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INTERNET OIL & GAS PRIMER

JOINT OPERATING AGREEMENTS

PART THREE: INTRODUCTION: WORKING WITH THE AAPL MODEL FORM

To effectively operate under the AAPL Model Form, it is critical that you familiarize yourself with the terms of the agreement. The majority of questions involving joint operations are answered, and answered specifically, by some specific provision of the agreement. However, to know where to look within the agreement to find the answer to the problem, and to know when the Model Form does not cover a problem (or cover it adequately), as well as to be alert to the more complicated situations under which the Model Form will give you an "answer" which is not appropriate for your more complicated "deal," you must know where within the agreement your specific problem is covered.

Herein lies the problem! Often, to find the Model Form's complete answer to the question, it's necessary to look at several different, and widely dispersed, portions of the Model Form. Turning to one provision alone may give you an "answer" which would be correct -- if that was the only portion of the agreement dealing with the problem. However, a more thorough working knowledge of the agreement would tell you that the apparent "answer" provided in one paragraph may be modified by provisions found elsewhere in the agreement. Likewise, the agreement often utilizes a "Simon Says" approach: one provision of the agreement will specifically refer you to another, and, from this, you are directed to a third provision. Without following this round-about approach, you will never receive a complete answer to your problem. (And, in some instances, an innocuous "throw-away" phrase may in fact have been a direction to look at some other agreement provision to understand what you have just read. If you aren't aware of this, your "reading" of the first provision alone may give you a very misleading impression concerning what the Model Form actually says concerning your rights and obligations under these circumstances.)

Being sure you have actually found the Model Form's true answer to your problem is not the only reason you need to acquaint yourself in advance with its provisions. In many instances, the "answer" provided by the Model Form may prove surprising. For instance, under all versions of the Model Form, a "Non-Consenting Party" is entitled to well information and access to observe operations on those wells in which it is not participating. (This is contrary to the result many members of the industry feel would be most desirable -- see below -- and is also contrary to the provisions of other "standard" operating agreements.)

In some instances, you simply must live with an "unpleasant" answer provided by the Model Form. However, in other circumstances -- and particularly if your joint operations do not fall within "plain vanilla" conditions -- an advance knowledge of the inappropriate solution would have led you to modify the Model Form before it was signed. However, if you are not aware of the circumstances under which the Model Form is not appropriate without modification, you will be "stuck" with an answer that is there -- but unsatisfactory.

Thus, knowledge of the organization and answers provided under the Model Form is necessary to be sure that you know where within the agreement to look for a solution, and before a problem arises -- to know when the Model Form needs modification.

Despite this critical need for familiarization, never rely on your memory concerning what the Model Form says: the agreement is simply too lengthy, too detailed, and too explicit in its language, to permit such an approach. Instead, each time a problem arises under the Model form, turn to the specific governing provisions (you know where to find them from your earlier study), read the detailed agreement provisions and then apply them to your specific circumstance.¹

Your familiarization process cannot be limited to the 1982 and 1989 Versions of the Model Form, the Model Form versions currently in use when a new "Contract Area" is to be formed. Your company will be conducting operations on many Contract Areas formed pursuant to the 1956 and 1977 Model Form Versions. When a problem arises, you will need to know the answer provided by the particular version of the Model Form under which this particular Contract Area was established. (Unlike industry practice as to the COPAS Accounting Procedure, adoption of a new agreement version by the AAPL does not "supersede" the agreements governing existing Contract Areas.)² Accordingly, to effectively operate under the Model Form, you must familiarize yourself with all four versions!

The 1956 Version of the Model Form still governs the majority of units under which most companies are operating. (After all, the "1977 Version" did not come into being until that year; and many companies continued to use the 1956 Version for several years thereafter.) Thus, where operational problems arise involving Contract Areas formed under that version of the agreement, including the decisions concerning the drilling of additional wells, or deepening or plugging back to different horizons, the rights of the parties must be determined under the 1956 version. (This can create substantial problems due to outdated or incomplete solutions sometimes provided under this earliest of the Model Form variations.)

A number of wells are still being drilled under agreements entered into under the 1977 Version. Accordingly, many questions that you will be called upon to answer for years to come will arise under the 1977 agreement.

As mentioned in an earlier article, the 1977 Version of AAPL Form 610 significantly modified the 1956 Version, both in the organization of the agreement and in agreement solutions. Accordingly, if you have worked primarily with the 1977, 1982 and 1989 Versions, as most of us have, it is often difficult to find the related provisions of the 1956 Version when you are required to solve a problem involving a 1956 operating agreement. Accordingly, a "side-by-side" comparison of the 1977 and 1956 forms will be included as a part of this Primer.

The 1982 Version of the Model Form did not involve the same massive format changes that characterized the 1977 revision: it is basically a "spot change" approach. However, the changes made were significant and represented a major improvement over the 1977 form. Many companies currently utilize the 1982 Version rather than the 1989 Version when entering into new agreements.³

Later in this Primer you will also find another side-by-side comparison, this time of the 1977 with the 1982 Version.

The 1989 Model Form is as dramatic a revision of the 1982 version as the 1977 Version was to the 1956. (Again, a side-by-side comparison of the 1982 Version with the 1989 Version will be contained later in this Primer.) While some companies – or divisions of companies – still cling to the 1982 Version, more and more industry members are following the preferable steps of moving to the 1989 Version.

Several pitfalls arise in utilizing the Model Form. First, and particularly under the 1956 Version of the Model Form, there are solutions contained in the agreement which are now outdated. (The 1977 and 1982 Versions are in many ways "outdated" as a result of the dramatic and unprecedented changes in the economic climate of the oil and gas industry; the same comment can even be made concerning the 1989 Model Form.) Secondly, in certain situations, the "solutions" adopted by the draftsmen of the various Model Form versions were intentional, but are either unexpected, or, to say the least, controversial. (And this has prove particularly true with the 1989 Version, as will be discussed in later articles.) Thirdly, in certain situations, the "answer" provided by the agreement version is unclear, ambiguous, or inadvertently wrong, although much of this has been corrected by the 1989 Version. Finally, in many situations, the answer is inappropriate when unusual circumstances or complications are present.

The AAPL Model Form Operating Agreement was originally adopted for use in "plain vanilla" situations. It tended to focus most heavily on Contract Areas that would involve a single exploratory well and a single objective horizon, and uniform ownership of formations among the parties. It was not primarily intended to apply to broad, multiple-prospect, multi-horizon areas. And it did not necessarily assume that there would be a large number of parties to the agreement.

This is not to say that the Model Form cannot be used under such circumstances. However, where a broad exploratory Contract Area is involved, or more complicated situations arise, the Model Form provides an "answer" which is frequently not that which would have been adopted by the parties if the agreement had been drafted with such conditions in mind -- although the 1989 Version deals much more effectively with such situations.

Even the 1989 Version of the Model Form is not sacred. Certain of its originally proposed changes were dropped, frequently because of a perceived administrative complexity or inconvenience, where a better approach would have been to utilize the changes with modification, or, with such modification, to utilize the changes in connection with specific Contract Areas. And as was true with the three versions of the Model Form which preceded it, no agreement is sacred and no committee of draftsmen can anticipate all possible problems.⁵

Coming Next: "An Overview of the AAPL Model Forms"

¹ Some companies have been known to pull very effective "bluffs" when situations arise where they feel that the Model Form solution would be both inappropriate and unexpected and, of course, work to their disadvantage! Thus, one major oil company refuses to furnish well information to Non-Consenting Parties, despite the Model Form's provision to the contrary. When queried, the company will reply, "As a Non-Consenter, you are not entitled to that information." And nine times out of ten, the Non-Consenter will acquiesce in the refusal to provide it information, assuming that the bluffer's answer was correct!

² Legally, of course, there is no right to charge Non-Operators in a manner contrary to the Accounting Procedure actually attached as "Exhibit C" to the operating agreement signed by the parties. However, as a matter of convenience, many companies acquiesce in permitting charges as to all Contract Areas to be governed by the latest version of the Accounting Procedure recommended by the Council of Petroleum Accounting Societies.

³The "whys" of this practice will be discussed later in this Primer in connection with our discussion of the adoption of the 1989 Model Form.

⁴See Boigon, "The Joint Operating Agreement in a Hostile Environment," 38 Inst. on Oil & Gas L. and Tax'n 5-1, 5-3 (1987), for a number of possible "tailoring" changes, including suggested language.

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