International energy consultant Daniel Johnston - formerly of Texas but now resident in New Hampshire - told the court he found nothing unusual with the Goldie sole risk provisions, nor with the conduct of Indo-Pacific subsidiary Ngatoro Energy Ltd (NEL) which drilled the Goldie-1 well within the Ngatoro mining licence in 2001.
When companies entered into a joint venture operating agreement, issues such as voting and control were critical because parties with small working interests could be overwhelmed by the voting rights of larger working interest partners. Sole risk provisions provided flexibility, alternatives and options in such circumstances.
The sole risk provisions of the PPL38706 JVOA were in accordance with industry custom and practice and similar to other operating agreements around the world. Indeed, the Goldie sole risk operation was the kind of situation for which sole risk provisions were created, and NEL had conducted its sole risk operations according to industry custom and practice.
However, experienced industry practitioners would neither recognise nor understand Greymouth's interpretation of the PPL38706 JVOA sole risk provisions.
"If that interpretation were correct, sole risk operations could never be undertaken, Goldie-1 would never have been drilled," said Johnston, who helped Crown Minerals draft its petroleum regime and was a keynote speaker at the 1996 New Zealand Petroleum Conference.
The commercial implications were "dramatic and alien" and the financial implications of the Greymouth interpretation would be extremely harsh. "The thought of companies drilling and then being extremely reluctant to test a well, for example, is distasteful.
"As far as industry practice is concerned it is extremely unusual to contemplate a situation where operatorship would vest control with a party that had no direct financial interest. In my view it would be unacceptable that Ngatoro, as the sole risk party, could be removed as operator before it had at least received its 'six times' sole risk premium. Any party which did not participate in the original sole risk operation should have no claim to the sole risk party's 'six times' premium."
Johnston said NEL's sole risk rights were uncontested as it drilled Goldie-1 and that it conducted post-discovery production operations as any prudent operator would have.
"Ngatoro had every right to be 'in the drivers seat' as operator throughout the premium repayment phases. It took the risk and deserved to be reimbursed and receive the premium before those parties which took no risk backed-in and benefited from the risks taken by Ngatoro."
The logic of Greymouth's effort to 'net off' some of the exploration risk capital with revenues accrued during testing was "terribly flawed".
If it could be argued that the testing period extended for a sufficient time, simple accounting could yield a zero basis for calculating the sole risk premium, which would be extremely beneficial to all parties which chose to go 'non-consent'.
"I have never seen any company perform risk analysis in this fashion by netting off post discovery revenues from the actual risk capital. It is also extremely unusual in my experience to try and extend this logic by claiming further that the Goldie-1 well was not producing after April, 2001."
He said that if such 'netting off' was consistent with industry practice then nobody would ever test a sole risk well properly. There would be a huge incentive to avoid testing such a well in the normal manner.
However, Goldie-1 was tested the way a well should be tested. "It is inconceivable that an operator would have such a huge incentive to not test a well."
NEL's interests as operator were properly aligned with those of its partners as it had a healthy financial incentive to conduct operations in a way that would serve the interests of all parties to the contract. The sooner production began and NEL received its premium, the sooner the other parties could profit from the sole risk operations.
