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Energy projects are expensive and risky, so companies often share them. A joint operating agreement (JOA) is the contract that sets how the partners run a property together. In Alberta oil and gas, many are built on industry-standard forms published by the Canadian Association of Petroleum Landmen (CAPL).
Operator and non-operators
One partner is usually named operator and runs day-to-day activities on behalf of everyone. The others, the non-operators, hold interests in proportion to their shares but leave operations to the operator. The agreement sets the operator’s standard of care, how it can be replaced and how it reports costs and activities.
The operator is typically paid a fee or overhead, and costs are billed to partners in proportion to their interests.
Spending decisions and non-consent
Larger expenditures are usually proposed through an authority for expenditure, or AFE, which partners approve or decline. Many operating agreements let a partner opt out of a proposed operation, with consequences: the partners who go ahead may recover their costs plus a penalty from production before the non-participant shares in the results.
How these penalties and voting thresholds are drafted is often one of the most negotiated parts of the agreement.
Disputes and exit
Well-drafted agreements cover default by a partner who does not pay its share, rights of first refusal or preferential purchase rights when someone wants to sell, and how disputes are resolved, often by arbitration.
Reviewing the transfer and change-of-control provisions before buying an interest is essential, because they decide who the buyer can be and what consents are needed.
Questions to settle before you join a project
- Who is the operator, how can it be replaced and what standard of care applies?
- What are the voting thresholds for spending and for major decisions?
- How does non-consent work and how large is any penalty?
- What consents or preferential rights apply if you later want to sell your interest?