CHAPTER 3 THE OPERATOR UNDER OIL & GAS JOINT OPERATING AGREEMENTS--THE 3 RS OF RESPONSIBILITIES, REMOVAL, AND REPLACEMENT

• Jurisdiction: United States

Joint Operations and the New AAPL Form 610-2015 Model Form Operating Agreement (Dec 2017)
CHAPTER 3
THE OPERATOR UNDER OIL & GAS JOINT OPERATING AGREEMENTS--THE 3 RS OF RESPONSIBILITIES, REMOVAL, AND REPLACEMENT
Keith B. Hall
Director
Mineral Law Institute
Campanile Charities Associate Professor of Energy Law
Louisiana State University Law School
Baton Rouge, LA

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KEITH B. HALL is the Director of the Mineral Law Institute and the Campanile Charities Professor of Energy Law at Louisiana State University Law School in Baton Rouge, Louisiana where he teaches Mineral Rights, Advanced Mineral Law, International Petroleum Transactions, and an Energy Law Seminar that focuses on environmental issues relating to the oil and gas industry. Before joining LSU Law School, he was member of Stone Pigman Walther Wittmann in New Orleans, where he practiced law for 16 years, focusing his practice on oil and gas law, environmental law, and toxic tort litigation. He is a member of the Board of Editors for the Oil & Gas Reporter, the Board of Trustees for the Rocky Mountain Mineral Law Foundation, the Advisory Council for the Institute for Energy Law, and the Board of Trustees for the Energy & Mineral Law Foundation. He previously served as Chair of the Louisiana State Bar Association's Environmental Law Section. Before attending law school, he earned a B.S. in Chemical Engineering from Louisiana State University and worked for eight years as a chemical engineer.

Contents

I. Introduction

II. The Initial Selection of Operator

A. The Operator Generally Must Own an Interest Governed by the JOA

B. Selecting an Operator that Does Not Own an Interest

C. Considerations in the International Context

III. Duties of the Operator

A. Operational Duties

1. Duty to test

2. Duty to drill to objective Zones and to the proposed Displacement

B. Financial Duties

1. Competitive Rates

2. Management of Joint Account

3. Protecting JOA Assets Against Liens

4. Acting as Custodian of Funds

C. Informational and Reporting Duties

1. Reporting to Regulators

2. Providing Information to Non-Operators

IV. Standard of Care

A. The Standard Specified

B. Attempts to Hold Operator to Fiduciary or Other Heightened Standards

1. Elements of Partnerships, Mining Partnerships, and Joint Ventures

a. Elements of a Partnership

b. Elements of a Mining Partnership

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c. Elements of a Joint Venture

2. Form 610's Efforts to Avoid Partnership, Mining Partnership, or Joint Venture

V. Relationship of Operator to Non-Operators

A. Independent Contractor Status and Avoiding Principal-Agency Relationship

1. The North American Forms--AAPL and CAPL

2. Forms Outside North America

B. Agency Status for Limited Purposes

C. Serving on a No-Gain, No-Loss Basis

D. Exculpatory Clauses

1. AAPL Forms

2. Other Forms

VI. Resignations of the Operator

A. Express Resignations

B. Deemed Resignations of Operator

C. Effect of Bankruptcy on Operator Status

D. Other Forms

VII. Removal of Operator

A. General Rules for Removal of Operator Under AAPL Forms

1. The Substantive Grounds Necessary for Removal

2. Procedure for Removal

B. Removal of Non-Owning Operator

C. Other Forms

VIII. Selection of Successor Operator

A. Voting and Election Procedures

B. The General Requirement that a Successor Operator Own an Interest

C. Other Forms

IX. Transfer of Operator's Interest to Affiliate

X. Assignment of Right to Operate to Non-Affiliate

A. AAPL Form 610

B. AAPL 710

C. AMPLA

XI. Conclusion

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I. Introduction

Next to the oil and gas lease, perhaps the most important type of contract governing oil and gas exploration and production rights is the joint operating agreement. A joint operating agreement typically is entered by parties that each own exploration and production rights in the same tract or in nearby tracts that the parties believe should be operated in a coordinated fashion. Sometimes, the parties will co-own a single oil and gas leasehold. Other times, each of the parties will own separate oil and gas lease interests that cover nearby tracts or perhaps even cover the same tract. Occasionally, the exploration and production rights of one or more of the parties to the operating agreement may be based on that party's ownership of either the land or a severed mineral interest, rather than an oil and gas lease.

The purpose of the joint operating agreement is to govern the exploration and production process, as well as the parties' rights and duties with respect to one another. Joint operating agreements almost always name one of the parties as the "Operator," and vests that party with the exclusive right to operate the parties' mineral interests in the area where the agreement applies, which is often called the "Contract Area" or something similar.

This article covers issues relating to the Operator,¹ including such topics as the selection of the Operator, the relationship between the Operator and non-operator parties, the duties of the Operator, the standard of care to which the Operator is held, resignation and removal of Operators, the selection of a successor Operator after an Operator resigns or is removed, whether

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Operators can assign the Operatorship, and the potential right of non-owners (persons who do not own an operating right in the mineral interests covered by the agreement) to serve as Operator.

To some extent, this article will cover general legal principles and practices relating to the position of Operator, but the article also will give special attention to how various issues are covered under certain model form joint operating agreements. Such attention is merited because, although some parties draft their own operating agreements, it is very common for parties to use model forms as their joint operating agreements. Further, there are only a handful of commonly used forms.

In the United States, the most commonly used model form for onshore joint operations is the AAPL Form 610.² The first version of the Form 610 was the 1956 version. Later versions include the 1977 version, 1982 version, 1989 version, a version of the 1989 form that was modified in 2013 with suggested revisions for use with horizontal wells, and finally the "2015" version, which was released in 2016. This article gives particular attention to the 2015 version of the AAPL Form 610, the 1989 version of the Form, and the differences between the two, though earlier versions of the AAPL Form 610 will also be discussed. To a still lesser extent, certain other model forms will be discussed--primarily in footnotes. The model forms that will be discussed in detail or in passing in this article the:

• AAPL Form 610 (2015)

• AAPL Form 610 (1989)

• Older versions of the AAPL Form 610 (1982, 1977, and 1956)

• The AAPL 610-HN (a version of the 1989 Form modified for use with horizontal wells)

• AAPL Form 710 (designed for offshore)

• AAPL Form 810 (designed for deep water operations)

• CAPL 2007 ³ (a form often used in Canada)

• AIPN Model Form (2012) ⁴ (a form commonly used internationally)

• UKCS 2009 ⁵ (a form used on the United Kingdom's continental shelf)

• AMPLA (an Australian form).

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II. The Initial Selection of Operator

As a general rule, it would be inefficient if more than one of the parties to a joint operating agreement attempted to conduct operations.⁶ Accordingly, joint operating agreements almost always provide that a single party will be designated as the "Operator," and that only the Operator will have authority to conduct most operations.⁷ For example, Article V.A of the 2015 AAPL Form states that the Operator "shall conduct and direct and have full control of all operations conducted under this agreement as permitted and required by, and within the limits of this agreement." The 1989 Form had very similar language, as did the 1982 and 1979 versions of Form 610.⁸

Typically, if parties contemplate agreeing to a JOA, they will select an Operator prior to executing the JOA, as part of their negotiations regarding the JOA (as opposing to executing a JOA and then selecting the Operator later). Indeed, most standard JOA forms provide a blank for the parties to insert the name of the party designated as Operator. This is the case with the 2015 AAPL Form. The first sentence of Article V.A of that form begins: "_______ shall

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be the Operator of the Contract Area...." In the 1989, 1982, and 1977 Forms, the first sentence of Article V.A begins exactly the same way.⁹

The parties to a joint operating agreement usually select the party with the largest working interest to be the Operator,¹⁰ and some model forms clearly assume that this will be the case.¹¹ Commentators have explained that this typical practice is grounded in the rationale that the company with the largest interest will have the greatest motivation to operate prudently and efficiently.¹² Further, the party with the largest ownership interest often desires to be Operator. Such a desire generally will not be based on hopes of making a profit by serving in the role as Operator. As discussed further in Section V(C) of this paper, the Operator generally is not entitled to make a profit from its service as Operator, though it is entitled to reimbursement of its expenses. In part, the desire to serve as Operator may arise from the attitude encapsulated in the old adage, "If you want something done right, do it yourself." But perhaps the primary reason a company might wish to serve as Operator is that the Operator "de facto has much more say" and control of operations than do any of the other parties.¹³

Notwithstanding the general tendency to choose the party with the largest ownership interest as Operator, parties are free to agree to the selection of some other company as Operator.

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And parties sometimes do this, particularly if a company with...