Adamantine Energy (Kenya) Ltd v Bowleven (Kenya) Ltd

A contractual drill-or-drop mechanism must be construed in its commercial and contractual context. Where the mechanism concerns the exercise of rights under an underlying production sharing contract, it does not ordinarily require a vote when it is known that those rights cannot realistically arise at the relevant future date. A vote is directed to the parties’ rights under the existing contractual framework, not to a possible renegotiation or variation of that framework. A conditional vote may be treated as a negative vote where an unequivocal decision is contractually required and the mechanism is intended to provide certainty, although that issue may arise only as an alternative ground.

Adamantine and Bowleven jointly held interests in a Kenyan oil exploration block. Under a sale and purchase agreement and joint operating agreement, clause 8 required a management committee meeting and vote on whether to proceed from one exploration period to the next.

By February 2015, the parties knew that Adamantine could not complete the minimum seismic work required under the production sharing contract before the initial exploration period expired. Adamantine nevertheless called a meeting and voted to proceed. Bowleven voted to proceed only if the Kenyan Government granted an extension, maintaining that otherwise no effective vote could be taken. The Government later granted an extension. Adamantine sought an order requiring Bowleven to transfer its participating interest.

1. Claim dismissed. The events of 25 February 2015 did not constitute a vote contemplated by clause 8 of the sale and purchase agreement. Bowleven was therefore not obliged to transfer its 50% participating interest under clause 8.4.
2. Clause 8 was construed by reference to the natural meaning of its language, the relevant provisions, the contractual purpose, the background known to the parties and commercial common sense, consistently with Arnold v Britton [2015] AC 1619. The vote concerned whether to invoke rights under clause 2(3) of the Production Sharing Contract to enter the first additional exploration period. It was not an abstract vote on whether to keep the project alive.
3. The contractual structure allowed uncertainty three months before expiry because the minimum work could be completed during the final three months and notice to enter the next period was required only one month before expiry. A valid vote could therefore be held while a realistic possibility remained that the relevant rights would arise.
4. Here, however, both parties knew that the required seismic work could not realistically be completed by the relevant date. There was consequently no realistic possibility that clause 2(3) rights would exist three months later. A vote on whether to invoke rights known not to exist could not be valid or meaningful.
5. A negotiated rollover of unfinished work, or any other arrangement requiring a variation of the production sharing contract, fell outside clause 8. It would require agreement between the parties on revised rights and burdens, including the allocation of additional costs.
6. The estoppel argument failed in the alternative because there was no communicated shared assumption that the vote would be postponed. If a vote had been required, Bowleven’s conditional vote would have been impermissible and treated as a no vote for clause 8.4 purposes. The good-faith issue did not arise, but Adamantine would have satisfied the requirement: the parties had genuinely discussed the extension, the available technical data and the commercial prospects.