CHAPTER 8 OPERATIONS NOT COVERED OR INADEQUATELY COVERED BY THE JOINT OPERATING AGREEMENT AND OTHER PROBLEM AREAS
| Jurisdiction | United States |
(Dec 2007)
OPERATIONS NOT COVERED OR INADEQUATELY COVERED BY THE JOINT OPERATING AGREEMENT AND OTHER PROBLEM AREAS
Attorney
Cotton, Bledsoe, Tighe & Dawson, P.C.
Midland, Texas
MICHEL E. CURRY
Michel E. Curry is a shareholder in the oil & gas section of Cotton, Bledsoe, Tighe & Dawson P.C. He is Board Certified in Oil, Gas & Mineral Law by the Texas Board of Legal Specialization, and is admitted to practice in Texas and New Mexico.
He received a B.S. degree from the University of Texas in 1973 and a J.D. cum laude from Texas Tech School of Law in 1989 where he served as a member and Note Editor of the Texas Tech Law Review. Prior to law school, Michel worked for more than 15 years in the oil & gas and the coal and lignite industries as an independent landman and in-house for a major oil company. His experience includes most phases of the petroleum industry.
Michel is currently a member on the council for the State Bar of Texas Oil, Gas and Energy Resources Law Section. He is an active member of the American Association of Professional Landmen, and is a former director and Chairman of the Forms and Publication Committees. He is currently serving as Assistant Chairman of the Forms Committee. Mike is also a past president and current Director of the Permian Basin Landmen's Association. He has lectured on numerous oil and gas topics and ethics issues and has published several articles.
Select publications and lectures: Seagull v. Eland and the Operating Agreement, Oil, Gas & Energy Resources Law Section Report, Vol. 31, No. 3, State Bar of Texas; Advanced Oil, Gas & Energy Resources Law Course, State Bar of Texas - October 5-6, 2006, A Look at the Maintenance of the Uniform Interest Provision in Joint Operating Agreements; Summer NAPE, Houston, Texas - August 22, 2006, AAPL Operating Agreement Workshop; AAPL JOA Workshop, Canton, Ohio - May 11, 2006, AAPL Operating Agreement Workshop; Arkansas National Resources Law Institute, Little Rock, Arkansas, February 22, 2006 - Overview of Operating Agreement Cases; Live Oak CLE, Permian Basin Oil & Gas Law Update 2006, Midland, Texas - February 10, 2006, Hot Oil & Gas Cases in Texas and New Mexico; South Texas Energy Law Institute, Houston, Texas, September 29, 2005 - Onshore Joint Operating Agreements: Recent Issues, Traps and Tips; EOG Landman's Conference, Houston, Texas, September 22, 2005 - JOA: Overview of the JOA in the current environment; Santa Fe Advanced Oil & Gas Land Institute, Santa Fe, New Mexico, September 19, 2005 - The Joint Operating Agreement - After the Honeymoon; University of Texas School Law, Ernest E. Smith Oil, Gas & Mineral Law Institute, Houston, Texas, April 1, 2005 - The Joint Operating Agreement - After the Honeymoon; Live Oak CLE, Oil & Gas Issues in Texas and New Mexico, Midland, Texas, February 25, 2005 - Hot Cases in Operating Agreements & Other Issues; San Antonio Association of Petroleum Landmen, Mid-Winter Seminar, San Antonio, Texas, February 19, 2005 -Oil & Gas Case Law Decisions Affecting the Operating Agreemen; Ark-La-Tex Professional Landmen, Shreveport, LA, February 11, 2005 -- Joint Operating Agreement Workshop; NAPE Institute 2005, Houston, Texas, January 25, 2005 - Joint Operating Agreement Workshop - The AAPL 610 Model Form; Dallas Energy Bar Association, Review of Oil and Gas Law XIX, August 19-20, 2004 - JOA Exhibit Overview.
OPERATIONS NOT COVERED or INADEQUATELY COVERED by the JOINT OPERATING AGREEMENT and OTHER PROBLEM AREAS II1
I. INTRODUCTION
Unquestionably, the operating agreement is the single most important agreement among co-owners of oil and gas development rights. Fortunately, industry professional organizations have undertaken to standardize the basic operating agreement by promulgating model form agreements. Perhaps the most widely used of these model forms are the various iterations developed and published by the American Association of Professional Landmen ("AAPL").2
However, a model form is only a starting place for negotiating and preparing an agreement. Model forms suggest a standard approach to resolving or dealing with commonly recurring matters, but model forms could not possibly, nor do they purport to, cover every conceivable issue that might arise among co-owners. This paper will explore recurring issues that are not fully dealt with, if addressed at all, by the model forms. In no way is this discussion meant as a criticism of the model form agreements, but rather is intended as an identification or amplification of additional matters that should be considered in drafting and negotiating a new operating agreement or in conducting operations under an existing, executed operating agreement. We have approached these issues from both legal and practical perspectives.
II. RIGHTS & OBLIGATIONS TO PARTICIPATE
A. The Right to Participate
Before commencing any operation within the scope of Articles VI.B and VI.C, notice of the proposed operation must be given to all of the parties having the right to participate. Following such notice, the non-proposing parties have a period of time, usually thirty (30) days, in which to respond. In this context, notice acts as a "trigger", following which the
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rights of the parties are determined. Those parties responding to the notice in the affirmative become obligated to pay for their proportionate share of all costs and expenses. Those parties who fail to respond or who affirmatively elect not to participate are deemed Non-Consenting Parties and relinquish their interests in production until the recovery of the non-consent penalty provided for in Article VI.B.2(b)(i)-(ii).3 The essential question in proposing any operation subsequent to the initial well is which parties to the agreement have the right to receive notice of a proposed operation, and therefore to participate in the operation? Although this seems like a simple question with any easy answer, it is often a complex undertaking and the source of dispute.
1. The 1989 Model Form Approach.
The 1989 model form provides that notice of any proposed operation for drilling, reworking, plugging back, deepening, sidetracking or recompleting shall be given to all parties who have not relinquished their interest in the objective zone. This notice requirement is by itself very clear and, as will be seen, a welcome revision from the similar provision contained in the 1982 model form, but it is not a complete fix. The clear implication is that any party who has not elected non-consent status in an operation and, therefore, has relinquished its interest in a particular zone of interest, is entitled to participate in any operation. However, the last part of the sentence includes an additional requirement to provide notice of a proposal for sidetracking or deepening to "all other parties" without reference to relinquished interests. This apparent conflict is magnified rather than resolved by subsequent provisions.
For example, Article VI.B.2(b) beginning at line 70 provides that upon commencement of operations for drilling, reworking, sidetracking, recompleting, deepening or plugging back, a non-consenting party shall be deemed to have relinquished its interest in the well and resulting production without regard to a particular zone or formation. The same sentence continues on to provide that with respect to all of the foregoing named operations except drilling, plus the added operation of completion pursuant to a permitted casing-point election, a non-consenting party is deemed to relinquish its interest solely with respect to the production obtained from the operation in which they did not participate. Thus, with respect to all operations except drilling and completion pursuant to a casing point election, it is unclear whether the relinquished interest applies to the well or to the operation.
Arguably, the inherent conflict within these provisions renders them ambiguous and subject to parol evidence concerning a matter upon which no party to the agreement likely had any subjective intent or understanding at the time of negotiation. Fortunately, reconciliation is relatively easy. By striking the terms "Sidetrack" and "Deepen" in line 73 of Article VI.B.1 and "Reworking, Sidetracking, Recompleting, Deepening or Plugging Back"
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from lines 70 and 71 of Article VI.B.2(b), the effect becomes that (i) the parties to receive notice are clarified according to logical types of operations proposals, and (ii) the non-consenting party to a drilling proposal is deemed to relinquish its interest in the well, whereas if the proposal is for any other identified operation, relinquishment is limited to production obtained from the particular operation. This proposed revision improves the consistency of the notice requirement and has the added benefit of uniformity with the remainder of Article VI.B.4
2. The 1982 Model Form Approach.
The 1982 model form provision dealing with notice of subsequent operations is notably less complex than that of the 1989 model form. The 1982 provision requires that notice of any proposed operation for drilling, reworking, plugging back or deepening a well drilled or owned by all parties, other than the initial well, shall be given to all parties. There is no specific provision for notice concerning a well in which there are non-consent interests.5 As a practical matter, it is unlikely that all parties to 1982 model form operating agreements, including those in non-consent status, generally receive notice of all proposed operations. Typically, the practice appears to be that only those parties that are believed to be entitled to participate in a proposed reworking, drilling, plugging back or deepening operation receive notice. No notice is usually provided to the non-consent parties prior to payout and, indeed, the 1982 model form is noticeably silent on this point.
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