Flvia Kaczelnik Altit, Mark Osa Igiehon

Early joint operating agreements would simply provide for the operators
obligation to recover or dispose of all joint-venture property by the end of the
economic life of the field, followed by the distribution of net proceeds to the joint
account. Some later joint operating agreements would require an abandonment
agreement to be executed by the parties (perhaps at a certain date, or on the
occurrence of a certain event). Typical provisions in such abandonment agreements
include how decommissioning works will be effected, by whom, who is liable to
meet the costs of decommissioning and financial security arrangements towards
meeting the costs of decommissioning.
Both the 1995 and the 2002 AIPN32 Model International Operating Agreements
address abandonment of wells and operations in their Article 10. Article 10 provides
for an optional provision. According to this Article, depending on whether in the
jurisdiction where the operations are undertaken the parties are liable for the costs of
ceasing operations, when negotiating the field development plan they must agree on
a security agreement.33 Furthermore, according to both model forms, a withdrawing
party remains liable for plugging and abandonment costs relating to wells in which it
participated, and such withdrawing party may be requested to provide the remaining
parties with security to satisfy them that such abandonment costs will be met to the
extent legally required. In the event of transfer of interest or rights, the 1995 model
form provides for the transferring party to remain liable before the other parties for
obligations that have vested, matured or accrued prior to the transfer. In the 2002
model form, however, liability of the transferring party for costs of plugging and
abandoning wells or portions of wells and decommissioning facilities in which the
transferring party participated is subject to negotiation. Yet, the draft models suggest
that if a well has been drilled as a joint operation and hydrocarbons have been
produced as an exclusive operation, then the party that assumes it will bear the costs
and liability of its plugging and abandonment, as required by applicable regulations.
AIPN also addressed decommissioning matters in its 2006 Model Form
International Unitization and Unit Operating Agreement in its optional Article 12,
Article 15.4 and in Exhibit D. Decommissioning costs and expenses are for the unit
account. Parties are due to provide cash deposits in a decommissioning trust fund, or
to provide an alternative security in lieu of such payment, all according to a
decommissioning work programme and budget. The parties may unanimously agree
alternative arrangements to the formation of a decommissioning trust fund. Such
security and other related decommissioning matters are further specified in Exhibit
D. In the case of termination of operations due to a group34 default or a group

32
33

34

Association of International Petroleum Negotiators.

The AIPN 1995 Model International Operating Agreement defines security as a letter of credit issued by
a bank or an on-demand bond issued by a surety corporation, or cash contributed to a trust fund. The
2002 Model slightly changed the definition of security to enlarge it, as follows:
1.53 Security means (i) a guarantee or standby letter of credit issued by a bank; (ii) an on-demand bond issued
by a surety corporation; (iii) a corporate guarantee; (iv) any financial security required by the Contract or this
Agreement; and (v) any financial security agreed from time to time by the Parties; provided, however, that the bank,
surety or corporation issuing the guarantee, standby letter of credit, bond or other security (as applicable) has a
credit rating indicating it has a sufficient worth to pay its obligations in all reasonably foreseeable circumstances.
Group in this sense means the unit group, ie the parties that together form one of the parties to the
unitisation and unit operating agreement.

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