Changes to the Operator’s Rights and Obligations under the New 2015 A.A.P.L. Model Form JOA

The American Association of Professional Landmen recently released its 2015 Model Form Operating Agreement. The A.A.P.L form 610 – Model Form Operating Agreement has established the operating framework within the United States since 1956, and the last major modifications to the Model Form occurred in 1989. The 2015 Model Form contains notable changes to provisions governing the appointment and removal of the Operator, access to records, assignments, authority of the Operator to communitize and pool, and the Operator’s standard of conduct. This summary is not comprehensive. There are many other substantive changes to the 2015 Model Form, including, but not limited to, changes related to horizontal drilling, which are not discussed in this summary.

Operator’s Standard of Conduct. The 2015 JOA revises the Operator’s standard of conduct. It now provides in pertinent part:

Operator shall conduct its activities under this agreement as a reasonably prudent operator, in a good and workmanlike manner, with due diligence and dispatch, in accordance with good oilfield practice, and in compliance with applicable law and regulations. However, in no event shall it have any liability as Operator to the other parties for losses sustained or liabilities incurred in connection with authorized or approved operations under this agreement except such as may result from gross negligence or willful misconduct. (Art. V.A, emphasis added)

Notably, the insulation of liability except for gross negligence or willful misconduct applies only to “authorized or approved operations” and not to all Operator activities such as accounting and other administrative functions. This is a significant change from the 1989 JOA form which broadly states that in no event shall Operator have “any liability as Operator to the other parties for losses sustained or liabilities incurred except such as may result from gross negligence or willful misconduct.” (Emphasis added.)

Non-Owning Operators. Article V of the 2015 Model Form maintains the general requirement that the Operator must own an interest in the Contract Area, except it allows the parties to decide the percentage of ownership the Operator must own and maintain and also allows a non-owning person to serve as Operator provided the putative non-owning operator and the Non-Operators enter into a separate agreement, or insert Article XVI provisions to the agreement to govern the relationship between them. Absent such separate agreement or Article XVI provisions, a non-owning operator shall be bound by all terms and conditions of the agreement applicable to Operator. Further, the failure of a non-owning operator and Non-Operators to enter into such a separate agreement or Article XVI provisions “shall disqualify said non-owning operator from serving as Operator, and a party owning an interest in the Contract Area must instead be designated as Operator.” Unless the parties have otherwise agreed, a non-owning Operator may also be removed at any time, with or without cause, by the affirmative vote of parties owning a majority interest. If good cause for removal of such non-owning Operator exists, the non-owning Operator may also be removed by the affirmative vote of Non-Operators owning a majority interest after excluding the voting interest of any non-operator who is an Affiliate of the non-owning Operator. Operatorship is “neither assignable nor forfeited” except in accordance with the provisions of Article V. The 2015 Model Form states that “a change of a corporate name or type of business entity” shall not be deemed to constitute resignation of Operator, but no longer includes the 1989 language that a “transfer of Operator’s interest to any single subsidiary, parent or successor corporation shall not be the basis for removal of Operator.” Whether courts will interpret this language to be a material change remains to be determined.

Removal of Operator. Article V.B.4 maintains the language in the 1989 JOA providing that an Operator may be removed for good cause by the affirmative vote of Non-Operators owning a majority interest after excluding the voting interest of Operator, and continues to provide that such vote is not effective until a written notice has been delivered to Operator by a Non-Operator detailing the alleged default and Operator has failed to cure within 30 days from its receipt of the notice (or 48 hours if the default concerns an operation then being conducted). The definition of “good cause,” however, is slightly broadened. The 1989 Form provides that good cause “shall mean not only gross negligence or willful misconduct but also the material breach of or inability to meet the standards of operations contained in Article V.A. or material failure or inability to perform its obligations under this agreement.” The new 2015 JOA form now states “good cause” shall “include, but not be limited to (i) Operator’s gross negligence or willful misconduct, (ii) the material breach of or inability to meet the standards of operation contained in Article V.A or (iii) material failure or inability to perform its obligations or duties under the agreement.” Art. V.B.4

Selection of Successor Operator. The 2015 Model Form generally maintains the 1989 Model Form provisions governing the selection of a successor Operator but clarifies that an assignee of the Operator’s interests is allowed to vote. Upon the resignation or removal of Operator, a successor Operator shall be selected by the affirmative vote of one or more parties owning a majority interest including the vote of the former Operator “and/or any transferee of the former Operator’s interest,” but if an Operator who has been removed or is deemed to have resigned fails to vote or votes only to succeed itself, the successor Operator shall be selected by the affirmative vote of the party or parties owning a majority interest remaining after excluding the voting interest of the Operator who was removed or resigned. The 2015 Model Form also includes a tie breaker provision: In the event of a tie, “the candidate supported by the former Operator or the majority of its transferee(s), shall become the successor Operator.” Art. V.B.6

Access to Records. Subject to certain exceptions, the 2015 Model Form provides that a Non-Consenting Party is not entitled to access the well and is not entitled to well information and reports solely relating to such non-consented operation until the earlier of full recoupment by the Consenting Parties or two years following the date the non-consented operation was commenced. Art. V.D.5. Prior to payout, however, a Non-Consenting Party who is not otherwise in default is generally entitled to review the joint account records pertaining to non-consented operations to the extent necessary to conduct an audit of the payout account. Under the 2015 Model Form, Operator is obligated to send “to the Consenting Parties” instead of “Non-Operators” (as used in the 1989 Model Form) such reports, test results and notices regarding the progress of operations on the well as the Consenting Parties may reasonably request, including daily drilling reports, completion reports and well logs. See Articles IV.A and V.D.5.

Operator Authority to Pool and Communitize. Article V.A and the Recording Supplement to the 2015 Model Form JOA now include provisions appointing the Operator as attorney-in-fact for executing declarations of pooling and communitization agreements on behalf of the Non-Operators. This provision eliminates some legal uncertainty related to whether an Operator can pool a lease in which it owns no interest (i.e., a lease owned by a Non-Operator), and addresses recent BLM actions which have denied communitization agreement proposals because not all the working interest owners signed the application.

Assignments. Article VIII.D of the 2015 Model Form JOA provides that, after expiration of a 30 day period, a transferor will not be liable for costs of operations conducted after that period. However, a recent Wyoming decision confirms the general rule that, with respect to those who are not parties to the JOA, the assignor remains liable under other contracts, such as leases or surface use agreements, absent an express novation or an agreement releasing the transferor of future liability upon assignment of interests.

Article VI. of the 2015 Model Form JOA also provides that any interests assigned to non-abandoning parties upon abandonment of a well by some but not all the owners will be made free of Subsequently Created Interests.

The 2015 Model Form JOA contains numerous other changes addressing horizontal drilling and other matters and should be carefully reviewed and modified depending on the intentions of the parties.