The ABCs of JOAs: Revisiting Some of the Changes in the 610-2015 JOA

December 29, 2020 In 2011, the AAPL began the process of updating the 610-1989 Model Form to incorporate the new norms that have emerged with the expanded use of horizontal drilling techniques.  In 2013, the AAPL Task Force released the 610-1989 Horizontal Modification Form, which was intended to serve as a temporary solution to address horizontal drilling issues while the Task Force worked to produce a fully updated model form.  Finally, in 2016 after a bit of a delay, the AAPL Task Force released the Form 610-2015 JOA.  The new 2015 form incorporates the changes that were made in the Horizontal Modification Form in addition to a number of other updates, revisions, and new provisions.  We have recently had a number of questions from operators who are interested in utilizing the 2015 form but hesitant due to a lack of familiarity. Despite the 1989 form’s various shortcomings they have encountered it more in the wild and believe they have a more thorough understanding of its terms.  It therefore seemed appropriate to revisit some of the changes in the 2015 form and why it may be better suited for your proposed horizontal operations.

The bulk of the changes that were made in the 2015 form were intended to reflect the oil and gas industry’s shift to horizontal drilling.  As such, many definitions related to horizontal drilling operations were added, and many provisions throughout the form were revised to allow JOA parties to better distinguish between horizontal and vertical drilling operations.[1]  For example, provisions throughout Article VI (Drilling and Development) were updated to reflect the choices and challenges that arise for operators when conducting horizontal drilling operations.  Some of these changes are discussed in greater detail below.

Additionally, Article XV was updated to address the likelihood when drilling horizontal wells that operations will need to be commenced without execution by all of the “Exhibit A” parties who own an interest in the contract area.  While the 1989 form assumed that the operator “agreed to indemnify the other parties for any costs associated with the unsigned interest and was allowed to receive the proceeds attributable to the unsigned interest,”[2] the 2015 form recognizes that horizontal drilling operations may span many tracts of land and that some interest owners might be difficult to locate.  As such, the 2015 form includes options that allow the JOA parties to decide in advance how they will proceed in the event that operations must commence without execution by all interest owners.[3]

In addition to the changes that were made throughout the form to accommodate the industry’s recent emphasis on horizontal drilling, a number of other changes were made to reflect new norms that emerged within the industry following the release of the 1989 form, and to clarify the most heavily litigated provisions from the 1989 form.

Some of the first major changes are to Article III (Interests of Parties) and are intended to encourage greater clarity and certainty as it relates to interested parties.  The 1989 form did not include provisions authorizing an operator to update the interests of the parties listed on Exhibit A in the event that a party’s interest was later deemed to be incorrect.  To address this issue, Article III.B of the 2015 form includes language that “allows the Operator to make changes to a party’s interest if the change is supported by a title opinion.”[4]  Language was also added to Article III.B to allow the JOA parties to more clearly describe their proportionate responsibility for royalties in working interest units.  This was in response to a trend that emerged over a decade ago when companies began inserting language to limit their burdens to “all burdens except the Subsequently Created Interest burdens of the other parties.”  Because it became so common within the industry to insert this language into the 1989 form, the Task Force decided to make it a permanent addition.

Article IV (Titles) was also updated in accordance with industry practice.  Article IV.B(1) was updated to clarify when a failure of title occurs and to better define what constitutes a failure of title.  Further, Article IV.B(3) was updated to clarify which losses will be shared jointly when a lease expires following a failure to develop.  Importantly, the updated provision clarifies that lands and depths that are lost will be considered joint losses, including “losses due to Pugh clauses, or due to a term lease or depth restrictions.”[5]

A number of changes were made to Article V (Operator) including the addition of a few entirely new provisions.  First, a new sentence was added in Section A to make clear that Operatorship may only be assigned or forfeited if done in accordance with Article V.  According to the Task Force, this sentence was added “to dispel any belief that simply acquiring an Operator’s interest in the contract area entitled the transferee to succeed as operator, in those circumstances where the former Operator was a minority owner.”[6]  New provisions were also added to Article V.A to clarify the Operator’s authority to file pooling declarations and communitization agreements, and to clarify that, when there is a non-owning Operator, the non-owning Operator “must have a separate agreement with the interest-owning parties (which could be entirely separate or one or more Article XV provisions).”[7]  Finally, in response to Reeder v. Wood County Energy, LLC, the Article V.A provision governing the Operator’s standard of performance was revised to make clear that “the limitation of the Operator’s liability to its gross negligence or willful misconduct only applies to authorized or approved operations, as distinguished from breach of the Operating Agreement, itself.”[8]

Article V.B was revised both organizationally and substantively.  With regard to the substantive changes, Article V.B.2 now allows the parties to designate a minimum percentage of ownership that an interest-owning operator must retain to avoid effective resignation.  Additionally, Article V.B.5 was added to prescribe a procedure for removal of a non-owning operator in the absence of an express provision in the above-mentioned “separate agreement” for non-owning operators.  Finally, V.B.6 was revised to clarify the procedure for election of a successor operator, and V.D.5 was revised to limit non-consenting parties’ access to Contract Area and Records.

Article VI (Drilling and Development) was updated throughout, though most of the changes were made with the goal of making the form more applicable to horizontal drilling operations, as discussed above.  For example, VI.B was updated to clarify what information is required in subsequent operations proposals for both vertical and horizontal wells.  Other provisions throughout Article VI were updated to provide the Operator with greater flexibility to respond to changed conditions when drilling a horizontal well, such as a provision allowing the operator to escape liability for deviating from an approved proposal, provided that the operator acts reasonably.  Article VI also now allows any party to propose the abandonment of a well that, although producing, is no longer economic.[9]

One of the most important changes in the 2015 form is in Article VIII and deals with transfers of interest.  Following the Texas Supreme Court’s decision in Seagull Energy E&P, Inc. v. Eland Energy, Inc., the Task Force felt it necessary to clarify “when and how a party transferring its interest in the Contract Area could be relieved of responsibility for expenses incurred following the transfer.”[10]  The new version of Article VIII.D clarifies that the transfer of interest will not become effective until thirty days after the transfer is complete.  After thirty days, the transferor will be relieved of liability for any costs or expenses that are incurred after the thirty-day period.  However, the transferor still may be joint and severally liable for costs that are incurred pursuant to operations that the transferor approved prior to transferring its interest.

Other updates were made throughout the form, including that the 2015 form now permits notice through electronic mail.  Additionally, Article VII.F was revised “to clarify that any disproportionate (non-uniformly assessed) taxes are borne by the party contributing the lease or interest from which such taxes arise, e.g., Indian lease severance tax.”[11]  Article XIV.C was updated to clarify that an operator is responsible for its proportionate share of losses that arise from the operator’s misinterpretation of governmental rules or regulations.  Finally, Article XV.A was revised to clarify the procedure for returning funds in the event that a proposed activity must be terminated.

While these are some of the major changes in the 2015 JOA form, it is necessary to consider the form in its entirety in order to fully appreciate the context and effects of these changes.  There are many additional changes that were made throughout the form that could be especially relevant in particular operating scenarios.  For more information, interested readers should consult the cited papers, which were written by members of the AAPL Task Force and are instructive in interpreting the reasoning behind many of the changes in the 2015 form.  In the meantime, we expect the 2015 form to continue to gain traction and eventually become the standard in joint horizontal operations.



[1]
For a full analysis of the horizontal drilling modifications that were made in the 2015 form, interested readers should consult Jeff Weems’ article for the 2013 Rocky Mountain Mineral Law Institute.  Weems was on the Task Force charged with updating the 1989 form.  Jeff Weems, Changes within the AAPL 610-1989 Model Form Operating Agreement: Horizontal Modifications and Other Developments, 59 RMMLF-INST 29-1 (2013).

[2] Jeff Weems, Changes within the AAPL 610-1989 Model Form Operating Agreement: Horizontal Modifications and Other Developments, 59 RMMLF-INST 29-1 (2013).

[3] AAPL 610-2015 Model Form Art. XV.A.

[4] Frederick M. MacDonald, The A.A.P.L. Form 610-2015 Model Form Joint Operating Agreement-Commentary of the Form 610 Revision Task Force, 2016 No. 6 RMMLF-INST Paper No. 1 (2016).

[5] Id. at *1-8

[6] Id. at *1-9

[7] Id.

[8] Id. at *1-9, *1-10

[9] For more information about the modifications that were made to Article VI, see MacDonald, The A.A.P.L. Form 610-2015 Model Form Joint Operating Agreement-Commentary of the Form 610 Revision Task Force at *1-12 et seq.

[10] Id. at *1-16

[11] Id. at *1-15


CONTACT

If you have any questions regarding this case law update or suggestions for topics to be covered in future issues, please call our office at 713-229-0360 or contact:

Zachary Oliva
     
Brad Gibbs, Partner

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Eli Kiefaber, Partner

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Zachary Oliva, Partner

[email protected]