CHAPTER 8 THE 1982 MODEL FORM OPERATING AGREEMENT: CHANGES AND CONTINUING CONCERNS
| Jurisdiction | United States |
(May 1983)
THE 1982 MODEL FORM OPERATING AGREEMENT: CHANGES AND CONTINUING CONCERNS
Hall, Estill, Hardwick, Gable, Collingsworth & Nelson
Tulsa, Oklahoma
TABLE OF CONTENTS
I. INTRODUCTION
II. SUMMARY OF MAJOR CHANGES
Commonly Shared Burdens
Subsequently Created Interests
Minimum Commencement Time
Stand-By Time
Sidetracking
Alternate Pages "8"
Regulatory Agencies
Side-by-Side Comparison
III. OPEN ISSUES AND SOME UNRESOLVED PROBLEMS
Removal Of Operator
Mid-Stream Termination Of Operations
Subsequent Operations
Advance Billing
Limiting Consent
Extension And Renewal Leases
IV. SUBSEQUENTLY CREATED INTERESTS
Prior Provisions
Changes
Class Of Burdens Covered
Coverage Of Existing Burdens
Enforcement Problems
Inequitable Operation of Clause
V. AUTHORITIES FOR EXPENDITURE
General
Cost Overruns: Case Of M&T, Inc
AFE As Basis For Cost Overrun Relief
Operations At Variance With AFE
VI. OPERATOR'S EXCULPATORY PROVISIONS—LIABILITY FOR ORDINARY NEGLIGENCE
General
Case Law
Statutory Provisions Invalidating Indemnities
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VII. RECORDATION AND FILING PROBLEMS
Introduction
Priority Problems Under Recording Acts
Security Interests Under the U.C.C.
Bankruptcy And Failure To Record Or File
Protection
VIII. EXECUTION PROBLEMS
Execution By Less Than All Intended Parties
Withdrawal Of Execution
Negotiated Variances In Terms
The Problem
Existing Cases
Analysis And Probable Result
Relief Against Operator
IX. IMPACT OF THE RULE AGAINST PERPETUITIES
Overview Of Rule
Operating Agreement Provisions Potentially Impacted
Non-Consent Operations
Abandonment Of Wells
Surrender Of Leases
Renewal Or Extension Of Leases
Preferential Purchase Right And Herein Of Producers Oil Co. v. Gore
Conclusion and Recommendation
APPENDICESAppendix I—A Comparison of the 1982 and 1977 Model Form Operating AgreementsAppendix II—Sample 1982 Model Form Operating Agreement With Changes
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I. INTRODUCTION
The A.A.P.L. Form 610-1977 Model Form Operating Agreement (herein "1977 JOA"), which itself replaced the Form 610-1956 Model Form Operating Agreement, was revised by a committee of the American Association of Petroleum Landmen. The revisions were completed in 1982 and have been embodied in the A.A.P.L. Form 610-1982 Model Form Operating Agreement (herein "1982 JOA") which will gradually supplant the 1977 form now in use. This presentation will summarize the major changes, will address some continuing concerns and review some existing and potential problems concerning use of the agreement. Headings II and III are overviews of the major changes and of unresolved issues and certain remaining problems. Heading IV deals in detail with the revisions made respecting subsequently created interests. The subsequent headings deal in more detail with selected issues relating to the joint operating agreement. There are also presented appendices consisting of (i) a table or "spread sheet" comparing the 1982 JOA with the 1977 JOA and (ii) a 1982 JOA with the author's preferred changes from the printed form.
II. SUMMARY OF MAJOR CHANGES
Commonly Shared Burdens
Article VII.E. of the 1977 JOA, dealing with the payment of royalties and the sharing of lease burdens, has been incorporated in Article III.B. of the 1982 JOA. Article VII.E. of the prior form was probably the most misunderstood "to be completed" provision in that form. That provision was too often read without a clear understanding of the term "its share of production" contained in line 43, page 9 of the 1977 JOA. The term has been mistakenly interpreted to be net of burdens when in fact it refers to a share of total (or 8/8ths) production prior to payment of any royalty. Properly completed, the fraction inserted in the former Article VII.E. was intended to represent that fraction of the royalty to be charged to the joint account of all parties, resulting in a common sharing of
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burdens to that extent. Having reviewed the operating agreements of many companies, I have observed many different fractions inserted and all sorts of changes made. Typically, the highest royalty burdening any lease in the unit was inserted. I'm quite certain the parties never intended the legal effect of so completing that provision, which is that each party will bear a portion of the royalty of the party which contributed the most heavily burdened lease, and likewise, the party contributing the most heavily burdened lease will receive the benefit of the lower NRI leases contributed by the other parties. I have also seen inserted in the blank line the words, "all royalty" or "all burdens", which, of course, is equally erroneous. In practice, most parties, having made the change, have ignored the legal result and have borne only the royalty and other burdens burdening the leases contributed by them, respectively.
Subsequently Created Interests
Subsequently created interests, previously treated in Article VIII.D., are now treated in Article III.D. These provisions have been expanded to include certain previously existing interests. Because of the potential for mischief which, in this author's opinion, results from this change, this matter will be treated in detail later.
Minimum Commencement Time
Provisions have been added to Article VI.B.1. specifying a time limit within which operator must commence operations consented to by all parties, failing which the operator must resubmit the proposed operation.
Stand-By Time
Article VI.B.3. has been added dealing with the charging of the expense of stand-by time pending responses to a proposal to complete or conduct other operations.
Sidetracking
Article VI.B.4. has been added specially dealing with sidetracking operations and making the "deepening" provisions of the agreement also applicable to sidetracking operations. "Sidetracking" is defined as the directional control and intentional deviation of a well from the vertical so as to change the bottom hole location unless the deviation is to straighten the hole, to drill around junk in the hole, or due to other
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mechanical difficulties. As a result of this exclusion, consent of the other parties will not be required (nor will the other parties be permitted to go non-consent) if the operator, because of mechanical difficulties, conducts an operation drilling out of the side of the existing well bore in order to reach the objective depth. In the event sidetracking operations are conducted through a non-consent well bore, the non-consenting parties are afforded the right to participate in the sidetracking operation and provisions are made for such parties to reimburse the consenting parties for the portion of the hole used.
Alternate Pages "8"
Two page 8's are supplied. The one designated "8" is for use if a gas balancing agreement is in effect between the parties, whether attached as Exhibit E or by separate agreement. This page "8" contains a modification of Article VII.C, deleting any reference to "gas" from the provisions (1982 JOA, line 7-14, p.8) authorizing the operator to sell a non-operator's share of production if the non-operator is not taking in kind. The page designated "8-alternate" is for use when no gas balancing agreement is in effect. On this page, the provisions dealing with operator's right to sell production of a non-operator not taking in kind are identical to the 1977 JOA provisions.
Regulatory Agencies
Article XIV.C. has been added dealing with two basically unrelated matters. The first grammatical paragraph provides that operator has no right to waive or release "any rights, privileges, or obligations which Non-Operator may have under federal or state laws, or under rules, regulations or orders promulgated under such laws in reference to oil, gas and mineral operations, including the location, operation, or production of wells, on tracts offsetting or adjacent to the Contract Area" (1982 JOA, lines 19-22, p.14). All law in the United States, including case law or non-statutory law, is either federal or state (although municipal law may be considered a separate species of law) and thus the term "laws in reference to oil, gas and other mineral operations" (line 21) can conceivably cover every activity which could be undertaken with respect to oil and gas. The ambit of this paragraph therefore may be quite broad. However, it is only directed at offsetting or adjacent tracts. Because of the title of the Article ("Regulatory Agencies") and the paragraph's inclusion with provisions relating to other strictly regulatory matters,
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possibly the types of federal and state laws intended are those pertaining to oil and gas conservation and control of production.
Article XIV.C. also contains provisions exculpating operator from misinterpretation of Department of Energy regulations and orders. Presumptively, the reference to "Department of Energy" also is intended to include the Federal Energy Regulatory Commission. Technically, however, it may not. The F.E.R.C. is an independent agency within the Department of Energy and, as a independent agency, has authority to, and does in fact, promulgate its own rules and regulations and issue its own orders. Under Article XIV.C., non-operators also authorize operator to submit the necessary certifications and other documents to pipeline purchasers under the Crude Oil Windfall Profit Tax Act.
Side-By-Side Comparison
The foregoing is a summary only of the major changes, as viewed by this author, between the 1982 JOA and the 1977 JOA. A complete schedule of the changes is contained in the table attached as Appendix I.
III. OPEN ISSUES AND SOME UNRESOLVED PROBLEMS
Removal Of Operator
Article V.B. governs the resignation and removal of the operator and the selection of a successor. The operator is automatically removed in certain specified events...
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