CHAPTER 12 COALBED METHANE JOINT OPERATING AGREEMENTS

• Jurisdiction: United States

Coalbed Gas Development
(Apr 1992)
CHAPTER 12
COALBED METHANE JOINT OPERATING AGREEMENTS
Marla J. Williams, Esq. ¹
Holme Roberts & Owen
Denver, Colorado

Coalbed methane development presents a unique challenge to engineers and others involved directly in exploration and production operations—but the challenge doesn't end, or begin, there. The basic documents that the landman and lawyer often take for granted must also be re-thought, for many of the assumptions on which these documents are based may not apply readily to coalbed methane operations. This paper will undertake such a re-thinking with respect to one of the most widely employed of these basic documents—the joint operating agreement, or "JOA".

Coalbed methane operations vary from east to west in ways that have practical and legal implications for the party attempting to draft a JOA. For example, joint operations conducted to date in areas such as the Black Warrior Basin typically involve large tracts of fee land owned by a

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comparatively small number of parties. In western areas, such as the San Juan Basin, development often involves large tracts of federal land where issues of ownership are not a matter of major concern and where the coal strata from which the gas is produced are typically deep enough to make coal mining operations impractical.² In those instances where title is clear, the coal seam is uneconomic for coal development and there is no historic dominance of the coal estate, a standard form JOA with only a few of the modifications discussed in this paper may suffice. For coalbed methane gas development in central Appalachia, however, special consideration in drafting the JOA is required to reflect the unique circumstances of the region, not the least of which are shallower, commercial coal seams, a plethora of competing ownership and use claims, an historic deference shown to coal development, and Virginia's relatively new Gas and Oil Act.³

The range of fact scenarios in which a JOA may be executed is boundless. For example, a single 80-acre spacing unit

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established under the Virginia Gas and Oil Act may involve one or more coal owners of the objective coal seam, one or more coal owners of shallower or deeper seams, one or more surface owners, one or more oil and gas owners, one or more oil and gas lessees, one or more coal lessees, and one or more coalbed methane gas lessees. Coal operations exploiting the objective coal seam or a deeper or shallower coal seam may have occurred in the past, may currently be in progress or may be in the planning stages. Mining methods may also vary. Surface mining techniques may be employed for surface outcrops or shallow seams, room and pillar mining techniques employed for somewhat deeper seams and long-wall mining techniques employed for the even deeper seams.

Given so many variables and so many opportunities for conflict, it is impossible within the confines of this paper to attempt to address all of the issues that could arise during the life of a coalbed methane JOA. In an attempt to narrow the field a bit our discussion assumes, for the most part, that the JOA will cover a single spacing unit in the State of Virginia, which is being developed for coalbed methane gas in advance of any coal mining activity.⁴ Also,

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because it is a fairly well known and widely utilized document, we employ the AAPL Form 610-1982 JOA as our example document for discussion purposes.

In this regard, a caveat is needed. The JOA accompanying this paper is intended to be used only for discussion purposes. It is not being recommended by the author as a form for any particular operations and, in many instances, points raised and suggestions made in this paper are not reflected in the example form. Nor has there been any attempt by the author to address the many issues that arise under JOAs even in the context of conventional oil and gas development.

Finally, for ease of reference, the organization of this paper tracts the organization of the example JOA.

GENERAL COMMENTS RE: PARTIES

Who are the required (or desired) parties to a JOA? This is a very basic question having a very complicated answer. We might begin by declaring that the JOA should be executed by all parties having the right to explore for or produce coalbed methane gas from anywhere within the Contract Area. This declaration may seem simple and obvious enough in the context of conventional oil and gas development, but additional analysis is needed in the context of Appalachian coalbed methane gas development in Virginia.

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In those situations where the owners of the coalbed methane operating rights do not also own the right to mine the objective coal seam, the gas operating rights are likely to be subordinate to the coal mining rights. As a result, there may be very significant limitations on one or more party's right "to explore for or produce coalbed methane gas". Depending upon the nature of those limits and the degree of control over gas operations that a coal owner⁵ is able to exert as a practical or legal matter, it may be beneficial to have that coal owner become a party to the JOA. For example, if the coal estate is dominant and coal mining operations are in progress or imminent, the owners of the gas operating rights will have a strong incentive to confront major operational conflicts directly and attempt, in advance, to reach agreement with the coal owner regarding competing surface use, mining through existing wellbores, reservoir stimulation techniques, venting, the capturing of gob gas and similar issues.⁶ If

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such agreements can be reached, consideration should be given to incorporating those agreements into the JOA and having the coal owner join in the JOA for two reasons. First, it would establish privity of contract between the coal owner and all of the gas operating rights owners who are parties to the JOA. Second, it would permit the other provisions of the JOA to be construed in light of the agreement with the coal owner and would highlight for the parties the need to review the other provisions of the JOA and revise them where necessary to accommodate the agreement with the coal owner.⁷

Who is to be become a party to the JOA must also be analyzed in light of the force pooling provisions of the Virginia Gas and Oil Act ("VGOA"). Under § 45.1-361.21, an owner of coalbed methane operating rights can be required (i) to sell or lease those rights to a participating operator,

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(ii) to enter into a voluntary agreement to participate in the well or (iii) to share in the well as a nonparticipating operator on a "carried basis" i.e., after proceeds attributable to his interest equal to 200% or 300% (depending on whether the interest is a leased tract) of the costs allocable to the interest. To minimize the need for ongoing supervision by the Board⁸ and minimize the potential for future disputes, the coalbed methane gas operator should consider having a form of JOA prepared for the pooling hearing and asking the Board to require that any party electing to participate in the well on a "carried basis" or on a voluntary "straight-up" basis execute the JOA. Needless to say, the Operator's chances of having the Board adopt a particular JOA will increase significantly if the JOA is drafted as even-handedly as possible to conform as nearly as possible to the provisions and scope of the VGOA.⁹ In those situations where

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two or more industry partners¹⁰ wish to conduct joint operations that may also involve additional participating or carried parties as a result of force pooling, it may be desirable to develop two JOAs; one to reflect the perhaps unusual or unique agreement among the industry partners and a second "vanilla" form to be applied to all parties, including the force-pooled participants. The industry partner JOA would provide that, in the event of conflict, it would govern as among those industry partners.

ARTICLE I: DEFINITIONS

Oil and Gas. Although the definition of "oil and gas" set forth in the JOA appears broad enough to include coalbed

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methane gas, it would be prudent nonetheless to add the term "coalbed gas" to the definition as indicated in the example JOA. The term "coalbed gas" can then, in turn, be defined as methane and other gases contained in, emitting from or produced from coal deposits. Similarly, this definition of "coalbed gas" is intended to be broad enough to include gob gas, but an additional definition of gob gas should be added if, under the specific circumstances involved, there is any potential for ambiguity or misunderstanding on this point.

Oil and Gas Lease. This definition should be modified, if necessary, to clarify that "deemed" leases and leases entered into pursuant to the pooling provisions of the VGOA are included. (See example JOA).

Contract Area. The Contract Area should consist only of the acreage included in the drilling unit established by the Board under the VGOA (or, in western states, the spacing unit established by the state conservation commission). Depending upon the nature of the ownership within the unit and the scope of any existing or anticipated VGOA pooling order, it may also be advisable to limit the Contract Area to specific depths or specific coal seams. A fact sometimes ignored, even in conventional oil and gas operations, is that the JOA is not designed to cover operations in multiple zones where ownership does not remain constant from one zone to the next. If for

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any reason such operations are contemplated, extensive revisions outside the scope of this paper would be necessary.

Additional Definitions. Depending upon the particular operations being contemplated, other definitions or modifications of definitions may be required. For example, if the parties intend to recover gob gas, a special definition of gob gas may be merited, or if the parties...