CHAPTER 20 INTERNATIONAL OIL AND GAS JOINT VENTURES: A DISCUSSION WITH ASSOCIATED FORM AGREEMENTS
| Jurisdiction | United States |
(Feb 1991)
INTERNATIONAL OIL AND GAS JOINT VENTURES: A DISCUSSION WITH ASSOCIATED FORM AGREEMENTS
Oryx Energy Company
Dallas, Texas
CONFIDENTIALITY AGREEMENTS
Although the typical Confidentiality Agreement is only a few pages long, companies often devote dozens of hours negotiating and preparing the Agreement. To avoid unnecessary negotiations and to expedite the future interpretation of Confidentiality Agreements, a Model Form Confidentiality Agreement was developed by a committee of the Association of Petroleum Negotiators in 1990.
Most Confidentiality Agreements begin by describing the information and data covered. It is critical that information and data included within the scope of the Confidential Agreement be described in sufficient detail to ensure future coverage. Frequently, an exhibit will be used wherein all information and data covered will be delineated.
Confidentiality Agreements generally prohibit the sale, trade, publishing or disclosure of such delineated information and data to any third party. Some Agreements go a step further and limit or prohibit even the reproduction of such information and data.
Disclosure of confidential information is generally permitted where the information is (1) already known to the receiving party; (2) in the public domain; (3) required by law, regulation or a stock exchange to be disclosured; or (4) acquired independently by the receiving party from a third party. Moreover, confidential information may be disclosed to affiliated companies; employees, officers and directors of the receiving company and its affiliated companies and consultants and banks if they execute similar confidentiality agreements.
If the confidential information is highly sensitive, it may not be advisable to permit disclosure to consultants and banks. In light of the breaches of confidence in the investment banking community, one might be cautious about disclosing highly sensitive and confidential information to investment bankers. Likewise, consultants outside the investment banking community should be scrutinized. Larger companies are generally the international players and these large companies usually rely on in-house staff to review information and data. Only in rare instances will a larger company desire to disclose such information and data to an outside consultant. The situation is, of course, different for the smaller international players who will make extensive use of consultants and will insist that the Confidentiality Agreement explicitly authorize disclosure to outside consultants. If the information and data disclosed involves an exploration property, it is unlikely that a bank
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will be reviewing the data as banks generally do not fund international exploration efforts. Consequently, the authorization to disclose confidential information to banks can normally be deleted when the transaction involves only exploration properties.
The receiving party warrants that it will ensure that the information is kept confidential and that there will be no unauthorized disclosures. Some Agreements have attempted to put teeth into this undertaking by providing for liquidated damages in the event of a violation. Other Agreements avoid the harsh result of a liquidated damage covenant, only permitting compensatory damages. Recently, it has become common for the parties to agree that punitive, special and consequential damages will not be sought.
Some Agreements require that all information and data given must be returned within a specified time. Others provide that all information and data must be returned within a specified number of days after a request for such information and data has been made. If reproduction of the confidential information is permitted, all such reproductions must either be destroyed or given to the party disclosing the information and data. Some Confidentiality Agreements explicitly prohibit the reproducing of any information and data. This prohibition will probably never be completely complied with and, as a consequence, it is rarely inserted. It should be noted, however, that once reproductions are made, it is virtually impossible to police compliance with the mandate that all copies must be destroyed or given to the disclosing party. To address this issue, provisions are sometimes incorporated which restrict a party's right to acquire an interest in the area under review for a specified period. Without such a provision, a tire-kicker can examine your data today and become your competitor tomorrow.
The Confidentiality Agreement terminates when the receiving party legally acquires an interest in the property; or if the receiving party does not acquire such interest, after a specified number of years (e.g., two to five years).
The customary disclaimer of liability for any expenditures made in reliance of the quality, accuracy or completeness of the information and data is usually incorporated. The disclosing party warrants only that it has the right to disclose such information and data.
Most Confidentiality Agreements let the parties select the relevant law (often Texas, New York or England) and provide for arbitration. To control costs and to expedite the conflict resolution process, arbitration is employed and a mutually selected single arbitrator is frequently used. The parties
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generally select the rules and procedures of the American Arbitration Association or the International Chamber of Commerce to govern the arbitration.
In summary, companies spend many millions of dollars in their geoscience efforts. It is this information and data that will shape the future of most oil and gas companies. Appropriate prophylactic measures must be undertaken to ensure that critical and sensitive information is not expropriated without compensation by one's competitors. Although Confidentiality Agreements are short, relatively uncontroversial documents, they serve an important purpose.
PARTICIPATION AND BIDDING AGREEMENTS
The oil and gas industry has historically used groups or consortia as vehicles to conduct exploration, development and production activities. By forming groups, companies have been able to limit their financial exposure on the drilling of any single well or prospect. Companies have felt more secure in diversifying and playing in a wide number of plays. It is common to hear companies talk in terms of drilling sufficient wells to get the statistics working in their favor. This is even more important in the international setting because of the enormous costs involved and the inherent political risk.
To bind companies together, Participation or Bidding Agreements have been developed. These Agreements have a fair amount in common with the Agreements used when companies jointly bid on offshore U.S. blocks. After identifying the parties and the blocks or acreage on which the parties contemplate bidding on, most Agreements include a definitional section.
If the Agreement is executed in the evaluation phase of the project, it will include a provision which details how the evaluation process will be conducted. Generally, one party will be appointed to coordinate the acquisition of data and to conduct the analysis and evaluation of the blocks. The party appointed to conduct this evaluation is usually (although by no means always) appointed Operator under the Operating Agreement.
The party conducting the evaluation frequently will be given a specified amount of money to expend. A specific percentage of the parties must vote in favor of a proposal to increase the expenditure limit. Authority for Expenditures ("AFEs") are occasionally used for informational purposes to track expenditures. A portion of the allocated expenditure is sometimes used to acquire data from the government or third parties.
The party conducting the evaluation will customarily make periodic presentations to the other parties. Some Participation
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Agreements will require that these technical presentations be held at certain times and places. If there are no confidentiality restrictions on the dissemination of technical data, where such data might be acquired from the government or third parties, the technical evaluation will be given to the other parties. Copies of the "raw data" should be made available to all parties, whenever such dissemination does not run against any contractual restrictions. The Participation Agreement should address who should pay for the reproduction cost of the "raw data".
A procedure for invoicing the parties and collecting the parties' participating share of such expenses should be included. Payment should be made in a specified currency (frequently U.S. dollars). If some of the expenditures will be made in a foreign currency, the Agreement should provide that no party shall gain or lose as a consequence of foreign currency fluctuations. Although many Agreements do not so provide, it may be advisable to include language which addresses when the parties should be invoiced or cash called and the penalty (withdrawal and interest) that will accrue on any debts due and owing.
It is common to include a provision disclaiming any liability by the evaluating parties to any other party for such work performed. The evaluating party, however, often covenants to perform its work in a good and workmanlike manner or in accordance with accepted practices in the petroleum industry. Each party is therefore liable to a third party for any damages to the extent of its participating interest.
Pursuant to the Agreement, at a specified time, usually 30 to 60 days prior to the bidding date, the evaluating party will present its final evaluation and each of the parties will independently decide whether it wishes to participate in the submission of a bid. The commercial terms of such bid may include a bonus payment and/or a...
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