CHAPTER 12 JOINT OPERATING AGREEMENT EXHIBITS: AN OVERVIEW
| Jurisdiction | United States |
(Dec 2007)
JOINT OPERATING AGREEMENT EXHIBITS: AN OVERVIEW
Attorney
Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C.
Oklahoma City, Oklahoma
MICHAEL E. SMITH
Michael E. Smith is a member and Director of the firm of Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C., in the firm's Oklahoma City office. He graduated from the United States Military Academy, West Point, New York in 1969. He graduated from the University of Oklahoma College of Law in 1975.
Mr. Smith's practice is devoted exclusively to litigation in state and federal courts, with emphasis in oil and gas litigation, including oil and gas related class action litigation. He has been lead counsel in numerous oil and gas contract cases, including JOA issues, preferential rights to purchase, gas balancing and other oil and gas contract issues. He has also litigated numerous oil and gas related environmental cases. In addition, he has extensive experience in other complex commercial litigation, including class actions.
Mr. Smith is admitted to practice in state and federal courts in Oklahoma, the Tenth Circuit Court of Appeals and the United States Supreme Court. He authored "Survey on State Class Action Law-Oklahoma", published by the American Bar Association, Litigation Section, Class Action Committee for years 1999 through 2006. He has been selected to continue as author of this annual survey which is now published by West Publishing Co., as a yearly supplement to Newberg on Class Actions. He co-authored "Countdown to Trial", presented at the 91st Oklahoma Bar Association Annual Meeting, November 1995.
I. INTRODUCTION
A. General. This paper deals with the exhibits commonly attached to the joint operating agreement. Unless otherwise indicated in this paper, "operating agreement" will mean the AAPL Form 610-1989 Model Form Operating Agreement, copyright by the American Association of Petroleum Landmen.
B. Contemplated Exhibits. Article II of the operating agreement contemplates seven Exhibits:
1. Exhibit "A" - A description of the Contract Area; restrictions, if any; the parties and their addresses for notice purposes; the parties' interests in the Contract Area; leasehold and/or interests in the Contract Area; and burden on production.
2. Exhibit "B" - Form of Lease.
3. Exhibit "C" - Accounting Procedure.
4. Exhibit "D" - Insurance Requirements.
5. Exhibit "E" - Gas Balancing Agreement.
6. Exhibit "F" - Non-Discrimination and Certification of Non-Segregated Facilities.
7. Exhibit "G" - Tax Partnership.
C. Inconsistencies. Article II provides that in the event of an inconsistency between the body of the operating agreement and any exhibit, then Exhibits "E", "F" and "G" prevail over the body, but the body prevails over all other exhibits.
D. Optional v. Mandatory Exhibits.
1. Certain of the exhibits are optional while others are mandatory. Exhibits "A", "C" and "D" are always required. Without Exhibit "A", neither the Contract Area nor the interests of the parties (which under Article III.B. governs their share of costs as well as their share of production) is defined. The provisions
[Page 12-2]
of the Accounting Procedure are referred to and made operative in several places throughout the agreement. See Article IV.A., Article VI.B.4, Article VI.E.2., Article VII.B., Article VII.C., Article VII.D.2., Article VII.D.3., Article VII.F., Article VIII.A. The Insurance Requirements are brought into the operating agreement by Article V.D.
2. Exhibit "B" - Form of Lease is only necessary if one of the parties has an unleased oil and gas interest. See Article III.A. If there are unleased interests, such exhibit becomes mandatory. Exhibit "F" is optional in the sense that it is nowhere referred to in the body of the agreement and thus failure to include it will not cause a contract construction problem. However, if the size or identity of the parties is such that the exhibit is required by law to be included, failure to include it can result in ineligibility of the parties for certain federal contracts, including federal leases. See discussion of Exhibit "F" infra.
3. Exhibit "E" - the Gas Balancing Agreement and Exhibit "G" the Tax Partnership provisions are the only truly optional provisions. The presence or absence of gas balancing provisions is tied into Article VI.G. dealing with the taking of production in kind. The 1989 Operating Agreement requires in Article VI.G. that the appropriate box be checked as to whether a gas balancing agreement is attached. Whether or not tax partnership provisions are to be used depends upon certain matters later discussed herein.
II. EXHIBIT "A"
A. Requirements. Article II of the Operating Agreement specifies that Exhibit "A" shall contain the following:
1. Description of the lands subject to the agreement.
2. Restrictions, if any, as to depths, formations or substances.
3. Addresses and telephone numbers of the parties for notice purposes.
4. Percentage or fractional interests of the parties.
5. Oil and gas leases and/or oil and gas interests subject to the agreement.
6. Burdens on production.
B. Failure To Describe Lands Or Interests. The most important information to be supplied by any of the exhibits to the operating agreement is that which is supplied by Exhibit "A", to-wit: the lands which comprise the Contract Area and the interests of the parties. It is evident without the necessity of argument that without an identification of the lands to which the operating agreement is to apply, the agreement is meaningless. Of equal importance is the tabulation of the parties' interests. It is these interests that govern the
[Page 12-3]
share of costs and expense which the parties will bear and the portion of production which will be allocated to them. Article III.B. These terms are so essential to the operating agreement that, it is submitted, failure to include either of them, whether inadvertently or intentionally, will cause the operating agreement to be a nullity. Clearly where parties to an agreement have failed to reach an accord upon an essential term with the result that it must be left to future determination, there can be no enforceable contract. 13 Samuel Williston, Williston on Contracts § 45 (3d. ed. 1961). The rule is much stronger in the case of an operating agreement which, it is submitted, is within that portion of the Statute of Frauds relating to sales of interests in real estate.
1. The Statute of Frauds requires a written memorandum for certain classes of contracts to be enforceable. One of those classes is a contract for the sale of an interest in land. Restatement (Second) of Contracts § 110 (1981). An interest in land within the meaning of the Statute of Frauds is any right, privilege, power or immunity, or combination thereof, which is an interest in land under the law of property. Thus, agreements affecting the use of land are within the Statute. Restatement (Second) of Contracts §127 (1981).
2. While no case was found holding an operating agreement to be within the Statute, consider the following attributes of an operating agreement:
(a) It relates to matters and activities on a defined tract of land. See "Whereas" clause of operating agreement.
(b) It confers upon each party a specific interest in production irrespective of record title to the lease from which the production is obtained. Article III.B.
(c) It is to be binding upon the successors in interest of each of the parties as a covenant running with the land burdening their respective leasehold estates. Article XV.B.
(d) It grants to the designated operator exclusive possession for the purpose of conducting operations. Article V.A.
(e) It operates as a relinquishment from nonconsenting parties to consenting parties of the non-consenting parties' interests in wells and production from such wells resulting from non-consent operations. Article VI.B.2.
(f) It confers upon non-abandoning parties a right to takeover wells and obtain from abandoning parties an assignment of the production therefrom in the event of abandonment. Article VI.E.
(g) It contains a grant of lien rights. Article VII.B.
[Page 12-4]
(h) It affords the parties the right to acquire leases proposed to be surrendered. Article VIII.A.
(i) The maintenance of uniform interest provisions operates as a limitation upon each party's right to assign its interest in the Contract Area. Article VIII.D.
(j) It contains a waiver of the right to partition. Article VIII.E.
(k) It contains a preferential right of purchase in favor of all parties in the event of a sale by any party (even though that provision usually is not checked for inclusion). Article VIII.F.
3. In Triangle Ranch v. Union Oil Company, 287 P.2d 537 (Cal.App. 1955), it was held that an oil producer's oral agreement to carry on its operations in a manner so as not to destroy the residential character of certain land by limiting the number of and manner of operating wells created mutual rights in real property and as a result was not enforceable because it was within the Statute of Frauds. Restrictions on the use of land constitute an interest in land and are within the Statute. Keith v. Seymour, 335 S.W.2d 862 (Tex. App. 1960). See also Chandler v. City State Bank, 135 S.W.2d 1013 (Tex.App. 1940) holding every agreement which contemplates alienation of an existing interest in land is within the Statute.
4. The case of Procom Energy, L.L.A. v. Roach, 16 S.W.3d 377, (Tex. App. 2000) illustrates what might happen where the parties do not enter into a JOA or similar development agreement specifying the duties and relationships of the parties. Procom v. Roach discussed joint acquisition of two separate mineral estates, one called the Loden leases and the other the Tubbs leases. Some type of agreement was reached to acquire the Loden leases whereby Roach advanced $24,000 to...
To continue reading
Request your trial