Negotiations

and

Agreements

Eric R. King

Oil and Gas Practice

OU Law School

September 16, 2015

Speed controls being used in

Canada . . . How’s this for effective

speed control?

I don't know about you, but this

would certainly slow me down!

People slow down and actually try

to "straddle" the hole.

This is an actual speed control

device that is currently in use.

It is MUCH cheaper than speed

cameras, radar guns, police

officers, etc.

Pretty clever -- especially when

they move them around every

day.

Isn't art wonderful?

Definitions

• Williams & Meyers, “Manual of Oil and

Gas Terms,” Thirteenth Edition

Joint Operating Agreement

• An agreement between or among interested

parties for the operation of a tract or

leasehold for oil, gas and other minerals.

• This type of agreement is frequently entered

into before there has been any development.

• Typically the agreement provides for the

development of the premises by one of the

parties for the joint account.

• The parties to the agreement share in the

expenses of the operations and the proceeds

of development, but the agreement normally

is not intended to affect the ownership of the

minerals or the rights to produce, in which

respects, among others, the joint operating

agreement is to be distinguished from a

unitization agreement and from a mining

partnership.

Non-Consent Provisions

• An affirmative election by a working

interest owner not to participate with

his/her working interest in the drilling of

a well. Under a JOA, the working interest

owner will have 100% of his/her interest

returned/re-instated/come back in after

400% Payout on the well (4 times).

• Non-Consent Interest

The name which has been applied to a form of

carried interest held by non-consent parties

under a widely used form of operating

agreement.

A share of the working interest in a drilling and

spacing unit whose owner does not consent to

bear his proportionate share of the costs of the

drilling and operation of a well, and which

interest is picked up by others under the JOA

who elected to participate with their

proportionate share of the “non-consent

acreage.”

• Non-Consent Party

A party to a joint venture, a joint operating

agreement, or a pooling or unitization

agreement who does not agree in advance to

participate in drilling, reworking, deepening, or

plugging back of a well.

Under such circumstances, the interest of the

non-consent party becomes subject to a non-

consent penalty.

• Non-Consent Penalty

A penalty against a party to a joint venture, a

joint operating agreement, or a pooling or

unitization agreement, or a pooling order of a

state agency who did not agree in advance to

participate in drilling, reworking, deepening, or

plugging back of a particular well by the

operator or another party to the agreement or

agency order.

The penalty under a JOA is expressed as a

percentage, in Oklahoma typically 4 times the

recovery of the amount expended as to this

non-consent interest (400%).

Industry practice in voluntary pooling

agreements between lessees calls for non-

consent penalties ranging from 200 to 400

percent for development of wells, at lease 300

percent for most exploratory (wildcat) wells,

and in very expensive areas, particularly

offshore operations, as much as 1,000 percent.

With respect to pooling or unitization orders,

the non-consent or risk penalty may be fixed

by statute, or the statue may give discretion to

the agency to set the penalty within a

determined range.

The statute may define the costs subject to the

risk penalty with some specificity, or it may

leave the terms rather general, with the

agency having the authority in either instance

to resolve disputes as to costs.

Casing Point Election

• A right to elect whether a party wants to

participate in a completion attempt.

After the well has reached casing point or

liner point.

Overhead

• A term employed loosely in the oil and

gas industry to describe a variety of

expenses.

• Monthly overhead is the amount paid to

the operator under the terms set out in

the JOA.

Joint Interest Billings

(JIBs)

• Statement attached to a check disclosing

well names, month of expenses, total

expenses, and venturer’s shares.

• JIB’s reflect an owner’s proportionate

share of all costs associated with a well

for a one month period (an invoice for

those charges).

Area of Mutual Interest

Agreements

• An agreement between or among parties

to a farmout agreement or a joint

operating agreement, or other

agreement by which the parties attempt

to describe a geographical area within

which they agree to share certain

additional leases or other interests

acquired by any of them in the future.

Farmout Agreement

• A very common form of agreement

between operators, whereby a lease

owner not desirous of drilling at the time

agrees to assign the lease, or some

portion of it (in common or in severalty)

to another operator who is desirous of

drilling the tract, where there is no cash

involved in the transaction.

Right of Way Agreements

• An agreement whereby one party acquires the

rights to cross a surface owner’s land for a

specific purpose, e.g. for a pipeline, for a road,

for a utility, for underground gas storage.

• This is a right to use the land for a specific

purpose, but does not give ownership of the

land to the right-of-way owner.

Produce to Earn

Agreement

Drill to Earn

Agreement

Non-Compete

Agreement

Purchase and Sale Agreements

• An agreement for the purchase and sale of oil

and/or gas produced from designated leases,

setting forth the terms and conditions of

purchases and sale, and requirements as to

quality and condition of the product and

measurement of quantities.

Statutory Pugh

Clause

Habendum Clause

• It is agreed that this lease shall remain in force

for a term of __________ (___) years from

date (herein called primary term) and so long

thereafter as oil or gas, or either of them, is

produced from said land or lands pooled

therewith.

Depth Clause

• At the end of the primary term hereof, this

lease shall automatically terminate (1) as to all

of the leased premises except lands located

within the boundaries of a proration unit,

drilling unit, spacing unit, or pooled unit, as

the case may be, on which is then located a

well producing in paying quantities, whether

actually producing or shut-in, or upon which

operations are then being conducted in

accordance with this lease; and (2) as to all

depths below one hundred feet (100’) below

the stratigraphic equivalent of the deepest

formation penetrated on the leased premises

or on land pooled therewith, unless this lease

is otherwise maintained as to such outside

lands or deeper depths as may elsewhere be

provided herein.

Shut-In Gas Royalty Clause

• If at any time or times after the expiration of

the primary term this lease is being

maintained in force and effect by a shut-in gas

well for a period of ninety (90) consecutive

days, then Lessee may pay or tender to the

credit of Lessor at the address set out herein,

a sum (called shut-in royalty) equal to the

amount of $20.00 per acre for the land then

held by Lessee under this lease and such

payment shall continue this lease in force and

effect for a period of one year from

commencement of said ninety (90) day

period. Upon like tenders or payments

annually, on or before the expiration of the

last preceding year for which such payment

was made, this lease shall continue in force

and effect for successive one year periods as

to the lands covered by and included in the

lease at the time the respective payments

or tenders are made. However, this lease may

not be maintained solely by the payment of

shut-in royalty after the expiration of the

primary term for more than two consecutive

years immediately thereafter, or for shorter

terms at various intervals not to exceed two

years in the aggregate. Should the primary

term be extended by the payment of shut-in

royalty for two (2) years past the primary

term, this lease will terminate and Lessee

shall immediately file a Release of record in

the Office of the County Clerk/Registrar of

Deeds in ________ County, Oklahoma, and

furnish Lessor a recorded copy of said Release.

Shut-In Gas Clause

• Lessee shall pay or tender a royalty of Five

Dollars ($5.00) per year per net royalty acre

per well retained hereunder, such payment or

tender to be made, on or before the later of

ninety (90) days following the date of shut in

or the anniversary date of this lease during

the period such well is shut in, to the Lessor.

When such payment or tender is made it will

be considered that gas is being produced

within the meaning of the entire lease.

Delay Rentals

• If drilling operations or mining operations are

not commenced on the leased premises on or

before one year from this date, this lease shall

then terminate as to both parties unless

Lessee on or before the expiration of said

period shall pay or tender to Lessor, or to the

credit of Lessor in ______ bank at _________

or any successor bank, the sum of _________

dollars ($_____), hereinafter called “rental”

which shall extend for twelve months the time

within which drilling operations or mining

operations may be commended. Thereafter,

annually, in like manner and upon like

payments or tenders the commencement of

drilling operations or mining operations may

be further deferred for twelve months each

during the primary term. Payment or tender

of rental may be made by check or draft of

Lessee delivered or mailed to the authorized

depository bank or Lessor (at address last

known to Lessee) on or before such date for

payment, and the payment or tender will be

deemed made when the check or draft is so

delivered or mailed. If said named or

successor bank (or any other bank which may,

as hereinafter provided have been designated

as depository) should fail or liquidate or for

any reason refuse or fail to accept rental,

Lessee shall not be held in default for failure

to make such payment or tender until thirty

days after Lessor shall deliver to Lessee a

proper recordable instrument naming another

bank to receive such payments or tenders. He

above named bank or any other bank which

may be designated as depository shall be

Lessor’s agent. Drilling operations or mining

operations shall be deemed to be commended

which the first materials is placed on the

leased premises or when the first work, other

than surveying or staking the location, is done

thereon which is necessary for such

operations.

No Deduction Clause

• It is agreed between the Lessor and Lessee

that, notwithstanding any language herein to

the contrary, all oil, gas or other proceeds

accruing to the Lessor under this lease or by

state law shall be without deduction for the

cost of producing, gathering, storing,

separating, treating, dehydrating,

compressing, processing, transporting, and

marketing the oil, gas and other products

produced hereunder to transform the product

into marketable form; however, any such costs

which result in enhancing the value of the

marketable oil, gas or other products to

receive a better price may be deducted from

Lessor’s share of production so long as they

are based on Lessee’s actual cost of such

enhancements. However, in no event shall

Lessor receive a price that is less than, or

more than, the price received by Lessee.

Warranty Clause

• This lease is made by Lessor without warranty

of title, either express or implied, except as to

conveyance or encumbrances by, through, or

under Lessor, but not otherwise. Lessor

agrees that Lessee shall have the right at any

time to redeem for Lessor by payment any

mortgages, taxes, or other liens on the above-

described lands, in the event of default of

payment by Lessor, and be subrogated to the

rights of the holder thereof.

Eric R. KingOne Leadership Square, 15th Floor

211 N. Robinson Ave.

Oklahoma City, OK 73102

(405) 235-5518