The 1989 AAPL Model Form
Operating Agreement:
why are you not using it?
Andrew B. Derman & Isabel Amadeo
Thompson & Knight LLP
1700 Pacific Avenue • Suite 3300
Dallas, Texas 75201
214.969.1700
1
The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Introduction
2

Oil Industry relies on form agreements

AAPL standardized forms: 1956, 1977, 1982, & 1989

1989 Form superior to its predecessors yet not
universally accepted – Why?

Provisions of 1989 Form used worldwide but not
onshore – Ironic!
The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
The Debate: Investors vs. Operator
3

Is special protection required for Investors?

Parties to a JOA can negotiate and establish their
rights and duties

1989 Form  standardized “form”; a basis

Advantages of using form  reduce negotiation and
drafting costs, comprehensively well written, efficient
interpretation, among others
The 1989 AAPL Model Form
Operating Agreement:
why are you not using it?
Review of 1989 Form
4
The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Definitions – Article I
5

Several definitions added

Elimination of ambiguity and conflict

“Affiliate” should be defined

If drilling a horizontal well  the definition of
“deepen” must be expanded
The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Exhibits – Article II
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
Various Exhibits

Improved Exhibit A (identification of contract area)
phone numbers of parties for notice purposes and
burdens on production
The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Interest of Parties in Costs & Production –
Article III.B
7

Production as allocated in Exhibit A

Revenues and Royalties not pooled

1989 Form  clarifies that parties should share
burdens up to the amount provided for in the blank
and individually shoulder all excess burdens
The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Subsequently Created Interests –
Article III.C
8

1989 Form includes definition of subsequently
created interests

Critical to fully disclose existing burdens in Exhibit
A otherwise they are deemed as subsequently
created interests
The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Titles – Article IV.A
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
1989 Form improvement – Title examination if
requested by a majority in interest of the drilling
parties or by Operator vs. 1982 Form that requires all
of the parties’ consent

Copies of drilling title opinions only to parties that
pay for them
The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Loss or Failure of Title – Article IV.B

Owner’s of wellbore interests not considered a
party to JOA unless otherwise specified in Exhibit
A

If a lease is lost due to failure of title & no new
lease secured within 90 days  Exhibit A adjusted
10
The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Designation and Responsibilities of
Operator – Article V.A

Standard of care of Operator expanded

Negligent Operator liable for its percentage interest
only
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Resignation or Removal of Operator –
Article V.B

Operator may resign at any time providing proper
notice

Inclusion of removal standard

Good Cause Removal

Successor Operator  affirmative vote of 2 or more
parties owning a majority interest
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
New Provision

Insolvent or bankrupt Operator = deemed to have
resigned

No action of non-operators needed, only selection
of new Operator

Bankruptcy Court may prevent removal of Operator
 interim operating committee
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Rights & Duties of Operator – Article V.D

Timely pay expenses

Keep Contract Area free of liens

Operator not a fiduciary

Non-operators greater ability to monitor the project
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Initial Well – Article VI.A

Drilling of initial well obligatory

Horizontal wells not addressed
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Subsequent Operations – Article VI.B

New language clarifies procedure

Non-consenting parties may now participate in
deepening or sidetracking operations

Party proposing a subsequent operations must
provide proper notice
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Operations By Less Than All Parties –
Article VI.B.2(B)

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New provision  if well not drilled to its objective
due to reasons other than mechanical problems or
impenetrable substances  non-consenting parties
entitled to participate
The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Reworking or Plugging Back –
Article VI.B.2

100% penalty replaced by a blank

Parties will seek for higher penalties
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Deepening – Article VI.B.4

Detailed provision added

Non-consenting parties can participate in deepening
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Sidetracking – Article VI.B.5

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Provision added similar to deepening provision
The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Order of Preference of Operations –
Article VI.B.6

New procedure to elect between conflicting
proposals

Majority interest prevails & in event of tie initial
proposal prevails
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Paying Wells – Article VI.B.8

New provision provides certainty

Consent of all parties needed to operate a
commercial well
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Completion of Wells; Reworking &
Plugging Back – Article VI.C

Casting point expanded: AFE

Procedure for conflicting completion proposals
incorporated

AFEs are estimates of costs not firm commitments
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Other Operations – Article VI.D

1989 Form improves efficiency of production
operations

Certain work can be undertaken with written consent
of any party or parties owning at least ___% of the
interest
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Abandonment of Wells – Article VI.E

Satisfactory proof of financial capability needed to
take over a well

Costs of plugging, abandoning exceed salvage value
 abandoning parties have to pay the party taking
over the well
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Termination of Operations – Article VI.F

Operations can be terminated prematurely if a
determined percentage of the parties wish to do so

For the operations to end no need for it to be
“impractical”
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Taking Production in Kind – Article VI.G

Each party owns a share of production in
accordance with its proportionate interest in the
Contract Area

For antitrust & tax reasons  Operator only able to
buy or sell the non-operator’s oil for a limited period
of time
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Operator Notification

Parties have to advise Operator their gas marketing
arrangements, except for price

Split stream gas deliveries pursuant to gas balancing
agreements
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Liability of Parties – Article VII.A

Several not joint

Explicit disclaim to any intent to create a
partnership

Duty to deal in good faith with each other
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Liens & Security Interests – Article VII.B

Lien covers real property & present and future
acquired personal property & fixtures

Each non-operator grants Operator a lien on its oil
and gas rights and a security interest on its share of
production
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Defaults & Remedies – Article VII.D

Defaulting party automatically has certain rights
suspended

Non-defaulting parties can sue to recover at joint
account expense
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Surrender of Leases – Article VIII.A

Surrender of lease requires consent of all parties to
JOA

Failure to respond within designated time = consent
to receive surrendered interest. Caution!
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Renewal or Extension of Leases –
Article VII.B

Now renewals, replacements & extensions of leases
are addressed

BUT intent to eliminate 1982 Form’s ambiguity not
that clear
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Assignment; Maintenance of
Uniform Interest – Article VIII.D

Transfer of ownership not recognized until 30 days
after satisfactory notice has been received

Transferor liable for all costs incurred prior to
assignment
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Preferential Right to Purchase –
Article VIII.F

Now an optional provision

If box is not checked  preferential right not applicable

Does “sell” include farmout?

Do mergers & corporate restructurings trigger
preferential rights?
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Claims & Lawsuits – Article X

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Operator is authorized to settle claims arising from
operations if the amounts do not exceed a
specified amount
The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Notice – Article XII

Oral notices need to be confirmed immediately in
writing

Responsive notices deemed delivered when
deposited in mail
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Miscellaneous – Article XV

New article

Addresses execution, successors and assigns
counterparts and severability
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The 1989 AAPL Model Form Operating
Agreement: why are you not using it?
Conclusions

1989 Form incorporates many improvements over the
1982 Form

1989 Form has yet not attained universal acceptance

1989 Form is an improvement
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