ARE TODAY'S INTERNATIONAL MODEL OPERATING AGREEMENTS LOOKING FAR ENOUGH INTO TOMORROW? --OPERATOR LIABILITY FOR MAJOR SPILL OR BLOWOUT INCIDENTS

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development, and Investment
(Apr 2011)
CHAPTER 21B
ARE TODAY'S INTERNATIONAL MODEL OPERATING AGREEMENTS LOOKING FAR ENOUGH INTO TOMORROW? --OPERATOR LIABILITY FOR MAJOR SPILL OR BLOWOUT INCIDENTS
Robert P. Thibault
Perkins Coie LLP
Denver, Colorado

ROBERT THIBAULT represents clients in energy law and commercial litigation matters, emphasizing domestic and international oil and gas transactions as well as oil and gas, environmental, and administrative agency litigation. Mr. Thibault represents the full range of energy companies involved in highly technical energy disputes, emphasizing the use of engineering and scientific experts in combination with the relevant administrative and regulatory environment. Mr. Thibault also represents clients in negotiating, developing, and drafting the full range of operational and transactional documents for international oil and gas transactions, having directly managed the sale or acquisition of concession interests or equity participation in the Middle East, Eastern Europe, and Australia. His experience includes advising on transactional and litigation matters involving royalty payments, gas sales and purchases contracts, lease operations and termination, and gas processing plants and storage facilities. Previously, Mr. Thibault served as senior attorney a major multi-national oil and gas company, providing advice on complex litigation and transactional matters, where he represented the company and its subsidiaries in civil litigation, arbitration, and mediation.

I. Introduction.

• Shared ownership of or participation in international oil and gas concessions is ubiquitous, giving rise to a universal use of operating agreements among the participants and with the host government.

• Depending on the locale and choice by the participants, there is a number of form operating agreements made available for and used in the industry often by industry organizations, including the Association for International Petroleum Negotiators ("A.I.P.N.") and Oil and Gas UK. There are common example agreements accepted by, and thus a quasi-form for, various governmental bodies. There are also operating agreements uniquely drafted by the parties for individual projects.

• All operating agreements provide, as a central purpose, the appointment of a single entity, invariably from among the participants, to serve as operator of the project with specified duties and resources and treatment of liabilities arising from serving as operator.

• While we can presume that everyone of us who, as party or attorney for a party to an operating agreement, has carefully considered the fullest scope of the provisions governing the operator and its responsibilities under these operating agreements, the recent experience of the major blowout event in the U.S. Gulf of Mexico in April, 2010 may give us reason to re-visit these operator provisions in light of the extremely large, in truth, for some, bet-the-company liabilities that arise from such significant events.

• The issue of liabilities and allocation among participants is made more complex when oil pollution statutes exist, or may come to exist in the future, that create statutory liability for oil spills and do so by such devices as prospective demonstration or proof of financial responsibility and statutorily-created designations for liability that are not recognized under the express terms of the operating agreement, such as the designation of the "Responsible Party", with strict liability exposure.

• The parties whose roles, needs, obligations and rights are impacted by major incidents:

o the operator	o host government
o the Operating Committee	o general domestic public
o the non-operator interest owners	o general international public.

• Major events, like the significant one in the U.S. Gulf of Mexico last April, certainly can have the result of refocusing all of our concentration on how what may appear to be contract boiler-plate in fact sets the complex inter-relation between these parties.

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II. What model forms of Operating Agreements are available?

A. The primary note is that the use of a model form is always subject to the acceptance by the host government and the practical likelihood that any particular host government may have significant experience with, and particular expectations or demands concerning, operating agreements.

B. AIPN:

1. 2002 Operating Agreement, which shall be the AIPN Model Form Operating Agreement referred to throughout unless noted otherwise.

2. 2005 Unitization and Unit Operating Agreement, incorporating the AIPN Model Form Operating Agreement.

3. 1995 Operating Agreement.

4. 1990 Operating Agreement.

C. Other groups who have developed widely available operating agreements:

1. Oil and Gas UK, which published a form Operating Agreement in 2009.

2. American Association of Petroleum Landmen ("A.A.P.L"), which published form Joint Operating Agreements in 1977, 1982 and 1986, although generally used in domestic U.S.

III. Post Macondo, a discussion of Operating Agreements now should start with recognizing the full range of relevant and applicable laws.

A. Petroleum Laws of the host government: the starting place to determine any special provisions of operator liability.

1. Example: Article 13 of the Petroleum Code of the Republic of Guinea places joint and several liability on joint participants and requires a copy of the agreements between them, and Article 43 requires that operations be conducted with diligence and according to good international industry practice.

B. Oil Spill or Pollution Laws:

This paper does not present or attempt a survey of oil spill pollution statutes currently existing or pending in producing countries. The following is merely for purposes of exemplifying the impact that three statutes taken at random have when drafting an Operating Agreement. Certainly, no opinion is offered as to the comparative efficacy of any one statutory regime.

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1. U.S. Laws:

a. Oil Pollution Act (OPA), 33 U.S.C. § 2701 et seq. (1990)

(i) Largely a response following the Exxon Valdez incident, streamlined and strengthened U.S.'s Environmental Protection Agency's ("EPA") ability to prevent and respond to catastrophic oil spills.

(ii) Creates the national Oil Spill Liability Trust Fund ("OSLTF"), which is available to provide up to one billion dollars per spill incident to expeditiously satisfy claims by injured persons and entities.

(iii) Provides that the responsible party ("RP") for a vessel or facility from which oil is discharged, or which poses a substantial threat of a discharge, is liable for: (1) certain specified damages resulting from the discharged oil; and (2) removal costs incurred in a manner consistent with the National Contingency Plan (NCP). § 2702(a)

(iv) Establishes a claim procedure for the RP to directly handle claims submitted by claimants, with subrogation rights in federal government for any claims refused by RP, but subsequently paid from OSLTF.

(v) Places direct authority in federal government to direct clean-up response and requires contingency planning by both government and industry. The National Oil and Hazardous Substances Pollution Contingency Plan (NCP) creates a three-tiered approach: federal government is required to direct all public and private response efforts for certain types of spill events; Area Committees (federal, state, and local government officials) develop detailed, location-specific Area Contingency Plans; owners or operators of vessels and certain facilities that pose a serious threat to the environment must prepare their own Facility Response Plans.

(vi) Increased penalties for regulatory noncompliance, broadened the response and enforcement authorities of the federal government, and preserved State authority to establish law governing oil spill prevention and response

(vii) Set limits on liability, for example, the liability for tank vessels larger than 3,000 gross tons is $1,200 per gross ton or $10 million, whichever is greater; RPs at onshore facilities and deepwater ports are liable for up to $350 million per spill; holders of leases or permits for offshore facilities, except deepwater ports, are liable for up to $75 million per spill, plus removal costs; the Federal government has the authority to adjust, by regulation, the $350 million liability limit established for onshore facilities. §2704.

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But, Limitations on liability do not apply if the incident was proximately caused by: (A) gross negligence or willful misconduct of, or (B) the violation of an applicable Federal safety, construction, or operating regulation by the RP.

(viii) Offshore facilities are required to maintain evidence of financial responsibility of $150 million and vessels and deepwater ports must provide evidence of financial responsibility up to the maximum applicable liability amount. Claims for removal costs and damages may be asserted directly against the guarantor providing evidence of financial responsibility. §2716

(ix) Civil and criminal penalties for violations and failure to notify. Maximum fine for failing to notify of a discharge up to $250,000 for an individual or $500,000 for an organization. Maximum prison term is five years. The penalties for violations have a maximum of $250,000 and 15 years in prison. Civil penalties are authorized at $25,000 for each day of violation or $1,000 per barrel of oil discharged. Failure to comply with a federal removal order can result in civil penalties of up to $25,000 for each day of violation.

b. Oil Spill Laws passed by American States, such as Louisiana Oil Spill Prevention and Response Act.

c. But see, the Shipowners' Liability Limitation Act of 1851, (Appendix E) which limits a shipowner's liability to the

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