I learned to drive on an old, black, stick-shift, straight-six, no-radio, no-A/C automobile manufactured the year after the AAPL’s first Form 610 -Model Form Operating Agreement was created. The ’57 Chevy is now considered a classic. Not so with the 1956 Model Form, which is generally considered a relic. Clovelly Oil Co., LLC v. Midstates Petroleum Co. shows that while the 1956 Model Form might be old, it is still alive and dangerous. In Clovelly, the Supreme Court of Louisiana busted a 242-acre hole in the operator’s Unit Area (as the Contract Area was then called) by ruling that the 1956 Model Form, without more, does not apply to leases acquired after the JOA was executed. What could that “more” be? See below.
Through a series of assignments, Clovelly and Midstates became parties to the JOA. In 2008, Midstates secured a new oil and gas lease that covered acreage in the Unit Area. Clovelly claimed the lease was covered by the JOA, and as such, it was entitled to its working interest described in the JOA and, as operator under the JOA, the right to operate the new lease.
Relying on the language of the JOA, the court held that the original parties entered into the JOA with the intent to explore and develop only the leases and unleased mineral interests owned by the parties at the time they signed the JOA. The ’56 Form used present-tense language when referring to the leases to which the JOA applies. For example, the preamble referred to leases and unleased mineral interests of which the parties “are owners” in the land described, and the parties agreed “to explore and develop these leases and interests.” Also, the JOA defined “oil and gas interests” as “unleased fee and mineral interest in tracts of land lying within the Unit Area which are owned by the parties.”
The court reasoned that holding otherwise would create an absurd result: If all new leases automatically became subject to the JOA, then the parties would be required to share in the costs for those leases—without having the option to elect whether the leases should be subject to the JOA.
If you’ve ever questioned the need for an AMI in an exploration project, ignore Clovelly at your peril. The rationale could apply to other situations. The court noted that the parties could have easily avoided this problem by including an Area of Mutual Interest provision, an “agreement between or among parties to a JOA by which the parties attempt to describe a geographical area within which they agree to share certain additional leases or other interest acquired by any of them in the future.” The court also noted that an AMI is often established by parties to the AAPL Model Forms when the parties desire to maintain their proportionate interest in newly acquired leases.
What would be the result with the later forms? Find out in a later post.
While you wait for the next post, a musical interlude.