Thread by @Jarushub

Understanding Oil & Gas Industry VI

Common Contract Types

2. Joint Venture (JV)

JV is an arrangement between government oil company (NOC - NNPC in Nigeria's case) and the private oil company where all risks, including exploration risks, are shared by all parties.

In other words, the government oil company is actively involved from start. Unlike in PSC where exploration is funded by the private company, in JV, all parties pool fund together to fund exploration and share the crude proceeds. If no oil is found, all parties have lost money

One party, usually one of the private oil companies, is designated operator. An operator is the party that coordinates the day to day running of the project and operations. It disburses funds to the vendors and contractors, amongst others. However, this does not mean ...

...the non-operating partner does not do anything beyond contributing funding. It usually has a number of representatives seconded to the JV. Key decisions on the field are also jointly taken. There is usually an agreement called Joint Operating Agreement (JOA) which guides the

activities of the JV. An example is the NNPC/Shell/Total/Agip JV. NNPC has 55% interest in that JV, while Shell, Total and Agip own 30%, 10% and 5% respectively. This means these companies are meant to contribute in this ratio to the funding of that field

and share the revenue in that ratio after sorting cost, tax and royalty. Shell is the operator of this JV, meaning Shell runs it on daily, with involvement of other parties in some things, beyond funding

The mechanism for pooling money together to fund the JV is called cash call

A cash call, like the name implies, is a call for cash contribution by the parties in the agreed ratio. For example, if it is agreed that the operations of the field will cost $20m for Q2 2021, each party contributes in the ratio above. It is a sort of advance payment

And for accountants, this gets recorded by each party as current asset in balance sheet. When the money is spent by the operator on behalf of the parties, there is another reconciliation that is done, which spells out what it is spent on. That document is called billing statement

Each party signs off and receives own copy of the billing statement. For accountants, a billing statement is what is used to record the expense - whether as operating expenditure or capital expenditure. In other words, cash call is advance provision of money (current asset) while

Billing statement is what is used to account, post-spending, for the actual cost (capital expenditure during exploration phase, or capex or opex as appropriate during production phase). Note that, in accounting, all costs incurred during project phase is treated as capital cost

Sometimes, there are disputes in this billing statement with some parties, especially govt (NNPC), refusing to sign off. A long reconciliation ensues.

It should be noted that JV does not have to be between NNPC and private oil companies. Private companies could have a

JV among themselves. For example, NNPC are not involved in marginal fields and the indigenous companies form JVs among themselves.

It should be noted that funding doesn't always follow ownership ratio in a field. It is possible for a field to be owned, say 60:40

between 2 companies, but the 40% guy may not be able to fund its 40% cost obligation, it could sign an agreement that the other party will find 30% from its 40% and funding goes to 90:10. That arrangement is called "carry" ie Party A is carrying 30% of cost obligation of Party B

In return, Party A gets extra proceeds from the revenue, as agreed in the contract.

Everything that has been discussed so far is Unincorporated JV. In other words, the JV is an artificial entity, not registered as a company. Just companies coming together, designating staff and

resources for certain project.

There is another type of JV called incorporated JV. Here, a distinct company is registered (ie incorporated) by the parties and given a name, not just, say, NNPC/Shell/Total/Agip JV. Under IJV, they will form a new company and be the shareholders

There wont be cash calls. The entity can raise money in its own name, can borrow etc. NLNG is a classic example of incorporated JV. It was incorporated by NNPC, Shell, Total and Agip, and they are the shareholders. NLNG is a company on its own, not an artificial arrangement

So that is JV in layman's terms - both incorporated and unincorporated. Unincorporated is way more common.

JV is the most common type of partnership in the upstream oil and gas industry.