Santos (BOL) Pty Ltd v Apache Northwest Pty Ltd (now known as Quadrant Northwest Pty Ltd)
[2017] WASCA 101
•6 JUNE 2017
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT : THE COURT OF APPEAL (WA)
CITATION: SANTOS (BOL) PTY LTD -v- APACHE NORTHWEST PTY LTD (now known as QUADRANT NORTHWEST PTY LTD) [2017] WASCA 101
CORAM: MURPHY JA
MITCHELL JA
BEECH JA
HEARD: 20 & 21 MARCH 2017
DELIVERED : 6 JUNE 2017
FILE NO/S: CACV 70 of 2016
BETWEEN: SANTOS (BOL) PTY LTD
Appellant
AND
APACHE NORTHWEST PTY LTD (now known as QUADRANT NORTHWEST PTY LTD)
Respondent
ON APPEAL FROM:
Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram :CHANEY J
Citation :SANTOS (BOL) PTY LTD -v- APACHE NORTHWEST PTY LTD [2016] WASC 225
File No :CIV 2924 of 2013
Catchwords:
Contract law - Construction of terms - Proper construction of joint venture agreement - Turns on own facts
Legislation:
Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth)
Petroleum (Submerged Lands) Act 1967 (Cth)
Result:
Appeal dismissed
Category: B
Representation:
Counsel:
Appellant: Mr B Dharmananda SC & Mr D J Jackson SC
Respondent: Mr E C Muston SC, Ms A A Gomez & Mr B Luscombe
Solicitors:
Appellant: Herbert Smith Freehills
Respondent: Clifford Chance
Case(s) referred to in judgment(s):
Appleby v Pursell [1973] 2 NSWLR 879
Bowring & Walker Pty Ltd v Jacksons Corio Meat Packing (1965) Pty Ltd [1972] 1 NSWLR 277
Director General, Department of Education v United Voice WA [2013] WASCA 287
Homestate Australia Ltd v Metana Minerals NL (1991) 11 WAR 435
Max Cooper & Sons Pty Ltd v Sydney City Council (1980) 54 ALJR 234
Santos (BOL) Pty Ltd v Apache Northwest Pty Ltd [2016] WASC 225
Table of Contents
Summary
Legislative context
The Agreement
Parties, the Operator and the Operating Committee
Permit, Joint Licences and the Permit Area
Discovery
Kinds of Programmes and Budgets
Development Programmes and Budgets for Joint Operations
Development Programmes and Budgets for Sole Risk Development
Amendment of Programmes and Budgets
Production licence for the development of a Discovery
Joint Operations
Sole Risk Development
Payment of expenses
Receipt of Petroleum
Voting rights and the Operating Committee
Withdrawal from Joint Licences
How the dispute arose
The Parties' positions in the litigation
The trial judge's approach
Grounds of appeal
The critical issue
Santos' submissions as to the construction of the Agreement
Apache's submissions as to construction of the Agreement
Proper construction of the Agreement
Language used in the Agreement
Industry understanding of the relevant terms
Commercial considerations
Mutual exclusivity
Operation of s 8.01 of the Agreement
Grounds 2 and 3
Orders
Appendix - Terms of the Agreement
REASONS OF THE COURT:
Summary
The appellant (Santos) and respondent (Apache) are parties to a Joint Venture Operating Agreement (Agreement). They agreed to participate in the exploration of petroleum in the area of an exploration permit issued under the Petroleum (Submerged Lands) Act 1967 (Cth) (PSLA), and the development of any discovery of reserves of petroleum in that area. The John Brookes field was developed pursuant to the Agreement, and a development Programme and Budget which was approved under the Agreement in October 2003. Production of petroleum (in the form of natural gas) commenced in September 2005.
The dispute which is the subject of this appeal concerns the installation of compression facilities at the inlet to processing facilities on Varanus Island. Apache proposed the Varanus Island Compression Project (VICP) for the installation of compression facilities on Varanus Island. The estimated cost of the VICP, over the life of the project, is $294 million. Apache submitted a 2014 production Programme and Budget which included provision for expenditure of over $247 million on the VICP in that year. Santos was opposed to the VICP being undertaken at that time.
The Agreement provides for different kinds of 'Programmes and Budgets'. Article VI deals with exploration and appraisal Programmes and Budgets. Article VII deals with development Programmes and Budgets. Article VIII deals with production Programmes and Budgets.
It is common ground that provision for the VICP was deemed to have been approved on the vote of Apache (which holds the majority interest) if, but only if, it could properly be contained in a production Programme and Budget. The critical issue in this case is whether the VICP is capable of being included in a proposed production Programme and Budget, under art VIII of the Agreement.
Having paid for costs associated with the VICP under protest, Santos commenced proceedings seeking to recover the amount it had paid. Santos sought recovery on the basis that provision for the VICP could not be included in a production Programme and Budget. Santos relevantly contended that provision for the VICP could only be made in an amendment to the development Programme and Budget for the John Brookes field. That development Programme and Budget contemplated the possibility that inlet compression may be required, but did not provide for its installation. Under the Agreement, an amendment to the development Programme and Budget could only be made with Santos' support.
The trial judge identified the difference in the parties' contentions in the following terms:
1.Santos contended that any project or other work that is properly characterised as 'development' could only be undertaken utilising the provisions of Article VII of the Agreement, regardless of when the project or work was undertaken.
2.Apache contended that Article VII applied to the development phase in a temporal sense and art VIII applied to work done and expenses incurred in the production phase (again in a temporal sense).
The trial judge preferred the construction contended for by Apache. He concluded that the VICP was capable of being the subject of a production Programme and Budget under art VIII of the Agreement. That was so, notwithstanding that persons working in the petroleum industry might characterise the VICP as a 'development' project. The trial judge therefore dismissed Santos' action.
Santos now appeals against the trial judge's decision.
In our view, the projects and other work which may be the subject of a production Programme and Budget must relate to the extraction and processing of Petroleum from a developed Discovery which is, or developed Discoveries which are, the subject of an approved development Programme and Budget. For this purpose a Discovery is developed when Petroleum in saleable form is first produced from the Discovery.
The VICP satisfied that criterion, and so was capable of being included in the 2014 Programme and Budget. The trial judge was correct to dismiss Santos' action, and the appeal must also be dismissed.
Legislative context
The Agreement, which was made in February 1992 and amended in October 1994, makes a number of references to the PSLA. That Act regulated mining for petroleum in the waters with which we are concerned in the present case. A broad understanding of the PSLA is necessary to understand the operation of the Agreement.
The relevant provisions are now found in the Offshore Petroleum and Greenhouse Gas Storage Act 2006 (Cth). However, in construing the Agreement, it is relevant to note the provisions of the legislation in force at the time the Agreement was made and amended.
For the purposes of the PSLA the Earth was divided into graticular sections which (or the parts of which located within the 'adjacent areas' to which the PSLA applied) were 'blocks'.[1] Generally, a person who explored for petroleum in an adjacent area, except under and in accordance with an exploration permit, committed an offence.[2] Generally, a person who carried on operations for the recovery of petroleum in an adjacent area, except under and in accordance with a production licence, committed an offence.[3]
[1] Section 17 of the PSLA.
[2] Section 19 of the PSLA.
[3] Section 39 of the PSLA.
The PSLA provided for the grant of an exploration permit over specified blocks. An exploration permit authorised the permittee to explore for petroleum, and to carry out operations and execute works necessary for that purpose, in the permit area.[4] Conditions of an exploration permit could require work to be carried out by the permittee and require an amount to be expended in carrying out that work.[5]
[4] Section 28 of the PSLA.
[5] Section 33 of the PSLA.
Where petroleum was discovered in a permit area, the holders were obliged to inform the State Minister, as Designated Authority,[6] of the discovery.[7] The PSLA provided for the nomination and declaration of blocks within the permit area in which a petroleum pool was identified, and from which petroleum had been recovered, as a 'location'.[8] For this purpose, a 'petroleum pool' was a naturally occurring discrete accumulation of petroleum.[9]
[6] See s 14(2) of the PSLA.
[7] Section 34 of the PSLA.
[8] Section 36 and s 37 of the PSLA.
[9] Section 5(1) of the PSLA.
The PSLA provided for the holders of an exploration permit to apply for and be granted a production licence in respect of all or some of the blocks in their permit area which had been declared to be a location.[10] The holder of a production licence was authorised to recover petroleum in and from the licence area, to explore for petroleum in the licence area and carry on operations and execute works in the licence area necessary for those purposes.[11]
[10] Section 39A, s 40 and s 42 ‑ s 44 of the PSLA.
[11] Section 52 of the PSLA.
The PSLA required that an application for a production licence be accompanied by 'particulars of the proposals of the applicant for work and expenditure in respect of' the relevant blocks.[12] At the time of making and amendment of the Agreement, guidelines issued by the Department of Industry, Tourism and Resources referred to these particulars as a field development plan.[13] The Guidelines referred to an operator notifying the Designated Authority of changes to the field development plan after the grant of a production licence. The Guidelines also referred to major changes being evaluated and accepted prior to adoption. This was said to be to meet 'ongoing approval requirements'. However, subject to any conditions of a production licence, the PSLA did not at the relevant time require any approval to vary the field development plan.[14]
[12] Section 41(1)(c) of the PSLA.
[13] Offshore Petroleum Guideline for Grant of a Production Licence and Grant of an Infrastructure Licence published by the Resources Division of the Department of Industry, Tourism and Resources (Updated May 2002).
[14] Approval to vary a field development plan is required by the current provisions of Part 4 of the Offshore Petroleum and Greenhouse Gas Storage (Resource Management and Administration) Regulations 2011 (Cth).
On the grant of a production licence, the exploration permit ceased to be in force for the blocks to which the production licence related.[15] The exploration permit also ceased to cover blocks in a declared location if the holder did not apply for a production licence within a prescribed period. The same result followed if a production licence application was made and allowed to lapse.[16]
[15] Section 44(5) of the PSLA.
[16] Section 46 of the PSLA.
The PSLA also required a licence for the construction or operation of a petroleum pipeline in an adjacent area.[17]
[17] Section 60 of the PSLA.
The Agreement
The most relevant terms of the Agreement are set out in the Appendix to these reasons. Below, we note some significant features of those terms of the Agreement. Parenthesised references are to sections of the Agreement, unless otherwise specified. Capitalised terms appearing from this point are used in the sense defined by the Agreement.
Parties, the Operator and the Operating Committee
The Agreement was originally made between three joint venture partners, who were the Parties to the Agreement. The term 'Party' is defined to include the permitted assigns of the original parties (1.01).
Santos and Apache are the current Parties to the Agreement.
The Agreement refers to the 'Percentage Interest' in respect of each Party, being most relevantly the percentage undivided interest held under the Agreement in respect of the Joint Property and the Joint Petroleum. 'Joint Property' means all property acquired or held for use in connection with Joint Operations. Joint Operations are operations conducted in accordance with the Agreement by or on behalf of all of the Parties. Joint Petroleum means all Petroleum won and saved pursuant to Joint Operations (1.01).
The original Parties and their Percentage Interests in the Joint Property and Joint Petroleum were Western Mining Corporation Ltd (70%), Bridge Oil Ltd (15%) and Australasian Oil Exploration Ltd (15%). Currently, Santos holds a 45% Percentage Interest in the Joint Property and Joint Petroleum, while Apache holds a 55% Percentage Interest in the Joint Property and Joint Petroleum.
The Agreement provides for one of the Parties to be designated the Operator, which has various rights and obligations in relation to the conduct of Joint Operations (art IV).
Apache has been the Operator under the Agreement at all material times.
The Agreement also provides for an Operating Committee, comprised of one representative of each Party, to exercise overall supervision and control of all matters relating to Joint Operations (art V).
Permit, Joint Licences and the Permit Area
At the time of entry into the Agreement, the Parties held an exploration permit (WA-214-P) granted over 15 blocks to the west of islands including Varanus Island. This was designated as the 'Permit' by the Agreement.
The Permit was a 'Joint Licence' for the purposes of the Agreement, as were other petroleum tenements 'granted or issued for the purpose of conducting Joint Operations' (1.01).
The Permit Area was defined to be the area the subject of a Joint Licence (1.01).
Discovery
The concept of a Discovery is important in this case. A Discovery is defined to mean any discovery of reserves of Petroleum (1.01). Petroleum has the meaning ascribed to it under the Act (1.01), which includes naturally occurring hydrocarbons in a gaseous state.[18]
Kinds of Programmes and Budgets
[18] Section 5(1) of the PSLA.
The Agreement refers to various kinds of 'Programme'. The definition of Programme (1.01) contemplates:
1.A programme of Joint Operations; and
2.A programme of Sole Risk Drilling or Sole Risk Development.
The Agreement relevantly defines a 'Budget' to be a budget in respect of a Programme (1.01).
Substantive parts of the Agreement refer to the following kinds of Programme and Budget:
1.An exploration Programme and Budget, which is not expressed to relate to a particular Discovery, which the Operator is to submit to the parties annually (6.01), and which the Operating Committee may approve (6.03).
2.An appraisal Programme and Budget for a Discovery, which the Operator shall submit to the Parties as soon as practicable after the Operating Committee decides that a Discovery is likely to contain Petroleum in commercial quantities (6.02). This may also be approved by the Operating Committee (6.03).
3.A development Programme and Budget for a Discovery which the Operating Committee has decided to develop after considering the information obtained from an appraisal Programme. A development Programme and Budget for a Discovery may be prepared by the Operator or a Party in prescribed circumstances, which are discussed below (7.01, 7.02, 11.03).
4.An annual production Programme and Budget, the first of which must be submitted by the Operator 'not later than four months prior to the expiry of the year prior to the year in which production commences'. A production Programme and Budget is also to be submitted in each subsequent year. The submitted production Programme and Budget is to be 'for the next year', and shall include the 'projects and works to be undertaken'. The production Programme and Budget is not expressed to be for a specific Discovery. It is submitted to the Parties and may be approved by the Operating Committee (8.01).
Each kind of Programme and Budget shall include the projects and other works to be undertaken (6.01(i), 6.02(i), 7.02(a), 8.01(a)).[19]
Development Programmes and Budgets for Joint Operations
[19] An exploration Programme and Budget must at least satisfy the Work Obligations required by the conditions of the PSLA exploration licence. An appraisal Programme and Budget must also include the wells to be drilled.
The Operator may only, and is only obliged to, prepare a development Programme and Budget for a Discovery after a decision of the Operating Committee. The Operating Committee must first consider the information obtained from an appraisal Programme and determine whether or not the Discovery has resulted in the delineation of Petroleum in commercial quantities. If so, the Committee may decide to proceed to 'development of the Discovery' (7.01).
After the Operating Committee decides to develop a Discovery, the Operator submits to the Parties a proposed 'development Programme and Budget for the Discovery' (7.02(a)).
The Operating Committee considers, and may amend, revise or approve, the development Programme and Budget (7.02(b)). If the Operating Committee does not approve the development Programme and Budget, it may direct the Operator to prepare a new Programme and Budget for the Operating Committee to consider (7.02(c)).
After approval of a development Programme and Budget, each Party decides whether to 'participate in respect of its Percentage Interest share in the development of the Discovery' (7.02(d)). Implementation of the development Programme will be a Joint Operation if all of the Parties agree to participate in the development of the Discovery.
Development Programmes and Budgets for Sole Risk Development
Sole Risk Development is defined to be the development of a Discovery carried out by less than all the Parties under art XI of the Agreement (1.01). The Agreement provides for this to occur in three circumstances.
The first circumstance arises where the following requirements are all satisfied:
1.The Operating Committee votes against, or fails to vote in favour of, an Operator's proposal that a development Programme and Budget be prepared 'for a particular Discovery' (11.03(a)).
2.The Operating Committee does not direct the Operator to prepare a new development Programme and Budget (7.02(c)).
3.Any appraisal Programme approved by the Operating Committee and relating to that Discovery has been completed (subject to an exception on which it is presently unnecessary to dwell) (11.03(a)).
4.A Party gives notice to the other Parties that it intends to prepare a development Programme and Budget 'for that Discovery' (11.03(a)).
5.The notifying Party prepares a development Programme and Budget for the Discovery and submits it to the Operating Committee for approval (11.03(c)).
6.The Operating Committee does not approve the notifying Party's development Programme and Budget (11.03(c)).
7.The notifying Party gives the other Parties notice of its intention to 'develop the Discovery' at its sole risk, with details of its proposed development Programme and Budget (11.03(c)).
8.The other Parties do not all give a counter-notice that they wish to participate in the development of the Discovery (11.03(c)).
The second circumstance arises where the following requirements are all satisfied:
1.The Operating Committee directs the Operator to prepare a new development Programme and Budget, having failed to vote in favour of a development Programme and Budget proposed by the Operator (7.02(c)).
2.The Operating Committee does not approve the Operator's new development Programme and Budget (11.03(c)).
3.A Party gives the other Parties notice of its intention to 'develop the Discovery' at its sole risk, with details of its proposed development Programme and Budget (11.03(c)).
4.The other Parties do not all give a counter-notice that they wish to participate in the development of the Discovery (11.03(c)).
The third circumstance arises where the Operating Committee approves a development Programme and Budget proposed by the Operator, and the parties do not unanimously decide to participate 'in the development of the Discovery' (7.02(d)).
Where multiple sole risk development Programmes are prepared in respect of a Discovery, the Agreement provides for which shall take precedence over the other(s) (11.03(g)). This clause indicates that there can be only one development Programme and Budget relating to a single Discovery, even where Sole Risk Development is undertaken.
Amendment of Programmes and Budgets
The Agreement provides for the amendment of exploration, appraisal, development and production Programmes and Budgets 'at any time' (6.06, 7.03, 8.02). In each case a Party proposes to other Parties that an approved Programme and Budget be amended. Except in the case of an amendment to a production Programme and Budget, the Operating Committee considers whether to direct the Operator to prepare and submit a revised Programme and Budget. The Operating Committee decides whether to approve the amended or revised Programme and Budget.
The Operating Committee may not amend or revise an agreed Programme and Budget so as to 'prejudice commitments previously made by the Operator within the limits of the original Programme and Budget' (9.03(d)).
In each year, the Operator is to review a development Programme and Budget and report to the parties with any recommended amendments to the development Programme (7.03(a)).
The Parties recognise that, at the time of approval of a development Programme and Budget, it may be necessary for them to meet and consider whether any provision of the Agreement 'may be found wanting at the development phase'. If so, the Parties are to negotiate in good faith and endeavour to agree on any amendments or additions which may be considered necessary and desirable (7.03(c)).
The Parties also recognise that, prior to the commencement of regular production of Petroleum from any development, it shall be necessary for them to meet together to determine and agree on more detailed programming and budgeting provisions to apply to the production phase of Joint Operations. They agree to meet and consider whether any other provisions of the Agreement may be found wanting at the production phase and, if so, to negotiate in good faith and endeavour to agree on any amendments (8.03).
Production licence for the development of a Discovery
The Agreement makes different provision for applications for a production licence to allow the development of a Discovery in the case of Joint Operations and Sole Risk Development.
Joint Operations
After instructing the Operator to prepare a development Programme in respect of a Discovery, the Operating Committee may instruct the Operator to nominate blocks in the Permit Area as a location for the purposes of the PSLA. The Parties are to use their best endeavours to ensure that a location is declared under the PSLA (7.01).
If the Operating Committee approves a development Programme and Budget for a Discovery, and the parties unanimously decide to participate in the development of the Discovery, the Operator is to apply for a production licence. The Operator is to apply for a production licence on behalf of the Parties in respect of so much of the declared location 'as the Operating Committee considers necessary for the development of the Discovery' (7.02 (d)). When granted, the production licence is part of the Joint Property held under the Agreement.
Sole Risk Development
In the case of Sole Risk Development, the Agreement provides, 'where appropriate', for the Operating Committee to determine and identify up to 9 blocks. The identified blocks must 'overlie the Pool in which the Discovery to be the subject of the Sole Risk Development was made'. The Pool, or so much of it as underlies the identified blocks, constitutes a 'sub-area' (11.02(i)). The term 'Pool' is defined in terms which refer to a discrete natural reservoir (1.01).
If less than all parties elect to participate in the development of a Discovery, the Operator is to make an application for a production licence. The application is made on behalf of the parties participating in the development of the Discovery in respect of the sub-area referred to above (11.03(e)).
Under the Agreement, any party which does not participate in the development of a Discovery shall have no further rights to the sub-area (11.03(i)).
Payment of expenses
The Operator is authorised to make expenditures as may be approved by the Operating Committee on receipt of an authorisation for expenditure, or AFE. Approval shall not be unreasonably withheld for expenses within 10% of the approved budgeted amount (9.01 and 9.02).
The Operator may make Cash Calls for the advance of each Party's Percentage Interest share of 'estimated cash requirements for the succeeding month for the Joint Operations under the Agreement' (item 1.5.1 of Appendix B).
The Agreement makes provision for a Party to protest or question the correctness of payments made in response to Cash Calls (item 1.8 of Appendix B).
Receipt of Petroleum
Each party shall be entitled to separately 'take in kind and dispose of its Percentage Interest in the total quantities of Joint Petroleum produced and made available under this Agreement' (2.01, 13.01(i)).
Section 13.01(ii) and s 13.01(iii) of the Agreement refer to the rights of the parties to 'separately lift and dispose of Joint Petroleum to which it is entitled'. Section 13.03 refers to the Parties meeting to discuss entry into 'special arrangements' in the event of any discovery of natural gas. Until any special arrangements are formalised, the provisions of the Agreement apply 'mutatis mutandis to natural gas' (which is in any event included in the definition of Petroleum).
These provisions of the Agreement contemplate the Parties separately contracting for the sale of their share of Joint Petroleum extracted and processed from a Discovery.
Voting rights and the Operating Committee
Subject to certain exceptions, the Agreement provides for decisions of the Operating Committee to be made by the affirmative vote of Parties (5.08(b)). Each Party has a voting interest equal to its Percentage Interest (5.08(a)). An affirmative decision requires a vote of two or more Parties holding an aggregate Percentage Interest of 65% or more (Appendix A, Item 5). The effect of these provisions is to require both Santos and Apache to vote in favour of a decision before it will be made by the Operating Committee.
The Agreement provides for two cases where, absent an affirmative vote, a Programme and Budget may be deemed to be approved by the Operating Committee.
The first case concerns provision made in an exploration Programme and Budget for Work Obligations under the PSLA and the exploration permit. The Agreement deems the Operating Committee to have approved work necessary to satisfy those obligations which is proposed by the highest Percentage Interest vote (5.09, 6.04).
The second case arises where the Operating Committee is unable to approve a production Programme and Budget prior to the expiry of the current year. In those circumstances, the Operating Committee shall be deemed to have approved a Programme and Budget which, on the final vote of the Operating Committee, attracted the highest Percentage Interest vote (8.01(b)). Where they apply, the effect of these provisions is to deem a production Programme and Budget supported by Apache (which holds the greater Percentage Interest) to have been approved by the Operating Committee.
Withdrawal from Joint Licences
Article XVI of the Agreement provides for the circumstances and manner in which a Party may withdraw from the Agreement or any of the Joint Licences. The effect of that provision where less than all Parties withdraw after agreeing to participate in the development of a Discovery is as follows.
A party may withdraw by notice to the other parties, but a Party participating in a development Programme may not withdraw unless one or more other parties are willing to accept its Percentage Interest (16.02(a) and (d)). The withdrawing Party shall assign its respective Percentage Interest to the non‑withdrawing Parties 'without any right to compensation or reimbursement whatsoever' (16.02(b)(ii)). Unless a remaining Party agrees otherwise, the withdrawing Party remains liable for expenditure incurred, accrued or budgeted prior to the effective date of its withdrawal (16.03(vii)).
That is, in those circumstances, a withdrawing Party loses their prior investment but, absent agreement, remains liable for expenditure incurred, accrued or budgeted prior to its withdrawal.
How the dispute arose
The resolution of this appeal turns on the proper construction of the Agreement. It is unnecessary to set out the facts giving rise to the proceedings in any detail in these reasons. The following features of the facts detailed in the trial judge's reasons may be noted.
An underground hydrocarbon reservoir is an area in the subsurface of the earth where hydrocarbons have accumulated over geologic time. A hydrocarbon reservoir consists of a porous and permeable rock layer which has the capacity to store and allow the flow of hydrocarbons. It also has a mechanism, such as impermeable rock, to prevent the escape or migration of the hydrocarbons.[20]
[20] Santos (BOL) Pty Ltd v Apache Northwest Pty Ltd [2016] WASC 225 (Primary Reasons) [44].
When well bores are drilled from the surface, it is necessary that there be a force within the reservoir (or reservoir drive mechanism) that moves the hydrocarbons up the well bore to the surface of the earth.[21] In a natural gas field, there are two basic drive mechanisms by which the gas reservoir is typically produced. One is an aquifer drive, where encroaching water fills the part of the reservoir space originally occupied by gas as the gas is removed. The other is a depletion drive, characterised by the expansion of the compressed gas remaining in the reservoir due to a pressure decline as the gas is produced.[22]
[21] Primary Reasons [45].
[22] Primary Reasons [46] ‑ [47].
In the case of a depletion drive, the productivity of the gas wells declines as reservoir pressure decreases because gas is being removed. In conventional good quality gas reservoirs, recovery of gas from a depletion reservoir will generally be in the range of 50 to 70%, so that approximately 30 to 50% remains in the reservoir rock. That recovery rate can be increased to approximately 80% by the addition of compression at the surface. That may be necessary to ensure that the pressure at which the gas arrives at the point of processing is sufficient for processing. It is to that end that the VICP was contemplated.[23]
[23] Primary Reasons [47].
On 2 September 2003, the Operating Committee resolved that the Operator should commence preparation of a development Programme and Budget in respect of the John Brookes field.[24]
[24] Primary Reasons [48].
A development Programme and Budget for the John Brookes field was issued by Apache, as Operator, on 6 October 2003.[25] The development Programme did not propose the installation of compression equipment. It did note that the development concept allowed onshore compression equipment to be installed on Varanus Island if and when necessary.[26] The Operating Committee approved the development Programme and Budget on 7 October 2003.[27] In January 2004 Apache and Santos both agreed to participate in the development of the Discovery.[28]
[25] Primary Reasons [48].
[26] Primary Reasons [52] ‑ [53].
[27] Primary Reasons [58].
[28] Primary Reasons [63].
On 21 December 2004, a production licence (WA-29-L) was granted to Apache and Santos for production of gas from the John Brookes field.[29] Production of gas commenced in September 2005.[30] Gas drawn from the field was transported about 55km by pipeline to processing facilities located on Varanus Island, which were operated under the East Spar Joint Venture and the Harriet Joint Venture.[31]
[29] Primary Reasons [68].
[30] Primary Reasons [69].
[31] Primary Reasons [3].
By 2010, Apache came to the view that inlet compression would be required for, or would at least be desirable for, maximisation of the production of gas from the John Brookes field.[32] Santos did not accept Apache's position.
[32] Primary Reasons [70].
On 28 August 2013, Apache provided Santos with a proposed 2014 production Programme and Budget. It provided for major capital expenditure relating to the VICP of about $247 million in 2014.[33] This involved installing compression equipment at the inlet point of a processing facility on Varanus Island operated by the East Spar Joint Venture. This was one of two facilities used to process gas from the John Brookes field.
[33] Primary Reasons [93].
The Operating Committee met on 30 October 2013, and the Parties disagreed as to whether the VICP should be progressed as:
1.an amendment to the development Programme and Budget for the John Brookes field; or
2.as part of the 2014 production Programme and Budget.
At the conclusion of the meeting, Apache voted to approve the 2014 production Programme and Budget (which contained provision for the VICP). Santos abstained from voting on the basis of its position that the 2014 production Programme and Budget was invalid.[34]
[34] Primary Reasons [101].
On 13 March 2014, Apache issued an AFE for expenditure relating to the VICP. Santos notified Apache that it did not approve of the AFE.[35]
[35] Primary Reasons [103].
On 18 July 2014, Apache made cash calls in relation to the VICP in amounts totalling about $72 million. Apache advised Santos that it would proceed on the basis that Santos had approved the AFE because of its unreasonable refusal to approve it.[36] Santos paid the amount, and subsequent cash calls totalling about $11.5 million, under protest. Santos did so in order to avoid being treated by Apache as a defaulting party under the Agreement.[37]
[36] Primary Reasons [104].
[37] Primary Reasons [105] ‑ [106].
Santos sought to recover the amounts paid under protest in the primary proceedings, and also sought declaratory and injunctive relief.
The Parties' positions in the litigation
Santos contends that the Parties' manifested objective intention was that work in the nature of development could only be approved under the Agreement by way of a development Programme and Budget or an amendment to it. Santos contends that this is the case even after production from a Discovery has commenced. Santos contends that the VICP is work in the nature of development, and approval of that work could not be effected by way of a deemed approval of a production Programme and Budget. Santos claims that expenditure on the VICP was never validly authorised under the Agreement. It claims repayment of the sums paid under protest in response to cash calls which Santos contends Apache issued in breach of the Agreement.
Apache contends that art VII of the Agreement, dealing with development Programmes and Budgets, applied to the 'development phase' in a temporal sense. Apache says that art VIII of the Agreement, dealing with production Programmes and Budgets, applies to work done and expenses incurred in the production phase (again in a temporal sense). A production Programme and Budget may provide for projects and other works to be undertaken in the production phase, regardless of whether the activity may be described as being in the nature of development. On that basis, the VICP was appropriately included in the 2014 production Programme and Budget even if it was work which would generally be regarded as in the nature of development by participants in the petroleum industry.
Alternatively, Apache contends that the evidence did not establish that the VICP was regarded as in the nature of development by participants in the petroleum industry. Apache therefore argues that, even on Santos' construction of the Agreement, the VICP was validly included in the 2014 production Programme and Budget, which was deemed to be approved.
Apache accepts that, if Santos succeeds on its construction argument and establishes that the VICP is in the nature of development work, then Santos is entitled to be repaid the amount of the cash calls under the accounting procedures. Apache denies that declaratory relief is warranted in those circumstances.
The trial judge's approach
The trial judge referred to the principles of construing a commercial contract in terms which are uncontroversial in this appeal:[38]
•A commercial contract must be given an objective construction, by giving proper effect to the text, context, subject matter and purpose of its provisions.
•The meaning of the terms of a commercial contract is to be determined by what a reasonable business person would have understood those terms to mean.
•A commercial contract is to be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience'.
•A reasonable commercial construction according with commercial efficacy or common sense is to be preferred to 'strict literal meaning' or a 'literal interpretation'.
•In construing a commercial contract in its context, its terms must be considered as a whole, giving consistent meaning to all its terms and avoiding any apparent inconsistency.
•Preference is to be given to a construction that gives a 'congruent operation to the various components of the whole'. (citations omitted)
[38] Primary Reasons [110].
The trial judge undertook a detailed analysis of the most relevant provisions of the Agreement, and agreed with Apache's contention.[39] The trial judge concluded:
In my view, on the proper construction of the [Agreement], notwithstanding that the VICP might be categorised as a development project as that expression is commonly understood in the industry, it is capable of being the subject of a production Programme and Budget pursuant to Article VIII of the [Agreement] [132].
[39] Primary Reasons [125] ‑ [131].
The correctness of the trial judge's conclusion about the proper construction of the Agreement is the central issue for determination in this appeal.
The trial judge also considered an alternative argument advanced by Santos to the general effect that Apache breached the Agreement by incurring expenditure without approval, and by including previously incurred expenditure in the production Programme and Budget. Santos abandoned grounds of appeal challenging the trial judge's conclusions in relation to these matters.
Given the trial judge's conclusions as to the issues of construction, he did not find it necessary to deal with the issue of remedies.
Grounds of appeal
Ground 1 in effect contends that the trial judge made an error of law in construing the Agreement in the manner described above.
Ground 2 contends that the trial judge erred in law and fact in failing to find that the VICP was in the nature of 'development' within art VII and not in the nature of 'production' within art VIII. The ground also contends that the trial judge erred in finding the deemed approval of the 2014 production Programme and Budget was effective as approval of the VICP.
Grounds 3 and 4 were abandoned.
Ground 5 is a consequential ground which contends that the trial judge erred in failing to grant relief to Santos.
Ground 2 depends on the success of ground 1, and ground 5 depends on the success of grounds 1 and 2. It is appropriate to begin by considering the issue concerning the proper construction of the Agreement raised by ground 1.
The critical issue
The critical issue of construction in this case is whether the VICP is capable of being included in a 'proposed production Programme and Budget for the next year', under s 8.01(a) of the Agreement.
It is not enough for Santos to show that the VICP could be included in the development Programme and Budget. Rather, the question is whether the VICP could not be included in a production Programme and Budget.
Santos' submissions as to the construction of the Agreement
Santos relies on the references to 'exploration', 'appraisal', 'development' and 'production' Programmes and Budgets. It contends that the concepts of exploration, appraisal, development and production are mutually exclusive in a sense that an activity can only fall into one of those categories. Santos contends that the different terms refer to different functional activities. It says that the activities must be regarded as mutually exclusive in order to give commercial sense to the provisions of the Agreement which regulate those functional activities differently. If a programme or work is to be characterised as development, it can only be provided for in a development Programme and Budget approved under art VII. It cannot be included in a production Programme and Budget under art VIII of the Agreement.[40]
[40] Appeal ts 36 ‑ 37, 42 ‑ 43, 49 ‑ 50, 65.
Santos says that references to the 'development of a Discovery' in the Agreement are to the creation of relevant infrastructure in order to facilitate the extraction of petroleum from the relevant Pool.[41] It says that the 'essential concept' of development concerns the things which need to be done to extract petroleum and market it. Santos contends that 'development' means work of a kind which would be understood by participants in the petroleum industry as development work. In order to determine whether a particular programme or work was development work, it is necessary to take account of the factors identified by the expert evidence.[42]
[41] Appeal ts 8.
[42] Appeal ts 12 ‑ 13.
Santos says that 'production' is the ultimate creation of saleable petroleum by extraction and processing of the petroleum.[43] It says that 'appraisal' consists of activities directed to the delineation of petroleum in commercial quantities.[44]
[43] Appeal ts 22.
[44] Appeal ts 54.
Santos submits that, as a matter of language, the activities of exploration, appraisal, development and production are, by their very nature, different. Santos says that the different articles of the Agreement deal with these different types of activities. Santos submits that the manifest intention was to refer to these activities as functionally discrete, not as temporally discrete and compartmentalised.
The force of Santos' argument about commerciality is directed to the 'deemed approval' provision for production Programmes and Budgets in s 8.01(b) of the Agreement. Santos points to the provisions of art VII of the Agreement which provide for the Parties to decide whether to participate in the development of a Discovery only after a development Programme and Budget is approved. It also points to s 7.03(b), which enables the amendment of a development Programme and Budget only by the actual approval of at least two Parties holding a combined Percentage Interest of at least 65%. It notes that each Party is entitled to act in its own commercial interest in deciding what Programmes and Budgets to support, and that the Parties' views of their commercial interests may differ.
Santos says that it is inconsistent with the structure of the Agreement, and would produce an uncommercial result, if a minority Party were subject to the decisions of the Party with the highest Percentage Interest, which could include additional development projects and works in a production Programme and Budget once some production had started. Santos contends that there is only one production Programme and Budget for the whole Permit Area. Santos says that the Agreement contemplates activities of exploration, appraisal and development continuing in the Permit Area after production from a Discovery commences. Santos says that it would be an uncommercial result and inconsistent with the structure of the Agreement if all activities were to be dealt with in a production Programme and Budget, the contents of which could be effectively dictated by the Party with the highest Percentage Interest, after some production commenced.
Santos says that once a development Programme and Budget for a Discovery has been approved, the only way that additional development projects or work can be approved is by an amendment of the development Programme and Budget. Santos notes that the Agreement provides for all kinds of Programmes and Budgets to be amended 'at any time', and says that there is no warrant for reading those words down.
Another way that Santos put its submissions was that a production Programme and Budget within the meaning of s 8.01 of the Agreement was a work programme and budget which gives effect to production in accordance with, or substantially in accordance with, the infrastructure approved and created under a development Programme and Budget. It says that development work for the construction of infrastructure which has not been approved under a development Programme and Budget therefore stands outside the scope of s 8.01 of the Agreement.
Apache's submissions as to construction of the Agreement
Apache's submissions may be summarised as follows:
1.Broadly speaking, Articles VI to VIII reveal an intention that the exploitation of petroleum from an individual Discovery takes place in a phased and sequential manner.[45]
2.A production Programme and Budget must relate to the recovery of petroleum from a Discovery which has been developed and cannot relate to a different Discovery.[46] That is, a production Programme and Budget must deal with a Discovery which has 'passed through the gateway of art VII'.[47] This can only occur after the Operating Committee approves a development Programme and Budget for the Discovery and the Parties unanimously decide to participate in the development of the Discovery.[48] Once that point has been reached, that Discovery has 'travelled into Article VIII'.[49] At that point, the available scope and subject matter of a production Programme and Budget is not limited to projects and works having the character of 'production' rather than 'development'.[50] The only other limit on the works or projects capable of being the subject of a production Programme and Budget is one of good faith.[51]
3.The sequential phases of a particular Discovery, and their respective Programmes and Budgets, do not and inherently cannot overlap as that Discovery moves from appraisal to development and into production.[52] This is subject to an exception which applies during the period between 4 months before the commencement of the year when production commences and the commencement of production.[53]
4.The Agreement provides for a separate production Programme and Budget for each particular Discovery.[54]
[45] Respondent's submissions [13].
[46] Appeal ts 84 ‑ 85, 115 ‑ 120, 123 ‑ 124.
[47] Appeal ts 123 ‑ 124.
[48] Respondent's submissions [16], [17]; appeal ts 116, 118, 125.
[49] Appeal ts 123.
[50] Appeal ts 84 ‑ 85, 110 ‑ 111.
[51] Appeal ts 85.
[52] Respondent's submissions [23] ‑ [24]; appeal ts 82, 84, 90, 99, 123 ‑ 126.
[53] Appeal ts 126 ‑ 127, 129.
[54] Appeal ts 110 ‑ 113.
Proper construction of the Agreement
For the following reasons, we do not accept Santos' submissions as to the operation of the Agreement by reference to different mutually exclusive functional activities. We accept Apache's first two contentions set out in the previous paragraph. While we do not accept Apache's third and fourth contentions, those contentions are not critical to Apache's success in the appeal.
Language used in the Agreement
In our view, the language of the Agreement is more consistent with the different kinds of Programmes and Budgets being concerned with phases of a Discovery.
First, the subject of art VII is not simply work in the nature of development but the 'development of the Discovery'. That phrase naturally connotes bringing the Petroleum reserve which constitutes the Discovery into production.
Secondly, the structure and language of the Agreement strongly suggests that each kind of Programme and Budget deals with different phases of a Petroleum project. The Programmes and Budgets referred to sequentially in the Agreement deal with:
1.exploration (in which the Discovery is identified);
2.appraisal (in which commercial quantities of Petroleum in a Discovery are delineated),
3.development (where the infrastructure necessary to allow production to commence from a Discovery is installed); and
4.production.
The inference which arises from the structure of the Agreement is reinforced by references to the 'development phase' (7.03(c)) and 'production phase' (8.03) of the operations. Further, s 1.02(d) of the Agreement, in defining a 'year', distinguishes between matters pertaining to the 'exploration or appraisal phases' and matters pertaining to the 'development or production phases'.
Thirdly, the words 'development' and 'production' form part of the title of the relevant kinds of Programme and Budget. The title is not necessarily determinative of the permissible content of the Programme and Budget.
Fourthly, the substantive provisions of the clauses all require each kind of Programme and Budget to include the 'projects and other works to be undertaken'. The substantive provisions do not specifically limit the nature of the projects and works which may be undertaken, and the same phrasing is used for each kind of Programme and Budget. As the trial judge correctly observed:
The use of those same expressions in relation to each type of programme and budget suggests that a particular programme and budget is to be directed to the work to be undertaken, however it might be characterised, during the different temporal phases. That is, they are directed to whatever expenditure is proposed to be incurred during the relevant phase. The contention made by Santos requires that 'projects' be read as 'exploration projects', 'development projects' or 'production projects', in Articles VI, VII and VIII respectively. Within the context of the [Agreement], I see no basis to provide that gloss to the plain words of the provisions.[55]
[55] Primary Reasons [131]
There is no imperative to imply a prohibition against including development projects or work in a production Programme and Budget if the development and production Programmes and Budgets each deal with work undertaken in different phases of the project. The language and structure of the Agreement indicates that each kind of Programme and Budget is to be directed to the projects and other work to be undertaken, however it might be characterised, during the different phases of a Discovery.
One factor which does favour Santos' construction is that a production Programme and Budget is proposed 'for the next year'. Santos points out that projects and work in the nature of development may be expected to occur over more than one year. However, that consideration does not demand acceptance of Santos' construction. It may be noted that projects and work in the nature of production may also be carried out across budget years. It is not unusual for a budget to include forward estimates of expenditure which may require approval in subsequent years.
Industry understanding of the relevant terms
The evidence in this case identified two senses in which terms such as 'development' and 'production' were used in the petroleum industry. The first was to describe the phases of a project, and the second was to describe the nature of activity which could be undertaken in any of the phases.
The two different senses in which the terms can be used were reflected in the evidence of Dr Brand, which was summarised in the Primary Decision. [56]
[56] Primary Reasons [114] ‑ [119].
Dr Brand identified the phases of a petroleum project as being:
1.Exploration and appraisal (in which it is determined that the volume of hydrocarbons is sufficient to meet a company's required minimum rate of return, or some other economic requirement);
2.Development (in which concept selection options for the asset are studied and analysed. Investment decisions are made and the project moves into actual engineering, procurement, construction and installation of the production platforms and, if part of the development concept, pipelines and onshore processing facilities);
3.Production (in which the project is turned over to production operations so that day-to-day operations in the field can be managed and the field produced in a safe and efficient manner. The major activities of petroleum production are to bring the fluid to the surface, separate the liquid and gas components, and remove impurities); and
4.Abandonment (in which facilities and wells are decommissioned and abandoned).
Dr Brand recognised that 'redevelopment' could occur after initial development had been completed and production had begun. That would occur where there was a need for new infrastructure and additional capital investment to further develop the field so as to extract additional hydrocarbons. He said that the development phase includes redevelopments, which may occur after production has started.
The expert evidence, including that of Dr Brand, also addressed the question of whether work undertaken during the production phase of a petroleum project would be regarded as development work or production work. The effect of that evidence was that whether work undertaken during the production phase of a petroleum project was regarded as being in the nature of development work would depend on a range of factors, including:
1.Whether the project involves large capital expenditure;
2.The project management structure adopted by the project operator;
3.How the project is approved;
4.The accounting treatment of the costs of the project; and
5.The objective of the project.[57]
[57] Primary Reasons [119] ‑ [122].
There is no imperative in the language of the Agreement to read references to exploration, appraisal, development and production as kinds of work, rather than a reference to the phase in the life of a petroleum project.
To the contrary, the construction proposed by Santos involves the application of a test which in many cases will have no certain answer. The evidence did not suggest a clear and precise dividing line between work that may be characterised as being in the nature of development and work which may be characterised as being in the nature of production.
For example, when asked whether the replacement of an extensive section of pipeline would be production or development work, Santos' senior counsel said that it would 'turn on the various matters discussed by Dr Brand in his expert report, and a line can be drawn and would be drawn'.[58] Counsel then said that if it 'requires significant infrastructure construction and requires a whole new project to be implemented' the work would be in the nature of development.[59] However, as senior counsel for Apache pointed out, the 2014 production Programme and Budget anticipated $187 million of expenditure for the replacement of a corroded pipeline. That project had an initial budget of $1 million to 'fully develop the scope and secure long lead items'.[60] It does not appear that either party has treated this as work that can only be dealt with by an amendment to the development Programme and Budget. While this subsequent conduct does not bear on the proper construction of the Agreement, it illustrates the kinds of uncertainty that Santos' construction of the Agreement may produce.
[58] Appeal ts 8.
[59] Appeal ts 9.
[60] Items 5 and 5.2.1.5 at pages 12 and 14 of the 2014 production Programme and Budget (Green AB 735, 737).
In our view, a reasonable businessperson would not understand the Agreement to divide the kinds of work that could be the subject of a Programme and Budget in a manner productive of commercial uncertainty. That is particularly so in the commercial context of an industry where, as the trial judge found, the distinction between the exploration, appraisal, development and production phases of a petroleum project is widely understood.[61]
[61] Primary Reasons [114] ‑ [117], [125].
Further, Santos' construction does not give any particular meaning to the term 'development' as it appears in the Agreement. Santos' argument goes beyond the orthodox approach of using evidence of well‑established industry usage of a term to inform the objectively intended meaning of the same term appearing in a contract.[62] Rather, it says that the development work is work that a participant in the industry would regard as development work, having evaluated the work by reference to a number of criteria. In our view, it is objectively unlikely that the parties would have intended the Agreement to operate in that way. The factors which must be evaluated to determine how work would be characterised by participants in the petroleum industry are not at all apparent from the actual terms of the Agreement. In our view, a reasonable business person would not understand the various criteria to which Dr Brand referred as being incorporated simply by the use of the term 'development'. To the extent that the business person would attribute an industry usage to the terms, he or she would be more likely to see the reference as being to the phases of a petroleum project than the characterisation of work by the application of Dr Brand's criteria.
Commercial considerations
[62] Director General, Department of Education v United Voice WA [2013] WASCA 287 [85] ‑ [87]; Homestate Australia Ltd v Metana Minerals NL (1991) 11 WAR 435, 446 ‑ 448; Appleby v Pursell [1973] 2 NSWLR 879, 888 ‑ 889; Max Cooper & Sons Pty Ltd v Sydney City Council (1980) 54 ALJR 234, 239; Bowring & Walker Pty Ltd v Jacksons Corio Meat Packing (1965) Pty Ltd [1972] 1 NSWLR 277, 280 ‑ 281; N Seddon, R Bigwood and M Ellinghaus, Cheshire & Fifoot Law of Contract (10th ed, 2012) 432 [10.14].
Santos points to commercial considerations. It says those considerations favour construing the Agreement as treating development and production as mutually exclusive concepts, with development necessarily being dealt with under a development Programme and Budget. Those commercial considerations revolve around the deemed approval for which s 8.01(b) of the Agreement provides in respect of production Programmes and Budgets. As noted above, Santos contends that it would be an uncommercial result if a Party, which elected to participate in the development of a Discovery only after the approval of a development Programme and Budget, prospectively accepts all liabilities in relation to the Discovery, regardless of the amount or whether they are specified in the approved development Programme and Budget, provided the liabilities were affirmed by the Party with the highest Percentage Interest.
The problem which Santos' argument faces is that, even on its construction of the Agreement, a Party with a minority Percentage Interest may be forced into investing in infrastructure of a much larger scale than proposed in an approved development Programme and Budget.
It is relevant to consider how the Agreement would have operated with the Parties and Percentage Interests which existed at the time of entry into the Agreement. At that time, as provided for in the Agreement, Western Mining held a 70% Percentage Interest and Bridge Oil and Australasian Oil Exploration each held 15% Percentage Interests. On Santos' construction, if Western Mining Corporation and one of the minority partners agreed to amend the development Programme and Budget to include new work, the other minority party (with only a 15% interest) would be liable to contribute to the cost of the work even if it opposed the development. This could occur at any time after those Parties agreed to participate in the development of a Discovery based on an approved development Programme and Budget. In that manner, even on Santos' construction, the Agreement enabled one of the original minority Parties to be subjected to liabilities for infrastructure expenditure not provided for in development Programme and Budget current at the time that party elected to participate in the development of a Discovery.
We recognise that there is a difference between the scenario described in the previous paragraph and that presented by the current appeal. In the scenario described above, there is an actual approval of an amendment to a development Programme and Budget by at least two parties holding at least a 65% interest. There is no provision for a deemed approval of the amendment. However, the point remains that the Agreement allows for increased development costs to be imposed on a minority party, which has decided to participate in the development of a Discovery only after the approval of a development Programme and Budget.
Further, even on Santos' construction, a Party may be subject to dramatically increased infrastructure expenditure after production commences, depending on how contracts for the delivery of that infrastructure are framed. This point may be illustrated by an example which senior counsel used to illustrate Santos' point about commerciality. Counsel said:[63]
Varanus Island has, I think, five trains that process gas, and each of those trains cost a significant amount of money. And so there could be debates the parties. One train, two trains, three trains - it depends on how much gas you want to get out how quickly. And these are valuable assets that, in our submission, the parties did not intend objectively that the minority party, once some production has started, is entirely at the behest of the majority party and the majority party’s commercial judgments.
[63] Appeal ts 38.
However, the approved development Programme and Budget for the John Brookes field did not make any provision for the construction of processing facilities. Rather, the development Programme and Budget contemplated that gas and liquids from the John Brookes field would be 'toll processed' through the Varanus Island facilities operated under two different Joint Ventures.[64] Tolling charges were estimated to be the main part of the annual production costs ($24 million compared to $7.9 million to operate the John Brookes facilities).[65] Counsel accepted that much of the processing costs for the John Brookes Discovery were fees charged for processing gas, which both parties regarded as a production rather than a development cost.
[64] See page 6 of the John Brookes Development Program and Budget (green AB 271).
[65] See page 32 of the John Brookes Development Program and Budget (green AB 297).
If Apache wished to contract for the provision of 10 processing trains for a toll or fee in the same manner, the annual cost of the use of that infrastructure would be expected to dramatically increase. Apache could propose a production Programme and Budget which paid an annual fee for the use of 10 processing trains on Varanus Island, to be provided by a third party, and the deeming provision in s 8.01(b) of the Agreement would apply.
Equally, in the present case Apache could propose contracting for the provision of compression services, under which a third party would own, install, operate and maintain compression equipment on Varanus Island for an annual fee. Even on Santos' construction, the cost of the provision of those compression services could be included in a production Programme and Budget.
The examples given at [127] ‑ [132] above illustrate various ways in which additional unanticipated infrastructure costs may be imposed on a minority Party, even on Santos' construction of the Agreement. They count against allowing considerations of commerciality concerning the Agreement's provision for deemed approval of a production Programme and Budget to drive the construction of other provisions of the Agreement.
There is a further aspect of commerciality which counts against Santos' construction of the Agreement. Once Parties agree to participate in the development of a Discovery after the approval of a development Programme and Budget, they are committed to sharing in the costs of works required to extract and process the gas. That commitment is made in a context where the investment of very large sums of money is required to develop a Discovery. The commitment is also made in a context where the Agreement provides for each Party to separately contract for the sale of Petroleum to third parties, so as to produce potentially divergent commercial interests. It is in that commercial context that s 8.01(b) provides for a default position in relation to the annual production Programme and Budget. This prevents existing investment, and the Parties' ability to perform contracts for the sale of gas to third parties, being put at risk by a disagreement about the annual production Programme and Budget.
It is not obvious why that mechanism for breaking a deadlock would be provided for in relation to some kinds of work which is necessary to allow production to continue at acceptable levels but not others. Implementation of a particular project, which is not contemplated in a development Programme and Budget and which involves substantial expenditure, may be necessary to effectively continue production. In the event of disagreement, should the deemed approval of the budget for that project depend on whether the work is classified as development or production? If the commercial purpose of s 8.01(b) of the Agreement is to prevent an inability by Parties to agree from jeopardising past investment and the future performance of supply contracts, it would be expected that the provision would apply to all potentially necessary kinds of expenditure.
Mutual exclusivity
Having regard to the above considerations, we are not convinced that there is any imperative in the language or commercial purpose of the Agreement to treat exploration, appraisal, development and production as discrete mutually exclusive kinds of activities. Many activities, such as drilling, may be a component of each stage of the project, and the boundaries for which Santos contends for are not clearly defined. Continued appraisal of a Discovery may be expected throughout the development and production phases of the Project, as is contemplated by the development and production Programmes and Budgets for the John Brookes field.[66] The line between development and production work which may take place during the production phase of a project is far from clearly defined. The commercial considerations on which Santos relies, concerning the different approval mechanisms, do not justify Santos' construction.
[66] See page 22 of the John Brookes Development Program and Budget (green AB 287). The John Brookes Field Development Plan (Compression Update), which formed part of the 2014 production Programme and Budget, described the ongoing appraisal of the John Brookes field at pages 10 ‑ 12 (green AB 714 ‑ 716).
Apache contends for a different kind of mutual exclusivity, between the different phases of a petroleum project. Senior counsel for Apache sought to identify 'bookends' which separated the phases. We do not accept that the phases of a project contemplated by the Agreement are wholly discrete. Continued exploration of the whole of the Permit Area is contemplated by the Agreement and required by Work Obligations to which the Agreement refers. This will continue even after production from a Discovery commences. There may be different Discoveries within the Permit Area which are at different phases at any one time.
Even in respect of a single Discovery, there may be overlapping development and production Programmes and Budgets. Section 8.01(a) requires the submission of a production Programme and Budget not later than four months prior to the expiry of the year in which production commences. The Budget is for the next year. However, if production from the first Discovery does not commence until the end of the 'next year', then development and production Programmes and Budgets may both apply to projects and works undertaken during most of the year. Further, a development Programme and Budget may provide for the development of multiple wells or processing trains, not all of which will necessarily be complete when Petroleum is first produced from the Discovery.
There are two other considerations which count against Apache's argument that the Agreement provides for entirely discrete and mutually exclusive phases.
First, in our view art VIII provides for a single production Programme and Budget in each year which will relate to the whole of the Permit Area. Article VIII is not Discovery specific, and requires a production Programme and Budget to be submitted by reference to the year in which production commences. The obligation continues after production commences from any Discovery in the Permit Area.
Section 8.03 refers to the 'commencement of regular production of Petroleum from any development' and the 'production phase of Joint Operations'. This also suggests that there is a single annual production Programme and Budget prepared for each year after production commences from any Discovery.
Secondly, the Agreement provides for the amendment of the various kinds of Programme and Budget 'at any time'. In our view, contrary to Apache's submissions and the view of the trial judge, there is no warrant for reading down the words 'at any time'. That broad language suggests that, for example, an appraisal or development Programme and Budget may be amended even after the works and programs provided for in the Programme and Budget are complete. This may occur, for example, to allow for reappraisal of a Discovery which the Parties had decided against developing in light of changing technology or economic circumstances, or to allow for further development of a developed Discovery.
Our above rejection of aspects of Apache's submissions does not demand the rejection of the whole of Apache's argument as to the proper construction of the Agreement. Our rejection of Apache's argument about the mutual exclusivity of the phases does not compel acceptance of Santos' argument about the mutual exclusivity of different kinds of activity. It may well be that provision for compression could have been made either as an amendment to the development Programme and Budget or as a provision in the production Programme and Budget.
As noted above, and as Santos accepted on appeal,[67] the critical issue is not whether the programme and work might have been included in an amendment of the development Programme and Budget. The critical issue is whether it can be included in a production Programme and Budget.
Operation of s 8.01 of the Agreement
[67] Appeal ts 2 ‑ 3.
Section 8.01(a) provides for the submission of a 'Programme' and 'Budget' (which is defined to be in respect of a Programme) for the next year. A 'Programme' is relevantly defined to be a 'programme of joint operations'.[68] Joint Operations are defined to be operations conducted by or on behalf of all Parties. Work and programmes relating to a Discovery which has been appraised will only be Joint Operations if the parties have decided unanimously to participate in the development of the Discovery, after the approval of the Development Programme and Budget, under s 7.02(d) of the Agreement.
[68] There being no suggestion that a programme of Sole Risk Drilling or Sole Risk Development would be submitted under s 8.01.
That structure of the Agreement gives rise to an implied limitation on the kind of projects and other works which may be provided for in a production Programme and Budget. That limitation is that the projects and other work which may be the subject of a production Programme and Budget must relate to the extraction and processing of Petroleum from a developed Discovery which is, or developed Discoveries which are, the subject of an approved development Programme and Budget. The Discovery, or Discoveries, must have been developed, in the sense that Petroleum has been produced from the Discovery in the implementation of a development Programme and Budget.
This limitation is implicit because it is inconsistent with the structure of the Agreement to allow everything occurring in the Permit Area after the first production of Petroleum from a Discovery to be dealt with by the annual production Programme and Budget. That would allow a production Programme and Budget to deal with matters including the appraisal and development of other Discoveries, once some production commenced. To do so would compromise a Party's right, for which the Agreement expressly provides, to decide whether or not to participate in the development of a Discovery. Both parties accept that it is inconsistent with the structure and commercial purpose of the Agreement to treat the commencement of any production in the Permit Area as a temporal dividing line, after which all activity in the Permit Area must be dealt with in a production Programme or Budget.
Further, to be a Joint Operation, all Parties must have agreed to participate in the development of the Discovery after the approval of a development Programme and Budget for the Discovery.
It was also uncontroversial that the Operator's discretionary power to prepare and submit a production Programme and Budget was to be exercised in good faith.
Once a Discovery has been developed (in the sense that Petroleum in saleable form has been produced from the Discovery), then the operator, acting in good faith, may submit a production Programme and Budget which proposes projects and other work for the extraction and processing of Petroleum from that Discovery. It may do so irrespective of whether or not the programmes and other work proposed may also be characterised as being in the nature of appraisal or development of the Discovery.
That is, recognising that the development and production phases for a Discovery may overlap, the production phase of a Discovery begins when Petroleum is first produced from that Discovery. From that point, projects and work relating to the extraction and processing of Petroleum from that Discovery may be the subject of a production Programme and Budget. The first production Programme and Budget is prepared four months prior to the expiry of the year prior to the year in which production commences from the first Discovery, and annually thereafter. As further Discoveries are developed in accordance with an approved development Programme and Budget and reach the production phase, they will be the subject of the production Programme and Budget. In that manner, art VI to art VIII of the Agreement deal with the Programmes and Budgets for different (although potentially overlapping) phases of a project to extract Petroleum from a Discovery or Discoveries in the Permit Area.
Therefore, the trial judge was correct to conclude that art VIII applies to work done and expenditure incurred in the production phase in a temporal rather than a functional sense. The production phase of a Discovery begins when Petroleum is first produced from the Discovery. Article VIII provides for the submission and approval of a production Programme and Budget proposing projects and other work relating to the extraction and processing of Petroleum from Discoveries which are developed in that sense.
The VICP clearly relates to the extraction and processing of Petroleum from the John Brookes Discovery, undertaken well after Petroleum was first produced from that Discovery in implementation of the John Brookes development Programme and Budget. It is not suggested that Apache, as Operator, did not act reasonably and in good faith in proposing the inclusion of the VICP in the 2014 production Programme and Budget. The VICP was a programme or other work which could be provided for in the 2014 production Programme and Budget, even if it might also have been the subject of an amendment to the development Programme and Budget.
For these reasons, ground 1 should be dismissed.
Grounds 2 and 3
The issues raised by grounds 2 and 3 therefore do not arise. If it had been necessary to determine ground 2, we would have found that the VICP would be classified as being in the nature of development work applying the criteria identified by Dr Brand. That conclusion is based on Dr Brand's uncontradicted evidence to that effect, given at trial. If Santos had established that provision for the VICP could not be included in a production Programme and Budget, then we would have ordered repayment of the money paid by Santos under protest, but would not have seen the other declaratory relief which Santos sought as necessary or appropriate.
Orders
For the above reasons, the appeal should be dismissed.
Appendix - Terms of the Agreement
THIS AGREEMENT is made this 18th day of Feb 1992 BETWEEN
WESTERN MINING CORPORATION LIMITED, … ("Western Mining") of the first part,
BRIDGE OIL LIMITED, … ("Bridge Oil") of the second part,
AND:
AUSTRALASIAN OIL EXPLORATION LIMITED … ("AOE") of the third part.
WHEREAS
A. The Parties are or are entitled to be registered as the joint holders of the Permit under the provisions of the Act.
B. The Parties have agreed to participate in exploration for Petroleum in the Permit Area and the development of any Discoveries of Petroleum in the Permit Area in accordance with the terms and conditions set forth in this Agreement.
C. The Parties desire to enter into this Agreement for the purpose inter alia of appointing the Party specified in item 1 of Appendix A as Operator, and to define as from the Effective Date hereof their respective rights, interests and obligations in respect of the exploration for Petroleum and the development of any Discoveries of Petroleum in the Permit Area.
D. The scope of this Agreement and the terms and conditions upon which the Parties have agreed to participate in exploration for the development of Petroleum are contained in this Agreement.
E. Pursuant to an oral agreement between the Parties prior to the grant of the Permit WMC agreed that it would assign to Bridge Oil a 15% Percentage Interest and to AOE a 15% Percentage Interest, for (in each case) nil consideration other than their respective compliance with the terms of the Permit (as to their respective 15% Participating Interests) and participation in the joint operations in accordance with the terms of a joint operating agreement.
NOW THEREFORE it is agreed by and between the Parties hereto as follows: …
Article I
Definitions and Interpretations
Section 1.01 - Definitions
In this Agreement including the Recitals and Appendices hereto, unless a contrary intention appears:
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'AFE' means an Authorisation For Expenditure more particularly defined in Article IX;
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'Budget' means a budget, including any variations thereto made from time to time in accordance with this Agreement in respect of a Programme;
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'Discovery' means any discovery of reserves of Petroleum;
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'Field' means a single Pool or an aggregate of overlapping, contiguous or superimposed Pools with a certain geographical area where Petroleum is or may be produced;
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'Joint Operations' means all operations conducted in accordance with this Agreement by or on behalf of all of the Parties;
'Joint Petroleum' means all Petroleum won and saved pursuant to Joint Operations;
'Joint Property' means all property acquired or held for use in connection with Joint Operations including the Joint Licence;
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'Operating Committee' means the Committee established pursuant to Article V;
'Operator' means the Party described in item 1 of Appendix A acting in that capacity and not as the owner of a Percentage Interest and includes any other operator for the time being designated and acting as such under this Agreement;
'Party' means a Party to this Agreement and its successors and permitted assigns;
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'Permit' means the Petroleum exploration permit described in Item 3 of Appendix A, a copy of which is set out in Appendix C, or any renewal or extension thereof or substitution therefor;
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'Petroleum' has the meaning ascribed to it under the Act;
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'Pool' means any under ground accumulation of Petroleum in a discrete natural reservoir bounded by geological barriers so that it is effectively separated from any other pools that may be present in the same district or in the interpreted confines of the same geological structure or interpreted confines of the same stratigraphic trap. A Pool is characterised by a single natural pressure system so that production of Petroleum from one part of the Pool affects the reservoir pressure throughout its extent;
'Production Licence' means a licence to carry on operations for the recovery of Petroleum pursuant to the Act and any renewal thereof or substitution therefor granted by the Designated Authority in respect of the whole or any part of the Permit Area;
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'Programme' means any programme of Joint Operations including any variations thereto made from time to time in accordance with this Agreement; and any programme of Sole Risk Drilling or Sole Risk Development;
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'Sole Risk Development' means a development of a Discovery carried out by less than all the Parties under Article XI;
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'Working Obligations' means the minimum work requirement program or programs to be performed in or in relation to the Permit Area as a condition of a Joint Licence.
Section 1.02 - Interpretation
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1.02(b) The table of contents of this Agreement and any headings and marginal notations in this Agreement have been inserted for convenience only and shall not in any way limit or govern the construction of the terms of this Agreement;…
1.02(d) any reference in this Agreement to a 'month' or 'monthly' shall mean calendar month and calendar monthly respectively. Any reference in this Agreement to a 'year' or 'yearly' shall mean;
(i)in relation to any matter pertaining to the exploration or appraisal phases - Permit Year or Permit Yearly terminating on the anniversary of the Permit in each year respectively;
(ii)in relation to any matter pertaining to the development or production phases - year or yearly termination on the anniversary of the relevant Joint Licence in each year respectively.
Article II
Objects and Interests of the Parties
Section 2.01 - Objects and Percentage Interests
The Parties agree to participate in Joint Operations for the exploration and, if appropriate, the development and production of Petroleum within the Permit Area and each Party undertakes to commit its Percentage Interest share of all Joint Property ...
The Joint Property shall be owned by the Parties in undivided shares as tenants in common in proportion to their respective Percentage Interests. In respect of Joint Petroleum, the Parties or such of them as are not in default hereunder, as specified in Article XII, shall own and, unless otherwise specified under Article XIII, shall have the right and obligation to separately take in kind and dispose of its Percentage Interest in the total quantities of Joint Petroleum produced and available under this Agreement.
Section 2.02 - Percentage of Costs and Benefits
Subject as hereinafter provided, all costs, obligations, claims, liabilities, rights, privileges and benefits and all Joint Petroleum and credits incurred or arising in the conduct of the Joint Operations shall be borne by and accrue to the Parties in proportion to their respective Percentage Interests.
Section 2.03 - Restriction
A Party shall not conduct any operation under, or exercise any rights conferred by, a Joint Licence except in accordance with the provisions of this Agreement.
Article III
The Operator
Section 3.01 - Initial Operator
The Party specified in Item 1 of Appendix A is hereby appointed as Operator from the date hereof and agrees to act as the Operator under the terms of this Agreement as from such date.
Article IV
Authority and Duties of the Operator
Section 4.01 - Rights
Subject to this Agreement the Operator has the right and is obliged to conduct the Joint Operations whether by itself, its Affiliates, its agents or its contractors under the overall supervision and control of the Operating Committee.
Section 4.02 - Responsibility
4.02(a)The duties, obligations and responsibilities of the Operator shall include but not be limited to:
(i)the preparation of Programmes, Budgets and AFEs pursuant to the provisions of this Agreement.
(ii)the implementation of such Programmes and Budgets as shall, together with the relevant AFEs, have been approved by the Operating Committee;
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Article V
The Operating Committee
Section 5.01- Establishment and Powers
There is hereby established an Operating Committee which shall exercise overall supervision and control of all matters pertaining to the Joint Operations. Without limiting the generality of the foregoing, but subject as otherwise provided in this Agreement, the powers and duties of the Operating Committee shall include:
(i)the consideration and determination of all matters relating to general policies, procedures and methods of operation hereunder;
(ii)the consideration, revision and approval or disapproval of all proposed Programmes, Budgets and AFEs prepared and submitted to it pursuant to the provisions of this Agreement;
(iii)the determination of the timing and location of all seismic programs and of all wells drilled under the Joint Operations and any change in the use or status of a well; and
(iv)the consideration and, if so required, the determination of any other matter relating to the Joint Operations which may be referred to it by the Parties or any of them (other than a dispute between the Parties or any of them, or any proposal to amend this Agreement) or which is otherwise designated under this Agreement for reference to it.
Notwithstanding the foregoing, the Operating Committee shall not except by unanimous vote have the power to:
(i)vary the terms and conditions contained in the Permit or to require any Party to participate in any application for renewal of the Permit;
(ii)vary the provisions of this Agreement or the Accounting Procedure attached hereto, in particular (but not limited to) the objects set forth in Section 2.01 hereof.
Section 5.02 - Representation
The Operating Committee shall consist of one representative appointed by each of the Parties. …
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Section 5.08 - Voting Procedure
5.08(a)Subject as hereinafter provided each Party shall have a voting interest equal to its Percentage Interest.
5.08(b)Unless otherwise provided in this Agreement, all decisions of the Operating Committee shall be made by the affirmative vote of Parties which complies with the requirements of Item 5(a) or (b) of Appendix A provided that the affirmative vote of all the Parties shall be required for any decision to determine the Permit or voluntarily surrender any part of the Permit Area.
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Section 5.09 - Permit Provisions
In respect of the Work Obligations, the Operating Committee shall, unless and to the extent that relief from such obligations is sought and obtained from the Designated Authority, determine the location and time at which such obligation is to be discharged provided always that if the Operating Committee has not, in relation to any well which is required to be drilled by the Work Obligations, made a decision as to the location thereof by a time which, in all the then existing circumstances, will reasonably enable Operator to secure a drilling rig, obtain approval of the Designated Authority for and drill such well all before the expiration of the applicable period for discharge of these obligations, then the location shall be that location which on the final vote of the Operating Committee attracted the highest Percentage Interest vote and the Operator shall proceed to drill such well for the Joint Account. Provided that where two locations only are under discussion by the Operating Committee there shall be but one vote, the result of which shall be the final determination of the Parties. Where, however, more than two locations are under discussion by the Operating Committee, the Committee shall before conducting a final vote (such vote representing a choice between the two most favoured locations) vote as many times as the locations under discussion exceed two. As a result of each such vote, the location attracting the lowest percentage vote shall be eliminated from the discussions. If any such vote is tied then the Operator's vote shall be deemed to be the highest vote.
Section 5.10 - Parties Bound
All Parties shall be bound by decisions of the Operating Committee.
Article VI
Exploration and Appraisal Programmes and Budgets
Section 6.01 - Exploration Programme and Budget
The Operator shall, in each year, submit to the Parties not later than three (3) months prior to the expiry of the year then current a proposed exploration Programme and Budget for the next year which shall include but not be limited to:
(i)the projects and other works which will at least satisfy the Work Obligations to be undertaken; and
(ii)the information required under Article IX; and
(iii)such other information as the Operating Committee may have required the Operator to provide.
Section 6.02 - Appraisal Programme and Budget
In the event of a Discovery, the Operator shall, if the Operating Committee decides such Discovery is likely to contain Petroleum in commercial quantities and as soon as practicable after such decision, submit to the Parties a proposed appraisal Programme and Budget for such Discovery which shall include but not be limited to:
(i)the wells to be drilled and other projects and work to be undertaken; and
(ii)the information required under Article IX.
Section 6.03 - Review and Approval
Except as provided in Section 6.04, each exploration and appraisal Programme and Budget shall be subject to consideration, revision and approval by the Operating Committee in accordance with Section 5.08(b). The Operating Committee shall consider each exploration and appraisal Programme and Budget:
(i)In the case of an exploration Programme and Budget - not later than two (2) months prior to the expiry of the then current Permit Year; or
(ii)In the case of an appraisal Programme and Budget - as soon as practicable;
and shall make such amendments or revisions thereto as may be proposed by any of the Parties and approved in accordance with Section 5.08(b). Approval of a Programme and Budget shall, subject to AFE approval pursuant to Section 9.02, authorise and oblige the Operator to proceed with such Programme and Budget.
Section 6.04 - Work Obligations
6.04(a)In respect of any of the Work Obligations and in particular each Work Obligation well, which the Permit requires to be drilled, following a proposal which attracted the highest Percentage Interest vote under Section 5.09, the Operator shall include such work and the drilling of such well or wells in the relevant exploration Programme and Budget and, notwithstanding any other provisions or this Article VI such Programme and Budget shall, to the extent that they relate to such work and to the drilling of such well or wells and in the absence of approval or amendment by the Operating Committee as provided in Section 6.03, be deemed to be approved by the Operating Committee. If, by a time which, in all the then existing circumstances, will reasonably enable Operator to discharge the Work Obligations, the Operating Committee has not approved an AFE therefor, such AFE shall be deemed to be considered and approved by the Operating Committee insofar as it relates to such Work Obligations.
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Section 6.06 - Amendment
At any time any Party may, by notice to the other Parties, propose that an approved exploration or appraisal Programme and Budget be amended. The Operating Committee shall consider such proposal and, if the Operating Committee so requires, the Operator shall as soon as possible prepare and submit to the Parties a revised Programme and Budget incorporating any such amendment and showing the matters listed under Article IX. To the extent that any such amendment or revised Programme and Budget is approved by the Operating Committee in accordance with Section 5.08(b), the approved Programme and Budget shall, subject to Section 9.03(d), be deemed amended accordingly.
Article VII
Development Programmes and Budgets
Section 7.01 - Location
As soon as practicable after the Operating Committee has considered the information obtained from an appraisal Programme, the Operating Committee shall determine whether or not such Discovery has resulted in the delineation of Petroleum in commercial quantities to proceed to development of the Discovery. If the Operating Committee decides to instruct the Operator to commence the preparation of a development Programme in respect of the Discovery the Operator as and when instructed by the Operating Committee shall nominate in the Permit Area a block selected by the Operating Committee for the purpose of the making of a declaration of a location (in accordance with and as defined in the Act). The Operator and the Parties shall use their best endeavours to ensure such location is declared.
Section 7.02 - Joint Programme and Budget
7.02(a)If the Operating Committee decides to develop the Discovery, as soon as practicable after such decision the Operator shall submit to the Parties a proposed development Programme and Budget for the Discovery which shall include but not be limited to:
(i) the projects and other work to be undertaken;
(ii) the information required under Article IX including a preliminary estimate of operating costs for the first year of operations;
(iii) the manner in which the development is to be managed; and
(iv) an estimate of the date of commencement of production and the annual rates of production.
(v) such other information as the Operating Committee may have required the Operator to provide.
7.02(b)The proposed development Programme and Budget shall be subject to consideration, revision and approval by the Operating Committee. The Operating Committee shall meet to consider such proposed development Programme and Budget as soon as practicable and to make such amendments or revisions thereto as may be proposed by any of the Parties and agreed to by the Operating Committee. The Operating Committee shall by voting in accordance with Section 5.08(b) vote, approve or reject the development Programme and Budget within ninety (90) days of its submission.
7.02(c)If the Operating Committee does not approve the development Programme and Budget the Operating Committee may direct the Operator to prepare a new Programme and Budget as soon as possible for submission to the Operating Committee and until such new Programme and Budget has been submitted to, and considered by, the Operating Committee pursuant to Section 7.02(b) no other Party shall be entitled to prepare a development Programme and Budget pursuant to Section 11.03(a).
7.02(d)If a development Programme and Budget is approved by the Operating Committee, each of the Parties shall decide within ninety (90) days of such approval, or such longer period as the Operating Committee may agree, whether to participate in respect of its Percentage Interest share in the development of the Discovery, and the Operator shall, subject to Sections 7.03(b) and 9.02, thereafter be authorised and obliged to proceed in accordance with it. In that event, the Operator shall submit an application to the Designated Authority on behalf of the Parties for a Production Licence in respect of so much of the area of the location declared under Section 7.01 as the Operating Committee considers necessary for the development of the Discovery. The Operator and the Parties shall use their best endeavours to ensure such Production Licence is obtained. If the Parties do not decide unanimously to participate in the development of the Discovery, the provisions of Article XI shall apply (mutatis mutandis).
7.02(e)Each of the Parties at its own expense unless the Operating Committee decides otherwise, shall have the right to nominate its technical personnel to work in the office or offices of the Operator while the Operator is preparing a proposed development Programme and Budget for a Discovery under paragraphs (a) or (c) of this Section; provided that the Party identifies the personnel and gives reasonable notice of the time and period at and for which such personnel must be accommodated and provided further that accommodation is available. The Operator will keep such personnel fully informed of its planning for and preparation of the proposed development Programme and Budget.
Section 7.03 - Review and Amendment
7.03(a)The Operator shall in addition to the report required each month under Section 9.03(e), in each year, review the approved development Programme and Budget and submit to the Parties a report thereon together with a review of and any recommended amendments to such development Programme and showing matters listed under Section 7.02(a) and the information required under Article IX.
7.03(b)At any time any Party may, by notice to all the other Parties, propose that an approved development Programme and Budget and/or an approved AFE be amended. The Operating Committee shall consider such proposal and, if the Operating Committee so requires, the Operator shall prepare and submit to the Parties a revised development Programme and Budget and/or AFE incorporating any such amendments and showing in the case of a Programme and Budget the matters listed under Section 7.02(a). To the extent that any such amendment or revised development Programme and Budget and/or AFE is approved by the Operating Committee in accordance with Section 5.08(b), the approved development Programme and Budget and/or AFE shall, subject to Section 9.03(d), be deemed amended accordingly.
7.03(c)The Parties recognise that at the time of approval of a development Programme and Budget it may be necessary for them to meet together to consider whether any provision of this Agreement may be found wanting at the development phase and, if so, to negotiate in good faith and endeavour to agree on any amendments or additions hereto or replacement hereof which may be considered necessary and desirable. PROVIDED THAT until a development agreement is finalised this Agreement shall to the extent it is able govern any matters which arise.
Article VIII
Production Programmes and Budgets
Section 8.01 - Annual Programme and Budget
8.01(a)The Operator shall not later than four months prior to the expiry of the year prior to the year in which production commences and each subsequent year, submit to the Parties a proposed production Programme and Budget for the next year which shall include but not be limited to:
(i) the projects and other work to be undertaken;
(ii) the information required under Article IX;
(iii) an estimate of the date of commencement of production (if appropriate) and of the total production by month and maximum daily rate to be achieved in each month; and
(iv) such other information as the Operating Committee may have required the Operator to provide.
8.01(b)The proposed production Programme and Budget shall be subject to consideration, revision and approval by the Operating Committee. The Operating Committee shall consider such production Programme and Budget and make such amendments or revision thereto as may be proposed by any of the Parties and as may be agreed. If for any reason the Operating Committee is unable to approve a production Programme and Budget prior to the expiry of the current year, the Operating Committee shall be deemed to have approved a Programme and Budget which on the final vote of the Operating Committee attracted the highest Percentage Interest vote and the Operator shall thereby be authorized and obliged to proceed in accordance with that Programme and Budget.
Section 8.02 Amendment
At any time any Party may, by notice to all the other Parties propose that an approved production Programme and Budget and/or an approved AFE be amended. To the extent that an amendment is approved by the Operating Committee in accordance with Section 5.08(b), the approved production Programme and Budget and/or AFE shall, subject to Section 9.03(d), be deemed amended accordingly.
Section 8.03 - Review
The Parties recognise that prior to the commencement of regular production of Petroleum from any development it shall be necessary for them to meet together to determine and agree on more detailed programming and budgeting provisions to apply to the production phase of Joint Operations. The Parties hereby agree that their respective representatives shall meet together as and when necessary and upon the request of any of them for this purpose and also to consider whether any other provisions of the Agreement may be found wanting at the production phase and, if so, to negotiate in good faith and endeavour to agree on any amendments or additions hereto or replacement hereof which may be considered necessary and desirable.
Article IX
Costs and Expenses
Section 9.01 - Expenditure and Authorisations
9.01(a)The Operator is authorised to make such expenditure and take such actions as may be approved by the Operating Committee or as are authorised under Section 9.01(b).
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Section 9.02 - Authorisation for Expenditure
Subject to Sections 9.01(b) and 9.03(c), the Operator shall, before entering into any commitment or incurring any expenditure under any of the categories included in an approved Programme and Budget, submit to the Parties an AFE therefor with a request for the Operating Committee to approve the same within 14 days after receipt. … Provided that the AFE does not exceed the approved budgeted amount for the item covered thereby by more than 10 per cent (10%) of the approved budgeted amount and, provided further that the AFE is within the operational or technical scope of the approved budget amount to which it relates, the approval by any Party of the AFE shall not be unreasonably withheld. Where no response is received from a Non-Operator within 7 days of receipt of the reminder notice, that Non-Operator shall be deemed to have approved that AFE.
Section 9.03 - Budget and AFE Procedures
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9.03(d)The Operating Committee may amend a Programme and Budget provided that no amendments or revisions to an agreed Programme and Budget shall be made which would prejudice commitments previously made by the Operator within the limits of the original Programme and Budget.
Article XI
Sole Risk Development
Section 11.01 - Preliminary
Any Party may under take Sole Risk Development subject to the following provisions of this Article.
Section 11.02 - General Provisions
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11.02(b)Subject to Section 11.03, the only type of Sole Risk Development that may be proposed shall be a Sole Risk Development consisting of the development of a Discovery.
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11.02(i)Where appropriate, the Operating Committee shall determine and identify the number of blocks (as that term is defined in the Act) or nine blocks, whichever is less, which overlie the Pool in which the Discovery to be the subject of the Sole Risk Development was made. The Pool, or so much thereof as underlies the blocks so identified, shall constitute a sub-area.
This Agreement shall so far as possible apply independently to Sole Risk Development in the manner of a separate contract to such sub-area and apply mutatis mutandis to the interests of the Parties which participate in such Sole Risk Development provided always that there shall be a separate right of assignment of withdrawal and accordingly Articles XV and XVI shall apply independently to such separate contract.
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Section 11.03 - Conditions of Sole Risk Development
11.03(a)In the event that a proposal is made to the Operating Committee that a development Programme and Budget would be prepared for a particular Discovery, pursuant to Section 7.02(a) and the Operating Committee has voted against or, having considered it, failed to vote in favour of such proposal then, provided that any appraisal Programme approved by the Operating Committee and relating to that Discovery has been completed … any Party may give notice to the other Parties that it intends to prepare a development Programme and Budget for that Discovery. Such Party, together with such of the other Parties as within twenty-eight (28) days of receipt of such notice give counter-notice of their wish to participate therein, shall be entitled to proceed with the preparation thereof and to submit the same for approval by the Operating Committee in accordance with Section 7.02(b).
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11.03(c)In the event that, following the submission to the Operating Committee of a proposed development Programme and Budget for a particular Discovery in accordance with Section 7.02(b) or a further development Programme and Budget prepared by the Operator at the direction of the Operating Committee under Section 7.02(c), the Operating Committee does not approve such development Programme and Budget within the period provided under Section 7.02(b), then any Party may serve notice on the other Parties of its intention to develop the Discovery at its sole risk. Such notice shall be accompanied by details of its proposed development Programme and Budget. The other Parties may give counter-notice that they wish to participate in the development:
(i)within twenty-eight (28) days of receipt of such notice if the proposed development Programme and Budget is the same as, or substantially similar to that which was not approved by the Operating Committee; or
(ii)within ninety (90) days of receipt of such notice if the proposed development Programme and Budget is substantially different from that which was not approved by the Operating Committee.
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11.03(e)In the event that, following approval by the Operating Committee of a development Programme and Budget pursuant to Section 7.02(b) or following any notice served under Section 11.03(c) less than all the Parties elect to participate in the development of a Discovery within the periods therein respectively provided, those Parties which elected to participate shall be entitled to proceed with the development of the Discovery at their sole risk and expense in accordance with the relevant development Programme and Budget. In that event, and where appropriate, the Operator shall submit an application to the Designated Authority on behalf of the Parties participating in the development of the Discovery for a Production License in respect of the sub-area constituted in accordance with the second sentence of Section 11.02(i). The Operator and the Parties shall use their best endeavours to ensure such Production License is obtained.
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11.03(g)In the event that there is more than one development Programme prepared in respect of a Discovery to be developed as a Sole Risk Development the development Programme which shall take precedence over the other development Programme or Programmes shall be:
(i)that development Programme which has the support of any two or more Sole Risk Parties together holding more than 50% of the Percentage Interests under this Agreement or, failing there being any such a proposal,
(ii)that development Programme which is supported by the Sole Risk Party or Parties holding the greatest aggregate Percentage Interest, or if each of the competing development Programmes is supported by a Sole Risk Party or Parties which have alone or together equal aggregate Percentage Interests, then,
(iii)that development Programme which has the support of the greatest number of Sole Risk Parties.
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11.03(i)Any Party which does not participate in the development of a Discovery shall have no further rights in the sub-area constituted in accordance with the second sentence of Section 11.02(i).
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Article XIII
Disposal of Petroleum
Section 13.01 - Right and Obligation
Subject to Article XII and to the provisions hereinafter contained:
(i)each of the Parties shall be entitled to separately take in kind and dispose of its Percentage Interest in the total quantities of Joint Petroleum produced and made available under this Agreement, provided that notwithstanding anything contained in Section 2.01 the Operator shall have the right to use in any Joint Operations as much of the Joint Petroleum as may be reasonably required by it therefor … ;
(ii)should two of more of the Parties so agree they may each appoint one of those Parties as marketer/scheduler to lift and dispose of the total quantities of Joint Petroleum which those Parties cause to be produced in accordance with such procedures as may be agreed by all those Parties prior to the commencement of production. Any such agreement for the appointment of a marketer/scheduler shall supersede for the period or periods such agreement as is in effect the right and obligation of a Party to that agreement to separately lift and dispose of the Joint Petroleum to which it is entitled; and
(iii) each of the Parties shall have the obligation to separately lift and dispose of all Joint Petroleum which it causes to be produced at such times, in such quantities and in accordance with such procedures as may be agreed by all the Parties prior to the commencement of production but so that the rights of each of the Parties to separately lift and dispose of Joint Petroleum to which it is entitled shall not be prejudiced.
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Section 13.03 - Natural Gas
The Parties recognise that, in the event of any discovery of natural gas, it may or will be or become desirable for them to enter into special arrangements for the disposal of the same and they agree that, in such event and upon the request of any of them, their respective representatives shall meet together as necessary to consider their entry into such arrangements, and if such arrangements are agreed, they will adopt and undertake the same. Until such special arrangements are formalised the provisions of this Agreement shall apply mutatis mutandis to natural gas.
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Article XVI
Withdrawal
Section 16.01 - Restriction
The following provisions of this Article shall apply in the case of a Party withdrawing from this Agreement or a Joint Licence where no compensation whatsoever is to be made to the Party so withdrawing.
In the case where compensation is to be made to the Party or Parties withdrawing from this Agreement of a Joint Licence the provisions of Article XV shall apply.
Section 16.02 - Right
16.02(a)Subject to Section 16.03 and Article XVIII, any Party may withdraw from this Agreement or any of the Joint Licences [by giving specified notice]
16.02(b) Subject to Section 16.03:
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(ii)If less than all the other Parties give such notice of withdrawal pursuant to Section 16.02(a) the withdrawing Parties shall withdraw from the Joint Property and this Agreement or the specified Joint Licences as the case may be on the earliest possible date and shall assign their respective Percentage Interests therein to the non-withdrawing Parties without any right to compensation or reimbursement whatsoever.
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16.02(d)A Party participating in a development Programme may not withdraw from the Joint Property or this Agreement unless one or more of the other Parties are willing to accept its Percentage Interest therein or unless all Parties agree to withdraw from that development Programme.
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Section 16.03 - Conditions
With respect to Section 16.02:
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(vii)unless the Party or Parties acquiring its said Percentage Interest agree to accept the withdrawing Party's liabilities and obligations, a withdrawing Party shall remain liable and obligated in respect of its Percentage Interest share of all expenditure incurred, accrued or budgeted prior to the effective date of withdrawal even if the operations concerned are to be implemented thereafter provided always that this sub-paragraph (vii) shall not render a withdrawing Party liable for any amounts which such Party would not have been obliged to pay had it not withdrawn;
(viii)a withdrawing Party shall remain liable and obligated for its Percentage Interest share of all net costs and obligations that in any way relate to the abandonment of Joint Operations or any Sole Risk Drilling or Sole Risk Development in which such withdrawing Party participated if abandonment occurs within five (5) years after the effective date of withdrawal and, prior thereto, such withdrawing Party shall provide the other Parties with such security therefor as is acceptable to all such other Parties;
(ix)notwithstanding its withdrawal, a withdrawing Party shall remain fully liable for, and shall keep each of the non-withdrawing Parties fully indemnified in respect of its Percentage Interest share of any claims or liabilities which arise out of any event occurring prior to the effective date of its withdrawal;
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Article XVII
General Provisions
Section 17.01 - Duration of Agreement
This Agreement shall be deemed to have commenced on the date hereof and shall continue for so long as a Joint Licence remains in force in the names of at least two of the Parties hereto and until all Joint Property has been disposed of and final settlement has been made between the Parties in accordance with their respective rights and obligations hereunder.
Section 17.02 - Scope and Understanding
17.02(a)The scope of this Agreement shall extend to the exploration for and the production of Petroleum under the Joint Licences and without prejudice to Article XIII the consideration of the treatment, storage and transportation of the same.
17.02(b)Notwithstanding the foregoing, this Agreement shall not extend to any joint financing arrangements or any joint marketing or joint sales of Petroleum.
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Appendix A
The Reference Schedule
ITEM 1 OPERATOR (Section 1.01)
Western Mining Corporation Limited
ITEM 2 PERCENTAGE INTEREST OF EACH PARTY (Section 1.01)
Western Mining Corporation Limited 70%
Bridge Oil Limited 15%
Australasian Oil Exploration Limited 15%
ITEM 3 THE PERMIT (Section 1.01)
Exploration Permit for Petroleum No. WA-214-P, a copy of which is set out in Appendix C.
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ITEM 5 PERCENTAGE INTEREST MAJORITY REQUIRED FOR AFFIRMATIVE DECISION (Section 5.08(b))
(a) In regard to exploration or appraisal Programmes and Budgets for Joint Operations to be performed in excess of or to satisfy Work Obligations - two or more Parties holding an aggregate Percentage Interest of 65% or more;
(b) Any other matter (including without limitation any matter with respect to development and production Programmes and Budgets) - two or more Parties holding an aggregate Percentage Interest of 65% or more.
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Appendix B
The Accounting Procedure
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1.5 Cash Calls
1.5.1The Operator shall request each of the Parties to advance to the Operator its Percentage Interest share of estimated cash requirements for the succeeding month for the Joint Operations under the Agreement and in accordance with the provisions of Clause 1.6. Such estimates shall be based on the latest information available to the Operator at the time the request is sent as to actual cash requirements for the month. Not less than thirty (30) days prior to the beginning of each month, the Operator shall furnish the Parties by Telex or Facsimile with a forecast of cash requirements for the following three months. The cash forecast for the first month shall constitute a firm request for an Advance (a Cash Call). The estimates for the second and third succeeding months shall be tentative only and may be revised in subsequent submittals. Payment by the Parties shall be in accordance with paragraph 1.6.2.
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1.6 Payments by the Parties
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1.6.2Cash Calls if made by the Operator to the Parties under paragraph 1.5.1 shall be paid by a Party as to its proportionate share in the currencies requested to the appropriate bank account maintained by the Operator for the Joint Account, by the first day of the month in respect of which the Cash Call is required. …
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1.8 Adjustments
Payment of Advances and billing statements shall not prejudice the right of a Party to protest or question the correctness thereof provided however, all Cash Calls and billing statements rendered to a Party by the Operator during any year shall, save in the case of fraud or Wilful Misconduct, conclusively be presumed to be true and correct after twenty-four (24) months following the end of any such year unless within the said twenty-four (24) month period a Party takes written exception thereto and makes claim on the Operator for adjustment. The provisions of this Clause shall not prevent adjustments resulting from physical inventory.
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