The recent decision in Marathon Oil U.K. LLC v Centrica Resources Limited and Others  EWHC 322 (Comm) may have significant ramifications in the oil and gas industry regarding cost overruns incurred pursuant to joint operating agreements (JOAs).
The Court considered whether the Defendants, being participants in the Brae fields operations, were liable to pay a share of pension deficit funding costs in respect of a pension scheme of which some of the employees working on the Brae operations were beneficiaries.
The Court held that the Participants were liable to pay a share of a proportion of such pension deficit funding costs. In arriving at this decision the Court made the following observations:
- The employees were properly taken on to enable operations, being operations of which the Operating Committee (OpCom) were aware. The authorisation of the OpCom that first engaged the liability of participants came when the operations were approved, rather than when later budgets were approved year by year;
- The alternative proposal that the Operator was alone responsible for the costs would be at odds with the arrangements agreed between the parties. The Operator’s obligations did not include underwriting expenditure over budget of this sort and the Operator should not be left with a cost because the others having taken the benefit of the employment then chose not to pay the resulting costs; and
- The outcome in law could have been quite different if there had been a material dispute over whether the employees were required, whether they were properly selected for employment or as to the propriety of the Operator agreeing the pension arrangements it did but no such suggestions were made by the Defendants.
Consequences of Ruling
The facts of the case related specifically to a pension deficit in respect of employees engaged by the Operator in compliance with its obligations under the JOA. However, the JOA only contained provisions addressing the treatment of cost overruns in respect of decommissioning and not in general, as often appears in industry standard JOAs. However, the possibility remains that the ruling made in this case could be applied to cost overruns other than pension deficits, especially where the alternative to the participants paying their respective share of the costs is the Operator being responsible for settlement in full of costs relating to approved operations.