The JOAAs A Title Document€¦ · • Co-tenancy rights under state law are substantially modified by the JOA. • A cross-conveyance changes the royalty burdens so that WIOs contributing

The JOA As A Title Document

May 2, 2013

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JOA As A Title Doc

4

The most popular JOAs are those produced by theAmerican Association of Professional Landmen

• Mostly onshore, United States, lower 48 forms promulgated

in 1956, 1977, 1982, and 1989.

• There is a form for the Continental Shelf (710), one fordeepwater offshore (810), and various modifications to theforms for specific purposes.

• The Rocky Mountain Mineral Law Foundation and otherorganizations have their own forms.

• Examples today will be from the AAPL Form 610 - 1989;unless otherwise noted, all citations to a particular provisionof a JOA are to the 1989 form.

May 2, 2013 Dentons US LLP

The JOA As A Cross-Conveyance

5

• Some writers and courts believe that the description and stipulation ofinterests committed to the JOA create a cross-conveyance of interestsunder the JOA such that each owner holds legal title to its Exhibit Ainterest in each lease described in Exhibit A. The relevant language:

• WHEREAS, the parties to this agreement are owners of Oil and GasLeases and/or Oil and Gas Interest in the land identified in Exhibit “A,”and the parties hereto have reached an agreement to explore anddevelop these leases and/or Oil and Gas Interests for the production ofOil and Gas to the extent and as hereinafter provided.

• Exhibit “A,” shall include the following information:

• (1) Description of lands subject to this agreement,

***

• (4) Percentages or fractional interests of parties to this agreement,



6

Article II.A. continued:• (5) Oil and Gas Leases and/or Oil and Gas Interests subject to this

agreement …. Article II.A.

• Unless changed by other provisions, all costs and liabilities incurred inoperations under this agreement shall be borne and paid, and allequipment and materials acquired in operations on the Contract Areashall be owned, by the parties as their interests are set forth in Exhibit“A.” In the same manner, the parties shall also own all production of Oiland Gas from the Contract Area subject, however, to the payment ofroyalties and other burdens on production as described hereafter.Art. III.B.

• On the other hand, see Art. III.B., lines 29-31: “Nothing contained in thisArticle III.B. shall be deemed an assignment or cross-assignment ofinterests covered hereby, and in the event two or more partiescontribute to this agreement jointly owned Leases, the parties’undivided interests in said Leaseholds shall be deemed separateleasehold interests for the purposes of this agreement.”



7

One Texas Case, p.2• Gillring Oil Co. v. Hughes, a 1981 Texas Civ. App. From

Beaumont.

• Contract Area of 401 acres, several leases.

• Formed 320 acre Unit entirely within the Contract Area.

• Gillring owned no interest in excluded tracts. Owned 75%of one 25 acre tract.

• Gillring sued to distribute production based on ownershipof Unit, not Exhibit A to JOA.

• Court of Appeals

• By executing the operating agreement, Gillring had relinquished75% of its ownership in the 25 acres in exchange for 6.23% of eachacre within the 401 acres.



8

Gillring Case• JOA Language:

• “(A)ll costs and liabilities incurred in operations under this contractshall be borne and paid, and all equipment and material acquired inoperations on the Unit Area shall be owned, by the parties as theirinterests are given in Exhibit ‘A.’ All production of oil and gas fromthe Unit Area, subject to the payment of lessor’s royalties, shall alsobe owned by the parties in the same manner.”

• Probably the 1956 form which lacks the following languagefrom all subsequent AAPL Forms: "however, this shall notbe deemed an assignment or cross-assignment of interestscovered hereby."

• Unlikely that a Texas court with conclude that the currentAAPL Form JOA results in a cross-conveyance of interestin the Exhibit A leases.



9

What if it were a cross-conveyance?

Four possibilities:• All of the parties to the JOA are in privity of estate with

lessor which makes each party to the JOA liable for theperformance of the covenants, express and implied,under each lease.

• A conveyance of leases by a WIO must be as to eachlease in Exhibit A; a normal conveyance may only conveyan interest in the original lease.

• Co-tenancy rights under state law are substantiallymodified by the JOA.

• A cross-conveyance changes the royalty burdens so thatWIOs contributing low royalty leases lose the advantagethat the low royalty leases gives them in a non-co-tenancysituation.


Surrender of Interest

10

Non-Consent• The parties to a JOA usually agree to participate in the

Initial Well to be drilled in the Contract Area.

• The parties may elect whether or not to participate insubsequent operations in the Contract Area.• This election process is outlined in Article VI of the JOA.

• All of the parties, the Operator included, are given anopportunity to participate or not participate in eachsubsequent operation after the Initial Well. Art. VI.B.1 andVI.B.2.(a).

• Those electing not to participate are subject to a “penalty”for not consenting to such operations and, under the 1989JOA, that penalty is relinquishment (at least temporarily)of the Non-Consenting Party’s interest in the well and itsshare of production therefrom.



11

Non-Consent• Parties may structure a JOA with a more draconian “sit

out-fall out” participation requirement (non-consent resultsin the permanent relinquishment of the Non-ConsentingParty’s interest in the well), the JOA is structured so thatthe relinquishment continues only until the proceeds fromthe sale of production attributable to the Non-ConsentingParty’s interest (after deducting taxes and other leaseburdens associated with such interest) equals apercentage of the costs incurred with respect to both (i)surface equipment and operating expenses, and (ii) thecosts and expenses of drilling and the equipment in thewell. Art. VI.B.2(b)(i) and (i).

• The non-consent penalty is used to reward the parties whoassume the Non-Consenting Party’s interests and rewardthe Consenting Parties for accepting additional risk withrespect to the proposed operations.



12

Non-ConsentNon-cross-conveyance• “nothing more than a rearrangement of contractual rights

and obligations of the partners as to specific operationswithin the enterprise as a whole.” While the party is notparticipating in the operation in question, and is thereforesubject to the benefits and obligations with respect thereto,the Non-Consenting Party is still a party to the JOA ingeneral and entitled to the rights and subject to theobligations with respect thereto.

Other• In situations in which the parties are co-owners of the lease

or leases, whether originally or by a cross-conveyanceunder the JOA, the title implications are more uncertain.The Non-Consenting Party “relinquishes” its interest in thewell and its related production and present ownership isvested in the Consenting Parties until the non-consentpenalties have been satisfied.



13

Non-Consent• Conine argues that the non-consent provision calls for a

conveyance of the working interest during the period ofrelinquishment.

• Not supported by current language.

Olin case, p. 6• Are non-consenting parties liable for plugging obligations

under RRC regs as non-operators?• Held -- a non-consenting party is responsible for plugging

and abandoning a well, even if production from the non-consent operation has yet to recoup the non-consentpenalties. Ownership of a future interest in the well was stilla working interest resulting in liability for plugging andabandonment even though the non-consenting party was notcurrently bearing its working interest.

Distinction• Case was about reach of RRC regs, not an interpretation of

JOA. Courts tend to favor expansive reach of police powers.



14

Not a cross-conveyance• Unclear how much of the leasehold working interest is affected;

no reference to transfer of WI in the lease or in the unit. Non-consents get to participate in future wells and future operations innon-consent wellbore.

• A substantial degree of control over operations remains vested inthe Non-Consenting Party, even with respect to the subsequentoperation in which it has elected not to participate. The Non-Consenting Party may still access the entire Contract Area, obtaininformation about all operations, vote on the surrender of leases,vote on the removal/replacement of the Operator. These arecontrary to an implied reassignment of working interest under anon-consent provision.

• A cross-conveyance is not necessary to achieve the intent of thenon-consent provision. The obligation to bear costs, the right toproduction, and the power to determine the objectives of theproposed operation are the only interests which are redistributed.The relinquishment should be viewed as a temporary transfer ofrights in production and as an accounting device to compensatethose assuming obligations for drilling the well.

• Derman suggests the non-consenting party consider selling itsreversionary interest to party who can assume future liabilities.



15

Failure to Pay.• Optional with the non-defaulting parties.

• Notice to defaulting party• Notice of Default• Then Notice of non-consent election.

• This is a special remedy in the event that the default isrelated to billing for the drilling of a new well or the PluggingBack, Sidetracking, Reworking, Deepening or Recompletionof any well. In the event that a party defaults in the paymentof such obligations then, following the applicable cure period,the party will be “conclusively deemed” to have elected not toparticipate in the operation and to be a Non-Consenting Partywith respect thereto under Article VI.B. or VI.C. to the extentof the costs unpaid by such party. This provision acts as asort of retroactive election not to consent to an operation.Thereafter, the non-consent provisions and title implicationsthereof described above will control the relinquishment andrecovery of the “deemed” Non-Consenting Party’s interest.


Date of the JOA

16

Not a random act.• Failure to enter into a JOA or commencing operationsbefore JOA is entered into can result in formation of amining partnership.• Mining partnership is implied by law, without and agreement

and creates general partnership with joint and severalliability.

• Date on cover page and in Article XVI should be thesame.

• All signature blocks should carry a date prior to thecommencement of operations.

• Initial Well date in Article VI.A. should be after ArticleXVI date in order to create a binding obligation.

• Unless the language is revised the date in Article XVIsets the date before which a lease burden will not beconsidered a Subsequently Created Interest in Article III.


Express Title Transfers

17

The Oil and Gas Interest

• Refers ONLY to unleased mineral interest• Confusing because term is used generally in PSAs to apply to any

leasehold interest.

• Treated "as if" covered by the form of Oil and Gas Leaseattached as Exhibit B.• Owner deemed to own both royalty interest and interest of lessee.

Article III.A.

• Most parties fail to attached Exhibit B or, if they do, it is notfilled in sufficiently to comply with SF.

• No requirement that Exhibit B lease be executed orrecorded. Prudent to record under Recording Acts.• No case on whether other parties can be BFPs as to Exhibit B lease.

But, without cross-conveyance does it matter?• Yes. The parties want the mineral interest and the lease to be subject to the

JOA without third party claims.

• Recommend that Ex. B be signed as a separate doc when JOAexecuted• Avoids subjecting the mineral interest to the obligations and liabilities of the

JOA.


Express Title Transfers

18

Mineral Interests

• Wagner & Brown, Ltd. v. Sheppard, p. 10.

• This 2008 Texas Supreme Court case held that theauthorization to pool contained in the relevant oil and gaslease applied both to the Leasehold interest and to thereversionary interest of the lessor so that, when the leaseexpired, the lessor became a working interest owner inthe unit and the unit continued.

• The Ex. B. lease should contain:

• Language to avoid the result in Sheppard.

• Should generally provide that the lease terminates whenthe other leases in the contract area expire.


Express Title Transfer

19

Mineral Interests

• What if Article III.A. is deleted?• Often deleted because the owner of the mineral interest does not

want its mineral interest covered by the JOA. Seen where apromoting party does not wish to share its minerals with the otherowners and would rather they not know about it. Such deletionputs the mineral owner in an advantageous position with respect tothe other non-operators; for example, the mineral owner canchoose to be treated as an unleased mineral owner and thus claima full ownership interest in production (after the recovery of costs).

• Federal tax law imposed disparate tax treatment on royaltiesversus working interests ( “windfall” profits tax). Some parties tothe JOA elected to treat their mineral interests entirely as workinginterests with no division of the interest into royalty and workinginterests by the use of Ex.B. It would behoove that party to securean exemption from the lien provisions of Article VII.B. for whatwould have been the royalty portion of the interest. At the veryleast, such an owner should exempt a reversionary interest in themineral interest (when production ceases and the JOA expires, Iget my minerals back), otherwise a foreclosure on the mineralinterest will result in a complete loss of the mineral interest, notjust the working interest portion.


Allocation of Interests

20

Done pursuant to Ex. A by Article III.B.

• Shares costs and liabilities incurred in operations;

• Shares revenues " In the same manner [Exhibit A], the parties shallalso own all production of Oil and Gas from the Contract Area subject,however, to the payment of royalties and other burdens on productionas described hereafter;"

• Amongst the working interest owners, each is responsible for its shareof costs in the Joint Account as established by Article V.B.2., but this issolely with respect to the other parties to the JOA. With respect to thelease contributed to the Contract Area, the lessee remains liabledirectly to the lessor for compliance with the lease terms;

• Also provides for the ownership of "all equipment and materialsacquired in operations on the Contract Area" by the parties according toEx. A.

• There is no such ownership provision with respect to the Ex. A oil andgas leases.


Sharing Royalties

21

Lease burdens in units, not JOAs, p. 12.• TXO v. Prickette.

• lessee of one lease in the unit had not been able to sell its gas for 21months; the court held that the unit operator was required to payroyalties to the lessors of the non-selling lessee from the date of firstproduction. The court based the decision on the pooling clause whichgave the lessor a pro rata share of production from the unit. Thoughnot so articulated, this applies a weighted average approach whichrequires the party selling gas to pay royalties on production throughoutthe unit.

• Puckett v. First City National Bank.• lessee was receiving a lower price (the interstate price) for its

production while others in the unit were receiving a higher pricebecause their gas was sold in the intrastate market. The court foundthat the parties to the unit agreement, except for the plaintiff’simmediate lessee had no contractual obligation to the plaintiff; i.e. theplaintiff lessors could only look to the price received by their lessee todetermine the basis for their royalty payment. To get there the courthad to narrowly construe the cases holding that a pooling constitutes across-conveyance by holding that none of the cross-conveyance casesinvolved the question of royalty allocation.


Sharing Royalties

22

Lease Burdens under the JOA.

• Well drafted provision in Article III.B. Does not purport tobind the lessor -- just allocate the royalty burden under theJOA.

• First requires the WIOs to deliver a share of burdens up toa [blank] percentage.• Designed to burden all WIO's interest with the lowest royalty figure in

the field and distribute this portion on a weighted average basis.

• Second says any party who contributed a lease with aburden in excess of the amount in the blank "shall assumeand alone bear all such excess obligations…."• Allows parties to maintain the higher NRI attributable to lower royalty

leases.

• Exception. If the drilling unit and the Contract Area areidentical then each party much pay all burdens onproduction from the Contract Area -- the blank iseliminated.• Not sure I understand unless it is providing burden sharing that would

work whether the state law provides cross-conveyancing or not.May 2, 2013 Dentons US LLP

Sharing Royalties

23

Lease Burdens under the JOA.

• 1982 version provided for the sharing of royalties.

• 1989 version provides for the sharing of burdens

and defines same:

• Royalty, overriding royalty, production payment or otherburden on production.

• Not aware of the case but obviously, someone

attempted to create a non-royalty "burden" and

attempted to avoid sole liability for it by saying it

was not a royalty.


Sharing of Subsequent Burdens

24

Mortgages• Leases burdened by a mortgage are Subsequently

Created Interests, regardless of when created.Article III.C., l 33-34.

• Actually only applies to assignment of productioncontained in most mortgages.

Other Burdens• First Category• One created after the date of the JOA;• Includes royalty, overriding royalty, production payment,

NPI, or other burdens payable out of production;• A "Subsequently Created Interest."• Second Category• One created before the date of the JOA;• But not shown on Ex. A;• Deemed a Subsequently Created Interest -- but only if it

exceeds the amount in the blank in Article III.B. line 17.


Sharing of Subsequent Burdens

25

Consequence of being a Subsequently CreatedInterest -- SCI

• Burdened Party assumes all liability for the SCI andindemnifies other parties.

• If Burdened Party is required to assign or relinquish aninterest, it must be delivered free of the SCI.

• The SCI is subject to all of the Article VII.B. enforcementright that the other parties have against the BurdenedParties.• Holder of the SCI may not be bound by the statement in the

JOA.• If holder of SCI pays value and has no notice of JOA and SCI is

delivered prior to filing JOA or memo of JOA of record, then theSCI may be free of the Article VII.B. enforcement rights.

• Article VIII.D. already requires any assignments of interests tobe made subject to the JOA; failure to do so creates liabilityagainst the transferor but not against the transferee withoutnotice and for consideration.

• File memorandum of JOA of record.• Still may not catch previously assigned interest.


Specific Title Requirements

26

Operator• Required to have title examined on the Drillsite.

• that “(n)o well shall be drilled on the Contract Area until after (1) thetitle to the Drillsite or Drilling Unit … has been examined … and (2)the title has been approved by the examining attorney or title hasbeen accepted by all of the Drilling Parties in such well.” Article IV.A.

• Generally, do not see title attorney say "approve" in a titleopinion.

• Rare that Operator delays drilling until title has beenaccepted by all of the participating parties.• Failure to object to "acceptance" by all of the drilling parties likely is

waived.• What if less than "all" accept the title? No remedy -- such as a

deemed non-consent -- is provided in the JOA.

• What is examined? "Drillsite."• The Leases "on which a proposed well is to be located."• In a horizontal well, all tracts touched by the wellbore are "Drillsites."

So says the case law.• Will the JOA conform? Probably.• May want to add to definition of Drillsite, "The term “Drillsite,” when used in connection

with a Horizontal or Multi-lateral Well, means the surface location on the Contract Area (or surfacelands in proximity of adjacent thereto) plus the Oil and Gas Lease or Oil and Gas Interests onwhich wellbores, including all Laterals, are located.


Failure of Title

27

Process• Contributing party gets 90 days to cure or get new lease.• New lease after that time is acquired under Article VIII.B.

• … each party to the JOA would be entitled to its proportionate shareassuming the Exhibit A interests have been adjusted for the lost lease.

• Party who contributed the lease bears the entire loss andcannot charge the Operator or another party with any of itscosts previously paid or incurred.

• Party who contributed the failed lease "shall bear alone theentire loss…."

• In horizontal well situation, loss may be greater than theloss of the lease.

Browning Case, p. 19• 1979 Leases in Fayette County, Texas• Standard pooling provision with sharing based on

proportion of acreage in unit.• If any pooled unit is created with respect to any well drilled

on the land covered hereby, at least sixty percent (60%) ofsuch pooled unit shall consist of the land covered hereby.


•Browning• Lessee requested this change:

• In addition to the provisions for pooling, combining orunitizing as contained in Paragraph 4 of the Lease, inthe event Lessee, its successors or assigns, shouldexercise its right and power, in its sole option anddiscretion, to pool, unitize or combine the leasepremises or any portion thereof with other lands inorder to form a unit or pooled unit containing a well witha horizontal drainhole, as defined herein, such unit orpooled unit may, within the discretion of Lessee, itssuccessors or assigns, contain the greatest acreageallowable to the extent prescribed or permitted by theRailroad Commission of Texas or other governmentalauthority having jurisdiction . . .


Failure of Title

•Browning

• Lessors refused to modify.

• Lessee drilled anyway; 60% of the pooled units

did NOT consist of Luecke’s land.

• Luecke sued.

• Lessee’s defense:• In order to drill horizontal wells, Lessee was entitled to

ignore the lease provision so long as complied withhorizontal drilling rules.

29

Failure of Title


Medusa Unit 839 Acres Luecke Tracts 268 acres 31% Drillsite Tracts 83 ac 10% Required 60%Hayes Unit 346 Acres Luecke Tracts 114 acres 32% Required 60%

Browning Case

Luecke

Luecke

Luecke

Luecke

●Wellbore

Hays Drillsite

●Wellbore

Medusa Drillsite

LueckeLuecke

• Court

• Parties to oil and gas leases must strictly

comply with its terms. Such compliance

applies to pooling clauses.

Failure of Title

31May 2, 2013 Dentons US LLP

•Browning• Court:• Breach "rendered the pooled units invalid withrespect to the Lueckes’ land."

• Without valid pooled units, the leases do not andcannot award the Lueckes royalties on oil and gasproduced from tracts they do not own.

• Rule of Capture does not apply because: (1) thegeophysical characteristics of the formationactually inhibit the natural drainage underlying therule of capture, (2) production from multiple drillsitetracts is involved, and (3) the fractures contributingto production are not all adjacent to any singledrillsite.


Failure of Title

Medusa Unit 839 Acres Luecke Tracts 268 acres 31% Drillsite Tracts 83 ac 10% Required 60%

Hayes Unit 346 Acres Luecke Tracts 114 acres 32% Required 60%

Browning Case

Luecke

Luecke

Luecke

Luecke

●Wellbore

Hays Drillsite

●Wellbore

Medusa Drillsite

LueckeLuecke

•Browning• Court considered:

• (1) Lessees should not be allowed to ignore anti-dilution provisions with impunity, and (2) Theimmense benefits that have accompanied the adventof horizontal drilling, including the reduction of wasteand the more efficient recovery of hydrocarbons:

• "Draconian punitive damages for a lessee’s failure tocomply with applicable pooling provisions could result inthe curtailment of horizontal drilling. We decline to applylegal principles appropriate to vertical wells that are soblatantly inappropriate to horizontal wells and woulddiscourage the use of this promising technology. Thebetter remedy is to allow the offended lessors to recoverroyalties as specified in the lease, compelling adetermination of what production can be attributed totheir tracts with reasonable probability. "


Failure of Title

• Browning• Court:

• Remanded for determination of damages.

• While the result in Browning may well limit thedamages caused by a failure of title in a JOAcontext, the question is whether any paymentsto the Lueckes, over and above what theywould have received under the unit allocationformula, will be charged to the joint account orto the party who contributed the failed leaseunder Article IV.B.1.(a)


Failure of Title

36

Failure of Title• But what if the Operator is the one that

contributed the failed lease?

• Recent opinion casts doubt on whether theoperator will be treated in the same way as anyother WIO:

• Reeder v. Wood County Energy, LLC.• Reeder, an individual, was the operator under a 1989

form of JOA.

• The wells covered by the JOA needed expensive repairsbut the working interest owners (“WIOs”) refused to pay.

• Reeder, as operator, spent his own money trying topreserve the wells but, ultimately, the RRC suspendedproduction from the wells.

• The WIOs sued Reeder for damages for failing tomaintain production in paying quantities, for lost leasesand loss of the unit.


37

• Operator contributed the leases.• Reeder case.

• Clause at issue: Article V.A., l. 11-13:• "Operator shall conduct its activities under this agreement as a

reasonable prudent operator, in a good and workmanlikemanner, with due diligence and dispatch, in accordance withgood oilfield practice, and in compliance with applicable lawand regulation, but in no event shall it have any liability asOperator to the other parties for losses sustained or liabilitiesincurred except as may result from gross negligence or willfulmisconduct."

• Clause in 1982 and earlier JOAs:• "It shall conduct all such operations in a good and workmanlike

manner, but it shall have no liability as Operator to the otherparties for losses sustained or liabilities incurred, except suchas may result from gross negligence or willful misconduct.

• Compare underlines.

Failure of Title


38

• Reeder case.

• Texas Supreme Court held that the changebroadened the protection of operators and exemptsthe operator from liability for its activities unless itsliability-causing conduct is due to gross negligenceor willful misconduct.

• Court did not define "activities."

• So, title failure on lease may not make the operatorliable to "bear alone the entire loss."

• Can revise exclulpatory clause:• Provided, however, that the foregoing limitation of liability shall

apply only to a breach of the duties set out in the precedingsentence and shall not apply to any other claims betweenOperator and the Non-Operators for breach of this Agreement orany provisions of any exhibit to this Agreement.

Failure of Title


•Seagull case• Seagull was Operator. Eland was a former WIO in anoffshore lease that had assigned its interests in lease– shortly before plugging and abandonment costswere to be incurred. Eland’s assignee declaredbankruptcy. Operator sued. Texas Supreme Courtheld that JOA language on transfer not enough torelease party from obligations incurred afterassignment.

• All WIOs who assign all interest in leases subject toJOA remain liable for future costs incurred unless geta specific release.

• Significant future liabilities if industry has downturn.

39

Transfer of Interest


40

Transfer of Interest• Seagull v. Eland

• The JOA at issue was a customized offshore JOA.

• After examining various provisions, the court

concluded that "Nowhere do they mention the

subject of release or the consequences which are to

follow the assignment of a working interest. These

subjects are, however, mentioned elsewhere in the

agreement…" and "The operating agreement simply

does not explain the consequences of an

assignment of a working interest to a third party."


41

• Seagull case.

• 1989 JOA Language in Article VIII.D.:• Every sale, encumbrance, transfer or other disposition made by any

party shall be made expressly subject to this agreement and shall bemade without prejudice to the right of the other parties, and anytransferee of an ownership interest in any Oil and Gas Lease or Interestshall be deemed a party to this agreement as to the interest conveyedfrom and after the effective date of the transfer of ownership; provided,however, that the other parties shall not be required to recognize anysuch sale, encumbrance, transfer or other disposition for any purposehereunder until thirty (30) days after they have received a copy of theinstrument of transfer or other satisfactory evidence thereof in writingfrom the transferor or transferee. No assignment or other disposition ofinterest by a party shall relieve such party of obligations previouslyincurred by such party hereunder with respect to the interesttransferred, including without limitation the obligation of a party to payall costs attributable to an operation conducted hereunder in whichsuch party has agreed to participate prior to making such assignment,and the lien and security interest granted by Article VII.B. shall continueto burden the interest transferred to secure payment of any suchobligations."



42

• Seagull case.• No express release language.

• Several implications but not certain. See p. 27.

• Need to add express release language as to futureobligations incurred but preserve liability for priorobligations.

• Possible language:

• A sale of all (or a proportionate part) of one party’sinterest in the Contract Area acts as a release of anyclaims, obligations or liabilities accruing after the effectivedate of the sale except as to any interest retained by theassigning party. The Parties intend to reject theconclusion reached in the case of Seagull Energy E&P,Inc. v. Eland Energy, Inc., 207 S.W.3d 342 (Tex. 2006).



Maintenance of Uniform Interests


• Article VIII.D.:

• “For the purpose of maintaining uniformity ofownership in the Contract Area in the Oil and GasLeases, Oil and Gas Interests, wells, equipmentand production covered by this agreement no partyshall sell, encumber, transfer or make otherdisposition of its interest in the Oil and Gas Leasesand Oil and Gas Interests embraced within theContract Area or in wells, equipment andproduction unless such disposition covers either:• 1. the entire interest of the party in all Oil and Gas

Leases, Oil and Gas Interests, wells, equipment andproduction; or

• 2. an equal undivided percent of the party’s presentinterest in all Oil and Gas Leases, Oil and Gas Interests,wells, equipment and production in the Contract Area.”

43

Maintenance of Uniform Interests

44

•Lack of specific remedies in JOA for violationof UMI requirement.

• Must show damages.

• Valence case

• Exxon farmed out in violation of the UMI.

• Valence put to a non-consent election by farmee whenzones could have been reached from existing wells.

• Exxon found liable for non-consent penalty that Valencesuffered.


Preferential Purchase Rights.


•Article VIII.F. Clause is optional and most,but not all parties delete it, p. 29.

•First Issue:

• What interests are covered?

• Case law applied provision to ORRI.

• Clause specifically excludes transfer to sub or majorityowned company.

• But if used as a device to avoid pref right, what then?

• Example: create sub and transfer ½ interest to sub thensell sub to 3rd party.

Preferential Purchase Rights.

46

• Package sales

• Offers to purchase are rarely limited to asingle JOA.

• Case law:• Properties must be offered even if the package

includes properties not subject to the pref rights.

• Holder of the pref right not required to acceptother interests in order to exercise pref right (nota JOA case).

• Pref right holder must give selling party its intentto exercise subject to objection to the inclusionof other properties.


H. Martin Gibson

Dentons US LLP2000 McKinney Avenue

Suite 1900

Dallas, Texas 75201-1585 USA

[email protected]

Thank you.

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Documents

The JOAAs A Title Document€¦ · • Co-tenancy rights under state law are substantially modified by the JOA. • A cross-conveyance changes the royalty burdens so that WIOs contributing