CHAPTER 12 ALTERNATIVE AGREEMENTS TO THE FORM 610 OPERATING AGREEMENT
| Jurisdiction | United States |
(May 1990)
ALTERNATIVE AGREEMENTS TO THE FORM 610 OPERATING AGREEMENT
Attorney at Law
Denver, Colorado
I. Introduction
The purpose of this paper is to identify some of the situations where the Model Form Operating Agreement, AAPL Form 610-1989 (Form 610 agreement) is not suited for certain types of oil and gas operations. We will address the reasons for the incompatibility and discuss some of the provisions in the alternative agreement that are not readily adaptable for inclusion in the Form 610 agreement. We will also note the differences in organizational structure among the agreements.
For the reasons that will be obvious when operations are considered, the Form 610 is not adaptable to a field-wide unitization. In those instances where the unit operation is applicable primarily to private and state lands, the generally accepted form is the Model Form of Unit Operating Agreement for Statutory Unitization published by the American Petroleum Institute, Division of Production (API Form). The first edition of this agreement was published in March, 1974, and is an adaptation from an earlier non-statutory form of API Unit Operating Agreement that dates back to the mid 1950's. The API Form agreement is included in the Appendix. This Form is currently under revision by the API, Division of Production.
For similar reasons, the Form 610 Operating Agreement is lacking provisions required for the establishment of a Federal Exploratory Unit. The form of operating agreement utilized for this purpose is the Rocky Mountain Unit Operating Agreement, Form 2, Divided Interest, (RMMLF—Form 2 Operating Agreement) published by the Rocky Mountain Mineral Law Foundation. This form is included in the appendix.
Primarily, because of the different operating conditions and, also, the economic magnitude of operations, the provisions of operating agreements utilized in offshore operations are much more detailed and comprehensive than the Form 610. An illustrative offshore operating agreement that has acceptance by gulf coast majors and large independents is likewise included in the appendix.
II. Responsibilities of Operator — Form 610
Full control and direction of operations under the Form 610 agreement as permitted and required by the agreement and within the
[Page 12-2]
limits of the agreement is granted to the operator. The operator is designated an independent contractor. The Form 610 negates control and direction by Non-Operators, except as to the type of operation to be undertaken in accordance with the election procedures contained in the agreement. Any agency relationship between operator and non-operator is negated.
As a contrast to the Form 610, Article 3.1 of the API Form provides that the overall supervision and control of operations is exercised by each working interest owner solely in its own behalf in the capacity of an individual owner and not on behalf of the owners as an entirety.
The major matters that are decided by Working Interest Owners include the following:
1. Method of operation, including the type of recovery program to be employed.
2. Drilling of wells.
3. Well recompletion and change of status.
4. Approval of operator to use its own tools and equipment.
5. Approval of major expenditures.
6. Disposition of equipment.
7. Appearances before court or regulatory agency.
8. Audits.
9. The taking of periodic inventories.
10. Authorization of charges for services by consultants or unit operators technical personnel not covered in overhead.
11. Assignment to committees to study problems in connection with unit operations.
12. Removal of operator.
13. Changes and amendments to unit area, to unit agreement or to unit operating agreement.
14. Investment adjustments.
15. Termination of agreement.
III. API Form—Voting Procedure
In the API Operating Agreement under Article 4, the management of the operation is directed by the working interest owners, acting in a committee fashion, with the operator's representative acting as chairman and each party having a vote equal to its percentage participation. Each matter coming before the working interest owners shall be decided by a vote of each party's representative. Ordinarily, the affirmative vote required to carry a proposal is 65% with appropriate safeguards. Where one party has sufficient interest to determine a vote, the party must be supported
[Page 12-3]
by one other party to carry or veto a proposal. On those matters which may decrease or increase a party's unit participation, such as increasing the size of the unit, a greater percentage vote to carry is usually provided.
The reservation of more control by the working-interest owners in the API Form over the decisions to be made in the operation raises the issue of responsibility to third parties of non-operator for unit operations. This responsibility is discussed in Mr. Pharo's paper on the operator and non-operators. The manner of exercising control and direction, as provided in the API Form, is substanially similar in the RMMLF — Form 2 Operating Agreement and the illustrative offshore operating agreement.
IV. Other material differences between Form 610 and the API Form:
A. Under the API Form the working-interest owner does not have a non-consent election to drill, deepen or, otherwise, change the status of a well. The affirmative vote of the required percentage of working-interest owners binds all of the working-interest owners to participate and pay their share of the cost of any operation presented, including the drilling of a well. This is in sharp contrast to the elections to non-consent of each working-interest owner in the 610 Form pursuant to Article V. Operations By Less Than All Parties. The API Form, has been designed for a field-wide operating unit in a pool that is, for the most part, fully defined. Further drilling is to be at a minimum in unproven areas. For the reason that under a unit pressure maintenance program, some of the wells required to be drilled will be injection wells that are necessary to the successful operation of the unit, the inclusion of a non-consent well provision would adversely affect the program contemplated under the unitization plan.
B. Article 10 of the API Form provides for adjustment of investments among working-interest owners for disparities between investment in wells and facilities incurred prior to unitization by a working-interest owner and the equitable sharing of investment in existing wells and facilities determined in accordance with the benefits to be derived by a working-interest owner in the unit operation. In oil and gas operations conducted under the Form 610, the interest of a working-interest owner in the equipment and facilities are fixed for the term of the agreement.
C. In addition to the API Form operating agreement, there is a companion API Model Form Unit Agreement. The unit and unit
[Page 12-4]
operating agreement have interrelated provisions applicable to unit operations. A review of the API agreement will convince one that the Form 610 is not readily adaptable to a field-wide unit operation. For years the API agreements have provided a starting point for lawyers, landmen and engineers to draft and negotiate field-wide unitization agreements. The forms have enjoyed general acceptance throughout the oil and gas industry.
V. RMMLF Form 2 Unit Operating Agreement For Exploratory Divided Interest Unit
A. RMMLF Form 2 Unit Operating Agreement and the companion Unit Agreement set forth in 43 CFR 3186.1 et seq. are the forms utilized in an exploratory unit consisting, primarily, of federal onshore lands. An explanation should be made to those that are not familiar with the structure of a divided unit. The unit area in a federal exploratory unit at the effective date of an exploratory unit, ordinarily, does not have producing wells within the unit area. At that time, separate lease boundries remain intact within the unit area. The federal unit form allocates the production and the cost attributable thereto on the basis of the participating area within the unit. The participating area is defined in the regulations and unit agreement as:
"That part of the unit area which is considered reasonably proven to be productive of unitized substances in paying quantities or which is necessary for unit operations, and to which production is allocated in the manner prescribed in the unit agreement."1
For purposes of the participating area, a well in "paying quantities" is a well capable of producing oil and gas in quantities that will allow the operator to recover all of the cost of drilling, marketing and development with a reasonable profit.2 Under the federal unit agreement, the non-working interest production is allocated to the separate tracts within the participating area on an acreage basis, and the working-interest production is divided as provided in the operating agreement. This permits the working-interest owners to have a volumetric formula for the basis of allocation; but as a practical matter, except in rare cases, exploratory units provide for working-interest participation on the basis of acreage. Only those parties with interest in the participating area share cost and
[Page 12-5]
revenues in a federal unit. A participating area is expanded to include the additional lands reasonably proven to be productive of unitized substances in paying quantities as additional paying wells are completed. The lands that are not within a participating area but on which there is a non-paying well, are operated by the unit operator on a lease basis for the benefit and at the cost of the owners of the well. Needless to say, there is nothing in a Form 610 operating agreement that provides the procedure for changing a parties participating interest in the entire pool every time a paying well is completed on a different tract; nor can the Form...
To continue reading
Request your trial