CHAPTER 1 AN INTRODUCTION TO THE AAPL MODEL FORM OPERATING AGREEMENT
| Jurisdiction | United States |
(May 1990)
AN INTRODUCTION TO THE AAPL MODEL FORM OPERATING AGREEMENT*
Apache Corporation
Tulsa, Oklahoma
Lewis G. Masburg, Jr.
Attorney at Law
Tulsa, Oklahoma
I. INTRODUCTION
A. The Nature of "Joint Operations."
The oil and gas producer that owns leases in a prospect area has various alternatives available to it in "processing" that acreage. "Own account" drilling, supporting a well drilled by another (or accepting support), and farming out or farming in, are all available alternatives. However, a prospect area frequently contains leases owned by more than one party. All of the lessees may wish to participate in the development of the prospect, or, as is common today, budgetary restraints may prevent a party from participating in such development. Likewise, following an exploratory farmout, both the Farmor and the Farmee will normally own undivided interests in the leases covering the "outside acreage." It is also possible that the producer may seek a "partner" to (i) spread the costs and risks of developing the prospect; (ii) accelerate that development or (iii) spread its drilling budget over more wells and areas. Under the aforementioned circumstances, an agreement should be reached to define how the jointly owned interest are to be developed and operated.
The producer may develop the prospect in which other lessees own an interest without reaching an agreement with those lessees. However, absent "forced pooling" it would be carrying the other lessees for an interest in the well. Even if the lessees do participate in the development of the prospect, the absence of an agreement will leave unresolved the potential areas of disagreement which an operating agreement would have covered; thus, the necessity for an operating agreement.
The label of "operating agreement" may be misleading in that such an agreement is not limited to the operation of producing wells. Such an agreement, in fact, covers three separate stages of prospect development:
1. The initial testing of the Contract Area (the "Exploration phase");
2. The further development of the Contract Area, if the initial exploration is successful (the "Exploitation phase"); and
3. Operation of the producing properties through the depletion of the reserves (the "Production and Abandonment" phase).
To define the rights of the parties throughout these various
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operational phases, a "Joint Operating Agreement" must accomplish several objectives:
1. The interests of the parties must be "pooled" throughout the Contract Area.1
2. Since the parties will undoubtedly disagree at various stages in the operation as to how the operation should be conducted, the agreement must provide a method concerning how the joint operations are to be conducted.2
3. A formula must be established to provide how costs and production generated by these joint operations are to be shared.3
4. One of the parties must be designated as the "Operator" and placed in charge of the conduct of the day-to-day operations. The agreement must also specify this "Operator's" powers, responsibilities, compensation, and replacement.
The Joint Operating Agreement may cover a single Drilling and Spacing Unit. If this is the case, the parties will be sharing in costs and production in the same manner that these items would have been shared if no "JOA" had been entered into, i.e., based upon their proportionate ownership of the leasehold estate lying with the Unit. However, in certain instances, the parties may wish to share in costs and production over a larger area. In this event, the parties will form a "Working Interest Area" by entering into a Joint Operating Agreement covering a "Contract Area" consisting of several (or many) Drilling and Spacing Units. Under this arrangement, the rights of the parties will be "contractually" pooled throughout the entire Contract Area, so that the sharing of costs and production will be assessed not upon the ownership of the particular drilling and spacing unit on which a well is drilled, but on the formula specified in the Joint Operating Agreement. Such a formula will normally, but not always, provide for a sharing based upon proportionate Contract Area leasehold ownership. Finally, the parties may agree to enter into a much more ambitious undertaking in which the "Contract Area" consists of a number of widely-scattered prospects. Despite this increased complexity, many onshore drilling operations are conducted using the same agreement form that is used for the much simpler single well or single prospect Contract Area.
B. Development of AAPL Model Form 610
Prior to the early 1950s, there was less need for a "model" form of Joint Operating Agreement. Joint operations were normally conducted one well at a time. Most wells were shallow, with oil as their objective. The lesser costs and risks involved in such drilling, and the prevalent spacing patterns, meant that there would be both less likelihood and less need for a large number of
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"partners" to participate in the operation.
As the industry began to drill deeper, however, costs and risks escalated. Gas-oriented drilling also meant larger spacing. Thus, larger Contract Areas were needed to facilitate larger drilling and spacing units and to spread costs and risks over a larger number of parties and a greater area. Multiple objective horizons also created a greater likelihood of disagreement among the parties concerning how the operations should be conducted.
Until the mid-1950s, there was no "model" form of operating agreement in general use within the industry. Instead, each major oil company had its own "company form," which it required to be utilized if it were to participate in joint operations. However, as Contract Areas, and the number of parties participating in a joint operation increased, the industry found that disputes concerning contract language resulted in wells being spudded, completed, and produced to depletion without agreement ever having been reached concerning a mutually-acceptable form of Joint Operating Agreement. This practice might have been acceptable when a single horizon, or a single drilling and spacing unit, was involved in the joint operations. However, with multiple parties, broad Contract Areas, and multiple objective horizons, the "stalemate," and the resulting conduct of operations with no enforceable agreement in effect, could no longer be tolerated.
In 1956, following several years of diligent effort in the Legal Committee of the Mid-Continent Oil and Gas Association, a "Model Form" Operating Agreement (initially designated "Kraftbuilt Form 610") was developed through the combined efforts of 26 oil companies and a synthesis of 17 different company forms. This agreement has subsequently been designated as the "AAPL Model Form Operating Agreement 610 (1956 Version)." The 1956 Version of the Model Form was a highly-detailed document. It is a wonder that common ground could be found among so many companies, and so diverse an industry, for any such generally-accepted agreement version. The 1956 form thus represented an outstanding accomplishment and was used, with very little modification, for a lengthy period of time throughout the industry.
No matter how well the drafting committee had done its job, no agreement form is perfect. As the years went by, certain solutions under the Model Form now appeared outdated; certain others, as it developed, had been questionable from the start; and still others utilized language which was unclear or did not say what the draftsmen had intended. And new problems were requiring entire new areas of coverage. Aside from a few spot changes, there had been virtually no revisions to the Model Form Operating Agreement for 20 years. Accordingly, the Drafting Committee of the American Association of Petroleum Landmen (the "AAPL") was assigned the task of developing a new version of the Model Form.
Some persons suggested that the 1956 Version be scrapped, and an entirely new agreement drafted. Others suggested that the
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agreement remain intact except where "spot" changes were required. The Drafting Committee adopted a mid-ground: significantly revise the format of the agreement; make whatever changes in solutions, additions, or language were required; but, otherwise leave the agreement language unchanged. After several years, and rounds of industry comment, a new version of the Model Form was released — the AAPL Model Form Operating Agreement Form 610 (1977 Version). It is this agreement which has, until recently, been the most widely used for domestic onshore operations.
The AAPL was determined not to let another 20 years elapse without continuing its Model Form upgrading process. Accordingly, in 1981, a revision committee was again designated. To avoid the time delays involved in completing the 1977 revisions, the Committee speedily prepared a new set of revisions; this version of the Model Form was adopted by AAPL in June 1982, without formal circulation among industry members for comment, and was designated "AAPL Model Form Operating Agreement Form 610 (1982 Version)." Unlike the 1977 revisions, the 1982 Version of the Model Form, with a few exceptions, left the basic organization of the form unchanged, utilizing the "spot change" approach. However, these "spot changes" were significant.
Not even the 1982 version of the Model Form was prepared to deal with the economic chaos resulting from the collapse in oil and natural gas prices and demand, a chaos and collapse that had been totally unforeseen by most in 1981. Accordingly, in 1986 a new Drafting Committee was formed by the AAPL to revise the Model Form again. While this Committee's initial charge was primarily to concern itself with the inadequacies of the Model Form in providing adequate remedies against "non-performing" parties, the Committee...
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