OPERATORSHIP

The oil and gas business, particularly in relation to upstream activities, namely exploration, development and production, has always been regarded as high risk and high reward. The cost of exploration, development and production varies depending whether the activities take place onshore, off shore or in a deepwater region, or in an unconventional landscape, which can run into hundreds of million and even billions of dollars. In this context it is paramount that a capable operator with strong technical expertise, knowledge, experience and financial standing is chosen to undertake the petroleum operations of any such ventures. The operator is expected to ensure that upon the signing of the production sharing contract (PSC), concession or licence with the host government(s), the obligations to achieve certain milestones, such as the minimum work obligations, are fulfilled within an agreed time frame. In addition, it is incumbent upon the operator who acts on behalf of the other joint venture parties (‘all of them are regarded as Contractor by the host authorities’) to carry out the petroleum operations in a safe, environmentally friendly manner and to comply with the international health and safety standards regarding operations. Thus the operator has a fiduciary duty to perform as the lead partner in the joint venture within the contractual and legal framework of the host country.

There are a few ways that petroleum operations can be managed. It is common for the party who has the highest participating interest in a joint venture to become the operator of the oil and gas block. As mentioned earlier, the main criterion is that the operator is an entity that has good financial standing or backing, knowledge and experience and is technically sound. Unless an entity has the experience and knowledge, the entity may not be able to meet the requirements of a PSC. This will not only jeopardise the venture but may attract penalties and even termination of the PSC by the host authorities. The further consequence is that it will erode shareholders value by attracting close scrutiny by the market analysts and worst if it fails audit exercises by auditors and the host authorities.