Apache Oil Australia Pty Ltd (now known as Quadrant Oil Australia Pty Ltd) v Santos Offshore Pty Ltd - [2016] WASCA 213

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

TITLE OF COURT : THE COURT OF APPEAL (WA)

CITATION: APACHE OIL AUSTRALIA PTY LTD (now known as QUADRANT OIL AUSTRALIA PTY LTD) -v- SANTOS OFFSHORE PTY LTD [2016] WASCA 213

CORAM: NEWNES JA
MURPHY JA
MITCHELL JA

HEARD: 5 & 6 OCTOBER 2016

DELIVERED : 1 DECEMBER 2016

FILE NO/S: CACV 160 of 2015

BETWEEN: APACHE OIL AUSTRALIA PTY LTD (now known as QUADRANT OIL AUSTRALIA PTY LTD)
First Appellant
APACHE EAST SPAR PTY LTD (now known as QUADRANT EAST SPAR PTY LTD)
First-named Second Appellant
APACHE KERSAIL PTY LTD (now known as QUADRANT KERSAIL PTY LTD)
Second-named Second Appellant
AND
SANTOS OFFSHORE PTY LTD
Respondent

ON APPEAL FROM:
Jurisdiction              :  SUPREME COURT OF WESTERN AUSTRALIA
Coram  :CHANEY J
Citation  :APACHE OIL AUSTRALIA PTY LTD -v- SANTOS OFFSHORE PTY LTD [2015] WASC 318
File No  :CIV 2787 of 2013

Catchwords:

Contract - Joint venture - Joint operating agreement - Construction - Right to remove the operator - Whether the operator breached the joint operating agreement by undertaking steps to develop the joint venture without authorisation or supervision from the operating committee - Whether any breach by the operator was committed 'in its capacity as operator' or as a party to the joint operating agreement - Whether undertaking steps to develop the joint venture without authorisation or supervision amounted to a 'material' breach of the joint operating agreement

Legislation:

Nil

Result:

Appeal allowed

Category: B

Representation:

Counsel:

First Appellant : Mr P J Brereton SC &
Mr N J Landis

First-named Second Appellant : Mr P J Brereton SC &
Mr N J Landis

Second-named Second Appellant : Mr P J Brereton SC &
Mr N J Landis

Respondent: Mr B Dharmananda SC &
Mr D J Jackson

Solicitors:

First Appellant               :        Clifford Chance
First-named Second Appellant     :        Clifford Chance
Second-named Second Appellant    :        Clifford Chance
Respondent:        Herbert Smith Freehills

Case(s) referred to in judgment(s):

Apache Oil Australia Pty Ltd v Santos Offshore Pty Ltd [2015] WASC 318
Dovuro Pty Limited v Wilkins [2003] HCA 51; (2003) 215 CLR 317
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640
George 218 Pty Ltd v Bank of Queensland Limited [No 2] [2016] WASCA 182
Halford v Price [1960] HCA 38; (1960) 105 CLR 23
Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited [2015] HCA 37; (2015) 256 CLR 104
Redhill Iron Ltd v API Management Pty Ltd [2012] WASC 323
Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52; (2004) 219 CLR 165

Table of contents

Newnes & Murphy JJA

Table of contents

Introduction
Overview of the dispute and its background

The history of the Spar Title, production licence WA‑45‑L, and the Spar‑2 well
Apache Parties' acquisition of interest
The East Spar JV and Halyard development
The proposed tie back of the Spar‑2 well to the Halyard development
Proposals for the development of the Spar‑2 well and the tie back
The dispute in overview

The facts in more detail

2009 - 2010
2011
2012
2013
The 2013 development Work Program and Budget
Santos Offshore's material breach notice
Proposed deferment of Operating Committee meeting
November 2013 - further correspondence regarding material breach notice
The Operating Committee meeting of 11 November 2013
The Operating Committee meeting of 1 May 2014, cash calls and revised Field Development Plan

The reasons and orders of the primary judge

The primary judge's reasons
Orders made by the primary judge

Grounds of Appeal
Disposition - ground 1

The question for resolution
Santos Offshore's arguments
The proper construction of cl 7.1(A)

Disposition - ground 2 and the Notice of Contention
Disposition - ground 3

Conclusion

Mitchell JA:
Effect of cl 7.1(A) of the JOA
Capacity as Operator

Appendix - the terms of the JOA

Parties and the recited purpose of the JOA
Scope of the JOA
Operations - Joint or Exclusive
The Operator
Joint Account maintained by the Operator
Rights, functions and duties of the Operator
Removal of the Operator
Joint Operations under cl 5 - Operating Committee
Work Programs and Budgets

Exploration
Appraisal
Development Plans and development Work Programs and Budgets

Preparation and approval (or rejection) of a Development Plan and a development Work Program and Budget

Production
Award of contracts
AFE procedure
Revisions to Work Programs and Budgets

Exclusive Operations - proposals and conduct
Exclusive Operations - consequences

NEWNES & MURPHY JJA:

Introduction

This appeal concerns a dispute over the removal of the 'Operator' under a Joint Operating Agreement dated 27 August 2010 (JOA) in respect of a joint venture (Spar JV) for the exploration and production of natural gas from the Spar gas field off the coast of Western Australia (Spar project). The area in question is the subject of retention lease WA‑4‑R, and for which production licence WA‑45‑L has been issued.
The appellants (who will be referred to as Apache Oil, Apache East Spar and Apache Kersail, collectively Apache Parties) are participants in the Spar JV with the respondent (Santos Offshore).[1] The Apache Parties are wholly owned subsidiaries of Apache Energy Limited (Apache Energy), and Santos Offshore is a wholly owned subsidiary of Santos Ltd (Santos). The Apache Parties have a 55% interest in the Spar JV, and Santos Offshore has a 45% interest in it.[2] The Spar JV was formed by the JOA, under which Apache Oil was named as the Operator.[3]
[1] Apache Oil Australia Pty Ltd v Santos Offshore Pty Ltd [2015] WASC 318 (primary reasons) [1].
[2] Primary reasons [2].
[3] Primary reasons [2], [4].
The JOA contains a term to the effect that the Operator may be removed if, 'in its capacity as Operator', it has committed a material breach of the JOA which, in effect, has not been cured within a specified time.[4]
[4] GB 131.
The primary judge found that Apache Oil had committed material breaches of the JOA, and that Santos Offshore was entitled to remove Apache Oil as the Operator under the JOA. The Apache Parties appeal against that decision.

Overview of the dispute and its background

The material facts are set out in more detail later in these reasons. It is convenient at this juncture to provide a broad overview of the dispute and the background to the dispute.

The history of the Spar Title, production licence WA‑45‑L, and the Spar‑2 well

From about 19 September 2008 until the commencement of the JOA in 2010, Santos Offshore was the sole holder of retention lease WA‑4‑R (Spar Title).[5] Santos Offshore applied for a petroleum production licence in respect of that area and, as part of the application process, in September 2009, submitted a Field Development Plan (Santos Offshore Field Development Plan) to the Western Australian Department of Mines and Petroleum (Department).[6]
[5] Primary reasons [10].
[6] Primary reasons [11].
By letter dated 25 August 2010, the Department advised Santos Offshore that it was prepared to grant a petroleum production licence in respect of the area.[7] Production licence WA‑45‑L (Spar Production Licence) was subsequently granted to the Apache Parties and Santos Offshore on 25 July 2011 (following the Apache Parties' acquisition of their interest in the Spar Title referred to below).[8]
[7] Primary reasons [12].
[8] Primary reasons [63]; witness statement of Robert Jamieson Cowan (Cowan), par 49.
In the latter part of 2010, the Apache Parties and Santos Offshore, as participants in the Spar JV, carried out drilling works in relation to a well within the area of the Spar Title known as the 'Spar‑2' well.[9]

Apache Parties' acquisition of interest

[9] Primary reasons [15].

The Apache Parties purchased their interest in the Spar Title pursuant to a Sale and Purchase Agreement dated 27 August 2010 (SPA).[10] By the SPA, Santos Offshore sold to the Apache Parties, with effect from 31 March 2010, a 55% legal and beneficial interest in the Spar Title, certain 'materials' listed in a schedule to the SPA, and all wells, facilities, equipment and other like property items held by Santos Offshore for use in 'Joint Operations' under the JOA. The 55% interest was held by Apache Oil as to 25%, Apache Kersail as to 5%, and Apache East Spar as to 25%.[11]
[10] Primary reasons [40] - [41]; GB 51.
[11] Primary reasons [40].
Relevantly, for present purposes, cl 7.1(A) of the JOA provided that '[n]o operations may be conducted under this Agreement' except as 'Joint Operations' or 'Exclusive Operations'. Joint Operations were defined as operations and activities carried out by the Operator pursuant to the JOA, the costs of which were chargeable to all the parties: cl 1.45. Exclusive Operations were defined as operations and activities carried out pursuant to the JOA, the costs of which were chargeable to fewer than all the parties: cl 1.33. The ability of parties to conduct Exclusive Operations was limited, however, by cl 7.1(C) which provided, in effect, that, except in respect of an abandoned well, a party could not propose or conduct an Exclusive Operation until a proposal to the same effect had gone to the Operating Committee as a proposed Joint Operation and had not been approved.
Part of the background against which the SPA was entered into was that the Apache Parties and another Santos subsidiary, Santos (BOL) Pty Ltd (Santos BOL) were in a joint venture (discussed below) for the production of gas from a nearby area, which was processed at Varanus Island.[12] In this context, by cl 2.4(a)(iv) of the SPA, the Apache Parties and Santos Offshore were required to execute a document setting out (in relation to gas produced from the Spar JV) principles for access to processing capacity on Varanus Island with Santos BOL and Apache Northwest Pty Ltd.[13]
[12] Primary reasons [13] - [14].
[13] Primary reasons [41]; GB 58.
This was done via a letter agreement entitled 'Capacity Access Agreement' dated 27 August 2010. The Capacity Access Agreement was directed to encourage cooperation between the parties in relation to access to facilities to process gas produced through the JOA and through other projects in which the parties had an interest. By [8] of the Capacity Access Agreement, the parties expressed an intention that if 'capacity to evacuate, process, compress or ship gas and liquids is required for Spar', then the parties would 'work together to agree the steps to be taken to obtain that capacity'. By [13] of the Capacity Access Agreement, the parties agreed to negotiate in good faith to enter into a 'fully termed Access Agreement … consistent with these terms on or before 1 November 2010'. However, no 'fully termed Access Agreement' was ever made.[14]

The East Spar JV and Halyard development

[14] Primary reasons [44] - [45].

The Apache Parties conduct a joint venture with Santos BOL in respect of an area adjacent to the area the subject of the Spar JV. This other joint venture (East Spar JV) involves the exploration and development of gas in connection with production licence WA‑13‑L (East Spar Production Licence). The area the subject of the East Spar Production Licence has within it a well known as the 'Halyard‑1' well.[15] Gas produced from the Halyard‑1 well is transported to, and is processed on, Varanus Island. In this regard, the East Spar JV owns pipelines and subsea infrastructure between the Halyard‑1 well and Varanus Island, and gas processing facilities located on Varanus Island. Pipeline licence WA‑21‑PL was issued by the Department to the East Spar JV participants in January 2011.[16] On 2 June 2011, Santos announced the commencement of gas production from the Halyard‑1 well.[17]

The proposed tie back of the Spar‑2 well to the Halyard development

[15] Primary reasons [13].

[16] Primary reasons [14].

[17] Primary reasons ]62].

Santos Offshore's intention, at the time of the sale of its interest in the Spar Title to the Apache Parties and on the creation of the Spar JV, was to 'tie back' the Spar‑2 well to the Halyard development, which was then under construction, so that gas from the Spar‑2 well could ultimately be transported to Varanus Island for processing.[18] As noted above, Varanus Island was the place under the East Spar JV for processing gas from the nearby Halyard‑1 well.
[18] Primary reasons [15].
In the course of 2011, the Apache Parties formed a view that the tie back for the Spar‑2 well to the Halyard development would most cost effectively be done in conjunction with the drilling of a well, known as the 'Beam‑1' well, located within the East Spar Production Licence area.[19]

Proposals for the development of the Spar‑2 well and the tie back

[19] Primary reasons [79] - [91].

In 2011, Apache Energy (it is to be inferred on behalf of Apache Oil as Operator) sent to Santos Offshore authorisations for expenditure (known as 'AFEs') in relation to the carrying out of certain engineering design work and certain geophysical and related work, in connection with the Spar‑2 well. The AFE for the design work was sent to Santos Offshore in the first quarter of 2011, and the AFE for the geophysical and related work was sent in September 2011.[20] Santos Offshore did not approve the proposed expenditure for either category of work.[21]
[20] Primary reasons [55] - [57], [68].
[21] Primary reasons [57], [69].
Subsequently, on 25 November 2011, the joint venture participants met to discuss the potential development of the Spar‑2 well. At this meeting, the Apache Parties gave a presentation to Santos Offshore. The Apache Parties suggested that the development of the Spar‑2 well and its tie back to the Halyard development be undertaken in conjunction with the drilling of the Beam‑1 well. The presentation indicated that by undertaking the tie back works in conjunction with the drilling of the Beam‑1 well, there would be a saving of over $58 million.[22] It appears that Santos Offshore indicated at this meeting that it may not, at that stage, approve a Work Program and Budget in connection with such a development, because of concerns related to, amongst other things, the 'accessibility' of Varanus Island.[23]
[22] Primary reasons [79] - [82].
[23] Primary reasons [88].
Following this meeting of the Spar JV participants, Apache Oil as Operator delivered to Santos Offshore a proposed Work Program and Budget for 2012 along the lines outlined in the presentation made to Santos Offshore on 25 November 2011 (proposed 2012 Work Program and Budget). The proposed 2012 Work Program and Budget was dated 28 November 2011. Apache Oil also enclosed a proposed resolution of the Operating Committee for the approval of the proposed 2012 Work Program and Budget.[24]
[24] Primary reasons [83] - [85].
On 25 January 2012, Santos Offshore rejected the proposed 2012 Work Program and Budget. It returned to Apache Oil the proposed Operating Committee resolution showing a 'no' vote from Santos Offshore.[25]
[25] Primary reasons [94].
The Apache Parties nevertheless, at their own expense, based on their own internal AFEs:[26]
(a)in 2012, completed front‑end engineering design (FEED) in relation to the Spar‑2 well;[27]
(b)in 2012, undertook evaluation and investigation into items of subsea infrastructure with long lead times between order and delivery, for use in the proposed tie back work;[28] and
(c)in 2012 and 2013, entered into contracts with certain suppliers for the procurement of certain long lead time items of equipment (but not their installation).[29]
[26] Primary reasons [93], [104] - [107], [109], [116], [118], [201].
[27] Primary reasons [104] - [107]; appellants' amended chronology, No 18, WB 61; respondent's chronology, No 24, WB 67.
[28] Primary reasons [98], [112].
[29] Primary reasons [98], [110] - [112], [133], [146].
Expenditure for this work was not charged to Santos Offshore on the Joint Account of the Spar JV until after Santos Offshore had approved, in late 2013, the 2013 Field Development Plan and the 2013 development Work Program and Budget, referred to below.[30] Also, it was common ground[31] that this work did not involve the use of Joint Property, ie, it did not involve the use of any wells, facilities, equipment, materials, information, funds or property held for use in Joint Operations.[32]
[30] Primary reasons [160], [201].
[31] Appeal ts 25.
[32] GB 118.
In 2013, the Operating Committee of the Spar JV participants determined that a Development Plan and a development Work Program and Budget be prepared by Apache Oil as Operator for the development of the Spar‑2 well.[33] Apache Oil prepared such documents and submitted them for approval to the Operating Committee.[34] In broad terms, they reflected the proposals for development set out in Apache Oil's proposed 2012 Work Program and Budget.[35] The proposed 2013 development Work Program and Budget included the costs which had, by that stage, been incurred by the Apache Parties in relation to the work referred to earlier.[36] It also made provision for the incurring of future expenditure by the Spar JV participants in relation to the completion of the tie back work and production from the Spar‑2 well.[37] The proposed 2013 Field Development Plan disclosed a schedule proposing:[38]
(a)the installation of the subsea equipment beginning in the first quarter of 2014;
(b)start up in the second quarter of 2014; and
(c)the production of gas from the Spar‑2 well in about mid‑2014.
[33] Primary reasons [137] - [138].
[34] Primary reasons [140].
[35] GB 235 - 269, 492 - 524, 525 - 543.
[36] Primary reasons [141] - [145].
[37] GB 533 - 534.
[38] GB 518.
On 11 November 2013, the Operating Committee of the Spar JV participants met and approved the 2013 Field Development Plan and the 2013 development Work Program and Budget which had been proposed by Apache Oil.[39] Apache Oil as Operator subsequently issued AFEs, including for the past expenditure incurred by the Apache Parties in relation to the work referred to earlier, and issued a cash call to participants of the Spar JV. Santos Offshore paid the cash call on 31 July 2014.[40]

The dispute in overview

[39] Primary reasons [158].

[40] Primary reasons [159] - [160].

Although Santos Offshore approved Apache Oil's proposed 2013 Field Development Plan and the 2013 development Work Program and Budget in relation to the development of the Spar‑2 well and its tie back to the Halyard development, it nevertheless contended that Apache Oil had breached cl 7.1(A) of the JOA by undertaking, albeit at the expense of the Apache Parties, the activities referred to in [20] above other than as a Joint Operation or a properly authorised Exclusive Operation. Santos Offshore alleged that the breaches were material breaches, entitling it to remove Apache Oil as Operator under the JOA.

The facts in more detail

2009 - 2010

The Santos Offshore Field Development Plan referred to the proximity of the Spar Title area to the Halyard‑1 well. The executive summary of the Santos Offshore Field Development Plan stated:[41]
[41] Cowan, par 20.
[T]he WA‑4‑R Spar Field development is designed to be conducted in an integrated, co‑operative manner with the WA‑13‑L development, in order to be able to produce the field at a plateau rate commensurate with the expected resource range outcome resulting from WA‑4‑R appraisal. It is anticipated that by undertaking an integrated approach to field development, optimal production from the reservoir will be achieved. In the context of this application, the Halyard‑1 connection is part of a broader subsea tieback project.
After entry into the JOA on 27 August 2010, Santos issued a media release announcing the sale of 55% of its interest in the Spar Title to Apache Energy. The media release said:[42]
[42] Primary reasons [53].
The two companies will complete and tie back the Halyard well in WA‑13‑L (Halyard) and subject to the outcome of the Spar 2 appraisal well in WA-4-R (Spar) will quickly complete and tie back Spar as part of this development. This development is a significant new addition to the Western Australian supply portfolio, with gas from this area expected to supply around 10% of Western Australia's domestic gas needs from 2012. (emphasis added)

By cl 7.3(a) of the SPA, the Spar JV participants had approved a Work Program and Budget, and an AFE, of approximately $67.5 million for drilling works, principally in relation to the Spar‑2 well.[43] In the latter part of 2010, the Spar‑2 well was drill‑tested and completed as part of the Joint Operations under the JOA. The target reservoir demonstrated very high productivity.[44]
[43] Primary reasons [54].
[44] Primary reasons [15].
Again, the plan, as announced publicly by Santos on 24 November 2010, was to tie the Spar‑2 well back to the Halyard development, which was then under construction, to transport gas to Varanus Island.[45]
[45] Primary reasons [15]; Cowan, par 29.

2011

On 19 January 2011, Apache Energy emailed Santos an AFE for the completion of FEED studies with a view to making a final investment decision recommendation by February 2011, and then commencing production from the Spar‑2 well by mid‑2012.[46] The amount of expenditure for which approval was sought was approximately $1.6 million.[47] On 8 February 2011, Apache Energy emailed Santos Offshore a document outlining the justification for the AFE for FEED studies.[48] This AFE for FEED studies was not, however, approved by Santos (or Santos Offshore) and, consequently, was not approved by the Operating Committee of the Spar JV.[49]
[46] Primary reasons [55], [57]; Cowan, par 33.
[47] Primary reasons [57].
[48] Primary reasons [58].
[49] Primary reasons [58], [61].
On 17 February 2011, Santos released a presentation outlining its 2010 full year results, which referred to the Spar‑2 well being tied back and on‑stream in early 2013.[50]
[50] Cowan, par 37.
On 8 March 2011, Apache Energy sent Santos a Work Program and Budget for the 2011 calendar year (2011 Work Program and Budget), together with a draft Operating Committee resolution, signed on behalf of the Apache Parties, proposing approval of the 2011 Work Program and Budget. The 2011 Work Program and Budget proposed expenditure of $196,000. It did not include any expenditure for the FEED studies the subject of the earlier AFE. On 9 March 2011, Santos Offshore approved the 2011 Work Program and Budget.[51]
[51] Primary reasons [59] - [60].
On 20 April 2011, Santos released its first quarter activities report for the period ended 31 March 2011. The report referred to the tie in of the Spar‑2 well to the Halyard development and stated:[52]
[52] Cowan, par 42.
The Spar‑2 well has been completed as a production well and will be tied in to the Halyard facilities for eventual processing at Varanus Island. The Spar‑2 well is located two kilometres from Halyard and is expected to be online in 2012.
On 2 June 2011, Santos announced that gas production had commenced for the Halyard‑1 well.[53]
[53] Primary reasons [62].
By August 2011, the Apache Parties had internally approved the Spar project proceeding to final investment decision, and wished to progress the development of the Spar‑2 well without delay.[54]
[54] Primary reasons [66] - [67], [115].
On 26 September 2011, Apache Energy sent to Santos an AFE for the sum of approximately $2.1 million for geophysical, environmental and geotechnical surveys for both the Spar project and the proposed Beam‑1 well.[55] On 19 October 2011, Santos Offshore advised the Apache Parties by email that it did not approve the AFE.[56] Following this response, the Apache Parties gave consideration to proceeding with this work as a 'sole‑risk activity', and raising an Apache Parties' internal AFE to cover 100% of the costs.[57]
[55] Cowan, par 54; primary reasons [68].
[56] Primary reasons [69].
[57] Primary reasons [70] - [73].
On 20 October 2011, Santos released its third quarter activities report for the period ended 30 September 2011. The report referred to the Spar project and again referred to the tie in of the Spar‑2 well to the Halyard development.[58]
[58] Cowan, par 57.
On 2 November 2011, Apache Energy sent Santos Offshore a proposed '2012 Production Geoscience and Reservoir Engineering Work Program and Budget' for the Spar Title. The accompanying memorandum stated that the budget allocated funds for proposed expenditure of approximately $460,000, which fell outside the scope of the '2012 Operations Budget'.[59] On 9 November 2011, Santos Offshore, by email, queried the reference to a '2012 Operations Budget'. The email said that Santos Offshore assumed that there would be no operations 'spend' in relation to the Spar Production Licence in 2012.[60] On 10 November 2011, Apache Energy replied and told Santos Offshore that the reference to the '2012 Operations Budget' was an error and that there was no operating budget planned for 2012.[61]
[59] Primary reasons [74].
[60] Primary reasons [75].
[61] Primary reasons [76].
Mr Joy of Apache Energy then wrote by email to Santos Offshore on 11 November 2011 stating:[62]
[62] Primary reasons [77].
As I mentioned to you yesterday, Apache is putting together plans to develop Spar and as soon as the development plan and budget is ready we will present it to the JV in accordance with the JOA. We may seek to amend the 2012 WA‑45‑L budget at that stage by means of an Operating Committee Resolution, having regard to [clauses] 6.2 and 6.5 of the JOA.
On 25 November 2011, the Apache Parties met with Santos Offshore. The Apache Parties outlined the proposed development of the Spar Production Licence involving the tie back, and the proposed development of the Beam‑1 well on the East Spar Production Licence.[63] They indicated that the development of the Spar‑2 well tie back in conjunction with the Beam‑1 well would cost $58.4 million less in capital expenditure than would be incurred if the developments were undertaken separately. The proposed critical path schedule for the Spar JV showed the ordering of long lead items by the end of 2011, and manufacture and delivery of the subsea equipment before the end of 2012.[64]
[63] Primary reasons [79].
[64] Primary reasons [82].
On 29 November 2011, Apache Oil delivered to Santos Offshore the proposed 2012 Work Program and Budget, together with a proposed resolution of the Operating Committee proposing its approval. The proposed resolution had been signed by the Apache Parties.[65]
[65] Primary reasons [83].
As had been foreshadowed at the meeting on 25 November 2011, the proposed 2012 Work Program and Budget proposed the development of the Spar Production Licence to be carried out in conjunction with the drilling of the Beam‑1 exploration well on the East Spar Production Licence, in order to achieve savings of approximately $58.4 million.[66]
[66] Primary reasons [84].
The proposed budget for the Spar Production Licence was for a total of $79 million, comprising $1.8 million for FEED and geotechnical surveys; $14 million for subsea equipment; $43.9 million for the installation of subsea equipment; and $19.5 million for project management and other costs. The project schedule associated with the budget indicated that FEED studies, and the evaluation of and tendering for long lead items, had been carried out in late 2010 and into 2011, and was scheduled to be completed by 31 December 2011.[67]
[67] Primary reasons [85]; GB 257 - 258.
Apache Oil also sent what was in effect a corresponding proposed Work Program and Budget for the East Spar JV to Santos Offshore on 14 December 2011.[68]
[68] Primary reasons [86].
Prior to receiving a response from Santos Offshore in relation to the proposed 2012 Work Program and Budget, the Apache Parties circulated amongst themselves on 15 December 2011 a memorandum proposing they commence development of the Spar Production Licence and the East Spar Production Licence in accordance with the proposed Work Programs and Budgets and that internal AFEs be executed.[69] The memorandum proposed approval by the Apache Parties of expenditure of approximately $31.2 million, of which approximately $11.6 million related to long lead items for the Spar Production Licence and approximately $19.6 million related to long lead items for the East Spar Production Licence.[70] The memorandum noted that at the JV participants' meeting on 25 November 2011, Santos had indicated that it may not approve the proposed 2012 Work Program and Budget because of concerns relating to the 'accessibility' of Varanus Island. The memorandum continued:[71]
[69] Primary reasons [87].
[70] Primary reasons [89].
[71] Primary reasons [88].
In order for Apache to preserve the opportunity to tie back both Spar-2 and the potential future Beam well to the recently installed Halyard / East Spar infrastructure in early 2013, this Recommendation for Apache Procurement of [long lead items] has been prepared. The current base case plan is to carry out the offshore construction activities in early 2013 ... Savings of over AUD 50 M have been identified if the work is executed in this time frame. Competitive pricing has been obtained for all the [long lead items].
It is recommended that a 100% Apache AFE be prepared for the [long lead items], in order to allow procurement to commence before the end of 2011. When Santos approve the DP&B for WA-45-L, a JV AFE will be raised for the development of Spar-2.
The Apache Parties' internal 15 December 2011 memorandum further described the reason for the combined development of the Spar Production Licence and the East Spar Production Licence, in the following terms:[72]
[72] Primary reasons [90].
Procurement of the [long lead items] associated with the combined development of the Spar-2 and Beam wells … would allow for an estimated cost saving of AUD 0.7 M for WA-13-L' [bold emphasis in the original]
…
It has been estimated that development of Spar-2 and Beam in the same program would lead to savings of AUD 58.4 M, predominantly from savings from a single installation mobilisation [bold emphasis in the original].
…
Significant cost savings have been identified for the combined development of the Spar-2 and Beam wells, versus standalone execution and consequently the combined development option is considered the best financial solution.
After receipt of the Apache Parties' internal 15 December 2011 memorandum, Mr Cooper of Apache Energy emailed the other recipients of the memorandum stating, in effect, that Santos was unlikely to give approval in the short term, so he would create a 100% Apache AFE to facilitate the procurement of the long lead items with a view to reallocating those costs once agreement had been reached.[73] In December 2011 and January 2012, an internal AFE was signed by the Apache Parties committing expenditure of approximately $31.1 million by the Apache Parties on equipment proposed in the 15 December 2011 memorandum. (The internal AFE received final approval from Apache Energy on 1 September 2012. The effect of this was that the Apache Parties bore the cost of those items.)[74]
[73] Primary reasons [92].
[74] Primary reasons [93], [116]; Cowan, par 79.

2012

Also, between 18 and 21 May 2012, the Apache Parties approved expenditure of approximately $1.6 million for FEED studies in relation to the Spar‑2 well, which had been proposed to Santos Offshore in February 2011 and which had not been approved by Santos Offshore or the Operating Committee.[75]
[75] Primary reasons [57], [104].
In the meantime, on 25 January 2012, Santos Offshore wrote to the Apache Parties advising that it rejected the proposed 2012 Work Program and Budget, and attached the Operating Committee's resolution proposing its approval showing a 'no' vote from Santos Offshore.[76]
[76] Primary reasons [94].
On 7 February 2012, the Apache Parties sent a notice to Santos Offshore for a proposal to conduct the work set out in the proposed 2012 Work Program and Budget as an 'Exclusive Operation' under cl 7.2 of the JOA.[77] On 10 February 2012, Santos Offshore wrote to the Apache Parties referring to cl 17(b) of the SPA, which provided, in effect, that no party would submit a notice for Exclusive Operations under the JOA until after 27 August 2013.[78] Apache Energy, on behalf of the Apache Parties, then wrote to Santos Offshore withdrawing the notice dated 7 February 2012.[79] The Apache Parties nevertheless continued to proceed with the proposals to secure long lead items.[80]
[77] Primary reasons [96].
[78] Primary reasons [97]; GB 85 - 86.
[79] Primary reasons [97].
[80] Primary reasons [98].
Pursuant to the internal AFEs referred to in [46] above, Apache Energy entered into the following contracts for the procurement of subsea equipment:
(a)on 3 October 2012, it entered into a contract with Cameron Australia Pty Ltd for the purchase of subsea production equipment for a price of approximately $14.9 million (Subsea Items contract);[81] and
[81] Primary reasons [110].
(b)on 16 November 2012, it entered into a contract for the supply of electro‑hydraulic umbilicals in the sum of approximately GBP£1.5 million (EHU contract).[82]
[82] Primary reasons [111].
On 18 October 2012, there was a technical committee meeting of the Spar JV at which Mr Galway, of Apache Energy, gave a presentation to representatives of Santos Offshore, including Mr Hackett, on the status of the project. Mr Galway's presentation:[83]
[83] Primary reasons [113].
(a)noted that a final investment decision was targeted for November 2012;
(b)referred to negotiating and finalising 'long-lead item delivery contracts', including, in effect, the Subsea Items contract, and to ongoing engineering involving flow assurance, flow line flushing and on-bottom stability;
(c)contained a target schedule which specified the date for award of contracts for long lead items as October 2012 and contemplated the award of installation contracts in February 2013; and
(d)provided a budget estimate, which showed that costs, representing approximately 12.5% of the budget of $US75 ‑ 85 million, had already been incurred for 2012.
In late November or early December 2012, the Apache Parties circulated amongst themselves a memorandum dated 28 November 2012 with an attached internal AFE for $US81.73 million.[84] The memorandum stated that the revised AFE covered 'the full project execution, inclusive of all PM&E, long lead items, transportation, installation, and commission/start‑up'.[85] Under the heading 'Joint Venture Partner Strategy', the memorandum stated:[86]
[84] Primary reasons [115].
[85] Primary reasons [117].
[86] Primary reasons [118].
[The Spar project] is a joint venture with Santos (Apache 55% / Santos 45%), however Santos is yet to approve the project and commit funding of their 45% share. Apache is currently in negotiation with Santos … Current expectation is that an agreement will be reached early in Q1 2013. An overview and update on [the Spar project] was part of a broader presentation to Santos in October 2012, and additional information will be provided to Santos to facilitate their approval in Q1 2013.
The [Spar project] AFE as previously approved for long-lead items is 100% sole risk to Apache, as is this request to supplement the AFE. The continuation of 100% Apache is required in the absence of Santos' approval, and also in order to award the transportation and installation contract early in 2013 to remain on schedule for a Q1 2014 offshore installation campaign.
Upon reaching agreement with Santos, the AFE would be amended to reduce the Apache share to 55%. In the case where no agreement is reached, Apache has the option in August 2013 under the JOA to sole risk the project, which would allow offshore installation to commence in Q1 2014, thus maintaining the committed RFSU and first sales gas dates outlined above.

2013

On 1 February 2013, Apache Energy emailed Santos Offshore and attached a copy of the '[Spar] Development Project - Scope of Work' and the '[Spar] - Basis of Design'.[87] The 'Scope of Work' outlined proposed development of the Spar project using a subsea tie back to link the Spar‑2 well into the existing Halyard subsea facility and the Varanus Island onshore processing facility.[88] On 8 March 2013, Mr Cowan of Apache Energy provided Mr Hackett of Santos Offshore with a copy of the 'Project Execution Plan'.[89] The 'Schedule & Planning' section in the plan referred to a schedule of milestones, including 'Commitment to Long Lead Subsea Equipment', in the fourth quarter of 2012.[90] The 'Scope of Work' section stated that the project execution comprised two phases, a FEED phase (completed in the third quarter of 2012), and a proposed subsequent execution phase.[91]
[87] Primary reasons [119].
[88] Primary reasons [120].
[89] Primary reasons [122].
[90] Primary reasons [122]; GB 402.
[91] Primary reasons [124]; GB 393.
On 18 April 2013, Santos Offshore wrote to Apache Oil noting that the Operating Committee had not approved the project or expenditure described in the Project Execution Plan. Santos Offshore queried whether any expenditure on the project had been incurred to the 'Joint Account'.[92] By letter dated 2 May 2013, Apache Energy replied to the letter to Apache Oil advising Santos Offshore that no expenditure had been incurred to the Joint Account, and that 'Apache' had incurred 100% of the expenditure. The letter advised that no expenditure was planned for the Joint Account until the matter was brought to the Operating Committee of the Spar JV.[93]
[92] Primary reasons [131].
[93] Primary reasons [132]. Note that the letter referred to the 'East Spar Joint Venture', but was meant to refer to the 'Spar JV'.
On 22 May 2013, Santos Offshore wrote to Apache Oil referring to the correspondence on 18 April 2013 and 2 May 2013. Santos Offshore stated that there was no capacity for the Apache Parties to take any steps to develop joint venture assets on their own account. Santos Offshore asserted that Apache Oil was acting outside its rights and obligations under the JOA, and that it had no authority to pre‑empt the approach which the Operating Committee might ultimately take in respect of a development of the Spar‑2 well. Santos Offshore requested certain information as to expenditures that had been or would be incurred, and requested that Apache Oil undertake that it would not incur any further expense or commit to any further contracts without Operating Committee approval. Santos Offshore also requested that the matter of the 'Great East Spar Project' be brought before the next Operating Committee meeting.[94]
[94] Primary reasons [134].
On 5 June 2013, Apache Oil responded to Santos Offshore's letter dated 22 May 2013, saying, in effect, that Santos Offshore had no right to require such an undertaking and Apache Oil had no obligation to provide it.[95]
[95] Primary reasons [136].
By letter dated 14 August 2013, Apache Oil, as Operator, proposed a motion to the Operating Committee that it determine that a Development Plan and a development Work Program and Budget should be prepared. Attached to the letter was a proposed resolution, pre‑signed in the affirmative on the part of the Apache Parties.[96]
[96] Primary reasons [137]. The reference in the primary reasons to 'Spar Development Work Plan and Budget' appears to be a reference to the '2013 development Work Program and Budget'; Cowan, par 93.
On 27 August 2013, Santos Offshore voted in favour of the motion that the Operating Committee determine that a Development Plan and a development Work Program and Budget should be prepared.[97]
[97] Primary reasons [138].
Also on 27 August 2013, the moratorium on issuing an Exclusive Operation notice imposed by cl 17(b) of the SPA expired.[98]
[98] Primary reasons [139].
Also pursuant to the internal AFEs referred to earlier, Apache Energy entered into the following further contracts for the procurement of subsea equipment:
(a)on 8 May 2013, it entered into a contract with Kongsberg Nemo Pty Ltd for approximately $3 million for the supply of a subsea cooling skid (Subsea Cooling Skid contract); and
(b)on 13 September 2013, it entered into an agreement with National Oilwell Varco Denmark I/S for the supply of flexible flow line for the sum of DKK12.77 million (Flexible Flow Line contract).[99]
[99] Primary reasons [146].

The 2013 development Work Program and Budget

In September 2013, Apache Oil gave notice to Santos Offshore of an Operating Committee meeting to be held on 29 October 2013. Apache Oil provided copies of a revised Field Development Plan (2013 Field Development Plan) and a Development Work Program and Budget (2013 development Work Program and Budget), together with a meeting agenda and a proposed Operating Committee resolution.[100]
[100] Primary reasons [140]; Cowan, par 95.
The 2013 development Work Program and Budget included work that had already been done, being:[101]
[101] Primary reasons [141].
(a)completion of FEED;
(b)completion of detail design and procurement engineering;
(c)tendering and award of major contracts relating to subsea production system, umbilical and cooling skid; and
(d)engagement with regulatory bodies and preparation of documentation for regulatory approvals.
The 2013 development Work Program and Budget also contained work yet to be done in relation to the Spar‑2 well and the tie back to the Halyard development. This included:[102]
[102] Primary reasons [142].
(a)finalising regulatory approvals;
(b)completing the award of contracts for the procurement of materials and components, including transportation, installation, testing and commissioning of the project; and
(c)installation, commissioning and start‑up of the project.
The 2013 development Work Program and Budget identified that the project was already approximately 19% complete.[103]
[103] Primary reasons [143].

Santos Offshore's material breach notice

Santos Offshore, by letter dated 4 October 2013, alleged, in effect, that Apache Oil had committed two material breaches of the JOA.[104] The first alleged breach was that Apache Oil had carried out operations, as shown in the 2013 Field Development Plan and the 2013 development Work Program and Budget, without authorisation. Santos Offshore complained, in effect, that Apache Oil thereby advanced the Spar project, and executed a significant portion of the project as if it were authorised to do so pursuant to an Exclusive Operation notice.[105]
[104] Primary reasons [148], [150].
[105] Primary reasons [151].
The second breach was said to be the submission of, and reliance on, the 2013 Field Development Plan and the 2013 development Work Program and Budget. In that respect, it was said that Apache Oil was in material breach of the JOA by:[106]
[106] Primary reasons [152].
(a)failing to comply with the resolution of the Operating Committee on 27 August 2013, in that it failed to prepare a Development Plan and first annual development Work Program and Budget either at all, or which was compliant with the JOA, in contravention of cl 6.2(A) of the JOA;
(b)failing to include within the documents any or adequate detail of the proposed capacity access arrangements for the processing and transportation of petroleum upstream of the delivery point, in contravention of cl 6.2(A) of the JOA; and
(c)including within the documents expenditure for the Joint Account which the Spar Operator had expressly incurred on its own account, without having submitted any of the expenditure to the Operating Committee for approval and without having submitted any of the contracts pursuant to which those liabilities arise to Operating Committee scrutiny, in contravention of cls 4.2(A), 6.4, 6.6 and 6.7 of the JOA.
Santos Offshore's letter concluded by requiring Apache Oil to remedy the breaches.[107]
[107] Primary reasons [153].

Proposed deferment of Operating Committee meeting

In another letter dated 4 October 2013, Santos Offshore stated that it agreed to the deferment of the Operating Committee meeting from 29 October 2013 to 11 November 2013. The letter referred to the 2013 Field Development Plan and the 2013 development Work Program and Budget, and suggested that by reason of the failure of those documents to address proposed capacity access arrangements, and by reason of the inclusion of prior work and expenditure in the 2013 development Work Program and Budget, the documents had not been validly issued pursuant to the JOA.[108]
[108] Primary reasons [149].

November 2013 - further correspondence regarding material breach notice

On 1 November 2013, Apache Oil denied committing the alleged breaches, and issued a notice of dispute under cl 18.2(A) of the JOA.[109]
[109] Primary reasons [154].
Also on 1 November 2013, Santos Offshore wrote to Mr Cowan seeking to add various items to the agenda for the Operating Committee meeting scheduled for 11 November 2013, and requested certain information in relation to expenses incurred and contracts awarded in relation to the Spar JV. By letter in response dated 7 November 2013, Apache Oil refused to provide the full details that had been requested. In particular, Apache Oil refused to provide details or copies of contracts already entered into on the basis that no Joint Operation or Exclusive Operation had been conducted. In response to a question as to the authority upon which Apache Oil had incurred the expenses and committed to contracts in relation to the Spar JV, Apache Oil said 'The Spar Development is not yet a Joint Operation'.[110]
[110] Primary reasons [154].
By a further letter dated 7 November 2013, Apache Oil responded to the breach notice. It denied that it had breached the JOA by including past expenditure in the documents because, it said, nothing in the JOA prevented it from seeking approval of the past expenditure for work which may benefit the joint venture. It continued:[111]
[111] Primary reasons [155].
Apache Oil's activities in working on proposals to develop the Spar 2 Discovery have been for the benefit of the Spar Joint Venture. Apache Oil has also kept the participants informed about the proposals to develop the Spar 2 well. The fact that Apache Oil has brought the work it has performed to the Operating Committee to enable the Operating Committee to properly assess the proposed Development Plan and Development Work Program and Budget refutes the allegation that the work was to advance only Apache Oil's interests. The development of the Spar 2 Discovery is clearly proposed to be undertaken as Joint Operations and the work Apache Oil has undertaken has been directed to the Operating Committee assessing and approving the Development Plan and Development Work Program and Budget to enable this to occur. If the Operating Committee adopts the work that Apache Oil has performed by approving the Development Plan and the Development Work Program and Budget, Apache Oil will be able to be reimbursed for its work from the Joint Account. If the Operating Committee does not approve the Development Plan and Development Work Program and Budget, Apache must then consider whether it is prepared to develop the Spar 2 discovery as an Exclusive Operation.
By letter dated 8 November 2013, Santos Offshore advised that Apache Oil had not remedied the breaches within the requisite 30 days, and that it intended to remove Apache Oil as the Operator.[112]
[112] Primary reasons [157].

The Operating Committee meeting of 11 November 2013

The Operating Committee meeting which had been scheduled for 29 October 2013, and deferred, was eventually held on 11 November 2013.
The Operating Committee, on 11 November 2013, approved the 2013 Field Development Plan and the 2013 development Work Program and Budget.[113]
[113] Primary reasons [158].

The Operating Committee meeting of 1 May 2014, cash calls and revised Field Development Plan

On 1 May 2014, an Operating Committee meeting for the Spar JV was held. An AFE for FEED and a development AFE were approved by all participants. These included past expenditure by the Apache Parties. The minutes noted that in voting to approve the AFEs, Santos Offshore reserved all of its rights in relation to the alleged breaches of the JOA.[114]
[114] Primary reasons [159].
On 30 June 2014, Apache Oil issued a cash call to participants of the Spar JV, which Santos paid on 31 July 2014.[115]
[115] Primary reasons [160].
On 5 August 2014, Apache Oil proposed an Operating Committee vote by notice to resolve to submit a revised Field Development Plan to the Administrator. That proposal was approved on 18 August 2014.[116]
[116] Primary reasons [161].

The reasons and orders of the primary judge

The primary judge's reasons

His Honour found that:
(a)The prohibition in cl 7.1(A) of the JOA extends to 'activities and operations' directed towards the development of the Spar Project, and not merely to 'physical steps' taken within the Title Area.[117]
[117] Primary reasons [178] ‑ [182].
(b)The reference to operations 'conducted under this Agreement' in cl 7.1(A) refers to activities or operations 'falling within the scope of' the JOA, or otherwise being of a type which are 'capable of being the subject of Joint Operations or Exclusive Operations'.[118]
[118] Primary reasons [183].
(c)On a proper construction of the JOA, the Apache Parties were not entitled to take steps which fell within the scope of the JOA, other than with Operating Committee approval as Joint Operations, or failing that approval, as Exclusive Operations.[119]
[119] Primary reasons [186].
In relation to the alleged breaches of the JOA, the judge found that Apache Energy conducted development operations to facilitate development within the Title Area without the approval under the JOA by:[120]
[120] Primary reasons [188], [190].
(a)completing FEED in the second quarter of 2012 (ie, 1 April - 30 June 2012);[121]
[121] There was no dispute that the judge's reference to 'quarters' referred to a calendar year rather than a financial year.
(b)completing the process of identifying, tendering and evaluating long lead items in the second and third quarters of 2012 (ie, 1 April - 30 September 2012); and
(c)awarding contracts for major items of equipment in late 2012 and in 2013, including the Subsea Production Equipment contract, the EHU contract, the Subsea Cooling Skid contract and the Flexible Flow Line contract.
His Honour found that those matters, which he described as 'unauthorised work breaches' or 'unauthorised development breaches', came within the scope of the JOA, and 'were impermissible activities in breach of cl 7.1(A)' of the JOA.[122]
[122] Primary reasons [191].
In a section of the reasons headed 'Capacity in which Apache Energy acted', his Honour said:[123]
[123] Primary reasons [194].
Whether Apache Energy was acting pursuant to the arrangements set out in the 1997 agreement, and thus as agent of [Apache Oil] as the Operator, or whether it was acting on behalf of the Apache Parties as Spar participants, is of no moment. The fact that cl 4.2(A) provides for the exclusive conduct of Joint Operations by the Operator makes it plain that a Spar participant is not permitted to act unilaterally in the development of a discovery.
His Honour also said:[124]
[124] Primary reasons [195] - [196].
It would be inconsistent with [the] commercial purpose [of the JOA] if the Operator could simply permit others to undertake activities which, if undertaken by the Operator, would be subject to the requirements of the [JOA]. The [JOA] is directed to exploration, development and production of petroleum in the Title Area. It would be to defeat the clear commercial purpose of the [JOA] if the parties were at liberty, in their capacity as licensees of the Spar production licence, to embark upon activities outside of the operation of the [JOA].
The breaches of the [JOA] which I have identified above are no less breaches because they occurred through the activities of Apache Energy.
On the question of 'material' breach, his Honour found, in effect, that a breach was 'material' if it substantially adversely affects the interests of the other party, or where the breach is 'important' or of 'significance'.[125]
[125] Primary reasons [199].
His Honour found that the 'unauthorised development breaches' were material breaches of the JOA in that:
(a)the overall control of the development by the Operating Committee was fundamental to the operation of the JOA, and the unauthorised work breaches circumvented that overall supervision;
(b)clause 6.6 of the JOA gave the parties to the agreement significant input into the process of awarding contracts, and Santos Offshore was deprived of that input in relation to the long lead items contracts entered into by Apache Energy; and
(c)Santos Offshore 'was deprived of the benefit of the provisions of the [JOA] which entitled it to influence or have input into matters of budgets, contract awards and timing in relation to the project'.[126]
[126] Primary reasons [200] - [204].
His Honour prefaced these findings with observations to the effect that although the work was not charged to the Joint Account and was done at the sole risk of Apache Energy and the Apache Parties, the Apache Parties anticipated that either Santos Offshore would ultimately adopt the works or, when the three‑year moratorium period on Exclusive Operations imposed by cl 17(b) of the SPA had expired, the Apache Parties would continue with the work as an Exclusive Operation. In this regard, his Honour said that the objective of the Apache Parties was to 'circumvent' the delay in development which would result in strict adherence to the requirements of the JOA, coupled with the moratorium on the service of an Exclusive Operations notice until after 27 August 2013, by virtue of cl 17(b) of the SPA. His Honour referred in this context to Santos Offshore's wish to resolve the ultimate capacity issues before progressing to the development.[127]
[127] Primary reasons [201].

Orders made by the primary judge

The primary judge made a number of declarations, including the following:
2.It is declared that on the proper construction of the Sale and Purchase Agreement dated 27 August 2010 (SPA) and the Joint Operating Agreement dated 27 August 2010 [JOA], neither a Party to the [JOA], nor the Operator under the [JOA] can take any material step with respect to the development of gas from the Title (within the meaning of that term in the [JOA]) unless:
(a)that step is taken in accordance with a Development Plan and development Work Program and Budget approved by the Operating Committee under cl 6.2 of the [JOA]; or
(b)that step is taken pursuant to an Exclusive Operation notice properly proposed under cl 7.2 of the [JOA].
3.It is declared that [Apache Oil], as the Operator under the [JOA], committed material breaches of the [JOA] in that the Operator, without approval under the [JOA] as either a Joint Operation or an Exclusive Operation, conducted development operations to facilitate development within the Title Area (within the meaning of that term in the [JOA]) by:
(a)completing Front End Engineering and Design in the second quarter of 2012;
(b)completing its process of identifying, tendering and evaluating long lead items in the second and third quarter of 2012; and
(c)awarding the following contracts for major items of equipment:
(i)Agreement for Supply of Subsea Production Equipment dated 3 October 2012, between Cameron Australasia Pty Ltd and Apache Energy Limited;
(ii)Agreement for Supply of Umbilicals dated 16 November 2012, between Oceaneering International Services Ltd and Apache Energy Limited;
(iii)Agreement for Supply of Subsea Cooling Skid dated 8 May 2013, between Kongsberg Nemo Pty Ltd and Apache Energy Limited; and
(iv)Agreement for Supply of Flexible Flowline dated 13 September 2013, between National Oilwell Varco Denmark I/S and Apache Energy Limited.
4.It is declared that [Santos Offshore] validly notified [Apache Oil], as the Operator, of the material breaches referred to in paragraph 3 above on 4 October 2013 under the [JOA].
5.It is declared that [Apache Oil], as the Operator, failed to commence to cure the material breaches referred to in paragraph 3 above within the 30 day period set out under cl 4.10(B) of the [JOA].
6.It is declared that by reason of the matters declared in paragraphs 2 ‑ 5 above, Santos Offshore is entitled to remove [Apache Oil] as the Operator under the [JOA] by deciding to do so under cl 4.10(B) of the [JOA] and serving notice of that decision on [Apache Oil] within 30 days of the conclusion of the proceedings (including any appeals).

Grounds of Appeal

The appellants' case contained four grounds of appeal. The Apache Parties only pressed the first three. They are as follows:
1.The trial judge erred in law in his findings regarding the proper construction of the Spar JOA. The trial judge erroneously held that the Spar JOA prohibited the participants taking any material step with respect to the development of gas from the Title Area unless that step is taken in accordance with a development work program and budget approved by the operating committee or pursuant to an Exclusive Operations notice. The trial judge should have found that a party, at its own risk and expense, was at liberty to carry out activities where those activities did not require authority under the Spar JOA.
2.In the alternative to ground 1, the trial judge erred in law in failing to consider whether any material breach was committed by Apache Oil 'in its capacity as Operator'. The trial judge should have found, in light of his findings and the evidence, that any breaches of the Spar JOA that were committed by Apache Oil were committed by Apache Oil in its capacity as a Spar participant and party to the Spar JOA, and were not committed by Apache Oil in its capacity as Operator.
3.The trial judge erred in law and fact in finding that the effect of the breaches on Santos Offshore was important and significant and therefore material. The trial judge should have found as a matter of fact and law, the effect of the breaches on Santos was not significant and therefore not material.
There was also a Notice of Contention by Santos Offshore, referred to later in these reasons.

Disposition - ground 1

The relevant terms of the JOA are set out in the Appendix which follows the reasons of Mitchell JA herein.
Ground 1 challenges the judge's findings as to the proper construction of the JOA, and in particular the first sentence of cl 7.1(A).
The first sentence of cl 7.1(A) provides:
No operations may be conducted under this Agreement except as Joint Operations under Clause 5 or as Exclusive Operations under this Clause 7.

The question for resolution

The question is whether, prior to the Operating Committee determining in August 2013 that a Development Plan and a development Work Program and Budget under cl 6.2(A) should be prepared by Apache Oil as Operator for the development of the Spar‑2 well for consideration by the Operating Committee, cl 7.1(A), in the context of the JOA read as a whole, precluded Apache Oil, or the Apache Parties, from (at their own expense):
(a)carrying out FEED work in relation to the potential for developing the Spar‑2 well involving a subsea tie in with the Halyard development;
(b)evaluating, including by tender, the nature, availability and price of long lead items that might be utilised in such a development; and
(c)entering into (at their own expense) contracts for the procurement of such long lead items of equipment in anticipation that the Operating Committee might approve such a development.

Santos Offshore's arguments

Santos Offshore contended, by way of overview to its arguments, that:[128]
[128] Respondent's written submissions, par 1.
The … judge was correct to find that there are only two ways in which the Spar field could be developed without breaching the … JOA: as a Joint Operation approved by the Operating Committee; or as an Exclusive Operation, which could only be properly constituted by proposing the development to the Operating Committee first. There is no 'third road' whereby the parties may commence operations or activities to develop resources in the Title Area, somehow outside the scope of the … JOA, and subsequently seek the Operating Committee's approval to continue the operations as Joint Operations under the … JOA. Clause 7.1(A) expressly prohibits such conduct, particularly (but not only) when it is considered in the context of the … JOA as a whole. (footnotes omitted)

Santos Offshore's arguments appeared in summary to be along the following lines:[129]
[129] Appeal ts 54 - 55, 71, 75, 82 - 85, 92, 95 ‑ 97, 109, 111 - 113, 125.
(a)the Operator had, contractually, exclusive responsibility for the taking of 'development steps' under the JOA subject to the approval and supervision of the Operating Committee, and was thereby prohibited from taking 'development steps' other than with the approval of, and under the supervision of, the Operating Committee;
(b)the work and activities referred to earlier constituted 'development steps' because they fell within the scope of the JOA or, in the language used by the judge, involved steps which 'can be carried on' as Joint Operations or Exclusive Operations, or which are 'capable of being the subject of' Joint Operations or Exclusive Operations;[130]
[130] Primary reasons [182] - [183].
(c)Apache Oil took the 'development steps' without authorisation or supervision by the Operating Committee; and
(d)accordingly, Apache Oil breached the JOA in its capacity as Operator.
Santos Offshore elaborated upon these propositions by contending that 'development steps' had to be 'material' or 'real' in order to fall within the prohibition.[131] Material or real development steps included design work as contemplated by cl 3.1(A)(2) and cl 4.4(A)(7). Also, the Operator, who is a joint venture participant, could not 'permit itself' to take development steps in its capacity as participant.[132] If the Operator permitted itself to take development steps as a joint venture participant, the permission it gave itself would be in breach of its duty as Operator. Thus, if Apache Oil as a joint venture participant carried out what were, properly characterised, 'development steps' under the JOA, then 'it would be watching itself breaching, and that would be the breach' of the JOA by Apache Oil in its capacity as Operator.[133] Santos Offshore also submitted that work done by a party in connection with its interest in the Title would not be a 'development step' amounting to a breach if it was work done for the purpose of submission to the Operating Committee for approval.[134]
[131] Appeal ts 66.
[132] Appeal ts 61, 112.
[133] Appeal ts 111.
[134] Appeal ts 116.
Santos Offshore also submitted that by carrying out the work and activities referred to earlier, the Apache Parties obtained a 'timing advantage' under the JOA, and Santos Offshore was denied 'input' into the decision‑making. Reference was made, amongst other things, to cl 17(b) of the SPA, which prohibited a party from giving an Exclusive Operation notice until, in effect, after 27 August 2013. Santos Offshore nevertheless accepted that the restraint on giving notice under cl 17(b) of the SPA applied only to the giving of notice, and that if there were to be any prohibition on taking 'development steps' anterior to the giving of such notice, it had to emerge, on Santos Offshore's case, from the JOA.[135]
[135] Appeal ts 64 - 66, 93.

The proper construction of cl 7.1(A)

Clause 7.1(A) of the JOA refers to 'Joint Operations' and 'Exclusive Operations'.
'Joint Operations' are defined, relevantly, to mean 'those operations and activities carried out by [the] Operator pursuant to this Agreement … the costs of which are chargeable to all Parties': cl 1.45. 'Exclusive Operation[s]' are defined to mean 'those operations and activities carried out pursuant to this Agreement, the costs of which are chargeable to the account of fewer than all the Parties': cl 1.33.
When those definitions are read into cl 7.1(A) as would ordinarily be done as a matter of construction,[136] the first sentence of cl 7.1(A), in effect, contains two elements preceded by a chapeau and reads, relevantly:
[136] Halford v Price [1960] HCA 38; (1960) 105 CLR 23, 28; Redhill Iron Ltd v API Management Pty Ltd [2012] WASC 323 [127]; George 218 Pty Ltd v Bank of Queensland Limited [No 2] [2016] WASCA 182 [82].
No operations may be conducted under the JOA except as:
(i)operations and activities carried out by the Operator pursuant to the JOA and in accordance with cl 5, the costs of which are chargeable to all Parties; and
(ii)operations and activities carried out pursuant to the JOA and in accordance with cl 7, the costs of which are chargeable to the account of fewer than all Parties.
In relation to the first element, the words 'operations and activities carried out by the Operator … in accordance with cl 5' direct attention to cl 5. Clause 5 concerns, in substance, approval by the Operating Committee of proposed operations as Joint Operations, and their conduct. Once proposed operations are established as Joint Operations in accordance with cl 5, the Operator has the exclusive charge and conduct of such operations as agent on behalf of the parties under the supervision and control of the Operating Committee: cl 4.2(A). By cl 5.2, Joint Operations include (1) matters related to Joint Property; (2) operations that are necessary or desirable to fulfil the Parties' obligations under the Title; and (3) operations that are 'necessary or desirable … to properly explore for, Appraise and develop Petroleum in the Title Area in accordance with [the JOA] and in a manner appropriate in the circumstances'.
Further, the first sentence of cl 7.1(A) should be read, as Santos Offshore contended,[137] in the context of the purpose of the JOA. Clause 3.1(A)(1) provides, in effect, that the purpose of the JOA is to establish the parties' respective rights and obligations 'with regard to operations under the Title', including the joint exploration for, and appraisal, development and production of, Petroleum 'from the Title Area'. In this context, the words '[n]o operations may be conducted', in the first sentence of cl 7.1(A), are to be read as referring to operations conducted for the exploration for, and appraisal, development and production of, Petroleum from the Title Area.
[137] Appeal ts 70 - 72; respondent's written submissions, pars 6 - 7, 16 - 18, 26, 32.
In light of the foregoing, the first sentence of cl 7.1(A) provides, in effect:
No operations may be conducted under the JOA, including for the exploration for, and appraisal, development and production of, Petroleum from the Title Area, except as:
(i)operations and activities carried out by the Operator pursuant to the JOA and in accordance with cl 5, the costs of which are chargeable to all Parties; or
(ii)operations and activities carried out pursuant to the JOA and in accordance with cl 7, the costs of which are chargeable to the account of fewer than all Parties.
The Apache Parties' primary submission is that cl 7.1(A) is not, in any relevant sense, a prohibition.[138] Alternatively, the Apache Parties contend that if cl 7.1(A) does contain a prohibition, it does not extend to prohibit the operations in question in this case.
[138] ts 14 ‑ 16, 26 ‑ 30, 36.
In relation to their primary submission, the Apache Parties contend that cl 7.1(A) is simply an agreement that any operations under the JOA are to be either Joint Operations (in accordance with the JOA) or Exclusive Operations (in accordance with the JOA). In other words, cl 7.1(A) is not in the nature of a prohibition imposed on individual participants. Rather, it merely serves to record the parties' agreement as to the character of any operations to be undertaken under the JOA. On the Apache Parties' case, prohibitions as to the conduct of the parties are to be found elsewhere in the JOA, and in particular in cl 3.3(A), on its proper construction or by necessary implication. Clause 3.3(A) provides:
Unless otherwise provided in this Agreement, all the rights and interests in and under the Title, all Joint Property, and any Petroleum produced from the Title Area shall, subject to the terms of the Title, be owned by the Parties in accordance with their respective Participating Interests.
On the other hand, at the heart of Santos Offshore's case, is the proposition that cl 7.1(A) is a provision in the nature of a prohibition.
It is unnecessary for present purposes to decide whether cl 7.1(A) is merely an agreed statement of the kind suggested by the Apache Parties. That is because even if cl 7.1(A) is construed as a prohibition, it does not, on its proper construction, extend to prohibiting the type of work and activities which the Apache Parties carried out in this case.
The scope of any prohibition under cl 7.1(A) may be discerned from a consideration of the powers and duties of the Operating Committee with respect to Joint Operations in cl 5.2. When regard is had to cl 5.2, any prohibition in cl 7.1(A) is directed to operations or activities which could prejudice or interfere with the functions of the Operating Committee in authorising, reviewing and supervising Joint Operations, including (1) utilising Joint Property for the purpose of conducting Joint Operations; (2) carrying out operations that are necessary or desirable to fulfil the parties' obligations under the Title; or (3) carrying out operations that are necessary or desirable to properly explore for, appraise and develop Petroleum in the Title Area in accordance with the JOA, and in a manner appropriate in the circumstances.
Thus, for example, if one party were to drill a well, or install subsea equipment in the Title Area, it may be readily envisaged that those operations or activities could have the effect of prejudicing or interfering with operations that were otherwise 'necessary or desirable to … properly … develop … Petroleum in the Title Area' (cl 5.2). Similarly, operations or activities, whether in the Title Area or outside of it, which jeopardised the maintenance of the Title, would also fall within the scope of any prohibition in cl 7.1(A). There may be others.
In the present case, it was common ground that the work and activities undertaken by Apache Energy did not involve the use of Joint Property.[139] Also, it was not suggested that their character was such that they could have jeopardised the Title. Could it be said that the work and activities carried out by Apache Energy interfered with or prejudiced the Operating Committee in relation to the carrying out of operations necessary or desirable to properly develop Petroleum in the Title Area? The answer to that question must be no. Desk or office work by a party (or even the Operator) of the kind referred to in pars (a) and (b) of [92] above did not interfere with the operations and activities of the Operating Committee. The entry into contracts for the procurement of subsea equipment might have the potential for interfering with the activities of the Operating Committee if there was a limited market in the supply of such equipment, and the contracts were entered into with the purpose or effect of making such equipment unavailable to the Operating Committee for the purposes of the JOA. But there is no evidence of that in this case.
[139] Appeal ts 25.
Santos Offshore's submissions to the contrary, which are to the effect that anything that might be characterised as 'development steps' (or at the least 'material' development steps) is prohibited by cl 7.1(A), and thereby a material breach by the Operator, cannot be accepted for a number of reasons.
The first is that cl 7.1(A) is an agreement between the parties as participants in the Spar JV that they would only, in effect, explore for, appraise, develop and produce Petroleum from the Title Area within the framework of Joint Operations, or (if cl 7.1 applied) Exclusive Operations. Within this overall framework, the Operator is given specific functions and duties, but it is the parties as participants, and not one of their number as Operator, who, by cl 7.1(A), agree to bind themselves to conducting operations within this structural framework. Submissions by Santos Offshore about the Operator not giving itself 'permission' to undertake development steps as a participant, or being in breach by 'watching itself' undertake development steps as a participant, no doubt seek to overcome this threshold point, but do not do so in any convincing way.
Secondly, Santos Offshore's submissions that cl 7.1(A) (on its own or read in context) is referring to 'steps', which are 'material' or 'real', and which are 'capable of being the subject' of Joint Operations or Exclusive Operations, involve substantial glosses on the language of the JOA. These asserted features of cl 7.1(A) cannot reasonably be read into cl 7.1(A) either considered on its own, or in the context of the JOA as a whole.
Thirdly, cl 7.1(A) is referring to 'Joint Operations' and 'Exclusive Operations' as defined. These definitions direct attention to the agreed financial implications of the carrying out of operations under the Spar JV. The costs of Joint Operations are allocated to the Joint Account, and the risk and reward of such operations are shared by all parties in proportion to their respective Participating Interests. Exclusive Operations, where permissible, are ultimately operations of the consenting parties only, who undertake them at their own risk and reward, through either the Operator identified under cl 4.1, or through a replacement Operator for that purpose under cl 7.10(E). Whilst the general proposition may be accepted that, for the purposes of cl 7.1(A), Joint Operations and Exclusive Operations may include activities such as FEED studies and the purchase of equipment, it does not follow that any such work done by a party outside of established Joint Operations or Exclusive Operations, is forbidden.
Further, it is difficult to see why reasonable persons in the position of the parties would, objectively, have intended cl 7.1(A) to have the effect contended for by Santos Offshore and found by the primary judge.[140] For example, suppose that a party carried out the above activities but subsequently, for one reason or another (eg, it later established that the FEED studies were fundamentally defective), never suggested or contemplated that the Spar‑2 well should be developed involving the tie back to the Halyard development, or at all. Such activities would prove to be wasted expenditure, but why they would be treated by the parties as breaches of contract is not easily discernible from the terms and purpose of the JOA.
[140] Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52; (2004) 219 CLR 165 [40]; Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited [2015] HCA 37; (2015) 256 CLR 104 [47].
Alternatively, suppose that a Development Plan and Work Program and Budget for the development of the Spar‑2 well involving the tie back to the Halyard development were approved by the Operating Committee, but the Operator rejected or ignored the earlier work undertaken by the party in that regard. In that event, the Development Plan and the Work Program and Budget prepared by the Operator and approved by the Operating Committee, would involve the carrying out of such work afresh. It is difficult to see why, in these circumstances, the mere carrying out of the earlier work by a party would, objectively, be intended to be a breach of cl 7.1(A) read in the context of the JOA as a whole.
Further, there was no 'timing advantage' contrary to the JOA which the Apache Parties obtained by carrying out the work and activities. The effect of Santos Offshore's rejection of the proposed 2012 Work Program and Budget was to preclude Joint Operations being undertaken in 2012 and the first half of 2013 for the development of the Spar‑2 well and the Halyard tie back in conjunction with the development of the Beam‑1 well on the East Spar Production Licence, as had been proposed by Apache Oil as Operator. Santos Offshore was no doubt within its rights to disagree with the Operator's proposal in that regard, and it effectively maintained its disagreement until it approved the 2013 development Work Program and Budget in late 2013. The result was that in late 2013, the Operating Committee decided to take advantage of the earlier work, and incorporate into the Joint Operations the earlier work undertaken by the Apache Parties. But that, if anything, conferred a timing advantage on the participants with respect to the execution of the Joint Operations agreed to in late 2013 for the development of Petroleum from the Spar‑2 well.
Similarly, Santos Offshore's argument to the effect that unless its construction were accepted, Santos Offshore would be denied the 'input' into the proposals that come before the Operating Committee which it is entitled under the JOA as a participant, cannot be accepted. Santos Offshore continues to have the input provided by the JOA at Operating Committee level in any event. That input may be given at the time the Operating Committee comes to decide whether to accept work already undertaken, and Santos Offshore could use its vote to ensure that the Operating Committee rejected a proposal of which it did not approve: cl 5.9(A). The opportunity for the Apache Parties then to proceed by way of an Exclusive Operation is merely a consequence of the structure of the JOA. Clause 7.1(A) does not prevent any participant (including Santos Offshore) from undertaking, at its own expense, the kind of work and activities undertaken by the Apache Parties in this case.
For these reasons, ground 1 should be upheld.

Disposition - ground 2 and the Notice of Contention

It is convenient to address ground 2 and the Notice of Contention together.
Ground 2 alleges that the judge failed to consider whether any material breach was committed by Apache Oil 'in its capacity as Operator' for the purposes of cl 4.10(B) of the JOA, and thereby failed to attend to the correct question. The Apache Parties contend that the judge should have found that any breaches of the JOA were committed by Apache Oil in its capacity as a Spar JV participant and party to the JOA, and not by Apache Oil in its capacity as Operator.
Ground 2 raises a question as to the proper construction of the judge's reasons. Santos Offshore contends that when the judge's reasons are properly understood, his Honour did attend to the direct question. It is convenient then, to return to the judge's reasons.
The judge appears to have found that:[141]
[141] Primary reasons [186], [190] ‑ [191], [194].
(a)the JOA prohibited the Apache Parties from carrying out the activities referred to earlier other than with Operating Committee approval as Joint Operations or, failing that, as Exclusive Operations (for ease of convenience, and consistently with the primary reasons, these activities will be referred to as the 'unauthorised development breaches');
(b)Apache Energy carried out the unauthorised development breaches; and
(c)whether Apache Energy carried out the unauthorised development breaches as agent for Apache Oil as Operator, or as agent for the Apache Parties as Spar JV participants, was of 'no moment'.
The last mentioned finding does lend credence to the suggestion that the judge may not have addressed the critical issue of whether any breach by Apache Oil was a breach in its capacity as Operator for the purposes of cl 4.10(B). Nevertheless, Santos Offshore submits, in effect, that when the judge's reasons are read as a whole, his Honour has found, in effect, that if Santos Offshore showed that Apache Energy carried out the unauthorised development breaches either as agent for Apache Oil as Spar JV participant, or as agent for the other Apache Parties in their capacity as Spar JV participants, that was sufficient, on the proper construction of the JOA, to establish that Apache Oil had committed a breach of the JOA in its capacity as Operator. Santos Offshore contends that the judge has found, in effect, that in those circumstances, Apache Oil has 'permitted' itself, or 'permitted' the other Apache Parties, to carry out the unauthorised development breaches, and by so 'permitting' the unauthorised development breaches, Apache Oil was in breach of its duty as Operator.[142]
[142] Santos Offshore referred to primary reasons [192] - [196]; see appeal ts 109 ‑ 114.

Where the Operating Committee cannot agree on the Exploration Work Program and Budget, then by cl 6.1(B):
(a)the proposal which is capable of satisfying the Minimum Work Obligations for the calendar year in question which receives the largest vote (even if it is less than the percentage vote required under cl 5.9) shall be deemed to be adopted as part of the Exploration Work Program and Budget; and
(b)in the event that competing proposals receive equal votes, the Operator shall choose between the proposals.
Clause 6.1(B) also provides that any portion of the Exploration Work Program and Budget adopted under cl 6.1(B)[158] rather than cl 5.9, shall contain only such operations for the Joint Account as are necessary to maintain the Title, including such operations as are necessary to fulfil the Minimum Work Obligations required for that calendar year.
[158] Clause 6.1(1B) says 'pursuant to this Clause 6.1(C)', but this appears to be a typographical error.
By cl 6.1(C), subject to cl 6.8, approval of any Exploration Work Program and Budget which includes an Exploration Well, whether by

drilling, Deepening, Sidetracking, shall include approval for all expenditure necessary for drilling, Deepening, Sidetracking, Testing and Completing such Exploration Well.

Appraisal

By cl 6.1A(A), if a Discovery is discovered, the Operator shall deliver any requisite notice of the Discovery and submit to the Parties a report containing available details concerning the Discovery, and the Operator's recommendation as to whether the Discovery merits Appraisal. As noted earlier, the word 'Appraisal' is defined (in cl 1.8) to mean 'activities and operations directed at appraising and evaluating a Discovery, including Appraisal Well operations'.
If the Operating Committee determines that a Discovery merits Appraisal, the Operator shall, no later than 90 days following notice of such determination, deliver to the Parties a proposed Work Program and Budget, called an Appraisal Work Program and Budget, detailing the Joint Operations relating to the Appraisal activities to be performed for the remainder of the calendar year and, if appropriate, the following year. The Appraisal Work Program and Budget may include the activities of declaring a Location in respect to the Discovery and applying for a Lease or Licence (cl 6.1A(B)).
The provisions of cl 6.1(B) which apply to deadlocks for the approval of an Exploration Work Program and Budget apply with necessary amendments to a deadlock in respect of the approval of an Appraisal Work Program and Budget (cl 6.1A(C)).
Clause 6.1A(D) is to similar effect as cl 6.1(C) in relation to an Appraisal Work Program and Budget which includes an Appraisal Well, whether by drilling, Deepening or Sidetracking.

Development Plans and development Work Programs and Budgets

Clause 6.2 deals with the preparation and approval (or rejection) of a 'Development Plan' and a 'development Work Program and Budget'.
The term 'Development Plan' is defined in cl 1.24 to mean 'a plan for the development of Petroleum as prepared in accordance with Clause 6.2 or Clause 7.4'. The term 'development Work Program and Budget' is not a defined term, but cl 6.2(A) provides that a development Work Program and Budget (or at least such document read with a Development Plan) is to contain inter alia:
(1)details of the proposed work to be undertaken, personnel required and expenses to be incurred, including the timing of those matters, on a calendar year basis;
(2)details of the proposed capacity access arrangements for the processing, compression, transportation and liquid storage and loading of Petroleum upstream of the Delivery Point;
(3)an estimated date for the commencement of production; and
(4)any other information requested by the Operating Committee.
The level of detail required for a Development Plan and any Work Program and Budget, including a development Work Program and Budget, is apparent from cl 6.4, which provides:
6.4Itemization of Expenditures
(A)Each Work Program and Budget and Development Plan submitted by Operator shall contain an itemized estimate of the costs of Joint Operations and all other expenditures to be made for the Joint Account during the Calendar Year in question and shall, among other things:
(1)identify each work category in sufficient detail to afford the ready identification of the nature, scope and duration of the activity in question; and
(2)include such reasonable information regarding Operator's allocation procedures and estimated manpower costs as the Operating Committee may require.

(B)The Work Program and Budget shall designate the portion or portions of the Title Area in which Joint Operations itemized in such Work Program and Budget are to be conducted and shall specify the kind and extent of such operations in such detail as the Operating Committee may deem suitable.

Preparation and approval (or rejection) of a Development Plan and a development Work Program and Budget

By cl 6.2(A), if the Operating Committee determines that a Development Plan, and a development Work Program and Budget should be prepared for a particular Discovery, the Operator shall deliver to the Parties a Development Plan together with the first annual development Work Program and Budget. It should also provide provisional Work Programs and Budgets for the remainder of the development of the Discovery, or a multi‑year Work Program and Budget.
By cl 6.2(B), after receipt of the Development Plan and the first annual Work Program and Budget, the Operating Committee shall meet to consider and modify, and then either approve or reject, the Development Plan and the first annual development Work Program and Budget.
By cl 6.2(C), if the Development Plan and the first annual Work Program and Budget is approved by the Operating Committee, the work shall be incorporated into and form part of the annual Work Programs and Budgets.
By cl 6.2(D), if the Operating Committee has voted against, or failed to vote in favour of, the proposal that a Development Plan and development Work Program and Budget should be prepared for a particular Discovery pursuant to cl 6.2(A), then any Party who voted in favour of the proposal may give notice to the other parties that, with respect to such Discovery, it intends to prepare a Development Plan together with the first annual development Work Program and Budget, and provisional Work Programs and Budgets, for the remainder of the development of the Discovery. Such Party, and any other Parties who elect to participate in the preparation of the Development Plan and Work Program and Budget, shall submit the Development Plan and Work Program and Budget for approval by the Operating Committee in accordance with cl 6.2(B) and cl 6.2(C).
If the Development Plan and Work Program and Budget under cl 6.2(D) are approved by the Operating Committee, the Party or Parties who prepared them shall be entitled to charge all reasonable costs incurred in the preparation thereof to the Joint Account (cl 6.2(E)).

Production

By cl 6.3(A), on or before 60 days before the end of each calendar year beginning with the calendar year prior to that in which the Operator reasonably considers that production shall commence, the Operator shall deliver to the Parties a Production Work Program and Budget detailing the Joint Operations to be performed and the projected production schedule for the following calendar year. By cl 6.3(B), within 30 days of its receipt, the Operating Committee shall meet to consider, modify (if appropriate) and either approve or reject the Production Work Program and Budget. If for any reason the Operating Committee is unable to approve the Production Work Program and Budget prior to the expiry of the current calendar year, the Operating Committee shall be deemed to have approved a Production Work Program and Budget which is substantially similar in scope to the Production Work Program and Budget for the most recently completed calendar year.

Award of contracts

Clause 6.6 deals with the award of contracts for Joint Operations by the Operator. It stipulates three procedures to be followed, 'Procedure A', 'Procedure B', and 'Procedure C'.
Procedure A applies to expenditure up to $1 million for exploration, appraisal and development. Under Procedure A, the Operator is to award the contract to the best qualified contractor, and without informing or seeking the approval of the Operating Committee, except that before entering into contracts with any Affiliates of the Operator exceeding $100,000, the Operator shall obtain the approval of the Operating Committee.
Procedure B applies to expenditure of $1 million to $10 million for exploration and appraisal, and $1 million to $20 million for development. Procedure B requires the Operator to provide the Parties with a list of the entities whom the Operator proposes to invite to tender for the contract; to add to the list any entity whom a Party reasonably requests to be added to the list; to complete the tendering process within a reasonable time; to inform the Parties of the entities to whom the contract has been awarded; and to circulate to the Parties the results of a competitive bid analysis, stating the reasons for the choice made.
Procedure C applies to expenditure greater than $10 million for exploration and appraisal, and to expenditure greater than $20 million for development. Procedure C requires the Operator to provide the Parties with a list of the entities whom the Operator proposes to invite to tender for the contract; to add to the list any entity whom a Party reasonably requires to be added to the list; to prepare and dispatch tender documents to the entities on the list and to the other parties to the JOA; after the expiration of the tender period, to consider and analyse the details of the bids received; to prepare and circulate to the Parties the results of a competitive bid analysis, stating the Operator's recommendation; and to obtain the approval of the Operating Committee to the recommended bid, which approval shall not be unreasonably withheld or delayed.

AFE procedure

Clause 6.7 deals with AFE procedure. In effect, prior to incurring any commitment or expenditure for the Joint Account estimated to be in excess of $1 million for a Work Program and Budget, the Operator must send to each Non‑Operator an AFE (other than with respect to Minimum Work Obligations and certain other matters) (cl 6.7(A)). By cl 6.7(B), the Operator must obtain the approval of the Operating Committee to an AFE for cost and technical control purposes, and in the circumstances set out, a Party's Operating Committee representative may vote to disapprove an AFE issued in furtherance of an approved Work Program and Budget (cl 6.7(B)). When the Operating Committee approves an AFE, the Operator is authorised to conduct the operation under the terms of the JOA (cl 6.7(B)). Clause 6.7(B) also makes provision for a Party to propose to conduct an operation as an Exclusive Operation under cl 7 if the Operating Committee fails to approve an AFE in certain circumstances.
By cl 6.7(C), each AFE proposed by the Operator shall identify the operation by specific reference to the corresponding line items in the Work Program and Budget; describe the work to such level of detail as any Party reasonably requires or the Operating Committee decides; contain the Operator's best estimate of the total funds required for the work; outline the proposed work schedule; provide a forecast timetable of expenditures; and be accompanied by other supporting information as is necessary, in the reasonable opinion of any Party, to enable an informed decision to be made.

Revisions to Work Programs and Budgets

By cl 6.9, any approved Work Program and Budget may be revised by the Operating Committee from time to time, and amended accordingly.

Exclusive Operations - proposals and conduct

Clause 7 contains a scheme for the proposal for, and conduct of, Exclusive Operations.
Parties may propose Exclusive Operations (cl 7.1(C); cl 7.2). A Party may not propose an Exclusive Operation until a proposal to that effect has gone to the Operating Committee as a proposed Joint Operation and has not been approved, or unless the Party is otherwise entitled under cl 10 (cl 5.13, cl 7.1(C)).
By cl 7.1(D), the following operations may be proposed or conducted as Exclusive Operations:
1.drilling and/or Testing of Exploration Wells and Appraisal Wells;
2.Completion of Exploration Wells and Appraisal Wells in a Zone not then completed;
3.Deepening, Sidetracking, Plugging Back and/or Recompletion of Exploration Wells and Appraisal Wells;
4.development of a Discovery (ie, relevantly, an accumulation of Petroleum discovered by a Well);
5.acquisition of 'G & G Data' (ie, geological, geophysical and geochemical data and other similar information that is not obtained through a well bore); and
6.any operations specifically authorised to be undertaken as an Exclusive Operation under cl 10.[159]
[159] Clause 10 provides, in effect, that a party who has voted against an Operating Committee decision to plug and abandon an Exploration Well or Appraisal Well, may itself conduct an alternative Exclusive Operation in the well bore.
By cl 7.2(A), if a Party proposes to conduct an Exclusive Operation, it shall give notice to that effect to all Parties (other than those who have, in effect, relinquished their rights with no option for reinstatement). Such notice is to include a description of the work to be performed, and identify the location, the objectives and the estimated cost of the operation (cl 7.2(A)).
By cl 7.2(B), any Party entitled to receive such an Exclusive Operation notice, has the right to participate in the proposed operation by giving notice to the Operator and the proposing Party within specified times. In the case of a proposed Exclusive Operation to develop a Discovery, the Party wishing to exercise the right must give notice within 60 days.
If all of the Parties to the joint venture are entitled to receive an Exclusive Operation Notice and exercise their rights to participate in the proposed operation, it is to be conducted as a Joint Operation (cl 7.2(D)).
On the other hand, if fewer than all Parties entitled to receive an Exclusive Operation Notice exercise their right to participate in the proposed operation, then the proposing Party and any other Parties who do consent (known as Consenting Parties) are entitled to instruct the Operator to conduct the proposed operation as an Exclusive Operation (cl 7.2(E)(1)). An Exclusive Operation is to be carried out by the then existing Operator, or any replacement Operator for that purpose under cl 7.10(E), as soon as reasonably practicable, and subject to certain time limits (cl 7.2(E)(3)).
By cl 7.10(E), if the Operator, in its capacity as a Party, did not consent to an Exclusive Operation to develop a Discovery, the Operator may resign as Operator for the Location Area for that Discovery. Further, the Consenting Parties to such an Exclusive Operation may, in such circumstances, require the Operator to resign as Operator for that particular Discovery, and shall select a Party who has consented to the Exclusive Operations as the Operator for that purpose (cl 7.10(E)).

Exclusive Operations - consequences

By cl 7.3(A), the Consenting Parties bear the entire cost and liability of conducting an Exclusive Operation.
By cl 7.4(B), any Non‑Consenting Party is deemed to have relinquished to the Consenting Parties, and the Consenting Parties are deemed to own (in proportion to their respective Participating Interests in any Exclusive Operation):
(1)all of each Non‑Consenting Party's right to participate in further operations in the well(s) in which the Exclusive Operation was conducted, and in operations on any Discovery discovered, appraised or developed in the course of such Exclusive Operation; and
(2)all of each Non‑Consenting Party's right pursuant to the Title to take and dispose of Petroleum produced and saved from such well, and from any wells drilled to appraise or develop a Discovery discovered or appraised in the course of such Exclusive Operation.
The deemed relinquishment under cl 7.4(B) is subject to cl 7.4(C). Clause 7.4(C), generally speaking, provides that a Non‑Consenting Party may reinstate its rights relinquished under cl 7.4(B) in certain circumstances, including by paying, in effect, its own share of the costs of the operation in accordance with its Participating Interest, together with premium payments to participate in the proposed program, in accordance with cl 7.5(A) and cl 7.5(B). By cl 7.4(C), a Non‑Consenting Party is not entitled to reinstate its rights in any other type of operation other than those mentioned in cl 7.4(C)(1), (2) and (3).
The reinstatement rights the subject of cl 7.4(C)(1) concern a decision by the Consenting Parties to appraise a Discovery discovered in the course of an Exclusive Operation. In that event, where the Consenting Parties decide to appraise such a Discovery, they must submit to each Non‑Consenting Party the approved appraisal program. Each Non‑Consenting Party may then exercise an option within a certain period to participate in such appraisal program, and to bear its share of the expense and liability of such program, and to pay such premium amounts as set out in cl 7.5(A) and cl 7.5(B).
Clause 7.4(C)(2) applies to a Discovery that has been discovered or appraised in the course of an Exclusive Operation. If the Consenting Parties decide to take the next step to develop a Discovery that has been discovered or appraised in the course of an Exclusive Operation, then the Consenting Parties shall submit to the Non‑Consenting Parties a Development Plan substantially in the form intended to be submitted to the Government under the Title (if applicable) and a Development Plan and Work Program and Budget essentially in the form referred to in cl 6.2(A). Within a specified period of time, the Non‑Consenting Parties then have the option to reinstate the rights relinquished under cl 7.4(B) and to participate in such Development Plan. Again, reinstatement requires the payment of the premium amounts set out in cl 7.5(A) and cl 7.5(B).
Clause 7.4(C)(3) deals with the position where the Consenting Parties decide to Deepen, Complete, Sidetrack, Plug Back or Recomplete an Exclusive Well, and that further operation was not included in the original proposal for the Exclusive Well (ie, a well drilled pursuant to an Exclusive Operation (cl 1.34)). In that case, the Consenting Parties shall submit to the Non‑Consenting Parties the approved AFE for such further operation. Thereafter, the Non‑Consenting Parties have a period of time in which to reinstate their rights relinquished under cl 7.4(B) and to participate in such operations. Again, if a Non‑Consenting Party does so, it has to bear its share of operational expenses and pay the premium amounts set out in cl 7.5(A) and cl 7.5(B). A Non‑Consenting Parties' option to reinstate does not, however, apply if the Exclusive Well is located within a Location Area to which the Non‑Consenting Party has forfeited its entire interest as described in cl 7.4(F).
Clause 7.4(D) provides for the consequences if a Non‑Consenting Party does not exercise its rights to reinstate under cl 7.4(C), including by paying the required premium. In that event, such Non‑Consenting Party forfeits its options under cl 7.4(C) and the right to participate in the proposed program, plan or operation unless, subject to cl 7.4(F), such program, plan or operation is 'materially modified or expanded'. If the program is materially modified or expanded, then a new notice and option to reinstate shall be given to the Non‑Consenting Party under cl 7.4(C).

However, cl 7.4(F) provides that, notwithstanding cl 7.4(D), unless the Development Plan is materially modified or expanded prior to the commencement of operations under it (in which case a new notice and option is to be given to the Non‑Consenting Parties under cl 7.4(C)), each Non‑Consenting Party to the Development Plan forfeits, inter alia, all economic interest in the Location Area covering such development.
Clause 7.6 deals with the situation where a Party desires to propose the conduct of an operation that will conflict with an existing proposal for an Exclusive Operation. In that event, the Party desiring to propose the conduct of the alternative operation may, within five days of receipt of the proposal of the Exclusive Operation, deliver its alternative proposal to all other Parties. Such alternative proposal is to contain the information required under cl 7.2(A). Each Party then receiving the alternative proposal shall elect, by notifying the Operator, and by notifying the proposing Parties within the relevant period, to participate in one of the competing proposals. Any failure to respond is deemed to be a vote by that Party against the proposals. The proposal receiving the largest aggregate Participating Interest vote will have priority over all other competing proposals. In the case of a tie vote, the Operator is to choose among the proposals receiving the largest aggregate Participating Interest vote.