6Apr

Anatomy of a Joint Operating Agreement

In Introduction to Joint Operating Agreements, we reviewed several of the critical roles the Joint Operating Agreement plays within the oil and gas industry.  One of the first steps to understanding the JOA is to understand the anatomy of its several components. The AAPL Joint Operating Agreement is organized into the following sections, in order:

  1. Cover page,
  2. Table of contents,
  3. 15 sections of standard provisions labeled as “articles,”
  4. An article designed exclusively for custom provisions, and
  5. Several placeholders for exhibits which parties may identify.

Cover Page

The cover page of the JOA is designed to identify the properties or prospect covered, as well as the initial operator. This allows for quick access to information at a glance for operations teams, as well as acquisition and divestiture teams. Perhaps you were hoping for more here, but it’s just a cover page!  The best advice I have here is that you cannot rely entirely on the cover page.  Typos and oversights can and do happen.  Don’t be surprised to see a JOA that purports to cover the _____ well, but then later find out it also covers a broader Contract Area including other wells.

Table of Contents

All newcomers to the JOA should examine the table of contents (“TOC”). The TOC to the JOA is well organized with each Article specifying one major area of joint operations that calls for special attention and understanding.

One common practice within the industry is to modify and update the TOC to match any changes made to the model form.  For example, parties typically strike the preferential right to purchase provision (“pref right”), and in doing so typically strike the pref right from the TOC as well.  This can be helpful, as it allows parties to, at a glance, gain a quick understanding of some of the substantial modifications made to the JOA. However, as a word of caution, one should not rely on the TOC when determining whether a certain provision has or has not been included or stricken from any particular JOA.  While the TOC can be a helpful tool, it is not the heart of the JOA itself.

Standard Provisions, Blanks, Check Boxes, and Striking Clauses

The AAPL JOA contains 15 standard Articles covering a variety of critical aspects of joint operations.  Generally, the terms and conditions contained within these articles consist of boilerplate, check boxes, and blanks which must be filled in, and there may also be manually stricken provisions, and custom modifications made within the lines.

The 15 standard Articles in the JOA have variables that must be identified by the parties.  For example, several sections contain blanks where the parties are expected to negotiate terms and fill in the corresponding blank in the JOA.  Other sections contain option boxes that can be checked.  Read these boxes carefully, as certain sections simply allow none, any, or all boxes to be checked depending on the transaction, while others are alternatives to one another. More than once I have learned of parties coming to a dispute under a JOA with both boxes checked in Article VI.B.1. Apparently this was done under the presumption that the parties wanted all associated authorities for expenditure (“AFEs”) to include all cost figures including completion costs, but they still wanted to allow for a casing point election. However, the entire AAPL JOA form is predicated on the parties choosing only one option in Article VI.B.1.

As stated above, one method parties often use to modify the form JOA to better meet their specific deal terms is to strike certain provisions of the JOA they do not wish to appear in their customized agreement. Perhaps one of the most common places this is found is within the pref right provision found in Article VIII.F. Parties often strike this entire provision, so as to omit the granting of any preferential rights to purchase under the JOA.

Word of Caution:

Parties should be careful when striking language from any agreement, so as to ensure that the intent of such striking is sufficiently clear from an objective viewpoint, and to ensure that the modification still affords harmony with the remaining provisions of the agreement. Does striking a provision exhibit an intent to merely omit the stricken terms, or does this evidence that the parties had the opposite intent from that of the stricken terms?

One common example I have encountered this type of ambiguity, while outside the JOA context, is in North Dakota oil and gas leases.  In North Dakota, the definition of “drilling or reworking operations” has been liberally construed to include certain types of mere preparatory work that may occur months prior to the actual spudding of a well. [1]See Anderson v. Hess Corp., , 733 F. Supp. 2d 1100, 1104 (D.N.D. 2010). Parties occasionally strike from their leases any definition of “drilling operations” that includes this mere preparatory work.  However, I have seen this result in competing interpretations of the lease: the lessor arguing that striking this language sufficiently demonstrates that the parties intended to expressly exclude preparatory activities from the definition of “drilling operations,” while the lessee argues that this merely demonstrates that the parties intended to resort to the judicially established definition of “drilling operations” as indicated by Anderson v. Hess and its progeny.

Special Provisions in Article XVI

Article XVI in the 1989 Form is labeled “Other Provisions” and is designed to allow the parties to insert their own custom provisions into the form.  These provisions may expressly replace other standard provisions found earlier in the form, or may merely supplement these provisions.  Typically a provision at the beginning of Article XVI will provide that, in the event of conflict between Articles I-XV, and Article XVI, then Article XVI is to control.  However, disputes may arise if parties do not adequately specify which collections of terms and conditions are intended to control in the event of a conflict.

An additional item to consider is whether the Article XVI provisions are intended to control over competing terms and conditions found within the Exhibits attached to the JOA. Of course, no overarching general rule can be given, as this is an issue that must be considered against each Article XVI provision.

There are several sets of “Example Article XVI Provisions” floating around on the internet. One such set pertains to updating the 1989 JOA to adequately address horizontal drilling operations. As we examined in my previous article covering the “new” AAPL Horizontal JOA, most of these typical additional provisions have been implemented directly into one version of the AAPL JOA form itself.

Other common Additional Provisions may include:

  1. Modified forfeiture provisions
  2. Clarified title provisions
  3. Modified exculpatory provisions
  4. Modified successor and predecessor liability concerns
  5. Clarified AFE requirements, and cost-overrun provisions
  6. Clarified or modified cost advancement provisions
  7. Farmout provisions
  8. Area of mutual interest agreement
  9. Priority of operations provisions
  10. Confidentiality and/or trade secret provisions

Another interesting fact that may be worth noting is that, when dealing in certain geographical areas or with certain operators, the 1982 Form may still remain the standard form.  Under the 1982 Form, the “Other Provisions” section is found within Article XV, rather than Article XVI.  For this reason, one should not be surprised if the party “on the other side of the table” becomes confused when a terms sheet discussion turns to “Article XVI provisions.”

Exhibits to the Model Form

The Model Form contemplates several types of Exhibits that may be attached thereto. Many practitioners believe that no deal is truly complete if each Exhibit is not included.  However, parties may believe that certain Exhibits are unnecessary to their specific deal, or may already have other separate agreements in place covering these areas of the parties’ relationship.

The Exhibits to the JOA include the following:

  1. Exhibit “A,” which identifies the lands, division of working interest ownership, interests subject to the agreement, and addresses of the parties.
  2. Exhibit “B,” which identifies a Form Lease to be used if any of the JOA Parties own a mineral interest within the Contract Area.
  3. Exhibit “C,” which identifies the accounting procedure the Parties agree to use.  In recent years the industry standard has been to utilize a 2005 COPAS.
  4. Exhibit “D,” which identifies the Insurance requirements;
  5. Exhibit “E,” which is a Gas Balancing Agreement.
  6. Exhibit “F,” which is typically a Non-Discrimination and Certification of Non-Segregated Facilities.
  7. Exhibit “G,” which is a Tax Partnership, if the JOA Parties elect to utilize a tax partnership.
  8. Exhibit “H” and onward, which are limited only by the imagination. One common example included is a Memorandum of Operating Agreement and Financing Statement.

Image courtesy Sebastien Wiertzsome rights reserved under Creative Commons License.

Austin Brister
Austin represents oil and gas exploration and production companies and landowners in a wide variety of complex commercial litigation matters, including contract and property disputes, royalty disputes, breach of lease cases, lease termination/perpetuation disputes, and an array of other issues in the upstream oil and gas sector. Austin has prosecuted and defended claims in state courts and federal courts. Austin strives to find practical business solutions to complex issues, but if necessary, he works hard to implement effective strategies in the courthouse.
Austin Brister

Footnotes   [ + ]

© Copyright 2012-2018, McGinnis Lochridge LLP. All Rights Reserved. DISCLAIMER: The information in this article is for general information purposes only. This article should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading this article does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided in this article.
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