Mosburg 3-7-99-3a

AREA OF MUTUAL INTEREST PROVISIONS
by Lewis G. Mosburg, Jr.
Copyright 1994, 1999 by Lewis G. Mosburg, Jr. All Rights Reserved.
Part Two: Advantages and Disadvantages of Forming an Area of Mutual Interest

In General. There are no set rules as to when an AMI should, or should not, be formed. In some instances, it will be to your advantage for your agreement to contain such a provision; in others, it will not. Likewise, whether or not this becomes a "deal point" -- a circumstance in which you would simply rather not enter into the agreement if you cannot have your way as to the presence or absence of an AMI provision -- will also vary from deal to deal. However, certain general conclusions can be drawn as to when an AMI will work to your advantage and when it will not.

There are certain disadvantages in AMI arrangements. Such provisions will reduce your flexibility in dealing with other parties in subsequent trades concerning this acreage. Also, your agreement may have been a "shotgun marriage" -- entered into due to pressures of rig availability, the other party's acreage position on the structure, or to avoid proving up his acreage. Under these circumstances when you would have preferred no "partner" (or at least not this partner), you normally would not want to "expand" the relationship by adding an AMI provision.

Sometimes, you may also have a competitive edge in an area due to preexisting information which is not available to the other party; greater financial resources; or a more effective Land or Exploration Department. Here, again, an AMI provision would not be to your advantage. Likewise, if you are the more aggressive drilling party, and do not want to "carry" the other party even on a "penalty" basis under your Joint Operating Agreement, an AMI provision would not be in your best interest.

AMI provisions also create problems in Lease Administration (keeping track of AMIs can be a nightmare) and can create even greater headaches when multiple AMIs overlap. In other words, there are times when an AMI can prove a "pain in the neck."

There are, though, advantages in forming an Area of Mutual Interest. One such advantage is the mirror image of the disadvantage of an AMI to the other side of the deal: if the other company has greater financial resources, a more effective Land or Exploration Department, or information which you lack, it would be to your advantage to have an AMI provision included in the agreement.¹

There are other advantages to an Area of Mutual Interest relationship which extend to both parties to the deal:

A relative uniformity of interest will be maintained throughout the Contract Area. This should lessen conflicts of interest concerning well location, the timing of drilling, etc.²
Risk and participation will be spread over a larger number of acres. While such participation will simply be a smaller share of a larger pie, this will permit you to take greater advantage of the "serendipity factor" that is often involved in truly significant discoveries.
Most importantly, the presence of an Area of Mutual Interest clause will reduce unnecessary competition between you and your "partner," particularly in those circumstances where the information gained from the drilling of an Earning Well is critical to the determination of whether or not, and where, additional Leases should be acquired.³

AntiTrust Implications. The point just mentioned that creating an AMI reduces unnecessary competition immediately raises a question: Do AMIs violate antitrust rules?

To date, the Justice Department has focused on more compelling issues than "plain vanilla" AMI arrangements in carrying forward its war against monopolies. However, to reduce any argument that antitrust restrictions have been violated, the following guidelines are suggested:

The area covered should be limited.
The duration should be restricted.
A limited number of companies should be involved in the arrangement.⁴
A reasonable business purpose other than "squeezing out the competition" should exist for forming the AMI.

Also, particular care must be taken in federal or state sale situations to insure that a "joint bidding" arrangement doesn't violate antitrust rules, public policy, or express limitations contained in federal or state statutes or regulations.

An analogous problem exists when, as a condition of showing data to another company in connection with a proposed farmout or other arrangement, you have insisted on an "Anti-Top Leasing Provision" – in other words, a contractual agreement that the company will not use the viewing of your information as an opportunity to "top lease" your acreage.⁵ Here, limiting the size of the area and the period of time that the restriction will last are even more critical.⁶

Coming Next: Problems in Drafting Area of Mutual Interest Provisions

¹Expiring Leases or the like could lead the other party to agree to the AMI, if, to you, it was a "deal point."

²Of course, an AMI does not guarantee such a uniformity of interest, since the participation of either party in sharing in leases acquired by the other is optional with the non-acquiring party.

³There are other reasons that, as to a given agreement, an Area of Mutual Interest provision might prove desirable: for example, where you suspect that your "partner" might be tempted to top lease certain of your Leases, or where you desire to form an Area of Mutual Interest for the limited purpose of joint bidding at a federal or state sale, or where an AMI seems appropriate for this particular trade.

⁴You should also be prepared to demonstrate that there are other companies active in the area that are not parties to the AMI.

⁵In some instances, if the other company has no acreage position in the area, you may seek to extract an "Anti-Leasing Provisions" -- an agreement that the company will acquire no acreage in the specified area, at least for a specified period of time.

⁶If your contractual restricting is of the "Anti-Leasing" rather than the "Anti-Top Leasing" variety, restricting the area and particularly the time becomes more critical still.

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