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INTERNET OIL & GAS PRIMER

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JOINT OPERATING AGREEMENTS

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

PART FOUR: AN OVERVIEW OF THE AAPL MODEL FORM JOINT OPERATING AGREEMENT(S)

Preliminary Matters

In General. The AAPL Model Form serves as an independent agreement covering the joint exploration and development of individually-owned leases and "Oil and Gas Interests" for the production of oil and gas.1

All four versions of the Model Form contain a limited number of explanatory "Definitions." These definitions both clarify terms that otherwise might be unclear or capable of several possible interpretations,2 and give easy-of-reference labels for various concepts.3

Since the definitions contained in the various versions of the Model Form both clarify the terms used and in some instances may lead to a different interpretation of a "familiar" term, the definitions must be studied very carefully: it is impossible to understand the effect of the Model Form unless you know how these terms are defined in the agreement.

The Model Form is also "fleshed out" and expanded by a number of attached "Exhibits." One of these Exhibits is the all-important "Exhibit 'A'," which describes the lands making up the Contract Area; the interest of the parties; the leases committed to the agreement; and the addresses (and, under the 1989 Version, the telephone numbers) of the parties for notice.  The Exhibits also include, as an "Exhibit 'C'," the "Accounting Procedure" which will form the basis for determining what types of charges, and what level of charge, may be charged to the joint account; an "Insurance Schedule" ("Exhibit 'D'"); and, under the later versions of the agreement, an optional "Gas Balancing Agreement" ("Exhibit 'E'") and "Certificate of Non-Discrimination and Non-Segregation of Facilities"  or "EEOC Certificate" ("Exhibit 'F'").  The 1982 and 1989 Versions of the agreement also provide for attaching an optional "Tax Partnership" exhibit as an "Exhibit 'G'."

The agreement also provides for attaching a "Form of Lease" as an "Exhibit 'B'" for use when one of the parties is the owner of an "Oil and Gas Interest."4

As in the case of "Definitions," it is impossible to understand the effect of the Model Form Operating Agreement unless you also understand and are familiar with the contents of these Exhibits.  While, in the event of an inconsistency between the base agreement and the exhibits, the operating agreement itself will normally control,5 the "fleshing out" effect of the Exhibits is critical to the effective implementation of the operating agreement. This "fleshing out" may also modify what would otherwise be the answer to a given problem if the provisions of the operating agreement alone were governing the rights of the parties.

Interests of the Parties in Costs and Production

In General. Under the Model Form, the parties bear costs, and own production, equipment and materials, in the percentages or fractions specified in Exhibit "A,"6 normally arrived at based upon the parties' relative acreage position within the Contract Area.7 Provision is also made for a "dual" participation as both a working interest and royalty owner by any owners of (unleased) "oil and gas interests."8

The agreement does contain certain provisions restricting the transferability of interests. Thus, to maintain a uniformity of lease ownership, the parties are prohibited from disposing of or encumbering their interests except transfers that cover a party's entire interest (or an equal undivided interest) in all Contract Area leases, equipment, and production.9 Likewise, the other parties may be given a preferential right to purchase in the event that any party desires to sell its rights under or subject to the agreement.10

There is no pooling of revenues under the Model Form Operating Agreement. Instead, each party is to take (or separately dispose of) its own share of the production allocated to it pursuant to its "Exhibit 'A'" interest.11

It is not the intention of the Model Form to create a legal partnership between the parties. Accordingly, the agreement specifies that the liability of the parties will be several, and not joint.12

Payment of Royalties. Unlike what might be expected, royalties are not a "joint account" charge under the Model Form; instead it remains the individual responsibility of each party to the operating agreement to pay its share of royalties.13 Under the operating agreement, the royalties are borne by each party, based upon its interest in production, and not based upon the ownership of the lease under which the royalties are to be paid.14

Titles and Title Loss. Under both Article IV.A of the post-1956 versions of the Model Form, and Paragraph 2.A of the 1956 Version, procedure for title examination and approval prior to the drilling of each well, and the sharing of the costs of such title examination, are specified. Under all four versions, no drilling is to commence until title has been examined and approved by the examiner or by all Drilling Parties.

In the event of a subsequent Loss of Title involving the loss of a leasehold interest due to title failure or an unintentional mis- or non-payment of some amount due (such as a delay rental or shut-in royalty), the party whose interest is lost bears no monetary liability to the other parties to the agreement. However, under the post-1956 versions of the Model Form, unless a replacement lease is secured within 90 days from the discovery of the failure, the interests of the parties are readjusted throughout the entire Contract Area, with the new ownership being calculated on the revised acreage basis.15 If a lease is lost for any other cause, such as normal lease expiration at the end of the primary term, such loss is a "joint" loss:  there is no adjustment in the interests of the parties to reflect their revised acreage positions.16

The post-1956 versions of the agreement also contain provisions addressing the effect of the creation of a "Subsequently Created Interest" an overriding royalty, production payment or similar burden created subsequent to the execution of the agreement or not disclosed to the other parties.17

Operations Under the Model Form

The Operator.18 The party who will serve as Operator is designated in Article V.A of the post-1956 versions of the Model Form and in Paragraph 5 of the 1956 Version. Article V/Paragraph 5 also contain a very broad general grant of control to the Operator over the conduct of the joint operations.19 However, this broad grant of authority is subject to the further limitation that such operations shall be conducted "as permitted and required by, and within the limits of this agreement." Since most major decisions concerning undertaking a new operation, or terminating an operation once undertaken, are subject to other express limitations contained in the agreement, this provision has the effect of giving the Operator control over how operations are to be conducted, but not the ability, as a general rule, to bind the other parties as to which operations should be undertaken or terminated.

The Operator is obligated to conduct the operations in "a good and workmanlike manner." However, the Operator is exonerated from liability to the Non-Operators except for losses or liabilities resulting from the Operator's "gross negligence or willful misconduct."20

In all four versions of the operating agreement, there is a provision for voluntary resignation and for selection of a successor operator in the event of such a resignation or the sale by the Operator of all of its interests in the Contract Area.  No provision is contained in the 1956 Version of the agreement, however, for removal of the Operator.  There are limited rights of Operator removal provided in the post-1956 versions of the agreement; however, the right of removal is quite limited, requiring: (i) existence of specified types of "cause"; and (ii) an affirmative vote of Non-Operators owing a majority interest.21

Conduct of Operations In General.  The Model Form Operating Agreement contains provisions covering five basic types of operations:

       (1) The drilling of an original ("Initial" or "Test") Well in which all parties must participate.22

       (2) The drilling of Subsequent Wells, the procedures for which vary depending upon whether the well is drilled as a "Joint Consent" Well with all parties electing to participate,23 or as a "Consent/Non-Consent" operation with less than all the parties electing to participate.24

      (3) Operations affecting existing wells ("wellbore" operations), which apply both to Initial and Subsequent Wells (whether Joint Consent or Consent/Non-Consent).  These operations include decisions to:

        o Modify or terminate an operation;25

        o Sidetrack;26

        o Complete the well;27

        o Rework;28

        o Plug Back or Recomplete;29

        o Deepen;30

        o Abandon the well, with separate procedures being established for abandoning a well as a dry hole31 and for abandoning a well which has produced;32 The 1989 Version has also added provisions concerning

        o Routine Maintenance33 and Repair Work34 (added as separate categories in the 1989 version);

        o Subsequent Equipping of wells35 (again, added as a separate category in the 1989 version).

       (4) Decisions concerning non-producing leases such as participation in Extension/Renewal Leases36 and the Surrender of Leases.37

       (5) Major Construction (construction of fixed assets).38

 -- Procedures. The procedures for initiating the types of operations just discussed, for the conduct of the operations, and the methods for resolving disputes among the parties concerning such operations, will vary, depending upon the type of activity and the agreement version involved.39 Thus, the Model Form may provide that:

       (1) An Operator-controlled operation exists: the Operator may undertake the operation, with the parties bound to share in the costs of the operation, without the consent of the other parties.40

       (2) That the operation is mandatory (i.e., it must be undertaken) or prohibited (i.e., it can't be undertaken), unless all parties consent to the decision -- a "tyranny of the minority" result.41

       (3) The Model Form may provide that participation is optional.  In this event, an operation would be undertaken on a "Joint Consent" basis if all parties elected to participate, or as a "Consent/Non-Consent" operation if less than all elected to participate. In such Consent/Non-Consent situations, the Non-Consenting Parties are commonly carried subject to a production penalty (the solution applying to most "drilling" and drilling-related decisions); however, in some instances, an acreage penalty may be involved, with Non-Consenting Parties "forfeiting out" of any interest if they elect not to participate in the operation (e.g., decisions concerning whether or not to abandon undeveloped leases or producing wells).42

       (4) The method for resolving the disputes may be unclear.  Examples of this highly unfortunate situation are decisions concerning where and how to complete a well (as contrasted with decisions of whether or not to complete); decisions as to whether or not to discontinue drilling on Subsequent Wells; and (under the 1956 Version of this agreement) decisions concerning whether or not to complete and/or abandon Subsequent Wells.43

       (5) The 1989 Model Form has added an additional possibility: that a vote of the parties may be utilized under certain circumstances.44

Most commonly, the proposal before the parties will be the drilling of a well, or the conduct of operations within or affecting the wellbore of a well previously commenced.

The drilling of the Initial Well on the Contract Area is "agreed to" by the parties by their signing of the operating agreement: all parties are obligated to participate in that well in the ratio of their Exhibit "A" interests.45

Any party may propose the drilling of a subsequent well, or the conduct of a wellbore operation.46 At the time such a subsequent Operation is proposed, there is no way of knowing whether it will be undertaken with "joint consent," or whether it will be an "Operation by Less than All Parties."  Accordingly, both Joint Consent and Consent/Non-Consent operations are triggered by the giving of a notice containing the information called for in Article VI.B.1 of the post-1956 versions of the agreement and Paragraph 11 of the 1956 Version.

Following this initiating notice, each party to the agreement is given a 30-day response period (48 hours for specified "wellbore" operations if a drilling rig is on location) to determine whether or not it wishes to participate in the operation.47

If all parties consent to participate in the activity, the operations are conducted in accordance with the other provisions of the agreement, particularly Articles V and VI of the 1989 Model Form, Articles V through VII of the 1977 and 1982 Versions, and Paragraphs 5, 11 and 12 of the 1956 Version.

If less than all parties elect to participate in the operation, procedures unique to such Consent/Non-Consent operations are followed.48 Under the 1956 Version of the agreement, the Consenting Parties then undertake the operation, bearing the costs in the ratio of their "Exhibit 'A'" interest.  However, under the 1977 and 1982 versions, there is a "second notice" procedure if less than all parties elect to participate. Under this provision, the operation may now be abandoned; or, if the operation is to be continued, each party must be given a second right to elect as to whether he wishes to limit his participation to his interest as specified on Exhibit "A" in the ratio which his Exhibit "A" interest bears to the aggregate Exhibit "A" interests of all the Consenting Parties.49

The operation must be commenced within a specified period of time;50 otherwise, before the operation can be undertaken after the expiration of such period, a new notice must be given.

Under the "production penalty" provisions applicable to Consent/Non-Consent operations under Article VI.B.2/Paragraph 12, the Consenting Parties bear all costs and receive all production until they have recovered:

 (1) 100% of operating costs and the costs of surface equipment;51 and

 (2) A specified percentage of drilling costs and costs of equipment in the well.52

During this "recoupment" period, the Non-Consenting Parties "shall be deemed to relinquish to the Consenting Parties, and the Consenting Parties shall own and be entitled to receive . . . all of such Non-Consenting Party's interest in the well and share of production therefrom . . . ." After recoupment, the Non-Consenting Parties' interests automatically revert to them.

The 1982 and 1989 versions of the Model Form also contain elaborate provisions concerning the rights of the parties if a further operation is proposed in a "Non-Consent Well a well in which a non-consent operation has previously been conducted. These provisions will be discussed later in this Primer.

Operator's Expenditure Authority. Once a decision has been made that an operation will be undertaken, or where the Operator is given the authority to reach this decision without consulting the other parties, the question arises as to whether the Operator has the authority to commit unlimited funds to such a project or must secure approval once expenditures exceed a certain level.

Where an activity involves the drilling of an "approved" well or an "approved" wellbore operation, the Operator's expenditure authority is unlimited.53 Likewise, when the Operator is authorized to act in the event of an emergency, there are no limits on the dollars that may be expended in connection with the action, subject only to the Article V/Paragraph 5 requirement that the Operator proceed "in a good and workmanlike manner."54

As to "Other" projects conducted under Article VI.D of the 1989 Version of the Model Form, VII.D.3 of the 1977 and 1982 versions, and Paragraph 11 of the 1956 Version, the Operator is not required to secure approval or submit an "Authority for Expenditure" ("AFE") if the project is "low cost," i.e., falls below an expenditure limitation specified in the agreement. Likewise, if a "medium cost" project is involved again, based upon a cost limitation to be arrived at on an agreement-by-agreement basis no approval of the project is required before it can be undertaken by the Operator; however, the Operator is required to submit a copy of its AFE (if one is prepared for its own use) for "information purposes."  However, if a "high cost" project is involved which exceeds the expenditure limit provided for the medium-cost operation, unanimous consent of the parties is required before such a project can be undertaken, with the exception of the "voting procedure" provisions of the 1989 Version where expensive repair work or certain expensive subsequent equipping is involved.

Unit Administration

Books, Record and Information. The Operator is required to keep accurate records.55 Non-Operators are entitled to access to the Contract Area and to information concerning operations (including operations in which they did not participate).56

Payments and Accounting. The Operator is required to pay bills promptly, then bill the Non-Operators for their appropriate portion of such charges on the basis specified in the Accounting Procedure.57

The Operating Agreement gives the Operator the right to request advance payment of the estimated expenses to be incurred during the succeeding month.  Until the late 1980s, this practice was seldom utilized (nor honored if advances were billed), nor was interest billed, or if billed, paid.  However, the financial turmoil in the industry now sees frequent billings for, and payment of, advances and/or interest.

As mentioned, the Operating Agreement itself, generally speaking, does not specify what amounts are proper to charge the various parties to the agreement: it simply specifies how proper charges are to be allocated among the parties. Accordingly, we must look to the Accounting Procedure to determine:  (i) the proper type of charges; (ii) the proper level of those charges; (iii) the procedures for billing and collection; and (iv) the Non-Operators' rights of audit.

If a party objects to a charge, the Accounting Procedure permits (but does not require) that it pay the amounts billed, and then dispute the charges in accordance with the Accounting Procedure provisions.58

All versions of the Model Form provide remedies on default in the event a party does not promptly pay its bills; however, under the 1982 and earlier versions, these remedies are rather limited:59

    • The Operator is granted a lien on the production, oil and gas rights and equipment of a defaulting party.60
    • The Operator is also entitled to require contribution from the remaining Non-Operators when one or more Non-Operators continue in default.
    • However, unlike the Canadian Operating Procedure and the Rocky Mountain Federal Exploratory Unit forms, a party who is in default in the payment of its bills is still entitled to well information.

The 1989 Version of the Model Form has significantly improved the remedies of the parties against a party who is not paying his bills.61

Other Provisions

The Model Form Operating Agreement contains a number of other provisions to round out the contractual relationship between the parties:

    • The Operating Agreement specifies the Insurance to be carried by the Operator in connection with the joint operations.62
    • Provision is also made for an Internal Revenue Code election to be excluded from the provisions of Subchapter K.63
    • A "Force Majeure" provision is contained in Article XI of the post-1956 versions and in Paragraph 29 of the 1956 Version.
    • Treatment of Acreage or Cash Contributions is covered in Article VII.C of the post-1956 versions and in Paragraph 25 of the 1956 Version. 
    • The post-1956 versions of the agreement also contain provisions concerning compliance with Laws and Regulations,64 and, for Governing Law in the event the "Contract Area" encompasses land in more than one state.65

Miscellaneous provisions are contained in Article XV of the 1989 Version; in Articles XVI of the 1982 and 1977 Versions; and following Paragraph 31 in the 1956 Version.  Each agreement also contains a blank article/paragraph for the insertion of "Other Provisions/Conditions."66 Unfortunately, modifying provisions, to adapt the agreement to the conditions of the particular Contract Area, are utilized far less than they should be.

The 1956 Version of the Model Form contains a single "Term" provision, calling for the agreement to remain in force "for as long as any of the oil and gas leases . . . remain in force as to any part of the Unit Area . . . ."67 However, the 1977 and 1982 versions of the agreements, in addition to the "life of lease" provision ("Option No. 1") also provide for an "Option No. 2" -- a "duration of production" provision.68 (Article XIII of the 1989 Model Form expands this provision.)

    Coming Next: "The AAPL Model Forms: A Detailed Discussion:  Preliminary Matters:  Definitions"

 

1 See the "Recitals" to each version of the Model Form.

Unlike the Model Form "Operating Procedures" of the Canadian Association of Petroleum Landmen ("CAPL"), the AAPL Model Form is set up to serve as a "stand alone" agreement, not merely an exhibit to some "base" agreement. However, it is not uncommon for the AAPL Model Form also to be attached as an exhibit to some underlying agreement, such as a Farmout or Seismic Option.

2For instance is "Gas" as used in the agreement limited to gaseous hydrocarbons, or does the term include any vaporous substance (such as nitrogen and helium)?

3For instance, "Nonconsent Wellbore" and "Drilling Party."

4"Oil and Gas Interest" (or, simply, "Interest") is a defined term, meaning any unleased fee or mineral interest.

5Exceptions to this are Exhibit "E" (the optional Gas Balancing Agreement), Exhibit "F" (the EEOC Certification) and Exhibit "G" (the optional Tax Partnership Exhibit).

6See Art. III.B ('89/'82/'77); 4 ('56). These percentages may subsequently be revised as a result of specified loss of title [see Article IV.B. ('89/'82/'77); 4, 17 ('56)], or as to a given operation undertaken by less than all parties [see Article VI.B.2 ('89/'82/'77); 12 ('56)].

Note, that while the Model Form provides for a "pooling" of rights in production, equipment and materials, there is no such provision establishing any pooling of the ownership of the leases.

7Brook, "An Introduction to Joint Operating Agreements," 31 Min. L. Inst. 1, 12 (LSU: 1984).

8See Art. III.A ('89/'82/'77); 3 ('56).

9See Art. III.B ('89/'82/'77). 

10See Art. VIII.F ('89/'82); Art. VIII.G ('77); 18 ('56). 

11See Arts. VI.G/H VI.C ('89); Art. VI.C ('82/'77); 13 ('56). 

12See Art. VII.A ('89/'82/'77); 22 ('56).  However, in many states, the Model Form may create a "mining partnership" by operation of law, despite these provisions.  See Boigon, "The Joint Operating Agreement in a Hostile Environment," 38 Inst. on Oil & Gas L. and Tax'n 5-1, 5.02[1], 5.03[1] (1987), hereinafter referred to as "Boigon".

13If royalties were a "joint account" item, the Operator would be required initially to pay such expenses, and then rebill the other parties to the agreement. In this age of financial unrest in the oil and gas industry, it is thus highly important, from the Operator's standpoint, that it is under no such contractual obligation to advance these amounts for a Non-Operator's account.

Often, it may be to the advantage of all parties for the Operator to make royalty payments on behalf of them all.  This will be addressed in our later, detailed discussion of "Royalties."

14See Art. III.B ('89/'82/'77); 13 ('56).  There will be exceptions to this rule, however, where a Lease is heavily burdened by overrides or excess royalties, or in "market value" royalty situations where the Lessor may be entitled to payment at a rate higher than that at which the production is being sold.  See the detailed discussion of Royalties, later in this Primer.

In practice, it would an administrative nightmare plus confusing to the Lessor for each Lessee to pay its proportionate part of all royalties payable under all Leases.  Practical methods of dealing with this will be again be discussed in our later, detailed discussion of Royalties.

15See Art. IV.B ('89/'82/'77). Under the 1956 Version of the agreement, whether interests will, or will not, be readjusted under such circumstances is dependent upon whether the "Individual Loss" or "Joint Loss" versions of pages one, two, and eight have been used:  see 2.B. and 17.

16See Art. IV.B.3 ('89/'82/'77); 2.C ('56).

17See Art. III.C ('89); III.D ('82); Art. VIII.D ('77).

18For an excellent discussion of these "general" provisions concerning the Operator, and some of the pitfalls in these provisions, see Boigon, op. cit. n. 12, 5.04.

19". . . and shall conduct and direct and have full control of all operations on the Contract Area . . ."

In addition to this general grant of authority, numerous other specific grants are contained throughout the Model Form.

20See Article V.A ('89/'82/'77). Under the 1956 Version of the agreement, the exception is more expansive, covering "gross negligence or . . . breach of the provisions of this agreement." [5('56)]

21See Art. V.B. ('89/'82/'77); 19 and 21 ('56).

22See Art. VI.A ('89/'82/'77); 7 ('56).

23See Art. VI.B.1 ('89/'82/'77); 11 ('56).

24See Art. VI.B.2, VI.B.7 ('89); Art. VI.B.2, VII.D.1 ('82/'77); 12 ('56). Such operations are referred to under the Model Form Operating Agreement as "Operations by Less than All Parties."

25See Art. VI.F ('89); Art. VI.A-B ('82/'77); 7, 11-12 ('56).

26See Art. VI.A..-C.1 ('89); Art. VI.B and VII.D.1 ('82/'77); 11-12 ('56).

27See Art. VI.C.1 ('89); Art. VII.D.1 ('82/'77); 7, 11-12 ('56).

28See Art. VI.B and VI.C.2 ('89); Art. VI.B and VII.D.2 ('82/'77); 11-12 ('56).

29See Art. VI.B and VI.C.2 ('89); Art. VI.B and VII.D.2 ('82/'77); 11-12 ('56).

30See Art. VI.A. C.1 ('89); Art. VI.B and VII.D.1 ('82/'77); 11-12 ('56).

31See Art. VI.E.1 and E.3 ('89); Art. VI.A and VI.E.1 and E.3 ('82); Art. VI.A and VI.E.1 ('77); 7, 11-12.

32See Art. VI.E.2 and E.3 ('89/'82); Art. VI.E.2 ('77); and 16 ('56).

33See Art. I.P. ('89).

34See Art. I.P. and VI.D. ('89).

35 See Art. VI.D. ('89).

36See Art. VIII.B ('89/'82/'77); 23 ('56).

37See Art. VIII.A ('89/'82/'77); 24 ('56).

38See Art. VI.D ('89); VII.D.3 ('82/'77); 11 ('56).

39Where "wellbore" operations are involved, the answer may also vary based upon the type of well within which such operation is being conducted. This "solution" has been virtually eliminated under the 1989 version of the Model Form.

40See, e.g., Art. VI.D ('89); Art. VII.D ('82/77); 11 (emergencies).

The authority of the Operator will be discussed in much greater detail in our detailed discussion of "The Operator," later in this Primer.

41Examples are such activities as decisions to discontinue the drilling of the Initial Well [See Art. VI.A ('82/'77); 7 ('56)]; or decisions under the 1956 Version not to complete an Initial Well, or not to put an Initial Well on-stream (see 7).

42See Art. VI.E.2 ('89/'82/'77); 16 ('56) (abandonment of wells); Art. VIII.A ('89/'82/'77); 24 ('56) (surrender of leases).

43However, much of this is corrected in the 1989 version of the Model Form:  see the detailed discussion of  "Conduct of Operations," later in this Primer.

44Examples are Art. VI.B.6 (preference of operations); VI.D (expensive maintenance or subsequent equipping); and VI.F (termination of operations).

45Procedures for the Completion, Reworking, Plugging Back or Deepening, etc., of the Initial Well are generally governed by the same procedures that apply to the conduct of wellbore operations for any other well on the Contract Area.

46The procedure gets a little more complicated where a Completion attempt is involved, or the modification or termination of an existing operation is being proposed. See Art. VI.C.1 ('89); VII.C.1 ('82/'77) (completion); Art. VI.F ('89); VI.A ('82/'77); 7 ('56) (modify/terminate).

47A failure to respond is an election not to participate.

48These procedures are spelled out in Articles VI.B - E of the 1989 Version, VI.B.2 and VI.E of the 1977 and 1982 versions, and in Paragraph 12 of the 1956 form.

49The 1989 Version expands on this option.

50This period varies from 30 to 90 days following expiration of the 30 day response period (or "as promptly as possible" where a drilling rig is on location), depending upon the agreement version involved and can be further extended for various specified reasons under the 1989 Version.

51Under the 1989 Model Form, the recoupment of costs of surface equipment is also a negotiable percentage, to be specified in the agreement.

52Under the 1956 version of the agreement this percentage is set at 200%. 

If the recoupment blank is filled in at, say, 300%, the agreement will frequently be described as providing for a "300% penalty." It is not a "300% penalty" (which is a dangerous choice of wording in any event), which would involve return of the original expenditures plus an additional tripling of that amount as a premium; instead, it is simply a 300% recoupment (i.e., a return of the original expenditure, plus a 200% premium for accepting the risk). Watch this misuse of language: it could lead to questions as to the actual intent of the parties.

53See Art. VI.C.1-2 ('89); Art. VII.D.1-2 ('82/'77); 11 ('56). For a discussion of this result, see Boigon, op. cit. n. 12, 5.04[2].

54See Art. VI.D ('89); Art. VII.D.3 ('82/'77); 22 ('56).

55See Art. V.D.2 ('89); Art. VII.C ('82/'77).  No such express provision is contained in the 1956 version.

56See Art. V.D. 5-7 ('89); Art. VI.D ('82/'77); 14 ('56).

57See Art. V.D.2 ('89); Art. VII.C ('82/'77); 8 ('56). The 1989 Version also contains express provisions concerning keeping the Contract Area free from liens and encumbrances (Art. V.D.3) and the Operator's custody of funds (Art. V.D.4).

58However, see the slip opinion issued September 13, 1984, in Resources Investment Corporation v. Templeton Energy, Inc. (USDCWDOk, Case No. Civ-83-1845-W), affirmed without opinion by the Tenth Circuit.

59See Art. VII.B ('82/'77); Paragraph 9 ('56). For an excellent commentary, see Boigon, op. cit. n. 12, 5.05[2].

60Under the post-1956 versions of the Agreement, a similar lien is granted to the Non-Operators if the Operator defaults in paying its share of the bills.

61See Art. VII.B D.

62See Art. V.D.9 ('89); Art. VII.G ('82); Art. VII.H ('77); 27 ('56).  See also Exhibit "D"

63See Art. IX ('89/'82/'77); 22 and 26 ('56). The 1989 and 1982 versions of the agreement expressly authorize reversing this election by attaching an optional Tax Partnership as Exhibit "G".

64See Art. XIV.A ('89/'82/'77).  See also Art. XIV.C ('89/'82).

65See Art. XIV.B ('89/'82/'77).

66See Art. XIV.B ('89/'82/'77).

67This "life of lease" was dependent upon securing initial production on the Unit Area. See 10.

68The duration-of-production requirement is subject to a "grace" provision similar to that found in the "continuous operations" clause of the typical oil and gas lease.

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 by Lewis G. Mosburg, Jr.

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