CHAPTER 14 EXTRA PROVISIONS—THE FINAL WORD IN THE AAPL MODEL FORM OPERATING AGREEMENT
| Jurisdiction | United States |
(Nov 2016)
EXTRA PROVISIONS—THE FINAL WORD IN THE AAPL MODEL FORM OPERATING AGREEMENT
McClure & Cross LLP
4600 Greenville Avenue, Suite 126
Dallas Texas 75206
214-329-1241
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TERRY I. CROSS is a founding partner of McClure & Cross LLP, established in 2008, and practices in the Dallas office of that firm. He has over 39 years of experience in providing legal counsel to the oil and gas industry as in-house counsel in a major oil company, partner in a large law firm energy practice, and now in the boutique oil and gas firm of McClure & Cross. He is licensed in North Dakota and Texas and board certified in Oil, Gas and Mineral Law by the Board of Specialization of the State Bar of Texas. He regularly teaches Texas Land Titles as Adjunct Professor at SMU Dedman School of Law and is a frequent speaker and author on energy finance, oil and gas law and industry contracts. He is a member of the joint editorial board for the development of title examination standards established by the Real Property, Probate and Trust Law and Oil, Gas and Energy Resources Sections of the State Bar of Texas. Cross was selected for the 23rd Edition of The Best Lawyers in America in Energy and Natural Resources Law and named the Best Lawyers? "Lawyer of the Year" in Energy Law for Dallas/Fort Worth for both 2015 and 2017, and "Lawyer of the Year in Natural Resources Law for Dallas/Fort Worth for 2016.
EXTRA PROVISIONS - THE FINAL WORD IN THE AAPL MODEL FORM OPERATING AGREEMENT
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Table of Contents
I. Introduction
II. Relationship Issues
A. Relation of Extra Provisions to the Boilerplate
B. Using Extra Provisions to Reference or Incorporate Other Documents
III. Regulating Operations
A. Order of Preference of Operations/ Priority of Further Operations in a Well
B. Speed Bumps
IV. Modifying the Consequence of Non-Consent Elections
A. Blackout
B. Farmout
C. Scale Back
V. Expanding Coverage of the Operating Agreement
A. Seismic Operations
B Downstream Facilities
C. What About Article VI.D?
VI. Area of Mutual Interest or "AMI"
VII. Empower the Operator / Rein in the Operator
A. Empower the Operator
1. Promoter Issues
2. Dealing with Fragmentation of Ownership
3. Enhancing the Operator's Position Against Payment Issues
B. Rein in the Operator
1. Remove the Operator- No "Operator for Life"
2. No Commingled Funds
3. Duty of Operator to Pay Royalty
4. Challenging Operator Charges
5. Supplemental AFEs and Cost Overrun Issues
6. Tag-Along
VIII. State Specific and Miscellaneous Provisions
A. Lien Provisions
B. Express Negligence Rule
C. We Don't Like That Case
D. DJ Basin Horizontal Offset Policy
E. Audits
D. Arbitration
F. Negating Duty of Good Faith- It's a Texas Thing
IX. Conclusion
I. Introduction1
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All of the AAPL versions of the Form 610 Model Form Joint Operating Agreement, from the first in 1956 to the new 2015 edition, end with a prompt for Other Provisions (herein "Extra Provisions"). This is Article XVI of the new form. In some instances, there may be nothing added here and in others the Extra Provisions may be lengthier than the seventeen or so pages of the standard form. This is where individual owners attempt to address issues not covered by the model form or address them in a different manner than the form does. In many instances, owners, without the benefit of any AAPL drafting committee, use this space to cover their pet peeves and to antidote the most recent bad thing that happened to them, so that we often get ill-conceived or poorly drafted deviations from the form and sometimes solutions in search of a problem. But there are often appropriate and beneficial Extra Provisions that acknowledge recent judicial decisions, changes in regulatory schemes or in markets, or specific asset and deal issues that need to be addressed. This article will identify and discuss the most common subjects and language provisions of these Extra Provisions,2 as well as some of the reported decisions that have arisen from them. Capitalized terms used below have the meaning assigned in the AAPL model form operating agreement.
The Extra Provision space has been the incubator for new developments in the AAPL forms through the various iterations, and the 2015 form contains new provisions that had their genesis as somebody's "extra provisions" add-on to a prior edition of the model form. Article V.A of the new form makes the Operator agent and attorney in fact for the purpose of executing pooling declarations authorized by the oil and gas leases contributed by the various parties. This
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appointment is probably a bit weaker than most of the tailor-made powers of attorney found tagged onto earlier operating agreements as an Extra Provision. The mechanism of the 2015 version that empowers the Operator, as agent, requires a notice by Operator and an affirmative or no response from the respective principal:
...only be exercised by Operator after providing written notice including a copy of the proposed pooling declaration or communitization agreement to Non-Operators, and shall be binding upon any Non-Operator failing to provide to Operator a written objection within ten (10) days after such notice ....
This device will leave title examiners pondering the questions of whether the threshold activating notices required by Article V.A were given, whether objections were made and, if the power became effective, whether the power was revoked before it was exercised. The tailor-made Extra Provision versions of a power of attorney for the Operator were generally effective immediately and only revocable by filing an instrument in the public records, which allowed the title examiners to rely solely on the public records in confirming the effectiveness of the power of attorney.
Another new provision of the 2015 form is the final paragraph of Article V.A., which expressly contemplates the possibility of a non-owning Operator. New Article V.B.5 provides that a non-owning Operator can be removed by a majority in ownership with or without cause, which would typically be the case with an unaffiliated contract operator, and reflects some contemplation that the model form may be used to retain such an operator. Even so, the relationship with an independent contract operator is best documented with a contract that expressly acknowledges the status of the contractor as "hired help." This contract will more closely resemble the forms typically used for "master service agreements" than the model form operating agreement.
Rather than facilitating the hiring of third party contract operators, the new accommodation of a non-owning Operator in the model form is first and foremost in recognition of the reality that owners are using non-owning affiliates to serve as Operator. If Frenetic Resources, LLC owns the majority interest in the Contract Area, and thus is the presumptive Operator, it will propose that its affiliate, Frenetic Operating, LLC, be the Operator. Typically, this affiliate does-not own any oil and gas assets and is virtually a no-asset "operating company" formed primarily to shield the affiliate that owns the assets from liabilities arising from operations. As this practice has escalated, language has been inserted in the Extra Provisions to deactivate the portion of Article V.A.1 of the 1989 form (Article V of the 1977 and 1982 forms) that provides that when the Operator "no longer owns an interest hereunder in the Contract Area," it is deemed to have resigned as Operator. Article V.A of the 2015 form now allows a non-owning Operator so long as the parties "...enter into a separate agreement, or insert Article XVI provisions to this agreement, to govern the relationship between them." Thus, we now have an explicit prompt to add an Extra Provision or enter into a separate agreement. The issues that need to be covered include: (1) Does the owning affiliate of the non-owning Operator guarantee all performance of the Operator? Otherwise, the undertakings from the Operator, including the allocation of risk and liability provisions of Article V.A and the lien against the Operator's interest under Article VII.B, do not have the same effect as they would with an owning Operator; and (2) Can the non-owning Operator propose operations and thereby trigger non-consent elections? (Article VI.B.1 allows "any party" to propose operations.) Or conversely, must an owner propose operations?
II. Relationship Issues
A. Relation of Extra Provisions to the Boilerplate
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The Extra Provisions are usually prefaced with language that explicitly gives these provisions priority over conflicting provisions. Even without that preface, the mere fact that the Extra Provisions are tagged onto the preprinted form generally will result in an Extra Provision having priority over conflicting provisions in the form: "Written or typed matter prevails over printed matter." 11 Williston on Contracts ? 32:13 (4th ed.). The 1989H form, which included some Extra Provisions as part of the form, used the following language to establish the Extra Provisions as the trump in the event of conflict:
Conflict of Terms:
Notwithstanding anything in this agreement to the contrary, in the event of any conflict between the provisions of Article I through XV of this agreement and the provisions of this Article XVI, the provisions of this Article XVI shall govern.
In the 2015 form, Article XVI is blank and the "trumping language" has been moved to Article XV.E:
Conflict of Terms:
Notwithstanding anything in this agreement to the contrary, in the event of any conflict between the provisions of Articles I through XV of this agreement and the provisions of Article XVI, if any, the provisions of Article XVI, if any, shall govern.
When creating or adopting an Extra...
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