INTERNATIONAL ARBITRATION 1/3LY
THE CONTRACTUAL ARRANGEMENTS On 30 May 2012, Adamantine (as contractor) acquired an interest in the East Africa Rift System play by entering into a PSC with the Government of Kenya. The PSC anticipated a six-year exploration phase divided into three periods. Each two-year period contained certain minimum spend (MS) and minimum work obligations (MWO) for Adamantine. The Government was obliged to allow Adamantine to move into the next exploration period if the MS and MWO were completed. On 14 September 2012, Adamantine transferred a 50% participating interest in the PSC to Bowleven pursuant to a Sale and Purchase Agreement (SPA). In return, Bowleven was required to carry the MS for each exploration period. Bowleven subsequently farmed out a 30% participating interest in the PSC to First Oil. The SPA provided that no later than three months before the expiry of each exploration period (or any extension thereof) the parties would vote on whether to continue with exploration or to relinquish the PSC. If both parties voted to drill, Adamantine would seek to activate the next exploration period in accordance with the PSC. If both parties voted to drop, they would relinquish the PSC. However, if one party voted to drill and the other voted to drop (the relinquishing party), then the relinquishing party would exit and would be required to transfer its 50% participating interest to the other party for nil consideration. In accordance with industry standard practice, a Joint Operating Agreement (JOA) dated 12 October 2012 between Adamantine and Bowleven supplemented the SPA. THE DISPUTE Both Adamantine and Bowleven acknowledged that they would not complete the MWO for the IEP (initial exploration period) by the deadline of 26 May 2015. Work was already behind schedule when disaffected locals attacked a work camp in January 2015 and caused seismic work to stop. Adamantine had sought, but had not (yet) been granted an extension to the IEP by the Government. Nonetheless, Adamantine called for a management committee meeting and a drill or drop vote on 25 February 2015 (i.e. three months before the expiry date of the IEP). Bowleven responded that the call for a vote was premature and invalid. Bowleven argued that since it was clear they would not complete the MWO by the IEP deadline, the right to move into the 1AEP (first additional exploration period) did not exist. Regardless, Adamantine proceeded with the drill or drop vote and voted to move into the 1AEP. During the management committee meeting Bowleven voted “yes” to proceeding, conditional on receiving the extension to the IEP. Bowleven insisted at the meeting that a conditional vote was valid and should be recorded. Adamantine characterised Bowleven as having voted not to move into the 1AEP (i.e. having voted to drop its participating interest). In a follow up email, Bowleven said that, if required to vote, it voted no on the basis that the parties were unable to move into the 1AEP. Bowleven also stated that, if the IEP expiry date was extended, its no vote should be considered invalid and there should be a further vote no later than three months before that extended expiry date. Adamantine subsequently instigated proceedings to establish that the vote was valid and that it was entitled to Bowleven’s participating interest in the PSC because Bowleven had voted to drop its interest.
THE DECISION The Court said that the commercial rationale for the voting timetable was to balance two competing needs: 1. each party’s need to have the maximum opportunity to assess the existing data before being required to make the drill or drop decision; and 2. each party’s need to have sufficient time to make the arrangements for the next exploration period should a party elect to continue with exploration (for example, securing necessary finance or farming out a participating interest). The parties had agreed that holding a drill or drop vote three months before the next exploration period was due to begin struck the right commercial balance between these needs. The Court held that the drill or drop vote called by Adamantine was not valid. The Court noted that if Adamantine’s call for a vote was valid, and Bowleven had voted yes, then if the Government extended the term of the IEP the parties would have been irrevocably committed to moving into the 1AEP and there would not have been a vote three months prior to the expiry of the extended IEP. In effect, the parties would have taken their decision without the benefit of the results of the data collected during the extension. In addition, this would have hinder the parties’ forward planning as the decision to continue exploration would have been dependent on a variable outside their control, namely, the Government agreeing an extension under the PSC. This outcome was contrary to the commercial rationale for the agreed timetable for the drill or drop vote.
Made with FlippingBook Annual report