CHAPTER 5 BIDDING AND JOINT OPERATING AGREEMENTS: SIMILARITIES AND DIFFERENCES IN GULF OF MEXICO AGREEMENTS AND ALASKA AGREEMENTS
| Jurisdiction | United States |
(May 1989)
BIDDING AND JOINT OPERATING AGREEMENTS: SIMILARITIES AND DIFFERENCES IN GULF OF MEXICO AGREEMENTS AND ALASKA AGREEMENTS
Davis & Hogwood
Houston, Texas
Nothing is more exciting than anticipating the creation or review of the necessary instruments needed to conduct operations in the waters of the Gulf of Mexico or in Alaska, both onshore and offshore. This paper was conceived to review bidding agreements and joint operating agreements, which agreements are the primary basis for bringing to conclusion all scientific and engineering endeavors culminating in the production of oil and/or gas. Without these two agreements in place, obviously drafted to reflect the client company's philosophy, the obtaining of leases, the drilling of the wells and the conducting of operations in the above two areas could not be accomplished.
Perhaps the hardest drafting decision in designing a paper is to decide what subjects will and will not be covered and from what perspective the paper will be presented. This paper will not review the regulatory schemata governing oil and gas operations in either the State of Alaska or Gulf of Mexico, be they state or federal. The paper will also not discuss any of the typical "boiler plate" language common to many agreements. The author recognizes that not every provision in either agreement is covered by this paper. Rather, only certain provisions have been chosen as being substantive provisions necessitating review and discussion. Hopefully, in the pages to follow, the provisions not reviewed here due to time and space limitations will be reviewed by others in subsequent papers.
This paper is agreement driven. That is, the author solicited and received from many companies examples of not only their own particular form of agreement but examples of agreements that they had entered into with other companies not directly surveyed. The author has been careful to keep confidential the identities of those companies that submitted the various agreements from being associated with any particular provision. The reader is cautioned that no conclusions can be drawn from the paper about which company submitted which provision. Given the time factor within which to write the paper, the author recognizes that not all companies participating in the two above identified areas were contacted. However, a diligent effort was made to solicit sample agreements from both the major participants in a given area as well as smaller companies also active in that particular area.
This paper was drafted not as a suggested model form for the provisions examined but as a starting point for the reader, when confronted with the
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possibility of drafting or commenting on a similar agreement, to have an idea of the apparent majority and potential minority positions on a given provision. It is equally as important to explore the underlying philosophy for the various provisions so that the reader can determine if its client company has the same or similar philosophy.
The format of the paper is premised upon starting with a review of Gulf of Mexico agreements and provisions and then comparing the similarities and differences in those provisions with the similar provisions in the Alaska agreements. The author has chosen to only reproduce a sample provision from the relevant Gulf of Mexico agreements. The discussion of the relevant provision will hopefully be better facilitated by a visual reference to an actual provision. Generally, the author found that Alaska agreements/provisions were too dissimilar to allow a representative provision to be chosen and reproduced for reference purposes coupled with the fact that it appears more of the readers would be familiar with Gulf of Mexico agreements as a starting reference point. A general discussion will take place for each provision, noting preliminarily the underlying philosophy, where applicable. Any significant minority provisions will also be noted as well. What the author hopes to accomplish with this article is to: (1) identify the more common provisions in the above two agreements as they occur in the two areas, (2) point out the philosophy giving rise to such provisions so that the reader, if faced with the drafting or reviewing of such a provision or agreement, can examine its own company's philosophy to determine if it is similar or dissimilar to that expressed in the sample clause and (3) enable the reader, if he or she has an expertise in one of the areas examined, to be able to transfer that expertise with relative ease to another area by being familiar with the pertinent provisions of the bidding and operating agreements covered in this paper.
Lastly, the author recognizes that this paper is not the "end" of the review and comparison of Gulf of Mexico and Alaska agreements nor the various provisions contained in them. Rather, this paper is merely the start of the review and comment on such agreements and provisions. It is not, as are some papers, advocating the use of one form of provision over another. It is intended only as a factual review of the pertinent provisions in both agreements and areas as seen in the agreements provided by the responding companies.
Bidding Agreements
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PROVISION ONE:
SCOPE OF AGREEMENT AND PARTICIPATION
This Agreement shall apply only to the tract(s) which are described in Exhibit "A" attached hereto, excepting any such tract(s) which may hereafter be excluded from this Agreement by the parties hereto. It being understood that tracts not now subject to this Agreement may be added by unanimous agreement of the parties to amend said Exhibit "A".
The parties hereto shall have the right to participate in the acquisition and ownership of leases on the tracts covered by this Agreement in the following proportions:
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Provision One — Scope of Agreement and Participation
Gulf of Mexico
This provision addresses the preliminarily issues of what Lease Sale the bidding agreement is to cover as well as what blocks (or tracts, as applicable) are to be reviewed and possibly governed by the agreement. In most agreements, this provision has been refined by many companies and appears to be strikingly similar throughout the industry. The author could find no exceptions to the rule that all bidding agreements for the Gulf of Mexico are block specific. That is, each bidding agreement is tailored around the parties selecting what blocks they will be interested in studying as a group and possibly bidding on at the respective lease sale.
Each party is responsible for placing its block nominations within the purview of the agreement for consideration. No agreement reviewed applies to the entire sale area as drafted. Rather, the parties to the bidding agreement must affirmatively place all blocks they are interested in on a formal list to be reviewed by the other parties to the agreement. After review and consideration, it is possible but certainly not probable that all blocks in a sale area could be subject to the bidding agreement. The underlying philosophy appears to be that no block will be considered unless one or more parties to the agreement affirmatively place such block on a list for consideration. Should a client company want to make the entire sale area subject to the bidding agreement, not only would the sample clause have to be altered, but the sponsoring company would have, in the author's opinion, a difficult selling job ahead of it. Given the long history of offshore sales in the Gulf, it appears that most companies have commitments in various parts of the Gulf which do not allow them to contract on a sale basis. Rather, given those pre-existing commitments, the block specific agreement allows each company to decide what blocks it can bid on and what blocks it has pre-existing contractual commitments on. It can then remove itself from any participation on the previously committed-to blocks with little effort under the framework of the agreement.
This provision also covers the initial percentages the parties will bid on as well as how they will own any leases awarded pursuant to a successful bid. The majority of agreements did not provide for any mechanism for the remaining party(ies) to assume any party's interest should that party not wish to participate in one or more bids. Rather, it left to the parties how they would assume a non-participating party's interest and in what proportions. If
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the parties did not otherwise provide for a differing method of sharing in the bids, the percentages set out in the agreement would be utilized.
The minority position in the agreements reviewed did not leave it to the parties to decide how to pick up and share a non-participating party's interest. Rather, they provided for a pro rata sharing of the non-participating party's interest by the remaining parties unless one or more of the remaining parties did not want that much interest, at which point, the parties could go outside of the bid group and bring in as many additional parties as they deemed necessary to pick up the non-participating party's interest.
Alaska
Contrary to popular belief, most Alaska bidding agreements are also block specific. Less than forty per cent (40%) of the agreements reviewed applied to all blocks (or tracts, if a State of Alaska sale was involved) being offered at the sale. As with Gulf of Mexico agreements, the Alaska bidding agreements required the parties to (1) have previously designated those blocks within the sale area that would be subject to the agreement or (2) designate, by memorandum, those blocks that one or more of the parties were interested in placing under the terms of the bidding agreement. Apparently in Alaska, as in the Gulf, the parties are aware, at the time of the execution of the bidding agreement, of their various areas of mutual interest...
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