Key Considerations for Companies Looking to Exit Oil and Gas Projects

The Eagles, in their popular song "Hotel California," were prophetic when singing, "You can check out any time you like, but you can never leave."

Oil and gas companies today may find it increasingly difficult to exit oil and gas projects. Selling may prove difficult as access to capital is less available for interested parties to acquire oil and gas projects. Smaller companies that were the likely candidates to acquire oil and gas assets may not be able to access funds needed for the acquisition, much less post required guarantees that are supported by an equivalent sum of capital. Many oil and gas projects have unfunded decommissioning, as well as plugging and abandonment programs. In addition, the technical, commercial and legal requirements to exit are often not liquidated and subject to manipulation.

Beyond this, the sale or withdrawal from oil and gas projects may not relieve the seller or assignee from obligations and liabilities that it would have been responsible if it remained in the project. The adage that you cannot give it away holds true for many projects today, unless the seller or assignor contractually retains obligations and liabilities or is willing to risk having to pay for such obligations or liabilities, notwithstanding some contractual arrangement to pass such obligations or liabilities to the buyer or assignee.

Exiting Issues and Withdrawal Provision

The attached presentation addresses issues related to exiting oil and gas projects and, specifically, the withdrawal provision (Article XIII) of the Model Form International Joint Operating Agreement (JOA)¹ from the Association of International Energy Negotiators (AIEN), formerly the Association of Petroleum Negotiators (AIPN). As addressed in this presentation, companies seeking to exit oil and gas projects may retain obligations and liabilities related to their previous operations. For example:

• If the Operating Committee votes to decommission facilities and equipment, and one or more of the Parties elects to continue operations, those Parties voting to decommission may remain liable for all acts and omissions that were conducted prior to the election.
• If a Party subject to a Change of Control is unable to provide evidence reasonably satisfactory to the other Parties that it has the financial capacity to satisfy its payment obligations, it may be required to provide Security satisfactory to the other Parties concerning its Participating Interest share of any obligations or liabilities that the Parties reasonably may be expected to incur under the Contract and the JOA during the then-current Exploration or Exploitation Period or phase of the Contract.
• In the context of an asset transfer, both the transferee and the transferring Party are liable to the other Parties for the transferring Party's Participating Interest share of any obligations (financial or otherwise) that accrued under the Contract or the JOA before such transfer. Such obligations shall include any proposed expenditure approved by the Operating Committee before the transferring Party notifies the other Parties of its proposed transfer and (subject to an alternative provision provided in the Model Form International Operating Agreement) [shall also include] [but shall not include] costs of plugging and abandoning wells or portions of wells and decommissioning facilities in which the transferring Party participated (or was required to bear a share of the costs pursuant to this sentence) to the extent such costs are payable by the Parties under the Contract.
• A Party withdrawing from the JOA and the Contract shall provide Security satisfactory to the other Parties to satisfy any obligations or liabilities for which the withdrawing Party remains liable, but which become due after its withdrawal, including Security to cover the costs of decommissioning, if applicable.
  • The required Security must be satisfactory to the other Parties and this provision is not qualified by a reasonable standard.
  • Among other obligations, a withdrawing Party remains liable for all other obligations and liabilities of the Parties or Consenting Parties, as applicable, concerning acts or omissions under the JOA before the effective date of such Party's withdrawal for which such Party would have been liable, had it not withdrawn.
  • A notice of withdrawal is unconditional and irrevocable when given, except where the Government does not approve a Party's withdrawal and assignment. As written, as the withdrawal notice is unconditional and irrevocable, the withdrawing Party will generally not know the Security satisfactory to the nonwithdrawing Party(ies) at the time of its withdrawal notice, unless it negotiates such Security prior to issuing a notice of withdrawal.

The attached presentation also traces the evolution of the JOA's Article XIII withdrawal provision. This analysis illuminates how the withdrawal provision has evolved. As almost all JOAs, outside of a few jurisdictions, are based on one of the five AIEN Model Form JOAs, understanding the evolution of the withdrawal provision will further the explanation of the rights and obligations of the Parties in the context of withdrawing.

Conclusion

In addition to exiting oil and gas projects for typical purposes (to generate cash, reposition portfolios, etc.), companies today seek to exit oil and gas projects for social and political reasons. Or they may exit simply because good projects of yesterday are reaching, or have reached, their economic limit. All exiting companies seek a clean break. To secure a clean break, a Party seeking to exit oil and gas operations or transfer its Participating Interest must secure a novation under both the JOA and the Contract. An assignment may well prove inadequate. Once in the chain of title, a company may find it difficult to escape liability for previous operations. Consequently, some will find that checking in was hard, but leaving is harder.

Notes

¹ The AIEN has published five versions of the JOA (1990, 1995, 2002, 2012 and 2023).

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.