CHAPTER 3 AN OVERVIEW OF ARTICLE VI THE DRILLING AND DEVELOPMENT ARTICLE OF THE A.A.P.L. FORM 610-1989 MODEL FORM OPERATING AGREEMENT
| Jurisdiction | United States |
(May 1990)
AN OVERVIEW OF ARTICLE VI THE DRILLING AND DEVELOPMENT ARTICLE OF THE A.A.P.L. FORM 610-1989 MODEL FORM OPERATING AGREEMENT
Exxon Company U.S.A.
Houston, Texas
TABLE OF CONTENTS
Page
PURPOSE AND SCOPE
INTRODUCTION
ARTICLES: VI.A. Initial Well
VI.B. Subsequent Operations
VI.B.1. Proposed Operations
VI.B.2. Operations By Less Than All Parties
VI.B.2.(a) Determination of Participation
VI.B.2.(b) Relinquishment of Interest for Non-Participation
VI.B.2.(c) Reworking, Recompleting or Plugging Back
VI.B.2.(d) Recoupment Matters
VI.B.3. Stand-by Costs
VI.B.4. Deepening
VI.B.5. Sidetracking
VI.B.6. Order of Preference of Operations
VI.B.7. Conformity to Spacing Pattern
VI.B.8. Paying Wells
VI.C. Completion of Wells, Reworking and Plugging Back
VI.C.1. Completion
VI.C.2. Rework, Recomplete or Plug Back
VI.D. Other Operations
VI.E. Abandonment of Wells
VI.E.1. Abandonment of Dry Holes
VI.E.2. Abandonment of Wells That Have Produced
VI.E.3. Abandonment of Non-Consent Operations
VI.F. Termination of Operations
VI.G. Taking Production in Kind
CONCLUSION
EXHIBITS: "A" 1956 Model Form Operating Agreement: Election Period 3-20
"B" 1977 Model Form Operating Agreement: Election Period 3-22
"C" 1982 Model Form Operating Agreement: Election Period 3-24
"D" 1989 Model Form Operating Agreement: Election Period 3-26
"D-1" 1989 Model Form Operating Agreement: Election Period With Competing Proposal 3-28
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PURPOSE AND SCOPE
The purpose and scope of this paper is to provide an overview of Article VI of the new A.A.P.L. Form 610-1989 Model Form Operating Agreement with comments on how it relates to prior Operating Agreements and on some of the new provisions contained therein. Throughout this paper I will refer to the A.A.P.L. Form 610-1956 Model Form Operating Agreement, the A.A.P.L. Form 610-1977 Model Form Operating Agreement, the A.A.P.L. Form 610-1982 Model Form Operating Agreement and the A.A.P.L. Form 610-1989 Model Form Operating Agreement as the '56, '77, '82 or '89 Agreements, respectively. This paper is not intended to be an exhaustive commentary on the '89 Agreement and should not be used as such. Any questions relating to the provisions of any of the agreements discussed in this paper should be addressed to the specific language contained within the governing agreement. The opinions expressed in this paper are those of the author and do not necessarily reflect those of Exxon Corporation or any of its personnel.
INTRODUCTION
The intent of the current revision of the Operating Agreement was originally aimed at resolving problems created by parties filing for bankruptcy protection under prior agreements. The committee formed by the A.A.P.L. took this opportunity not only to address the bankruptcy problems but also to address other problems and pitfalls they saw contained within the prior agreements. The revisions to Article IV, the Drilling and Development Article, deal primarily with those problems and pitfalls.
Some have commented that the '89 Agreement is too complicated, attempts to resolve problems that are best left unresolved and gives certain parties to the agreement rights they did not have under prior agreements. Generally, I can see the point such critics are making. However, a close scrutiny of the agreement, in light of former agreements, should reveal that such negative reaction to the '89 Agreement is generally unwarranted. I am sure that similar reactions resulted when the '77 and '82 Agreements were first introduced.
If I were to characterize the theme of the revisions made to Article VI of the '89 Agreement, it would be that such revisions were made to "tighten-up" the agreement. This theme, however obvious, should not be perceived as something new or revolutionary. All the Agreements ('56, '77, '82 and '89), in a broad
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sense, generally are attempting to accomplish the same thing. The '77 Agreement attempted to "tighten-up" the '56 Agreement and resolve some of its problems and pitfalls while the '82 Agreement did the same for the '77 Agreement. The '89 Agreement should be viewed as the next step in the evolutionary process and any new problems or pitfalls it creates will more than likely be addressed in the next revision of the agreement.
Probably the most damaging criticism about the revisions found in Article VI of the '89 Agreement is that such revisions give certain parties rights that they did not previously have under prior agreements. To approach an answer to this claim, one must first assess what those particular rights are and how they have been increased by the current revisions. If you say that one such right is the right of a non-consenting party to participate in the deepening of a non-consent well, you would have to say that such non-consenting party had, under prior agreements, relinquished its rights to the zones below the total depth either proposed or drilled in the non-consent well. This is certainly not the case in any of the prior agreements. The prior agreements, at best, are simply silent on the issue. Logic, however, would say that the non-consenting party did not relinquish such rights and the '89 Agreement simply attempts to provide an equitable means for a non-consenting party to participate in the deepening of a well that is proposed to be deepened to zones where it has not relinquished its rights.
Another right that is perceived as being increased by the revisions to the '89 Agreement is the right of a non-consenting party to participate in a non-consent well if the well is completed at a depth shallower than the originally proposed depth. A close review of this provision (Article VI.B.2.b., page 7, lines 18 through 26) would indicate that it deals more with assuring rights than expanding rights. A non-consenting party who may benefit from this provision would be one that would not have objected to the drilling of a well, but rather, by means of the competing proposal provision (VI B.6. Order of Preference of Operations), would have indicated its desire to drill a well to a shallower objective. It would be only fair therefore, if the well did not reach the original objective by virtue of a decision by the consenting parties, (and not as a result of mechanical problems) the non-consenting party should have the right to participate in such well if completed in a shallower zone. The right which may be increased by this provision is the right by the non-consenting party to a "free look" or the ability to judge the outcome of the well (through the review of well logs and well data) before having to pay any costs. The consenting parties, however, are aware of this when they make the decision to complete the well at a shallower depth. This "free look" benefit should act to prevent a party from proposing a well to a deeper zone simply to usurp the rights of a non-consenting party while all along intending to complete the well in shallower zones; zones which the non-consenting party would not otherwise have consented to relinquish its rights in.
It is important to note all the conditions which must exist to effectuate this provision. Those conditions are:
(a) The requirement for a competing proposal to have occurred.
(b) The non-consenting party to have elected under such competing proposal to participate in a well to be drilled to a shallower depth.
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(C) The non-consent well is not drilled to the originally proposed depth by election of the consenting parties and not as a result of mechanical problems.
(d) The non-consenting party must elect to participate in any zone being proposed to be completed, whether or not it is the zone it originally elected (under the competing proposal).
The option afforded by the '89 Agreement to reduce the previously required 100% approval to perform certain work on a well which would exceed the amount established under the limitation of expenditures provision (Article VI.D. Other Operations) may be considered as an increase in the rights of large working interest owners. It has not increased such rights, in my opinion, as the percentage of interest required for approval to undertake such an operation is a negotiated amount. Such percentage of interest approval can still be 100% if the parties so choose. Most operators should welcome this revision as it allows for a democratic election based upon the respective interests of the parties, to determine if such an operation should be performed. This revision does not disrupt the cost/benefits ratio of any of the parties.
The remainder of this paper will follow the outline of Article VI of the '89 Agreement in discussing the provisions contained therein. Unless otherwise indicated the definitions of the terms used in this paper are the same as provided under Article I, Definitions, of the '89 Agreement.
:VI.A. INITIAL WELL
The language contained in the '89 Agreements regarding the initial well is essentially identical to the three previous agreements. The agreements provide that on or before a specified date the operator shall commence the drilling of the initial well at a specified location and shall thereafter continue the drilling of the well with due diligence to a specified depth and/or formation. The '56 Agreement recognized that substances may be encountered in drilling the well which would render the further drilling impractical and therefore allowed the operator to stop drilling the well in this event at a lesser depth. The '77 and '82 Agreements expanded this by also allowing for other conditions in the hole that would render further drilling impractical. The '89 Agreement diverges significantly from the other agreements since such conditions in the hole are not discussed at this point. The '89 Agreement simply describes the drilling of the initial well as being obligatory and states that any termination of operations will be done...
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