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06 February 2017
Petroleum licensees on the Norwegian Continental Shelf (NCS) must actively monitor and control operators' performances pursuant to a production licence, including in relation to procurement of facilities, goods and services for the conduct of petroleum activities. This update explains the reasons for these requirements, outlines what is required from non-operating partners of production licence joint ventures and provides some examples of procurement follow up by non-operators.
New petroleum production licences are awarded to a group of licensees, conditional on entering into an 'agreement concerning petroleum activities', including a standard joint operating agreement (JOA) and accounting agreement forming the basis for an unincorporated joint venture.
From the government's perspective, one of the main reasons for awarding licences to groups of licensees is to establish joint venture internal checks and balances, utilising the licensees' complementary competences to the advantage of both the joint venture and the government as the resource owner. Through the established mix of obligations, liabilities and incentives under the petroleum legal framework, the joint venture partners are compelled to monitor, audit and challenge the appointed operator of the licence, with regard to resource management, health, safety and environment, and management of development and production.
Important premises to achieve this end include the following:
These premises presuppose that the licensees are jointly and severally liable towards each other (and third parties) for the activities conducted by the operator on behalf of the joint venture.
All licensees entering into the non-negotiable model JOA must meet the conditions for being granted a production licence on the NCS. The JOA must establish a management committee as the supreme body of the joint venture, but each licensee is also required to contribute to the management and control of joint venture activities, both through their participation in the management committee and as separate entities.
The operator manages day-to-day operations on behalf of the joint venture by entering into "requisite agreements". The operator must keep the management committee informed of matters of importance to the joint venture and enable the committee, as well as individual joint venture partners, to supervise and access all information concerning joint activities. The operator is obliged to prepare and submit reports as often as the management committee or one of the joint venture partners "reasonably makes a request" for them.
Subsequent to the European Free Trade Association Surveillance Authority's decision to exempt upstream operations from the scope of the EU Utilities Directive(1) in 2013, there is no direct public law regulation of procurement procedures on the NCS. However, the JOA does provide procurement-specific regulation, requiring involvement of the management committee and individual joint venture partners. This requirement is closely connected to the JOA regulation of annual work programmes, budgeting and authorisation for expenditure. The management committee must approve an overall procurement and contract strategy prepared by the operator for 'significant purchases', with the threshold of significance defined by the committee. The operator must also include the planned significant purchases of the budget year in budget proposals for the committee's decision, including the expected contract value for individual purchases, a market evaluation and a description of any suitable framework agreements.
The JOA contains thresholds for the operator's mandate to conclude contracts. Before concluding a contract which the operator expects will exceed Nkr50 million (or Nkr25 million for a single source procurement), the operator must present a proposal to the management committee for a decision on a contract-specific strategy, including bidding lists and approval of supplier. Irrespective of these thresholds, the committee may also instruct the operator on contracts below these limits. The short timeframe for reaching such decisions should incentivise joint venture parties to get involved at an early stage in the process (ie, during the contract-strategy decision process) and actively seek information. As described above, both the management committee and the individual joint venture partners must have access to procurement information on request.
Although the elements mentioned above create strong incentives for contribution and supervision of the operator's performance, Norwegian petroleum law establishes further requirements to this end. The Petroleum Act requires that a licensee – acting both through the management committee and individually – "see to it" that petroleum activities are carried out prudently and in compliance with law and licence requirements, in a manner that safeguards good resource management and health, safety and environment objectives, ensuring also that anyone conducting work on its behalf complies accordingly. This is known as 'see to it liability'.
In order to fulfil its obligations, the licensee must implement systematic measures for monitoring and actively follow up procurement strategies and decisions on subcontractors in terms of the verification and documentation of goods and services provided. The particulars of the see-to-it duty are complex; therefore, this update points out only the main characteristic. As a point of departure, each participant in petroleum activities is responsible for performing to required standards. However, due to the see-to-it duty, the licensee must inform any contractor or subcontractor of such responsibilities and ensure that it has the necessary qualifications, management systems, equipment, vessels and construction or production facilities to fulfil these responsibilities, and to enable the licensee to fulfil its own responsibilities.
With respect to procurement, the see-to-it duty applies throughout the entire procurement process – from early identification of procurement needs and contract strategy to selection of contractors, throughout the construction phase, concluding with delivery, completion and hand-over to operations. This means controlling aspects such as:
Although the Petroleum Act requires that licensees have an organisation in Norway that "enables the licensee to make informed decisions about its petroleum activities", several oil companies holding what may be considered minimum organisation and capacity have entered the NCS lately. This may affect both the operator's and the non-operating partners' capacity to follow up contracting procedures prudently. An inexperienced operator on the NCS with a relatively small organisation may invoke a need for non-operators to direct particular attention to the operator's contract award procedure; while, on the other hand, reduced capacity of non-operators may affect their ability to contribute to joint venture operations and to exercise the required control. In some instances the authorities have instructed non-operators to upgrade their in-country organisational capacity, based on failure to observe these duties. Consequently, it is essential that non-operators have sufficient available resources to fulfil their commitments.
For further information on this topic please contact Nikolai Brøvig or Gunnar Espeland at Simonsen Vogt Wiig Advokatfirma by telephone (+47 21 95 55 00) or email (firstname.lastname@example.org or email@example.com). The Simonsen Vogt Wiig Advokatfirma website can be accessed at www.svw.no.
(1) Previously Directive 2004/17/EU, now repealed by Directive 2014/25/EU of the European Parliament and the European Council on February 26 2014 on procurement by entities operating in the water, energy, transport and postal services sectors.
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