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The Magazine of the Canadian Association of Petroleum Landmen
October 2015
THE NEGOTIATOR
Operating Agreement Models for Unconventional
Shale Projects
Re-Evaluating Your Drilling ContractsPrecision Drilling Canada Limited Partnership
vs Yangarra Resources Ltd.
Inability to Withhold Payments under Processing Agreements
Where Prior Billings Arguable
MANAGING THELIFE CYCLE OF
SHALE PROJECTS
For information on the services McMillan’s Energy Group can provide, please visit our website or contact Michael Thackray, QC.
Your energy partnerBuilding on over 20 years of recognized oil and gas leadership and valued relationships with CAPL, McMillan continues to be your trusted and experienced energy counsel.
Michael A. Thackray, QCe: michael.thackray@mcmillan.cat: 403.531.4710
Senior Editorial BoardDirector of Communications
Kent Gibson [ph] 403-698-8822Advertising Editors
Kevin Young [ph] 403-831-4908Trevor Rose [ph] 403-233-3136
Coordinating Editor Krissy Rennie [ph] 403-663-2595
Feature Content EditorMark Innes [ph] 403-818-7561
Regular Content EditorMartin Leung [ph] 403-699-5864
Social Content EditorJason Peacock [ph] 403-691-7077
Editorial CommitteeJosh Lewis [ph] 403-233-4446Amy Kalmbach [ph] 403-619-2868Nathan Roberts [ph] 403-268-3006Dinora Santos [ph] 403-470-1558
Design and ProductionRachel Hershfield, Folio Creations
PrintingMcAra Printing
SubmissionsFor information regarding submission of articles, please contact a member of our Senior Editorial Board.
DisclaimerAll articles printed under an author’s name represent the views of the author; publication neither implies approval of the opinions expressed, nor accuracy of the facts stated.
AdvertisingFor information, please contact Kevin Young (403-831-4908) or Trevor Rose (403-233-3136). No endorsement or sponsorship by the Canadian Association of Petroleum Landmen is suggested or implied.
The contents of this publication may not be reproduced either in part or in full without the consent of the publisher.
2015–2016 CAPL Board of DirectorsPresident
Nikki Sitch, P.Land, PSLVice-President
Larry Buzan, P.LandDirector, Business DevelopmentAlberta & British Columbia
Ted Lefebvre, P.LandDirector, Business DevelopmentSaskatchewan & Alberta Oilsands
Michelle CreguerDirector, Communications
Kent GibsonDirector, Education
Bill Schlegel, P.LandDirector, Field Acquisition & Management
Paul Mandry, PSLDirector, Finance
Andrew WebbDirector, Member Services
Ryan Stackhouse, P.LandDirector, Professionalism
Noel Millions, PSLDirector, Public Relations
Gary Richardson, PSLDirector, Technology
Mandy CooksonSecretary/Director, Social
Jordan MurrayPast President
Michelle Radomski
Readers may obtain any Director’s contact information from the CAPL office. Suite 1600, 520 – 5 Avenue S.W. Calgary, Alberta T2P 3R7 [ph] 403-237-6635 [fax] 403-263-1620www.landman.ca
Kaitlin Polowski reception@landman.caDenise Grieve dgrieve@landman.ca Irene Krickhan ikrickhan@landman.caKarin Steers ksteers@landman.ca
Also in this issue
14 Ugly Oil Speakeasy Fundraiser
16 H1 M&A Report
24 October General Meeting Guest Speaker
26 2015 CAPL Golf Tournament
THE NEGOTIATORThe Magazine of the Canadian Association
of Petroleum Landmen THE NEGOTIATOR
Features October 2015
2 Unconventional Risk Allocation: Managing the Life Cycle of Shale Projects
Fenner L. Stewart & Anthony G. Cioni
9 Knock-for-Knock Indemnification Clauses in the Oil and Gas Industry
Kourtney Rylands
12 Summary Judgement on Contested Amounts Owing under Natural Gas Processing and Related Agreements
Nigel Bankes
In Every Issue 8 The Negotiator’s Message From the Board: Communications
15 Roster Updates
19 Get Smart
27 The Social Calendar
28 CAPL Calendar of Events
28 October Meeting
28 November Meeting
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THE OIL AND GAS INDUSTRY IN ALBERTA AND INTERNA-TIONALLY IS LARGELY GOVERNED BY STANDARD FORM CONTRACTS.1 These types of agreements provide certainty and
efficiency to contractors and operators alike, on the assumption
that the parties have read and fully understand the implications
of entering into such a contract. However, a recent decision of the
Alberta Court of Queen’s Bench illustrates how even sophisticated
entities can be caught off guard by the practical results of the
provisions in standard form drilling contracts.2 In Precision Drilling
Canada Limited Partnership v Yangarra Resources, 2015 ABQB 433, the
court upheld a bilateral no fault contract between a contractor and
an operator, resulting in multi-million dollar losses for the operator.
This case illustrates that Alberta courts have been more than willing
to hold experienced and sophisticated commercial entities to their
agreements, and serves as a cautionary tale for industry to be fully
informed about what is contained in its contracts, especially those
that purport to allocate liability in a particular manner.
In this case Yangarra Resources Ltd. (“Yangarra”), an oil
and gas operator, contracted with Precision Drilling Canada
Limited Partnership (“Precision”) to drill two wells. The agree-
ment between the parties was governed by a bilateral no fault
contract, or reciprocal indemnity agreement. Agreements such as
these are commonly referred to as “knock-for-knock” contracts
because, pursuant to the contract, each party agrees to bear the
risk of damage to its own assets even if its assets are destroyed or
damaged by the fault of the other.
The losses to Yangarra occurred during the drilling of the second
well when an employee of Precision improperly mixed the drilling
mud. Precision employees then “neglected to test or carelessly
tested the drilling mud and wrongly advised Yangarra’s supervisor
that the drilling mud was in order.”3 During drilling, the drill string
and bit subsequently became stuck in the hole and could not be
extracted, resulting in equipment losses to Yangarra of approxi-
mately $300,000.00. It was assumed these losses were due to the use
of the improperly mixed drilling mud. Yangarra also incurred addi-
tional expenses in the amounts of $720,000.00 in attempts to retrieve
the drill string and bit and $2.5 million to drill a replacement well.
This decision may be surprising to some as Precision success-
fully sued Yangarra for all of its fees, including the extra expenses
incurred in fishing operations and to drill the replacement well.
Yangarra was required to pay the full amount of Precision’s bill
and was not able to set off any of its losses. This scenario was
made possible by the wording of the knock-for-knock drilling
contract. The contract provided that Yangarra was to assume all
of the risk of damage to its equipment or the hole “regardless of
the negligence or other fault of Precision or howsoever arising.”4
The contract further provided that Yangarra was to
assume all of the risk of and be solely liable for the cost of
repairing and re-drilling a lost or damaged hole, including,
without limitation, the cost of fishing operations, regardless of
the negligence or other fault of Precision or howsoever arising.5
The court relied on a plain language reading of the agreement to
find that Yangarra was required to assume all of the losses caused
by Precision. Yangarra was also required to pay for Precision’s day
work. Yangarra attempted to counterclaim against Precision for
the losses it suffered based on arguments of negligence, gross
negligence, breach of contract, negligent and fraudulent misrep-
resentation and unjust enrichment. However, under the contract,
Yangarra had released Precision from any and all claims based on
negligence or any other theory of legal liability. The court was not
willing to overturn the clear intentions of the contract or find a
carve-out the parties did not specifically agree to.6 The ultimate
question asked by the court and those who have read this deci-
sion is: “why would anyone knowingly make such a contract?”7
Oil and gas companies around the world rely on model forms.
As commentators have noted, this practice “saves the parties
time and transaction costs and gives comfort that they are using
documents with which they are already familiar.”8 One of the
most common provisions of a standard form oil and gas service
contract is the apportionment of liability or knock-for-knock
provision.9 These types of agreements have become common in
the oil and gas industry because they can offer significant bene-
fits to all parties, such as reduced costs with respect to litigation,
increased certainty with respect to risk allocation, and decreased
friction between multiple parties at a wellsite.10 However, the
Precision case is an example of the most significant drawback of
the knock-for-knock regime: the requirement for a contracting
party to assume liability for damage for which it is not responsible.
Depending on the jurisdiction, courts have taken different
approaches with respect to the enforcement of knock-for-knock
indemnification clauses. For example, there is legislation in place
in the United States that generally prohibits indemnification for an
indemnitee’s own negligence.11 In addition, some courts have raised
the issue of public policy with respect to the enforcement of knock-
for-knock provisions.12 In the Precision case Yangarra attempted
to make the public policy argument that the enforcement of the
knock-for-knock provisions would encourage negligent and grossly
negligent behaviour in the oil and gas industry, therefore placing
Knock-for-Knock Indemnification Clauses in the Oil and Gas Industry
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the public at risk.13 However, the Alberta court made clear that
Precision and Yangarra were sophisticated commercial entities
with equal bargaining power who had significant motivation to
avoid negligent behaviour; the court determined that enforcing the
knock-for-knock contract under those circumstances was neither
unconscionable nor contrary to public policy.
As might be expected, negotiating knock-for-knock indemnifi-
cation provisions can be a time consuming and heated endeavour.
Part of this negotiation process often involves the carve-out of
specific circumstances in which liability will be apportioned to each
party. For example, a knock-for-knock contract may have a carve-
out for negligence or gross negligence. One of the key factors in this
decision was that the contract provided indemnification for damage
based on any theory of legal liability. In Canada, there is no legis-
lation in place which prohibits this type of broad indemnification
clause.14 In the Precision case the court found that the indemnity
clause covered all heads of damage advanced by Yangarra and
concluded that the indemnity clause would only be unenforceable
in circumstances in which intentional harm was inflicted.15
As discussed, standard form contracts (some complete with
knock-for-knock provisions) are common in the oil and gas industry
worldwide. These types of agreements are often drafted by experts
over many years and negotiated with certain purposes in mind.
For example, if we look slightly closer to home, the CAPL 2007
Operating Procedure is a widely used and accepted standard form
document. The Operating Procedure is by all accounts a “norm based”
standard form document and was designed by its drafters to serve
“typical” situations and transactions (remember $90.00/bbl oil?), all
in an acknowledged environment of ever-increasing non-typical
situations and transactions. Modifications to the norm were expected
to address special circumstances and efforts were made (see the
inclusion of special related annotations to assist users in recognizing
areas for which modifications might be appropriate) to highlight this
potential need and to facilitate special circumstance customization.
However, to understand when modifications to a standard form
document are necessary, one first has to completely understand what
the norm is and what the standard form document purports to do. I
have it on good authority that it was never the drafters intention to
create a document that could be mindlessly stapled onto a generic
and one-size-fits-all head agreement. Quite the contrary in fact. The
situation faced by Yangarra with respect to the use of a standard form
drilling contract should cause every reader to reach to their shelf to
review the liability provisions of the Operating Procedure.
In the Precision case, the contract used by the parties was
not a CAPL standard form document, but instead was negotiated
between the Canadian Association of Oilwell Drilling Contractors and
the Canadian Association of Petroleum Producers.16 As cautioned,
contractors and operators alike must still carefully consider and fully
understand the provisions of such contracts, including the liability and
release provisions they are committing to. For example, parties might
turn their minds to allocating certain risks between them instead of
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releasing each party completely. One way parties can accomplish this
is to identify in advance certain circumstances in which one party
has complete control of a particular aspect of the job and carve out an
exception to the knock-for-knock contract that allocates responsibil-
ity to such a party.17 In this instance the parties had the opportunity to
allocate some risk to Precision, which might have covered the prepa-
ration of the drilling mud. However, the contract used by Precision and
Yangarra noted that the risk allocated to Precision would be “nil.”18
If parties do proceed with the broad form of indemnification they
need to consider whether there are gaps in their insurance coverage
which a knock-for-knock contract might expose. Additionally, parties
should be aware of how the indemnification clauses in their agree-
ments interact with the contract’s payment terms. Here the parties
agreed that Precision would be paid day rates, which resulted in
additional losses for Yangarra due to Precision’s continued work at
the wellsite. A requirement for Precision to drill a complete well may
have resulted in reduced losses to Yangarra. Finally, operators head-
quartered in jurisdictions outside of Alberta with a different approach
to the interpretation of indemnification clauses should carefully
consider choice of law clauses in their standard from agreements.
The results of this case indicate that Alberta courts may hold sophis-
ticated commercial entities to their agreements and will not hesitate
in enforcing them, whatever the result may be. m
Kourtney Rylands
Notes1. Trent Mercier, Josh Kane, and Sharbil Nammour, “Drafting Oilfield
Master Service Agreements”, 52 Alta L Rev 245 (2014) at p 247 [Drafting
Oilfield Master Service Agreements].
2. Precision Drilling Canada Limited Partnership v Yangarra Resources, 2015
ABQB 433 at para 5 [Precision v Yangarra].
3. Ibid at para 17.
4. Ibid at para 11.
5. Ibid at para 29.
6. Ibid at para 36.
7. Ibid at para 44.
8. Toby Hewitt, “An Asian Perspective on Model Oil and Gas Services
Contracts”, 28 J Energy & Nat Resources L 331 (2010) page 331 [Model
Oil and Gas Services Contracts].
9. Model Oil and Gas Services Contracts, supra note 10 at p 333; Drafting
Oilfield Master Service Agreements, supra note 1 at p 255.
10. Nick Kangles, R Ben Rogers, and Chris Harris, “Risk Allocation
Provisions in Energy Industry Agreements: Are We Getting It Right?”,
49 Alta L Rev 339 (2011-2012) at p 340 [Risk Allocation]; Christopher L
Evans and F. Lee Butler, “Reciprocal Indemnification Agreements in the
Oil and Gas Industry: The Good, The Bad And The Ugly, 77 Def Counsel
J 226 (2010) at p 227-229 [Reciprocal Indemnification Agreements].
11. Risk Allocation, supra note 12 at p 342.
12. Ibid at p 247.
13. Precision v Yangarra, supra note 2 at paras 101-112.
14. Risk Allocation, supra note 12 at p 341.
15. Precision v Yangarra, supra note 2 at para 37.
16. Precision v Yangarra, supra note 2 at para 5.
17. Reciprocal Indemnification Agreements, supra note 12 at p 231.
18. Precision v Yangarra, supra note 2 at para 30.
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