MAIN PROVISIONS OF JOA and JOB

JOINT OPERATION AGREEMENT (JOA)

Since the enactment of the Oil and Gas Law, JOA has also been a derivative of the KKS used by the KKS Contractors. Basically, JOA stipulates the percentage of capital to implement an oil contract.

Standard Provisions in the JOA:

1.         Terms

In principle, the JOA becomes effective after the KKS is signed. Negotiations in the drafting of JOA begin before the parties obtain the KKS. Because the JOA is for the purpose of the KKS, the JOA term shall conform to the terms of the KKS.

2.         Scope

The scope of the JOA is aimed at covering all joint operations starting from the signing of the KKS to the termination of the KKS. The implication of the JOA is the establishment of a joint venture which will require a separate account from the parties in the JOA.

3.         The Interests of the Parties

The JOA determines the portion of ownership and income, the amount of obligations to finance the production, and the size of risk to be borne by each respective party. In certain circumstances, the obligations of a party may be bigger than the percentage of its interests in the JOA if this party acts as the operator.

5.         Operator

Generally, the operator shall not obtain profit from the operations for itself and shall not suffer loss from acting as the representative of the parties. The duties and responsibilities of the operator are to conduct joint operations under the supervision of the operation commission.

6.         The Limited Responsibility of the Operator

The operator shall only be responsible for losses or accidents due to its own gross negligence or willful misconduct, such as the failure to take out insurance required by the operation commission; therefore, if the shared property is damaged or destroyed, the operator shall replace it and the replacement cost shall not be charged to the joint account.

7.         Monitoring the Operator

The operation commission (or often referred to as joint commission) is responsible for joint operations, policy related decision making, and approving work plans and budget. The parties shall provide information through reports and data in monitoring and decision making by the operation commission.

8.         Expense Control

Expense control is a form of monitoring joint operations by the operation commission. Generally, joint operations’ financing is jointly borne from the beginning by the parties through proportionate charging to the share of interests of each respective party.

9.         Insurance and Lawsuits

In addition to controlling expenses, the JOA also covers another form of protection to the operations through insurance and provisions on lawsuit settlement. There are at least 2 (two) categories of insurance in the JOA, namely insurance required by law and required by the joint venture itself.

Regarding provisions on lawsuit settlement, the operator shall notify the parties of every event that may lead to a lawsuit. Operators are usually authorized to settle lawsuits under a limited expense. In settling a certain case, the parties shall consult their lawyer (at their own expense) and not choose an operator to represent them.

10.       Non-Consent

A non-consent is applied because the mechanism in the operation commission will determine the operational plans based on the majority vote from the stakeholders in the JOA. The mechanism may certainly cause the interests of parties with fewer stakes to not be accommodated. Disapproval of the plans made by the operation commission is a result of various reasons such as operational financing or having majority stakeholders preferring their assets to be more significant than what has been approved by the operation commission. In principle, the non-consent provision is aimed at protecting parties with fewer stakes; even though the provision “contradicts” the basis of the JOA.

11.       Sole Risk

The background for the sole risk is the proposal (for drilling, assessment, and development) approved by more than 1 (one) party which in turn is not approved by the operation commission (majority party). Therefore, the parties not obtaining approval from the operation commission may still operate at their own risk.

12.       Default

Among the events categorized as default in the JOA includes failure of a party to pay its obligations to meet the “cash call” within the designated period. Generally, the operator shall notify in writing the parties not meeting their cash call and the party is given the opportunity to pay within 12 (twelve) days after the notification. If after passing 12 (twelve) days the defaulting party has not met its payment obligations for the cash call, the party shall be sanctioned by a withdrawal from the rights to (i) gain information access, (ii) attend the meetings and (iii) receive a production share.

13.       Transfer of Interest

In principle, the parties withdrawing from the joint venture shall transfer (reallocate, sell, swap) its stakes to the other parties in the JOA and normally this does not require approval from the licensor/SKK Migas. On the other hand, transfer of interests to another party outside the JOA shall require obtaining approval from BP Migas. It should be noted that in several cases, the JOA prohibits transfer of interests to parties outside the JOA. However, such provisions do not prohibit transfer to affiliates and therefore parties outside the JOA can be involved in the JOA by becoming affiliates to the parties planning to transfer interests.

Regarding the transfer of interests, the JOA uses the terms farm in and farm out.

14.       Transfer of Shares of a Party in the JOA

Similar to the provisions in the PSC, the provisions in the JOA do not stipulate, restrict, or prohibit the parties in the JOA from transferring its shares to other parties.

JOINT OPERATING BODY (JOB)

Unlike the JOA, in a JOB, Pertamina is directly involved in operations. This is evident in the operator which is usually a joint venture or consortium commonly referred to as the Joint Operations Board (Badan Operasi Bersama or “BOB”). BOB is a board established in the joint operation to act as the operator running oil operations and not a legal entity. To obtain a better picture of the JOB, the following is a definition of forms of cooperation in a joint venture:

Basically there are 2 (two) forms of cooperation used in a joint venture namely (i) equity joint venture (incorporated) and (ii) contractual joint venture (unincorporated). Hossain, in Law and Policy in Petroleum Development 121 (1979) defines equity joint venture as:

“A form of agreement in which a host government (or its national oil company) and foreign oil company form an operating company in which each owns a specified percent of the shares”

The two forms have different implications on the exposures of responsibility/liability. In a contractual joint venture (unincorporated) the form of cooperation is a consortium (BOB) which is not a legal entity and therefore the parties are directly responsible for the joint operations. On the other hand, an equity joint venture (incorporated) is in the form of a joint venture which is a legal entity and therefore it is directly responsible for the joint operations; the status of the parties is only as shareholders.

The author also presented an interesting fact that there is a form of joint venture which is initially a consortium/BOB; which is actually a contractual joint venture (unincorporated), but upon agreement of the parties and stipulated in a contract shall become a joint venture company within several years in the form of an equity joint venture (incorporated). This is allowable because the establishment of a contractual joint venture (unincorporated) is relatively faster and therefore the parties can prevent any delays in commencing joint operations.