CHAPTER 4 DRILLING AND OTHER DEVELOPMENT OPERATIONS UNDER THE MODEL FORM OPERATING AGREEMENT
| Jurisdiction | United States |
(Dec 2007)
DRILLING AND OTHER DEVELOPMENT OPERATIONS UNDER THE MODEL FORM OPERATING AGREEMENT
Attorney
Mock, Schwabe, Waldo, Elder, Reeves & Bryant PLLC
Oklahoma City, Oklahoma
JOHN R. REEVES
John R. Reeves is a member of the law firm of Mock, Schwabe, Waldo, Elder, Reeves & Bryant PLLC. He has a practice concentrated in oil and gas conservation matters before the Oklahoma Corporation Commission. Mr. Reeves is also a member and past president of The Mineral Lawyers Society of Oklahoma City and of the Oklahoma City Real Property Lawyers Association.
Mr. Reeves graduated from the University of Oklahoma with a B.B.A., with special distinction (1971) and from Florida State University with an M.B.A. and a J.D., with highest honors (1974).
Mr. Reeves is the co-author of "How the Doctrine of Equitable Conversion Affects Land Sale Contracts Forfeiture," 3 Real Estate Law Journal 249, 1975; "Changes to the A.A.P.L. Form 610 Model Form Operating Agreement" appearing in various publications of The Institute of Energy Development; "Significant Cases Governing the Onshore Operating Agreement," 49th Annual Institute on Oil and Gas Law and Taxation (Southwestern Legal Foundation); "Compendium of Cases Construing the Model Form Operating Agreement," 52nd Annual Rocky Mountain Mineral Law Institute (Rocky Mountain Mineral Law Foundation); "The Development of the Model Form Operating Agreement: An Interpretative Accounting," 54 Oklahoma Law Review 211, 2001.
The purpose of a joint operating agreement is to encourage and facilitate the development of oil and gas interests.
Without a mechanism to facilitate and encourage the development of oil and gas interests, such interests would remain merely intangible legal concepts. It is only when a party is willing to assume risk and spend money in connection with the drilling of a well so as to reduce to possession the oil and gas in the earth that the legal concept of a mineral or working interest has any tangible meaning. An operating agreement is aimed at facilitating the development of oil and gas interests so that such interests have true worth and value.
BACKGROUND
Development of the Model Form Operating Agreement
In the oil and gas industry in the continental United States for privately owned lands, a reference to a joint operating agreement normally refers to one of the versions of the American Association of Petroleum Landmen (A.A.P.L.) Form 610 Model Form Operating Agreement. The Model Form Operating Agreement has been in use in the oil and gas industry in one form or another since 1956.1
Prior to 1956, there was no standard form operating agreement that had been accepted and used in the oil and gas industry. The development of the Model Form Operating Agreement began in 1952, when a group of oil and gas representatives, mostly landmen, from Tulsa and Oklahoma City, Oklahoma, decided to attempt to prepare a standard form operating agreement.2 This group invited many of the larger oil and gas companies to attend a meeting in Tulsa, Oklahoma, where the parties discussed the possibility of preparing a standardized joint operating agreement. As a result of this meeting, a steering committee of seven members was appointed which met for two years in an effort to prepare a standardized joint operating agreement. After approximately two years of studying and drafting, a proposed form was finalized for review by a legal committee.3 After approximately two more years of refinement, the agreement was ready to be presented to the oil and gas industry. In 1956, the American Association of Petroleum Landmen (A.A.P.L.) at its annual meeting endorsed
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the proposed Model Form Operating Agreement, which endorsement was essentially the origin of the standardized joint operating agreement that is in use today.
In 1967, the A.A.P.L. revised limited portions of the 1956 form. Furthermore, as a result of an agreement with the Ross-Martin Company, the name of the form agreement was changed from the "Kraftbilt 610 Agreement" to the "A.A.P.L. Form 610" agreement.4
Since the finalization of the original Model Form Operating Agreement in 1956, the agreement has been revised on various occasions. In 1977, a significant restructuring and revision of the 1956 Model Form Operating Agreement resulted in the 1977 A.A.P.L. Form 610 Model Form Operating Agreement. Thereafter, in 1982, the 1977 Model Form Operating Agreement was revised slightly, resulting in the 1982 A.A.P.L. Form 610 Model Form Operating Agreement.
In March 1986, an operating agreement revision committee was formed at the request of then A.A.P.L. President, Mr. Omar Humble, to consider further revisions to the 1982 Model Form Operating Agreement. The committee was composed of three attorneys and four landmen. The drafts from the committee were reviewed and discussed by representatives of nine major oil and gas companies and one large independent oil and gas company. After further refinement, the final draft was submitted to the A.A.P.L. for approval, which resulted in the most recent version of the Model Form Operating Agreement, the 1989 A.A.P.L. Form 610 Model Form Operating Agreement.
The Model Form Operating Agreement constitutes a voluntary agreement entered into by parties, after negotiation, who desire to participate as working interest owners in the development of oil and gas interests within the designated contract or unit area. Given the overall purpose of the Model Form Operating Agreement, the provisions thereof which deal directly with the initial well or with a subsequent well (or other subsequent operation) are frequently reviewed, analyzed and applied by the various landmen and attorneys who must administer the development under such an agreement. It appears that in addition to the accounting procedures attached to the Model Form Operating Agreement, the provisions of the agreement dealing with subsequent wells and other subsequent operations are the most frequently reviewed and applied provisions in the agreement.
TEST OR INITIAL WELL
Selected Provisions of the Model Form Operating Agreement
Each version of the A.A.P.L. Form 610 Model Form Operating Agreement provides for the drilling of a test or initial well within the lands covered by the operating agreement. Each version of the agreement provides for the commencement date, the location and the
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total depth or objective or target formation for such well.5 All versions of the Model Form Operating Agreement provide that the operator is obligated to drill the test or initial well to the designated depth or target formation unless the well encounters specified conditions in the hole, which renders further operations impractical.
The 1956 Model Form Operating Agreement provides in Section 7., "TEST WELL," that the test well is to be drilled to a specified depth "unless granite or other practically impenetrable substance is encountered at a lesser depth or unless all parties agree to complete the well at a lesser depth." Article VI.A., "Initial Well," of the 1977 and 1982 Model Form Operating Agreements expanded this provision to state that the initial well is to be drilled to the specified depth unless granite or other practically impenetrable substance "or condition in the hole, which renders further drilling impractical, is encountered at a lesser depth, or unless all parties agree to complete or abandon the well at a lesser depth."
The last paragraph of Section 7 of the 1956 Model Form Operating Agreement provides that if the operator determines that the test well will not produce oil or gas in paying quantities and it desires to plug and abandon the well as a dry hole, the operator must secure the consent of all parties to the proposed plugging and if the consent is obtained, to plug and abandon the well as promptly as possible. When such provision of the 1956 Model Form Operating Agreement is read in conjunction with Section 16, "ABANDONMENT OF WELLS," of such version, it is unclear whether a party who disagrees with the judgment of the Operator and desires to complete the test well would have the right to take over the well and attempt such a completion. The last paragraph of Article VI.A. of the 1977 and 1982 Model Form Operating Agreements removed any uncertainty by providing that if in the Operator's judgment the initial well is to be plugged and abandoned as a dry hole, the provisions of Article VI.E.1, "Abandonment of Wells," apply, with any party objecting to plugging and abandoning the initial well having the right to take over the well and conduct further operations.
The 1989 Model Form Operating Agreement streamlined the provisions of Article VI.A., "Initial Well". The last sentence of Article VI.A. of the 1989 Model Form Operating Agreement expressly states that the drilling of the initial well and the participation therein by all of the parties to the agreement is "obligatory," subject to the provisions of Article VI.C.1 as to a casing point election, Article VI.F. as to the right to terminate operations and Article XI. as to the occurrence of force majeure. The "obligatory" participation in the test or initial well by the parties to the agreement is assumed and not expressly stated in the prior versions of the agreement. Article VI.F., "Termination of Operations," in the 1989 Model Form Operating Agreement provides that if drilling operations on the initial well are commenced, such operations are not to be terminated without the consent of "parties bearing ___ % of the costs of such operation," with the further proviso that if granite or other practically impenetrable substance or condition in the hole is encountered which renders further operations impractical, then the operator may discontinue operations, with the provisions
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of Article VI.B., "Subsequent Operations," or Article VI.E., "Abandonment of Wells,"...
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