The Claimant (Ithaca) and the Defendant (North Sea Energy “NSE”) were participants, together with Dyas UK Ltd, in an oil field in the Moray Firth called the Jacky Field. Ithaca and Dyas decided to drill a well together, which NSE disagreed with. NSE believed that they were entitled to opt out of their obligation to contribute costs under the Joint Operating Agreement (JOA) governing their venture. Ithaca argued that the drilling was a Joint Operation and therefore, NSE was obliged to contribute costs under the terms of their JOA. The crucial factor on which the case turned was whether the well that was drilled was an appraisal well. If the well was an appraisal well, NSE could opt out of contributing costs by virtue of a “non-consent” clause in the JOA. If it was not an appraisal well, then NSE would have to contribute costs.
The Joint Operating Agreement
The JOA provided that, as an exception to the normal principle that costs of operations by the parties are shared, if a party or parties participate in certain types of drilling, a non consenting party will not be obliged to contribute costs to such a venture. Within the definition of such drilling is
“the drilling, completion and production testing of an appraisal well inside, or the carrying out of geophysical work in respect of, the interpreted closure of any geological structure or stratigraphic trap on which a well has been drilled in which Petroleum has been found to be present.”
If NSE could convince the court that Ithaca and Dyas were carrying out such an activity, then under the terms of the JOA, they could refuse to contribute any costs.
One point Mr Justice Popplewell was keen to make was that the language of the JOA was wide enough to contemplate an appraisal well which was drilled into an area where there had already been production. This interpretation was favourable for NSE because it gives more scope to defining a well as an appraisal well. However, NSE was ultimately unsuccessful.
After hearing the arguments the court concluded that the well in question was not an appraisal well and that NSE were obliged to contribute costs towards the drilling of the well in question. In considering his decision, Mr Justice Popplewell made some comments on the arguments of the parties.
- Firstly, the court accepted that in determining whether or not the well was an appraisal well, the purpose behind its drilling had to be considered. Mr Justice Popplewell decided that this purpose had to be determined objectively and that a subjective test would not be employed. Mr Justice Popplewell decided, after considering the actions of the parties, that the purpose behind the drilling was development and production and that there was no two stage process of appraisal and then development envisaged.
- Secondly, Mr Justice Popplewell rejected an argument from NSE that a well could not be a production well if it was targeting contingent resources. The court accepted the view that one purpose of an appraisal well was to identify whether a geological compartment where oil has been discovered had “potential commercial significance”. However, Mr Justice Popplewell made it clear that drilling targeting contingent resources could still be a production well.
- Thirdly, the court rejected an argument from Ithaca that a well cannot be an appraisal well if it is drilled once the development stage has been reached. Mr Justice Popplewell noted that there were four different types of well and they are exploration, appraisal, development and production wells. The appraisal stage is often said to be the phase preparatory to a decision made to submit a Field Development plan to the Department of Energy and Climate Change. Mr Justice Popplewell said that there is no simple distinction and that appraisal activities could take place after the submission of an FDP and into the development stage. Although this argument was unsuccessful, Ithaca was still successful overall because the court found that the well in question was not an appraisal well on an objective analysis.
Although non-consent provisions are not particularly common in UKCS JOAs and although the case turned on the precise drafting of the clause(s) in question, this case does highlight the need both for clarity of drafting in JOAs and the need for clarity (and, where necessary, references to JOA provisions) in joint venture communications and in agreeing work programmes.
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