The New And Improved 1989 Joint Operating Agreement

300 Pages·2003·1.26 MB·English

The New and Improved
1989 Joint Operating Agreement: A Working Manual
By
Andrew B. Derman

© 1991 Andrew B. Derman. All rights reserved.
Table of Contents

INTRODUCTION............................................................................................. 1
Acknowledgements............................................................................................ 1

1989 Joint Operating Agreement
with Commentary
AAPL Form 610-1989 Model Form Operating Agreement................................... 2
COVER PAGE ....................................................................................... 3
TABLE OF CONTENTS........................................................................ 5
PREAMBLE........................................................................................... 9
I. DEFINITIONS........................................................................................ 9
II. EXHIBITS.............................................................................................. 13
III. INTERESTS OF PARTIES..................................................................... 15
A. OIL AND GAS INTERESTS........................................................................ 15
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION................................ 15
C. SUBSEQUENTLY CREATED INTERESTS.................................................... 17
IV. TITLES................................................................................................... 19
A. TITLE EXAMINATION............................................................................. 19
B. LOSS OR FAILURE OF TITLE.................................................................... 21
1. Failure of Title................................................................... 21
2. Loss by Non-Payment or Erroneous Payment
of Amount Due.................................................................. 23
3. Other Losses...................................................................... 25
4. Curing Title....................................................................... 25
V. OPERATOR........................................................................................... 27
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR.............................. 27
B. RESIGNATION OR REMOVAL OF OPERATOR AND
SELECTION OF SUCCESSOR..................................................................... 31
1. Resignation or Removal of Operator.................................. 31
2. Selection of Successor Operator......................................... 35
3. Effect of Bankruptcy.......................................................... 35
C. EMPLOYEES AND CONTRACTORS........................................................... 37
D. RIGHTS AND DUTIES OF OPERATOR........................................................ 37
1. Competitive Rates and Use of Affiliates............................ 37
2. Discharge of Joint Account Obligations............................. 37
3. Protection from Liens........................................................ 37
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Table of Contents

4. Custody of Funds............................................................... 39
5. Access to Contract Area and Records ............................... 39
6. Filing and Furnishing Governmental Reports .................... 41
7. Drilling and Testing Operations......................................... 39
8. Cost Estimates .................................................................. 39
9. Insurance........................................................................... 41
VI. DRILLING AND DEVELOPMENT....................................................... 41
A. INITIAL WELL........................................................................................ 47
B. SUBSEQUENT OPERATIONS..................................................................... 47
1. Proposed Operations.......................................................... 47
2. Operations by Less Than All Parties.................................. 49
3. Stand-By Costs.................................................................. 51
4. Deepening......................................................................... 55
5. Sidetracking....................................................................... 55
6. Order of Preference of Operations..................................... 57
7. Conformity to Spacing Pattern........................................... 57
8. Paying Wells...................................................................... 57
C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK.................. 59
1. Completion........................................................................ 59
2. Rework, Recomplete or Plug Back.................................... 61
D. OTHER OPERATIONS.............................................................................. 63
E. ABANDONMENT OF WELLS.................................................................... 63
1. Abandonment of Dry Holes............................................... 63
2. Abandonment of Wells That Have Produced ..................... 65
3. Abandonment of Non-Consent Operations......................... 65
F. TERMINATION OF OPERATIONS .............................................................. 67
G. TAKING PRODUCTION IN KIND............................................................... 67
(Option 1) Gas Balancing Agreement .......................................... 69
(Option 2) No Gas Balancing Agreement..................................... 69
VII. EXPENDITURES AND LIABILITY OF PARTIES............................... 71
A. LIABILITY OF PARTIES........................................................................... 71
B. LIENS AND SECURITY INTERESTS ........................................................... 83
C. ADVANCES............................................................................................ 91
D. DEFAULTS AND REMEDIES..................................................................... 95
1. Suspension of Rights ......................................................... 95
2. Suit for Damages............................................................... 95
3. Deemed Non-Consent........................................................ 95
4. Advance Payment.............................................................. 95
5. Costs and Attorneys' Fees.................................................. 95
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES........... 97
F. TAXES................................................................................................... 97
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Table of Contents

VIII. ACQUISITION, MAINTENANCE OR
TRANSFER OF INTEREST................................................................... 99
A. SURRENDER OF LEASES......................................................................... 99
B. RENEWAL OR EXTENSION OF LEASES..................................................... 99
C. ACREAGE OR CASH CONTRIBUTIONS...................................................... 101
D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST............................ 103
E. WAIVER OF RIGHTS TO PARTITION......................................................... 107
F. PREFERENTIAL RIGHT TO PURCHASE...................................................... 107
IX INTERNAL REVENUE CODE ELECTION.......................................... 111
X. CLAIMS AND LAWSUITS................................................................... 111
XI. FORCE MAJEURE ................................................................................ 113
XII. NOTICES............................................................................................... 113
XIII. TERM OF AGREEMENT...................................................................... 115
XIV. COMPLIANCE WITH LAWS AND REGULATIONS.......................... 117
A. LAWS, REGULATIONS AND ORDERS....................................................... 117
B. GOVERNING LAW.................................................................................. 117
C. REGULATORY AGENCIES........................................................................ 117
XV. MISCELLANEOUS............................................................................... 119
A. EXECUTION........................................................................................... 119
B. SUCCESSORS AND ASSIGNS.................................................................... 121
C. COUNTERPARTS..................................................................................... 123
D. SEVERABILITY....................................................................................... 123
XVI. OTHER PROVISIONS........................................................................... 127
A. ADVANCE OF WELL COSTS.................................................................... 129
ADVANCE OF WELL COSTS -- INTEREST AND RELINQUISHMENT.............. 131
B. ESCROW AGREEMENT............................................................................ 135
C. RIGHTS OF OPERATOR AGAINST A DEFAULTING PARTY......................... 140
D. OBLIGATORY WELL --
WITH OPPORTUNITY TO EXTEND OR RENEW........................................... 141
OBLIGATORY WELL............................................................................... 142
E. RELINQUISHMENT PROVISION -- EXPLORATORY WELL........................... 143
RELINQUISHMENT PROVISION -- ALL WELLS 143
RELINQUISHMENT PROVISION -- HORIZONTAL WELL.............................. 144
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Table of Contents

F. FARMOUT.............................................................................................. 146
FARMOUT -- HORIZONTAL WELLS.......................................................... 149
G. CHANGE OF OPERATOR -- FINANCIAL..................................................... 151
CHANGE OF OPERATOR -- DILUTION OF INTEREST.................................. 153
H. PRIORITY OF OPERATIONS...................................................................... 154
I. LANDS EXCLUDED FROM THE OPERATING AGREEMENT.......................... 156
J. WELL PROPOSAL................................................................................... 157
K. AREA OF MUTUAL INTEREST.................................................................. 158
L. GEOSCIENCE OPERATIONS..................................................................... 161
M. BANKRUPTCY........................................................................................ 164
N. MEMORANDUM OF OPERATING AGREEMENT
AND FINANCING STATEMENT................................................................. 165
O. PROPRIETARY TECHNOLOGY -- HORIZONTAL WELL............................... 182
P. COST OVERRUNS................................................................................... 183
Q. REMOVAL OF OPERATOR -- FINANCIAL INTEREST................................... 185
REMOVAL OF OPERATOR -- WITHOUT CAUSE......................................... 185

MEMORANDUM OF OPERATING AGREEMENT AND
FINANCING STATEMENT and Related Forms............................................... 191

Memorandum of Operating Agreement and
Financing Statement .......................................................................................... 192

Exhibit A to Memorandum of Operating Agreement ......................................... 194

Supplemental List of Farmout and
Option Farmout Summaries............................................................................... 195

Instructions........................................................................................................ 196

Continuation Statement...................................................................................... 198

Release of Memorandum of Operating Agreement
and Termination of Financing Statement............................................................ 199

Ratification of Memorandum of Operating Agreement
and Financing Statement.................................................................................... 200

Model Form Recording Supplement to Operating
Agreement and Financing Statement.................................................................. 201

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Table of Contents

FORMS TO OPERATING AGREEMENT
EXHIBIT "A" CONTRACT AREAS TO PARTIES.......................................... 205
Contract Areas and Parties...................................................................... 206
Exhibit "A" Sample................................................................................. 207
EXHIBIT "B" FORM OF LEASE ..................................................................... 209
Paid Up Oil and Gas Lease Sample......................................................... 210
EXHIBIT "C" ACCOUNT PROCEDURE JOINT OPERATIONS.................... 213
I. General Provisions ...................................................................... 215
II. Direct Charges ............................................................................. 217
III. Overhead ..................................................................................... 225
IV. Pricing of Joint Account Material Purchases,
Transfers and Dispositions ........................................................... 231
V. Inventories.......................................................................................... 237
EXHIBIT "D" INSURANCE............................................................................. 239
Form 1.................................................................................................... 240
Form 2.................................................................................................... 241
Commentary ........................................................................................... 243
EXHIBIT "E" GAS BALANCING AGREEMENT........................................... 245
Commentary ........................................................................................... 246
Sample.................................................................................................... 257
EXHIBIT "F" NON-DISCRIMINATION AND
CERTIFICATE OF NON-SEGREGATED FACILITIES.................................. 263
Sample.................................................................................................... 264
Commentary ........................................................................................... 268
EXHIBIT "G" TAX PARTNERSHIP AGREEMENTS..................................... 269
Commentary ........................................................................................... 270
Tax Partnership Provisions...................................................................... 272
"G-1" Fair Market Value of Property
Contributed to Tax Partnership................................................................ 275
Use of Tax Partnership............................................................................ 276
Model American Petroleum Institute
Tax Partnership Provisions Form............................................................ 278
COMMENTARY .............................................................................................. 283

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1989 JOINT OPERATING AGREEMENT
WITH COMMENTARY
*
by Andrew B. Derman
INTRODUCTION
To facilitate the annual drilling of thousands of wells within the United States, the oil
industry has relied on form agreements. The American Association of Petroleum
Landmen (A.A.P.L.) has, since 1956, provided industry with standardized Joint
Operating Agreements. The 1956 form was revised in 1977, 1982 and again in 1989.
The forms have, generally, been effective in establishing procedures and obligations
which have resulted in the drilling of tens of thousands of wells with minimal
litigation.
This Manual reviews each of the provisions of the Joint Operating Agreement and
provides a discussion of that provision with selective comments on how the provision
might be strengthened or amended. In addition, this Manual reviews exhibits that are
customarily attached to the Joint Operating Agreement.
Article XVI. is reserved for additional provisions. I have suggested a number of
additional provisions which amend and/or supplement the Joint Operating
Agreement.
We live in a dynamic age where rules should be modified to fit the times. The
A.A.P.L. Form Joint Operating Agreement has served the industry well, but as the oil
industry evolves so must the form. This Manual seeks to educate the reader as to
what the Joint Operating Agreement provides and to offer suggestions on how it can
be improved.

*
Chief Counsel, Exploration and International, Oryx Energy Company; B.A., New York
University; J.D., Temple University Law School.
I want to acknowledge my wonderfully talented secretary, Julie Whitmire. During the
lengthy preparation process, Julie's positive attitude and eye for perfection substantially
contributed to the success of this project.
I would also like to acknowledge my wife, Lynn Derman, who has always assisted me in
attaining a healthy balance between my work and personal endeavors.
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A.A.P.L. FORM 610 - 1989
MODEL FORM OPERATING AGREEMENT

OPERATING AGREEMENT
DATED
* * * * , 19 ,
* * * * OPERATOR
* * * * CONTRACT AREA

COUNTY OR PARISH OF , STATE OF

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Cover Page -- JOA
Date: The date inserted should be consistent with the date included in
Article XVI., lines 1 and 2, page 18. As a word of caution, this date
should be earlier than the date provided in Article VI.A. If not, it is
questionable whether the Operator is obligated to drill the Initial Well.
If the Joint Operating Agreement (JOA) is attached to a farmout
agreement or an exploration agreement and will become effective at
some future date, the date provisions should be modified accordingly.
For example, if the JOA is attached as an exhibit to a farmout and is to
be effective after payout and conversion, the date provisions might read,
"To be effective if and when Farmor and Farmee become joint owners in
any of the Farmout Lands covered by the Farmout Agreement dated
, 19 and attached hereto."
Operator: This is the same person named in the body of the JOA. Be certain to use
the proper corporate or partnership name.
Contract This is a brief description of lands covered by the JOA. For example
Area: NW of Section 16, Township 6 North -- Range 8 East. Be certain that
the Contract Area description is identical to that described in
Exhibit "A." If the description is long and detailed, describe the
Contract Area on an Exhibit and include the following reference, "as
described on Exhibit 'A' attached hereto."
The parties should carefully consider the size of the Contract Area. A
Contract Area that is overly expansive may well contractually bind the
parties to jointly develop property years after the Initial Well is drilled.
This can be troublesome where the Contract Area includes unleased
acreage. In this situation, an area of mutual interest provision should be
included in Article XVI. (See Article XVI.M. for an example.) An
expansive Contract Area combined with the selection of Option No. 1 of
Article XIII. can unintentionally create contractual relationships which
will endure for decades. A party may find that a nine year old JOA
controls operations on a new play on acreage that has never been drilled.
Conversely, a Contract Area that is too small may cause difficulties
where the exploration or development program includes acreage that is
not within the Contract Area. If a lessee or a mineral owner refuses to
expand the Contract Area or execute another JOA which encompasses
this additional acreage, the party desirous of drilling has neither the
benefit of a procedure that governs the proposal of a well nor the benefit
of the non-consent penalty provisions.

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