The parties will commit to dedicating their natural gas entitlement to joint gas sales and will authorize the operator to conduct various activities on their behalf in a coordinated manner such as preparing a marketing strategy, designing and constructing facilities dedicated to joint gas sales and obtaining finance for them, and negotiating with potential gas buyers. This condition in the agreement will raise some, but not all, of the points which a multiparty disposition agreement should cover.
It is essential that the agreement addresses how the parties will agree to a negotiation mandate and whether any one party, including the operator, has authority to conduct those negotiations. Each option has its advantages and disadvantages. The operator may be a good choice if it is incorporated, under the joint control of the parties and does not have any other conflicting marketing or sales activity. Furthermore, the operator should be able to procure marketing studies and develop a gas price model for the parties using third-party information. This would avoid drawing upon the parties’ own pricing information and strategies, which brings with it significant competition law risks.
If the joint venture is unincorporated and the operator is one of the joint venture parties, these concerns become significant. Such an operator would need to establish very robust internal ‘firewalls’ to prevent the information it receives and transmits on behalf of the joint venture’s gas sales activities from reaching other parts of its organization responsible for sales of gas from other assets.
If the operator is chosen to act as the parties’ sellers’ representative, it would be important to consider whether it would perform such role as part of its operator functions under the Joint Operating Agreement (JOA) (in respect of which its liability will be governed by a limitation of liability of operator condition) or whether such role would be a separate role, either requiring the JOA to be amended to address its sellers’ representative function or whether a completely independent liability regime for the operator should be set out in the multiparty agreement or a separate agreement with the operator.
That analysis should extend to the role of the operator under the contract which, according to its terms, may only apply to the upstream activities of the operator or the parties. Activities which the operator agrees to conduct in terms of marketing or sales may fall outside the activities governed by, and protected by, the terms of the contract (Fowler 2018).
The condition of the agreement will also raise the question whether the joint venture will need to invest in downstream transportation or processing facilities so that its natural gas can reach the marketplace and/or meet market specifications for natural gas. This would be unusual in the context of a joint venture performing its obligations as counter party under the contract. In normal circumstances, that contract would permit, and indeed expect, the parties to build, pay for and recover from the sale of cost hydrocarbons, all facilities necessary for crude oil and natural gas to reach the marketplace and meet market specifications.
Furthermore, the contract will likely specify the delivery point for each hydrocarbon stream as the physical point at which natural gas enters the regional gas transmission system. Indeed, the parties would be commercially exposed if the scope of the contract did not include the construction and cost recovery of such facilities within its scope. The parties would be at a significant disadvantage if the evacuation of their natural gas production were dependent on negotiating the right to build facilities outside of the scope and protections of the contract.
It is hard to foresee circumstances in which any such multiparty gas disposition agreement would need to deal with the construction of additional facilities. In most cases, the construction of additional facilities for processing of natural gas to marketable specifications and transporting it to the regional gas transmission system would be necessary whether the parties are selling individually or jointly.
A possible exception might arise if the Parties to the multiparty gas disposition agreement elected to build and supply a power generation plant as a means of joint natural gas disposal. if the parties elected to sell natural gas by individual disposition and needed to invest in additional facilities to do so, the prudent course would be to manage such capital expenditure under the contract and the JOA, if necessary extending its scope to do so. That course would also be open to the parties selling jointly.
In brief, this condition raises two very different issues; the role of the sellers’ representative and the management of capital expenditure necessary for joint sales.
Joint Sales Decision-making
Joint gas sales are in a sense its own joint venture and the agreement governing multi-party gas sales will need to have its own governance mechanism, probably by way of gas sales committee functioning on terms similar to the operating committee.
In practice, joint gas sales agreements tend to include detailed provisions regarding the process of nomination, production forecasts, invoicing, pricing, and payment with which every seller must be satisfied before approving and executing the gas sales agreement. Accordingly, any negotiation mandate in favour of the operator or a subset of the parties will need to take that into account.
It would be unusual for the parties to accept being bound by a pass mark vote, voting them into a gas sales agreement with which they are not fully satisfied. Furthermore, competition law regulators (and minority parties voted into such gas sales agreements) may be able to challenge such an arrangement on the basis that it would force sellers to sell jointly in circumstances where individual gas sales were commercially possible.
Once the joint gas sales agreement is in force, the relationship between the selling parties will change dynamically. The gas sales agreement will likely lock them into a specific regime in terms of the volume sold, its pricing and invoicing. However, the sellers will need to reach a decision at certain key points in the evolution of the agreement—they will need to agree how to respond to any default in payment by the buyer, the application of any hardship clause triggering price renegotiation, the setting of annual production forecasts and the resolution of disputes with the buyer for example.
In such cases, it may be necessary for the sellers to bind themselves to a decision based on pass mark voting since the timeliness of the decision is nearly as important as the decision itself. The parties may choose to extend the scope of the operating committee’s responsibilities to include such decisions; alternatively, they may duplicate the operating committee and replicate the rules for operating committee voting in the multiparty agreement itself for the sake of simplicity.