the a.a.p.l. 610-1989 model form operating agreement...model form operating agreement an overview...

© 2016 Fox Rothschild

THE A.A.P.L. 610-1989MODEL FORM OPERATING AGREEMENT

AN OVERVIEW AND LEGACY CONSIDERATIONS

Presented by:

Brent [email protected]

ROADMAP

• Overview of the A.A.P.L. 610-1989 Model Form Operating

Agreement

• Typical additions addressing modern horizontal well oil and gas

exploration and development

MODEL FORM JOA STRUCTURE

• Five Main Model Form JOA Parts

– Title page

– Table of contents

– Preamble

– Articles

– Additional provisions in Article XVI (special provisions)

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

MODEL FORM JOA: TITLE 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

MODEL FORM JOA: TABLE OF CONTENTS

• A good quick reference guide

MODEL FORM JOA: PREAMBLE

– Properly identify the operator of the Contract Area by full and

correct name

MODEL FORM JOA: ARTICLE I

– Definitions

MODEL FORM JOA: ARTICLE II

• Model Form JOA Exhibits

– There are eight (8) exhibits included in the Model Form JOA,

in a check-box format

– 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

MODEL FORM JOA: ARTICLE II (CON’T.)

• Model Form JOA Exhibits (cont.)

– Model Form JOA Exhibit B

• A form oil and gas lease to be used for acquisition of leaseholdinterests covering unleased minerals in contract area



– Model Form JOA Exhibit C

• Council of Petroleum Accountant Societies (“COPAS”) accountingprocedure



– Model Form JOA Exhibit D

• Covers insurance matters between parties

– Model Form JOA Exhibit E

• Gas balancing agreement



– Model Form JOA Exhibit F

• Certification of non-discrimination and non-segregation of facilities

– Model Form JOA Exhibit G

• Tax partnerships



– Model Form JOA Exhibit H

• Miscellaneous additional exhibit(s)

MODEL FORM JOA: ARTICLE III

• Interests of Parties

– Article III.A: Oil and Gas Interests

• Designed to impose Exhibit B oil and gas lease terms on mineralinterests owned by Model Form JOA parties

MODEL FORM JOA: ARTICLE III (CON’T.)

• Interests of Parties (con’t.)

– Article III.B: Interests of Parties in Costs and Production

• Designed to provide proceeds distribution and burden predictability andlimits

• Provides basis for treatment of interests acquired by Model Form JOAparties subsequent to the effective date

MODEL FORM JOA: ARTICLE IV

• Titles

– Article IV.A: Title Examination

• Provides requirements for acquisition of Contract Area attorney’s titleopinion and allocation of costs for the same

– Article IV.B: Loss or Failure of Title

• Provides the procedure for identifying and handling title defects

MODEL FORM JOA: ARTICLE V

• Operator

– Article V.A: Designation and Responsibilities of Operator

• Again provides the proper name of the operator designated on theModel Form JOA Title Page and Preamble

• Provides basis for reasonably prudent operator duties and obligations,and the standard(s) for the same

MODEL FORM JOA: ARTICLE V (CON’T.)

• Operator (con’t.)

– Article V.B: Resignation or Removal of Operator

• Provides procedure for operator resignation

• Provides basis and procedure for operator removal

• Provides procedure for selecting successor operator

– Article V.C: Employees and Contractors

• Expressly allows operator control over the selection, labor andcompensation of employees

MODEL FORM JOA: ARTICLE V (CON’T.)

• Operator (con’t.)

– Article V.D: Rights and Duties of Operator

• Sets forth the specific duties and rights of operator, both operationallyand contractually

MODEL FORM JOA: ARTICLE VI

• Drilling and Development

– Article VI.A: Initial Well

• Provides for insertion of the anticipated date for commencement ofinitial well operations, legal description of the exact well location andtarget subsurface formation

MODEL FORM JOA: ARTICLE VI (CON’T.)

• Drilling and Development (con’t)

– Article VI.B: Subsequent Operations

• Provides the procedure by which operations beyond the initial well areto be proposed and conducted

• Provides the procedures when not all Model Form JOA parties elect toparticipate in a given operations proposal



– Article VI.B: Subsequent Operations (con’t.)

• Provisions also address stand-by costs and operational orderpreference

– Article VI.C: Completion of Wells

• Provisions address the scope of a Model Form JOA party’s election toparticipate in a proposed operation

– Article VI.D: Other Operations

• Contains provisions limiting the costs operator can expend on “non-drilling” operations



– Article VI.E: Abandonment of Wells

• Provides detailed procedures for the abandonment of wells

– Article VI.F: Termination of Operations

• Allows the parties to set minimum ownership percentages fortermination of operations

– Article VI.G: Taking Production in Kind

• Provides options for dealing with gas imbalancing issues

MODEL FORM JOA: ARTICLE VII

• Expenditures and Liability of Parties

– Article VII.A: Liability of Parties

• Provides basis of the legal relationship between the parties

– Article VII.B: Liens and Security Interests

• Provides the parties with the necessary rights to assert real andpersonal property liens to secure payment of operations costs

– Article VII.C: Advances

• Provides the operator with the ability to “cash call” non-operatorsprovided certain requirements are met

MODEL FORM JOA: ARTICLE VII (CON’T.)

• Expenditures and Liability of Parties (con’t.)

– Article VII.D: Defaults and Remedies

• Available in addition to the lien and security interest provisions of theModel Form JOA, provides the mechanisms through which the partiesmay recoup costs from breaching parties

– Article VII.E: Rentals, Shut-In Well Payments and Min. Royalties

• Provides direction as to the obligations of the parties to pay these costsand receive information regarding the same

– Article VII.F: Taxes

• Provides obligation for operator to pay taxes

MODEL FORM JOA: ARTICLE VIII

• Acquisition, Maintenance or Transfer of Interest

– Article VIII.A: Surrender of Leases

• Provides mechanism for how oil and gas leases are surrendered andthe procedure for the same being taken over by other parties

– Article VIII.B: Renewal or Extension of Leases

• Provides mechanism for how oil and gas leases are to be renewedand/or extended

– Article VIII.C: Acreage or Cash Contributions

• Provides procedure for situations where a party is receiving third partyfunds or leasehold/mineral interests that will fall under the parties’agreement

– Article VIII.D: Assignment & Uniform Interest Maintenance

• Provides requirements for interest assignment and limitations on same

MODEL FORM JOA: ARTICLE VIII (CON’T.)

• Acquisition, Maintenance or Transfer of Interest (con’t.)

– Article VIII.E: Waiver of Partition Rights

• Prevents parties owning undivided interests in committed assets fromseeking partition of the same at common law

– Article VIII.F: Preferential Right

• Requires parties to offer interest being sold to third party to other ModelForm JOA parties first

MODEL FORM JOA: ARTICLE IX

• Internal Revenue Code Election

– Provides additional tax obligations and rights for operator

MODEL FORM JOA: ARTICLE X

• Claims and Lawsuits

– Provides operator with right to settle claims without approval of

non-operators, up to a dollar amount set by parties in this provision

MODEL FORM JOA: ARTICLES XI & XII

• Force Majeure

– Covers those matters which will be considered to stay the

performance of the parties’ respective Model Form JOA duties and

obligations

• Notice

– Provides specific procedures for giving required/allowed notices to

other Model Form JOA parties

MODEL FORM JOA: ARTICLE XIII• Term of Agreement

– Provides two (2) options for the term of the Model Form JOA

MODEL FORM JOA: ARTICLE XIV• Compliance with Laws and Regulations

– Articles XIV.A-C: Laws, Regulations, Orders, Governing Law &

Regulatory Agencies

• Requires full and timely compliance with all applicable laws andregulatory orders by operator, and makes Model Form JOA subject tothe same

MODEL FORM JOA: ARTICLE XV• Miscellaneous

– Articles XIV.A-C: Laws, Regulations, Orders, Governing Law &

Regulatory Agencies

• Requires full and timely compliance with all applicable laws andregulatory orders by operator, and makes Model Form JOA subject tothe same

MODEL FORM JOA: ARTICLE XVI• Other Provisions

– Designed to allow Model Form JOA parties to insert

specific/controlling additional terms

MODEL FORM JOA: HORIZONTAL DRILLING EDITING

• The Model Form JOA does not address horizontal drilling

operations

• Modifications and additions are often made if horizontal drilling is

contemplated

36

MODEL FORM JOA: HORIZONTAL DRILLING EDITING (CON’T.)

• Article I – Definitions

– Updated to include horizontal drilling references and language

• AFE: Include directional drilling costs

• Deepen, Sidetrack and Plug Back: Include language to addresshorizontal drilling differences

• Drillsite: Include surface and bottomhole locations

37


• 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

38


• Additional Article I Definitions (con’t.)

– 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)

– 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

39


• Article IV – Titles

– Drillsite: Title examination must cover entire DSU

40


• Article V – Rights and Duties of Operator

– Information: Prevent non-consenting party receipt

41


• Article VI – Drilling and Development

– Initial Well: The surface location, depth and horizontal depth should be

provided

– Completion of Wells; Reworking and Plugging Back: Option 1 should be

checked if drilling horizontal wells

42



– Non-Consent Penalty: Appropriate penalty given planned operations

– Completion of Wells; Reworking and Plugging Back: Option 1 should be

checked if drilling horizontal wells

43



– Relinquishment: May be used in place of or in conjunction with non-

consent penalties

– Farmout: May also be used to curb non-participation

44



– Deepening: Similar to vertical recompletion

– Sidetracking: Vertical and horizontal wellbores considered one

operation

45


• 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

46

CONCLUSION / Q&A

• 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

Brent D. Chicken

Partner

Fox Rothschild LLP

1225 17th St., Ste. 2200

Denver, CO

80202

303.446.3844

[email protected]

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