Chapter 7 Introduction to JOA's
| Jurisdiction | United States |
JESSICA LARAMIE is the Director of the Energy Management Program at Western Colorado University. Prior to her role as Director, Jessica served as Energy Management Program faculty teaching courses on strategic negotiations, oil and gas law, property and contracts, federal land management, energy regulation and policy, oil and gas agreements, title and business law. Jessica has over 15 years of experience in various land-based roles for exploration and production companies including Encana Corporation, Noble Energy Inc., Jonah Energy LLC and Whetstone Resources LLC. Jessica is a native of Homer Glen, Illinois. She earned undergraduate degrees in History and Politics and Government from Illinois State University, a Masters in Natural Resources Law from the University of Denver and a J.D. from the University of Denver Sturm College of Law. She is admitted to practice law in Colorado and is a member of the American Association of Professional Landmen, the Rocky Mountain Mineral Law Foundation, the Denver Association of Professional Landmen, the Colorado Bar Association and Whetstone Resources LLC.
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Introduction to the Model Form Template
Joint operating agreements (JOA('s)) are one of the most frequently used, reliable, and comprehensive contracts used in oil and gas development projects and are designed to manage risk between working interest parties (Parties).1 This paper will introduce the general purpose and terms of the widely-used American Association of Professional Landman (AAPL) Model Form 610 Onshore JOA templates (Model Form Template). This paper does not offer intricate suggestions for drafting the perfect JOA; rather, the intent of this paper is to introduce to the Model Form Template(s) for anybody new to working with JOA's.
The Model Form Template has evolved over time to better address modern technologies and the evolution of law.2 Each updated version of the Model Form Template is assigned a title based on the year that the AAPL approved or published the template. There are currently six Model Form Templates available: 1956, 1977, 1982, 1989, 1989-H, and 2015.34
It is recommended that any attorney working with JOA's for the first time not only review the Model Form Templates in detail, but also examine a multitude of scholarly articles to best understand the differences between Model Form Templates. These resources, layered on top of situational specific facts, are helpful in selecting a Model Form Template and making the requisite edits. Whether one is new to working with JOA's or is a seasoned veteran, The Foundation for Natural Resources and Energy Law has published a plethora of scholarly resources available for anybody working with Model Form Templates.5
It is further recommended that practitioners familiarize themselves with the best practices for JOA use, negotiation, and drafting. For instance, Model Form Templates are most respectfully
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modified. When exchanging drafts, Parties typically avoid deleting words or paragraphs from the agreement, utilizing strike-through text for deletions, even in the Table of Contents. Parties typically add new or modified text between numbered lines, near the modified language, or at the end of the document. Industry practice encourages parties to track all changes in a visible manner when proposing edits to other parties. It is common to utilize the track changes and font strikethrough features in a Microsoft Word document exchanged over a secured email exchange; however, depending on resources and comfort level with security, some organizations may exchange edits via Google Docs, Dropbox, or other file sharing media.
Purpose of a JOA
As one of the most frequently used oil and gas contracts, and arguably the most important company-to-company risk management tool in joint oil and gas operations, the purposes of the JOA are many. Much like a joint development project involving more than one party in any other context, adding multiple players to the game can impede project success or irreparably damage relationships. However, adding players to the game can also be greatly beneficial in spreading out cost and risk for capital-intensive projects. The same rings true for oil and gas development, where there the risks inherent to oil and gas development are great. At the same token, the benefits of successfully partnering to jointly develop oil and gas through a JOA can significantly outweigh the risks. In oil and gas operations, the decision to involve a joint development partner may be strategic, but may be required.6
Oil and gas development projects are costly, involve a high level of risk for return on investment, and frequently involve lands where sub-surface ownership is fractionalized. The JOA is a risk management tool that sets the rules of engagement for Parties combining assets in the contract area. In addition to mitigating risk, JOA's can accomplish the following goals7 :
1. Set clear rights and obligations through the life-cycle of oil and gas project development for Parties in a jointly owned project while avoiding the creation of a true partnership or joint venture.8
2. Identify and define one controlling party (Operator) and all other contract parties (Non-Operators) with clear duties and a standard of care, including parliamentary-like procedures for identifying the Operator. 9
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3. Clearly allocate costs and payment responsibilities among Parties.10
4. Define operational and decision-making processes for both Operators and Non-Operators, rewarding risk-takers and imposing penalties for non-participating Parties.11
5. Offer remedies for Parties' failure to meet contractual obligations.12
6. Afford Parties control over bringing newcomers into the agreement through limits on Parties' ability to transfer their interests in the contract area.13
Use of the JOA
JOA's are the preferred contract to manage Parties relationships in most development projects that involve multiple working interest owners in a drilling spacing unit(s).14 15 Typically, a working interest owner seeking to claim operatorship and begin operations on a project involving multiple Parties will attempt to secure all Non-Operators signatures on a JOA prior or simultaneously with election letter and Authority for Expenditure (AFE) for the proposed well(s).
As noted, ideally Operators will secure signatures from all Parties in the drilling spacing unit prior to commencing operations. However, Parties might elect to participate in a well but will not agree to sign a JOA. For instance, a lack of capital might impact a Party's desire to sign the contract. Under both the 1989 and 2015 Model Form Templates, signatories are obligated to participate in the drilling of the initial well.16 A non-consenting Party might be dissuaded from signing a JOA because that Party might be subject to more favorable non-consent penalties than the proposed contract under either common law co-tenancy rules or compulsory pooling statues.
Parties' might also have concerns with indefinite timelines under a JOA. The term of a JOA is indeterminate at the time of signing. A JOA typically expires in at the same time as the
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underlying leases or in conjunction with the life of the subject well(s).17 The long-term uncertainty of a contract with an indeterminate term may not appeal to a risk-averse non-operating working interest owner.
Moreover, a JOA might allow the Operator to delay the drilling of the initial well past the contractually-agreed upon initial well obligation date.18 It is not uncommon for Operators to experience permitting delays or other issues that postpone operations. In the event that the initial well is significantly delayed and the governing JOA provides little to no recourse for Non-Operators, the Non-Operator(s) might owe the Operator for their proportionate share of drilling and completions costs long past the originally anticipated timeframe.19 This can lead uncomfortable level of budgeting risk and uncertainty for some Non-Operators.
The implications of operating without signatures on a JOA from all Parties in a drilling spacing unit can range from non-existent to incredibly complex. The notable issues that may arise when a Party refuses to sign a JOA include but are by no means limited to: operator difficulty in recovering Parties' share of project costs, a lack of express authority to pool interests, and unclear delegation of responsibility and liability in the contract area.
Despite the lack of a JOA, Operators can effectively satisfy duties and mitigate risks. For example, to pool non-signatory Parties, operators might rely on a separate pooling agreement or state pooling statutes.20 To address liability concerns, operators might require non-signatory Parties to furnish proof of insurance. Despite the availability of safeguards outside of a JOA, the aforementioned "back-up" plans can lack clarity and add uncertainty to already risk-laden operations. At best, utilizing these mechanisms may add time and cost to projects. At worst, these mechanisms may be entirely unavailable as remedies.
Lacking a JOA, an operator might rely on a number of statutory and common law mechanisms for recovering proportionate payments from Parties, including but not limited to claims involving: statutory liens, statutory pooling, the Uniform Commercial Code21 , bankruptcy law, contract law, co-tenancy principles, doctrine of recoupment and setoff, and unjust enrichment.22 The application of statutes or common law remedies for cost-recovery efforts differ across jurisdictions and can vary greatly in their level of operator protection.23
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A JOA may not always not be the best-suited agreement to accomplish the joint development goals of multiple working interest owners.24 If Parties are uncomfortable with the substantial...
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