Apache Oil Ltd v Santos Offshore Ltd [2015] WASC 318

Rare judgment provides insight into exploration JV disputes and construction of Joint Operating Agreements.

In an area that is rarely exposed to the glare of public court judgments, the WA Supreme Court has recently upheld an offshore petroleum joint venture party’s application to remove the joint venture operator.

Santos Offshore Pty Ltd was party to a joint venture with 3 Apache entities for exploration and development of the Spar gas field. In 2010, Santos had sold a 55% interest in the production licence to Apache. The parties entered into a Joint Operating Agreement (the JOA) to govern their rights and obligations regarding the operations of the joint venture.

Apache Oil Ltd was appointed operator of the joint venture. Under the JOA, the operator had the exclusive charge and conduct of all “Joint Operations”, as agent for the JV parties and under the overall supervision and control of the operating committee. The operator could be removed by Santos if it committed a material breach of the JOA and failed to begin curing the breach within 30 days but, in the event of a dispute, would remain as operator pending determination of the dispute.

Joint Operations were defined as “those operations and activities carried out by the operator pursuant to [the JOA]”. But where a Joint Operation had been proposed to, and rejected by, the operating committee, then the party proposing that operation would be permitted to pursue that operation as an “Exclusive Operation”. Apache agreed not to submit an Exclusive Operation request before August 2013. Centrally, the JOA provided that “no operations may be conducted under this Agreement except as Joint Operations or Exclusive Operations.”

In late 2010, initial drilling of the well was carried out as a Joint Operation, showing very high productivity. At the time of the sale and entry into the JOA, Santos had publicly announced that the companies intended to tie back the Spar-2 well to the Halyard well, to enable transport to Varanus Island.

In 2011, Apache, as operator, developed preliminary engineering and design proposals that it discussed informally with Santos, but did not submit to the operating committee. Over the following 2 years, for reasons of cost and efficiency, Apache continued work in developing the well itself, with the intention of presenting the proposal to the operating committee in due course, either to approve it or to reject it, in which case Apache would be free to pursue the project as an Exclusive Operation.

In September 2013, Apache Oil notified Santos of a field development plan that it intended to propose to the operating committee. Santos responded by notifying Apache Oil of material breaches of the JOA arising from Apache’s having unilaterally carried out development work without the authorisation of the operating committee. At that stage, the development of the Spar-2 well was 19% complete.

Apache Oil commenced proceedings seeking a negative declaration, namely that Santos was not entitled to remove it as operator. Santos counterclaimed for declarations that Apache Oil had committed material breaches, and that Santos was entitled to remove it as operator.

After the commencement of the proceeding, the operating committee resolved to pursue the development plan as a Joint Operation, but subject to Santos reserving its rights in relation to Apache’s alleged breaches of the JOA.

The facts were undisputed, and the case turned essentially on the construction of the JOA. Among other points, Apache argued that the central prohibition was on conducting “operations”, whereas the agreement elsewhere used the formulation “operations and activities”. Apache contended that “operations” should be construed as referring only to physical steps taken within the title area, and not to other “activities” of a preliminary nature. Chaney J rejected that construction, noting that if the parties had intended there to be such a distinction between “operations” and “activities”, one would have expected those words to be defined, rather than leaving the parties to fall back on detailed contextual analysis.

Secondly, Apache argued that, having carried out the development work at its own risk and expense, it was not an operation “under this Agreement”. Chaney J rejected that argument on the basis that, construed as a whole, the JOA manifested a clear intent to comprehensively govern the parties’ activities on and with respect to the exploration title.

Apache next argued that Santos had not demonstrated that it had suffered any loss, and therefore its breach was not material. Following Androvitsaneas v Members First Broker Network Pty Ltd [2013] VSCA 212, Chaney J approached the question of materiality of the breach having regard to the importance and significance of the breach against the overall contractual bargain. In particular, Apache had circumvented the oversight of the operating committee, through which Santos was entitled to influence, or have input into, matters such as budgets, awarding of contracts and timing. Accordingly, the breach was held to be material.

Finally, Apache argued that the breach was cured or waived by the operating committee’s subsequent decision to adopt the development proposal. Santos complained that the effect of Apache’s conduct had been to present the operating committee with a fait accompli, which Santos would either have to approve, or face the prospect that Apache could proceed to develop the well in its own right. Chaney J held that no election or waiver had occurred, because the operating committee’s decision to proceed with the proposal (subject to Santos’s reservation of rights) was not inconsistent with Santos pursuing its contractual right to remove Apache as operator for material breach.

The court therefore upheld Santos’s counterclaim, and declared that Santas was entitled to remove Apache Oil as operator for material breach.

As well as providing rare insight into intra-JV disputes over the development of offshore petroleum resources, the decision serves to underscore that a JOA will likely be presumed to comprehensively regulate the parties’ rights of exploration and development, and thereby minimise any implied scope for a JV party to engage in unauthorised development activity on its own account. It also emphasises the commercial significance of the parties’ ability to oversee, and have input into, JV development operations through the operating committee.