When Non-Operators Fail to Pay: Issues Arising under Joint Operations Gregory D. Russell and Webb I. Vorys Vorys, Sater, Seymour and Pease LLP Kentucky Mineral Law Conference October 20, 2016 Copyright 2016, Vorys, Sater, Seymour and Pease LLP. All Rights Reserved.
Appalachian Basin Development 2
Appalachian Basin Development 3
Relationship Between the Parties 4
Relationship Between the Parties 5
Relationship Between the Parties 6
Relationship Between the Parties 7
Relationship Between the Parties No written JOA? Oral JOA Implied JOA Terms Standard of conduct Statute of frauds 8
Relationship Between the Parties Statute of frauds KY: KRS 271.010 OH: ORC 1335.05 PA: 33 PS 1 et seq. WV: WVC 55-1-1 Agreement which cannot be performed within [1] year must be in writing But part performance 9
Relationship Between the Parties If no JOA, then what? Mining partnership Joint venture Trust Agency Co-tenant Combination of the above 10
Joint Operating Agreement (A.A.P.L. Form 610) 1956, Art. 22: The liability of the parties shall be several, not joint or collective. Each party shall be responsible only for its obligations, and shall be liable only for its proportionate share of the costs of developing and operating the Unit Area. It is not the intention of the parties to create, nor shall this agreement be construed as creating, a mining or other partnership or association, or to render them liable as partners. 1989, Art. VII.A: The liability of the parties shall be several, not joint or collective. It is not the intention of the parties to create, nor shall this agreement be construed as creating, a mining or other partnership, joint venture, agency relationship, or association, or to render the parties liable as partners, coventurers, or principals. 11
JOA Fiduciary? Gas Sales Bank Andrau v. Michigan Wisconsin Pipe Line Co., 712 P.2d 372 (Wyo. 1986) 12
JOA Fiduciary? 15.5 Lien. Each of the other Parties hereby grants to Unit Operator a lien upon its Committed Working Interests, its interest in all jointly owned materials, Unit Operator equipment shalland haveother right property to bringand anyits action interest at lawin or all in equity Production, to enforce as security collection forof payment such indebtedness of Costs with chargeable or without toforeclosure it, together ofwith such lien. any interest payable thereon. Unit Operator shall have the right to bring any action at law or in equity to enforce collection of such indebtedness with or without foreclosure of such lien. In addition, upon default by any Party in the payment of Costs chargeable to it, Unit Operator shall have the right to collect and receive from the purchaser or purchasers thereof the proceeds of such Party's share of Production, up to the amount owing by such Party plus interest at the rate of 10% per annum until paid; each such purchaser shall be entitled to rely on Unit Operator's statement concerning the existence and amount of any such default. Andrau v. Michigan Wisconsin Pipe Line Co., 712 P.2d 372 (Wyo. 1986) 13
JOA Fiduciary? 15.5 Lien. Each of the other Parties hereby grants to Unit Operator a lien upon its Committed Working Interests, its interest in all jointly owned materials, equipment and other property and its interest in all Production, as security In addition, for payment *** Unit of Operator Costs shall chargeable have theto right it, together collect and withreceive any interest from the payable purchaser thereon. or purchasers Unit Operator thereofshall proceeds have the of such right Party's to bring shareany of Production. action at law or in equity to enforce collection of such indebtedness with or without foreclosure of such lien. In addition, upon default by any Party in the payment of Costs chargeable to it, Unit Operator shall have the right to collect and receive from the purchaser or purchasers thereof the proceeds of such Party's share of Production, up to the amount owing by such Party plus interest at the rate of 10% per annum until paid; each such purchaser shall be entitled to rely on Unit Operator's statement concerning the existence and amount of any such default. Andrau v. Michigan Wisconsin Pipe Line Co., 712 P.2d 372 (Wyo. 1986) 14
JOA Fiduciary? But see Johnston v. American Cometra, Inc. 837 S.W.2d 711 (Tex. App. 1922) (found agency relationship under 1977 Model Form JOA) Shell Oil Co. v. Prestige, 249 F.2d 413 (9 th Cir. 1957) (joint venture relationship found despite alleged independent contractor relationship under contract) 15
Exculpatory Clauses Operator 55% NO 45% SWIW Abraxas Petroleum Corp. v. Hornburg, 20 S.W.3d 741 (Tex. App. 2000) 16
Exculpatory Clauses [Operator]... shall conduct and direct and have full control of all operations on the Contract Area as permitted and required by, and within the limits of, this agreement. It shall conduct all such operations in a good and workmanlike manner, but it shall have no liability as Operator to the other parties for losses sustained or liabilities incurred, except such as may result from gross negligence or willful misconduct. Abraxas Petroleum Corp. v. Hornburg, 20 S.W.3d 741 (Tex. App. 2000) 17
Exculpatory Clauses (Caution) 1982, Art. V.A: [Operator] shall conduct all such operations in a good and workmanlike manner, but it shall have no liability as Operator to the other parties for losses sustained or liabilities incurred, except such as may result from gross negligence or willful misconduct. 1989, Art. V.A: Operator shall conduct its activities under this agreement as a reasonable prudent operator, in a good and workmanlike manner, with due diligence and in accordance with good oilfield practice, but in no event shall it have any liability as Operator to the other parties for losses sustained or liabilities incurred except such as may result from gross negligence or willful misconduct. Reeder v. Wood County Energy, LLC, 395 S.W.3d 789 (Tex. 2012) 18
Exculpatory Clauses (Caution) 1982, Art. V.A: [Operator] shall conduct all such operations in a good and [Operator] workmanlike shall conduct manner, all such but operations it shall have in a good no liability and as Operator workmanlike to the other manner. parties for losses sustained or liabilities incurred, except such as may result from gross negligence or willful misconduct. 1989, Art. V.A: Operator shall conduct its activities under this agreement as a reasonable prudent operator, in a good and workmanlike manner, with due diligence and in accordance with good Operator oilfieldshall practice, conduct but itsin activities no event under shall thisit agreement have anyas liabilityaas reasonable Operator prudent to theoperator. other parties for losses sustained or liabilities incurred except such as may result from gross negligence or willful misconduct. Reeder v. Wood County Energy, LLC, 395 S.W.3d 789 (Tex. 2012) 19
Exculpatory Clauses (Caution) Possible Revision 1989, Art. V.A: Operator shall conduct operations on the Contract Area its activities under this agreement as a reasonable prudent operator, in a good and workmanlike manner, with due diligence and in accordance with good oilfield practice, but in no event shall it have any liability as Operator to the other parties beyond its interst as reflected on Exhibit A, for losses sustained or liabilities incurred in such operations except such as may result from gross negligence or willful misconduct. Nothing in this agreement, however, shall limit the liability of Operator for breach of its other specific and express contractual duties and obligations under this agreement. Michael C. Sanders, Disputes Between Working Interest Owners and Operators, South Texas College of Law (2014) 20
Exculpatory Clauses But see Atlantic Richfield Co. v. Long Trusts, 860 S.W.2d 439 (Tex. App. 1993) (agency relationship and liability found despite terms of Model Form JOA) 21
AFE s M&T, Inc. v. Fuel Resources Dev. Co., 518 F. Supp. 285 (D. Colo. 1981) 22
AFE s The parties further agree that written approval shall be required for any expenditures which exceed the AFEs attached hereto by ten percent or more. AFE 1 AFE 2 Pegasus Energy Group, Inc. v. Cheyenne Petroleum Co., 3 S.W.3d 112 (Tex. App. 1999) 23
AFE s But see Cone v. Fagadau, 68 S.W.3d 147 (Tex. App. 2001) (co-tenant relationship found despite terms of 1982 Model Form JOA, thus permitting operator to rework well but not charge non-operator) 24
Failure / Loss of Title 2,000 3,400 Amoco Prod. Co. v. Charles B. Wilson, Jr., Inc., 266 Kan. 1084 (1999) 25
Failure / Loss of Title 1956, Art. 2.B: Failure of Title: Should any oil and gas lease, or interest therein, be lost through failure of title, this agreement shall nevertheless, continue in force as to all remaining leases and interests, and (1) The party whose lease or interest is affected by the title failure shall bear alone the entire loss ; and (2) the interests of the parties shall be revised on an acreage basis so that the interest of the party whose lease or interest is affected by the title failure will thereafter be reduced in the Unit Area by the amount of the interest lost Amoco Prod. Co. v. Charles B. Wilson, Jr., Inc., 266 Kan. 1084 (1999) 26
Failure / Loss of Title 2,000 3,400 Amoco Prod. Co. v. Charles B. Wilson, Jr., Inc., 266 Kan. 1084 (1999) 27
Failure / Loss of Title But see Texas Oil & Gas Corp v. Hawkins, 668 S.W.2d 16 (Ark. 1984) (Court reasoned that parties to JOA were engaged in joint-venture and thus operator had fiduciary duty to hold one-half of interest in new leases for the benefit of nonoperator) 28
Assignment Operator A B Seagull Energy E&P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342 (Tex. 2006) 29
Assignment For example: Operator shall pay all costs and each Party shall reimburse Operator in proportion to its Participating Interest. Compare: Each Participating Party desiring to abandon a well [shall assign] to the non-abandoning Parties its interest in such well. Any Party so assigning shall be relieved from any further liability with respect to said well. Seagull Energy E&P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342 (Tex. 2006) 30
Assignment Form 610 (1989): [A]ll costs and liabilities incurred in operations under this agreement shall be borne and paid by the parties as their interests are set forth in Exhibit A. Form 610 (1989): Each abandoning party shall assign to the non-abandoning parties all of its interest in the wellbore [thereafter], abandoning parties shall have no further responsibility, liability, or interest in the operation or production from the well. Seagull Energy E&P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342 (Tex. 2006) 31
Assignment Operator X Operator Y Non-Operator Unit Petroleum Co. v. Mobil Exploration & Prod. N. Am., Inc., 78 P.3d 1238 (Ok. App. 2003) 32
Assignment Possible Revision Any assignment or transfer of an Oil and Gas Lease or Oil and Gas Interest subject to this agreement shall relieve the transferor from liability for the cost and expense of operations conducted thereafter, provided that the transferor shall remain liable for and shall cause to be paid its proportionate part of the cost and expense of all operations conducted prior to the actual transfer, except that cost and expense [related to operations for which the transferor elected to go non-consent]. Seagull Energy E&P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342 (Tex. 2006) 33
Failure to Pay by Non-Operators Written JOA Look to other JOA Non-Ops Liens and security interests PERFECT! PERFECT! PERFECT! Right to demand advance payments Remedies for default Special provisions (For example e.g., max 125% AFE overrage) 34
Failure to Pay by Non-Operators Without Written JOA Joint liability No consensual liens Limited remedies (e.g., self-help) But state lien statutes 35
Failure to Pay by Non-Operators State lien statutes KY: KRS 376.140 OH: ORC 1311.021 PA: 49 PS 1101 et seq. WV: WVC Chapter 38 Article 2 And.... 36
Failure to Pay by Non-Operators Experience Teaches: He who holds the gold makes the rules - or - Possession is nine-tenths of the law 37
Thank You Remember, punctuation matters: Some people find inspiration in cooking their families and their dogs. Others find inspiration in cooking, their families, and their dogs. Gregory D. Russell and Webb I. Vorys Vorys, Sater, Seymour and Pease LLP 52 East Gay Street Columbus, Ohio 43216 gdrussell@vorys.com / (614) 464-5468 wivorys@vorys.com / (614) 464-6442 www.vorysenergy.com Copyright 2016, Vorys, Sater, Seymour and Pease LLP. All Rights Reserved. 38