CHAPTER 9 MISCELLANEOUS APPROVALS
| Jurisdiction | United States |
(Jan 1990)
MISCELLANEOUS APPROVALS
Clanahan, Tanner, Downing & Knowlton
Denver, Colorado
I. Opening Remarks
The joinder and approval process is unquestionably somewhat mundane. It easily falls within the trap that everyone assumes it is taken care of to the point that occasionally a joinder falls through the cracks. At the time the unit is formed, if the interest is noncost-bearing, or covers only a small portion of the unit, it sometimes slips into oblivion until it rears its head with some very undesirable results. These issues most often arise with inexperienced parties who choose not to use advisors who specialize in unit formation. When we advise companies of the unintended consequences that may result, shock is too mild an expression.
You can imagine the surprise of a lessee when he learns that he is not included in the unit notwithstanding that his tract is within the physical perimeter of the unit boundary. It's easier to imagine the depth of surprise when a landowner has been omitted, the well is drilled on that particular lease, and that fee land owner has no interest whatsoever in joining the unit; he is happy to receive his 12.5% (or more) of production, and could care less that the other royalty owners within the participating area will be receiving their royalty share on a tract participation basis. A similar surprise may await where the non-joining party is an overriding royalty interest owner. A significant portion of this paper will address how these types of situations might be handled. At the risk of sounding patronizing, every lessee should strive to obtain complete joinder at the inception of the unit.
II. Unit Joinder
A. Unilateral Rights of Lessee
1. Specific lease language. As simple as this may seem to some, a significant amount of confusion lies with the type of pooling and/or unitization language contained in the lease form. In the appendix, we have included a pooling clause as opposed to a unitization clause for your reference. If you are in an area where there are significant amounts of public lands, it is appropriate to expect that unitization may be in the offing. If you anticipate unitization, be certain to have a unitization clause in your lease, or at least understand the problems you will have with the party with whom you are dealing. Do not mistake a pooling clause, or a secondary recovery unitization clause if an exploratory unit is your objective.
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This issue of the correct clause is somewhat complicated by the loose use of the term "unit" or "unitized" in any number of clauses. Keep in mind that if the clause looks to the development of an entire field, you are on your way to unitization, but if the clause is limited to a spacing unit, or the development of production from a single well, you probably have a pooling, and possibly a communitization clause, but will not likely have the right to unilaterally commit the lessor to a federal exploratory unit, or a secondary recovery unit.
If you anticipate a secondary or enhanced recovery unit, you should have a clause which specifically addresses this type of development. We have included a proposed form of this clause which can readily be inserted or included in your printed form if you anticipate this activity.
Having one of these clauses, depending on your needs, takes the challenge out of unitization. If one of these clauses is specifically stricken, it gives you advance warning of a potential problem.
2. Assignment Language. Just as the danger posed by an uncommitted royalty owner can be avoided with advance drafting, so can the problem of an uncommitted overriding royalty interest. As an assignor, we strongly recommend you consider retaining the right to commit the assignee's overriding royalty interest to any unit plan of development.
B. Voluntary Joinder
1. Separate agreement. If you do not have the unilateral right to unitize, you will need to obtain ratification and joinder to the unit agreement by separate agreement. There is no required form for the ratification and joinder instrument; however, we have included a proposed form in the appendix which is frequently used, and which will get the job done. We have included a separate form which contemplates the need to take care of additional issues such as lease ratifications. As there is no absolute prescribed form, you can use this form of document to meet a variety of your curative needs. A ratification and joinder instrument is frequently used in lieu of having the individual party sign the actual unit agreement, and if a working interest owner is involved, the unit operating agreement.
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Once the unit agreement is approved, then the unit agreement and the unit operating agreement will control any subsequent joinders.
2. Compliance with Specific Provisions of the Unit Agreement and Unit Operating Agreement. The place to begin compliance with the agreement terms which provide for joinder is Section 28 of the unit agreement. Once final approval of the unit is obtained and there exist uncommitted tracts or partially committed tracts, the procedures split into those used prior to the commencement of operations and those used after operations are commenced.
a. Prior to the Commencement of Operations. Prior to the commencement of operations, the subsequent joinder to the unit is a straightforward process. Any owner of a non-cost bearing interest simply ratifies and joins the unit agreement, and the previously committed working interest owner whose interest is affected by this non-cost bearing interest must consent to this joinder. Additionally, if the interest to be committed is a working interest, the working interest owner must also join the unit operating agreement. The prior to commencement of operations joinder issues are also addressed by Article 34.1 of the unit operating agreement.
b. After Commencement of Unit Operations. After the commencement of operations, the requirements of joinder for a non-cost bearing interest owner stay the same as before operations. That entity must join, and the working interest owners who bear the responsibility for paying this interest must consent to the joinder.
For a working interest owner, things can get much more complicated. The right of subsequent joinder for a working interest owner is subject to such requirements or approvals, if any, pertaining to such joinder as may be provided for in the unit operating agreement. Article 28 of the unit agreement goes on to provide that joinder to the unit agreement must be accompanied by appropriate joinder to the unit operating agreement in order for the working interest to be regarded as committed to the unit agreement. Article 34.2 of the
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unit operating agreement provides that after commencement of operations under the unit agreement, any working interest in land within the unit area may be committed to the unit operating agreement and the unit agreement upon such reasonable terms and conditions as may receive the approval of the parties.
As one might imagine, it is the efforts to determine what is reasonable that cause problems between parties. This issue has recently been addressed in Coors Energy Co., 110 IBLA 250, GFS (O&G) 98 (1989). In that case, there existed an unleased federal tract within a participating area. A competitive bid sale affecting this tract was held, and the high bidder was informed that a lease would issue upon his joinder to the unit agreement. In attempting to join the unit agreement, the successful bidder was informed that he must pay the non-consent penalty prescribed by the unit operating agreement.
This never occurred, and no joinder to the unit agreement and unit operating agreement was obtained. While these efforts were underway between the unit operator and the prospective lessee, the BLM ordered the production revenue attributable to this tract held in suspense. The unit operator, Coors, appealed arguing that no money should be held in suspense for a tract that was not entitled to receive production as it was not in the unit. The position of Coors was sustained.
A concurring opinion spent some period of time arguing the pros and cons of this joinder requirement and concluded that there was a gap in the federal regulations due to the ability of this type of problem to prevent a lease from being issued, and the commensurate draining of federal property.
It was successfully argued by Coors Energy Co. that any attempt to change the unit operating agreement would constitute improper interference with a private contract, and the IBLA agreed. The question which does not seem to have been squarely addressed, although arguably dealt with by inference, is whether or not a 300% non-consent penalty was reasonable as that phrase is used by
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Article 34.2 of the unit operating agreement. The government at least stated the logical, technical position that this interest could not have gone non-consent as defined by the unit operating agreement as no election was made due to there being no notice given to the ultimate lessee or the federal government such that the non-consent penalty could be invoked. The merits of this argument were not specifically addressed by the decision. The concurring opinion appears to have assumed the mandatory imposition of this penalty.
While giving due deference to the parties who assumed the risk of drilling, the non-consent penalties imposed by states in a forced pooling setting rarely give a 300% penalty, most ranging from a low of 100% (which does not appear to compensate people for their risk) to 200% (which appears to be an often used number). It would seem that an argument could be made that as the new lessee could not have actually gone non-consent, that the state applied penalty would be a reasonable term upon which to allow the party to join the unit...
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