CHAPTER 10 AREA OF MUTUAL INTEREST AGREEMENTS
| Jurisdiction | United States |
(Mar 2010)
AREA OF MUTUAL INTEREST AGREEMENTS
Law Offices of Allen D. Cummings
San Antonio, Texas
Allen D. Cummings is a solo practitioner with offices in San Antonio and Houston, Texas. He concentrates his practice in oil and gas title examination, oil and gas transactions and oil and gas litigation, arbitration, and mediation. He has practiced law in the energy area since 1975, in both corporate legal departments and in private practice. He received his J.D. degree from the Dedman School of Law, Southern Methodist University in Dallas, Texas (1974), graduating Order of the Coif. He was admitted in Texas in 1975. He has been Board Certified in Oil. Gas & Mineral Law by the Texas Board of Legal Specialization since 1987. Allen is a past Chair of the Oil, Gas and Energy Resources Law Section of the State Bar of Texas and the Oil, Gas and Mineral Law Section of the Houston Bar Association. He was selected as a Texas Super Lawyer in oil and gas law in the years 2004 through 2008, he was among the Top 100 Texas Lawyers - Houston Region in 2006 and was listed in Best Lawyers in America - Energy for the years 2005 through 2009. Mr. Cummings has presented numerous papers on oil and gas matters at annual and special institutes and continuing education seminars sponsored by the Rocky Mountain Mineral Law Foundation, the Oil, Gas and Energy Resources Law Section of the State Bar of Texas, the University of Texas, the American and Houston Associations of Professional Landmen, and similar organizations.
A. INTRODUCTION
If you have ever drafted an agreement containing an area of mutual interest provision, try to recall how much actual discussion or negotiation there was concerning the terms of the provision. More often than not, there has been only minimal thought given to the terms of an area of mutual interest provision, unless the client has questioned about what purpose it expects to achieve, what advantage it expects to gain from and how it expects the area of mutual interest to operate, both today and six months before the term of the area of mutual interest ends. Even then, it may be difficult to get clients to give much thought to the area of mutual interest provisions.
This paper is intended to provide the practitioner with a checklist of issues to be considered and discussed with the client. Of course, not every area of mutual of interest provision will need to address each of the issues set forth below. However, by reviewing the circumstances in which an area of mutual interest provision will operate and the issue checklist set forth below, the practitioner and his client should avoid most unpleasant surprises in the application of the area of mutual interest provision. The paper includes some sample clauses and a sample area of mutual of interest provision, which are intended only as a starting point for drafting.
B. DRAFTING CONSIDERATIONS
1. KISS Principle.
• When disagreements arise, and they will, the agreement will be read and interpreted by lawyers, arbitrators, judges and jurors who are strangers to the deal (and to the industry).
• If you have to be a landman, an accountant, a petroleum engineer or other oil and gas professional to understand the agreement, then simple disagreements can become real trouble.
• If the deal is so complex that it cannot be explained in a short executive summary, then simplify the business deal.
2. Words Have Consequences.
• Don't use words like "partner" and "joint venture" if you don't intend to create a partnership with joint and several liability and fiduciary duties among the participants.
• If disagreements arise, undefined terms will likely be understood by their "plain meaning," to folks not in the "oil bidness." Don't count on evidence of custom in the industry to interpret your agreement.
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• Avoid more than one provision on any issue or insure that the language used is consistent and not in conflict.
• Smaller companies or individuals with, for example, an exclusive data position, may have to give up control to obtain participation by a party with financial strength or a superior lease position.
3. When the Romance Ends (and it will) - What Is The Exit Strategy?
• Know your co-participants - if you don't trust them at the outset, it does not get any better.
• Will mullets be parties?
• There will be disagreements - how do the parties get a no-fault divorce?
• Make sure the client carefully reads and understands the document before signing. Avoid: THEY CAN'T DO THAT - CAN THEY?
C. Who and Why - The Negotiation (or Not) of Area of Mutual Interest Provisions
What is the Purpose of and What Advantage is to be Gained from Being Party to an Area of Mutual Interest?
Areas of mutual interest agreements, while mutual, usually are intended to benefit parties in different ways.
Similarly Situated Parties. One common scenario is the use of area of mutual interest provisions where there are two similarly situated companies seeking to avoid competition for seismic options or leases in the same area. When relative equals, as far as financial resources and technical or operating expertise, are working out the details of an area of mutual interest agreement, their negotiating drivers are similar, e.g. to avoid increasing the costs for seismic options or leases, to share the costs and risks of acquisition, exploration and development based on some percentage, usually their respective existing lease positions.
The Imposed Area Of Mutual Interest. Another not uncommon scenario is an independent oil and gas company with technical and operational expertise, access to limited geological and geophysical data, and perhaps a preliminary lease position, seeking to spread the cost and risk of obtaining additional seismic data and leases (and perhaps exploration) among non-operating industry parties or non-industry parties (often called mullets). The purpose of the area of mutual interest in this case is often to identify the area where the passive participants will to fund acquisitions, and little attention is given to negotiating the area of mutual interest agreement. The areal extent of the area of mutual interest and its term will likely be chosen by the company to achieve its goal to spread the cost and risk.
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It's My Area of Mutual Interest. Somewhat similar to the imposed area of mutual interest scenario, is an oil and gas company with a fairly extensive lease position, geological and geophysical data and technical and operational expertise, seeking to spread the risk of exploration and development with other industry participants. A prospective participant will buy, usually on a promoted basis, a share of the promoter's lease position and geological and geophysical data, subject to existing area of mutual area provisions. The areal extent and the terms of the area of mutual interest are not usually negotiable by a prospective participant, because there are other parties already bound by an existing area of mutual interest and their consent would be required for any change. Therefore, the prospective participant is faced with a "take it or leave" choice between whether to participate subject to less than optimum area of mutual interest provisions or not to participate at all. More often than not the decision is to participate and deal with area of mutual interest issues when they arise.
Small Guy-Big Guy. In another common scenario the area of mutual interest agreement is usually sought by a party with a geological idea or lease position ("Small Guy"), who is looking for the financing and/or the technical and operating expertise ("Big Guy") to convert its geological idea or lease position into a seismic shoot or an exploration program. Each party seeks to accomplish different objectives with an area of mutual interest agreement.
Small Guy wants to leverage its position to participate to the maximum extent possible in the information and oil and gas interests acquired by Big Guy, at the lowest cost to Small Guy. Therefore, Small Guy will likely want the area of mutual interest:
• to cover as large an area as can be negotiated
• for as long a term as possible
• to cover all types of interests that may be acquired, although Small Guy may want the right to buy minerals, royalty and overriding royalties under the area of mutual interest, without having to offer those to Big Guy.
• to bind any successors and assigns of Big Guy
• to be able to take a cost free interest, such as an overriding royalty or carried working interest in acquisitions, rather than come up with cash.
• to maintain its minority working interest in the area of mutual interest.
Big Guy wants to control Small Guy's geological idea and/or lease position and to leverage Small Guy's expertise or its relationships that garnered the lease position, with Small Guy participating in the costs as to its percentage in the risk of the seismic shoot or exploratory program. Therefore, Big Guy will likely want the area of mutual interest:
• to be limited to encompass the area that Big Guy evaluates as the areal limits of Small Guy's geological idea and/or influence to obtain expanded lease position, plus some additional lands to protect against competition by Small Guy.
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• to be of a limited term, so that after the area is fully leased and the initial exploration and appraisal phase is over, the area of mutual interest terminates.
• to cover all rights to explore for and develop oil and gas whether fee minerals or oil and gas leasehold, so that Big Guy is not negotiating leases with Small Guy.
• to bind related parties of Small Guy
• to require Small Guy to pay, at a minimum, its share of acquisition costs; Big Guy will be reluctant to decrease its net revenue interest by assigning cost free interests to Small Guy, although Big Guy may be...
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