Setting Operator overhead charges in joint ventures: benchmarking legal agreements

Abstract

Abstract Operators of extractive joint ventures are typically reimbursed for their costs incurred on a ‘no gain, no loss’ basis. Some costs can be directly attributed, but many corporate overhead charges are indirect and recovered through a negotiated overhead charge. These overhead charges are a recurring source of audit disputes, and can escalate to a point of delaying the approval of proposed budgets. Recent benchmarking of contractual language related to overhead charges across 76 joint ventures shows wide variety in both median rates as well as allowable costs included in overhead. Analysis also identified certain gaps in contractual agreements that likely give rise to overhead-related disputes, which leads to three ways for co-venturers to rethink their approach to setting, modifying, and auditing overhead charges – with an eye towards reducing the incidence of frictions and dispute.