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AREA OF MUTUAL INTEREST PROVISIONS

 by Lewis G. Mosburg, Jr.

Copyright  1994, 1999 by Lewis G. Mosburg, Jr.  All Rights Reserved.

    Part Four: Administrative Issues; Sample AMI Provision; Conclusion

Administration

Jointlyowned Leases create problems in Lease Administration, such as the handling of delay rental and shutin obligations. To avoid duplication of effort and a potential for loss of Leases, one party should be charged with the "Lease Administration" role and should pay all delay rentals and shutin royalties, subject to being reimbursed by the other party for its proportionate part of such payments.1

It is also critical that company personnel be aware of any AMIs entered into by their company, to avoid a breach of contract on Lease acquisition or upon entering into an agreement with a new party. Unfortunately, this is a concept that is much easier to state than it is to implement, particularly when "life of contract" AMIs are involved. Thus, the shorter the duration of the AMI, the less the chance of an inadvertent breach of a "forgotten" area of mutual interest.

Sample form

The following form may serve as a starting point for drafting an AMI provision which covers many of the points discussed in the other articles in this series.  While this form is set up as a "stand alone" letter agreement, more commonly the provisions would be included as separate clauses in a Joint Operating Agreement, Farmout, or Seismic Option.

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 October XX, 20XX

 YOUR OIL COMPANY

 One Energy Plaza

 Some City, Any State

XX Oil Company

Two Resource Row

Another City, Any State

Energetic Energy

Three Petroleum Place

Elsewhere, Any State

RE: Dynamic Area

 State of Uncertainty

Gentlemen:

This agreement will supplement that certain Farmout Agreement dated February XX, 19XX, entered into by our companies covering the captioned area.

It is agreed by and between our companies as follows:

1.01 Definitions.  As used in this agreement:

    (1) "Acquiring Party" shall mean a party to this agreement who acquired Oil and Gas Rights within the Area of Mutual Interest, and shall further include any Affiliate of an Acquiring Party.

    (2) "Acquisition Price" shall include all costs related to the acquisition of Oil and Gas Rights, and, in the case of options and contractual rights, shall include an assumption by the Participating Parties of their proportionate part of all burdens imposed under the contact.

    (3) "Affiliate" shall mean: (i) any person directly or indirectly owning, controlling, or holding 10% or more of the outstanding equity interests of such other party; (ii) any person 10% or more of whose equity interests are directly or indirectly owned, controlled, or held; (iii) any person directly or indirectly controlling, controlled by, or under common control with such other person; (iv) any officer, director, manager or partner of such other person; or (v) if such other person is an officer, director, manager, or partner, any entity for which such person acts in any such capacity.

    (4) "Area of Mutual Interest" shall mean the area outlined in red on the plat attached to this agreement as "EXHIBIT A."

      (5) "Base Agreement" shall mean the abovedescribed Farmout Agreement.

    (6) "NonAcquiring Parties" shall mean the parties to this agreement, other than the Acquiring Party.

    (7) "Oil and Gas Rights" shall mean leases and leasehold rights, mineral interests, rights to participate in the development of substances covered by the Base Agreement under joint operating agreements or pooling or unitization agreements or orders of regulatory agencies, and fee interests, including options and contractual rights to acquire any such Oil and Gas Rights[, but shall not include nonparticipating or other nonoperating royalty interests][; and, provided further, if the Acquiring Party has acquired an "Oil and Gas Interest," as that term is defined in the Operating Agreement, the term "Oil and Gas Rights" shall be limited to the interest of the Acquiring Party as lessee, as provided in Article III.A of the Operating Agreement].

    (8) "Operating Agreement" shall mean the Operating Agreement attached to the Base Agreement as "Exhibit F."

    (9) "Participating Parties" shall mean the Acquiring Party and all NonAcquiring Parties electing to participate in a particular acquisition of Oil and Gas Rights.

2.01 Notification Upon Acquiring Oil and Gas Rights. In the event an Acquiring Party hereafter acquires any Oil and Gas Rights lying within, or partially within, the Area of Mutual Interest, it shall promptly notify the NonAcquiring Parties in writing of such acquisition. Such notice shall include a full description of the Oil and Gas Rights so acquired; a copy of the instrument by which the Acquiring Party acquired such rights; and the Acquisition Price paid, or to be paid.

3.01 Option to Participate.  Within _____ days after receipt of the notice referred to in paragraph 2.01, each NonAcquiring Party may elect to acquire an interest in the Oil and Gas Rights so acquired by notifying the Acquiring Party in writing of such election within such _____day period.

3.02 Interests of the Parties. Each NonAcquiring Party electing to participate in such acquisition shall be entitled to an assignment of an interest in such Oil and Gas Rights equal to the percentage that its Participating Interest under the Base Agreement, as defined therein, bears to the Participating Interests of all the Participating Parties, as defined in paragraph 1.01.

3.03 Assignment of Interests. Following the expiration of the election period specified in paragraph 3.01, the Acquiring Party shall notify each NonAcquiring Party electing to participate in such acquisition of its proportionate part of the Acquisition Price. The NonAcquiring Party shall thereupon promptly pay the Acquiring Party its proportionate part of the Acquisition Price; and, upon the receipt thereof, the Acquiring Party shall assign to such NonAcquiring Party, without covenants of warranty, such NonAcquiring Party's interest in such Oil and Gas Rights. 

3.04 Election Not to Participate in Contractual Rights. An election by a NonAcquiring Party not to participate in the acquisition of Oil and Gas Rights involving an option or contract shall waive any right to participate in any subsequent acquisition of Oil and Gas Rights pursuant to such option or contract.

3.05 Failure to Respond. The failure of the NonAcquiring Party to respond to a notice given by an Acquiring Party pursuant to paragraph 2.01 within the period provided in paragraph 3.01 shall conclusively serve as an election not to acquire any interest in the Oil and Gas Rights which were the subject of such notice.

4.01 Oil and Gas Rights Lying Only Partially Within the Area of Mutual Interest. If any Oil and Gas Rights acquired by an Acquiring Party lie only partially within the Area of Mutual Interest, the NonAcquiring Parties' option to acquire an interest therein shall extend only to that portion of such Oil and Gas Rights lying within the Area of Mutual Interest; provided that: (i) if both less than ____% and ____ acres of such Oil and Gas Rights lie within the Area of Mutual Interest, the NonAcquiring Parties shall have no right to acquire any interest in such Oil and Gas Rights; and (ii) if both less than ____% and ____ acres of such Oil and Gas Rights lie outside the Area of Mutual Interest, the Participating Parties shall be assigned their interests in all of such Oil and Gas Rights, including the portion lying outside the Area of Mutual Interest; provided further that if the NonAcquiring Parties are not assigned an interest in the Oil and Gas Rights lying outside the Area of Mutual Interest, the Acquisition Price charged to the NonAcquiring Parties shall be proportionately reduced.

5.01 Additional Rights. If the rights acquired by the Acquiring Party cover substances and/or formations not covered by the Base Agreement, the assignment to the NonAcquiring Parties shall be limited to the substances and formations covered by the Base Agreement; provided that there shall be no reduction in the Acquisition Price charged to the NonAcquiring Parties, despite the fact that the rights assigned to them cover less than all the rights acquired by the Acquiring Party.

6.01 Notices. All notices given pursuant hereto shall be given in the same manner and with the same effect as provided in the Base Agreement.

7.01 Term. The Area of Mutual Interest created hereby shall remain in effect for a period of 24 months from the date of this agreement, and shall thereafter terminate.

 Please indicate your acceptance and approval of this agreement by executing and returning one copy hereof to the undersigned by no later than ten (10) days from the date of this agreement.

     Yours very truly,

     YOUR OIL COMPANY

 

 

              By_______________________ __________________ President

ACCEPTED AND APPROVED;

XX OIL COMPANY

 

 

By________________________________

 President

Date:_____________________________

ENERGETIC ENERGY

 

 

By________________________________

 President

Date:_____________________________

 EXHIBIT "A"

[Attach plat showing location of Area of Mutual Interest]

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Other areas not covered in this sample AMI provision that might be addressed are:

      • Disagreement among the parties concerning the proper calculation of the "Acquisition Price;"2 and
      • Failure of a party promptly to pay its proportionate part of the Acquisition Price, including potentially different treatment in the event of a good-faith dispute concerning the proper calculation of the Acquisition Price.

 CONCLUSION

The typical AMI clause is a very brief paragraph that rarely defines or covers the numerous potential conflicts and "question mark" areas that can arise between parties in this normally complicated relationship. While such "plain vanilla" treatment created no problems for many years, recently there have been numerous disputes and near litigation between companies which, in other matters, had been able to work closely together.

A more careful negotiation and drafting of the AMI provision to cover some of the more common potential dispute areas will go far toward avoiding such unfortunate situations and in making sure that the deal which you thought you had negotiated concerning subsequentlyacquired Leases is the deal that you actually get.

 

1The other party should also be furnished proof of such payments, in advance of the payment dates; and should be given the right to propose, or to consent or not consent to, Lease surrender, comparable to the provisions of the Model Form Operating Agreement.

2For instance, what should be done concerning fees paid to lease brokers, costs associated with Leases not acquired, costs of geological and geophysical evaluation, etc? While "arbitration" leaps to mind as a solution, anyone who has survived the cost and time delays of an arbitration proceeding knows that this "solution" may not be practical as it sounds.

 

Copyright © 1996 - 2007
 by Lewis G. Mosburg, Jr.

"Lewis Mosburg's OIL & GAS NEWSLETTER"™ and "Lewis Mosburg's OIL & GAS PRIMERS"™  are trademarks of Lewis G. Mosburg, Jr.