RISK ALLOCATION IN PETROLEUM JOINT VENTURES

Abstract

This paper will consider aspects of contractual risk allocation in the energy industry.

The industry is a mature one, with sophisticated and experienced contractors and operators. Hydrocarbons have uniquely hazardous characteristics making all parties, the State and the community acutely aware of the need to control the means of its discovery, appraisal, production and transportation.

The Exxon Valdez and Piper Alpha disasters are paradigm examples of the drastic consequences and the magnitude of the risk, that can flow from what might otherwise be considered 'a minor act or omission'.

Risk management is based on the premise that it is in the interest of any project that certain risks be borne by certain parties, normally the person in the best position to control the risk concerned. A realistic approach to allocation of risk will reduce costs and claims and prevent over or under insurance. Where a risk which can be efficiently absorbed or covered by one party is passed to another, the short-term gain may be more than offset by the other party's increased charges or defensive practices for absorbing the risk or its inability to perform following a liability arising from that risk.

As noted above, the risk allocation and management technique dealt with in this paper is contractual. Parties seek to distribute and allocate risks by the use of clauses of indemnity, limitation, exclusion, insurance and force majeure. Each of these contracts allocate risk to one party or the other for matters such as personal injury, property loss and damage, public liability, pollution, negligent workmanship and indirect loss or damage.

This paper will examine the structure of these clauses (other than insurance) in the context of offshore development projects, centring around the joint operating agreement made between an operator and the licence holders, and a consideration of contracts entered into between the operator and its participants and the project contractors and project insurers. It will also address the issue of conduct in breach of statute and the effect of such conduct on indemnity and insurance agreements.