Companies participate in upstream oil and gas activities through unincorporated joint venture arrangements. These may take different contractual forms such as joint bidding agreements or area of mutual interest agreements prior to bidding for or acquiring new acreage, and joint operating agreements (JOAs) once a right to explore or produce has been awarded. When a company is bidding for new acreage (by itself or as part of a consortium) in a bidding round they may wish to enter into agreements with one or more of its other existing joint venture partners to ensure they do not compete for the same acreage in an upcoming licensing round. Such agreements are known as non-compete agreements. This note discusses the competition law considerations that need to be taken into account when entering into such an agreement. It does not consider any competition law issues relating to area of mutual interest type agreements or exclusivity arrangements, which may also require separate analysis.
Prohibition: anti-competitive agreements
UK competition laws (which effectively replicate their EU equivalents) prohibit anti-competitive agreements and practices. In particular, companies that are competitors or potential competitors are, as a general rule, not allowed to agree not to compete with each other.
Contractual restrictions found to be in breach of the competition rules are void and unenforceable from the moment they are entered into and, in some cases, the parties can also be fined.
Exception: ancillary restraint
A non-compete obligation that is "ancillary" to the successful implementation of an existing transaction/joint venture can fall outside of the prohibition on anti-competitive agreements.
To be ancillary, a non-compete must be "directly related and necessary" to the legitimate purpose of the transaction/joint venture. In practice this means the non-compete must be limited to restrictions on competing against an existing joint venture as opposed to protecting a joint venture party (e.g. an IOC) in its individual capacity. In most upstream oil and gas cases, the "joint venture" is likely to comprise all the existing parties to a JOA or other joint venture arrangement.
Guidance on what constitutes an ancillary restraint (published by the EU Commission and applied by analogy by the UK authorities/courts) suggests that obligations accepted by JOA partners not to compete with an (unincorporated) joint venture are permitted provided:
- the parties giving the non-compete have a controlling interest in the venture;
- the non-compete is limited in time to the lifetime of the venture, or the period during which the party giving the non-compete retains a controlling interest in the venture (whichever is shorter); and
- the scope of the non-compete is limited to the products/services constituting the economic activity of the venture and the geographic area of activity of the joint venture.
Competition law regards control as occurring at the level where a party has the right to veto important commercial decisions of the venture (e.g. budget, business plan, important investments). Whether a party has such a right will depend on the terms governing the joint venture. In particular, it will be necessary to consider the "passmark" for voting through key commercial decisions taken by the joint operating committee (i.e. whether a joint venture partner can, by itself, exercise voting rights to pass a decision or to veto a decision). If another joint venture partner does not have a sufficient share to veto a decision by itself, it may still be possible to show it has a controlling interest if it and the other venture partners would always vote together on such matters.
Arguably the "business" of the unincorporated joint venture is in the exploration and development of the relevant licence or licences the unincorporated joint venture holds. Any restriction, therefore, which went beyond the scope of that particular business (i.e. bidding for other UK onshore/offshore licences) would risk being found not to be ancillary.
As to the relevant geographic scope of the non-compete, there may be some justification for a restriction that goes to the area within which the licences are to be operated (i.e. a defined radius around the licence area which is the subject of the unincorporated joint venture). The restriction would restrict the joint venture parties from competing with a bid for a new licence area within that radius made by all the partners through the venture itself. Therefore, unless the parties to a JOA are willing to coordinate a bid for new acreage within certain geographic limits through the existing unincorporated joint venture arrangement with all of the other joint venture parties, any attempt to restrict each of them individually from participating in any other UK licences would be likely to be difficult to enforce/uphold.