Joint Operations How They Come About

1
Joint Operations How They Come About

• Risk Sharing Joint from the beginning
• Unitization Separate properties combined after
  reserves discovered
• Pooling - Separate properties combined before
  reserves discovered

2
Joint Operations

• Nature of oil gas operations
• High risk business
• Spread risk through taking less than 100 of WI
• One WI owner serves as the operator of the lease
• Legal arrangements
• Joint venture of undivided interests
• Legal partnership
• Jointly owned corporation

3
Operators Duties

• Manages the day-to-day activities of the lease
• Pays all of the costs of exploration,
  development, and operation of the joint interest
  property
• Sends a bill to all non-operators who own an
  interest in the property
• Non-operators vote on all major expenditures

4
Joint Operating Agreement (JOA)

• Typical agreement is AAPL Form 610
• This is a contract between the operator and the
  non-operators.
• The language in the model form may be changed
  before all parties sign the agreement.

5
JOA Article 1 - Definitions

• This section of the JOA defines the terms as used
  in the agreement
• The terms are fairly standard and generally this
  artcile causes no problems.

6
JOA Article 2 - Exhibits

• This article lists various exhibits that are
  attached and incorporated into the JOA.
• Some of the more important ones are
• Description of lands subject to the agreement
• Names, addresses, phone numbers, etc. of parties
  to the agreement
• Percentages of expenses and revenues of parties
  to the agreement
• Accounting procedures

7
JOA Article 3 Interests of Parties

• Sets out interests of the parties to the
  agreement.
• Specifically references the attached exhibit that
  specifies how revenue and expenses will be shared.

8
JOA Article 4 Titles

• Provides for title examination for the drillsite
  of any proposed well
• Operator responsible for preparation and
  recording of pooling designations
• Costs incurred by operator for hearings before
  government agencies is chargeable to the joint
  account

9
JOA Article 5 Operator

• Designates the operator and the rights and
  responsibilities of the operator.
• Provides for the resignation or removal of the
  operator
• Selection of successor operator
• Includes reports to be given to non-operators.
• Provides for joint interest audits by
  non-operators

10
JOA Article 6 Drilling Development

• Specifies the drilling of the initial well
• Provides that if any of the WI owners want to
  drill additional wells, that they give notice to
  the other WI owners and allow them 30 days to
  decide whether or not to participate.
• Provides for non-consent and penalty to be
  recouped before non-consent party receives
  revenue

11
JOA Article 7 Expenditures and Liabilities of
Parties

• Specifies that liabilities are several and not
  joint. That is, each party is liable only for
  his percentage.

12
JOA Article 8 Acquisition, Maintenance or
Transfer of Interest

• A party who wished to surrender his portion of
  the lease gives other parties notice.
• Lease is surrendered only if all parties consent.
• The non-consenters get the interest of the party
  who wished to surrender the lease.

13
JOA Article 9 Tax Election

• The default is to elect out of Subchapter K of
  the Internal Revenue Code. If the parties wish
  to have the joint venture taxed as a partnership,
  this provision will have to be modified.