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The Joint Venture Agreement specifies the terms and conditions of drilling a well in a joint venture.

The JV leader must have a positive cash balance to enact a drilling decision.  The financial situation of the other JV partners is irrelevant. They can vote "yes" or "no" to any corporate proposal―even if they are in the red.

The JV agreement shall specify how much each partner must pay (as a percentage of the total) if the JV decides to drill a well.

• Round drilling percentages to the nearest tenth of a percent (e.g. 7.2% or 15.7%).
• Drilling costs include the basic drilling costs, the drilling contractor's fee, and the rig move.

If a partner is running in the red, does not vote, or voted against the decision, that partner shall still be liable for his share of drilling costs if the JV agrees to drill a well.

The JV agreement shall specify how much each partner earns (as a percentage of the total) from a successful well.

• Round revenue percentages to the nearest tenth of a percent (e.g. 4.6% or 30.0%)

As well, the agreement shall specify a leader's royalty as a percentage of total revenue that the leader shall receive. This amount must be at least 1.0%.

JV partners who did not vote or voted against a JV drilling project shall still share the revenue as per the JV agreement.

Majority Decision

The joint venture must specify its own majority in the JV agreement, and it must be at least 50%. A tie vote is considered a passing of the drilling proposal.

Internal Drilling Deal

The JV leader should consult with the other partners and the drilling contractor and get informal agreement. The leader should fill in the drilling agreement with the agreed-upon terms naming (1)  the drill contractor and (2) the JV as the sole partner. The leader shall submit this agreement to the administrator.

The administrator shall forward the agreement to all relevant parties. The deal is closed when the drilling contractor confirms the deal and a majority the JV votes cast (as per its quorum and majority requirements) are in favor of the agreement. All confirmations must be in within three OF Days. If the deal fails for any reason, the JV leader shall be subject to the shotgun deal fine. 

Joint ventures can make deals with other financiers and other joint ventures. For example, your joint venture has some nice prospects for a deep field and another joint venture has oil rights next to yours. Why not work together with that joint venture to develop all these prospects?

A joint venture leader should consult with his JV partners about proposals with external partners. Once some internal consensus has been attained, a JV leader should negotiate with a drilling contractor and the other JV leader.

When all negotiators have reached agreement, the leader shall prepare the drilling agreement with the joint ventures and independent financiers being named as partners. He shall submit it to the administrator, who shall then forward it to all relevant parties. The deal is closed when the drilling contractor and any independent financiers confirm the deal and when a majority of the JV votes cast in each joint venture (as per their own quorum and majority requirements) are in favor of the agreement. All confirmations must be in within three OF Days.

If the deal fails for any reason, the JV leader who submitted the agreement shall be subject to the shotgun deal fine.

When a joint venture is part of such an external drilling deal, its share of the drilling costs and revenues shall be prorated to the JV partners as per the drilling agreement.   

Complex Deals 1 Making deals between two JVs or between a JV and other financiers opens up more opportunities to drill wells in a financially sound way. But it will test your negotiation skills.

 

The Math of External Drilling Deals Let's assume Fred, Harry, and Susan are partners in JV A as constituted below. Fred: 15 votes, 20% of drilling, 45% of revenue. Harry: 12 votes, 40% of drilling, 30% of revenue. Susan: 10 votes, 40% of drilling, 25% of revenue. JV A has made a deal with JV B to drill a $500,000 well. JV B is constituted as follows: Fred: 8 votes, 12% of drilling, 7% of revenue. Emily: 35 votes, 52% of drilling, 45% of revenue Richard: 30 votes, 36% of drilling, 48% of revenue. In the deal, JV A will pay 70% of the drilling costs and JV B 30%: The cost is apportioned by the calculations tabled below: Fred: $500,000×(0.70×0.20+0.30×0.12)=$88,000 Harry: $500,000×0.70×0.40=$140,000 Susan: $500,000×0.70×0.40=$140,000 Emily: $500,000×0.30×0.52=$78,000 Richard: $500,000×0.30×0.36=$54,000 Note that Fred's calculation requires his share in both JV A and JV B. In the deal, JV A gets 65% of the revenue, JV B 35%. The revenue is apportioned by the calculations tabled below: Fred: 0.65×0.45+0.35×0.07=31.7% Harry: 0.65×0.30=19.5% Susan: 0.65×0.25=16.2% Emily: 0.35×0.45=15.8% Richard: 0.35×0.48=16.8%

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