THE MODEL FORM JOINT OPERATING AGREEMENT: AN OVERVIEW FOR ACCURATE COMPLETION AND CONSIDERATIONS IN LIGHT OF MODERN DEVELOPMENT Presented by: Brent Chicken Partner Burleson LLP 303-801-3210 [email protected] Burleson LLP © 2013 ROADMAP • Accurate completion of the A.A.P.L. 610-1989 Model Form • Additions to consider to address modern horizontal well oil and gas exploration and development • Recent judicial interpretations 2 Burleson LLP © 2013 JOINT OPERATING AGREMENTS • A contract between an operator and one or more non-operators to jointly develop an area • American Association of Petroleum Landmen Model Form 610-1989 Joint Operating Agreement (“Model Form JOA”) – Can be freely added to or subtracted from, but provides a basic uniform structure Burleson LLP © 2013 MODEL FORM JOA STRUCTURE • Five Main Model Form JOA Parts – Title page – Table of contents – Preamble – Articles – Additional provisions in Article XVI (special provisions) Burleson LLP © 2013 ACCURATE COMPLETION OF MODEL FORM JOA • There are numerous blanks to fill-in and options to choose from • Each option has a proper application and potential operational and legal consequences 5 Burleson LLP © 2013 MODEL FORM JOA: COVER PAGE Date: Insert an effective date for the Model Form JOA, which should be earlier than the date inserted in Article VI.A (Initial Well) Operator: Insert proper legal name and verify consistency with operator named in Preamble and Article V Contract Area: Insert legal description of the lands covered by Model Form JOA 6 Burleson LLP © 2013 MODEL FORM JOA: PREAMBLE – Properly identify the operator of the contract area by full and correct name 7 Burleson LLP © 2013 MODEL FORM JOA: ARTICLE II • Model Form JOA Exhibits – There are eight (8) exhibits included, in a check box format, although common to run a strike through line through unused exhibits – Model Form JOA Exhibit A • Identification of lands, wells and/or substances covered, including depth or formation restrictions • Names, addresses & other contact information of parties Burleson LLP © 2013 MODEL FORM JOA: ARTICLE II • Model Form JOA Exhibits (cont.) – Model Form JOA Exhibit A (con’t) • Ownership of parties in contract area, and listing of committed oil and gas leases and respective burdens Burleson LLP © 2013 MODEL FORM JOA: ARTICLE II • Model Form JOA Exhibits (cont.) – Model Form JOA Exhibit B • A form oil and gas lease to be used for acquisition of leasehold interests covering unleased minerals in contract area, although typically excluded Burleson LLP © 2013 MODEL FORM JOA: ARTICLE II • Model Form JOA Exhibits (cont.) – Model Form JOA Exhibit C • Council of Petroleum Accountant Societies (“COPAS”) accounting procedure; sets forth manner in which payment is made to service vendors, how operations costs are remitted to operator, and other financial matters Burleson LLP © 2013 MODEL FORM JOA: ARTICLE II • Model Form JOA Exhibits (cont.) – Model Form JOA Exhibit D • Covers insurance matters between parties, setting forth type of coverage, applicable limits and other matters – Model Form JOA Exhibit E • Gas balancing agreement; exclusion of this can create future ambiguities so, although not required, one is often included 12 Burleson LLP © 2013 MODEL FORM JOA: ARTICLE II • Model Form JOA Exhibits (cont.) – Model Form JOA Exhibit F • Certification of non-discrimination and nonsegregation of facilities • Often included just to ensure compliance with federal government non-discrimination mandates – Model Form JOA Exhibit G • Tax partnerships; typically not employed absent disproportionate sharing of expenses Burleson LLP © 2013 MODEL FORM JOA: ARTICLE II • Model Form JOA Exhibits (cont.) – Model Form JOA Exhibit H • Miscellaneous additions, including extra maps and plats, as well as recording forms; recording memorandum is important, because it provides record public notice of existence of terms contained in the Model Form JOA Burleson LLP © 2013 MODEL FORM JOA: ARTICLE III • Interests of Parties – A. Interests of Parties in Costs and Production • Insert maximum leasehold burden amount • Verify this amount to ensure accuracy Burleson LLP © 2013 MODEL FORM JOA: ARTICLE V • Operator – A. Designation and Responsibilities of Operator • Repeat the proper and correct name of the operator designated on the Model Form JOA Cover Page and Preamble Burleson LLP © 2013 MODEL FORM JOA: ARTICLE VI • Drilling and Development – A. Initial Well • Insert the anticipated date for commencement of operations, legal description of the exact well location and target subsurface formation Burleson LLP © 2013 MODEL FORM JOA: ARTICLE VI • Drilling and Development (con’t) – B.2 Subsequent Operations; Operations by Less than All Parties • B.2(b)(i)-(ii): Insert desired non-consenting party percentages • Incentive to encourage development • Percentages determined on a case-by-case basis, but a 100%-400% non-consent penalty is common • B.2(c): Insert the consenting party recovery percentage for reworking, recompleting or plugging back Burleson LLP © 2013 MODEL FORM JOA: ARTICLE VI • Drilling and Development (con’t) – C. Completion of Wells; Reworking and Plugging Back • C.1 Completion – Select Option 1 or Option 2 – Option 1 is broader; generally elected if there is intent to drill a horizontal well – Option 2 contains a “casing point election;” parties elect to participate in the completion attempt by AFE 19 Burleson LLP © 2013 MODEL FORM JOA: ARTICLE VI • Drilling and Development (con’t) – D. Other Operations • Insert the limit on operator’s single-project budget on a single project • Insert minimum ownership percentage for consenting parties associated with other operations 20 Burleson LLP © 2013 MODEL FORM JOA: ARTICLE VI • Drilling and Development (con’t) – F. Terminations of Operations • Insert minimum consenting parties percentage for commenced operation termination 21 Burleson LLP © 2013 MODEL FORM JOA: ARTICLE VI • Drilling and Development (con’t) – G. Taking Production In-Kind • Select Option 1 or Option 2 – Option 1 attaches a gas balancing agreement – Option 2 gives operator the right to market non-operator’s oil and gas, although this option is not a substitute for having a gas balancing agreement if needed 22 Burleson LLP © 2013 MODEL FORM JOA: ARTICLE VIII • Acquisition, Maintenance or Transfer of Interest – F. Preferential Right to Purchase • Select if intent of parties, however: – Often not included – A method for non-transferring parties to buy a greater interest in contract area – A way to control the parties who are subject to the Model Form JOA Burleson LLP © 2013 MODEL FORM JOA: ARTICLE X • Claims and Lawsuits – Operator may usually settle claims without approval of non-operators, up to a dollar amount set by parties in this provision Burleson LLP © 2013 MODEL FORM JOA: ARTICLE XIII • Term of Agreement – Two (2) options: • Option 1 maintains Model Form JOA for as long as any of the oil and gas leases committed to it remain or are continued in force as to any part of the contract area • Option 2 terminates effectiveness of Model Form JOA within a specified period following cessation of production or abandonment of the last well – Other provisions often dictate which option is best • Typically, Option 1 for multiple wells and Option 2 for a single well Burleson LLP © 2013 MODEL FORM JOA: ARTICLE XIV • Compliance With Laws and Regulations – B. Governing Law • Insert state of governing law, typically where majority of contract area lies – Model Form JOA is subject to all local, state and federal laws, ordinances, rules, regulations and orders • If lands straddle two or more states, parties can elect which state’s law should govern • Parties often do this to ensure predictability Burleson LLP © 2013 MODEL FORM JOA: ARTICLE XVI • Other Provisions (Special Provisions) – There may be no need for this article if everything is already covered, but it is often included and may address special matters such as: • Drilling and operation of horizontal wells • Treatment of advance well cost payment • Escrow agreements for payment of costs • Specific rights against defaulting parties • Additional obligation well requirements • Additional relinquishment for non-consenting parties, priority of operations, areas of mutual Burleson LLP © 2013 interest MODEL FORM JOA: HORIZONTAL DRILLING EDITING • The Model Form JOA does not address horizontal drilling operations • Modifications and additions should be considered if horizontal drilling is contemplated 28 Burleson LLP © 2013 MODEL FORM JOA: HORIZONTAL DRILLING EDITING • Article I – Definitions – Should be updated to include horizontal drilling references and language • AFE: Should include directional drilling costs • Deepen, Sidetrack and Plug Back: Should include language to address horizontal drilling • Drillsite: Should include surface and bottomhole locations 29 Burleson LLP © 2013 MODEL FORM JOA: HORIZONTAL DRILLING EDITING • Additional Article I Definitions – Lateral: The horizontal segment of the wellbore where the wellbore deviates from a vertical orientation – Horizontal Well: May cite to statutory or regulatory definition of particular state, if available 30 Burleson LLP © 2013 MODEL FORM JOA: HORIZONTAL DRILLING EDITING • Additional Article I Definitions – Multi-Lateral Well: A horizontal well containing more than one lateral from the same wellbore radiating in different directions or targeting different subsurface formations (definition should express the objective formation) 31 Burleson LLP © 2013 MODEL FORM JOA: HORIZONTAL DRILLING EDITING • Additional Article I Definitions (con’t): – Total Measured Depth: The vertical depth of the wellbore combined with the length of the lateral segment of the wellbore – Vertical Well: A well drilled, completed or recompleted other than a horizontal or multi-lateral well 32 Burleson LLP © 2013 MODEL FORM JOA: HORIZONTAL DRILLING EDITING • Article VI – Drilling and Development – A. Initial Well: The surface location, depth and horizontal depth should be provided – C. Completion of Wells; Reworking and Plugging Back: Option 1 should be checked if drilling horizontal wells 33 Burleson LLP © 2013 MODEL FORM JOA: HORIZONTAL DRILLING EDITING • Article XVI – Special Provisions – Priority of operations regarding horizontal wells • A list of elections regarding the priority of further operations in the event of non-consent may be included – Proprietary data and technology typically subject to confidentiality 34 Burleson LLP © 2013 MODEL FORM JOA: RECENT JUDICIAL INTERPRETATIONS • Several recent cases have focused on the application of the exclupatory language in Model Form JOA Article V.A – Relieves the operator of liability for its activities under the Model Form JOA “except as may result from gross negligence or willful misconduct” – In the past, this provision was interpreted as limited to operational, rather than contractual, duties 35 Burleson LLP © 2013 MODEL FORM JOA: RECENT JUDICIAL INTERPRETATIONS • Reeder v. Wood County Energy, LLC, 395 S.W.3d 789 (Tex. 2012) – Held that an exculpatory clause modeled from the Model Form JOA exempts the operator from all liability unless it arises from gross negligence or willful misconduct; the court found no evidence of gross negligence when the operator failed to offer a well before plugging it 36 Burleson LLP © 2013 MODEL FORM JOA: RECENT JUDICIAL INTERPRETATIONS • IP Petroleum Co. v. Wevanco Energy, LLC, 116 S.W.3d 888 (Tex. App. 2003): – The exculpatory clause in a Model From JOA protected the operator from damages resulting from operational ordinary negligence; without gross negligence or willful misconduct, there was not breach of contract entitling the plaintiff to damages 37 Burleson LLP © 2013 MODEL FORM JOA: RECENT JUDICIAL INTERPRETATIONS • Southern Mgmt. Servs. v. SM Energy Co., 398 S.W.3d 350 (Tex. App. 2013): – A claim for recovery of a non-operator’s proportionate share of costs after the non-operator elected to participate in the renewal of oil and gas leases that it had been assigned a working interest in, with one leasehold covered by the Model Form JOA – Held that the terms of payment were governed by the Model Form JOA, which stated that each party was liable for its proportionate share 38 Burleson LLP © 2013 CONCLUSION • It is vital to: – Pay close attention to accurate completion of each section of the Model Form JOA – Consider additions if horizontal drilling is contemplated – To ensure operation of the Model Form JOA that comports with the intent of all parties, in an effort to reduce potential future disputes Burleson LLP © 2013 Houston Pennzoil Place 700 Milam Street Suite 1100 Houston, TX 77002 T: 713.358.1700 F: 713.358.1717 San Antonio Weston Center 112 East Pecan Suite 700 San Antonio, TX 78205 T: 210.820.2625 F: 210.820.2609 Midland Wall Tower East 201 W. Wall Street, Suite 505 Midland, TX 79701 T: 432.695.6228 F: 432.695.6246 Pittsburgh Southpointe Center 501 Corporate Drive Suite 105 Canonsburg, PA 15317 T: 724.746.6644 F: 724.746.6645 Denver Wells Fargo Center 1700 Lincoln Street Suite 1300 Denver, CO 80203 T: 303.801.3200 F: 303.801.3201 Burleson LLP © 2013
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