1. 1
ISSUES RELATING TO TRANSFER OF
PARTICIPATING INTEREST: WHAT
STEPS CAN A PARTY TO A JOINT
OPERATING AGREEMENT TAKE TO
ENSURE HE IS NOT LEFT WITH
RESIDUAL LIABILITY AFTER
TRANSFER OF INTEREST UNDER A
COMMON FOR JOINT OPERATING
AGREEMENT?
Onyeka Nwaigbo*
ABSTRACT: Participation and the exercise of right under a Joint Operating Agreement are
determined by a bundle of right under an authorisation granted by a state to a contractor.
Such a contractor can possibly be a single party, or as is common in exploration and
production, a consortium made up of various parties whose relationship and interest under
the authorisation is determined by a Joint Operating Agreement. This agreement determines
the percentages of each party’s participation interest in the licence granted. Parties usually
take enter into such agreement with people they are certain can meet their obligations under
the agreement. Transfer of a parties interest under these circumstances must necessarily meet
certain standards set by the state and the agreement between the parties, and sometimes
transfer is expressly prohibited. The state may also by its legislation make liability under a
contract continue even after the party transfers his interest under a licence. Under these
various circumstances, I wish to consider the various hurdles a party may face with respect
to transfer of his interest, and the methods with which he can avoid residual liability after
such a transfer.
*
The author holds a Bachelor’s degree in Law. He is a member of the Nigerian bar. His main research and
policy interests are in Regulatory Compliance and Contracting in the Energy Industry. At the time of writing,
he was a postgraduate candidate in International Dispute Resolution and Management in the Extractive Industry
at the Centre for Energy, Petroleum, Mineral Law and Policy (CEPMLP), University of Dundee, Scotland.
Email: onyeka.nwaigbo@yahoo.com

2. i
Table of Contents
1. Introduction ........................................................................................................................1
2. The common form Joint Venture Agreement.....................................................................2
2.1. Scope of the JOA and interest held by parties ............................................................3
3. Issues relating to transfer of interest...................................................................................4
3.1. Restrictions under the applicable petroleum law ........................................................4
3.2. Obligations to co-venturers.........................................................................................5
3.2.1. Pre-emption right. ................................................................................................5
3.2.2. Valuation..............................................................................................................6
4. Conclusion..........................................................................................................................8
REFERENCES ........................................................................................................................10

3. ii
LIST OF ABBREVIATION
NOC National Oil Company
JOA Joint Operating Agreement

4. 1
1. Introduction
The ownership of (and by extension the right and authority to explore ad exploit) mineral
reserves is always vested in the state in which such a reserve is found. The laws usually vest
all rights to the nation’s mineral resources in the state.1
Although Host States own most of the
world’s petroleum reserves, they do not own the capacity to carry out such technical tasks as
drilling wells and laying pipelines. Subsequently, many Governments are forced to turn to
private companies (both indigenous and international) who hold most of the financial and
technical means (or have the capacity of acquiring them) needed for the exploration and
exploitation of petroleum resources.2
In order to give effect to this mutual relationship, a form
of legal arrangement must be entered into. The nature and content of this prearrangement and
what it is called will vary from one legal system to another.3
In the United Kingdom, the
petroleum development device takes the form of a “Licence”. In whatever name it is called, it
is simply an “Authorisation” or a “Permit” granted by the Host State to a private individual
(or contractor) to carry out certain exploration and production activities In a given area
(concession or licence area). The legal nature of a petroleum licence however does vary from
one jurisdiction to the next. Over the years, there has been much speculation as to the legal
nature of the ‘modern’ production licence. Is it a contractual or regulatory instrument?4
Presently this distinction will not be of much significance in this paper. The basic
presumptions are, however, here made. The licence is an authorisation or permit by a state,
and within this licence, the basic terms of the relationship between the state and the
contractor are expressly stated. The contractor’s position is clearly defined and his
remuneration is clearly stated.
Each sovereign host country distributes/grants authorisation in several ways, some in what is
classically called a “licensing round”. The technique for such can greatly differ from country
to country. The most significant change is usually if it is a "bid system” or a “grant system.”
Through a bid, each company or joint venture partnership will offer to gain the authorisation
for the petroleum exploration at the license for a specific period of time. The highest bid will
be given the authorisation. Through the grant system on the other hand, the authorisation will
1
Roberts, P.,Dawson Books 2010, Joint operating agreements: a practical guide / Peter Roberts, Globe Law
and Business, London. Page 1, Para 1.1
2
J. Jok, The Concession and the Licence as Oil Production Titles, (unpublished Dip. Pet. Law dissertation
submitted to CEPMLP, University of Dundee, 1982), at p. 3
3
Licences, concessions, Production Sharing Contracts
4
Omon Anenih , The UK Petroleum Production Licence – Is it a Contract or Regulation and Does it Matter?
(Unpublished Dip. Pet. Law dissertation submitted to CEPMLP, University of Dundee), at P 1

5. 2
be granted to the company or joint venture that displays the highest interest, ability and
competence for the exploration of the license. This can be presented by the company skill and
technical know-how, proposed plan for the exploration by high investment, and/or longest
permanent presence in the country as a petroleum exploration company.
2. The common form Joint Venture Agreement
In determining the Joint operating Agreement, we shall consider its terms and provisions as
contained in a common form JOA with all basic provisions.
Petroleum exploration and production is usually carried out in accordance with an agreement
entered into by two or more parties (companies).5
It is quite unusual to have a contractor who
is a single party. However if this is the case then there will be no need for a Joint Operating
Agreement. But this is an unusual case, as contractors are most often made up of a number of
companies in a contractual relationship. Pooling resources becomes necessary due to the high
investment risk, huge frontloaded capital outlay coupled with the long payback period.6
Aside from financial and risk considerations, technical expertise, nature of geological
formation,7
regional experience, possession of seismic data and other necessary information
and sometimes compulsory regulatory requirements may inform the need for joint venture.8
This cooperation usually span from preliminary stages like bidding to production and
sometimes joint marketing with different contracts reflecting the nature of risk, rights and
obligation involved.9
One of such agreement dealing with the joint operation in the licensed
area is the Joint Operation Agreement (JOA).10
Over the years, there has been much change to the form and content of the regular JOA.
Presently there are forms that are referred to as “hybrids” with specifications that cuts across
5
Mildwaters, Kenneth Charles. 1990. Joint operating agreements: A consideration of legal aspects relevant to
joint operating agreements used in great britain and australia by participants thereto to regulate the joint
undertaking of exploration for petroleum in offshore areas, with particular reference to their rights and duties /
by kenneth charles mildwaters Chapter 1, Pg, 1
6
Styles, S., „Joint Operating Agreements,’ in Gordon, G., and Paterson, J., (eds.) Oil and Gas Law – Current
Practice and Emerging Trends (Dundee, Dundee University Press, 2007),see generally par 11:
7
Styles, S., „Joint Operating Agreements,’ in Gordon, G., and Paterson, J., (eds.) Oil and Gas Law – Current
Practice and Emerging Trends (Dundee, Dundee University Press, 2007),see generally par 11:2
8
Duval, C., et al, International Petroleum Exploration and Exploitation Agreements: Legal, Economic and
Policy Aspects (2nd ed. Barrows, 2009) Para 16.1
9
Area of Mutual Interest Agreement, Joint Bidding Agreement, Confidentiality Agreement, Unitization
Agreement and Joint Operation Agreement
10
Silas Lawson Garba, “the impact of pre-emption right on the commercial viability of JOA interest: is the UK
approach a model for other jurisdictions?” (Unpublished LLM dissertation submitted to the CEPMLP,
university of Dundee May 2011) Page 1

6. 3
various types of contractual relationships. Licences to these private sector participants in the
form of a group of persons that have agreed to act together within some form of collaborative
joint venture, rather than to a single person as the sole concession holder.11
Under the terms
and provisions, the licence is usually silent on each party’s interest in the licence (when there
are several parties that make up the contractor consortium). As to obligation owed to the host
state, the licence will usually state that they are joint and several when more than one party is
involved. The Licence therefore sets out the vertical relationship between the government (as
grantor of the Licence) and the parties (in their capacity as a single Licence holder) but does
not address the term of the horizontal relationship between those parties.12
2.1. Scope of the JOA and interest held by parties
The typical JOA will determine all aspect of the relationship between co-venturers with
respect to the licence area.
The Joint Operating Agreement performs the essential role of defining, as between joint
venturers, the extent of their individual obligation to contribute to the funds required to carry
out operations under the licence and the share in which they will hold the jointly owned
property and facilities, and proportion in which oil shall be allocated among them.13
The JOA
is the most important agreement that regulates the rights and obligation of the joint venture
partners. It spells out on percentage of interest basis, the respective rights, and liabilities of
each co-venture partner as acquired under the principal authorisation.14
This is the purpose of
the Interest Clause under the JOA.
The interest clause allocates the percentage property right of each member of the JOA under
the licence. All other rights and duties in the JOA are borne in proportion to the extent of
their proprietary interest in the licence. Property is therefore to be held by members of the
JOA in the proportion of each party’s respective percentage interest in the licence. The
interest clause also determines a party’s percentage contribution when the operator makes a
cash call or invoice request and the extent of their liability with respect to the joint
operations.15
This aspect of a JOA is very relevant because the Licence does not divide the
right/interest granted by the state to the co-venturer. In fact, the licence is usually going to
11
Supra note 1 para 1.1
12
Ibid at pg 13
13
Winsor, T., & Tyne, S., Taylor and Windsor on Joint Operating Agreements, (2nd ed.) (London: Longman,
1992), p. xxii
14
Duval, C., et al, International Petroleum Exploration and Exploitation Agreements: Legal, Economic and
Policy Aspects (2nd ed. Barrows, 2009) pg 288 para 16.4
15
Supra note pg 47

7. 4
recognize all the co-venturers as “contractor” in the singular. This therefore creates the
difference between an interest under the licence and an interest under the JOA.16
This interest held by each party is an intangible/incorporeal personal property or a “chose in
action.” It can therefore be assigned, transferred or encumbered.17
A party’s right to assign
his interest is usually dealt with in the JOA, based on certain restrictions. This right to assign
is also governed by the terms of the licence itself and in most cases require the ministers
consent (governmental approval).
3. Issues relating to transfer of interest.
As a chose in action, the interest granted under a Licence can be transferred by the holder.18
The only restrictive factors are those imposed by the regulator and the laws of the state, either
through the Licence or the Petroleum Legislation and the conditions created by the JOA
between the parties. In achieving a clean break from his interest under the licence a transferor
will need to consider the following issues;
3.1. Restrictions under the applicable petroleum law
It is not uncommon for the applicable law to provide for specific provisions with respect to
the transfer of interest under a licence. The condition precedents to a transfer are strict and
must therefore be complied with. The law may prescribe certain mechanisms as to how a
transfer is to proceed; if this is the case then the Transferor has no option but to follow the
requirements of the law. Usually what is required by the law is just a formal consent by the
minister to this transfer; the minister may also have to give consent to the particular third
party that seeks to obtain the participating interest. The foremost requirement here will be the
consent of the minister, and if this is not granted then there cannot be a valid transfer of the
interest to a third party. As this requirement cannot be circumvented, it is important for the
transferor to obtain “consent in principle” from the minister before he starts negotiating a
transfer with the third party. This is not exactly consent to the transfer, but an
acknowledgement of the minister of the proposed deal.
16
If, for example, the state oil company seeks to participate under the Joint Venture, but does not want to bear
its cost, its interest will be carried by the members of the JOA because the state company will also be party to
the JOA. Therefore, under the licence, each party’s interest will be stated with respect to the amount they have
agreed to participate, but under the JOA the interest of the State Oil Company will be subdivided amongst the
entire members.
17
Gordon, Greg,Paterson, John 2007, Oil and gas law: current practice and emerging trends / editors, Greg
Gordon, John Paterson, Dundee University Press, Dundee pg 366
18
Ibid

8. 5
The law may also provide for a pre-emptive right to be exercised by the National Oil
Company (NOC). Where this is the case the Transferor must offer the NOC the interest on
the same terms as has been offered to a third party. There may also be a provision of a “right
of first negotiation” provided by the law. This provides that the Transferor must first give the
NOC an option to negotiate for a purchase of the interest based on the same commercial
terms the Transferor intends to apply to a third party. The right of first refusal at this point
may be distinct from that contained in the JOA, because in most cases the NOC is also a
party to the JOA. The law may not be extensive enough to determine what will be done in
circumstances where the interest being transferred is part of a package deal, when this is the
case, the JOA usually provides for a valuation of the participating interest; however the law
that requires a first offer made to the NOC does not provide for first valuation for of
participating interest. In such a case, a package deal cannot be offered to the NOC, the
interest will have to be valued, and then offered to the state. The process of valuation will be
discussed and explained subsequently.
If the law does not prohibit a transfer of interest to an affiliate, the Transferor can transfer all
his interest in the Licence to an affiliate and then transfer a certain percentage interest in that
affiliate company to the Transferee. However this method of transfer may not go unnoticed
by the host state and co-venturers. There may also be provisions in the JOA that prohibit
change of control in an affiliate; a transferor must therefore take these into consideration. The
JOA may also provide a mechanism for a transfer to affiliate.19
3.2. Obligations to co-venturers.
The issue of confidentiality has been made prominent in most recent Joint Venture
agreement. The obligation of Confidentiality must be met before a transfer can take place, or
the Transferor will be held liable by the other members the JOA. The common JOA usually
allows the Transferor to give confidential information to third party potential purchase. If the
JOA does not have such a provision, the Transferor will have to either seek an Amendment,
or reveal confidential information and held liable.
3.2.1. Pre-emption right.
Pre-emption right is a traditional concept introduced to protect the interest of existing
licensees.20
This is another infringement on the right to assign.21
It was thought that co-
19
Supra note 1 at page 52
20
Supra note 1 page 139 para a

9. 6
licensees who had expended effort and resources in the exploitation of a licensee should have
the opportunity of benefiting first from the license prior to third party new comers seeking to
derive interest under the license.22
Pre-emption rights were therefore being used to keep in-
house such available interests.23
It occurs in various forms; Pre-empting a fully negotiated
Sale Agreement, Right of First Refusal, Right of first negotiation. In whatever form it occurs,
the intent and purpose remains the same. If the Transferor has already negotiated a deal, he
must offer the interest to his co-venturers on the same terms. If it is a package deal he has to
value his participating interest and offer it on a cash basis, if this is provided under the JOA.24
At this point there may be some disagreement as to the correct cash value of the interest. This
is also dealt with by the JOA. If two or more parties are interested in the interest being
transferred, they shall all share it based on their individual interest in the Licence. A
transferor may also get the other parties to waive their right under this provision. This is,
however, most unlikely. If the JOA does not have any provision that prohibits transfer to an
affiliate, the Transferor can transfer its entire interest to an affiliate that is jointly owned by
the Transferor and the Transferee. However, whether or not the sale of shares will activate
pre-emption right will be contingent on the nature and scope of the pre-emption clause. If the
right does not effect or provide for change of ownership clause, it is mostly believed that it is
unlikely that such transfer will trigger pre-emption clause.25
The reasoning being that a JOA
should not restrict a party’s shareholders right to trade their shares.26
3.2.2. Valuation
If the negotiated arrangement with a third party is a package deal, the Transferor has to value
the interest being transferred and offer same to his co-venturers for cash only.27
The
assessment of an oil and gas asset changes over its life cycle depending on various factors.
Before drilling takes place, its value depends on estimates of its potential to contain
commercially viable hydrocarbon accumulations. After a discovery, its value is based upon
estimates of its economic performance if the accumulation is developed. After development,
its value is based on estimates of how the accumulation will continue to perform. The risk
21
Also known as right of first refusal‟, “option of first refusal,” „preferential right of first purchase‟ “pre-
emptive right,” “pre-emptive option” or “first option.”
22
Babatunde Osadare, Pre-Emption Rights in Joint Operating Agreements: Continuing Boiler Plate?
(Unpublished LLM dissertation submitted to the CEPMLP, university of Dundee, 1997). Pg 1
23
Supra note 7, page 3
24
Ibid
25
Major, R., A Practical Look at Pre-emption Provisions in Upstream Oil and Gas Contracts (2005) I.E.L.T.R
p.117
26
Supra note 10, at page 7
27
Supra note 7 at page 140

10. 7
and uncertainty of the block changes and fluctuates through the life cycle of production.
There is also the risk of creating a value based on “proven reserves” without considering the
fact that not all the hydrocarbon in a block is recoverable. An individual interest may include
property and assets of the joint operation operators, the proven reserves and costs required in
the process of Exploration and Production.28
Non cash payment or partly cash and partly kind consideration are other methods meant for
business strategy and also a means of making the exercise of pre-emption right difficult. The
usual method is either interest swap amongst two or more JOA interest owners or allocation
of interest in the purchasing company as consideration for the transaction. This type of
transaction will be unusual and cannot easily be matched by the co-venturers in the absence
of comparable cash price allocation or valuation provision in the JOA. Some JOAs simply
make it obligatory to make the offer in cash thereby making non-cash offers a breach of the
terms of the joint venture agreement.29
28
C.R.K. Moore; Perspectives on the valuation of upstream oil and gas interests: An overview. Journal of World
Energy Law & Business, 2009, Vol. 2, No. 1.
29
Supra note 10, Para 3.2.2

11. 8
4. Conclusion
Assignment involves the transfer (or relinquishment) of an interest, benefit or right from one
person to another. Yet the “burden”, or obligations/duties, under a contract cannot be
transferred or extinguished via an assignment.
Upon assignment, the assignee is eligible to the benefit of the contract and to bring
proceedings against the existing contracting party to impose its rights. The assignor still owes
commitments and obligations to the other contracting party, and will stay liable to perform
those parts of the contract that still has not been fulfilled since the burden cannot be assigned.
In practice situations, what usually occurs is that the assignee accepts the performance of the
contract with effect from assignment and the assignor will commonly ask to be indemnified
against any breach or failure to perform by the assignee. The assignor will normally remain
legally responsible for any past liabilities (or obligations such as decommissioning) incurred
before the assignment. However if the Transferor is interested in a “clean break” from the
interest he wishes to transfer, an assignment will not achieve this purpose. The Transferor
will be left with the obligations of the Licence.
In order to transfer the interest absolutely without any residual liability, the most effective
means of achieving this is by a Novation Agreement. If you want to transfer the burden of a
contract as well as the benefits under a JOA, you have to novate. Similar to assignment,
novation transfers the benefits in a contract, however unlike assignment; novation also
transfers the burden under a contract as well.
In a novation the original contract is extinguished and is substituted by a new one where a
third party takes up rights and obligations which are identical to those of one of the original
parties to the contract. Novation does not annul past rights and obligations under the original
contract, though the parties can agree to novate these as well. Novation is only possible with
the consent of the original contracting parties as well as the new party. Through an
authorisation by the state ministry, the novation will properly effect an assignment of the
interest under the JOA and also the Petroleum Licence granted by the host state.30
If all the parties do not consent to this novation, Transferor will have to use the process of
assignment stated above, and also obtain an indemnity or a deed of guarantee from the
Transferee which shall cover its obligations with respect to the portion of interest assigned.
30
supra note 1, page 130 and 131

12. 9
This is the limitation of the novation agreement; it necessarily needs the co-operation of all
the parties to the JOA for it to function. There will need to be an amendment to the Joint
Operating Agreement to reflect the interest of the Transferee under the JOA.
Before a transfer to Transferee can become effective, it must undertake in an instrument
reasonably satisfactory to the other parties that it shall perform the obligations of the
Transferor under the Petroleum Licence and obtains any governmental approval for the
transfer and provides the state with guarantees they may require. Transferee must also be able
to establish to the reasonable satisfaction of each party to the JOA its financial capability to
perform its payment obligations and its technical capability. All these measures do not deal
with the issue of continuing liability, if this is set out as a precondition under the licence. This
is a method applied by states when they want to insure against decommissioning liability. It
may also be a condition that this obligation under a licence cannot be assigned. Even after
obtaining an indemnity from a transferee, it is still unsafe for a transferor to have such a
liability hanging over its head. This is the importance of governmental consent and support in
the process of transfer. This way, the Transferor is not left with any residual liability.

13. 10
REFERENCES
SECONDARY SOURCES
Books
Duval, C. (2009). International Petroleum Exploration and Exploitation Agreements: Legal,
Economic and Policy Aspects. New York: Barrows.
Gordon, Greg,Paterson, John (2007), Oil and gas law: current practice and emerging trends /
editors, Greg Gordon, John Paterson, Dundee University Press, Dundee.
Roberts, P. (2010). Joint operating agreements: a practical guide. London: Dawson books.
Taylor, Winsor. (1992). Joint Operating Agreements. London: Longman.
Thesis
Babatunde Osadare. (1997). Pre-Emption Rights in Joint Operating Agreements: Continuing
Boiler Plate? (Unpublished dissertation submitted to CEPMLP, University of Dundee).
Garba, S. L. (2011). The Impact Of Pre-Emption Right On The Commercial Viability Of Joa
Interest: Is The Uk Approach A Model For Other Jurisdictions? (Unpublished Law
dissertation submitted to CEPMLP, University of Dundee).
Jok, J. L., The Concession and the Licence as Oil Production Titles (unpublished Dip. Pet.
Law dissertation submitted to CEPMLP, University of Dundee, 1982).
Mildwaters, K. C. (1990). Joint operating agreements: a consideration of legal aspects
relevant to joint operating agreements used in Great Britain and Australia by participants
thereto to regulate the joint undertaking of exploration for petrole. Dundee: University of
Dundee.
Omon Anenih, The UK Petroleum Production Licence – Is it a Contract or Regulation and
Does it Matter? (Unpublished dissertation submitted to CEPMLP, University of Dundee)
Article
Moore, C. (2009). Perspectives on the valuation of upstream oil and gas interests: An
overview. Journal of World Energ Law and Business, 2009, Vol 2