CHAPTER 11 THE AAPL FORM 610 JOA COALBED METHANE CHECKLIST1

• Jurisdiction: United States

Oil & Gas Agreements: Joint Operations
(Dec 2007)
CHAPTER 11
THE AAPL FORM 610 JOA COALBED METHANE CHECKLIST¹
Frederick M. MacDonald ²
Attorney
Pruitt Gushee, a Professional Corporation
Sale Lake City, Utah

FREDERICK M. MacDONALD

Fred MacDonald is a shareholder and a managing director of the Salt Lake City law firm of Pruitt Gushee, a Professional Corporation.

He received his B.S. in Engineering from Purdue University in 1983 and his J.D. from the Valparaiso University School of Law in 1986. He joined his current firm upon graduation and has since primarily concentrated his practice in oil and gas law, including title examination of Federal, fee, State of Utah and Indian lands, coalbed methane development, unit formation and operation, and administrative practice before the Utah Board of Oil, Gas and Mining and U.S. Interior Board of Land Appeals. He is a member of both the Utah and American Associations of Professional Landmen, and served as chairman of the Utah State Bar's Natural Resource Section from 1997-98.

Fred is actively involved with the Rocky Mountain Mineral Law Foundation, currently serving on the faculty of the Federal Oil and Gas Leasing Short Course and previously serving as a Trustee-at-Large.

Fred is the author of Coalbed Methane Units: Making The Square Peg Fit The Round Hole, Regulation and Development of Coalbed Methane, Paper No. 7 (Rocky Mtn. Min. L. Fdn. 2002), The New AAPL Form 610 Coalbed Methane Checklist: Making The List And How To Check It Twice, 27 Energy & Min. L. Inst. Ch. 4 (2006), and Preparing and Finalizing the Unit Agreement: Making Sure Your Exploratory Ducks Are In A Row, Federal Onshore Oil and Gas Pooling and Unitization, Paper No. 8 (Rocky Mtn. Min. L. Fdn. 2006). He is listed in the 2007 edition of Best Lawyers in America in the area of oil and gas practice.

Originally hailing from Detroit, Fred has a passion for Motown music and considers himself Utah's most rabid Red Wings fan.

§1. Introduction.

Coalbed methane ("CBM") was long considered to be a very dangerous nuisance. We all have heard the stories of the canaries in the coal mines and of the tragic loss of life due to CBM induced explosions. However, beginning in the 1980's, CBM's value as a viable hydrocarbon resource was recognized and companies began exploration and development to extract it as the primary recoverable resource. Estimates of CBM reserves in the continental United States are conservatively placed at more than 700 trillion cubic feet (TCF), with perhaps 100 TCF recoverable with today's existing technology.³ As of 2004, proved CBM reserves were 18,390 billion cubic feet (BCF), and accounted for 9% of all domestic dry gas production.⁴ Is it any wonder, particularly given the recent increase in natural gas prices, why CBM exploration and development continue to burgeon?

The American Association of Petroleum (now Professional) Landman ("AAPL") sanctioned the drafting of a uniform joint operating agreement first in 1956, known as the "Form 610." It quickly became adopted as the industry standard. As a consequence of issues arising over the intervening years, and in an attempt to improve its contents, the Form 610 was revised by AAPL in 1977, 1982 and most recently in 1989.⁵ However, the Form 610 and all revisions thereto were drafted generally with conventional oil and gas exploration and development in mind. As outlined below, CBM exploration and development have unique and distinct differences from conventional exploration and development.

Recognizing those differences, the AAPL in 2004 created a task force to make recommendations on how the Form 610 should be modified to address CBM exploration and development. This paper addresses the Task Force's efforts and resulting documentation ultimately adopted by AAPL's governing Board of Directors.

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§2. "Coalbed Methane (or CBM) 101."

To understand why modifications to the Form 610 to address CBM were deemed necessary, the fundamentals of CBM and its extraction must be understood. Methane is bonded and held to the coal matrix by hydrostatic pressure. In order for the methane to be released from the matrix (desorption), the hydrostatic pressure must be reduced, i.e. the coal seams must be dewatered.⁶ In some fields, the pressure must be reduced to less than half of its original state.⁷

The defining difference between conventional and CBM development is therefore the required infrastructure. As one CBM expert has stated, expenditures for the infrastructure necessary to simply produce CBM wells, let alone determine their profitability, account for up to two-thirds of a prospect's total costs.⁸ Another CBM expert has identified three infrastructure elements crucial to a successful CBM development: dewatering (subsurface communication), water disposal, and compression.⁹

The dewatering element is self-explanatory in light of the discussion above. Many wells must be drilled and strategically patterned to allow communication for quick and efficient dewatering. A large gap between wells will destroy the ability to achieve subsurface communication and make it much more difficult, if not impossible, to dewater the reservoir.¹⁰ Thus, contrary to conventional well development, interference between CBM wells is required and desirable. CBM development should be thought of as the antithesis of pressure maintenance; a depressurization unit if you will. In addition, a larger land block is required to allow for such a sufficient amount of wells to be drilled.

So dewatering a reservoir is essential for CBM development, but what are you supposed to do with the water? Trucking? It's a very expensive venture, especially given the usual large amounts of water produced. An evaporation pond program? This is a viable option unless you have an uncooperative landowner. In addition, there are permitting and other environmental considerations (such as treatment requirements before discharge). An injection well program is also a viable option but can be expensive and is only economical if kept at optimal capacity. This requires development on a larger scale (thus also requiring a larger land block). Reverse osmosis, especially in the arid West, is a desired option but is very expensive and may not always work.

Finally, as indicated, low reservoir pressure is essential to allow and maintain desorption; therefore gas pipeline pressure must also be extremely low.¹¹ However, before acceptance into an interstate pipeline, the gas must be compressed.¹² Centralized compression

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for use with many wells will run at capacity and be the most efficient and economical. Again, however, it requires several wells and a large acreage block.

§3. The Task Force Genesis.

CBM operators quickly became creative in trying to modify and tailor the Form 610 to fit their operations. Among some of the earlier modifications were including gas gathering and water disposal facilities within the definition of those costs included within an authority for expenditure ("AFE") and for which non-consent penalties would apply. Other modifications included adding provisions authorizing allowing a single AFE for a multiple well grouping, which could include a well drilled strictly for purposes of dewatering and not production, and the application of non-consent penalties to the entire grouping ("basket payout"). Still others provided for complete forfeiture by a non-consenting party in a well or wells rather than mere assessment of non-consent penalties and striking any provision allowing a separate completion election. Other operators decided to use the Form 610 only as a template and write an entirely different form with provisions more analogous to the federal exploratory unit concept of annual plans of development.¹³ All of these efforts were somewhat piecemeal and varied from basin to basin.

In late 2002 or early 2003, the AAPL Forms Committee, which oversees the Form 610, was approached about the need to avoid this piecemeal approach and adopt a more standardized form for CBM exploration and development. Some on the Committee initially believed a completely new version of the Form 610 would be required, but others argued that only a simple checklist outlining some modifications was required. Having failed to reach consensus, the Committee referred the matter to the AAPL's executive committee to appoint a Task Force to study the matter in detail, to make recommendations and to proceed with drafting based on its findings.

§4. The Task Force and Its Efforts.

In February, 2004, Craig Young, then President of AAPL, established the Coalbed Methane Joint Operating Agreement Task Force comprised of the following members in addition to the author: Arnold Schulberg, Hurricane, WV, Independent Landman and Attorney, who served as Task Force Chairman; Jim Dewbre, Houston, TX, Vice President of Land - Southwestern Energy Production Company; Max Eddington, Calgary, AB, Canada (formerly of Houston, TX), Landman - BP America Production Company; Paul Rote, Birmingham, AL, Landman - Energen Resources Corp.; and Jim Schaff, Denver, CO, Landman - Williams Production RMT Company. Luann Thomas, Oklahoma City, OK (formerly of Birmingham, AL), Landman - Samson Resources Company (formerly with GeoMet, Inc.), also served briefly with the Task Force and was of valuable assistance. Dorsey Roach, Esq., Tulsa, OK, Landman and Attorney - UnitPro Land Consultants, Inc. (formerly with Williams Production RMT Company), was later recruited to the Task Force to assist in making conforming changes to the 1989 version of the Form 610 (since he was actively involved in the drafting of that version). In addition to their CBM expertise, the members of the Task

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Force were chosen on the basis of their work in the diverse regions where domestic CBM development is occurring, including the Appalachian, Black Warrior, San Juan, Powder River and Uinta Basins and the analogous...