Member Article

Companies looking to purchase non-operating working interests will review longstanding operating agreements, or negotiate the terms of new operating agreements, to ensure that appropriate non-operator rights are present and enforceable. Lenders and investors are similarly interested in these rights when utilizing such non-operating interest to secure debt or as the basis for a direct investment in the form of overrides, farmouts, “drillcos”, volumetric production payments and a variety of other transactions. This article highlights some rights typically available to non-operators vis-à-vis their operator under the 1982 and 1989 versions of the model American Association of Professional Landmen Form Joint Operating Agreement (Form 610 Model Form).

The 1982 Form and the 1989 Form are commonly the basis for modern joint operating agreements. Important differences between the versions exist, and many operating agreements contain customized provisions added by the parties, which alter or add to the form’s printed terms. Therefore, it is important to carefully read every operating agreement to appreciate the rights and obligations of all parties.

Non-Operators May Propose and “Operate” Subsequent Wells and Operations

Any party to the agreement who desires to conduct operations on the Contract Area may propose such operations to the other parties. Under Article VI.B.1 of both the 1982 and 1989 Forms, the party proposing the operation (the “Proposing Party”) must give written notice of the proposed operation, specifying (1) the work to be performed, including wells to be drilled or reworked, (2) the location, (3) proposed depth, (4) objective formation being targeted for completion and (5) the estimated costs of the operation. The Proposing Party must send an Authority for Expenditure (“AFE”) to the other parties (the “Non-Proposing Parties”) to serve as a ballot to indicate whether such Non-Proposing Parties will join in the cost of the proposed operation. Each NonProposing Party shall notify the Proposing Party of its election within thirty days, unless there is a drilling rig on location or if the parties have altered the agreement to allow for a longer or shorter period of time. Both forms define “Consenting Parties” as the parties who agree to join in and pay their share of the cost of the proposed operation, while “Non-Consenting Parties” are the parties who elect, or are deemed to elect, not to participate in the proposed operation.

Article VI.B.2 of both forms states that the operator shall perform the proposed operation on behalf of the Consenting Parties; provided, however, if (1) no drilling rig or other equipment is on location, and (2) the operator is a Non-Consenting Party, then the Consenting Parties can either (i) request that the operator perform the work required by such proposed operation on behalf of the Consenting Parties, or (ii) designate one of the Consenting Parties to perform such work. The 1989 Form specifically states that in the event a Consenting Party is designated, the rights and duties granted to and imposed upon the operator under the agreement are granted to and imposed upon the designated Consenting Party. If any well drilled results in a well capable of producing oil or gas in paying quantities, the Consenting Parties shall complete and equip the well to produce at their sole cost and risk, and the well shall then be turned over to the operator to be operated at the expense and for the account of the Consenting Parties.

To read the full alert, please click on the PDF below:

A-Comparison-of-Non-Operators-Rights.pdf