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JOINT OPERATING AGREEMENTS
Copyright 1999 by Lewis G. Mosburg, Jr. All Rights Reserved.
PART TWO: INTRODUCTION: "MODEL FORM" OPERATING AGREEMENTS
Development of AAPL Model Form 610.1 Prior to the early 1950s, there was less need for a "model" form of Joint Operating Agreement. Joint operations were normally conducted one well at a time. Most wells were shallow, with oil as the objective: the lesser costs and risks involved in such drilling, and the prevalent spacing patterns, meant that there would be both less likelihood and less need for a large number of "partners" to participate in the operation.
As the industry began to drill deeper, however, costs and risks soared. Gas-oriented drilling also meant broader spacing. Thus, larger "Contract Areas" were required to cover larger Drilling and Spacing Units and to spread costs and risks over a larger number of parties and a greater area. Multiple objective horizons also created a greater likelihood of disagreement among the parties concerning how the operations should be conducted.
Until the mid-1950s, there was no "model" form of operating agreement in general use within the industry. Instead, each major oil company had its own "company form," which it required be utilized if it were to participate in joint operations. However, as the size of Contract Areas, and the number of parties participating in a Joint Operation, increased, the industry found that disputes concerning "pet" contract language resulted in an inability to negotiate mutually-acceptable JOAs. As a result, wells were spudded, completed, and produced to depletion without agreement ever having been reached concerning a form of Joint Operating Agreement that all parties would accept.
Drilling without a formal contract in place -- or even agreement as to many of the details of the deal -- might have been acceptable when a single horizon, or a single Drilling and Spacing Unit, was involved in the Joint Operations. However, with multiple parties, broad Contract Areas, and multiple objective horizons, the "stalemate," and the resulting conduct of operations with no enforceable agreement in effect, could no longer be tolerated.
Enter the AAPL Model Form Operating Agreement.
In 1956, following several years of diligent effort in the Legal Committee of the Mid-Continent Oil and Gas Association, a "Model Form" Operating Agreement (initially designated "Ross-Martin, Kraftbuilt Form 610") was developed through the combined efforts of 26 oil companies and a synthesis of 17 different company forms. This agreement is what has subsequently been designated the "AAPL Model Form Operating Agreement Form 610 (1956 Version)."
The 1956 Version of the Model Form was a highly-detailed document. It is a wonder that common ground could be found among so many companies, and so diverse an industry, for any such generally-accepted agreement version. The 1956 form thus represented an outstanding accomplishment and was used throughout the industry, with little modification, for a long period of time.
No matter how well a drafting committee has done its job, however, no agreement form is perfect -- or, at least, stays that way. As the years went by, certain solutions under the Model Form became outdated; others, as it developed, had been questionable from the start; and still others utilized language which was unclear or did not say what the draftsmen had intended. And new problems were requiring entire new areas of coverage.
Aside from a few spot changes, there had been virtually no revisions to the Model Form Operating Agreement for 20 years. Accordingly, the Drafting Committee of the American Association of Petroleum Landmen was assigned the task of developing a new version of the Model Form.
Some suggested that the 1956 Version be scrapped, and an entirely new agreement drafted. Others suggested that the agreement remain intact except where "spot" changes were required. The Drafting Committee adopted a mid-ground: significantly revise the format of the agreement; make whatever changes in solutions, additions, or language were required; but, otherwise, leave the agreement language unchanged.
After several years, and rounds of industry comment, a new version of the Model Form was released -- the "AAPL Model Form Operating Agreement Form 610 (1977 Version)." It is this agreement that, until the mid-1980s, was the most widely used for domestic onshore operations.
The AAPL was determined not to let another 20 years elapse without continuing its Model Form upgrading process. Accordingly, in 1981, a revision committee was again designated. To avoid the time delays involved in completing the 1977 revisions, the Committee speedily prepared a new set of revisions; this latest version of the Model Form was adopted by the AAPL in June, 1982, without formal circulation among industry members for comment, and was designated "AAPL Model Form Operating Agreement Form 610 (1982 Version)."
Unlike the 1977 revisions, the 1982 Version of the Model Form, with a few exceptions, left the basic organization of the form unchanged, utilizing the "spot change" approach. However, as will be seen, these "spot changes" were significant.
Few members of the industry had foreseen the economic chaos brought about by the collapse in the early 1980s of oil and natural gas prices and demand -- a chaos and collapse that had been totally unforeseen by most in 1981.2 Accordingly, in 1986 a new Drafting Committee was formed by the AAPL to again revise the Model Form. While this Committee's initial charge was primarily to concern itself with the inadequacies of the Model Form in providing adequate remedies against "non-performing" parties, the Committee requested, and received, the approval of the AAPL to broaden that charge to consider all areas in which the 1982 Version could be improved. And so a fourth version of the Model Form arose -- the 1989 Version of the AAPL Model Form.3
The AAPL Model Form, in its four versions, is not the only "model form" operating agreement in use on the North American continent. There are special operating agreement forms for operations in the Rocky Mountain area involving Federal Exploratory Units,4 as well as a model form operating agreement for use in Canada.5 Special operating agreement versions are also used in connection with "geological units" in Louisiana; and the Association of International Petroleum Negotiators ("AIPN") have developed a widely accepted form of operating agreement for international operations.6 Likewise, there is an American Petroleum Institute Model Form for offshore operations, although the API Model Form is by no means as widely used as the AAPL, Rocky Mountain, and CAPL versions.7 However, the vast majority of onshore operations conducted in the United States utilize some version of the AAPL Model Form.
Coming Next: Working with the AAPL Model Forms
1For a thorough discussion of the nature of Joint Operating Agreements, the various types of JOAs, and the development of the various model forms, see Brook, "An Introduction to Joint Operating Agreements," 31 Min. L. Inst. 1 (LSU: 1984), hereinafter referred to as "Brook."
2"These general concerns [over the Model Form's 'broadest common denominator' approach] become especially significant when exacerbated by the difficult financial times currently plaguing the industry. Many previously accepted assumptions are now routinely challenged as parties scramble to protect their interests in the face of assaults from co-working interest owners, landowners, third parties affected by joint operations, governmental regulators, creditors, and bankruptcy trustees. In this 'hostile environment," many questions can be raised about the way in which a joint operations is conducted, and the printed form JOA inevitably is increasingly scrutinized for loopholes and deficiencies." Boigon, "The Joint Operating Agreement in a Hostile Environment," 38 Inst. on Oil & Gas L. and Tax'n 5-1, 5-3 (1987), hereinafter referred to as "Boigon."
3For a further discussion of the impact of the 1989 Model Form, see also Pendleton, "A Comparison of the 1989 A.A.P.L. Model Form Operating Agreement with the 1982 A.A.P.L. Model Form Operating Agreement," Oil, Gas, and Mineral Law for Lawyers and Legal Assistants (State Bar of Texas: 1990), hereinafter referred to as "Pendleton."
4See Rocky Mountain forms "RM-1" and "RM-2."
5See the CAPL 1990 Operating Procedure.
6For a discussion of the AIPN model form, see the ongoing Lewis Mosburg's Internet Primer on International Joint Operating Agreements.
7For a discussion of these alternate operating agreement forms, see Brook, op. cit. n. 1.
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