The 1989 AAPL Model Form Operating Agreement why

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Andrew B. Derman & Isabel Amadeo Thompson & Knight LLP 1700 Pacific Avenue • Suite 3300 Dallas, Texas 75201 214. 969. 1700 1

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Introduction 2 n Oil Industry relies on form agreements n AAPL standardized forms: 1956, 1977, 1982, & 1989 n 1989 Form superior to its predecessors yet not universally accepted – Why? n Provisions of 1989 Form used worldwide but not onshore – Ironic!

The 1989 AAPL Model Form Operating Agreement: why are you not using it? The Debate: Investors vs. Operator 3 n Is special protection required for Investors? n Parties to a JOA can negotiate and establish their rights and duties n 1989 Form standardized “form”; a basis n Advantages of using form reduce negotiation and drafting costs, comprehensively well written, efficient interpretation, among others

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Review of 1989 Form 4

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Definitions – Article I 5 n Several definitions added n Elimination of ambiguity and conflict n “Affiliate” should be defined n If drilling a horizontal well the definition of “deepen” must be expanded

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Exhibits – Article II 6 n Various Exhibits n Improved Exhibit A (identification of contract area) phone numbers of parties for notice purposes and burdens on production

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Interest of Parties in Costs & Production – Article III. B 7 n Production as allocated in Exhibit A n Revenues and Royalties not pooled n 1989 Form clarifies that parties should share burdens up to the amount provided for in the blank and individually shoulder all excess burdens

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Subsequently Created Interests – Article III. C 8 n 1989 Form includes definition of subsequently created interests n Critical to fully disclose existing burdens in Exhibit A otherwise they are deemed as subsequently created interests

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Titles – Article IV. A 9 n 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 n Copies of drilling title opinions only to parties that pay for them

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Loss or Failure of Title – Article IV. B n Owner’s of wellbore interests not considered a party to JOA unless otherwise specified in Exhibit A n If a lease is lost due to failure of title & no new lease secured within 90 days Exhibit A adjusted 10

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Designation and Responsibilities of Operator – Article V. A n Standard of care of Operator expanded n Negligent Operator liable for its percentage interest only 11

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Resignation or Removal of Operator – Article V. B n Operator may resign at any time providing proper notice n Inclusion of removal standard n Good Cause Removal n Successor Operator affirmative vote of 2 or more parties owning a majority interest 12

The 1989 AAPL Model Form Operating Agreement: why are you not using it? New Provision n Insolvent or bankrupt Operator = deemed to have resigned n No action of non-operators needed, only selection of new Operator n Bankruptcy Court may prevent removal of Operator interim operating committee 13

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Rights & Duties of Operator – Article V. D n Timely pay expenses n Keep Contract Area free of liens n Operator not a fiduciary n Non-operators greater ability to monitor the project 14

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Initial Well – Article VI. A n Drilling of initial well obligatory n Horizontal wells not addressed 15

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Subsequent Operations – Article VI. B n New language clarifies procedure n Non-consenting parties may now participate in deepening or sidetracking operations n Party proposing a subsequent operations must provide proper notice 16

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Operations By Less Than All Parties – Article VI. B. 2(B) n 17 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

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Reworking or Plugging Back – Article VI. B. 2 n 100% penalty replaced by a blank n Parties will seek for higher penalties 18

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Deepening – Article VI. B. 4 n Detailed provision added n Non-consenting parties can participate in deepening 19

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Sidetracking – Article VI. B. 5 n 20 Provision added similar to deepening provision

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Order of Preference of Operations – Article VI. B. 6 n New procedure to elect between conflicting proposals n Majority interest prevails & in event of tie initial proposal prevails 21

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Paying Wells – Article VI. B. 8 n New provision provides certainty n Consent of all parties needed to operate a commercial well 22

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Completion of Wells; Reworking & Plugging Back – Article VI. C n Casting point expanded: AFE n Procedure for conflicting completion proposals incorporated n AFEs are estimates of costs not firm commitments 23

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Other Operations – Article VI. D n 1989 Form improves efficiency of production operations n Certain work can be undertaken with written consent of any party or parties owning at least ___% of the interest 24

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Abandonment of Wells – Article VI. E n Satisfactory proof of financial capability needed to take over a well n Costs of plugging, abandoning exceed salvage value abandoning parties have to pay the party taking over the well 25

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Termination of Operations – Article VI. F n Operations can be terminated prematurely if a determined percentage of the parties wish to do so n For the operations to end no need for it to be “impractical” 26

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Taking Production in Kind – Article VI. G n Each party owns a share of production in accordance with its proportionate interest in the Contract Area n For antitrust & tax reasons Operator only able to buy or sell the non-operator’s oil for a limited period of time 27

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Operator Notification n Parties have to advise Operator their gas marketing arrangements, except for price n Split stream gas deliveries pursuant to gas balancing agreements 28

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Liability of Parties – Article VII. A n Several not joint n Explicit disclaim to any intent to create a partnership n Duty to deal in good faith with each other 29

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Liens & Security Interests – Article VII. B n Lien covers real property & present and future acquired personal property & fixtures n Each non-operator grants Operator a lien on its oil and gas rights and a security interest on its share of production 30

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Defaults & Remedies – Article VII. D n Defaulting party automatically has certain rights suspended n Non-defaulting parties can sue to recover at joint account expense 31

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Surrender of Leases – Article VIII. A n Surrender of lease requires consent of all parties to JOA n Failure to respond within designated time = consent to receive surrendered interest. Caution! 32

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Renewal or Extension of Leases – Article VII. B n Now renewals, replacements & extensions of leases are addressed n BUT intent to eliminate 1982 Form’s ambiguity not that clear 33

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Assignment; Maintenance of Uniform Interest – Article VIII. D n Transfer of ownership not recognized until 30 days after satisfactory notice has been received n Transferor liable for all costs incurred prior to assignment 34

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Preferential Right to Purchase – Article VIII. F n Now an optional provision n If box is not checked preferential right not applicable n Does “sell” include farmout? n Do mergers & corporate restructurings trigger preferential rights? 35

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Claims & Lawsuits – Article X n 36 Operator is authorized to settle claims arising from operations if the amounts do not exceed a specified amount

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Notice – Article XII n Oral notices need to be confirmed immediately in writing n Responsive notices deemed delivered when deposited in mail 37

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Miscellaneous – Article XV n New article n Addresses execution, successors and assigns counterparts and severability 38

The 1989 AAPL Model Form Operating Agreement: why are you not using it? Conclusions n 1989 Form incorporates many improvements over the 1982 Form n 1989 Form has yet not attained universal acceptance n 1989 Form is an improvement 39