OGV Energy - Issue 65 - February 2023 - Subsea

PRODUCTIVE PARTNERING IN THE OIL AND GAS INDUSTRY

By Laura Petrie, Partner, Brodies LLP

February – and February 14th in particular - is traditionally when we as individuals focus on relationships and showing our appreciation towards our partners. For the oil and gas industry, partnerships and joint ventures are equally important and are typically highly negotiated arrangements where the participants seek ways to obtain leverage, protect their position and maximise their own benefits from the relationship. With new relationships likely to be borne out of the recent closing of the 33rd Licensing Round, what should prospective partners be thinking about?

Discover, determine, develop & define

In romantic relationships, psychologists have identified four phases when charting how a relationship progresses and the same stages apply equally to commercial relationships.

During the discovery phase, parties are seeking out the best possible partner. Consideration should be given to what it is you need in a potential partner well in advance, whether that is specific technical or financial capability, a proven history of skills or experience or perhaps even the underlying team members working for and supporting that partner. It is important to gather sufficient information on these factors and establish that the parties are all keen to work towards the same end goal. Using confidentiality agreements and / or memorandums of understanding can help the parties properly assess their intentions and discover if they are the right fit for each other.

Determining the relationship means moving forward and establishing the ground rules for how the parties are going to interact. If the relationship is for the purposes of bidding for a licence or considering future prospects together then the use of joint bidding agreements or agreements setting out areas of mutual interest can clarify the roles of each party. If a wider commercial endeavour is the objective, then the creation of heads of terms can ensure everyone is focussed on the same end goals while also setting out their expectations.

Once it's clear there is a good foundation, the relationship will enter the development phase. Here is where the fundamental agreements for the joint venture or project are negotiated. Whether entering into a traditional joint operating agreement or using a farm-in arrangement, incorporated joint venture or some other form of collaborative endeavour the development of the basic terms and more bespoke requirements will take time and parties should be clear from the outset on their expectations for that timeframe.

Finally, the parties will move into the define phase. This is where agreement has been reached and the roles of the parties are clear with the partnership moving forward in these defined roles under the agreed terms. Frequently, this is where relationships can stagnate unless the parties focus on maintaining communication, developing the established relationship and having regard to the defined parameters set down in the agreements.

Partnering principles

Whichever phase parties are working through there are some key principles around entering into agreements, of any type, that should always be kept in mind.

• Be clear and transparent on any hard lines. Whether it is caps on values, elements requiring unanimous decisions or simply expectations regarding frequency of engagement during project delivery, parties should seek to establish their parameters as early as possible and in an unambiguous way.

• Don't lose sight of the end goal. In the midst of negotiations, it can be easy to forget what the original intention was as well as the expected outcome. When negotiating, ensure that discussions are frequently brought back to the intended aim so that parties are discussing in a clear and focussed manner.

• Include appropriate processes. Where decision making or action is required always include practical steps as to how this will be achieved. Include timeframes, clear steps and obvious lines of responsibility to ensure that joint venturing can be managed efficiently. Also, include alternatives. Use of escalation or expert provisions ensures that there is always a backstop should matters reach a point where the parties cannot otherwise reach alignment.

• Ensure risk is appropriately managed. Parties may have different appetites when it comes to risk so appropriate allocation of risk and use of indemnities is vital to ensure all parties know what they are responsible for. This also allows for suitable insurances to be applied and the benefits of the joint venture to be appropriately analysed.

Happily ever after?

With all relationships, there can be no guarantees that things will work out perfectly. However, whether dealing with romantic or commercial relationships, taking the time to ensure that there is compatibility, clarity and shared objectives ensures there is a strong foundation to build on.