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The Todd verus Shell and OMV as and the implications for JV partners, by Bryan Gundersen and Phillipa MacDonald from Kensington Swan. Todd Pohokura Limited v Shell Exploration NZ Limited v Anor (13 July 2010) (‘the case’) is the latest judgment in a long history of litigation between the parties of the Pohokura joint venture (‘the JV’) being Todd, Shell and OMV. The case is most memorable for the fact that the presiding judge, Justice Dobson, concluded his judgment with an unusual plea to the parties to breathe fresh air into their relationship and to resolve any remaining issues through negotiation. However, little attention has been paid to what the case means for JV partners in the New Zealand oil and gas sector. The basis of this case was an allegation by Todd that Shell and OMV ‘colluded’ to prevent Todd from having access to the full potential of the Pohokura gas field. Ultimately Justice Dobson disagreed with Todd and found Shell and OMV’s arrangements for off-take of gas were lawful. The most important lesson to come out of this case is the need for JV partners to have clear off-take rules and nomination protocols in place. In this case, the partners had been operating without dedicated gas balancing agreements (GBAs) and set nomination processes since the respective partners had joined the JV. The desirability of setting GBAs had been pushed by Shell and OMV throughout the life of the JV, however Todd was not prepared enter into such agreements. Todd’s reluctance was based on a concern it would loose flexibility around the marketing and sale of gas, as well as a perceived risk of loosing a ‘property interest’ in the higher levels of gas off-take from the field. However, it quickly became apparent to Justice Dobson that the presence of a GBA would have prevented the allegation by Todd from arising in the first place. A clear GBA would have allowed for uneven off-take of gas in a fair and flexible manner, allowing Todd access to higher levels of off-take. The second lesson is the need for prospective JV partners to be wary of simply adopting model agreements (such as the Association of International Petroleum Negotiator’s (AIPN) agreement) without first tailoring the document to suit the particular JV. This was especially important in the Todd case because none of the current JV partners were original parties to the Joint Venture Operating Agreement (JVOA), rather they had inherited the agreement from predecessors. Therefore a review of the JVOA over time may have helped prevent the dispute from arising. Other important lessons for JV partners include: The JVOA needs to provide very clear scope around what the Operating Committee can and can not do (in this case the parties were not clear on whether or not the Operating Committee had the jurisdiction to set off-take rules and nomination protocols). In some cases, including an extended clause regarding the jurisdiction of the Operating Committees that goes beyond the AIPN model may be desirable. Good faith obligations can be implied into JVs in law, but only to a certain extent and it can be difficult to prove a breach by the other partners to the JV. Good faith obligations that can be implied into the JVOA itself are limited to the obligation to act honesty and to not defraud the other partners. JV partners should be aware that post-contractual conduct of parties to the JV may admissible as evidence in any future legal proceedings. Many partners will be under the incorrect impression that post-contractual conduct (emails, internal memorandums et cetera) cannot be used to ascertain meanings of terms within the JVOA once the JVOA is legally binding. Gas/condensate off-take rules are not GBAs in disguise and cannot be ‘dressed up’ to be GBAs (when using the AIPN model agreement). This means that, when using this model, setting off-take and nomination protocols are fully within the Operating Committee’s powers as ‘special arrangements’, and do not need a unanimous vote of all the JV partners. Rather, they can be set by a simple majority vote (normally 65 percent of participating interest). This case is important for JV partners in New Zealand as it provides insight into how the courts will treat relationships between partners under widely used JVOAs. The need for GBAs and clear off-take rules and nomination protocols cannot be overstated. The jurisdiction of the Operating Committee also needs to be well understood by all parties. As most JV’s used in New Zealand rely on the AIPN model agreement, this case reinforces the need to tailor each agreement to suit the parties – both when such agreements are formed, and when they are assigned or otherwise transferred to new parties.
Energy NZ Vol.4 No.5 September-October 2010 |