1 the 1989 aapl model form operating agreement: why are you not using it? andrew b. derman &...

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The 1989 AAPL Model The 1989 AAPL Model Form Form

Operating Agreement:Operating Agreement:why are you not using it?why are you not using it?

Andrew B. Derman & Isabel Amadeo

Thompson & Knight LLP1700 Pacific Avenue • Suite 3300

Dallas, Texas 75201214.969.1700

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The 1989 AAPL Model Form The 1989 AAPL Model Form Operating Agreement: Operating Agreement: why are you why are you

not using it?not using it?IntroductionIntroduction

Oil Industry relies on form agreements Oil Industry relies on form agreements

AAPL standardized forms: 1956, 1977, AAPL standardized forms: 1956, 1977, 1982, & 1989 1982, & 1989

1989 Form superior to its predecessors 1989 Form superior to its predecessors yet not universally accepted – Why?yet not universally accepted – Why?

Provisions of 1989 Form used worldwide Provisions of 1989 Form used worldwide but not onshore – but not onshore – Ironic! Ironic!

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not using it?not using it?The Debate: Investors vs. OperatorThe Debate: Investors vs. Operator

Is special protection required for Investors?Is special protection required for Investors?

Parties to a JOA can negotiate and establish Parties to a JOA can negotiate and establish their rights and duties their rights and duties

1989 Form 1989 Form standardized “form”; a basis standardized “form”; a basis

Advantages of using form Advantages of using form reduce reduce negotiation and drafting costs, negotiation and drafting costs, comprehensively well written, efficient comprehensively well written, efficient interpretation, among othersinterpretation, among others

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Review of 1989 Review of 1989 FormForm

The 1989 AAPL Model The 1989 AAPL Model Form Form

Operating Agreement:Operating Agreement:why are you not using it?why are you not using it?

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not using it?not using it?Definitions – Article IDefinitions – Article I

Several definitions addedSeveral definitions added

Elimination of ambiguity and conflict Elimination of ambiguity and conflict

““Affiliate” should be definedAffiliate” should be defined

If drilling a horizontal well If drilling a horizontal well the the definition of “deepen” must be definition of “deepen” must be expanded expanded

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not using it?not using it?Exhibits – Article IIExhibits – Article II

Various ExhibitsVarious Exhibits

Improved Exhibit A (identification of Improved Exhibit A (identification of contract area) phone numbers of parties contract area) phone numbers of parties for notice purposes and burdens on for notice purposes and burdens on production production

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not using it?not using it?Interest of Parties in Costs & Interest of Parties in Costs &

Production – Article III.BProduction – Article III.B

Production as allocated in Exhibit AProduction as allocated in Exhibit A

Revenues and Royalties not pooledRevenues and Royalties not pooled

1989 Form 1989 Form clarifies that parties clarifies that parties should share burdens up to the amount should share burdens up to the amount provided for in the blank and provided for in the blank and individually shoulder all excess burdens individually shoulder all excess burdens

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not using it?not using it?Subsequently Created Interests – Subsequently Created Interests –

Article III.C Article III.C

1989 Form includes definition of 1989 Form includes definition of subsequently created interestssubsequently created interests

Critical to fully disclose existing Critical to fully disclose existing burdens in Exhibit A otherwise they are burdens in Exhibit A otherwise they are deemed as subsequently created deemed as subsequently created interests interests

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not using it?not using it?Titles – Article IV.ATitles – Article IV.A

1989 Form improvement – Title 1989 Form improvement – Title examination if requested by a majority examination if requested by a majority in interest of the drilling parties or by in interest of the drilling parties or by Operator vs. 1982 Form that requires Operator vs. 1982 Form that requires all of the parties’ consentall of the parties’ consent

Copies of drilling title opinions only to Copies of drilling title opinions only to parties that pay for them parties that pay for them

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not using it?not using it?Loss or Failure of Title – Article Loss or Failure of Title – Article

IV.BIV.B Owner’s of wellbore interests not Owner’s of wellbore interests not

considered a party to JOA unless considered a party to JOA unless otherwise specified in Exhibit Aotherwise specified in Exhibit A

If a lease is lost due to failure of title If a lease is lost due to failure of title & no new lease secured within 90 & no new lease secured within 90 days days Exhibit A adjusted Exhibit A adjusted

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not using it?not using it?Designation and Responsibilities of Designation and Responsibilities of

Operator – Article V.AOperator – Article V.A

Standard of care of Operator expandedStandard of care of Operator expanded

Negligent Operator liable for its Negligent Operator liable for its percentage interest only percentage interest only

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not using it?not using it?Resignation or Removal of Resignation or Removal of Operator – Operator – Article V.BArticle V.B

Operator may resign at any time Operator may resign at any time providing proper noticeproviding proper notice

Inclusion of removal standard Inclusion of removal standard

Good Cause RemovalGood Cause Removal

Successor Operator Successor Operator affirmative vote affirmative vote of 2 or more parties owning a majority of 2 or more parties owning a majority interest interest

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not using it?not using it?New ProvisionNew Provision

Insolvent or bankrupt Operator = Insolvent or bankrupt Operator = deemed to have resigneddeemed to have resigned

No action of non-operators needed, No action of non-operators needed, only selection of new Operatoronly selection of new Operator

Bankruptcy Court may prevent removal Bankruptcy Court may prevent removal of Operator of Operator interim operating interim operating committee committee

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not using it?not using it?Rights & Duties of Operator – Rights & Duties of Operator –

Article V.DArticle V.D Timely pay expensesTimely pay expenses

Keep Contract Area free of liensKeep Contract Area free of liens

Operator not a fiduciary Operator not a fiduciary

Non-operators greater ability to Non-operators greater ability to monitor the projectmonitor the project

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not using it?not using it?Initial Well – Article VI.AInitial Well – Article VI.A

Drilling of initial well obligatoryDrilling of initial well obligatory

Horizontal wells not addressed Horizontal wells not addressed

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not using it?not using it?Subsequent Operations – Article Subsequent Operations – Article

VI.BVI.B

New language clarifies procedureNew language clarifies procedure

Non-consenting parties may now Non-consenting parties may now participate in deepening or participate in deepening or sidetracking operations sidetracking operations

Party proposing a subsequent Party proposing a subsequent operations must provide proper notice operations must provide proper notice

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not using it?not using it?Operations By Less Than All Parties Operations By Less Than All Parties – –

Article VI.B.2(B)Article VI.B.2(B)

New provision New provision if well not drilled to its if well not drilled to its

objective due to reasons other than objective due to reasons other than

mechanical problems or impenetrable mechanical problems or impenetrable

substances substances non-consenting parties non-consenting parties

entitled to participate entitled to participate

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not using it?not using it?Reworking or Plugging Back – Reworking or Plugging Back –

Article VI.B.2Article VI.B.2

100% penalty replaced by a blank100% penalty replaced by a blank

Parties will seek for higher penaltiesParties will seek for higher penalties

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not using it?not using it?Deepening – Article VI.B.4Deepening – Article VI.B.4

Detailed provision addedDetailed provision added

Non-consenting parties can participate Non-consenting parties can participate in deepeningin deepening

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not using it?not using it?Sidetracking – Article VI.B.5Sidetracking – Article VI.B.5

Provision added similar to deepening Provision added similar to deepening provision provision

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not using it?not using it?Order of Preference of Operations – Order of Preference of Operations –

Article VI.B.6Article VI.B.6

New procedure to elect between New procedure to elect between conflicting proposalsconflicting proposals

Majority interest prevails & in event Majority interest prevails & in event of tie initial proposal prevailsof tie initial proposal prevails

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not using it?not using it?Paying Wells – Article VI.B.8Paying Wells – Article VI.B.8

New provision provides certaintyNew provision provides certainty

Consent of all parties needed to Consent of all parties needed to operate a commercial welloperate a commercial well

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not using it?not using it?Completion of Wells; Reworking & Completion of Wells; Reworking &

Plugging Back – Article VI.CPlugging Back – Article VI.C

Casting point expanded: AFECasting point expanded: AFE

Procedure for conflicting completion Procedure for conflicting completion proposals incorporated proposals incorporated

AFEs are estimates of costs not firm AFEs are estimates of costs not firm commitmentscommitments

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not using it?not using it?Other Operations – Article VI.D Other Operations – Article VI.D

1989 Form improves efficiency of 1989 Form improves efficiency of production operationsproduction operations

Certain work can be undertaken with Certain work can be undertaken with written consent of any party or parties written consent of any party or parties owning at least ___% of the interest owning at least ___% of the interest

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not using it?not using it? Abandonment of Wells – Article Abandonment of Wells – Article

VI.E VI.E

Satisfactory proof of financial Satisfactory proof of financial capability needed to take over a wellcapability needed to take over a well

Costs of plugging, abandoning exceed Costs of plugging, abandoning exceed salvage value salvage value abandoning parties abandoning parties have to pay the party taking over the have to pay the party taking over the wellwell

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not using it?not using it?Termination of Operations – Article Termination of Operations – Article

VI.F VI.F

Operations can be terminated Operations can be terminated prematurely if a determined percentage prematurely if a determined percentage of the parties wish to do soof the parties wish to do so

For the operations to end no need for it For the operations to end no need for it to be “impractical” to be “impractical”

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not using it?not using it?Taking Production in Kind – Article Taking Production in Kind – Article

VI.G VI.G

Each party owns a share of production Each party owns a share of production in accordance with its proportionate in accordance with its proportionate interest in the Contract Areainterest in the Contract Area

For antitrust & tax reasons For antitrust & tax reasons Operator Operator only able to buy or sell the non-only able to buy or sell the non-operator’s oil for a limited period of operator’s oil for a limited period of timetime

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not using it?not using it?Operator Notification Operator Notification

Parties have to advise Operator their Parties have to advise Operator their gas marketing arrangements, except gas marketing arrangements, except for pricefor price

Split stream gas deliveries pursuant to Split stream gas deliveries pursuant to gas balancing agreementsgas balancing agreements

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not using it?not using it?Liability of Parties – Article VII.A Liability of Parties – Article VII.A

Several not jointSeveral not joint

Explicit disclaim to any intent to create Explicit disclaim to any intent to create a partnership a partnership

Duty to deal in good faith with each Duty to deal in good faith with each other other

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not using it?not using it?Liens & Security Interests – Article Liens & Security Interests – Article

VII.B VII.B

Lien covers real property & present Lien covers real property & present and future acquired personal property and future acquired personal property & fixtures& fixtures

Each non-operator grants Operator a Each non-operator grants Operator a lien on its oil and gas rights and a lien on its oil and gas rights and a security interest on its share of security interest on its share of productionproduction

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not using it?not using it?Defaults & Remedies – Article VII.D Defaults & Remedies – Article VII.D

Defaulting party automatically has Defaulting party automatically has certain rights suspendedcertain rights suspended

Non-defaulting parties can sue to Non-defaulting parties can sue to recover at joint account expense recover at joint account expense

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not using it?not using it?Surrender of Leases – Article VIII.A Surrender of Leases – Article VIII.A

Surrender of lease requires consent of Surrender of lease requires consent of all parties to JOAall parties to JOA

Failure to respond within designated Failure to respond within designated time = consent to receive surrendered time = consent to receive surrendered interest. interest. Caution! Caution!

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not using it?not using it?Renewal or Extension of Leases – Renewal or Extension of Leases –

Article VII.B Article VII.B

Now renewals, replacements & Now renewals, replacements & extensions of leases are addressedextensions of leases are addressed

BUT intent to eliminate 1982 Form’s BUT intent to eliminate 1982 Form’s ambiguity not that clear ambiguity not that clear

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not using it?not using it?Assignment; Maintenance of Assignment; Maintenance of

Uniform Interest – Article VIII.D Uniform Interest – Article VIII.D

Transfer of ownership not recognized Transfer of ownership not recognized until 30 days after satisfactory notice until 30 days after satisfactory notice has been receivedhas been received

Transferor liable for all costs incurred Transferor liable for all costs incurred prior to assignmentprior to assignment

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not using it?not using it?Preferential Right to Purchase – Preferential Right to Purchase –

Article VIII.F Article VIII.F

Now an optional provisionNow an optional provision

If box is not checked If box is not checked preferential right preferential right not applicablenot applicable

Does “sell” include farmout?Does “sell” include farmout?

Do mergers & corporate restructurings Do mergers & corporate restructurings trigger preferential rights? trigger preferential rights?

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not using it?not using it?Claims & Lawsuits – Article XClaims & Lawsuits – Article X

Operator is authorized to settle Operator is authorized to settle

claims arising from operations if the claims arising from operations if the

amounts do not exceed a specified amounts do not exceed a specified

amountamount

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not using it?not using it?Notice – Article XIINotice – Article XII

Oral notices need to be confirmed Oral notices need to be confirmed immediately in writingimmediately in writing

Responsive notices deemed delivered Responsive notices deemed delivered when deposited in mailwhen deposited in mail

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not using it?not using it?Miscellaneous – Article XV Miscellaneous – Article XV

New article New article

Addresses execution, successors and Addresses execution, successors and assigns counterparts and severability assigns counterparts and severability

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not using it?not using it?ConclusionsConclusions

1989 Form incorporates many 1989 Form incorporates many improvements over the 1982 Formimprovements over the 1982 Form

1989 Form has yet not attained 1989 Form has yet not attained universal acceptanceuniversal acceptance

1989 Form is an improvement1989 Form is an improvement

1 the 1989 aapl model form operating agreement: why are you not using it? andrew b. derman &...

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