By: Nigel Bankes

PDF Version: Interest Clause in a Drilling Contract Not a Penalty

Case Commented On: Precision Drilling Canada Limited Partnership v Yangaarra Resources Ltd, 2015 ABQB 649

This decision of Master Prowse follows on from his earlier decision on the merits of the dispute between the parties: Precision Drilling Canada Limited Partnership v Yangaarra Resources Ltd 2015 ABQB 433. The case involved so-called knock-for-knock provisions in a standard form drilling contract. My post on that decision is here and I note that it has also been the subject of a comment in The Negotiator here. This matter was back before Master Prowse because the parties could not agree on the terms of the formal judgement and in particular could not agree on two issues relating to Yangarra’s liability to pay interest on the amounts found to be owing. The contract provided for the payment of interest at 18% commencing 30 days after an invoice was tendered. If that clause were applicable Yangarra would be liable for approximately $2.4 million. Yangarra contested the validity or applicability of the interest provision on two grounds. First Yangarra argued that the clause operated as an unenforceable penalty. Second, Yangarra argued that a clause in the contract which afforded it the opportunity to contest an invoice meant that the interest clause was inapplicable so long as the invoices in question were subject to a bona fide dispute.

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By: Nigel Bankes

PDF Version: Upstream UK Oil and Gas Contract Case of Interest to the Energy Bar

Case Commented On: Scottish Power UL Plc v BP Exploration Operating Company Ltd et al, [2015] EWHC 2658 (Comm)

This case involved a long term agreement for the sale and purchase of natural gas between BP and its fellow working interest owners in the offshore Andrew field (Andrew owners\vendors) and Scottish Power, the purchaser. The dispute arose because the Andrew owners decided to shut-in the Andrew field and platform in order to allow the processing and related facilities to be reconfigured so as to permit resources from the adjacent Kinnoull field to be tied into the Andrew facilities and platform, as well as production from a deeper pool in the Andrew field. The entire project was referred to as the Andrew Area Development (AAD). The Andrew field was ultimately shut-in from 9 May 2011 – 26 December 2014 with full production not being attained until March 2015. During that period there were no deliveries to Scottish Power under the contract. The shut-in continued for longer than originally anticipated by the Andrew partners but nothing seems to turn on that. There was considerable common ownership in the Andrew and Kinnoull fields such that at the time of the litigation two of the Andrew owners (BP and Eni between them held a 79% interest in the Andrew field) also owned a 93% interest in the Kinnoull field.

The matter came on for hearing as a trial of certain preliminary questions. A central issue in the case was whether (assuming liability on the part of the Andrew owners) Scottish Power should be confined to the specific “default gas” remedies provided by the contract for default delivery or whether it could sue for damages at common law and claim, inter alia for the difference between the price of gas under the contract and the price it had to pay for make-up gas. The decision also discusses contractual interpretation issues (see discussion of the factual matrix at paras 24 et seq), force majeure issues and the reasonable and prudent operator standard. The post begins with this last issue.

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By: Fenner Stewart and Tony Cioni

PDF Version: Risk Allocation in Operating Agreements for Unconventional Resources

Model contracts play a principal role in reducing transaction costs. They offer parties a series of rules, which allocates risk so that delays, disagreements, over-expenditures, and under-capitalizations can be managed (or avoided altogether). The best model contracts are highly responsive, quickly adapting to new realities. Accordingly, top drafters are pressed to doggedly re-evaluate whether or not their model rules are optimal in light of the ever-changing nature of law and technology.

Modern hydraulic fracturing is a disruptive technology that shifts the incentives within oil and gas joint venture projects. Drafters are adjusting their contracts to adapt. Experimentation with model rules is presently occurring in jurisdictions such as the United States, Canada and Australia, where unconventional resources abound.

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