institute for energy law 68 annual oil & gas law conference … · 2017-02-09 · joint...
TRANSCRIPT
*Jeff Weems has practiced energy-related litigation for 26 years. In 2016, Jeff founded a new firm, Staff Weems
LLP, with Rick Staff, another energy litigation veteran. Jeff also is a member of the AAPL Task Force that was
charged with re-writing the AAPL Model Form. Thanks to Matthew Savage of Porter Hedges LLP for his help on
an earlier version of this paper. This paper is a direct takeoff of a paper prepared by Jeff Weems and
published for the 42nd Annual Ernest E. Smith Institute in April 2016 and the 29th Annual Energy Institute
for Attorneys and Landmen in September 2016.
Institute for Energy Law
68th Annual Oil & Gas Law Conference
Changes Incorporated into the AAPL 2015 610 Model Form
Joint Operating Agreement
Jeff Weems ⃰
Staff Weems LLP
Houston, Texas
_____________
Synopsis I. Introduction ............................................................................................................................ 2
II. Revisions to the 1989 Horizontal Form JOA ......................................................................... 3
A. Article I – Definitions ...................................................................................................... 4
[1] Affiliate ......................................................................................................................... 4
[2] Consenting Party/Drilling Party ................................................................................... 5
[3] Deepen/Extend .............................................................................................................. 5
[4] Lateral ........................................................................................................................... 6
[5] Workover ...................................................................................................................... 6
B. Article III – Interests of Parties ........................................................................................ 6
[1] Article III.B – Operator’s right to amend Exhibit “A”. ................................................ 7
[2] Article III.B – Allocation of Lease Burdens ................................................................. 8
C. Article IV – Titles ............................................................................................................ 9
[1] Article IV.A: Title Examination ................................................................................... 9
[2] Article IV.B: Loss or Failure of Title ......................................................................... 10
D. Article V – Operator ....................................................................................................... 11
[1] Article V.A: Designation and Responsibilities of Operator ....................................... 12
2
[2] Article V.B: Resignation or Removal of Operator and Selection of Successor ......... 15
[3] Article V.D: Rights and Duties of Operator ............................................................... 17
E. Article VI – Drilling and Development.......................................................................... 18
[1] Article VI.B: Subsequent Operations ......................................................................... 18
[2] Article VI.D: Other Operations .................................................................................. 20
[3] Article VI.E: Deviations from Approved Proposal .................................................... 21
[4] Article VI.F: Abandonment of Wells ......................................................................... 21
F. Article VII – Expenditure and Liability of Parties ......................................................... 22
[1] Article VII.C: Advances ............................................................................................. 22
[2] Article VII.D: Defaults and Remedies ....................................................................... 22
G. Article VIII – Acquisition, Maintenance or Transfer of Interest ................................... 23
[1] Article VIII.A: Defaults and Remedies ...................................................................... 23
[2] Article VIII.D: Assignment; Maintenance of Uniform Interest ................................. 23
H. Article X – Claims and Lawsuits ................................................................................... 24
I. Article XII – Notices ...................................................................................................... 25
J. Article XIV.C – Compliance with [Regulatory Agencies] ............................................ 25
K. Article XV.A – Execution .............................................................................................. 26
L. Article XVI – Other Provisions ...................................................................................... 26
III. Conclusion ........................................................................................................................... 26
I. Introduction
In 1956, the American Association of Petroleum Landmen (“AAPL”)1 published the first
standardized joint operating agreement known as the AAPL Form 610 Model Operating
Agreement (together with its later versions, generally referred to herein as “Model Form JOA”).
This agreement, and its later versions, has proven immensely popular with the industry as the
primary contractual document focused on governing the relationships among parties looking to
jointly develop the oil and gas resources in a particular area. Since its inception, the AAPL
periodically has revised the Model Form JOA to address both developments in the oil and gas
1 The AAPL later changed its name to the American Association of Professional Landmen.
3
industry and specific legal interpretations of earlier forms. In 2011, the AAPL formed a Task
Force to revise the Model Form JOA that had been published in 1989 (the “1989 Model Form
JOA”) in order to incorporate standard industry practices and documentation relating to the
increased use of horizontal drilling techniques to develop oil and gas reserves. Based on the Task
Force’s recommendations in 2013, the AAPL released a modified version of the 1989 Model Form
JOA (“1989 Horizontal Form JOA”) incorporating the Task Force’s revisions related to
horizontal drilling and development. After the AAPL released the 1989 Horizontal Form JOA,
the Task Force turned its attention to revising the entire Model Form JOA to address additional
operational realities in energy development and the wide range of judicial decisions interpreting
the 1989 Model Form JOA.
Recently, the AAPL Executive Committee and Board of Directors approved the Task
Force’s newest work, the 2015 Horizontal Form JOA (“2015 Model Form JOA”). This 2015
Model Form JOA is intended to be used for both horizontal and vertical operations. It was released
for public use in the Fall of 2016.
Before launching into a discussion of the changes found in the 2015 Model Form JOA, a
reminder of the purpose of any Model Form JOA is in order. Always remember that a Model
Form JOA is a template designed to reflect nationally-accepted standards for joint operations. It
is not intended to have every answer for every situation. That is the purpose of Article XVI, which
allows the parties to create and insert language that will govern their specific needs and desires for
their specific operations for their specific project.
II. Revisions to the 1989 Horizontal Form JOA
To create the 2015 Model Form JOA, the Task Force began with the 1989 Horizontal Form
JOA. Several articles published after the release of the 1989 Horizontal Form JOA specifically
4
discuss the differences between the 1989 Model Form JOA and the 1989 Horizontal Form JOA,2
so those changes will not be rehashed in this article except in a few instances to reemphasize major
changes brought about by that form.3 Rather, this article discusses the important items the Task
Force incorporated into the 2015 Model Form JOA.4
A. Article I – Definitions
The Task Force made the following changes to definitions to address some holdover issues
related to horizontal drilling and to add clarity.
[1] Affiliate
The 2015 Model Form JOA includes a defined term for “Affiliate.”5 This new term is
consistent with the 2005 COPAS Accounting Procedure definition. Specifically, the 2015 Model
Form JOA provides that “Affiliate shall mean for a person, another person that controls, is
controlled by, or is under common control with that person. For purposes of this definition,
“control” means the ownership by one person, directly or indirectly, of more than fifty percent
(50%) of the voting securities of a corporation or, for other persons, the equivalent ownership
interest (such as a partnership interest), and “person” means an individual, corporation,
partnership, trust, estate, unincorporated organization, association, or legal entity.” This definition
is specifically incorporated in the revisions to Article V.B that address operations by a non-owning
operator and the determination of events of resignation or removal of the operator under Article
V.B.
2 See Jeff Weems and Amy Tellegen, The New Horizontal Agreement and the Prospect of an Entirely New Form,
State Bar of Texas, 31st Annual Advanced Oil, Gas and Energy Resources Law Course, October 3-4, 2013; see also
James S. Robertson, David J. Yellow Robe, Robin S. Frederickson, Jeffrey S. Munoz, The New Horizontal Modified
Operating Agreement and Additional Drafting Considerations, 35 Energy & Min. L. Inst. 12 (2014). 3 Although not mentioned below, one of the big changes introduced in the 1989 Horizontal Form JOA was the
proviso in Article VI.C that there is no casing point election for horizontal wells. 4 As an interesting side note, Fred McDonald, the Task Force Chairman, estimates that for every change made, ten
suggestions were rejected as too regionally-specific or better left to the negotiation of the parties. 5 2015 Model Form JOA at I.B.
5
[2] Consenting Party/Drilling Party
In the 1989 Horizontal Form JOA, the terms “Consenting Party” and “Drilling Party” had
the same meaning. The Task Force received several comments from industry participants asking
why there were two terms being used that signified the same thing. In order to remove any
ambiguity that might arise from this duplication, the Task Force removed the term “Drilling Party.”
Now, “Consenting Party”6 is the only term used to describe those parties who have agreed to
participate and pay their share of the costs of certain operations under the provisions of the
operating agreement. A corresponding deletion was made with regard to “Non-Drilling Party” and
“Non-Consenting Party.”7
[3] Deepen/Extend
The 1989 Horizontal Form JOA broadened the definition of “Deepen” to encompass
activities that extend horizontal laterals. In response to comments received on the 1989 Horizontal
Form JOA following its publication, the Task Force decided to split the definition to reflect the
two concepts. In the 2015 Model Form JOA, the definition of “Deepen” is narrowed so that it
only applies to activities in which the well is drilled to a Zone below the deepest Zone previously
drilled or proposed (regardless of the type of well).8 The definition for “Extend” (“Extension”)9
applies specifically to the lengthening of existing or proposed horizontal wellbores, or “Laterals.”
6 2015 Model Form JOA at I.D. 7 Id. at I.P. 8 Id. at I.F. 9 Id. at I.J.
6
[4] Lateral
In the 1989 Horizontal Form JOA, the terms “Lateral” was introduced to define the concept
of the horizontal portion of the wellbore in a horizontal well. The Task Force received many
comments noting that the definition was too bulky and somewhat unclear. In response to these
concerns, the definition of “Lateral” is simplified in the 2015 Model Form JOA to state that it is
the “portion of the wellbore in a Horizontal Well between the point at which the wellbore initially
penetrates the objective Zone and the Terminus.”10 Note that in the case of a Horizontal Well that
traverses multiple Zones, the Lateral begins when the wellbore initially penetrates the first Zone
and extends to the wellbore’s ultimate Terminus.
[5] Workover
The 2015 Model Form JOA now includes a defined term for “Workover.” In earlier Model
Form JOA’s, the term “Workover” was not used; rather, the definition of “Rework” noted that it
did not include “routine repair or maintenance work.” Because particular passages of the 2015
Model Form JOA would benefit by a specific reference to these routine repair or maintenance
activities, the term “Workover” is added and defined as routine maintenance and repair work.11
Both the current definitions of “Rework” and “Workover” specifically exclude the other from their
respective ambits.12
B. Article III – Interests of Parties
As a general comment before discussing several specific changes in Article III,
practitioners should note that in the 2015 Model Form JOA, many of the references to “operations
10 Id. at I.N. 11 Id. at I.BB. 12 Id. at I.V and BB.
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in the Contract Area” have been changed to read “operations conducted under this agreement.”13
This change, albeit subtle, acknowledges the emergence and frequency of situations in which
operations extend to leases and interests outside of the Contract Area, such as operations involving
production sharing agreements and allocation wells. In order to give the parties to the 2015 Model
Form JOA as much flexibility as possible, this change permits application of the terms of the JOA
to these more expansive operations.
[1] Article III.B – Operator’s right to amend Exhibit “A”.
Under the earlier versions of Model Form JOAs, operators and non-operators alike often
have questioned whether an operator may unilaterally change or correct the working interest
percentages of the parties reflected on Exhibit “A” of the operating agreement after the parties
have signed the operating agreement. Many practitioners have dealt with situations where no one
bothered to keep Exhibit “A” current. Some suggested it was because there was no mechanism in
place for such changes. New paragraphs 1-6 in Article III.B explicitly grant the operator the right
to correct mistakes or address changes in ownership in the Contract Area in Exhibit “A.” This
structure will make it easier for operators to correct mistakes and inaccuracies within Exhibit “A.”
This “unilateral” right, however, is qualified. Upon making any changes to Exhibit “A”,
the operator must promptly send each party to the operating agreement a copy of the amended
Exhibit “A” and the supporting title documents, if any.14 If an amendment to Exhibit “A” will
change the interest of any particular party, the operator must obtain that party’s written consent.15
Further, if the proposed amendment results in either an increase or decrease in the percentage
ownership of any party, the operator should amend Exhibit “A” only if it receives written consent
13 E.g., id. at III.B. 14 2015 Model Form JOA at III.B(5). 15 Id. at III.B(2).
8
from the affected parties.16 This means that the operator is required to obtain the consent of parties
whose interest has changed through an instrument outside of the JOA.
The operator, however, is not entirely at the mercy of the other parties’ right to withhold
consent to such corrective amendments to Exhibit “A.” If any party affected by the operator’s
proposed amendment does not consent to such amendment, then the operator may still make the
amendment in order to conform the parties’ ownership interests (in the applicable contract area)
to a title opinion issued by a licensed attorney who is neither an employee of any party affected by
the proposed amendment nor an employee of an affiliate of such party.17 If a non-consenting party
continues to oppose the operator’s amendment, it may litigate the matter to resolve the dispute. If
the litigation results in an ownership determination that is contrary to the amended Exhibit “A,”
the operator must conform Exhibit “A” to the judicial result. 18
Finally, any amendments to Exhibit “A” are retroactive to the respective effective time. In
other words, if a change to Exhibit “A” is intended to correct a mistake made at the beginning of
the contract, the change is retroactive to the beginning. Changes stemming from assignments and
the like are made effective as of the time of the assignment.19
[2] Article III.B – Allocation of Lease Burdens
In previous versions of the Model Form JOA, a participating party was required only to
pay its share of royalties and other leasehold burdens up to the certain fraction specified in Article
III.B on leases it did not contribute; the participating party that actually contributed the lease was
required to pay any amount of royalty or other burden in excess of the stipulated amount. Because
this was the only option, there were situations in which a party contributing a lease with a burden
16 Id. at III.B(3). 17 Id. at III.B(4). 18 Id. at III.B(6). 19 Id. at III.B(1).
9
greater than the stipulated fraction could be damaged if a lateral was shortened (or a unit was
otherwise reduced) and the party was forced to pay the excess burden from its share of the smaller
unit’s production.20 Further, many parties engaging in horizontal development operations related
to the Task Force that they typically inserted language calling for “share and share alike” in
reference to leasehold burdens.
In order to provide an alternative to the sole choice of stipulated fractions for minimum
shared leasehold burdens, the Task Force added a second option in Article III.B that provides that
a participating party will pay its share of all leasehold burdens on leases it did not contribute,
except for amounts associated with leasehold burdens arising out of Subsequently Created Interests
of the party contributing the lease.21 Article III.C defines “Subsequently Created Interests” as “an
assignment of production given as security for the payment of money, or if, after the date of this
agreement, any party creates an overriding royalty, production payment, net profits interest,
assignment of production or other burden payable out of production attributable to its working
interest hereunder . . . .” Subsequently Created Interests also includes burdens created prior to the
effective date of the operating agreement but that were not listed on Exhibit “A”.
C. Article IV – Titles
[1] Article IV.A: Title Examination
The Task Force clarified that any costs incurred by the operator for outside landmen will
be borne by all participating parties. The operator, however, may not charge non-operators for
services rendered by staff landmen.22
20 See Weems/Tellegen, n. 2 supra, at 12. 21 2015 Model Form JOA at III.B “Option No. 2”. 22 Id. at IV.A.
10
[2] Article IV.B: Loss or Failure of Title
An area of significant concern and disagreement in past Model Form JOA’s was the
treatment of (responsibility for) interests that were lost or expired. Article IV.B of the Model Form
JOA allocates these losses of title among the parties to the operating agreement in one of two ways.
Such losses are either borne individually by the contributing party or they are borne jointly by all
parties to the operating agreement. Whether they are borne individually or jointly will depend on
whether the loss of title occurs as a “failure of title” or results from some subsequent action or
occurrence. Earlier versions of the Model Form did not define when a failure of title occurs. It is
generally understood in the industry that if a party contributes an interest to the operating
agreement for which it never actually had good title, the loss is void ab initio and should be borne
individually by the contributing party. On the other hand, if the loss of title is caused by some
event or occurrence after the effective date of the operating agreement, e.g., expiration of a lease
resulting from the failure to develop it, then the loss is not the fault of the contributor and should
be borne by all parties to the operating agreement. This understanding was called into question in
EOG Resources, Inc. v. Killam Oil Co.23
In Killam, EOG lost title to some zones under a farmout agreement with Killam Oil
Company, a party to the operating agreement, following the execution of an operating agreement.
EOG argued that there was no failure of title because it was contractually entitled to share in
production from the zones it lost to Killam and that the failure of title provision should only apply
to losses of title to third parties, not other parties under the operating agreement. The court
disagreed and held that the failure of title provision contained in Article IV.B.1 operated solely
23 239 S.W.3d 293 (Tex. App. – San Antonio 2007, pet denied).
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against the party whose title has been lost, regardless of whether a third party or a party under the
operating agreement acquired the title.
In light of the holding in Killam and following the general industry consensus that urged a
reduction in the types and number of situations that would qualify as a failure of title, the Task
Force revised Article IV.B.1 in the 2015 Model Form JOA to expressly provide that a “failure of
title” occurs only when a contributed lease or interest is determined to be invalid as of the effective
date of the operating agreement or if the lease covers less lands (either on a surface acreage basis
or as to particular zones) during the term of the operating agreement (unless such limitation was
described in Exhibit “A”).24 Prior versions did not clearly state what was meant by “failure of
title.” This restriction upon situations that may constitute a failure of title is reinforced by some
alterations to Article IV.B.3 (“Other Losses”), which now specifically states that the loss of any
lease or interest, or portion thereof, of lands or depths due to a failure to develop or due to express
provisions in the lease (such as by operation of a Pugh clause) must be borne by all parties to the
operating agreement.25 Stated another way, a party’s initial contribution of an interest that is
impaired in a manner not known to the other parties to the operating agreement results in a “failure
of title.” If the impairment is known to all parties at the time the interest is contributed, as that
impairment is triggered, it creates a joint loss.
D. Article V – Operator
Article V of the 2015 Model Form JOA governs the operator: its designation and
responsibilities, resignation and removal, and rights and duties. The Task Force rewrote and
reorganized the entire article with the goal of making it more readable and understandable.
24 2015 Model Form JOA at IV.B.1. 25 Id. at IV.B.3.
12
Although the revised Article V retains much of the substance contained in the 1989 Horizontal
Form JOA, substantive changes and improvements were made as discussed below.
[1] Article V.A: Designation and Responsibilities of Operator
The first change in Article V.A reflects a clarification that the operatorship under the Model
Form JOA cannot be assigned or forfeited except in accordance with Article V.26 The Task Force
deemed this clarification was necessary because of the numerous disagreements that have arisen
over the years concerning how and if an operator may transfer or lose its position as operator.27
The second change to Article V.A adds language that designates the operator as an agent
of the non-operators for the sole purpose of making routine filings and recordings of pooling
declarations and communization agreements as needed to conform with a governmental spacing
order. The operator may only act in such capacity upon providing notice (including a copy of the
proposed filing or recording) to the non-operators. If the non-operators do not object within ten
days after receipt of the operator’s notice, then the action taken by the operator will be binding on
the non-operators.28
The third change to Article V.A is very important. Since the very first Model Form JOA
was published in 1956, each version has contained an exculpatory clause in Article V.A. This
exculpatory clause is intended to limit the operator’s exposure to claims brought by other parties
to the operating agreement for particular activities. Restated, the clause was developed to shield
the operator from second-guessing by the non-operators for the operator’s decisions in conducting
exploration and field activities. The earlier forms fulfilled this purpose by shielding “operations.”
The 1989 Horizontal Form JOA, however, changed this language ever so slightly and provided:
26 Id. at V.A. 27 E.g., James C.T. Hardwick, “Transferability of the Right to Operate,” Section Report of the Oil, Gas & Energy
Resources Law Section of the State Bar of Texas, September 2010, Vol. 35, No. 1, at 64. 28 2015 Model Form JOA at V.A.
13
Operator shall conduct its activities under this agreement as a
reasonable prudent operator, in a good and workmanlike manner
with due diligence and dispatch, in accordance with good oilfield
practice, and in compliance with applicable law and regulations, but
in no event shall it have any liability as operator to the other parties
for losses sustained or liabilities incurred except such as may result
from gross negligence or willful misconduct (emphasis added).29
The change of the word “operations” to “activities” proved problematic after the Texas Supreme
Court’s interpretation of this language in Reeder v. Wood County Energy, LLC.30 Specifically, the
court in Reeder held that the exculpatory clause of the 1989 Model Form JOA (which is the same
exculpatory clause contained in the 1989 Horizontal Form JOA) applied to any actions undertaken
by the operator, whether in the field or in the bookkeeper’s office.31 In reaching this decision, the
court focused on the fact that, under the 1989 Model Form JOA, the exculpatory clause was based
on the operator’s “activities” rather than the operator’s “operations”, and that “activities” was
broader in scope than “operations”.32
Notwithstanding the holding in Reeder, the industry consensus shared with the Task Force
indicated that most parties to operating agreements did not agree that such a barrier to liability
should exist beyond activities in the field or those taken in the home office in direct support of
field operations (such as engineering work for a well). In other words, the consensus of the
industry was to return to the 1982 Model Form JOA concept of shielding the operator for its actions
in drilling and production, but leaving the concept of breach of contract in play for complaints
regarding the operator’s other functions under the JOA. To implement this change, the Task Force
29 1989 Model Form JOA at V.A. 30 397 S.W.3d 789 (Tex. 2013) 31 Id. at 795. 32 As noted before, earlier versions of the Model Form JOA used “operations” in the exculpatory clauses. It is not
clear why the drafters of the 1989 Model Form JOA decided to replace “operations” with “activities.” One of the
members of the Task Force, Dorsey Reach, who was the head of the team that drafted the 1989 Model Form,
remembers that the change was made for another purpose. See Model Form Operating Agreement, AAPL Form
610-1956; Model Form Operating Agreement, AAPL Form 610-1977; Model Form Operating Agreement, AAPL
Form 610-1982.
14
revised the sentence containing the operator’s duty and the exculpatory clause in two ways. First,
the operator’s standard of conduct was separated from the exculpatory clause (which is now an
exculpatory sentence instead of clause). Second, the exculpatory clause in the 2015 Model Form
JOA was revised to track previous language. The revised sentences now read:
Operator shall conduct its activities under this agreement as a
reasonable prudent operator, in a good and workmanlike manner
with due diligence and dispatch, in accordance with good oilfield
practice, and in compliance with applicable law and regulations.
However, in no event shall it have any liability as operator to the
other parties for losses sustained or liabilities incurred in connection
with authorized or approved operations under this agreement except
such as may result from gross negligence or willful misconduct
(emphasis added).
It is the Task Force’s intention that the underlined language will guide courts in the future when
interpreting the exculpatory sentence and that such language will avert the application of the
Reeder rationale in cases interpreting the 2015 Model Form JOA.
Lastly, a new paragraph was added to Article V.A containing language that explicitly
permits the operator to be a non-owning operator, i.e., an operator who has no ownership interest
in the leases contributed to the Contract Area under the operating agreement. The Task Force
made this change to recognize that non-owning operators commonly exist. Often, such non-
owning operators are affiliates of parties to the operating agreement who do own interests in the
Contract Area; other times, such non-owning operators are merely contract operators.33
Designating a non-owning party as operator does come with some caveats under the last
paragraph in Article V.A. First, the relationship between the non-operators and the non-owning
operator must be spelled out in terms that will govern the relationship, whether such terms are set
forth in a separate agreement between the non-operators and the non-owning operator or spelled
33 2015 Model Form JOA at V.A.
15
out in the “Other Provisions” section of the 2015 Model Form JOA, Article XVI. Failure to enter
into a separate agreement or otherwise provide governing provisions in Article XVI will disqualify
the non-owning party as operator, and a party who does own an interest in the Contract Area must
be designated as operator. Once a non-owning operator has been selected and its rights and duties
defined, such operator also will be subject to the provisions in the operating agreement applicable
to the operator, unless the parties provide otherwise either in the separate agreement or Article
XVI. Also, a non-owning operator must expressly consent to be bound by the terms of the
operating agreement.34
[2] Article V.B: Resignation or Removal of Operator and Selection of
Successor
The Task Force revised the order of Article V.B to achieve a more logical sequence.
Moreover, several substantive revisions have been made.
In Article V.B.2 of the 2015 Model Form JOA (“Events Deemed Resignation of
Operator”), the parties to the operating agreement now will specify the maximum percentage of
the interest an operator may sell, transfer or lose before it will is deemed to have resigned as
operator.35 In previous versions of the Model Form JOA, an operator that owned an interest in the
Contract Area was deemed to have resigned only if it no longer held any interest in the Contract
Area. This reality allowed operators with minimal skin in the game to stay on as an operator even
though their lack of any meaningful interest in the Contract Area might result in unaligned interests
with the non-operators.36
34 Id. at V.A. 35 If the operator is a non-owning operator, the parties should make a provision for this fact in Article XVI revising
this clause to address the fact that the operator does not have an interest to sell, transfer or lose, and thus should not
be deemed to have resigned based on the fact it does not own any interest in the Contract Area. 36 For example, some “minimal ownership” operators seem to try to turn their position as operator into a profit
center, even though that contradicts the long-held understanding that the operator should neither profit nor lose as a
result of its position as operator.
16
Another noteworthy change appears in Article V.B.4. This change involves providing
better instructions for what constitutes sufficient “good cause” that would allow the non-operators
to seek to remove the operator. The previous definition of “good cause” was written loosely,
stating:
For purposes hereof, “good cause” shall mean not only gross
negligence or willful misconduct but also the material breach of or
inability to meet the standards of operation contained in Article V.A.
or material failure or inability to perform its obligations under this
agreement. (emphasis added).
This language led to some disagreement as to whether the non-operator(s) seeking removal had to
prove both “gross negligence or willful misconduct” and either “the material breach of or inability
to meet the standards of operation contained in Article V.A.” or “material failure or inability to
perform its obligations under this agreement.” Article V.B.4 now states:
For purposes hereof, “good cause” shall include, but not be limited to, Operator’s (i) gross
negligence or willful misconduct, (ii) the material breach of or inability to meet the standards of
operation contained in Article V.A. or (iii) material failure or inability to perform its obligations
or duties under this agreement. (emphasis added).
This change in language was intended to underscore that the conditions giving rise to the right to
seek removal of the operator are disjunctive and include an operator’s violation of its duties set
forth in Article V.D as a basis for such actions. For example, there is no question now that, if an
operator does not timely commence operations, this could result in a “good cause” basis for
removal because the operator’s standard of conduct in Article V.A requires it to conduct its
activities “with due diligence and dispatch.” Consideration of gross negligence or willful
misconduct in this analysis is no longer necessary.
Because a non-owning party can be designated as the operator in the 2015 Model Form
JOA, the Task Force added Article V.B.5 to deal with the removal of such a non-owning operator.
17
Under this new segment, a non-owning operator may be removed at any time, with or without
cause, by the majority interest as shown on Exhibit “A.” Importantly, if good cause is alleged as
the basis for removal of a non-owning operator that is an affiliate of another non-operator, the
majority interest for the removal vote is calculated only after excluding the voting interest of the
affiliated non-operator.37 This prevents a non-owning operator’s affiliated non-operator(s) from
blocking an otherwise valid removal of the operator.
[3] Article V.D: Rights and Duties of Operator
Under the 1989 Horizontal Form JOA, all non-operating parties, including non-
consenting parties, are entitled to receive any technical information generated in activities on the
Contract Area. Many in the industry rightly consider this information to be highly sensitive and
do not believe that a party non-consenting in operations should have unfettered access to this data.
This sensitivity is amplified in many shale plays that have not been fully developed and where
proprietary horizontal drilling techniques are utilized.38
Thus, Article V.D.5 was revised to eliminate the requirement that the operator provide
access to non-consenting parties to the operations and records.39 Under a newly-added clause in
this section, non-consenting parties cannot compel the operator or any other consenting party to
provide access to the operations and records relating to such non-consenting operation until the
expiration of the earlier of either two years following the commencement of the non-consented
operation or at such time that the consenting parties to the particular operation have recouped the
entire non-consent penalty provided for in Article VI.B.2(b)(i).40 While the non-consenting parties
37 2015 Model Form JOA at V.B.5. 38 See generally John D. Furlow & John R. Hays, “Disclosure with Protection of Trade Secrets Comes to the
Hydraulic Fracturing Revolution,” 7 Tex. J. Oil, Gas, & Energy L. 289, 306 (2012). 39 2015 Model Form JOA at V.D.5(a). 40 Id. at V.D.5(b).
18
may audit the operator during any period in which they have non-consented, such audit rights are
now expressly limited to the extent necessary to determine the payout status.41
One final small change was made to Article V.D. The Task Force added Article V.D.7(d),
which states that in a horizontal well, the operator shall drill to the objective zones and drill the
lateral to the proposed displacement unless “drilling operations are terminated pursuant to Article
VI.G or the [o]perator deems further drilling is neither justified nor required.” This language
encompasses the comments from many industry participants who noted that the operator’s
judgment was crucial in many of today’s expensive and complex horizontal wells and that express
terms acknowledging the leeway implied in the reasonable prudent operator standard was helpful.
E. Article VI – Drilling and Development
[1] Article VI.B: Subsequent Operations42
Article VI.B.1 was revised to require that any party desiring to drill a well “under this
agreement” must provide a written proposal of the operation to the other parties to the operating
agreement. As noted before, the language “under this agreement” has replaced “on the Contract
Area” from the 1989 Horizontal Form JOA. The idea behind this revision is to accommodate
proposals that relate to pooled units, production sharing agreements or allocation wells.
Additionally, the proposing party must now provide more than mere notice—it must provide an
actual proposal and include information necessary for all parties to the operating agreement to
make an informed financial decision whether to participate in the proposed operation.
For vertical wells, the proposing party must include the following in its proposal: (1) that
the well is vertical, (2) drilling and completion plans specifying surface (and bottom-hole locations
41 Id. at V.D.5(b). 42 See generally Michel E. Curry, “Joint Operating Agreement Subsequent Operations,” 2016 Fundamentals of Oil,
Gas and Mineral Law (April 14, 2016).
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for deviated wells), objective zones, rigs to be used and (3) the estimated drilling and completion
costs as set forth in the AFE.
For horizontal wells, the proposal must provide: (1) that the well is horizontal, (2) drilling
and completion plans including total measured depth, surface hole locations, termini,
displacements, rigs to be used (including spudder rigs) and stimulation operations, and (3)
estimated drilling and completion costs as set forth in the AFE.43 Finally, an important point to
note is that an AFE is now a required feature of a valid proposal for both vertical and horizontal
wells. This is a major change from previous Model Form JOAs. The net effect of the changes in
Article VI.B.1 is to apply to vertical wells the expanded detail for proposals previously set forth
for horizontal wells in the 1989 Horizontal Form JOA.
As noted earlier, the definitions of “deepen” and “extend” were separated, with deepening
applying to any kind of well that is being drilled to a deeper zone. As a result, Article VI.B.4 no
longer prohibits its application to horizontal wells. On a similar note, because sidetracking is
understood to apply to horizontal wells also, the prohibition from it applying to horizontal wells
was removed from Article VI.B.5.
Because the 2015 Model Form JOA treats extensions as separate concepts, Article VI.B.6
was added to address them.44 As noted earlier, an extension deals with the lengthening of a lateral
in a horizontal well. The Task Force considered situations where the length of a proposed
extension would be so significant that it changed the nature of the originally contemplated
operation. In order to account for this scenario, new Article VI.B.6 provides that if the operator
desires to extend the lateral beyond an enumerated percentage of the existing proposed length, it
43 Note that the requirements for a horizontal proposal were first included in the 1989 Horizontal Form JOA
revisions and have not been changed in the new 2015 Model Form JOA. 44 Former provisions Article VI.B.6-10 have been renumbered as Article VI.B.7-11.
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will give written notice to the current consenting parties of its request and the estimated costs of
such an extension at least twenty-four (24) hours before it will reach the original approved
displacement. Unless a pre-approved percentage of the consenting parties agree to such an
extension within forty-eight hours of receiving the notice, the operator shall not extend the lateral
beyond the original approved displacement. If a pre-set percentage of the consenting parties
approve of the extension, all consenting parties will be deemed to have agreed.45
[2] Article VI.D: Other Operations
Two fundamental changes were made to the “Other Operations” portion of the JOA. First,
Article VI.D was revised to clarify what types of other operations a party that had not relinquished
its interest could propose. The references to certain specific types of activities (e.g., saltwater
disposal and installation of ancillary production facilities) were removed. The provision for
“repair work” was removed and expanded with the term “Workover operation.”46 The entire
reference to gathering lines or other marketing facilities (including the requirement for a separate
agreement to cover their installation) was removed. Thus, the final product lists Workover
operations, the installation of artificial lift equipment, or the conduct of additional work with
respect to a well drilled hereunder or other similar project as the activities that can be proposed by
a participating party, subject to a final important sentence added to the paragraph. In that last
sentence, it is now expressly provided that any facilities not servicing and benefitting the Contract
Area must be governed by a separate agreement. This means that facilities used for a unit or region
need to be proposed and approved under a separate agreement. This segment was added for several
reasons, the most important of which was the accounting treatment for such facilities.
45 2015 Model Form JOA at VI.B.6. 46 See definition of “Workover” on p.6, supra.
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[3] Article VI.E: Deviations from Approved Proposal
Much like the change made to Article V.D.7(d) mentioned above,47 Article VI.E is a new
article that clarifies that the operator will have no liability for deviations it makes from proposals
if such deviation is reasonable and based on facts and circumstances that arise following the
commencement of a particular operation.
[4] Article VI.F: Abandonment of Wells48
In the 1989 Model Form JOA (and earlier versions), dry hole abandonment proposals were
thought to only occur while the drilling rig was on location, not an unreasonable assumption for a
vertical well. The Task Force was made aware that this system did not address the reality of many
horizontal operations in which the well is drilled, the drilling rig is released, and the decision to
abandon is not made until months later - maybe not until after completion operations have been
attempted. In order to account for this aspect of horizontal operations, Article VI.F.1, which
addresses the abandonment of dry holes, is revised to allow abandonment proposals after the
drilling rig has been released from the drill site. Under the new language, when a drilling rig is
on location, the time provided for parties to elect to abandon remains at forty-eight (48) hours. If
no drilling rig is on location, the parties have thirty (30) days to elect. In addition, Article VI.F.1
now contains the clarification that the only parties required to consent in order to plug and abandon
a dry hole are those parties who owned an interest in the well at the time the abandonment proposal
was made.
47 See pp. 16-17, supra. 48 Because of the addition of the new Article VI.E, former Article VI segments E – G have been re-lettered as F - H.
22
Article VI.F.2 was modified to allow any party to propose abandoning a well previously
completed as a producer.49 Unchanged is the requirement that such a proposal, in order to succeed,
must be approved unanimously.
Finally, the 2015 Model Form JOA modifies the assignment requirements when non-
abandoning parties exercise their right to continue operating a well after its abandonment has been
proposed. As in previous versions, if a non-abandoning party continues operating a well that was
proposed to be abandoned, then the abandoning parties must assign their interest in the applicable
leasehold to the non-abandoning parties but only insofar as the leasehold “covers the right to obtain
production from that wellbore in the Zone then open to production.”50 The 2015 Model Form JOA
now requires that this assignment be made free of Subsequently Created Interests.
F. Article VII – Expenditure and Liability of Parties
[1] Article VII.C: Advances
Article VII.C allows an operator to demand advanced payments from its non-operators.
Under the 2015 Model Form JOA, such payments by the non-operators must be made within thirty
days following receipt of the demand. Previous Model Form JOAs required the non-operators to
pay within fifteen days. The Task Force felt that lengthening this amount of time was needed in
light of the substantial sums of money involved in horizontal operations and the difficulties some
parties might have in raising such sums on short notice.
[2] Article VII.D: Defaults and Remedies
At the end of Article VII.D.3, the Task Force included a usury savings clause intended to
preclude any non-consent penalty being characterized as usurious interest. The provision states
49 Regardless of whether the well is still producing (but potentially uneconomic). Further, this allowance still does
not apply if the well involved a non-consent operation for which the consenting parties have not been fully
reimbursed. 50 2015 Model Form JOA at VI.F.2.
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that “to the extent that all or any part of the risk penalty to be recovered pursuant to Article VI.B
or Article VI.C, as the case may be, in connection with the provisions of this Article VII.D.3, is
determined to constitute interest on a debt, such interest shall not exceed the maximum amount of
non-usurious interest that may be contracted for, taken, reserved, charged, or received under law.”
Any amount of “interest” that exceeds the usury rate must be applied to the principal of the debt
or, if none, refunded.
G. Article VIII – Acquisition, Maintenance or Transfer of Interest
[1] Article VIII.A: Defaults and Remedies
Article VIII.A deals with the surrender of leases. This clause is modified to clarify that
when a party desires to surrender a lease and not all parties consent, the surrendering party’s
assignment to the non-consenting parties will be for all of its right, title and interest in the lease
and any well, material and equipment acquired by the parties under the agreement and used
exclusively for the lease being surrendered.
[2] Article VIII.D: Assignment; Maintenance of Uniform Interest
The Task Force implemented significant changes to Article VIII.D. The new provisions
were prompted by the Texas Supreme Court’s decision in Seagull Energy E & P, Inc. v. Eland
Energy, Inc.51 The court in Eland held that the transferor of a working interest subject to an
offshore operating agreement similar to the Model Form remained liable to the operator under the
operating agreement for expenses incurred after it had conveyed its interest.52 Some of the
confusion arose from the earlier Model Form JOA’s use of the phrase “obligations previously
51 207 S.W. 3d 342 (Tex. 2006). 52 Id. at 346-47.
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incurred by such party”53 to describe the responsibility that remained with the transferor party.
Because the industry consensus was that the parties to an operating agreement needed some
certainty in determining when and how a party transferring its interest in the Contract Area could
be relieved of responsibility for expenses incurred following the transfer, the Task Force added
language to this provision.54
The new version of Article VIII.D now provides that an assignment or other disposition of
a party’s interest in the Contract Area will not become effective until thirty days following the
operator’s receipt of the instrument(s) documenting the transfer. The Task Force further clarified
this provision to state that after such thirty-day period, the transferor is relieved of liability for
costs and expenses occurring after the thirty-day period. An exception to this release of
liability arises if, prior to the transfer of its interest, the transferor approves an operation from
which the costs and expenses arise.55 In that case, the transferor and transferee shall be held jointly
and severally liable for the costs and expenses attributable to this previously approved operation.56
H. Article X – Claims and Lawsuits
Article X is revised so that the defense and settlement of uninsured third party claims will
be undertaken by the operator, unless, within fourteen (14) days of receiving the notice of the claim
sent by the operator, a party notifies all other parties that it elects to undertake its own defense. It
is important to note that even if a party elects to undertake its own defense, it will remain liable to
53 E.g., 1989 Model Form JOA at VIII.D. 54 See Michel E. Curry & Carleton L. Ekberg, “Operations Not Covered or Inadequately Covered or Inadequately
Covered by the Joint Operating Agreement and Other Problem Areas,” Oil and Gas Agreements: Joint Operations
8-13 (Rocky Mt. Min. L. Fdn. 2008); see also Mark A. Matthews & Christopher S. Kulander, “Additional
Provisions to Form Joint Operating Agreements,” State Bar of Tex. Oil, Gas & Min. L. Sec. Rep. vol. 33, no. 2, at
44-45 (Dec. 2008). 55 2015 Model Form JOA at VIII.D. 56 Note that the revisions did not insert language regarding the transfer of liability for plugging operations, a topic on
which the Task Force felt the body of common law and regulatory interpretations provides substantial certainty.
25
the operator for its share of costs and expenses attributable to the joint account in the defense of
the claims.
I. Article XII – Notices
The 2015 Model Form JOA now permits notice through electronic mail. The email notice
must be sent as an attachment to an email and it must state it is a notice under the applicable
operating agreement. Such email notice is only effective and deemed delivered when the recipient
affirmatively acknowledges the notice by return email and not by automatic delivery receipt. As
a practical matter, practitioners using the 2015 Model Form JOA should consider using multiple
methods of providing notice in order to guarantee that at least one of the acceptable methods
succeeds.
Additionally, references to notice by telegram, telex and telecopier have been deleted.57
J. Article XIV.C – Compliance with [Regulatory Agencies]
Article XIV.C was revised to clarify the scope of the operator’s release for actions, losses
and damages stemming from its interpretation of governmental rules and regulations. The new
language in Article XIV.C clarifies that the operator is responsible for its proportionate share of
any losses stemming from such a misinterpretation.58 In addition, the agencies whose rules or
regulations are the subject of this article was expanded from just the Department of Energy or the
Federal Energy Regulatory Commission to include any governmental agency having jurisdiction.
Finally, the Task Force added the willful misconduct of the operator to the types of conduct that
would disqualify the operator from the protection of this section.
57 But notice by facsimile remains a viable option. 58 In the prior version, it appeared that the operator would share in none of the loss occasioned by such a
misinterpretation.
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K. Article XV.A – Execution
Article XV.A was revised to allow the operator to address a situation stemming from its
termination of a proposed activity because of insufficient participation by the parties. From time
to time in these situations, the operator has already collected some funds for the proposed
operations from others and has spent some sums in preparation for the activities. In this case,
when the operator is returning the funds to the parties that prepaid them, the operator is allowed to
retain the proportionate share of the costs it had incurred prior to the termination.
L. Article XVI – Other Provisions
In the 1989 Horizontal Form JOA, three sections of text were added. In the 2015 Model
Form JOA, the Task Force moved the first two provisions of this article into the body of agreement.
Article XVI.A (Conflict of Terms) now appears as Article XV.E and Article XVI.B now appears
as Article V.D.7(d). Article XVI.C, which dealt with the priority of operations for horizontal wells,
was eliminated because industry comments indicated that such an order of priorities did not
necessarily enjoy nationwide uniformity.
III. Conclusion
The 2015 Model Form JOA represents a synthesis of twenty-six years of industry
development and interpretation since the publication of the 1989 Model Form JOA. The intent
and focus was to enhance clarity and readability. Ideally, the 2015 Model Form JOA will fit current
operational concerns and provide a useful template for oil and gas development for another two
and a half decades.