Santos (BOL) Pty Ltd v Apache Northwest Pty Ltd [2016] WASC 225

On 27 July 2016 Chaney J handed down his decision in the case of Santos (BOL) Pty Ltd v Apache Northwest Pty Ltd1.  This case is the latest decision in a series of disputes between Apache and Santos in respect of their various petroleum joint venture arrangements in Western Australia2.  Outside this stream of disputes, there is very little existing Australian case law on petroleum joint operating agreements, as it is unusual for petroleum joint venturers (especially in production) to pursue litigation.

Summary

This decision concerns approval for works and costs incurred by Apache Northwest Pty Ltd (Apache Northwest) and its parent entity, Apache Energy Ltd (together the Apache Group) in undertaking a gas compression project pursuant to the John Brookes joint operating agreement in respect of petroleum production licence WA-29-L, under which Santos (BOL) Pty Ltd (Santos) was also a participant (JOA). Chaney J accepted Apache Northwest’s arguments as to the interpretation of the JOA, the key points of which were:

  • even though a gas compression project may ordinarily be categorised as a development project, it was capable of being the subject of a production programme and budget under the JOA and therefore could be approved under that provision;
  • the Apache Group had undertaken the gas compression project on its own account – the project was not “Joint Operations” under the JOA as it did not fall within the scope of section 161(1) of theOffshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth) (and was not undertaken on a sole risk basis) and therefore initial Operating Committee approval was not required; and
  • even though the Apache Group had initially incurred the costs on its own account and then Apache Northwest charged it back to the joint venture, the JOA did not preclude past expenditure from inclusion in a production work programme and budget.

Chaney J also placed emphasis on the fact that when Santos and Apache Northwest approved the initial development programme and budget, inherent in that approval was a decision to undertake liability to contribute their percentage interest in future costs (subject to the approval of the Operating Committee) of future programmes and budgets within the regime for that approval.

Implications

Joint venture participants in both mining and oil and gas joint ventures should be wary of:

  • being bound by unquantified “possibilities” in development decisions that are not adequately costed or outlined in the initial development plan whereby it is important to scrutinise initial development plans and request clarification on any items that may be referred to as possibilities, but not necessarily quantified; and
  • operators undertaking (or procuring a related party to undertake) works and incurring costs outside the operation of a joint operating agreement which are then capable of being charged back to the joint venture if there is a perceived “benefit” to the joint venture, even if such works and costs were not authorised.

Santos is appealing the decision.