CHAPTER 5 CHANGES WITHIN THE AAPL 610 - 1989 MODEL FORM OPERATING AGREEMENT: HORIZONTAL MODIFICATIONS AND OTHER DEVELOPMENTS

• Jurisdiction: United States

Development Issues in Major Shale Plays
(May 2014)
CHAPTER 5
CHANGES WITHIN THE AAPL 610 - 1989 MODEL FORM OPERATING AGREEMENT: HORIZONTAL MODIFICATIONS AND OTHER DEVELOPMENTS
Worth Carlin
Vice-President Land
Vantage Energy LLC
Englewood, Colorado
Jeff Weems
Partner
Porter Hedges LLP
Houston, Texas

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WORTH CARLIN is currently Vice President-Land with Vantage Energy based in Englewood, Colorado. Worth is a 1977 graduate of the University of Texas at Austin with a BBA in Petroleum Land Management. Prior to coming to Vantage, Worth was Vice President of Land for Range Resources Appalachia. Worth has worked for various oil and gas companies over the past 35 years as a landman, including EnCana Oil & Gas, Kerr-McGee, and Sun Oil/Oryx Energy companies.

JEFF WEEMS is a partner in the Houston law firm Porter Hedges LLP. After years of working on the rigs and as a landman, he has practiced energy law for over 23 years, concentrating on litigation. Mr. Weems primarily represents working interest owners in a variety of energy-related disputes, although he also represents service companies, midstream companies and royalty owners. He is a skilled trial lawyer with a record of success in courts across Texas. Mr. Weems is the Co-chair of the Oil and Gas Section of the Rocky Mountain Mineral Law Foundation's 60th Annual Institute to be held in July 2014 in Vail, Colorado. He is also a member of the American Petroleum Institute - Houston, the Texas Independent Producers and Royalty Owners, and the American Association of Professional Landmen (AAPL). He is a member of the AAPL task force assigned to rewrite the AAPL Model Form Operating Agreement. Mr. Weems also has been selected for inclusion in Texas Super Lawyers in Energy Law. He is a frequent speaker at various seminars and events. In 2010, he was a candidate for Texas Railroad Commissioner. He is a Life Fellow of the Texas Bar Foundation. His representative experience includes serving as lead trial counsel for a mid-sized exploration and production company in a dispute with a seller of a non-operated working interest over an undisclosed over-produced position; lead trial counsel for a mid-sized exploration and production company in a dispute with a processing plant over improper plant rebalancing and suspension of payment; lead counsel for a large exploration and production company in a dispute with the supplier of material; and lead counsel for a midstream product aggregator in litigation brought by a major foreign production company for conversion, RICO, theft and other claims. Mr. Weems received his JD, with honors, from the University of Texas School of Law in 1989 (Associate Editor, Texas Law Review).

Chapter 29

§ 29.01 Introduction^*

Over the last several decades, commentators discussing joint operating agreements (JOA) usually focused their analyses on the intricacies of

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the provisions and the conflicting and disputed interpretations of these agreements by courts in the United States.¹ These analyses and interpretations often involved language provided in model form JOAs (Model Form) published by the American Association of Professional Landmen (AAPL).² These analyses, disputes, and interpretations encouraged landmen to customize the current Model Form to fit the expectations of the parties to a particular transaction.³ In addition, changes and developments in industry practices spurred customization; one of these industry developments has been the explosion of horizontal drilling.

In the last two decades, horizontal drilling has expanded drastically in North America.⁴ This development prompted land departments around the country to craft custom revisions and additions to the Model Form to handle aspects of horizontal drilling and production operations not addressed. The proliferation of these custom forms defeats a key function of the Model Form, which is to provide certainty and uniformity in the industry.

In response, the AAPL formed a committee to gather custom forms, to analyze the needs in the industry, and to craft a versatile Model Form that included language for horizontal operations.⁵ Recently, the AAPL has approved the committee's initial response, the AAPL 610 - 1989 Model Form Operating Agreement: Horizontal Modifications (Horizontal Form).

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While gathering information and drafting the Horizontal Form, the committee recognized that legal and operational issues beyond horizontal drilling have arisen since the implementation of the 1989 Model Form. As a result, the committee is now gathering information and drafting an entirely new Model Form, one that will include both the horizontal modifications and other revisions meant to address particular issues that have arisen in the last 24 years.

This chapter first discusses the Horizontal Form and the rationale behind the new language. Next it reviews a couple of recent cases interpreting particular clauses in Model Forms that have special importance to the planned additional modifications. Stemming from this review, the chapter concludes by addressing particular changes contemplated for the Model Form planned for the near future.

§ 29.02 History

In 1956, the AAPL published the first Model Form for joint operations.⁶ In response to industry demand, a new Model Form was published in 1977. The 1977 form was more comprehensive, representing the collective wisdom of the industry and those who wrestled daily with the business relationships involved in exploring for oil and gas. The 1977 form provided the basic template for its successor agreements, the 1982 and the 1989 Model Forms. Each of the Model Forms reflected changes to the previous forms that had been suggested by practitioners and spurred by industry developments.

Around the time of the publication of the 1989 Model Form, a new groundswell in the energy industry was beginning. Although wells had been drilled horizontally for decades, such operations were typically not conducted on a widespread, fieldwide basis. That changed. Throughout the 1990s and 2000s, the use of horizontal drilling grew steadily and in May 2009 reached the point at which the percentage of wells drilled horizontally exceeded that of vertical wells.⁷ In 2013, the number of wells drilling horizontally in any given week in North America is about two and one-half times as great as the number drilling vertically.⁸

The reasons for this expansion are legion. Horizontal wells expose more of the wellbore to the producing formation, allowing for greater and faster

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recovery of the resources therein.⁹ Advanced applications of hydraulic fracturing in shale and other tight formations have transformed zones previously considered unproductive into viable reservoirs.¹⁰ Below is a chart of the expansion in oil production in the Eagle Ford Shale in Texas--almost all of which is derived from wells that were horizontally drilled and hydraulically fractured.

OIL PRODUCTION¹¹

Eagle Ford Shale - Annual Growth;

B/D	Growth
2008	358
2009	844	136%
2010	11,986	1,320%
2011	126,459	955%
2012	338,911	168%

Although more expensive to drill,¹² the speed of resource production and the inherent efficiency in needing fewer wells to produce the same volumes ensure that horizontal drilling is here to stay.

Recognizing the need for cost-saving measures in these expensive wells, the industry has developed several innovative procedures and approaches to horizontal drilling. From the use of rigs intended to drill only the vertical portion of the well¹³ to the idea of using a single surface location (and common production equipment) for multiple wells,¹⁴ the industry continues to address and work on reducing the costs associated with drilling and development with horizontal wells. The introduction of these new practices, however, requires that they be addressed in the document primarily

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responsible for governing the relationship of the parties participating in these operations: the Model Form.

Before exploring and illustrating the language and concepts introduced in the Horizontal Form, a couple of standards regarding model forms bear repeating. First, a model form is not meant to encompass every potential issue or relationship in joint operations.¹⁵ The parties to an agreement must be aware of and account for particular factors that affect the operations and activities in their contract area.

Second, the provisions added to create the Horizontal Form do not reflect all of the changes the committee is considering; rather, these provisions were meant to expeditiously get a Model Form into circulation that addressed many of the common issues involving horizontal development. That said, note that the Horizontal Form still can be used for a vertical well. The new and modified definitions, together with all of the new clauses and segments, expressly make their application contingent upon the operations or proposals involving a horizontal well. The old provisions remain intact.

§ 29.03 New Provisions in the Horizontal Form

As we discuss the new revisions contained in the Horizontal Form, we first tip our hat to the many commentators who foresaw the need for changes related to horizontal operations and, in some instances, gathered industry suggestions into these prior publications.¹⁶

[1] Article I--Definitions

Crafting the Horizontal Form required the committee to add and change a series of definitions that address new terms and concepts unique to horizontal operations.¹⁷

[a] AFE

Modern exploration activities are very expensive and involve substantial and intensive preliminary planning. A part of this preliminary work involves the preparation and distribution of an Authority for Expenditure (AFE), which is the cost estimate for a proposed operation. As noted below, the Horizontal Form expands the requirements for using an AFE,

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mandating one for each proposal for a Horizontal Well under...