture entity formed by one or more industry members and a government oil company – whose purpose is not only to conduct the operations but also to (hopefully) operate at a profit.
4Here, theory often proves too optimistic: in practice, politics, intercompany rivalry, and the pride of the host country play a profound role in who is assigned to which position.
5The paranoia, differing agendas, cultural differences, etc., are not limited to differences between the industry members and the Government Oil Company. Analogous differences can also arise between a U.S. major and a French or Italian industry member.
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