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BY DORSEY ROACH, CPL OKLAHOMA CITY ASSOCIATION OF PROFESSIONAL LANDMEN APRIL 4, 2016

UPDATING THE AAPL MODEL FORM JOA: NEW HORIZONTAL DRILLING PROVISIONS AND MORE. BY DORSEY ROACH, CPL OKLAHOMA CITY ASSOCIATION OF PROFESSIONAL LANDMEN APRIL 4, 2016. INTRODUCTION. AS INDUSTRY HAS EVOLVED, NEW DRILLING AND COMPLETION TECHNOLOGIES DEVELOPED HORIZONTAL DRILLING FRACKING.

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BY DORSEY ROACH, CPL OKLAHOMA CITY ASSOCIATION OF PROFESSIONAL LANDMEN APRIL 4, 2016

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  1. UPDATING THE AAPL MODEL FORM JOA: NEW HORIZONTAL DRILLING PROVISIONS AND MORE BY DORSEY ROACH, CPLOKLAHOMA CITY ASSOCIATION OF PROFESSIONAL LANDMENAPRIL 4, 2016

  2. INTRODUCTION • AS INDUSTRY HAS EVOLVED, NEW DRILLING AND COMPLETION TECHNOLOGIES DEVELOPED • HORIZONTAL DRILLING • FRACKING

  3. INTRODUCTION(CONTINUED) • THINGS THAT EFFECT GOVERNING CONTRACTS & AGREEMENTS • NEW TECHNOLOGIES • CASE LAW • INDUSTRY CUSTOMS & PRACTICES

  4. HISTORY OF HORIZONTAL DRILLING • AROUND SINCE 1920 • COMMERCIALLY VIABLE IN LATE 70’s • OVER 15,000 HORIZONTAL DRILLING PERMITS ISSUED IN THE PAST 4-5 YEARS

  5. HISTORY OF HORIZONTAL DRILLING(CONTINUED) • LONGEST LATERAL NEARLY 7 MILES LONG (SOUTHERN ENGLAND) • HORIZONTAL DRILLING WAS THE MAJOR REASON GIVEN FOR IRAQ’S INVASION OF KUWAIT IN 1990

  6. HISTORY OF THE JOA • PRE-1956 • COMPANY FORMS • ROCKY MOUNTAIN MINERAL LAW (1954) • FORM 610-1956 MODEL FORM JOA • COMMON PROVISIONS • INDUSTRY CUSTOMS/PRACTICES

  7. HISTORY OF THE JOA(CONTINUED) • 1956 JOA - ALTERNATE TITLE LOSS PAGES RELEASED IN 1967 • INDIVIDUAL LOSS PAGES, or • JOINT LOSS PAGES

  8. HISTORY OF THE JOA(CONTINUED) • FORM 610-1977 • REVISION COMMITTEE FORMED IN 1975 • RELEASED 21 YEARS AFTER 1956 JOA • NEW PROVISIONS • CASING POINT ELECTION • SUBSEQUENTLY CREATED INTEREST

  9. HISTORY OF THE JOA(CONTINUED) • FORM 610-1982 • REFORMATTING OF PROVISIONS • SIDETRACKING PROVISION ADDED • GAS BALANCING ADDRESSED • ALTERNATE PAGE 8’s • PAGE 8 – GBA ATTACHED • PAGE 8 ALTERNATE – NO GBA ATTACHED

  10. HISTORY OF THE JOA(CONTINUED) • FORM 610-1989 • RELEASED IN AUGUST 1989 • 27 YEARS AGO! • CONSIDERED MAJOR OVERHAUL OF 1982 JOA

  11. HISTORY OF THE JOA(CONTINUED) 1989 JOA • BANKRUPTCY/CREDITOR RELATED ISSUES ADDRESSED • SEPARATE SIDETRACK AND DEEPENING PROVISIONS • TERMINATION OF OPERATIONS • COMPETING PROPOSALS • ADDRESSED MANY KNOWN PROBLEMS, PITFALLS AND AMBIGUITIES

  12. HISTORY OF THE JOA(CONTINUED) • 2002 COALBED METHANE MODIFICATIONS • PROVIDES OPTIONAL PROVISIONS • SHARING OF ROADS, PADS AND PRODUCTION FACILITIES • EQUITABLE ALLOCATION OF COSTS

  13. FORMATION OF AAPL 2015 JOA TASK FORCE • FORMED IN SEPTEMBER 2011 • TWO OBJECTIVES INVOLVING JOA • DRAFT NEW HORIZONTAL DRILLING PROVISIONS • REVISE THE ENTIRE JOA

  14. 2015 JOA TASK FORCE • THE FORMATION OF THE 2015 JOA TASK FORCE • 5 LANDMEN • 5 ATTORNEYS • PEER REVIEW GROUPS • LANDMEN & ATTORNEYS • COPAS

  15. 2015 JOA TASK FORCE • RELEASE OF 1989 HORIZONTAL JOA ( MARCH 2013) • RELEASE OF THE 2015 JOA • ROLLOUT 11/5/15 • AVAILABILITY OF NEW 2015 JOA FORM

  16. 2015 JOA TASK FORCE(CONTINUED) • AAPL BOARD APPROVED NEW HORIZONTAL DRILLING LANGUAGE AT MARCH 2013 BOARD MEETING • SUBMITTED TO FORMS-ON-A DISK • RETURNED TO TASK FORCE FOR MINOR CHANGES MAY 2013 • RE-SUBMITTED TO BOARD JULY 2013 • JOA AVAILABLE NOVEMBER 2013

  17. 2015 JOA TASK FORCE(CONTINUED) • CHANGES FIRST MADE TO 1989 JOA • CHANGES THEN TRANSLATED TO 1982 JOA • SUBMITTED TO FORMS-ON-A-DISK TO BE SET UP FOR PUBLICATION AND SALES BUT IT WAS NEVER SET UP/PUBLISHED

  18. 2015 JOA TASK FORCE(CONTINUED) • LAMONT LARSEN PAPER • “HORIZONTAL DRAFTING: WHY YOUR FORM JOA MAY NOT BE ADEQUATE FOR YOUR COMPANY’S HORIZONTAL DRILLING PROGRAM” • ROCKY MTN. MINERAL LAW FOUNDATION JOURNAL

  19. REDEFINED TERMS AND NEW PROVISIONS FOUND IN THE 1989 HORIZONTAL JOA

  20. RE-DEFINED TERMS FOR HORIZONTAL WELLS • AFE – NOT A CONTRACT OR COMMITMENT; ESTIMATE MADE IN GOOD FAITH • DRILLSITE – ALL TRACTS WELLBORE TRAVELS ON OR UNDER • PLUGBACK – COMPLETION IN STRATI-GRAPHICALLY SHALLOWER ZONE

  21. RE-DEFINED TERMS(CONTINUED) • DEEPEN - EXTENSION OF LATERAL • NON-CONSENTING PARTIES DO NOT HAVE THE RIGHT TO PARTICIPATE • SIDETRACK – CHANGE ZONE OR DIRECTION OUTSIDE EXISTING LATERAL • NON-CONSENTING PARTIES DO NOT HAVE THE RIGHT TO PARTICIPATE

  22. NEW PROVISIONS(CONTINUED) • NEW DEFINITIONS • DISPLACEMENT - LENGTH OF LATERAL • HORIZONTAL RIG MOVE-ON PERIOD – NO. OF DAYS BETWEEN RELEASE OF SPUDDER RIG AND DATE BIG RIG MOVES IN • HORIZONTAL WELL – WELL CONTAINS HORIZONTAL LATERAL(S) EXTENDING AT LEAST 100’ IN OBJECTIVE ZONE

  23. NEW PROVISIONS(CONTINUED) • NEW DEFINITIONS (CONTINUED) • LATERAL – THAT PORTION OF A WELL THAT DEVIATES FROM VERTICAL TO HORIZONTAL ORIENTATION • SPUDDER RIG – A DRILLING RIG UTILIZED FOR DRILLING ALL OR A PORTION OF THE VERTICAL COMPONENT OF A HORIZONTAL WELL

  24. NEW PROVISIONS(CONTINUED) • DEFINITIONS • TERMINUS – FURTHEST POINT DRILLED IN A LATERAL • TOTAL MEASURED DEPTH – DISTANCE OF WELLBORE PATH FROM SURFACE OF THE GROUND TO TERMINUS • VERTICAL WELL – ANY WELL DRILLED OTHER THAN A HORIZONTAL WELL

  25. NEW HORIZONTAL DRILLING PROVISIONS • WELL PROPOSAL LETTERS MUST NOW STATE THE TYPE OF OPERATION IS FOR THE DRILLING AND COMPLETION OF A HORIZONTAL WELL

  26. NEW HORIZONTAL DRILLING PROVISIONS • DRILLING AND COMPLETION PLANS • TOTAL MEASURED DEPTH • SURFACE AND BOTTOM HOLE LOCATIONS • HORIZONTAL DISPLACEMENT • RIG UTILIZATION • COMPLETION STAGING & SIZING

  27. NEW HORIZONTAL DRILLING PROVISIONS( • ESTIMATED COSTS • AFE NOW REQUIRED FOR ALL PROPOSED SUBSEQUENT OPERATIONS • SPUDDER RIGS MAY BE DEPLOYED IF: • ON AN APPROVED AFE • A MAJORITY IN INTEREST TO AN APPROVED AFE SUBSEQUENTLY AGREE

  28. NEW HORIZONTAL DRILLING PROVISIONS • FAILURE TO MEET HORIZONTAL WELL MOVE-ON PERIOD • MUST RE-PROPOSE WELL • PREVIOUSLY NON-CONSENTING PARTIES HAVE RIGHT TO JOIN • UNUSED FUNDS MUST BE RETURNED • DRILLING WITH SPUDDER RIG DEEMED COMMENCEMENT OF OPERATIONS FOR JOA PURPOSES

  29. OTHER NEW PROVISIONS FOUND IN THE 2015 JOA

  30. THE 2015 JOA • DEFINITIONS • Affiliate – A person who is controlled by another person. “Control” means 50% or more ownership. “Person” means partnership, LLC, corporation, parent or subsidiary company, etc. • Workover – Routine maintenance and repair work performed on a well; not a Rework operation

  31. THE 2015 JOA • Adjustments to WI%’s of Parties • Operator may make adjustments to a party’s WI% on Exhibit A if errors previously made • Requires approval of affected party • Affected party may pursue litigation

  32. THE 2015 JOA • Payment of Royalties and Other Lease Burdens • 1989 JOA Changes • WI Unit v. Pro-Ration (Spacing) Unit • 2015 JOA Optional Provisions • Option 1: Fill-In Blank On Line 17, or • Option 2: “All Burdens Except Subsequently Created Interests of Other Parties”

  33. THE 2015 JOA • Pugh Clauses • Lands/Depths That Terminate Are Now Classified as Joint Losses

  34. THE 2015 JOA • OPERATORSHIP IS NOT ASSIGNABLE • OPERATOR DOES NOT “OWN” OPERATORSHIP OF WELLS • OPERATOR IS ELECTED, AND MAY BE REMOVED, BY THE OTHER PARTIES • IF AN OPERATOR SHOULD SELL ___% OR MORE OF ITS INTEREST, OTHER PARTIES ENTITLED TO SELECT A SUCCESSOR OPERATOR

  35. THE 2015 JOA • Exculpatory Clause • 1989 JOA Was Modified to Provide That Operator Was Not Liable For Losses Sustained or Liabilities Incurred in Connection with Activities Under JOA Except For Gross Negligence • Reeder v. Wood County Exploration (2012 Texas Supreme Court Decision) • 2015 JOA limits Exculpatory Clause to Operations

  36. THE 2015 JOA • Non-Owner Operator • Allows Parties to Employ a Non-Owner Operator by Majority Vote in Interest • Requires Separate Agreement With Non-Owner Operator • Non-Owner Operator Subject to JOA • Non-Owner Operator May Be Removed Without Cause

  37. THE 2015 JOA • WELL DATA • NON-CONSENTING PARTY IS NOT ENTITLED TO WELL INFORMATION UNTIL: • PAYOUT OF THE NON-CONSENT PENALTIES • 2 YEARS • WHICHEVER OCCURS FIRST

  38. THE 2015 JOA • OPERATIONS • EXTENSIONS OF LATERALS REQUIRE ___% APPROVAL • PRIORITY OF OPERATIONS INCORPORATED INTO THE ORDER OF PREFERENCE OF OPERATIONS PROVISION • OTHER OPERATIONS • COVERS WORKOVERS • NO LONGER COVERS SWD WELLS

  39. THE 2015 JOA • EXPENDITURES AND LIABILITIES • JOA PROVIDES 2 OPTIONS • OPTION 1: CASH CALL FOR NEXT SUCCEEDING MONTH’S ESTIMATED COSTS • OPTION 2: CASH CALL FOR AN ENTIRE OPERATION’S ESTIMATED COSTS

  40. THE 2015 JOA • NOTICES • EMAILS ALLOWED TO PROPOSE WELLS AND MAKE ELECTIONS • REQUIRES CONFIRMATION OF RECEIPT • AUTOMATIC DELIVERY RECEIPTS NOT ACCEPTED

  41. CONCLUSION

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