28. The 2015 JOA: Art. VI.C. to VI.H
2015 JOA Form; Art. VI.C.
?C.? Completion of Wells; Reworking and Plugging Back:
?????????? 1. Completion: Without the consent of all parties, no well shall be drilled, Deepened or Sidetracked, except any well drilled, Deepened or Sidetracked pursuant to the provisions of Article VI.B.2. of this agreement.? Consent to the drilling, Deepening or Sidetracking shall include:
?????????? ???????? Option No. 1: All necessary expenditures for the drilling, Deepening or Sidetracking, testing, Completion and equipping of the well, including tankage and/or surface facilities.
?????????? ???????? Option No. 2: All necessary expenditures for the drilling, Deepening or Sidetracking and testing of a Vertical Well. When such well has reached its authorized depth, and all logs, cores and other tests have been completed, and the results thereof furnished to the parties, Operator shall give immediate notice to the Non-Operators having the right to participate in a Completion attempt whether or not Operator recommends attempting to Complete the well, together with Operator's AFE for Completion costs if not previously provided.? The parties receiving such notice shall have forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) in which to elect by delivery of? notice to Operator to participate in a recommended Completion attempt or to make a Completion proposal with an? accompanying AFE.? Operator shall deliver any such Completion proposal, or any Completion proposal conflicting
with Operator's proposal, to the other parties entitled to participate in such Completion in accordance with the procedures specified in Article VI.B.7.? Election to participate in a Completion attempt shall include consent to all necessary expenditures for the Completing and equipping of such well, including necessary tankage and/or surface facilities but excluding any stimulation operation not contained on the Completion AFE.? Failure of any party receiving such notice to reply within the period above fixed shall constitute an election by that party not to participate in the cost of the Completion attempt; provided, that Article VI.B.7. shall control in the case of conflicting Completion proposals.? If one or more, but less than all of the parties, elect to attempt a Completion, the provision of Article VI.B.2. hereof (the phrase "Reworking, Sidetracking, Deepening, Recompleting or Plugging Back" as contained in Article VI.B.2. shall be deemed to include "Completing") shall apply to the operations thereafter conducted by less than all parties; provided, however, that Article VI.B.2. shall apply separately to each separate Completion or Recompletion attempt undertaken hereunder, and an election to become a Non-Consenting Party as to one Completion or Recompletion attempt shall not prevent a party from becoming a Consenting Party in subsequent Completion or Recompletion attempts regardless whether the Consenting Parties as to earlier Completions or Recompletion have recouped their costs pursuant to Article VI.B.2.; provided further, that any recoupment of costs by a Consenting Party shall be made solely from the production attributable to the Zone in which the Completion attempt is made.? Election by a previous Non-Consenting party to participate in a subsequent Completion or Recompletion attempt shall require such party to pay its proportionate share of the cost of salvable materials and equipment installed in the well pursuant to the previous Completion or Recompletion attempt, insofar and only insofar as such materials and equipment benefit the Zone in which such party participates in a Completion attempt.
?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.
?????????????2. Rework, Recomplete or Plug Back: No well shall be Reworked, Recompleted or Plugged Back except a well Reworked, Recompleted, or Plugged Back pursuant to the provisions of Article VI.B.2. of this agreement.? Consent to the Reworking, Recompleting or Plugging Back of a well shall include all necessary expenditures in conducting such operations and Completing and equipping of said well, including necessary tankage and/or surface facilities.
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?Commentary:
?Article VI.C.1: Completion
?Article VI.C.1 (begins at line 65 on page 13) was added in the 610-2015 Form. It specifies that without the consent of all parties, no well can be drilled, deepened, or sidetracked except with notice of the proposal under Article VI.B.2. If a party consents to drilling, deepening, or sidetracking, that party is also deemed to have approved one of two options that the parties must select when negotiating the 610-2015 Form. These are the options:
? One (line 68 on page 13). This option provides that consent to the operation includes agreeing to all necessary expenditures for the operation, including:
?????????? ? costs for completing and equipping the well; and
? tankage and surface facility costs.
?? Two (line one on page 14). This option provides that consent to the drilling, deepening, or sidetracking of a vertical well includes agreeing to testing the well. Option two also states that once the well has reached its authorized depth and all information has been sent to the parties:
? ? the operator must give immediate notice to the appropriate non-operators that they can participate in a completion attempt. The notice must include an AFE for completion costs, including tankage and surface facilities costs, but excluding stimulation operation costs, and a statement whether the operator recommends attempting to complete the well;
? ? each party receiving the completion notice has 48 hours (not counting a Saturday, a Sunday, or a legal holiday) to give written notice of whether it opts to complete or provide its own completion proposal with an AFE; and
? ? the operator then delivers any completion proposal conflicting with the operator's initial proposal to the other consenting parties. The procedures in Article VI.B.2 apply to determine which proposal to choose. (See Article VI.B.2(a): Determination of Participation.)
?A party's failure to reply with an option choice within the specified period is an election not to participate. If less than all parties elect to participate, the non-consent election process of Article VI.B.2 applies. Specifically:
? The Article VI.B.2 process applies separately to each completion and recompletion attempt.
? An election:
? ? regarding one completion or recompletion attempt does not bind a party in a later attempt regardless of whether the consenting parties in an earlier completion or recompletion have recouped their costs.
? ? Recoupment only comes from production attributable to the zone where the completion attempt is made; and
? ? by a previous non-consenting party to participate in a later completion or recompletion requires that party to pay its share of previously installed salvageable material and equipment (to the extent the materials and equipment benefit the zone where the completion is attempted).
?To make a proper election between the two options, the parties should check the box for the selected option and strike through the other option.
?Well Completion in Vertical Wells
?Vertical wells are usually drilled so that when total depth is reached, the parties must decide whether to complete the well.? This is why a separate completion election is provided.
Well Completion in Horizontal Wells
?With horizontal wells, the drilling and completion are often part of one continuous operation so there is no specific event or time for electing whether to complete. In the 610-2015 Form, an election to drill a horizontal well is also an election to complete, equip, and stimulate the well, all of which should be provided for in the original proposal.
?In some cases, the parties may want to provide a completion election for a horizontal well. This requires:
? ? Selecting option two (and striking through option one).
? ? Inserting an election provision in option two that is triggered when the well reaches the point where operations for drilling:
? ? the vertical component are substantially complete; and
? the horizontal drainhole component have penetrated the objective zone.
?If adding an election option for a horizontal well in option two, the parties should amend the definition of completion in Article I.C to include the drilling of the horizontal drainhole component or the lateral of a horizontal well after penetration of the objective zone.
?Article VI.C.2: Rework, Recomplete, or Plug Back
?Article VI.C.2 (lines 27 to 30 on page 14) provides that:
? ? The reworking, recompleting, or plugging back of a well must only be undertaken under Article VI.B.2 (see Article VI.B.2(c): Reworking, Recompleting, or Plugging Back).
? ? Consenting to the reworking, recompleting, or plugging back of a well includes consenting to all necessary expenditures to:
? ? conduct the operation; and
? complete and equip the well (including tankage and surface facilities costs).
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?2015 JOA Form; Art. VI.D.
?D.? Other Operations:
?????????? Operator shall not undertake any single project reasonably estimated to require an expenditure in excess of ???????????? ??????????? ???????? ?Dollars ($? ?? ) except in connection with the drilling, Sidetracking, Reworking, Deepening, Completing, Recompleting or Plugging Back of a well that has been previously authorized by or pursuant to this agreement; provided, however, that, in case of explosion, fire, flood or other sudden emergency, whether of the same or different nature, Operator may take such steps and incur such expenses as in its opinion are required to deal with the emergency to safeguard life and property but Operator, as promptly as possible, shall report the emergency to the other parties.? If Operator prepares an AFE for its own use, Operator shall furnish any Non-Operator so requesting an information copy thereof for any single project costing in excess of ????? ?Dollars ($???? _______).? Any party who has not relinquished its interest in a well shall have the right to propose that Operator perform ?a Workover operation or undertake the installation of artificial lift equipment or? to conduct additional work with respect to a well drilled hereunder or other similar project? reasonably estimated to require an expenditure in excess of the amount first set forth above in this Article VI.D. (except in connection with an operation required to be proposed under Articles VI.B.1. or VI.C.1. Option No. 2, which shall be governed exclusively by those Articles).? Operator shall deliver such proposal to all parties entitled to participate therein.? If within thirty (30) days thereof Operator secures the written consent of any party or parties owning at least ___??% of the interests of the parties entitled to participate in such operation, each party having the right to participate in such project shall be bound by the terms of such proposal and shall be obligated to pay its proportionate share of the costs of the proposed project as if it had consented to such project pursuant to the terms of the proposal.? Facilities other than those exclusively servicing and benefiting the Contract Area shall be governed by separate agreement.?
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?Commentary:
?Article VI.D: Other Operations
?Article VI.D (lines 31 to 46 on page 14) addresses various operations issues and provides:
? ? A mechanism to set a maximum amount the operator can spend on a single project before seeking the parties' approval for an expenditure.
? ? An approval exemption for:
? ? operations already approved under the JOA, which likely includes Articles VI.A, VI.B.2(c), VI.B.4, VI.B.5, VI.B.6, and VI.C.1 (see Article VI.A: Initial Well, Article VI.B.2(c): Reworking, Recompleting, or Plugging Back, Article VI.B.4: Deepening, Article VI.B.5: Sidetracking, Article VI.B.6: Extension, and Article VI.C.1: Completion); and
? ? sudden emergencies of any kind, including explosion, fire, flood, and operations to safeguard life and property. The operator must report an emergency to the other parties as promptly as possible.
? ? That the operator must give requesting non-operators a copy of any AFE it prepares for its own use regarding a single project costing more than a specified amount.
? ? That a party not relinquishing its interest in a well may propose:
? ? that the operator perform a workover;
? that the operator install artificial lift equipment; or
? additional work on a well drilled under the JOA or a similar project that costs more than a specified amount.
? ? That the operator must submit a proposal to all parties entitled to participate, and if a specified percentage provide written consent, all parties entitled to participate must pay their share.
? That a separate agreement must govern any facilities not benefiting the contract area.
?Article VI.D does not apply to an operation required to be proposed under Articles VI.B.1 or VI.C.1 (option two) (see Article VI.B.1: Proposed Operations and Article VI.C.1: Completion).
?Saltwater Disposal Wells
?Unlike prior versions of the 610 form, Article VI.D in the 610-2015 Form includes workovers and artificial lift equipment but does not address saltwater disposal wells (SWD wells) or ancillary production facilities. If the costs of the SWD wells and ancillary production facilities are to be jointly owned, the parties must enter into a separate agreement. For a discussion of SWD wells, see Westlaw’s Practice Note, Saltwater Disposal Agreements (TX).
?For a standard form of saltwater disposal agreement and surface lease, see Westlaw’s Standard Documents, Saltwater Disposal Agreement and Surface Lease (Pro-Surface Owner) (TX) and Saltwater Disposal Agreement and Surface Lease (Pro-Operator) (TX).
?Downstream Projects
?The 1989 version of the 610 form JOA included a provision excluding downstream projects from the projects that can be proposed. That provision was omitted in the 610-2015 Form. Because the construction of downstream facilities has been a point of contention in many JOAs, the parties should consider including a downstream facilities provision in Article XVI (see Article XVI: Other Possible Provisions).
?Legal Challenges to Article VI.D.
?Although the first sentence of Article VI.D states that the operator cannot undertake any project exceeding a specified cost without authorization under the JOA, when this provision was challenged, a Texas court held that the operator:
? ? Was not prohibited from undertaking the operation.
? Was prohibited from charging it to the non-operators.
? May claim reimbursement using cotenancy rules.
(See Cone v. Fagadau Energy Corp., 68 S.W.3d 147 (Tex. App.—Eastland 2001, pet. denied).)
?
?2015 JOA Form; Art. VI.E.
?E.? Deviations from Approved Proposals:
?If Operator, in its reasonable judgment, deviates from an approved proposal based upon information derived from facts and circumstances determined subsequent to the commencement of the operations relating to such proposal (including, without limitation, revision of the originally proposed Completion staging and design), such deviations in and of themselves will not result in liability of the Operator to the Parties.
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?Commentary:
?Article VI.E: Deviations from Approved Proposals
?Article VI.E (lines 47 to 50 on page 14) is new to the 610-2015 Form. It provides that the operator, using reasonable judgment based on information derived after operations commence, may deviate from an approved operations proposal without incurring liability to the parties. The deviation may revise the original proposed completion, staging, and design.
2015 JOA Form; Art. VI.F.
?????????? 1.? Abandonment of Dry Holes: Except for any well drilled, Deepened or Sidetracked pursuant to Article VI.B., any well which has been drilled, Deepened or Sidetracked under the terms of this agreement and is proposed to be completed as a dry hole shall not be plugged and abandoned without the consent of all parties owning an interest in the well at the time of the dry hole completion proposal.? Should Operator, after diligent effort, be unable to contact any party, or should any party fail to reply within thirty (30) days or, if a drilling rig is on location, within forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) after delivery of notice of the proposal to plug and abandon such well, such party shall be deemed to have consented to the proposed abandonment.? All such wells shall be plugged and abandoned in accordance with applicable regulations and at the cost, risk and expense of the parties who participated in the cost of drilling or Deepening such well.? Any party who objects to plugging and abandoning such well by notice delivered to Operator within thirty (30) days or forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays), whichever is applicable, after delivery of notice of the proposed plugging shall take over the well as of the end of such thirty (30) day or forty-eight (48) hour notice period, whichever is applicable, and conduct further operations in search of Oil and/or Gas subject to the provisions of Article VI.B.; failure of such party to provide proof reasonably satisfactory to Operator of its financial capability to conduct such operations or to take over the well within such period or thereafter to conduct operations on such well or plug and abandon such well shall entitle Operator to retain or take possession of the well and plug and abandon the well.? The party taking over the well shall indemnify Operator (if Operator is an abandoning party) and the other abandoning parties against liability for any further operations conducted on such well except for the costs of plugging and abandoning the well and restoring the surface, for which the abandoning parties shall remain proportionately liable.
?????????? 2. Abandonment of Wells That Have Produced: Except for any well in which a Non-Consent operation has been conducted hereunder for which the Consenting Parties have not been fully reimbursed as herein provided, any party may propose that a well which has been completed as a producer be plugged and abandoned; provided, however, that such a well may not be plugged and abandoned without the consent of all parties.? If all parties consent to such abandonment, the well shall be plugged and abandoned in accordance with applicable regulations and at the cost, risk and expense of all the parties hereto.? Failure of a party to reply within sixty (60) days of delivery of notice of proposed abandonment shall be deemed an election to consent to the proposal.? If, within sixty (60) days after delivery of notice of the proposed abandonment of any well, all parties do not agree to the abandonment of such well, those wishing to continue its operation from the Zone then open to production shall be obligated to take over the well as of the expiration of the applicable notice period and shall indemnify Operator (if Operator is an abandoning party) and the other abandoning parties against liability for any further operations on the well conducted by such parties.? Failure of such party or parties to provide proof reasonably satisfactory to Operator of their financial capability to conduct such operations or to take over the well within the required period or thereafter to conduct operations on such well shall entitle operator to retain or take possession of such well and plug and abandon the well.
?????????? Parties taking over a well as provided herein shall tender to each of the other parties its proportionate share of the value of the well's salvable material and equipment, determined in accordance with the provisions of Exhibit "C," less the estimated cost of salvaging and the estimated cost of plugging and abandoning and restoring the surface; provided, however, that in the event the estimated plugging and abandoning and surface restoration costs and the estimated cost of salvaging are higher than the value of the well's salvable material and equipment, each of the abandoning parties shall tender to the parties continuing operations their proportionate shares of the estimated excess cost.? Each abandoning party shall assign to the non-abandoning parties, without warranty, express or implied, as to title or as to quantity, or fitness for use of the equipment and material, all of its interest in the wellbore of the well and related equipment, together with its interest in the Leasehold insofar and only insofar as such Leasehold covers the right to obtain production from that wellbore in the Zone then open to production.? If the interest of the abandoning party is or includes an Oil and Gas Interest, such party shall execute and deliver to the non-abandoning party or parties an oil and gas lease, limited to the wellbore and the Zone then open to production, for a term of one (1) year and so long thereafter as Oil and/or Gas is produced from the Zone covered thereby, such lease to be on the form attached as Exhibit "B."? The assignments or leases so limited shall encompass the Drilling Unit upon which the well is located. The payments by, and the assignments or leases to, the assignees shall be in a ratio based upon the relationship of their respective percentage of participation in the Contract Area to the aggregate of the percentages of participation in the Contract Area of all assignees.? All such assigned interests shall be free and clear of Subsequently Created Interests. There shall be no readjustment of interests in the remaining portions of the Contract Area.
?????????? Thereafter, abandoning parties shall have no further responsibility, liability, or interest in the operation of or production from the well in the Zone then open other than the royalties retained in any lease made under the terms of this Article.? Upon request, Operator shall continue to operate the assigned well for the account of the non-abandoning parties at the rates and charges contemplated by this agreement, plus any additional cost and charges which may arise as the result of the separate ownership of the assigned well.? Upon proposed abandonment of the producing Zone assigned or leased, the assignor or lessor shall then have the option to repurchase its prior interest in the well (using the same valuation formula) and participate in further operations therein subject to the provisions hereof.
?????????? 3. Abandonment of Non-Consent Operations: The provisions of Article VI.F.1. or VI.F.2. above shall be applicable as between Consenting Parties in the event of the proposed abandonment of any well excepted from said Articles; provided, however, no well shall be permanently plugged and abandoned unless and until all parties having the right to conduct further operations therein have been notified of the proposed abandonment and afforded the opportunity to elect to take over the well in accordance with the provisions of this Article VI.F.; and provided further, that Non-Consenting Parties who own an interest in a portion of the well shall pay their proportionate shares of abandonment and surface restoration cost for such well as provided in Article VI.B.2.(b).
?
??Commentary:
?Article VI.F: Abandonment of Wells
?Article VI.F (begins at line 51 on page 14) addresses the abandonment of both dry holes and wells that have previously produced and provides well abandonment protocol.
?Abandoning Dry Holes
?Article VI.F states that:
? ? Except when operations are performed under Article VI.B, any well drilled, deepened, or sidetracked under Article V.B that is later proposed to be completed as a dry hole cannot be plugged and abandoned without the consent of all parties then owning an interest in the well. This means all JOA parties must approve plugging and abandoning any well in which all parties participated.
? If the operator cannot contact a party or a party fails to reply within 30 days (or 48 hours if a rig is on location), the unreachable or nonresponsive party is deemed to have consented to plug and abandon the well.
? ? If plugging and abandoning is approved for a particular well, that well is plugged and abandoned at the risk and cost of the parties participating in the drilling or deepening operation.
? ? Any notified party objecting must inform the operator of the objection within 30 days of notice (or within 48 hours if a rig is on location). The objecting parties may then:
? ? take over the well as of the end of the 30-day or 48-hour period; and
? ? conduct further operations in search of hydrocarbons subject to Article VI.B.
? ? The party taking over the well must indemnify the abandoning parties (including the operator, if applicable) against liability for further well operations, except the proportionate costs of plugging and abandoning and related restoration. The indemnifying party's financial strength determines the usefulness of this provision.
? ? The operator may take possession of the well and plug and abandon it if the objecting party fails to:
?
? provide the operator with reasonably satisfactory proof of its financial capability to conduct the operation;
? timely take over the well; or
? plug and abandon the well.
?To address the possibility that an objecting party may take over dry hole operations, the parties should consider:
? ? Strengthening the provision to prevent small owners from taking over a high-risk well (H2S for example) which may put the other parties at risk if litigation occurs.
? ? The risks to the other parties if the objecting party defaults and does not plug and abandon the well.
?The reference to Article VI.B in the first clause of Article VI.F is likely intended to refer to Article VI.B.2. To add clarity, the parties should consider amending the JOA by adding that specific reference.
?Abandoning Wells That Have Produced
?Article VI.F of the 610-2015 Form applies to the plugging of wells that have produced. It states that:
? ? Any party may propose that a well that has produced be plugged and abandoned if there has not been a nonconsent operation at the well for which the consenting parties have not been fully reimbursed. Proceeding with the operation requires all parties to consent after notice is given. If approved, the well is plugged and abandoned at the parties' cost and risk.
? ? Within 60 days of notice of the proposal to plug and abandon a well:
?
? an objecting party must inform the operator of its objection; and
? a party's failure to respond is deemed an election to consent to the operation.
? ? If the proposal does not receive unanimous consent, the JOA parties desiring to continue operations from the open zone must:
? ? take over the well when the notice period expires; and
? indemnify the abandoning parties (including the operator, if applicable) against liability for further well operations. The 610-2015 Form does not address what happens if a party objecting to abandonment does not desire to continue operations until there is production but wants to, for example, use the wellbore to drill to a deeper zone or complete in a shallower zone.
? ? If the objecting parties cannot provide the operator with reasonably satisfactory proof of its financial capability to conduct the operations or fail to timely take over the well, the operator may take possession of the well for plugging and abandonment purposes. The form does not address what happens if the operator declines to take over for plugging purposes. Parties should consider whether they need to provide a solution for this scenario in Article XVI.
?Well Takeovers
?When parties objecting to a plugging and abandonment proposal take over a well:
? ? The parties assuming control must pay each of the other parties their proportionate share of the value of the well's salvageable material and equipment as determined by Exhibit C (see Exhibit C: Accounting Procedure). This amount is reduced by the estimated costs of plugging and abandoning the well and restoring the surface. If the plugging, abandoning, and restoration costs exceed the value of the well's salvageable material and equipment, the abandoning parties must pay the continuing parties their proportionate share of the difference.
? ? Each abandoning party must assign its interest in the wellbore, related equipment, and leasehold to the continuing parties:
? ? without warranty of any kind; and
? only to the extent the leasehold covers the right to obtain production from that wellbore in the zone that is open to production.
? ? If the abandoning party contributed minerals and not a lease, the abandoning party must sign and deliver an oil and gas lease, which is limited to the wellbore and the open zone, for a one-year term with the usual habendum clause.? The lease must be in the form attached as Exhibit B (see Exhibit B: Form of Lease).
? ? The assignment or lease:
? ? encompasses the drilling unit (the area fixed to drill one well) on which the well is located; and
? must be free of all SCIs (see Article III.C: Subsequently Created Interests).
? ? There is no readjustment of interests in the remainder of the contract area.
? ? Payments and assignments to the non-abandoning parties are in a ratio based on the relationship of each non-abandoning party's respective percentage of participation to the total percentages of participation of all assignees.
? ? When the assignments are complete, the abandoning parties no longer have liability under the JOA for or interest in what was abandoned other than a right to royalty payments if an oil and gas interest was leased to the non-abandoning parties.
?? If requested by the continuing parties, the operator must continue to operate the assigned well at the JOA rates and charges, plus additional costs incurred resulting from the separate ownership.
?? If the continuing parties later propose to abandon the assigned zone, all assignors or lessors have the option to repurchase their interest using the same valuation formula. The repurchase provision has minimal details addressing the precise interest to be reassigned and the time to give notice and make an election.
?Well Takeover Issues
?Because of the complexity of oil & gas regulations, the term “drilling unit” in Article VI.F may not correspond to the acreage actually assigned to the well for regulatory purposes. For example, under RRC rules, on a well's completion, the operator assigns acreage (known as a proration unit) to a well to obtain a production allowable to produce the well. ?Proration units can differ from the acreage assigned to the well at the time of drilling. For wells in Texas, the parties should consider:
? ? Adding a provision to Article XVI.
? ? Deleting the drilling unit reference in Article VI.F.
? ? Including a statement that the acreage to be assigned by the abandoning parties is the acreage assigned to the well for production purposes in the most recent RRC proration unit filing.
?For more information on regulation of drilling and production in Texas, see Westlaw’s PracticeNote, Railroad Commission of Texas Regulation of Oil & Gas Drilling and Production.
?Abandoning Non-Consent Operations
?Article VI.B.3 applies to abandonment of non-consent wells. It provides that Articles VI.F.1 or VI.F.2 apply to all consenting parties contemplating abandonment of a non-consent well. ?However, no non-consent well can be permanently plugged and abandoned unless all parties having a right to participate have been notified of the proposed abandonment and given the opportunity to take over the well.
The non-consenting parties owning an interest in the well must pay their share of the abandonment and surface restoration cost for the well under Article VI.B.2(b).
?
2015 JOA Form; Art. VI.G.
?G.? Termination of Operations:
?????????? Upon the commencement of an operation for the drilling, Reworking, Sidetracking, Plugging Back, Deepening, testing, Completion, Extension or plugging of a well, including but not limited to the Initial Well, such operation shall not be terminated without consent of parties bearing ??????% of the costs of such operation; provided, however, that in the event granite or other practically impenetrable substance or condition in the hole is encountered which renders further operations impractical, Operator may discontinue operations and give notice of such condition in the manner provided in Article VI.B.1, and the provisions of Article VI.B. or VI.F. shall thereafter apply to such operation, as appropriate.
?
?Commentary:
?Article VI.G: Terminating Operations
?Article VI.G (lines 47 to 51 on page 15) covers termination for:
? ? Drilling and deepening.
? Reworking and sidetracking.
? Plugging back or completion.
? Testing or extending.
? Plugging a well, including the initial well.
?Once an operation commences, it cannot be terminated unless approved by a specified percentage of the interest of the cost-bearing parties.
?If granite or another practically impenetrable substance or condition makes further operations impracticable, the operator may discontinue operations without a vote but must give notice as provided in Article VI.B.1 (see Article VI.B.1: Proposed Operations). The operation then either:
? ? Continues under Article VI.B., or
? Is abandoned.
?
?2015 JOA Form, Art. VI.H.
?H.? Taking Production in Kind:
?????????? ?????????????????? Option No. 1: Gas Balancing Agreement Attached
?
????????? Each party shall take in kind or separately dispose of its proportionate share of all Oil and Gas produced from the Contract Area, exclusive of production which may be used in development and producing operations and in preparing and treating Oil and Gas for marketing purposes and production unavoidably lost.? Any extra expenditure incurred in the taking in kind or separate disposition by any party of its proportionate share of the production shall be borne by such party.? Any party taking its share of production in kind shall be required to pay for only its proportionate share of such part of Operator's surface facilities which it uses.
?????????? Each party shall execute such division orders and contracts as may be necessary for the sale of its interest in production from the Contract Area, and, except as provided in Article VII.B., shall be entitled to receive payment directly from the purchaser thereof for its share of all production.
?????????? If any party fails to make the arrangements necessary to take in kind or separately dispose of its proportionate share of the Oil produced from the Contract Area, Operator shall have the right, subject to the revocation at will by the party owning it, but not the obligation, to purchase such Oil or sell it to others at any time and from time to time, for the account of the non-taking party.? Any such purchase or sale by Operator may be terminated by Operator upon at least ten (10) days written notice to the owner of said production and shall be subject always to the right of the owner of the production upon at least ten (10) days written notice to Operator to exercise at any time its right to take in kind, or separately dispose of, its share of all Oil not previously delivered to a purchaser. Any purchase or sale by Operator of any other party's share of Oil shall be only for such reasonable periods of time as are consistent with the minimum needs of the industry under the particular circumstances, but in no event for a period in excess of one (1) year.
??????????????? Any such sale by Operator shall be in a manner commercially reasonable under the circumstances but Operator shall have no duty to share any existing market or to obtain a price equal to that received under any existing market.? The sale or delivery by Operator of a non-taking party's share of Oil under the terms of any existing contract of Operator shall not give the non-taking party any interest in or make the non-taking party a party to said contract.? No purchase shall be made by Operator without first giving the non-taking party at least ten (10) days written notice of such intended purchase and the price to be paid or the pricing basis to be used.
?????????????????? All parties shall give timely written notice to Operator of their Gas marketing arrangements for the following month, excluding price, and shall notify Operator immediately in the event of a change in such arrangements. Operator shall maintain records of all marketing arrangements, and of volumes actually sold or transported, which records shall be made available to Non-Operators upon reasonable request.
?????????????????? In the event one or more parties' separate disposition of its share of the Gas causes split-stream deliveries to separate pipelines and/or deliveries which on a day-to-day basis for any reason are not exactly equal to a party's respective proportionate share of total Gas production available for sale to be allocated to it, the balancing or accounting between the parties shall be in accordance with any Gas balancing agreement between the parties hereto, whether such an agreement is attached as Exhibit "E" or is a separate agreement.? Operator shall give notice to all parties of the first sales of Gas from any well under this agreement.
?????????????????? ???????? ????????? Option No. 2: No Gas Balancing Agreement:
?????????? Each party shall take in kind or separately dispose of its proportionate share of all Oil and Gas produced from the Contract Area, exclusive of production which may be used in development and producing operations and in preparing and treating Oil and Gas for marketing purposes and production unavoidably lost.? Any extra expenditures incurred in the taking in kind or separate disposition by any party of its proportionate share of the production shall be borne by such party.? Any party taking its share of production in kind shall be required to pay for only its proportionate share of such part of Operator's surface facilities which it uses.
?????????? Each party shall execute such division orders and contracts as may be necessary for the sale of its interest in production from the Contract Area, and, except as provided in Article VII.B., shall be entitled to receive payment directly from the purchaser thereof for its share of all production.
?????????? If any party fails to make the arrangements necessary to take in kind or separately dispose of its proportionate share of the Oil and/or Gas produced from the Contract Area, Operator shall have the right, subject to the ?revocation at will by the party owning it, but not the obligation, to purchase such Oil and/or Gas or sell it to others at any time and from time to time, for the account of the non-taking party.? Any such purchase or sale by Operator may be terminated by Operator upon at least ten (10) days written notice to the owner of said production and shall be subject always to the right of the owner of the production upon at least ten (10) days written notice to Operator to exercise its right to take in kind, or separately dispose of, its share of all Oil and/or Gas not previously delivered to a purchaser; provided, however, that the effective date of any such revocation may be deferred at Operator's election for a period not to exceed ninety (90) days if Operator has committed such production to a purchase contract having a term extending beyond such ten (10) -day period.? Any purchase or sale by Operator of any other party's share of Oil and/or Gas shall be only for such reasonable periods of time as are consistent with the minimum needs of the industry under the particular circumstances, but in no event for a period in excess of one (1) year.
?????????? Any such sale by Operator shall be in a manner commercially reasonable under the circumstances, but Operator shall have no duty to share any existing market or transportation arrangement or to obtain a price or transportation fee equal to that received under any existing market or transportation arrangement.? The sale or delivery by Operator of a non-taking party's share of production under the terms of any existing contract of Operator shall not give the non-taking party any interest in or make the non-taking party a party to said contract.? No purchase of Oil and Gas and no sale of Gas shall be made by Operator without first giving the non-taking party ten days written notice of such intended purchase or sale and the price to be paid or the pricing basis to be used. Operator shall give notice to all parties of the first sale of Gas from any well under this agreement.
?????????? All parties shall give timely written notice to Operator of their Gas marketing arrangements for the following month, excluding price, and shall notify Operator immediately in the event of a change in such arrangements.? Operator shall maintain records of all marketing arrangements, and of volumes actually sold or transported, which records shall be made available to Non-Operators upon reasonable request.
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?Commentary:
?Article VI.H: Taking Production In-Kind
?Article VI.H (begins at line 52 on page 15) gives the parties an option to use a gas balancing agreement (GBA) by checking a box for one option and striking through the other. If the parties select option:
?? One (line 53 on page 15), they must use a GBA that is attached to the JOA (see Option One). For a discussion of natural gas balancing generally, see Practice Note, Natural Gas Balancing: Overview.
?? Two (line 12 on page 16), they must handle the production without a GBA (see Option Two).
?Option One
?Under this option, each party:
? ? Must take production in-kind, except for production used in operations and lost production.
? ? Must bear any extra expenditures for taking in-kind or separately disposing of its proportionate share, including its share of operator's surface facilities it uses.
? ? Must execute division orders and contracts as necessary for the sale of production.
? ? Is entitled to be paid directly by the purchaser of production unless the proceeds have been levied against under Article VII.B (see Article VII.B: Liens and Security Interests).
Most of the language in option one only applies to oil because a GBA is attached to the JOA. It states that:
? ? If a party fails to take in-kind or dispose of its share of oil, the operator may purchase or sell that oil on the non-taking party's account if:
? ? the right to purchase or sell oil may be revoked by the party owning the production;
? the operator may stop selling the oil on ten days' written notice to the owner; and
? the owner may exercise its right to take in-kind or separately dispose of the oil on ten days' written notice to the operator.
? ? A purchase or sale by the operator must be for a reasonable period, not more than one year, and consistent with the
minimum industry needs.
? ? A sale by the operator must be commercially reasonable, but it has no duty to:
? ? share any existing market; or
? get the non-taking party the same price the operator is receiving.
? ? The non-taking party has no interest in and is not a party to the contract under which the operator sells the non-taking party's production.
? ? If the operator decides to purchase the oil, it must give the non-taking party ten days' written notice of:
? ? the election to purchase; and
? the price or pricing basis to be used.
? ? Each party must give the operator written notice of the party's gas marketing arrangement for the coming month and inform the operator if the arrangement changes.
? ? The non-operator does not have to disclose to the operator the price at which the non-operator is selling its production.
? ? The operator must keep records of all gas marketing arrangements and volumes sold or transported. It must also:
? ? make the records available to all non-operators; and
? disclose the marketing arrangements (but not the price) of all the parties on any non-operator's reasonable request.
? ? If the separate disposition of gas causes split-stream deliveries to separate pipelines and these dispositions are not precisely equal to the parties' share of total production, the GBA controls the balancing.
? ? The operator must give notice to all parties (not only the consenting parties) of the first gas sales from any well.
?Option Two
?Option two is largely identical to option one, except that it applies to both oil and gas production and omits the balancing provision on page 16 (lines 7 to 11). Like option one, each party must:
? ? Take production in-kind, except for production used in operations and lost production.
? ? Bear any extra expenditures for taking in-kind or separately disposing of its proportionate share, including its share of operator's surface facilities it uses.
?Like option one, this option also states that any sale by the operator may be revoked by the party owning the production.? However, unlike option one, it provides that the operator may defer the election for up to 90 days if the operator has sold or agreed to transport the production under a contract extending beyond the ten-day period.
?Production
?Despite the mandatory language in both options, most JOA parties do not take production in-kind. They instead rely on the clause granting the operator the right (but not the obligation) to either:
? ? Purchase the oil or oil and gas, as applicable.
? ? Sell the production for the non-taking party's account.
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For a complete discussion of the 2015 JOA form, see Model Form of Onshore Oil & Gas Joint Operating Agreement AAPL 610-2015: Overview by Westlaw's Practical Law, Oil & Gas.
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