houston bar association oil, gas and mineral law section changes within the aapl 610-1989 model form...

HOUSTON BAR ASSOCIATION OIL, GAS AND MINERAL LAW

SECTION

CHANGES WITHIN THE AAPL 610-1989MODEL FORM OPERATING AGREEMENT - HORIZONTAL

MODIFICATIONS

(INCLUDING A DISCUSSION OF ANTICIPATED CHANGES)

SEPTEMBER 24, 2013

Jeff Weems

THE COMMITTEE

Fred MacDonald

Bob Duplantis

Jeff Weems

Mike Curry

Tom Daily

Dorsey Roach

Andy Rudderow

Worth Carlin

Dave Padgett

Jim Dewbre

Dora Soria

For Discussion Purposes Only

Before we begin

All the specific language is copyrighted.

Although this agreement is written to apply to horizontal wells, it can be used for either horizontal or vertical wells.

Your comments are important!


Why Bother?

24 years since the last revision

In 2013, horizontal wells outnumber vertical wells 5:2.

Number of rigs drilling horizontal wells:

48 in the first week of January 1993

1112 in the first week of January 2013

Major Changes

Article I - Definitions

Article VI.B.1 – Subsequent Operations

Article VI.B.9 – Spudder Rigs

Article VI.B.10 – Multi-well Pads

Article VI.C.1 – Casing Point Election

Article XV – Miscellaneous

Article XVI – Other Provisions


DefinitionsAFE

Just Kidding – No changes here.

Just Kidding Again – We did change it!

This definition had been changed, then left blank, then changed again. In the final version, we have added language noting that an AFE is not a contractual commitment; instead, it is a good faith estimate. Further expansion was shifted to the definition of a “proposal” in Article VI.B.1.


More Definitions

Deepen

Deepening was supplemented to fit the context of a horizontal well. In that vein, “deepen” means an operation where the Lateral is drilled to a horizontal distance - Displacement - greater than (a) that contained in the proposal or (b) the Displacement actually drilled.


And More Definitions

Displacement

What the state says it is (or the lateral length).


Even More Definitions

Drillsite

Surface hole location

AND

The Oil and Gas Leases/Interests within a drilling unit or under which the wellbore, including the Lateral, is located.


And More Definitions

Horizontal Rig Move-On Period

The number of days between the date of release of a Spudder Rig and the date a rig capable of drilling a Horizontal Well to its Total Measured Depth has moved onto location.

Note: You may want to address the timing element when you anticipate that your big rig may take multiple days to move onto the location.


How About Another Definition?

Horizontal Well – What the state says it is, or:

1. A well containing one or more laterals

2. Drilled, completed or recompleted so that:

a. The Completion interval extends more than 100 feet in the Zone(s) and

b. Exceeds the vertical component of the Completion interval in the Zone.


And Another

Lateral

The portion of the wellbore that deviates from approximately vertical to approximately horizontal and everything after such deviation.


And More!Plug Back

An operation to complete the well at a stratigraphically shallower Zone - NOT AN EXISTING LATERAL!

Sidetrack

To change the direction/deviation of a lateral so as to change Zones or direction from the approved proposal – UNLESS NOT!


Getting Closer!

Spudder Rig

More fully discussed in Article VI.B.9, but note:

Not a rig used only for setting conductor pipe.

Terminus

Again, what the State says it is, or the furthest point of a Lateral.


The Last Definition

Total Measured Depth

Surface to Terminus, vertical and horizontal components.

“Depth” and “Total Depth,” when they appear in a JOA relating to horizontal wells , mean Total Measured Depth.


No, Seriously, This Is the Last Definition

Vertical Well

Anything that is not a horizontal well (we struggled for days on this one!)

Scrivener’s Note: Review your leases, state statutes and other regulations for conflicting definitions!

Finally – Something New!

Note we had many discussions about including additional language in Article IV – Titles to include the ability to check title, upon request, of related tracts not part of the Drilling Unit.


Initial Well

For Horizontal Wells, the description of the initial well will describe the surface location and the terminus.


“Proposals”

In the context of Article VI.B.1, Proposed Operations, we have:

(a)required an AFE and

(b)provided a checklist of matters that should be included in the proposal. First, the proposal must state it is for a Horizontal Well. Next, it must specify:


Proposal Checklist

Total Measured Depth

Surface Location(s) and Terminus(i)

Displacement(s)

Utilization and Scheduling of Rigs

Stimulation Operations, Staging and Sizing

Must Include Estimated Drilling and Completion Costs as Set Forth in an AFE.


Inapplicable Segments

For horizontal wells, the new form notes that:

Article VI.B.4 (Deepening) does not apply to Deepening operations within an existing Lateral and

Article VI.B.5 (Sidetracking) does not apply to operations in an existing Lateral.

Consider exceptions in Article XVI.


Spudder Rigs

Spudder Rig - in definitions section

A drilling rig utilized only for drilling the vertical component of a Horizontal Well.


Spudder Rigs – New VI.B.9

1. Extensions with proposals that include a spudder rig and a horizontal rig move-on period:

If the operator wants to extend the Horizontal Rig Move-On Period, may get extensions of no more than ___ days upon notice and the affirmative vote at least ___% in interest of the Consenting Parties.

(This is the new VI.B.9 (a))


Spudder Rigs

2. No spudder rig within an existing proposal

If not previously included, a spudder rig can be added upon notice to drilling parties (which notice includes a Horizontal Rig Move-On Period) and the approval of ___% in interest of Consenting Parties.

Extensions can be granted under VI.B.9 (a)


Spudder Rigs

3. Failure to commence operations within Horizontal Rig Move-On Period.

Unless ___% in interest of Consenting Parties agree to abandon the operation, Operator must re-propose the well under VI.B – prior Non-Consenting Parties get a new election.

Expenses incurred both before and after such re-election will be borne:


Cost Distribution WithRe-Proposal

(1) Operator promptly will reimburse first-round consenting parties any unused funds.

(2) If drilling operations are resumed after re-proposal, all costs, whenever incurred, shall be borne equally by the new set of Consenting Parties (note: new will reimburse former).

(3) If no new operations, initial Consenting Parties bear all costs.

Note that in certain areas (like the Texas Gulf Coast), there may be significant productive intervals behind the pipe in the vertical segment. Consider how the parties want to address this in light of this re-proposal segment.


Spudder Rigs

The date a Spudder Rig commences actual drilling operations shall be considered as the commencement of drilling operations of the proposed well.

Practice Note: You may want to consider additional language in Article XVI if you plan on bring a rig out to just build the curve.


Multi-Well Pads

New Section VI.B.10

If multiple wells are drilled from a single pad, the costs of such pad shall be allocated, or reallocated if necessary, to the Consenting Parties of each of the wells thereon.


Casing Point Election

In a short addition to Article VI.C.1., the following language was added:

“Notwithstanding anything to the contrary, including the selection of Option 2 above, or anything else in this agreement, Option 1 shall apply to all Horizontal Wells.”

In other words, casing point elections are eliminated for all Horizontal Wells.

Further, language was added to Option 2 noting that it only applies to Vertical Wells.


Article XV – MiscellaneousLess Than Full Execution

If operations are commenced without the execution of the Operating Agreement by all interest owners listed on Exhibit A

AND/OR

If new working interest owners are discovered who were not previously listed on Exhibit A:

The Operating Agreement has an election for dealing with costs attributable to the unsigned/unknown parties.


Unsigned PartiesCost Election


Option No. 1: Just like on the 1989 Form, the Operator shall indemnify executing Non-Operators from all costs attributed to the unsigned parties, and shall receive all revenues attributed to the unsigned parties’ interest.

Option No. 2: The Operator shall advise all executing parties of the total interest that has executed. Everyone then has 48 hours to elect in a manner similar to VI.B.2.

Article XVIOther Provisions

Conflict of Terms: Provisions of Article XVI prevail in case of conflict.

Note that you may want to tweak this language if the courts of your state try to “harmonize” provisions, even if they obviously conflict.


Article XVIOther Provisions

Order of Operations

1. Testing, Coring and Logging

2. Complete drilling operations for all proposed Laterals

3. Extend or Deepen a Lateral

4. Kick out and drill an additional Lateral

5. Plug Back to a Zone above the Zone in which a Lateral was drilled.*


Order of Operations Continued

6. Sidetrack; and

7. Plug and abandon under VI.E.

Of course, the Operator can act as a Reasonably Prudent Operator and skip a step in the order if the well is in jeopardy.


Article XVIOther Provisions - Operator’s Duty

An Operator shall drill the Lateral in the Objective Zone at least to a Displacement at which a reasonably prudent operator would deem further drilling neither justified nor required.


Final Scrivener’s Instruction

Pay attention to the effects of abandoning or terminating a portion of a lateral.

Other Issues

We recognize that there are many additional issues relating to the current Model Form Agreement that need to be addressed.

We want your input!


Application of the Exculpatory Clause

Article V.A.

Reeder v. Wood County Energy

The question now is the extent to which the parties to an Operating Agreement intend the exculpatory clause to reach – all activities or just physical operations.


Re-spacing

Article III.B.

What effect do the parties want to assign to situations where a gas well changes characteristics over time and gets re-spaced/reclassified as an oil well?

What about a shortening of the lateral that excludes leases and/or alters the regulatory acreage allotment?


Failure of Title Versus Loss of Title

Horizontal Pugh Clauses

Term Leases

AFE’s

Suggestion to require a notice of overrun (over 125%) and/or a subsequent election.


Continuing Obligations

Article VII

Seagull Energy E&P Inc. v. Eland Energy, Inc.

How do the parties want to handle the situation of subsequent assignments of interests?


Disclosure/Confidentiality

Should all non-operators, whether consenting or not, have access to well information? If so when?

Currently, there are not standard requirements for maintaining the confidentiality of information.

One More Time

The proposed language is copyrighted.

The actual agreement should be available for purchase on the AAPL website soon.

Please send me your suggestions for the 2014 Form.


houston bar association oil, gas and mineral law section changes within the aapl 610-1989 model form...

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