17Sep

The 1989 JOA: Horizontal Modifications and Other Crucial Updates

The 1989 JOA is one of the most common O&G forms. However, updates are need in response to 25 years of case law and continually evolving custom & practice.

Introduction

As we discussed in the last article pertaining to Oil and Gas Joint Operating Agreements, the JOA is one of the most commonly used instruments in the oil and gas industry today.  A JOA provides the crucial foundation upon which multiple leasehold cotenants can cooperate in the joint exploration, development, and production of oil and gas properties. For example, JOAs cover the terms and conditions under which the operator is to conduct operations, such as drilling the initial well, it provides a voting mechanism for future operations, and establishes a basis for which the costs of operations are to be paid.  In addition, the Form 610 describes how the cost and revenue sharing percentages of the parties are to be calculated, how the operators and non-operators will handle title issues, and also covers the potential future acquisition and/or disposition of interests within the contract area.

By far the most common form is the AAPL Form-610.  However, the last major revision of the Form-610 was made in 1989.  THerefore, this form simply does not take into account the last 25 years of crucial case law updates and changes to industry custom and practice.  As a result, many believe an update is sorely needed.

Recently, as will be discussed below and in future articles on this blog, the AAPL has created a new committee to update and revise the JOA to create a new major revision. Perhaps it will be referred to has the “2014 Form-610” or the “2015 JOA.” As of the date of this article, the committee has not yet finished this revision.

However, the committee has created and published a new minor revision to the 1989 JOA, designed to cover crucial aspects relating to horizontal operations.  In the next article in this series, we will cover many of the modifications introduced by  the committee in the Horizontal version of the 1989 Form 610 JOA.  Then in later articles, we will cover several important cases that have been decided in the last 25 years, many of which are routinely addressed in the Additional Provisions section of most JOAs today.
But for the topic of this article, what is this history of the AAPL Form 610 JOA? Why did AAPL publish a Horizontal version? Why has the AAPL formed a committee to produce a new major revision? Does it need a major overhaul? What are some shortcomings that have been experienced over the past 25 years?

History of the AAPL “Form 610” JOA

The Form 610 JOA was first presented to the American Association of Petroleum Landman at the 1956 AAPL Annual Meeting in Denver, Colorado. AAPL officially endorsed the form at this meeting, and the Ross-Martin Company subsequently distributed the form under the name “Kraftbilt 610 agreement” to several thousand customers. [1]John R. Reeves, Compendium of Cases Construing the Model Form Operating Agreements, 52 Rocky Mt. Min. L. Inst. 11-1 (2006). In 1967, AAPL made limited revisions to the form, and with an agreement with the Ross-Martin Company, the form was renamed to the “A.A.P.L. Form 610.” [2]Id.

Since the date of its first publication, the Form 610 has been substantially revised on multiple occasions. In 1977, a substantial restructuring resulted in the “1977 A.A.P.L. Form 610 Model Form Operating Agreement” (hereinafter the “77 Form”). Then in 1982, the form was again revised, resulting in the “1982 A.A.P.L. Form 610 Model Form Operating Agreement” (hereinafter the “82 JOA”). [3]John R. Reeves, The Development of the Model Form Operating Agreement: An Interpretive Accounting, 54 Okla. L. Rev. 211, 278 (2001).

Later, in 1986, a revision committee was formed to update the 1982 Form 610.  The committee consisted of four landmen and three attorneys, and the revisions were reviewed by ten major oil and gas companies. The final revisions were submitted to the AAPL, which were approved in 1989 and resulted in the “1989 A.A.P.L. Form 610 Model Form Operating Agreement” (hereinafter the “1989 Form”). [4]Id.

The 1982 Form was quickly and widely adopted by the oil and gas industry. However, despite the merits of the subsequent revisions and improvements, the industry was slow to accept and utilize the 1989 Form. [5]Andrew B. Derman, The 1989 AAPL Model Form Operating Agreement – Why Are You Not Using It?, Oil and Gas Agreements: Joint Operations 8-1 (Rocky Mt. Min. L. Fdn. 2008)  In some jurisdictions, oil and gas companies still predominately utilize the 1982 Form. [6]Thomas Daily, Horizontal Modifications to the AAPL 610 JOA – A Focus Upon the 610-1982 Form, 2014 Oil, Gas and Mineral Law Institute, March, 2014, Houston, Texas.  However, in Texas, the most commonly used JOA form is the 1989 Form. [7] Cummings, supra note 5.  Nevertheless, the 1977 and 1982 variants of the Form 610 are commonly found when dealing with oil and gas properties that have been held by production for multiple decades.

The Out-of-Date 1989 Form

Background – Horizontal Drilling

The concept of drilling wells horizontally is not as new as one may believe. The first recorded horizontal oil well was completed in Texas in 1929. [8]U.S. Dept. of Energy, Drilling Sideways – A Review of Horizontal Well Technology and its Domestic Applications (April, 1993), 7.   Another horizontal well was reported in 1944 in Pennsylvania. [9]Id.  However, horizontal drilling initially had little practical application.  In the early 1980’s, improvements in drilling equipment, materials, and technologies allowed certain limited horizontal drilling applications to become commercially viable. [10]Id. Later, in the early 2000’s, multi-stage hydraulic fracturing technology had greatly improved. The combination of horizontal drilling and hydraulic fracturing technologies lead to a widespread and rapid proliferation of horizontal drilling operations. [11]Archie Skalbeck, Proliferation of the Oil and Gas Industry and its Effects on Agriculture in North Dakota, (2014) (Doctoral dissertation, The Colorado College).

Horizontal drilling has since spread like wildfire into the Permian Basin’s Wolf “Pack” in Texas, the Eagle Ford in Texas, the Barnett Shale in North Texas, and the Haynesville Shale in Texas and Louisiana, the Niobrara in Colorado and Wyoming, the Bakken in Montana and North Dakota, the Utica in Ohio, the Woodford in Oklahoma, the Fayetteville in Arkansas, and the Marcellus Shale in the northeastern states. [12]John H. Graves, Fracking: America’s Alternative Energy Revolution 73.; Kevin Fisher, Trends Take Fracturing ‘Back to the Future’, The American Oil & Gas Reporter (2012).  Baker Hughes reported 48 rigs drilling horizontally in January 8, 1993, and reported 1,317 on August 8, 2014. [13]Baker Hughes, “North America Rotary Rig Count (US Drilling Type 1991–2012)” (June 2013) (Rig Count), http://goo.gl/RFGgCA.

Shortcomings as to Horizontal Wells

A Form 610 JOA is designed to cover the complex set of rights and obligations related to sophisticated industry participants embarking on a complicated and high-risk business endeavor. It is sufficiently broad and general in many of its terms so as to cover a wide range of projects, risks, and circumstances. However, weighing in at only 17 pages, the Form 610 simply cannot be expected to cover every single possibility, contingency, and detail associating with such an undertaking in a high level of specificity. Additionally, no form is able to anticipate specific changes in technology or specific changes in industry custom and practice, and no form is able to adapt its terms in real-time to the constantly evolving legal landscape.

Horizontal wells were not common when the Model Form 610 was being revised in 1977, 1982 or 1989. As a result, the unique issues, practices and difficulties associated with horizontal wells simply were not specifically addressed in any of the existing forms. Several provisions in the existing 1989 Form are sufficiently general in scope that they may already adequately cover horizontal operations. However, several important changes are often suggested by attorneys throughout the forms to sufficiently cover the unique issues related to horizontal wells. [14]Lamont C. Larsen, Horizontal Drafting: Why Your Form JOA May Not Be Adequate For Your Company’s Horizontal Drilling Program, Rocky Mtn. Min. L. Found. J., Vol 48, No. 1 (Spring, 2011), 51.

Existing Provisions May Require Revisions

For example, many of the definitions found in the 1989 Form and its predecessors can be modified to clarify how they apply to horizontal wells. The definition of “deepen” is crucial, because if a subsequent operation is classified as an operation to “deepen” the well, then the parties are required to make an election regarding whether to consent thereto and pay their share of costs, or go “non-consent” and suffer a non-consent penalty. [15]Form 610-1989, Article VI.B.  The existing definition of “deepen” only includes operations where the well is drilled to zones below the deepest zone previously drilled.  However, in horizontal operations, the act of “deepening” will typically only result in an extension of the horizontal portion (“lateral”) of the well.  This definition is one of many that require revisions in order that they will more clearly specify how the provisions will apply to horizontal wells.

Additional Provisions Are Required

Other important terms applicable to horizontal wells are missing entirely from the 1989 Form and its predecessors.  For example, these forms do not include definitions such as “horizontal well,” “lateral,” or “vertical well,” all of which are necessary to specify which terms, conditions, rights and obligations are applicable to the two types of wells and to operations on those wells.

Additionally, the oil and gas industry has developed new unique methods of reducing the high costs of horizontal wells. For example, many companies how use less expensive drilling rigs to drill the vertical portion of the wellbore, and utilize the more expensive drilling rigs only for drilling the horizontal portion of the wellbore. This creates unique operations issues including timing and costs.

In addition to those revisions necessary for horizontal drilling purposes, legal commentators have been advocating for other various changes to the 1989 Form for the last 25 years. [16]See, e.g., See Andrew B. Derman, The New and Improved 1989 Joint Operating Agreement: A Working Manual, ABA Natural Resources, Energy and Environmental Law Sec. Monograph No. 15 (1991); Robert C. Bledsoe, The Operating Agreement: Matters Not Covered or Inadequately Covered, 47 Rocky Mt. Min. L. Inst. 15-1 (2001); Mark A. Matthews & Christopher S. Kulander, Additional Provisions to Form Joint Operating Agreements, State Bar of Tex. Oil Gas & Min. L. Sec. Rep. vol. 33, no. 2, at 39 (Dec. 2008); Michel E. Curry, The Operating Agreement – After the Honeymoon, 31 State Bar of Tex. Oil Gas & Min. L. Inst. (2005); Curry, supra; Lamont C. Larsen, supra note 36.  Many of these recommended changes were in response to conflicting, surprising, or disputed interpretations of the Model Forms by the courts. [17]Reeves, supra note 23.  Other commentators have focused specifically on the changes necessary to bring the form more in line with the general expectations of the industry. [18]Robert C. Bledsoe, Ten Unworkable Aspects of the Model Form Operating Agreement and Suggestions, 18th Annual Advanced Oil, Gas and Mineral Law Course Ch. 16, September, 2000, Houston, Texas.  Furthermore, over the past couple decades, attorneys and landmen alike have been customizing the Model Forms for each deal so as to better fit the unique circumstances of the transaction, and to better meet the expectations of the parties. [19]See Michel E. Curry, The Perfect Operating Agreement: Considerations in Drafting Changes to the Model Form JOA, 26 State Bar of Tex. Oil Gas & Min. L. Inst. 17-1 (2008); see also Thomas A. Daily, supra note 28 (stating that “a form is only a form. One size won’t ever fit all. Forms were made to be customized.”).   Additionally, as the 1989 Form has been in use for approximately twenty-five years as of the time of this paper, most practitioners are accustomed to seeing various additional provisions added to the form under Article XVI. [20]Michael Cooper, Austin Elam & Kim Mai, A Form for All Directions: A.A.P.L’s “New” 1989 Horizontal Well JOA, 2 American Bar Association Section of Environment, Energy, and Resources’ Oil and Gas Committee Newsletter 4 (2014).

Other Changes Ripe for Revision

In addition to those revisions necessary for horizontal drilling purposes, legal commentators have been advocating for other various changes to the 1989 Form for the last 25 years. [21]See, e.g., See Andrew B. Derman, The New and Improved 1989 Joint Operating Agreement: A Working Manual, ABA Natural Resources, Energy and Environmental Law Sec. Monograph No. 15 (1991); Robert C. Bledsoe, The Operating Agreement: Matters Not Covered or Inadequately Covered, 47 Rocky Mt. Min. L. Inst. 15-1 (2001); Mark A. Matthews & Christopher S. Kulander, Additional Provisions to Form Joint Operating Agreements, State Bar of Tex. Oil Gas & Min. L. Sec. Rep. vol. 33, no. 2, at 39 (Dec. 2008); Michel E. Curry, The Operating Agreement – After the Honeymoon, 31 State Bar of Tex. Oil Gas & Min. L. Inst. (2005); Curry, supra; Lamont C. Larsen, supra note 36.  Many of these recommended changes were in response to conflicting, surprising, or disputed interpretations of the Model Forms by the courts. [22]Reeves, supra note 23.  Other commentators have focused specifically on the changes necessary to bring the form more in line with the general expectations of the industry. [23]Robert C. Bledsoe, Ten Unworkable Aspects of the Model Form Operating Agreement and Suggestions, 18th Annual Advanced Oil, Gas and Mineral Law Course Ch. 16, September, 2000, Houston, Texas.

Furthermore, over the past couple decades, attorneys and landmen alike have been customizing the Model Forms for each deal so as to better fit the unique circumstances of the transaction, and to better meet the expectations of the parties. [24]See Michel E. Curry, The Perfect Operating Agreement: Considerations in Drafting Changes to the Model Form JOA, 26 State Bar of Tex. Oil Gas & Min. L. Inst. 17-1 (2008); see also Thomas A. Daily, supra note 28 (stating that “a form is only a form. One size won’t ever fit all. Forms were made to be customized.”).   Additionally, as the 1989 Form has been in use for approximately twenty-five years as of the time of this paper, most practitioners are accustomed to seeing various additional provisions added to the form under Article XVI. [25]Michael Cooper, Austin Elam & Kim Mai, A Form for All Directions: A.A.P.L’s “New” 1989 Horizontal Well JOA, 2 American Bar Association Section of Environment, Energy, and Resources’ Oil and Gas Committee Newsletter 4 (2014).

These many common “tweaks” and “additional provisions” will be discussed in future articles in this series.  In addition, we will explore many of the “famous” cases that will likely be considered by the committee in developing the next full modification to the AAPL Form 610.

Austin Brister
Austin assists clients in all aspects of mergers, acquisitions and divestitures of energy properties, from the first letter of intent through negotiations, closing and post-closing matters. He has assisted clients in a variety of deals including farmouts, purchase and sale transactions, joint exploration and development agreements, participation agreements, and more routine operational transactions such as joint operating agreements and master services agreements.
Austin Brister

Footnotes   [ + ]

  • Chad Rose

    Great blog post ! For what it’s worth if people require a OPM OF 612 , my kids filled out and esigned a blank form here http://goo.gl/27RDuv

© Copyright 2014, Austin W. Brister. 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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