Companies participate in upstream oil and gas activities through unincorporated joint venture arrangements. These may take different contractual forms such as joint bidding agreements or area of mutual interest agreements prior to bidding for or acquiring new acreage, and joint operating agreements (JOAs) once a right to explore or produce has been awarded. When a company is bidding for new acreage (by itself or as part of a consortium) in a bidding round they may wish to enter into agreements with one or more of its other existing joint venture partners to ensure they do not compete for the same acreage in an upcoming licensing round. Such agreements are known as non-compete agreements. This note discusses the competition law considerations that need to be taken into account when entering into such an agreement. It does not consider any competition law issues relating to area of mutual interest type agreements or exclusivity arrangements, which may also require separate analysis.
Prohibition: anti-competitive agreements
UK competition laws (which effectively replicate their EU equivalents) prohibit anti-competitive agreements and practices. In particular, companies that are competitors or potential competitors are, as a general rule, not allowed to agree not to compete with each other.
Contractual restrictions found to be in breach of the competition rules are void and unenforceable from the moment they are entered into and, in some cases, the parties can also be fined.
Exception: ancillary restraint
A non-compete obligation that is "ancillary" to the successful implementation of an existing transaction/joint venture can fall outside of the prohibition on anti-competitive agreements.
To be ancillary, a non-compete must be "directly related and necessary" to the legitimate purpose of the transaction/joint venture. In practice this means the non-compete must be limited to restrictions on competing against an existing joint venture as opposed to protecting a joint venture party (e.g. an IOC) in its individual capacity. In most upstream oil and gas cases, the "joint venture" is likely to comprise all the existing parties to a JOA or other joint venture arrangement.
Guidance on what constitutes an ancillary restraint (published by the EU Commission and applied by analogy by the UK authorities/courts) suggests that obligations accepted by JOA partners not to compete with an (unincorporated) joint venture are permitted provided: