Relationship between Operator and the Non-Operators in Petroleum Operations

In the last post, we had discussed the decision of the Delhi High Court in HLS Asia Ltd. V. Geopetrol International Inc. & Ors where it was held that although the Non-Operators may not have been party to the contract between the Operator and the Contractor which contains the arbitration clause, they would be necessary parties to the arbitral proceedings in light of the interrelationship between the Operator and the Non-Operators as the members of the Consortium in terms of the Production Sharing Contract (JOA) and the Joint Operating Agreement (JOA). This series of short posts discusses this interrelationship between the Operator and Non-Operators. In this post, the concept of Operatorship in general is analysed.

Concept of Joint Operations:

Petroleum exploration is a highly risky business. Typically, such a company will encounter the following risks:

• Geological risks- risk of not finding any petroleum in commercially viable quantities
• Financial risks- risk that exploitation of the commercially viable quantities of petroleum is far complicated and therefore costlier than initially estimated or change in the economic laws of the host nation drastically increasing the costs to be expended
• Political risks- instability in the region such as civil war, riots, etc thereby resulting in loss of investments.

The business is characterised by high input costs, and when there is commercial discovery, huge profits. Considering the high risks and costs, it is common for two or more parties to share the risks inherent in the business. The term “Contractor” in the Indian context is employed to collectively denote the companies engaged in petroleum exploration. Although the risk is shared, the same is always not equal. Each Party comprising the Contractor generally commits itself only to a certain amount of risk in the exploration project. Consequently, it is entitled to the reward only to the extent of the percentage of the risk shared. Such percentage is known as Participating Interest. Thus, all the rights and all obligations of whatsoever nature including privileges, entitlements, duties, penalties, etc are shared between the consortium members in accordance with their Participating Interest percentage. The percentage of Participating Interest held is recorded in the PSC as well as in the JOA.

Relation between Operator and Non-Operators:

In order to conduct the petroleum operations smoothly and in a focussed manner, a member of the consortium, usually the party having the highest participating interest and resources, is nominated as the Operator. The Operator is responsible for performing virtually all the operations, obtain approvals, comply with laws, employ contractors, and do all activities necessary to perform the petroleum operations. In performing these obligations, the Operator acts not only on behalf of itself but also on behalf of the Non-Operators. The Operator is also authorised to enter into contracts on behalf of the consortium. Thus, the Operator, apart from acting on its behalf, also acts for, or, represents the Non-Operators in dealings with third persons.

Although the Operator is authorized to act as the agent of the Non-Operators, the contours of such authority are delineated by the JOA. In addition, a body called the Operating Committee consisting of representatives of all members of the consortium (typically) is constituted to supervise the functioning of the Operator. Certain important actions in conducting petroleum operations require express authorization from the Operating Committee. Three possibilities exist as regards approval of Operating Committee for awarding contracts:

1. the JOA authorizes the Operator to award contracts without the approval of the Operating Committee,
2. the JOA authorizes the Operator to award only contracts below a specific value without the approval of the Operating Committee, and
3. the JOA requires all contracts to be approved by the Operating Committee. In such cases, the Operator is bound to follow relevant procedure, as applicable. If no consent is taken when the JOA makes it mandatory, the Non-Operators would be entitled to refuse to share the costs and risks for such contracts.

Since the Operator is authorized to enter into contracts to conduct petroleum operations, it is expected that claims or legal proceedings may be initiated against the Operator. Generally, the Operator is authorized to represent the members of the consortium in defending legal proceedings. In doing so, the Operator is mandated to obtain the approval and direction of the Operating Committee in proceedings with such legal proceedings. Costs expended for defending the said proceedings are shared by the members proportionate to their Participating Interest. However, the Non-Operators are not prohibited from appointing their own counsel, in which case, the resultant costs are borne by the Non-Operators. In case a claim is initiated against a Non-Operator by a third party in respect of the petroleum operations, the Non-Operator is entitled to defend the same but in consonance with the directions of the Operating Committee and the costs expended for the same would be shared as per the Participating Interest.

In all, while performing the role of Operator, whether in conducting petroleum operations or in dealing with the government or third parties for the purposes of petroleum operations, the Operator acts as agent for the Non-Operators. Consequently, the general principles of the law of agency are applicable. It may be noted that the JOA grants restricted authority to the Operator to act as agent. Such authority is also circumscribed by the directions of the Operating Committee as provided by the JOA. Thus, subject to the JOA, the Operator is entitled to all the rights of an agent available under law. Such rights include the right to be indemnified by the Non-Operators against consequences of acts which are lawful and acts done in good faith, right to retain expenses incurred and his remuneration from moneys collected by him on behalf of principal, etc. At the same time, the Operator is, subject to the JOA, obligated to perform the duties of an agent as per law.

The above discussion generalises the concept of Operatorship prevailing in the petroleum industry. In the next post, the concept of Operatorship as found in some of the standard formats of agreements used in the petroleum industry would be discussed.

Non-Operators as Parties to Arbitral Proceedings against Operator

Recently, a Single Judge of the Delhi High Court in HLS Asia Ltd. V. Geopetrol International Inc. & Ors., MANU/DE/5356/2012 held that it was necessary that each member of a consortium be made party to arbitral proceedings initiated by the Contractor Petitioner when the Operator to the Consortium had acted on behalf of the consortium. This decision is significant as there are two views concerning the question as to whether the Petitioner has to invoke arbitration against all members of the consortium or merely against the Operator when the contract was executed by the Operator and the Petitioner. One view is that the Petitioner should proceed against the Operator and the Operator can claim from other members of the consortium (hereinafter “Non-Operators”) in accordance with the participating interest of each member to the consortium. The second view is that the Petitioner should invoke arbitration against all members of the Consortium as the contract was executed by the Operator on behalf of the Consortium. The Delhi High Court has held that the Petitioner is entitled to invoke arbitration against all the members of the Consortium. This post analyses the said decision.

Facts:

A consortium consisting of Geopetrol International Inc. (GII), National Thermal Power Corporation Ltd. (NTPC), Brownstone Ventures Ltd. And Canoro Resources Ltd. entered into a Production Sharing Contract (PSC) with the Government of India for exploration of petroleum block in Arunachal Pradesh. The said members of the consortium entered into a Joint Operating Agreement (JOA) to govern their inter se relationship. GII was nominated as the operator for conducting petroleum operations. The Operator was responsible as per the JOA to conduct the day-to-day petroleum operations in the Block and was authorized to enter into contracts on behalf of the consortium but in accordance with the JOA and the PSC. Pursuant thereto, GII entered into a contract with HLS Asia Ltd. (HLS) for wireline logging services to be provided by HLS. Preamble to the contract noted that GII, the Operator, was acting on behalf of the members of the Consortium and that each member of the consortium was jointly and severally liable and only to the extent of its participating interest.

Disputes arose between HLS and GII. Consequently, HLS invoked arbitration under the proceedings. Subsequent to the filing of statement of claim by HLS, GII stated to the tribunal that all the members of the consortium had to be impleaded. Consequently, notices were sent by the tribunal and all the Consortium members were impleaded by it.

NTPC objected to the same and stated that it could not be compelled to participate in the arbitral proceedings. GII countered and stated that the contract was entered into with HLS in its capacity as operator of the Block on behalf of the members of the Consortium.

The tribunal accepted the contentions of NTPC on the following grounds, against which appeal was filed by HLS under Section 37 of the Arbitration and Conciliation Act, 1996:

"(i) HAL had not produced any documents to establish that the members of the consortium had authorised GII to enter into the contract on behalf of the members of the consortium.

(ii) In the absence of such authority, the members of the consortium could not be held liable under a contract to which they were not a party and which contract had not been signed by them.

(iii) The decisions in Mohan Aluminium Orchards Pvt Ltd v. M.P.E.B. MANU/MP/0717/2002 : 2002 (5) MPHT 429 and Austbulk Shipping SDN BHD v. P.E.C. Limited 2005 (2) Arb. LR 6 (Delhi) relied upon by HAL were distinguishable on facts.

(iv) Since no arbitration agreement existed between HAL and NTPC, NTPC was liable to be deleted from the array of parties."

Against this GII stated to the tribunal that the tribunal did not have jurisdiction to adjudicate the dispute as the claim was against all the respondents, that each of the respondent was liable only to the extent of its participating interest, and that the prayer of the claimant went beyond the scope of the agreement and could be maintained only when all the respondents were made party to the arbitral proceedings. HLS, in the meanwhile, appealed to the court under Section 37. The decision of the court is summarized below:

• The PSC and the JOA (especially Article 4.7(g) and (r), JOA) authorized the Operator to act on behalf of the members of the Consortium to enter into contracts, pursuant to which GII entered into a contract with GII.
• Although NTPC did not sign the said contract, the contract was executed by GII on behalf of NTPC and other members of the consortium.
• Each member to the Consortium was necessarily to be made party to the arbitral proceedings as such move would obviate a subsequent plea by any member to the consortium that it was not bound by the award as it was not a party.
• Even in the recent case of Chloro Controls v. Severn Trent Water Purification Inc., the Supreme Court contemplated the possibility of reference to arbitration of non-signatories to the arbitration agreement. (Our comment on the Chloro Controls case can be accessed from here (Part I) and here (Part II)).

The High Court held:

“Consequently, in the present case, although the individual members of the Consortium may not have been party to the contract between HAL and GII, which contains the arbitration clause, they would be necessary parties to the arbitral proceedings in light of the inter relationship between the Respondents as the members of the Consortium in terms of PSC and JOA.”

NLSIR Symposium

The National Law School of India Review, the flagship journal of National Law School of India University, Bangalore is pleased to present the second NLSIR Public Law Symposium to be held on 22 December, 2012 at the National Law School campus. Last year, the editorial board of NLSIR spearheaded the first edition of the Public Law Symposium on the "Adjudication of Socio-Economic Rights by the Supreme Court of India" in an effort to initiate a systematic study of public law jurisprudence in India. The theme of the symposium this year is "Delimiting Media Freedoms: Discovering the 'Delicate Balance' Between Article 19 and Article 21", an issue which has seen significant legal developments in the recent past. For this project, we are collaborating with the Alternative Law Forum, Bangalore. The symposium shall field opinions from the judiciary, practising lawyers, the media and students, and will be attended by renowned luminaries including Justice Muralidhar (Delhi High Court), Geeta Seshu (The Hoot), Apar Gupta (Partner, Advani & Co.), amongst others.

The discussion will be divided into two sessions. In the first session (scheduled between 10.30 A.M.-12.30 P.M.) the panel will discuss the right to privacy and the problems posed by its uncertain ambit of protection under Article 21. Questions regarding the balance between the right to privacy and the media's purported objective to protect public interest as well as the standards of privacy enjoyable by public figures together with the development of procedural innovations globally will constitute an important part of the discussion. The second session (scheduled between 1.30 P.M.-3.30 P.M.) will focus on the controversial subject of 'trial by media' and the propriety of the judiciary governing the content of media reports through instruments such as the recently invoked 'doctrine of postponement'. Lunch and refreshments will be provided by the Organizing Committee.

The registration fee for the symposium is Rs. 200 for students and Rs. 500 for professionals. All those interested are requested to register their attendance at the following link: https://docs.google.com/spreadsheet/viewform?formkey=dHN1M1ZJem1nVlgzaUxoX0NMYU9MaEE6MQ.

For any further details regarding the symposium, please contact Ashwita Ambast (Chief Editor, NLSIR) at +91-9986478265 or Sahil Kher (Deputy Chief Editor, NLSIR) at +91-9739265715 or email us at mail.nlsir@gmail.com.