CHAPTER 9 LIABILITIES OF THE PARTIES: WHO IS RESPONSIBLE FOR WHAT?
| Jurisdiction | United States |
(Nov 2016)
LIABILITIES OF THE PARTIES: WHO IS RESPONSIBLE FOR WHAT?
Of Counsel
Davis Graham & Stubbs LLP
Denver, CO
Lori Taylor
Associate
Davis Graham & Stubbs LLP
Denver, CO
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MILAM RANDOLPH PHARO is currently Of Counsel at Davis Graham & Stubbs LLP in its Denver office and is a member of the Natural Resources Department. He has over 35 years of experience in the oil and gas industry, with an emphasis in the Rocky Mountain Region as well as Texas, Louisiana, and the Mid-Continent. His past experience includes extensive title examination in various states and the representation of clients in many facets of the upstream E&P business including operations, exploration and development agreements, lending, and the purchase and sale of producing and non-producing properties. Mr. Pharo spent 15 years in-house with what is now SM Energy Company, retiring as its then Senior Vice President and General Counsel. Since becoming an oil and gas attorney, Mr. Pharo has been actively involved with the Rocky Mountain Mineral Law Foundation. He served as President during the organization year of July 2014 to July 2015. He has also served as the organization's vice president and will serve on its board of directors until July 2017. He has presented papers at several Foundation Annual Institutes and Special Institutes on various topics including land resurveys, transaction due diligence, drafting of purchase and sale agreements, unitization matters, joint operating agreements, and covenants that run with land title transfers. He has spoken to and written for various bar and industry associations on upstream oil and gas matters. He has served as President of the Denver Association of Oil and Gas Title Lawyers. In 1999, the University of Denver Sturm College of Law recognized Mr. Pharo as its Distinguished Natural Resources Practitioner in Residence. He has continued to teach classes at this law school and Washburn University School of Law primarily in oil and gas contract negotiations. He received his B.A. from the University of Texas at Austin in 1974 and his J.D. from Southern Methodist University in 1977.
LORI TAYLOR is an associate in the Natural Resources Department of Davis Graham & Stubbs LLP, in Denver. Her practice focuses primarily on oil and gas transactional matters including the drafting and negotiation of midstream agreements, purchase and sale agreements, and other agreements pertaining to the exploration, development, and production of oil and gas. Ms. Taylor also has experience preparing all forms of oil and gas title opinions covering fee, state, and federal lands. Ms. Taylor earned her B.B.A. in International Business, Finance, and Accounting from the University of Oklahoma in 2007 graduating summa cum laude, and she received a J.D. from the University of Virginia in 2010. During law school, Ms. Taylor was the Production Editor for the Virginia Law and Business Review and an advisor to international law students completing their LL.M. degree.
LIABILITIES OF THE PARTIES: Who is Responsible for What?
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Milam Randolph Pharo
Randy Pharo is Of Counsel at Davis Graham & Stubbs, LLP in its Natural Resource's Department. He 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. 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 spent the next 15 years in-house at St. Mary Land & Exploration Company, now SM Energy Company. He retired from that Company as its Senior Vice President - General Counsel. Mr. Pharo has served as President of the Rocky Mountain Mineral Law Foundation, served on its Board of Directors, and as a trustee. 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 served as President of Denver Association of Oil and Gas Title Lawyers. He 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, the Denver Association of Petroleum Landmen, and other oil and gas professional organizations. 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. He has assisted in the instruction of a number of classes at this law school as well as at Washburn University School of Law concentrating on contract negotiations.
Lori Taylor
Lori Taylor is admitted to practice before the State Bars of Colorado (2010), North Dakota (2013) and Oklahoma (2013). She earned a B.B.A. in International Business, Finance and Accounting from the University of Oklahoma in 2007, graduating summa cum laude, and a J.D. from the University of Virginia in 2010. Ms. Taylor spent the first year of her practice working as the Mergers and Acquisition Specialist for Line Energy followed by a year preparing all forms of oil and gas title opinions covering fee, state, and federal lands. Ms. Taylor joined the Natural Resources Department of Davis, Graham & Stubbs, LLP in September of 2012. Her current practice focuses primarily on oil and gas transactional matters including the drafting and negotiation of midstream agreements, purchase and sale agreements, and other agreements pertaining to the exploration, development, and production of oil and gas.
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TABLE OF CONTENTS
I. INTRODUCTION
II. WHAT DOES THE JOA PROVIDE?
A. Article III - Interests of the Parties
B. Article IV - Title Issues
C. Article V - The Operator
D. Article VI - Drilling and Development
E. Article VII - Expenditures and Liabilities
1. Considerations When Dealing With a Financially Distressed Operator or Non-Operator
A. Grant of Lien and Security Interest
B. Remedies Upon Default
F. Article VIII.D. Assignment; Maintenance of Uniform Interest
G. Article X - Claims and Lawsuits
H. Article XIV - Compliance With Laws and Regulations
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 - Who's Liable?
B. Tort and Contract Liability for Environmental Contamination - Who's Liable?
C. Who Pays Under the JOA?
VI. CONCLUSION
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Liabilities of the Parties to a Model Form Joint Operating Agreement: Who is Responsible for What?
I. Introduction.
This paper is an update of one prepared in 2007 for a prior Special Institute conference. While parts of the original paper survived the intervening years, various sections have been significantly changed to accommodate new cases, new thinking, and the new AAPL Model Form Joint Operating Agreement. That said, this paper will continue to 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 efforts, 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 at both model form operating agreements and judicial interpretations, the purpose of this paper is to take a systematic pass through the agreement.
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 2015 Model Form2 that is just being released, many of the referenced cases will refer to earlier agreement forms. The 1977 and later forms do not have materially different concepts with
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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 a property by itself and what burdens and obligations 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 the prior iteration of this conference has noted, "the operating agreement is 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...
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