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The basics of a joint operating agreement

When planning oil and gas transactions in California, many companies, government entities and individuals consider joint operating agreements. According to Chron.com, this type of operational partnership allows them to contribute manpower or other resources to an oil and gas project so it can be completed without the creation of a new entity.

Oil & Gas Financial Journal explains that ownership, control and risk are the main factors that the JOA attempts to balance through its structure. The agreement typically contains the following specifics:

  • Who the parties are to the agreement
  • How long the agreement will last
  • How parties may withdraw from the agreement
  • Who will be the operator
  • Who is on the operating committee
  • The participating interests

Also included are the scope of the project, the accounting procedure, and the allocation, lifting and disposal of the oil or gas asset. The contract should also have clauses defining how disputes will be resolved, what the liabilities of each party are and what will happen if any party defaults.

The importance of the agreement to the success of the project cannot be overstated. In fact, disputes over who will have control of the project and decision-making authority often lead to the dissolution of JOAs, in spite of the details included in the contract that are designed specifically to prevent conflict. An estimated 60 percent of JOAs either dissolve or fail outright within five years, and two-thirds of those that fail do so because of disputes. 

Even though there is a relatively high failure rate, JOAs continue to provide benefits in the industry, including the mitigating risk, sharing of technology and other resources, overcoming geographical limitations and promoting future mergers and acquisitions.

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