CHAPTER 13 GATHERING AND OTHER POST-PRODUCTION FACILITIES -A PRODUCER'S PERSPECTIVE
| Jurisdiction | United States |
(Nov 2004)
GATHERING AND OTHER POST-PRODUCTION FACILITIES -A PRODUCER'S PERSPECTIVE
Craig A. Haynes
Thompson & Knight LLP
Dallas, Texas
Arthur J. Wright is a Senior Partner of the firm of Thompson & Knight L.L.P. and was formerly an Assistant General Counsel of Texas Oil and Gas and Associate General Counsel of Delhi Gas Pipeline Corporation. He received a bachelor's degree from Tulane University and graduated with Honors from the University of Texas School of Law where he was a member of the Order of the Coif.
The present focus of his work is matters related to the acquisition and sales of oil and gas assets and the exploration for and production and marketing of oil and gas and the downstream products made therefrom. He also has represented both producers and pipelines before various regulatory agencies, such as the Federal Energy Regulatory Commission.
Mr. Wright currently serves on the ABA's Negotiated Acquisitions Committee and Asset Acquisition Task Force and on the Advisory Board of the Institute for Energy Law. He has been on the Council of the Oil and Gas Section of the State Bar of Texas, Chair of various Committees of the ABA's Natural Resources and Law Section and President of the North Texas Energy Council. He is also past Chairman of the Oil, Gas & Mineral Law Section of the Dallas Bar Association and has taught oil and gas law at SMU's School of Law.
He is a frequent speaker on oil-and-gas-related subjects at State and local Bar Association meeting and has authored numerous articles relating to natural gas, the acquisition of oil and gas properties, and legal ethics for the AAPL's Landman Magazine, Rocky Mountain Mineral Law Foundation, Universities of Texas, Houston and Tulsa and the Dallas, Oklahoma and Texas Bar Associations. He has also co-edited a book entitled Natural Gas Contracts for the American Bar Association.
Craig A. Haynes is a senior partner in the Trial Section of Thompson & Knight LLP. He has a complex commercial litigation practice with a focus on energy litigation. He represents defendants and plaintiffs in commercial cases. He has significant trial and appellate experience handling major commercial litigation in state and federal courts in all parts of Texas, as well as in Louisiana, Oklahoma, Wyoming, and Alaska. Most of his practice focuses on clients in the energy industry. He has also had significant experience in first party insurance litigation cases.
Mr. Haynes was recently listed by Texas Lawyer as one of the five selected "Top Notch" lawyers in the state of Texas in the area of Civil Litigation-Plaintiffs (non-personal injury cases). Mr. Haynes is a former Barrister of the Patrick E. Higginbotham American Inn of Court and a former Chair of the Dallas Bar Association Judiciary Committee. He earned his Juris Doctor degree, with high honors, from the University of Texas School of Law in 1985, and clerked for the Hon. Jerre S. Williams in the United States Fifth Circuit Court of Appeals.
RELATIONSHIP OF THE JOA PARTIES
A. Article VII
B. Good Faith
C. Fiduciary Relationship
JOA AND MARKETING ISSUES
A. Liability For Marketing For Non-Operator
B. Buying From Non-Operators
C. Another Solution -- Contract Ratification
JOA FACILITIES
A. Pay to Play
B. Maintenance of Uniform Interest Provisions
C. Confidentiality
LESSOR IMPOSED RESTRICTIONS
A. Issues Frequently raised by Lessors
1. Pipelines
2. Post Production Costs.
3. Other items relating to production
4. Plans.
5. Facilities.
6. Royalty
B. Sample Clauses
1. Pipelines
2. Post production costs
3. Other items relating to production
4. Plans development plans or consent for all operations
5. Above ground facilities
GATHERING EXEMPTION FROM NGA JURISDICTION
A. NGA Jurisdiction
B. Development of Current Modified Primary Function Test
1. Behind The Plant Test
2. Central Point Test
3. Primary Function Test
C. Modified Primary Function Test
D. The Shell Western Case
REGULATORY ISSUES -- TEXAS EXPERIENCE
GENERAL DISCUSSION OF TEXAS STATUTES
A. Gas Utility
1. Gathering and Field-Area Pipeline Entities
2. Gas Marketing Companies
3. Agricultural Service
4. Vehicle Fuel
5. Employee and Tenant Use
B. Regulation of Gas Utilities
1. Transportation Service.
2. Rates
3. Gas Utility Tax
4. Abandonment
5. Annual Report
6. Quality of Service Rules
7. Curtailment of Service
8. Reporting of Certain Transactions
C. Common Purchaser
1. Definition
2. Discrimination Prohibited
3. Remedies and Enforcement
D. Common Law Common Carriers
E. The "Code of Conduct," 16 Texas Administrative Code Section 7.59
F. Pipeline Disconnections from Producers/Shippers
ROYALTY ISSUES DEALING WITH POST-PRODUCTION COSTS, INCLUDING MARKETING AFFILIATES: OPERATOR'S PERSPECTIVE
A. Introduction
PART I: THE ROYALTY OBLIGATION
I. Calculating Gas Royalties
II. Calculating Oil Royalties
III. Determining Market Value or Market Price
IV. Implied Covenant to Market
V. The In Kind Royalty Provision
PART II: ISSUES RELATED TO SALES TO AFFILIATES
I. Royalties Based on Market Value
II. Royalties Based upon Amount Realized
III. Post-Production Costs
IV. Piercing the Corporate Veil In Texas
CONCLUSION
RELATIONSHIP OF THE JOA PARTIES
A. Article VII
Generally, Article VII of the 1989 Joint Operating Agreement (JOA) specifically disclaims that the JOA creates a partnership, joint venture, agency relationship, or association, or that if a document which renders the parties liable as partners, co-venturors, or principals. Article VII further states that the parties should not be considered fiduciaries or to have a confidential relationship. Instead, Article VII affirms the fact that the parties are free to act on an arm's-length basis and in their own respective self-interests -- "subject, however, to the obligation to act in good faith in their dealings with each other in respect to the activities hereunder."
B. Good Faith
The addition of the above-italicized phrase is unfortunate. The phrase appears to impose a duty of good faith on any decision or action of a party (operator or non-operator) made in connection with a JOA. Because Article VII initially specifically states that the parties shall not be considered to be fiduciaries or to have any sort of confidential or trustee relationship, it attempts to effectively negate the normal duties that parties would over one another under a partnership, joint venture or similar arrangement. However, the good faith requirement seems to impose some nebulous obligation as to a party's conduct. The good faith duty has been defined by some courts as "a covenant that neither party will do anything which injures the right of the other party to receive the benefits of the agreement." 17A AM JUR2d. § 370. Other courts and other jurisdictions undoubtedly have different definitions. This is an ambiguous obligation and subject to inconsistent applications by the courts. The caveat at the end of Article VII.a. in regard to the parties' relationship creates some difficulty in reconciling the right of a party to act in its own self-interest while at the same time acting in "good faith." The conflict is simply an invitation to litigation when one party feels it has been aggrieved in some way not specifically covered by the agreement.
Parties to the JOA should specifically negate any good faith obligation. Some states, though not Texas, do infer the obligation of good faith in every contract. Therefore, the language permitting the parties to act in their own self-interest would lessen the good faith duty in those states and give the parties greater latitude to act in their own self-interest. 1 If such latitude is intended, it should be clarified by negating any "good faith" obligation. Finally, the single piece missing from the JOA structure to negate a "con-torts" and limit the imposition of unreasonable liability is the specific exclusion of punitive or exemplary damages.
SOLUTION: Delete the "good faith" phrase and specifically negate any good faith obligation. Add to the JOA a provision that excludes the recovery of punitive or exemplary damages, as to all parties, arising from or related to actions or activities on the Contract Area or in relating to the JOA. The clause that is suggested in Paragraph C. below includes a sentence that should accomplish the desired results.
C. Fiduciary Relationship
The other exception to the arm's-length approach to the JOA parties' relationship appears in Article V.D.4. Article V.D.4. of the JOA states that "nothing in this paragraph shall be construed to establish a fiduciary relationship between the operator and non-operators for any purpose other than to account for non-operator funds as herein provided." The drafters of the JOA attempted to negate the operator's special or fiduciary obligation to the non-operators by adding the quoted phrase to the JOA. 2 While there are many cases interpreting prior joint operating forms with regard to the operator's relationship and duties toward the non-operators, 3 the JOA has not been interpreted as to the relationship of the operator toward the non-operators and any sort of fiduciary or agency duties it may have.
SOLUTION: The JOA should clearly establish the parties' relationship. The disclaimer of any fiduciary obligation should include reference to any unitization or other agreement also affecting the property that the JOA covers 4 and should provide specifically that there are no fiduciary obligations arising from or related to the JOA, including activities conducted pursuant thereto. To disclaim fiduciary obligations, the following changes to the JOA are suggested:
The last sentence of Article VII, Paragraph A, Liability of Parties, is deleted and the following substituted therefor:
In their relations with each other under and in performance of this...
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