Transfers of interest in Joint Operating Agreements: The risks associated with pre-emption rights: from a contractual, legal and political perspective

Abstract

The oil industry is no doubt facing challenges following the low crude price that since mid 2014 have affected the market. This has likely increased the need to monetize assets, vertically integrate businesses or seek other companies (even competitors) for the purpose of deepen market and technical expertise and grow market share. As a consequence, mergers and acquisitions in the oil industry have increased. Participating interest in petroleum projects are also transferred among actors through sale, assignment, encumbrance or other disposition of rights and obligations. Successfully managing a transfer of a participating interest can be very challenging. Recognizing some specific issues early on in a deal will simplify the process and drive these deals for success. One of the key elements to address is rights of pre-emption. This preferential mechanism is commonly found in Joint Operating Agreements (JOAs) in order to grant existent parties to the petroleum project a preferential right to acquire the interest being transferred by one of their co-venturers. However, the inclusion of pre-emption clauses requires careful considerations by the parties to the JOA about the risks associated with pre-emption rights. It may very well be that standardised clauses do not cover innovative methods of transferring interests to parties outside of the JOA. In addition, the interference of the governing law in the construction and interpretation of the contract as well as the hindrances associated with political contexts where the contract area resides will be of most importance when a transfer of interest is to take place.