HOUSTON BAR
ASSOCIATION OIL, GAS AND
MINERAL LAW SECTION
CHANGES WITHIN THE AAPL 610-1989
MODEL FORM OPERATING AGREEMENT HORIZONTAL MODIFICATIONS
(INCLUDING A DISCUSSION OF ANTICIPATED
CHANGES)
SEPTEMBER 24, 2013
Jeff Weems
THE COMMITTEE
Fred MacDonald
Andy Rudderow
Bob Duplantis
Worth Carlin
Jeff Weems
Dave Padgett
Mike Curry
Jim Dewbre
Tom Daily
Dora Soria
Dorsey Roach
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!
For Discussion Purposes Only
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
For Discussion Purposes Only
Definitions
AFE
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.
For Discussion Purposes Only
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.
For Discussion Purposes Only
And More Definitions
Displacement
What the state says it is (or the lateral length).
For Discussion Purposes Only
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.
For Discussion Purposes Only
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.
For Discussion Purposes Only
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.
For Discussion Purposes Only
And Another
Lateral
The portion of the wellbore that deviates from approximately
vertical to approximately horizontal and everything after such
deviation.
For Discussion Purposes Only
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!
For Discussion Purposes Only
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.
For Discussion Purposes Only
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.
For Discussion Purposes Only
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.
For Discussion Purposes Only
Initial Well
For Horizontal Wells, the description of the initial well
will describe the surface location and the terminus.
For Discussion Purposes Only
“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:
For Discussion Purposes Only
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.
For Discussion Purposes Only
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.
For Discussion Purposes Only
Spudder Rigs
Spudder Rig - in definitions section
A drilling rig utilized only for drilling the vertical component of
a Horizontal Well.
For Discussion Purposes Only
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))
For Discussion Purposes Only
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)
For Discussion Purposes Only
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:
For Discussion Purposes Only
Cost Distribution With
Re-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.
For Discussion Purposes Only
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.
For Discussion Purposes Only
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.
For Discussion Purposes Only
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.
For Discussion Purposes Only
Article XV – Miscellaneous
Less 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.
For Discussion Purposes Only
Unsigned Parties
Cost 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.
For Discussion Purposes Only
Article XVI
Other 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.
For Discussion Purposes Only
Article XVI
Other 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.*
For Discussion Purposes Only
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.
For Discussion Purposes Only
Article XVI
Other 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.
For Discussion Purposes Only
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!
For Discussion Purposes Only
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.
For Discussion Purposes Only
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?
For Discussion Purposes Only
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.
For Discussion Purposes Only
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?
For Discussion Purposes Only
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.
For Discussion Purposes Only