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England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Marathon Oil UK LLC v Centrica Resources Ltd & Ors  EWHC 322 (Comm) (21 February 2018)
Cite as:  EWHC 322 (Comm)
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THE BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
QUEEN'S BENCH DIVISION
COMMERCIAL COURT (QBD)
Strand, London, WC2A 2LL
B e f o r e :
| MARATHON OIL U.K. LLC
- and –
|CENTRICA RESOURCES LIMITED
TAQA BRATANI LIMITED
TAQA BRATANI LNS LIMITED
Paul Newman QC and Emily Campbell (instructed by Mills & Reeve LLP) for the Defendants
Hearing dates: 30-31 October, 6-7 November 2017
Crown Copyright ©
Mr Justice Robin Knowles:
5.2 In accordance with approved programmes and budgets and under the overall supervision and direction of the Operating Committee, and subject to this Agreement, Operator shall have exclusive charge of and shall conduct all operations under this Agreement either by itself or by its duly authorized agents or by independent Contractors engaged by it.
5.3 Subject to the provisions of any approved operating programme and budget the number of employees of Operator employed in connection with operations hereunder shall be determined by Operator. The Operator shall determine the selection of such employees, their hours of work and their remuneration, and all such employees shall be employees of Operator exclusively.
5.4 In the conduct of operations, Operator shall:
(a) use its best efforts to conduct diligently all operations in accordance with practices generally followed by the petroleum industry, to conform to good oil field and engineering practices and accepted conservation principles and to perform such operations in an efficient and economic manner. All operations shall be conducted in accordance with the provisions of the Licence and all applicable laws and regulations;
(g) pay all costs and expenses incurred by it in its operations hereunder promptly and when due and payable;
(j) obtain and maintain, in respect of the Joint Operations and the Joint Property, all insurance required under the Licence or any applicable law and such other insurance as the Operating Committee may from time to time determine, provided that, in respect of such other insurance, any [p]articipant may elect not to participate provided such [p]articipant gives notice to that effect to the other [p]articipants and does nothing which may interfere with the Operator's negotiations for such insurance for the other [p]articipants. The cost of insurance in which all the [p]articipants are participating shall be for the Joint Account and the cost of insurance in which less than all the [p]articipants are participating shall be charged to such [p]articipants in the proportion that each such [p]articipant's Participating Interest bears to the sum of the Participating Interests of such Participants. The Operator shall, in respect of any such insurances:-
(1) promptly inform the [p]articipants participating therein when it is taken out and supply them with copies of the relevant policies when the same are issued;
(2) arrange for the [p]articipants participating therein, according to their respective Participating Interests, to be named as co-insureds on the relevant policies with waivers of subrogation in favour of the Parties; and
(3) duly file all claims and take all necessary and proper steps to collect any proceeds and, if all the [p]articipants are participating therein, credit them to the Joint Account or, if less than all the [p]articipants are participating therein, credit them to the participating [p]articipants.
(l) prepare and furnish to the Operating Committee such reports,
statements, data and information as may be prescribed from time to time by the Operating Committee concerning [all operations conducted in accordance with the Agreement by or on behalf of any party with a Participating Interest];
5.5 (a) Without prejudice to Article 5.5(b) [which dealt with emergency expenditure] the Operator is authorised to make such expenditures, incur such Commitments for expenditure and take such actions as may be authorised by the Operating Committee in accordance with the provisions of this Agreement.
6.1 To provide for the orderly supervision and direction of [all operations conducted in accordance with the Agreement by or on behalf of any party with a Participating Interest], there shall be set up an Operating Committee composed of representatives of each [p]articipant. In exercising such supervision and direction, each representative on the Operating Committee shall act solely on behalf of the Party whom he represents and not on behalf of the participants as an entity. The powers and duties of the Operating Committee shall include:
(a) determination of all general policies, procedures and methods of [operations];
(b) consideration, revision and approval of all proposed operating programmes, budgets …;
7.2 On or before the 15th day of December of each year, the Operating Committee shall agree upon and adopt an operating programme and budget for the 12 month period beginning on the 1st day of January of the following year and for such further periods as the Operating Committee deems appropriate, which shall include as a minimum the work required to be performed under the Licence in respect of the Contract Area during such budget periods and the requirements of [the] Operator having regard to previously approved programmes and budgets and its obligations hereunder. At the time of agreeing upon and adopting an operating programme and budget, the Operating Committee shall provisionally consider, but not act upon or adopt, an operating programme for the calendar year next succeeding the period covered by such approved operating programme and budget.
7.10 Ongoing Liability
Following completion of Decommissioning, the [p]articipants shall remain liable for any residual liability (including in respect of remedial work) which arises at law or is otherwise imposed by regulatory authority unless and until the [p]articipants enter into a separate agreement as contemplated by in Article 2.3.
7.11 Expenditure Overruns
The Operator shall use reasonable endeavours not to exceed the approved Decommissioning Budget but shall be entitled without prior approval of the Operating Committee to incur expenditure:
(a) in excess of an approved AFE [Authorisation for expenditure] up to the lesser of ten per cent (10%) of the amount of the approved AFE and ten million Pounds (£10,000,000); and
(b) subject to (a) above, in excess of an approved Decommissioning Budget up to ten per cent (10%) of the amount of the approved Budget.
Whenever it appears to the Operator that the over-expenditure for any item will exceed the amount authorised under this Article 7.11.4 the Operator shall revise the appropriate AFE and/or Budget and will seek the prior approval of the Operating Committee to incur the additional expenditure prior to entering into any further commitment, such approval not to be unreasonably withheld or delayed where the over-expenditure is necessary to comply with the Decommissioning Programme approved by the Secretary of State.
10.1 All costs and expenses of all operations under this Agreement in or in respect of the Contract Area or the Licence, including the handling, treating, storing and transporting, whether within or outside the Contract Area, of Petroleum produced from the Contract Area, and all costs and expenses properly incurred by the Operator in its performance of the relevant provisions of the Decommissioning Security Agreement except for costs and expenses which are solely attributable or relevant to a Party, shall be borne by the [p]articipants in proportion to their respective Participating Interests from time to time except as herein otherwise specifically provided. Furthermore, the costs of all assets, including materials and equipment acquired for the Joint Account of the [p]articipants shall be for the account of the [p]articipants in accordance with their Participating Interests from time to time, and, similarly, liabilities shall be borne in such proportions.
10.2 All costs and expenses of whatsoever kind that are incurred in the conduct of operations under this Agreement shall be determined and settled in the manner provided for in the Accounting Procedures hereto attached and marked Exhibit A, which is hereby made part of this Agreement, and Operator shall keep its records of costs and expenses in accordance with such Accounting Procedure. In the event of conflict between the main body of this Agreement and the said Accounting Procedure, the provisions of the main body of this Agreement shall prevail.
COVENANT AND RELATIONSHIP OF THE PARTIES
18.1 Subject to the responsibility delegated hereunder to the Operator and the Operating Committee, each Party covenants and undertakes with each other Party that it will comply with all provisions and requirements of the Licence and the applicable laws and regulations and will do all such acts within its control as may be necessary to maintain the Licence in force and effect.
18.2 The rights, duties, obligations and liabilities of the Parties shall be several and not joint or collective, and each Party shall be responsible only for its obligations as set out herein, it being the express purpose and intention of the Parties that this Agreement shall not be construed as creating any partnership or association or as (except as expressly stated) authorising any Party to act as agent, servant or employee for any other Party for any purpose whatsoever."
"The purpose of this Accounting Procedure is to establish equitable methods for determining charges and credits applicable to [all operations conducted in accordance with the Agreement by or on behalf of any party with a Participating Interest] under the Agreement and to provide that Operator neither gains nor loses by reason of the fact it acts as Operator. In the event of a conflict between the provisions of this Accounting Procedure and the provisions of the Agreement, the provisions of the Agreement shall control."
A preliminary argument
The approval of the Operating Committee
(a) The Operator had charge of and was required to conduct all operations: see Clause 5.2.
(b) The Operator was to pay all costs and expenses incurred by it in its operations under the Agreement: see Clause 5.4(g).
(c) Subject to the provisions of any approved operating programme and budget the number of employees of the Operator employed in connection with operations was to be determined by the Operator: see Clause 5.3.
(d) The Operator was to determine remuneration (and thus the pension arrangements that would form part of that remuneration): see Clause 5.3.
(e) The Operator was to conduct all operations in accordance with approved programmes and budgets and under the overall supervision and direction of the Operating Committee: see Clause 5.2.
(f) The Operator was authorised to make such expenditures, incur such Commitments for expenditure and take such actions as may be authorised by the Operating Committee: see Clause 5.5(a).
(g) The Operating Committee was responsible for the orderly supervision and direction of operations: see Clause 6.1.
(h) This would include: (a) determination of all general policies, procedures and methods of operations and (b) consideration, revision and approval of all proposed operating programmes and budgets: see Clause 6.1(a).
(i) An operating programme and budget was to "include as a minimum the work required to be performed under the Licence in respect of the Contract Area during such budget period and the requirements of Operator having regard to previously approved programmes and budgets and its obligations": see Clause 7.2.
(j) All costs and expenses of all operations under the Agreements in or in respect of the Contract Area or the Licence were to be borne by the Participants in proportion to their respective Participating Interests: see Clause 10.1.
(k) The Operator was to prepare and furnish to the Operating Committee reports, statements, data and information: see Clause 5.4(l).
(l) All costs and expenses of whatsover kind that are incurred in the conduct of operations were to be determined and settled in the manner provided in the Accounting Procedure: see Clause 10.2.
(m) The purpose of the Accounting Procedure was to establish equitable methods for determining charges and credits applicable to operations under the Agreement and to provide that the Operator neither gained nor lost by reason of the fact it acted as Operator: see Exhibit "A".
(n) The Accounting Procedures envisaged that often estimation might be involved: see Exhibit "A".
"… why is it any more commercial to impose an unknown, uncontrollable and unlimited liability for [the] unforeseen risks [of "future pension deficit contributions"] on the [Participants]? The position is that neither [the Operator] not [the Participants] wish to bear the risk, but why should the contract be construed so as to require [the Participants] to bear the risk, with the impossible accounting consequences identified …. In the real world, [Mr David Wolfson QC, Leading Counsel for the Opertaor]'s impasse [where the matters are left with the Participants "refusing to take on the future undetermined liabilities, with [the Operator] exposed to those liabilities"] would be broken by negotiation and agreement between [the Operator] and [the Participants] about how to deal with future liabilities: [the Particpants] may argue that the volatility of the Scheme's funding should be reduced (by closing the [defined benefit] scheme and switching employees to a [defined contribution] scheme or a group personal pension arrangement); [the Operator] may argue that that would be a false economy, as a [defined benefit] scheme is vital to the recruitment and retention of key staff; but the point is that this would be dealt with by negotiation and agreement, perhaps leading to the amendment of the Agreements."
Conclusion on liability
Extracts from Exhibit "A" to the JOA
Operator shall furnish to Non-Operators [meaning participants other than the Operator, and including the Participants] a statement of expenditure on or before the 25th day of each month reflecting their proportionate share of expenditures incurred and credits received by the Operator on behalf of the Joint Account for the preceding month. This statement will be expressed in U.S. dollars and sterling currency as actually expended and will also reflect a reconciliation of cash advances received and actual cash disbursements for the preceding month and to date. The statement will also provide aggregate total expenditure to date expressed in Sterling. The statement shall include schedules of expenditures and credits to the Joint Account summarized by AFE and appropriate accounting classifications indicative of the nature thereof showing, inter alia, current expenditures, commitments, estimates to complete, total estimated expenditures and authorized expenditure. Operator shall, upon request by Non-Operator(s), furnish a description of such accounting classifications and all subsequent revisions thereto. Estimated summary expenditure statements shall be furnished at the earliest available date after each month end. The statement and/or schedules shall be so detailed or contain such explanations as to permit reference to the appropriate item, if any, in the approved budget. In addition, unusual payments and receipts shall be separately annotated.
Budgets and budget expenditure reports will be expressed in Sterling. U.S. dollar expenditures applicable thereto will be translated to sterling at the accounting rate described in Section 1.3.
Each Non-Operator shall advance to the Operator such Non-Operator's share of the estimated cash requirements for the succeeding month for the Joint Operations. Such estimates shall be based on the latest information available to Operator at the time the request is sent as to actual cash requirements for the month and shall indicate the main categories where funds are required.
Each [p]articipant shall pay its proportionate share of Cash Calls for value on the due date as provided in Section 1.5. That is Cash Advances called according to the above procedure should be available for disbursement by the Operator on the due date. If not so made, the unpaid balance shall bear interest at the rate set forth in Article 10.4 of the Agreement.
Payments of any such Cash Advances shall not prejudice the right of any Non-Operator to protest or question the correctness of any statements of expenditure. Subject to the right to audit in Section 1.8, all statements of expenditure rendered to Non-Operators by Operator during any calendar year shall conclusively be presumed to be true and correct after twenty-four (24) months following the end of any such calendar year, unless, within the said twenty-four (24) month period a Non-Operator takes written exception thereto and makes claim on Operator for adjustment. No adjustment favourable to Operator shall be made unless it is made in writing within the same prescribed period. The provisions of this section shall not prevent adjustments resulting from physical inventory of the Joint Property as provided in Section 5.3, claims involving a third party, or adjustments required by governmental authority.
A Non-Operator, upon at least thirty (30) days' advance written notice to the Operator and all other Non-Operators, shall have the right to audit Operator's accounts and records or those of Affiliates of Operator which are engaged in conducting a substantial part of the Joint Operations, relating to the accounting hereunder for any calendar year within a period of twenty-four (24) months following the end of such calendar year. The right of audit includes access to books of accounts, accounting entries, inventory records, vouchers, payroll charges, invoices, basis for allocation of charges allocated, and any other documents or correspond [sic] once necessary, including inter alia the Operator's standard personnel policies in force in the relevant periodical, to verify the charges and credits pertaining to the Joint Account. At the option of the Non-Operators conducting the audit, the auditors shall have the right to visit and inspect all sites, plants, facilities, warehouses and offices serving the Joint Operations.
Within sixty (60) days after conclusion of the audit, a written report of the audit results will be issued to the Operator and circulated to all [p]articipants who have participated in the cost of the audit. The Operator will then have ninety (90) days after receipt of the audit report to prepare a written reply for circulation to such [p]articipants. Operator and Non-Operators shall make every reasonable effort to resolve all audit claims. In event, the Operator and Non-Operators are unable to resolve any audit claim within a reasonable period; they shall endeavo[u]r to agree upon submitting the dispute to an independent expert for its recommendations and findings. The selection of the expert, the method and procedure for submission of the matter to the expert and the sharing of costs thereof shall be subject to the unanimous agreement of the Operator and Non-Operators. The recommendations and findings of the expert shall be advisory and not binding upon any of the parties; however, Operator and Non-Operators shall consider such recommendations and findings in endeavo[u]ring to reach a mutually acceptable resolution of the audit claim.
In the event that any of the provisions contained herein for determining charges and credits to the Joint Account prove unfair or inequitable to the Operator or Non-Operators, the [p]articipants shall meet and in good faith endeavour to agree on amendments or revisions to correct any unfairness or inequity. All amendments and revisions will be in writing and agreed to by the [p]articipants to the Agreement.
CHARGEABLE COST AND EXPENDITURES
Subject to the provisions of the Agreement and the limitations herein after prescribed, the Operator shall charge the Joint Account for all costs incurred in conducting Joint Operations (for avoidance of doubt, any personnel engaged solely in training on the Joint Property for assignment to other operations shall not be considered as engaged in the conduct of Joint Operations). Such costs include, but are not necessarily limited to the following:-
A. That portion of salaries and wages of Operator's and its Affiliates' employees who are directly engaged in the conduct of Joint Operations, representing the portion of time spent by such employees directly engaged in the conduct of Joint Operations. To the extent not included in salaries and wages, the Joint Account shall also be charged with Operator's cost of holiday, vacation sickness, disability benefits and other customary allowances applicable to the salaries and wages chargeable under this paragraph in accordance with Operator's standard personnel policy in force in the relevant period.
B. A pro-rata portion of expenditures or contributions made pursuant to assessments imposed by governmental authority which are applicable to Operator's labour cost of salaries and wages chargeable under Section 2.2A.
C. A pro-rata portion of reasonable: business expenses, travel expenses cost of living and housing allowances of those employees whose salaries and wages are chargeable under Section 2.2A and for which expenses the employees are reimbursed under Operator's standard Personnel policy enforce in the relevant period.
D. A pro-rata portion of any personal income taxes incurred by personnel whose salaries and wages are chargeable under Section 2.2A and reimbursed by Operator in accordance with Operator's standard personnel policy in force in the relevant period.
Operator's cost of established plans for employees' group life insurance, health insurance, pension, retirement, thrift, stock purchase, bonus, service and severance indemnities required by law or Operator's standard personnel policy in force in the relevant period and other benefits of a like nature applicable to the salaries and wages chargeable under Section 2.2A. However, the costs of any settlements for retirements and severance shall be pro-rated over those operations which the individual concerned served in the last three years of his/her employment, or, if less, over the period of employment with the Operator.
Any other expenditures nor cover [sic] or dealt with in the foregoing provisions which are incurred by the Operator or its Affiliates for the necessary or proper conduct of the Joint Operations.
OPERATING PROGRAMMES AND BUDGETS
The operating programmes and budgets shall include the following:-
(a) Details of the method by which the project is to be managed including estimates of the manpower requirements of the Operator or its Affiliates and third party contractors, such estimates to be provided in man hours.
(b) An estimate of operating costs for at least the first five years of production.
(c) An estimate of the movement of accruals, contractors advances and retentions in each quarter of the budget year and in each year thereafter.
(d) Details of the escalation factors, currency exchange rate assumptions and any general contingency provisions which have been used in the preparation of the programme and budget.