Transcript THE 1989 AAPL MODEL FORM OPERATING AGREEMENT
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The 1989 AAPL Model Form Operating Agreement:
why are you not using it?
Andrew B. Derman & Isabel Amadeo Thompson & Knight LLP 1700 Pacific Avenue • 214.969.1700 Suite 3300 Dallas, Texas 75201
2 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Introduction
Oil Industry relies on form agreements
AAPL standardized forms: 1956, 1977, 1982, & 1989
1989 Form superior to its predecessors yet not universally accepted – Why?
Provisions of 1989 Form used worldwide but not onshore – Ironic!
The 1989 AAPL Model Form Operating Agreement: why are you not using it?
3 The Debate: Investors vs. Operator
Is special protection required for Investors?
Parties to a JOA can negotiate and establish their rights and duties
1989 Form
standardized “form”; a basis
Advantages of using form
drafting costs, comprehensively well written, efficient interpretation, among others reduce negotiation and
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The 1989 AAPL Model Form Operating Agreement:
why are you not using it?
Review of 1989 Form
5 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Definitions – Article I
Several definitions added
Elimination of ambiguity and conflict
“Affiliate” should be defined
If drilling a horizontal well
“deepen” must be expanded the definition of
6 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Exhibits – Article II
Various Exhibits
Improved Exhibit A (identification of contract area) phone numbers of parties for notice purposes and burdens on production
7 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Interest of Parties in Costs & Production – Article III.B
Production as allocated in Exhibit A
Revenues and Royalties not pooled
1989 Form
clarifies that parties should share burdens up to the amount provided for in the blank and individually shoulder all excess burdens
8 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Subsequently Created Interests – Article III.C
1989 Form includes definition of subsequently created interests
Critical to fully disclose existing burdens in Exhibit A otherwise they are deemed as subsequently created interests
9 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Titles – Article IV.A
1989 Form improvement – Title examination if requested by a majority in interest of the drilling parties or by Operator vs. 1982 Form that requires all of the parties’ consent
Copies of drilling title opinions only to parties that pay for them
10 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Loss or Failure of Title – Article IV.B
Owner’s of wellbore interests not considered a party to JOA unless otherwise specified in Exhibit A
If a lease is lost due to failure of title & no new lease secured within 90 days
Exhibit A adjusted
11 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Designation and Responsibilities of Operator – Article V.A
Standard of care of Operator expanded
Negligent Operator liable for its percentage interest only
12 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Resignation or Removal of Operator – Article V.B
Operator may resign at any time providing proper notice
Inclusion of removal standard
Good Cause Removal
Successor Operator
affirmative vote of 2 or more parties owning a majority interest
13 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
New Provision
Insolvent or bankrupt Operator = deemed to have resigned
No action of non-operators needed, only selection of new Operator
Bankruptcy Court may prevent removal of Operator
interim operating committee
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Rights & Duties of Operator – Article V.D
Timely pay expenses
Keep Contract Area free of liens
Operator not a fiduciary
Non-operators greater ability to monitor the project
15 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Initial Well – Article VI.A
Drilling of initial well obligatory
Horizontal wells not addressed
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Subsequent Operations – Article VI.B
New language clarifies procedure
Non-consenting parties may now participate in deepening or sidetracking operations
Party proposing a subsequent operations must provide proper notice
17 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Operations By Less Than All Parties – Article VI.B.2(B)
New provision
if well not drilled to its objective due to reasons other than mechanical problems or impenetrable substances
non-consenting parties entitled to participate
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Reworking or Plugging Back – Article VI.B.2
100% penalty replaced by a blank
Parties will seek for higher penalties
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Deepening – Article VI.B.4
Detailed provision added
Non-consenting parties can participate in deepening
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Sidetracking – Article VI.B.5
Provision added similar to deepening provision
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Order of Preference of Operations – Article VI.B.6
New procedure to elect between conflicting proposals
Majority interest prevails & in event of tie initial proposal prevails
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Paying Wells – Article VI.B.8
New provision provides certainty
Consent of all parties needed to operate a commercial well
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Completion of Wells; Reworking & Plugging Back – Article VI.C
Casting point expanded: AFE
Procedure for conflicting completion proposals incorporated
AFEs are estimates of costs not firm commitments
24 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Other Operations – Article VI.D
1989 Form improves efficiency of production operations
Certain work can be undertaken with written consent of any party or parties owning at least ___% of the interest
25 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Abandonment of Wells – Article VI.E
Satisfactory proof of financial capability needed to take over a well
Costs of plugging, abandoning exceed salvage value
abandoning parties have to pay the party taking over the well
26 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Termination of Operations – Article VI.F
Operations can be terminated prematurely if a determined percentage of the parties wish to do so
For the operations to end no need for it to be “impractical”
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Taking Production in Kind – Article VI.G
Each party owns a share of production in accordance with its proportionate interest in the Contract Area
For antitrust & tax reasons buy or sell the non-operator’s oil for a limited period of time
Operator only able to
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Operator Notification
Parties have to advise Operator their gas marketing arrangements, except for price
Split stream gas deliveries pursuant to gas balancing agreements
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Liability of Parties – Article VII.A
Several not joint
Explicit disclaim to any intent to create a partnership
Duty to deal in good faith with each other
30 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Liens & Security Interests – Article VII.B
Lien covers real property & present and future acquired personal property & fixtures
Each non-operator grants Operator a lien on its oil and gas rights and a security interest on its share of production
31 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Defaults & Remedies – Article VII.D
Defaulting party automatically has certain rights suspended
Non-defaulting parties can sue to recover at joint account expense
32 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Surrender of Leases – Article VIII.A
Surrender of lease requires consent of all parties to JOA
Failure to respond within designated time = consent to receive surrendered interest. Caution!
33 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Renewal or Extension of Leases – Article VII.B
Now renewals, replacements & extensions of leases are addressed
BUT intent to eliminate 1982 Form’s ambiguity not that clear
34 The 1989 AAPL Model Form Operating Agreement: why are you not using it?
Assignment; Maintenance of Uniform Interest – Article VIII.D
Transfer of ownership not recognized until 30 days after satisfactory notice has been received
Transferor liable for all costs incurred prior to assignment
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Preferential Right to Purchase – Article VIII.F
Now an optional provision
If box is not checked
preferential right not applicable
Does “sell” include farmout?
Do mergers & corporate restructurings trigger preferential rights?
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Claims & Lawsuits – Article X
Operator is authorized to settle claims arising from operations if the amounts do not exceed a specified amount
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Notice – Article XII
Oral notices need to be confirmed immediately in writing
Responsive notices deemed delivered when deposited in mail
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Miscellaneous – Article XV
New article
Addresses execution, successors and assigns counterparts and severability
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Conclusions
1989 Form incorporates many improvements over the 1982 Form
1989 Form has yet not attained universal acceptance
1989 Form is an improvement