CHAPTER 6 HORIZONTAL PROVISIONS OF THE NEW JOINT OPERATING AGREEMENT FORMS
| Jurisdiction | United States |
CHAPTER 6 HORIZONTAL PROVISIONS OF THE NEW JOINT OPERATING AGREEMENT FORMS
Partner
Staff Weems LLP
Houston, TX
[Page 6 - 1]
JEFF WEEMS is a Partner with Staff Weems LLP in Houston, TX. Prior to opening his own firm, Mr. Weems was a partner in the litigation practice group of Porter Hedges LLP in Houston, Texas. After years of working on oil rigs and as a landman, he has practiced energy law for over 25 years, concentrating on litigation. Mr. Weems is on the Council of the Oil, Gas and Energy Resources Law Section of the State Bar of Texas. He was Co-Chair of the Oil and Gas Section of the Rocky Mountain Mineral Law Foundation's 60th Annual Institute held in July 2014 in Vail, Colorado. He is a member of the American Petroleum Institute-Houston, Texas Independent Producers and Royalty Owners, and the American Association of Professional Landman (AAPL). In addition to his membership in AAPL, Mr. Weems is on 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 seminars and events, and in 2010 was a candidate for Texas Railroad Commissioner. Mr. Weems represents energy service companies, midstream companies, and royalty owners in a variety of energy-related disputes. Mr. Weems is admitted and licensed in Texas and Arkansas.
Synopsis
§ 6.01 Introduction
§ 6.02 History
§ 6.03 Horizontal Provisions in the 2015 Form
[1] Article I--Definitions
[a] AFE
[b] Affiliate
[c] Deepen
[d] Displacement
[e] Drillsite
[f] Extension/Extend
[g] Horizontal Rig Move-On Period
[h] Horizontal Well
[i] Lateral
[j] Plug Back
[k] Sidetrack
[l] Spudder Rig
[m] Terminus
[n] Total Measured Depth
[o] Vertical Well
[2] Article V--Operator
[a] Article V.A: Designation and Responsibilities of Operator
[b] Article V.D.7: Drilling and Testing Operations
[3] Article VI--Drilling and Development
[a] Article VI.A.: Initial Well
[b] Article VI.B.1.: Subsequent Operations--Proposed Operations
[c] Article VI.B.4.: Subsequent Operations--Deepening
[d] Article VI.B.5.: Subsequent Operations--Sidetracking
[e] Article VI.B.6: Subsequent Operations--Extension
[f] Article VI.B.10.: Subsequent Operations--Spudder Rigs
[g] Article VI.B.11.: Subsequent Operations--Multi-Well Pads
[Page 6 - 2]
[h] Article VI.C.1.: Completion of Wells - Completion (Casing Point Election)
[4] Article XV--Miscellaneous (Operations Without Execution of All Parties on Exhibit A)
[a] Article XV.A.: Execution
[b] Article XV.E.: Conflict of Terms
[5] Article XVI--Other Provisions
§ 6.04 Conclusion
§ 6.01 Introduction*
Over the last several decades, commentators discussing joint operating agreements (JOA) typically focused their analyses on the intricacies of the provisions and the conflicting and disputed interpretations of these agreements by courts in the United States. These analyses and interpretations often involved language provided in model form JOAs (Model Form) published by the American Association of Professional Landmen (AAPL).1 These analyses, disputes, and interpretations encouraged landmen to customize the current Model Form to fit the expectations of the parties to a particular transaction.2 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.3 This development prompted land departments around the country to craft custom revisions and
[Page 6 - 3]
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 task force to gather custom forms, to analyze the needs in the industry, and to craft a versatile Model Form that included language for horizontal operations.4 The first output from the task force was the AAPL 610-1989 Model Form Operating Agreement: Horizontal Modifications (1989 Horizontal Form). Next, the task force (especially member Tom Daily) crafted the work of the 1989 Horizontal Form into the 1982 form, creating the AAPL 610-1982 Model Form Operating Agreement: Horizontal Modifications (1982 Horizontal Form).5
While gathering information and drafting the 1989 Horizontal Form, the task force recognized that legal and operational issues beyond horizontal drilling have arisen since the implementation of the 1989 Model Form. As a result, the task force set about to draft an entirely new Model Form, one that included both the horizontal modifications and other revisions meant to address particular issues that have arisen in the last 27 years. Importantly, the task force modified a few of the definitions and operational aspects of the horizontal language in the 1989 Horizontal Form to reflect comments and feedback from the industry. The new form is labeled as the AAPL 610-2015 Model Form Operating Agreement and is set for release in November 2016 (2015 Form).
This chapter primarily discusses the 2015 Form and the rationale behind the horizontal language, most of which carried over from the 1989 Horizontal Form. When applicable, changes to the horizontal language from the 1989 Horizontal Form found in the 2015 Form will be noted.
§ 6.02 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
[Page 6 - 4]
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 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
[Page 6 - 5]
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 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 2015 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 2015 Form do not reflect all of the changes the committee considered; rather, numerous provisions were debated and then put aside as too regional or because the task force could not reach consensus on the way to craft the provision. That said, note that the 2015 Form is intended to apply to any well, horizontal or vertical. The new or modified definitions, together with all of the new clauses and segments, make clear whether they apply to only a single type of well.16
§ 6.03 Horizontal Provisions in the 2015 Form
As we discuss the new revisions contained in the 2015 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.17
[1] Article I--Definitions
Crafting the 2015 Form required the task force to add and change a series of definitions that address new terms and concepts unique to horizontal operations.18
[Page 6 - 6]
[a] AFE
Modern...
To continue reading
Request your trial