CHAPTER 12 INDUSTRY AGREEMENTS AFFECTING RECORD TITLE

• Jurisdiction: United States

Oil & Gas Mineral Title Examination (Sep 2019)
CHAPTER 12
INDUSTRY AGREEMENTS AFFECTING RECORD TITLE
Sam Niebrugge
Davis, Graham & Stubbs LLP
Denver, CO
Elizabeth A. Ryan
Concho Resources, Inc.
Santa Fe, NM

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SAM NIEBRUGGE is a partner at Davis Graham & Stubbs LLP in Denver, Colorado. His practice focuses primarily on transactional matters for the oil and gas and mining industries. In addition to his work with oil and gas and mining producers at DGS, he worked in-house for a large independent oil and gas producer. He is experienced in drafting and negotiating purchase and sale, development, exploration, joint operating, farmout, and master services agreements, as well as various other agreements in the oil and gas and mining industries. He has experience in both asset and equity transactions. He also has extensive experience preparing all forms of title opinions covering fee, state, and federal lands. He is a trustee, member of the Financial Advisory Committee and Special Institutes Committee, and the co-chair of the Oil and Gas Section for the 2018 Annual Institute for the Rocky Mountain Mineral Law Foundation (RMMLF). He is also the former chair of the RMMLF Young Professionals Committee. He has authored several papers and spoken extensively to in-house counsel and at continuing legal education events on all matters associated with the oil and gas industry.

ELIZABETH ("BETH") ATKINSON RYAN is senior counsel at Concho Resources Inc., Santa Fe, New Mexico, where she advises asset teams on New Mexico operations, transactions, land, and regulatory matters. Prior to moving in house with Concho, Beth was a partner with Carson Ryan LLC in Roswell, New Mexico, where she focused her practice in the areas of oil and gas title examination, regulatory, complex transactions, corporate, public lands, and operational matters primarily for E&P companies operating in the State of New Mexico. After serving four years as a Member of the New Mexico Environmental Improvement Board (EIB), in 2015 Governor Susana Martinez appointed her to the New Mexico Game and Fish Commission where she served almost four years and sought to achieve the State's comprehensive wildlife management goals. Beth has also served as a Trustee for the RMMLF since 2008, representing the New Mexico Bar Association. She also served on the Lovelace Regional Hospital Board of Directors, and in the New Mexico Landman's Association, New Mexico Oil and Gas Association, and the Independent Petroleum Association of New Mexico. She is also an accomplished published author on issues ranging from appellate standards of review to oil and gas. Beth graduated from Texas Tech School of Law in May 2006. She has been married to Zack Ryan for sixteen years. They have two children: Belle (10 years old) and Kathryn (6 years old).

§ 1. Introduction ¹

The upstream - or exploration and production - phase of the oil and gas industry is filled with various contracts that may alter a party's interest in its leasehold ownership estate or that may pose duties or benefits on such record title interests notwithstanding their absence from the owner's chain of title. This Paper will give a brief overview of at least some of these typical contracts. In particular, this Paper will discuss how the constituent parts of such contracts may affect title, even if unrecorded, and review some of the issues facing subsequent purchasers regarding whether or not they are bound by the terms of these agreements.

§ 2. Typical Industry Agreements

[A] Operating Agreement

The operating agreement has been defined as a contract typical to the oil and gas industry whose function is to designate an operator, describe the scope of the operator's authority, allocate costs and production among the parties to the agreement, and provide for recourse among the parties if one or more defaults in their obligations.² For purposes of this Paper, we would add that for at least the last four decades, this agreement, particularly the Model Form JOA and its various versions,³ while beyond the scope of this Paper, has been dissected and analyzed extensively in presentations for this foundation and many others.⁴

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For our purposes, we should focus on the fact that a JOA is a form of contractual working interest pooling arrangement that can vary a lessee's⁵ share of costs and production from that of the lessee's individual lease, even if a well is located on that lease.⁶ By contract, a lessee may have a variable interest before and after the recoupment of non-consent penalties.⁷ A party may be subject to a preferential right to purchase that will affect the alienability of the party's tract.⁸ There may be other contractual duties such as an area of mutual interest ("AMI"), which we will discuss later in this Paper. Also, there may be forfeiture provisions due to non-consent that trigger the divestment of one's ownership interest. Development obligations or restrictions may exist on the use of one's leasehold such as a limitation on the number of wells that can be proposed in any defined time period. What is important for our purposes in this discussion is that all of these potential impacts on a party's record title ownership in its leasehold estate, i.e., its real property interest (in most states), can be caused by a document that is unrecorded in one's chain of title.

The examiner should expect that if the lands are at a stage of development where a well is anticipated, a JOA is likely to exist when multiple tracts of land are involved in the development project among multiple working interest owners contributing acreage to the project.⁹ The JOA has become the "go to" instrument for combining tracts from

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various parties and their attendant leasehold to provide for the orderly development of such lands. As noted above, the JOA appoints an "operator," defines many of the rights and duties as between the operator and the remaining parties (the "non-operators"), allocates revenues and expenses, and provides a framework by which an efficient and timely development process can occur. Except as discussed in a later portion of this Paper,¹⁰ we are not concerned with how the JOA binds the original contract parties, but rather the JOA's impact on subsequent purchasers who succeed to all or a portion of the interests of an original party, either directly or in an extended chain of title to the affected leasehold. The backbone issue of this presentation is this: Are subsequent purchasers bound by the terms of these unrecorded agreements?

Each version of the Model Form JOA contains language regarding successors and assigns. The 1989 Model Form JOA provides:

This agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, devisees, legal representatives, successors and assigns, and the terms hereof shall be deemed to run with the Leases or Interests included within the Contract Area. ¹¹

The 1956 Model Form JOA provides:

This agreement may be signed in counterparts, and shall be binding upon the parties and upon their heirs, successors, representatives and assigns. ¹²

This intent to bind subsequent purchasers appears in the 1977 Model Form JOA:

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This agreement shall be binding upon and shall inure to the benefit of the parties hereto, and to their respective heirs, devisees, legal representatives, successors and assigns. ¹³

The 1982 Model Form JOA provides:

This agreement shall be binding upon and inure to the benefit of the parties hereto and to their respective heirs, devisees, legal representatives, successors and assigns. ¹⁴

Thus, in each of the four Model Form JOAs, the drafters envisioned both assignability and continuing responsibility to the terms of the Model Form JOA on subsequent purchasers of the affected leasehold. This question of the original contracting parties' intent to bind subsequent purchasers will become important as we analyze how and why subsequent purchasers are or are not bound by the terms of unrecorded agreements, whether referenced or not. A clue to this analysis is provided by the enhanced language of the 1989 Model Form JOA, which spells out that the parties intend for the terms of the Model Form JOA to be deemed to run with the leases and the unleased lands affecting the tracts of land lying within the Contract Area covered by the Model Form JOA. This concept of running with the land will necessarily take us to an analysis of real covenants and equitable servitudes and the inquiries surrounding whether or not they are binding upon subsequent purchasers. Equally important to the assignor, we will examine one significant case where, while the terms of an operating agreement were binding on the subsequent purchaser, the assignor was not absolved from responsibility when the subsequent purchaser failed to perform.¹⁵

A JOA, may alter a party's record title ownership in an oil and gas lease by creating among the parties "beneficial contractual working interests" on which the parties are allocated production revenue.¹⁶ Assuming that the lease in question covers the entire fee oil and gas mineral estate on a particular tract of land, this leasehold is nevertheless combined or contractually pooled with other tracts such that:

Unless changed by other provisions, all costs and liabilities occurred and operations under this agreement shall be borne and paid, and all equipment and materials acquired in

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operations on the Contract Area shall be owned, by the parties as their interests are set forth in Exhibit "A." In the same manner, the parties shall also own all production of all Oil and Gas from the Contract Area subject, however, to the payment of royalties and other burdens on production as described hereafter. ¹⁷

Thus, even if the well is located entirely on the mineral estate covered by an individual party's oil and gas lease, such party will not receive 100% of the production nor bear...