AGREEMENT. Observations, Ideas and Insights AAPL Fort Worth Chapter May 4, 2007

Transcription

1 OPERATING AGREEMENT Observations, Ideas and Insights AAPL Fort Worth Chapter May 4, 2007 Greg W. Curry Thompson & Knight LLP 1700 Pacific Avenue Suite 3300 Dallas, Texas

2 Introduction Establish and define the contractual relationship. Oil Industry has relied on form agreements AAPL provided industry with standardized forms; 1956, 1977, 1982 and Form not universally accepted Oil Industry evolves form amended Provisions of 1989 Form used worldwide but not onshore Ironic! Advantages of Form: reduce negotiation comprehensive well written consistent in interpretation

3 Cover Page and Preamble Use Legal name Do not create ambiguity

4 Definitions Article I Several new definitions added Elimination of ambiguity and conflict (incorporation of definitions such as sidetrack, rework, zone, plug back, completion or complete, deepen, etc.) If drilling a horizontal well the definition of deepen should be expanded Consider defining affiliate

5 Exhibits Only check those where exhibits are attached Exhibit A 1. Description of lands Very important Statute of frauds - Long Trusts v. Griffen 2. Restrictions, if any, as to depths formation or balance 3. Parties to agreement with address and telephone numbers for notice purposes 4. Percentages of fractional interests of parties to the agreement -- in essence the contract 5. Oil and gas leases and/or oil and gas lease subject to the agreement Don t use computer printouts Statute of frauds 6. Burdens or productions Not deemed subsequently created interests Provide accurate information

6 Exhibits Exhibit B - Form Lease Unleased mineral interests Helps deal with Lease termination issues Exhibit C - Accounting Procedure

7 Exhibit D - Insurance Exhibits Often overlooked Risk management tool Death Serious injury Monitoring important Insurance companies not bound if no coverage is obtained Additional insured Other insurance - certificate Aging of the JOA Types of insurance Workers compensation Employers liability General liability Automobile liability Umbrella Control of well Be careful with self insurance

8 Exhibits Exhibit E - Gas Balancing Agreement Needed when gas production is possible Needed when split stream sales are possible Not a storage agreement Exhibit F - Certification of no discrimination and non-segregated facilities Required with Federal leases Exhibit G - Tax Partnership Not a state law partnership Partnership for tax reporting only

9 Exhibits Article II Exhibit H - Memorandum of Operating Agreement and Financing Statement

10 Interest of Parties in Costs & Production Article III.B Production owed as allocated in Exhibit A Revenues and Royalties are not pooled 1989 Form clarifies that parties should share burdens up to the amount provided for in the blank and individually shoulder all excess burdens

11 Subsequently Created Interests Article III.C 1989 Form includes the definition of Subsequently Created Interests - includes overrides created after the fact. Boldrick v. BTA Oil Producers Critical to fully disclose existing burdens in Exhibit A - otherwise burdens are deemed to be Subsequently Created Interests

12 Titles Article IV.A Title examination if requested by a majority in interest of the drilling parties or by Operator vs Form that requires all of the parties consent Copies of drilling title opinions only to parties that pay for them Cost of curative borne by party contributing

13 Loss or Failure of Title Article IV.B If a lease is lost due to failure of title and no new lease secured within 90 days Exhibit A adjusted Consider joint loss agreement

14 Designation and Responsibilities of Operator Article V.A Standard of care of expanded as a reasonably prudent operator, in a good workmanlike manner, with due diligence and dispatch, in accordance with good oilfield practice and in compliance with applicable plicable law and regulation Liability - gross negligence or willful misconduct Does not cover contract claims - only operations. Abraxas Does it meet fair notice and conspicuousness requirements of Texas law? Re draft provision Satisfy Dresser Negate punitive damages Negate fiduciary duty

15 Resignation or Removal of Operator Article V.B Operator may resign at any time providing proper notice Situations in which Operator is deemed to have resigned (end of legal existence, no longer holds interest, no longer capable) Improvement of 1989 Form inclusion of Good Cause Removal (gross negligence, willful misconduct, material breach or material failure or inability to perform) Successor Operator affirmative vote of 2 or more parties owning a majority interest what about only 2 parties? What about farm-out situation?

16 New Provision Insolvent or bankrupt Operator = deemed to have resigned No action of non-operators needed, only selection of new Operator Bankruptcy Court may prevent removal of Operator interim operating committee

17 Rights & Duties of Operator Article V.D Timely pay expenses and keep Contract Area area free of liens Operator shall hold funds, but is not a fiduciary Non-Operators are to be given more operational and financial information Operator must test all zones capable of production both initial well and subsequent wells

18 Initial Well Article VI.A Drilling of initial well obligatory Be careful on date Horizontal wells not addressed Possible controversies: 1. Sufficient to test the formation - Who determines 2. What tests? 3. How is depth measured?

19 Subsequent Operations Article VI.B Clarifies processes and procedures Non-consenting parties may now participate in deepening or sidetracking operations Sidetracks are now defined as subsequent operations Valence Operating v. Dorsett - Operator not required to wait to begin operations. But give the notice. El Paso v. Valence Operating

20 Operations By Less Than All Parties Article VI.B.2(B) P&A costs allocated between consenting and non-consenting parties If well not drilled to its objective due to reasons other than mechanical problems or impenetrable substances non-consenting parties entitled to participate

21 Reworking or Plugging Back Article VI.B.2 100% penalty or premium replaced by a blank Parties may include a penalty or premium

22 Deepening Article VI.B.4 Non-consenting parties can participate in Deepening Non-producing reimbursement Producing reimbursement less sales

23 Sidetracking Article VI.B.5 Provision added similar to deepening provision

24 Order of Preference of Operations Article VI.B.6 New procedure to elect between conflicting proposals Majority interest prevails and in event of tie initial proposal prevails (operator variation) Significant improvement over 1982 Form (first come, first served basis)

25 Paying Wells Article VI.B.8 New provision provides certainty Consent of all parties needed to conduct operations on a well then capable of producing in paying quantities

26 Completion of Wells; Reworking & Plugging Back Article VI.C Caseing point election now includes AFEs Voting to determine between conflicting completion proposals Completion decisions are separate decisions

27 Other Operations Article VI.D Repair work, artificial lift or ancillary production facilities can be undertaken with written consent of any party or parties owning at least % of the interest

28 Abandonment of Wells Article VI.E Satisfactory proof of financial capability needed to take over a well Costs of plugging, abandoning and surface restoration exceed salvage value abandoning parties will have to pay the party taking over the well

29 Termination of Operations Article VI.F Operations can be terminated prematurely if a determined percentage of the parties wish to do so improvement over 1982 form Operator may terminate if the well encounters granite, practically impenetrable substance or further operations become impractical

30 Taking Production in Kind Article VI.G A procedure to allow Operator to buy Non- Operator s production is included (as well as termination procedures) Explicit statement that Operator is not required to share its market and purchases do not give Non-Operator any right to Operator s marketing arrangements

31 Operator Notification Non-Operators are to advise Operator of their gas marketing arrangements, except for price This allows the Operator to furnish the pipeline with certain requisite information

32 Liability of Parties Article VII.A Further clarification Non-Operators not liable to third parties Not Fiduciaries No confidential relationship Act in self-interest

33 Liens & Security Interests Article VII.B Lien covers now or hereinafter acquired real property, personal property and fixtures Each Party grants a lien on its oil and gas rights and a security interest on its share of production Lien and security interest first and prior lien Right to sell production Right to offset

34 Defaults and Remedies Article VII.D Defaulting party automatically has certain rights suspended Operator can be replaced Denied right to receive operational information and deemed non-consent Sue at joint account expense

35 Renewal or Extension of Leases Article VII.B Renewals and replacements of oil and gas leases Renewals and replacements need to consider depth ownership

36 Assignment; Maintenance of Uniform Interest Article VIII.D Transfer of ownership not recognized until 30 days after satisfactory notice has been received Transferor liable for all costs incurred prior to assignment but consider Eiland Assignment vs. Novation Maintenance of uniform interest provision has not been revised

37 Preferential Right to Purchase Article VIII.F Now an optional provision Does sell include farmout? How are package deals to be handled? Does it cover non-operated operated interests? Carved out before JOA Carved out after JOA Delete it?

38 Force Majeure Article XI Provision amended to state that in addition to payment of money, the furnishing of a security will not be affected by a force majeure event

39 Term of Agreement Article XIII The JOA terminates upon "Abandonment" no production and no operations for 180 days. Operator is authorized to file termination of lien and security interest.

40 Miscellaneous Article XV JOA is binding on all those who execute Bankruptcy court may accept or reject entire JOA

41 Conclusion The 1989 Form clarifies many ambiguities that exist in prior A.A.P.L. Model Form JOAs Be careful Arbitration - be careful