CHAPTER 5 LIABILITIES OF THE PARTIES TO A MODEL FORM JOINT OPERATING AGREEMENT: WHO IS RESPONSIBLE FOR WHAT?
| Jurisdiction | United States |
(Mar 2008)
LIABILITIES OF THE PARTIES TO A MODEL FORM JOINT OPERATING AGREEMENT: WHO IS RESPONSIBLE FOR WHAT?
Vice President - Land and Legal
St. Mary Land and Exploration Company
Denver, Colorado
Constance L. Rogers
Davis Graham & Stubbs LLP
Denver, Colorado
Howard Boigon
Hogan & Hartson L.L.P.
Denver, Colorado
MILAM RANDOLPH PHARO
Randy Pharo is admitted to practice before the State Bars of Texas (1977) and Colorado (1979). He earned a B.A. at the University of Texas (1974) and a J.D. from Southern Methodist University (1977). He is a member of the Denver, Colorado, and Texas Bar Associations. The first two years of Mr. Pharo's practice were in the area of insurance defense litigation. Beginning in 1979, his practice became limited to oil and gas matters. This included extensive title examination experience in the states of Colorado, Wyoming, Montana, North Dakota, Nebraska, Kansas, and Nevada. Mr. Pharo also represented clients in all facets of the upstream E&P business including operating matters, exploration and development agreements, lending matters, and the purchase and sale of producing and non-producing properties. He left private practice in 1996 and is now the Vice President - Land and Legal for St. Mary Land & Exploration Company in its Denver, Colorado, headquarters. Mr. Pharo has served as the President of the Denver Association of Oil and Gas Title Lawyers. He also has served as the Colorado reporter for the Rocky Mountain Mineral Law Foundation Mineral Law Newsletter and as a trustee for this foundation. Mr. Pharo has spoken to both the Colorado Bar Association and the Denver Bar Association on natural resource issues. He has presented papers at various Rocky Mountain Mineral Law Foundation Annual Institutes and Special Institutes focusing primarily on upstream transaction matters, joint operating agreements and unitization. Additionally, Mr. Pharo has spoken to the AAPL - International Conference, the AAPL - 2003 National Conference, the National Association of Lease and Title Analysts, the Denver Association of Division Order Analysts and the Denver Association of Petroleum Landmen. He has written articles for the DAPL's Newsletter and the AAPL magazine, Landman. In the Spring of 1999, the University of Denver, College of Law recognized Mr. Pharo as its Distinguished Natural Resources Practitioner in Residence, and he has assisted in the instruction of a number of classes at the law school concentrating on contract negotiations.
CONSTANCE L. ROGERS
Connie Rogers is a senior associate at Davis Graham & Stubbs LLP in Denver, Colorado where she represents clients in the oil and gas and mining industries in transactions, litigation and permitting and in environmental law, public lands, cultural resources law and Indian law matters. Ms. Rogers is admitted to practice in the State of Colorado, the Tenth Circuit Court of Appeals, and the United States Supreme Court. Ms. Rogers earned her undergraduate degree from William Jewell College, and a J.D. from Georgetown University Law Center, magna cum laude. Ms. Rogers has spoken to the Colorado Bar Association and the Denver Association of Petroleum Landman on Indian law and cultural resources issues and regulatory updates, and has written articles for the DAPL newsletter and the Colorado Lawyer.
HOWARD L. BOIGON
Howard L. Boigon is a partner in the Denver office of Hogan & Hartson LLP, an international law firm based in Washington, D.C. He is co-leader of the firm's Western Energy Practice Group, which advises energy companies and other resources developers on project development throughout the Rocky Mountain West. Howard's practice focuses on transactional, legislative, and regulatory matters in the various fields of natural resources law and on business counseling of natural resources companies. Howard was a principal author of the 1989 revision to the AAPL form 610 operating agreement and has lectured and written widely on joint operations in the extractive industries and other aspects of oil and gas law and practice. Prior to joining Hogan & Hartson, Howard served as vice president, general counsel, and corporate secretary at Westport Resources Corporation, a Denver-based NYSE exploration and production company. Before his position at Westport, he served as director, vice president, general counsel and secretary at Basin Exploration, Inc., another public E&P company. Before that, he was a partner in the Denver firm of Davis, Graham & Stubbs, where he specialized in oil and gas law. Howard co-chaired the Natural Resources Committee for the Transition Team for Governor-elect Bill Ritter. He has served as president, and is a current member of the board of directors, of the Colorado Oil and Gas Association. He has served on the board of trustees of the Rocky Mountain Mineral Law Foundation and has chaired and spoken at several past programs of the Foundation. He is a past chair of the Mineral Law Section of the Colorado Bar Association and served as Natural Resources Practitioner in Residence at the University of Denver School of Law. Prior to entering private practice, Howard served as law clerk to the Honorable Wade H. McCree, Jr. of the United States Court of Appeals for the Sixth Circuit. He graduated from the University of Michigan for both college and law school.
TABLE OF CONTENTS
I. INTRODUCTION
II. WHAT DOES THE JOA PROVIDE?
A. ARTICLE III--INTERESTS OF PARTIES
B. ARTICLE IV--TITLE ISSUES
C. ARTICLE V--THE OPERATOR
D. ARTICLE VI--DRILLING AND DEVELOPMENT
E. ARTICLE VII--EXPENDITURES AND LIABILITIES
F. ARTICLE X--CLAIMS AND LAWSUITS
III. HEIGHTENED DUTIES AND RESPONSIBILITIES
IV. CIRCUMSTANCES WHERE PARTIES TRY TO ALTER THEIR RESPONSIBILITIES
A. THE OPERATOR IS INCOMPETENT
B. I'M NOT RIDING YOU DOWN; I'M JUST NOT NON-CONSENT
C. YOU CAN'T DO THAT
D. THOSE COSTS AREN'T PROPER
V. CAN A NON-OPERATOR BE LIABLE FOR ENVIRONMENTAL MATTERS?
A. STATUTORY ENVIRONMENTAL LIABILITY
B. TORT AND CONTRACT LIABILITY
C. WHO PAYS?
VI. CONCLUSIONS
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I. INTRODUCTION
This paper will explore specific approaches the parties to an operating agreement have taken to allocate responsibility for the payment of costs and sharing of liabilities. Through the operating agreement, the parties have further expressly stated how they will share the fruits of their collective effort, and this will also be examined. The Foundation and its authors have provided a treasure-trove of articles and analysis of the statutory and jurisprudential law insofar as it pertains to the liabilities and responsibilities of the operator and non-operators vis a vis each other and third parties.1 While these authors have looked both at the model form operating agreements and the judicial interpretations, the purpose of this paper is to take a systematic pass through the agreement and explore what the parties have actually agreed.
A common thread fortunately appears while reviewing the various forms of the AAPL Model Form Operating Agreement. While the focus of this paper will concentrate on the 1989 Form, many of the referenced cases will refer to earlier agreements.2 The 1977 and later forms do not have materially different concepts with regard to the sharing of costs, liabilities, and revenue. When attempting to analyze how the parties have elected to treat one another, it is instructive to consider what would happen if an individual or single party was attempting to develop by itself a property and the burdens that party would bear. In this context, that single party should have presumed that it would individually bear the costs, liabilities, and benefits of its commercial endeavor, and fundamentally this is what the joint operating agreement tends to provide. As another author at this Institute has noted, "the operating agreement is
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principally a mechanism to provide for the efficient development and operation of separately owned mineral interest by co-tenants [and those who are not legal co-tenants] and creates the added benefit of avoiding imposition of joint and several liability associated with mining partnerships."3 As one looks at the many provisions in the operating agreement which allocate risk and responsibility, one is left with the distinct impression that a party will bear its proportionate share of all of the rights, duties, benefits, and obligations that such party would assume were it to develop the property individually, but with the added benefits of third party liability protection and the ability to delegate the day-to-day responsibility for conducting operations to another, and thus avoid incurring the operational and administrational expenses attendant to performing such tasks.
II. WHAT DOES THE JOA PROVIDE?
In the preamble to the agreement the parties state their intention to explore and develop the affected leases to the extent and as provided in the agreement. Given that Article I is a set of definitions and Article II enumerates the attached exhibits, the parties waste no time in setting forth their most pivotal overarching principle regarding the allocation of costs, risks, and revenues between the parties in Article III.B.
A. Article III--Interests of the Parties
This is where the general rules and concepts regarding responsibility and benefits are first laid out.
Article III.B. provides:
Unless changed by other provisions, all costs and liabilities incurred in operations under this agreement shall be borne and paid, and all equipment and materials acquired in operations on the Contract Area shall be owned, by the parties as their interests are set forth in Exhibit "A." In this same manner, the parties shall own all production of Oil and Gas from the Contract Area subject, however, to the payment of royalties and other burdens on production as described hereafter.
The use of the phrase "costs and liabilities...
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