CHAPTER 8 DRAFTING BASIC AGREEMENTS USED IN DEVELOPING OIL AND GAS PROSPECTS
(Apr/May 2009)
DRAFTING BASIC AGREEMENTS USED IN DEVELOPING OIL AND GAS PROSPECTS
McClure & Cross LLP
Dallas, Texas
Donald G. Sinex
Susan A. Stanton
Zukowski, Bresenhan & Sinex LLP
Houston, Texas
Terry Cross is a founding partner of McClure & Cross LLP, established in 2008, and practices in the Dallas office of that firm. He has over 30 years experience in providing legal counsel to the oil and gas industry and investors. He is licensed in North Dakota and Texas and board certified in Oil, Gas and Mineral Law by the Board of Specialization of the State Bar of Texas. Terry is a frequent speaker on oil and gas law and industry contracts, and some of his recent presentations include: Concepts in Documenting Participation Agreements, JOA's and Other Industry Agreements, AAPL Next Generation Landman Institute, April 20, 2007; Drafting Assignments of Working Interests and Non-Operating Interests; Restrictions on Assignment, 2007 AAPL Annual Meeting Workshop, June 13, 2007; Why Texas Titles are Different, Rocky Mountain Mineral Law Foundation Special Institute of Mineral Title Examination, September 13, 2007; Landman, September/October, 2008; Paying Lease Bonus with Time Drafts- Inspection Report on a House of Cards, State Bar of Texas Oil, Gas and Energy Resources Law Section Report (2008).
Donald G. Sinex, a 1964 Petroleum Landman Management graduate from Oklahoma University, was employed as a petroleum landman for two major oil companies, Union Oil Company of California and Getty Oil Company, prior to 1971. This experience led naturally into a law practice emphasizing oil, gas and mineral law upon graduation from South Texas College of Law in 1971. As Vice-President and General Counsel for ITR Petroleum, Inc. from 1984 to 1987, Mr. Sinex was extensively involved in oil and gas property acquisitions, including the acquisition of financially troubled companies in bankruptcy. Mr. Sinex' practice today continues to focus on the oil and gas industry, particularly on matters involving oil and gas exploration and production. His transactional practice includes matters related to acquisition and sale, bank financing, exploration, development and production, contracts and title to oil and gas properties and mediation of disputes arising from related oil and gas issues. As a result of litigation experience gained early in his practice, Mr. Sinex continues to supervise oil and gas related litigation matters for various clients. Mr. Sinex is Board Certified in Oil, Gas and Mineral Law by the Texas Board of Legal Specialization. He is a member of the of the State Bar of Texas; the Houston Bar Association Oil and Gas Section (Chairman in 1993-1994); the Houston Association of Petroleum Landmen; and the American Association of Petroleum Landmen. He was a member of the Texas Board of Legal Specialization Advisory Committee for the 1994 through 1996 term. He was included in H Texas Magazine's listing of Best Lawyers in Houston from 2004 through 2008; in Texas Super Lawyers, Texas Monthly, from 2003 through 2008; and in The Best Lawyers in America (Natural Resources Law) from 2005 through 2009. Mr. Sinex is a speaker on oil and gas law and several of his recent presentations include: ``Lease Maintenance and Term Royalty Issues'', Houston Association of Professional Landmen 29th Annual Technical Workshop, Houston, Texas, April 6, 1998; ``Lease Maintenance and Shut-In Royalty Issues'', The Landman, November/December, 1998; ``Seller's Duty to Disclose to Buyer'', American Association of Professional Landmen, Landman's Workshop on Acquisitions and Divestitures, May 21, 1999 and The Landman, July/August, 1999; The 47th Mineral Law Institute, LSU Law Center, Baton Rouge, Louisiana March 30-31, 2000; The Energy Law Institute, Oil & Gas/Power, South Texas College of Law, Houston, Texas, August 17-18, 2000; ``After Acquired Title Revisited'', co-authored with Susan A. Stanton, Ernest Smith Oil, Gas and Mineral Law Institute, University of Texas, 2004, and reprinted in The Landman, March/April 2005, at 13-21 and Rocky Mountain Mineral Law Review, Vol. 42, No. 2, 2005, at 429; and ``Preparing and Drafting Agreements Used in Developing Oil & Gas Prospects'', co-authored with Susan A. Stanton and Scott C. Petry, 2008 AAPL Summer Land Institute, Houston, Texas, August 26, 2008.
Susan A. Stanton has been practicing law for over 17 years. Her practice covers property title examination and acquisition, divestiture and financing transactions involving oil and gas properties, and commercial real estate acquisition, divesture, financing, development, and leasing transactions. Before practicing law, Ms. Stanton spent more than 20 years in the offshore petroleum industry as a research department manager, market research specialist, consultant, and journalist and editor of the first published directory of offshore mobile drilling rigs. Ms. Stanton holds a bachelor of arts and a master's degree from the University of Oklahoma and received her doctor of jurisprudence in 1992, cum laude, from the University of Houston Law Center. She is a member of the State Bar of Texas and the Houston Bar Association; member of the Oil, Gas and Mineral Law and Real Estate Sections, State Bar of Texas; past Treasurer and Board Member of Women in Commercial Real Estate (CREW Houston); Vice President and Board Member of Briargrove Park Property Owners Association; Member of Women in Real Estate and Finance; and Member of Houston Producers Forum. Ms. Stanton is a speaker on oil and gas law and several of her recent presentations include: ``After Acquired Title Revisited'', co-authored with Donald G. Sinex, Ernest Smith Oil, Gas and Mineral Law Institute, University of Texas, 2004, and reprinted in The Landman, March/April 2005, at 13-21 and Rocky Mountain Mineral Law Review, Vol. 42, No. 2, 2005, at 429; ``Title to Oil and Gas Properties: Common Problems and Special Issues'', Advanced Oil & Gas Seminar, University of Houston, 2001, 2002, 2003, 2004, 2005 and 2006 and National Association of Lease and Title Analysts, 2003; Statute of Frauds, Covenants Running with the Land Confidentiality Agreements, Association of Petroleum Landmen Annual Workshop, June 2007; ``Preparing and Drafting Agreements Used in Developing Oil & Gas Prospects'', co-authored with Donald G. Sinex and Scott C. Petry, Association of Petroleum Landmen Summer Land Institute, August 2008.
I. HISTORY OF BASIC DOMESTIC ONSHORE AGREEMENTS.
The basic agreements used in developing domestic onshore oil and gas prospects today are not only a product of the evolution of the oil and gas industry, but themselves reflect the changes that have occurred in the industry. The basic agreements upon which the industry relies today evolved to their present forms as the pace of activity, the players and the focus areas of the exploration and development industry changed over the past fifty years.
A. 1960s. By the 1960s, most of the major oil companies, large and small, were actively engaged in domestic onshore exploration. The major oil companies and larger domestic oil companies acquired substantial inventories of oil and gas leases, generally making their acquisitions on a prospect basis and/or a trend basis. These companies acquired their leases primarily using their own company landmen, whom they hired in large numbers and trained extensively in-house using other experienced company landmen. The company landmen conducted all of the in-house work and almost all of the field work for their employers. They handled not only title search and curative, leasing, map and lease maintenance and division orders, but they also drafted basic oil and gas contracts. Occasionally, the companies would use individual independent landmen and small brokerage firms; however, large full service land brokers did not exist then as they do today. The companies with the large lease inventories anticipated developing their inventory of prospects throughout the 1960s and early 1970s.
In addition to the large oil companies, the 1960s saw a number of small independent oil companies emerge and grow; however, their method of growth was different from that of the larger oil companies. The smaller companies had limited resources and limited ability to acquire prospects and compete with the large independents and major oil companies in the lease acquisition business. The smaller independents grew their businesses primarily by fanning out undeveloped acreage from the bigger oil companies with large inventories of oil and gas leases and depended heavily upon such inventory for their drilling opportunities. In addition, although the larger oil companies engaged in some wildcat drilling, if the prospect size was not sufficient to meet their economic requirements, they either did not develop the prospect and plugged and abandoned the well or they drilled a few wells and then farmed out further development to other companies. Consequently, the small independent oil companies conducted most of the wildcat drilling. The result was an industry in which those companies with money acquired the leases and then joined with skilled explorationists to drill and develop the prospects.
During the 1960s and early 1970s, the most frequently used basic contract for exploration was the farmout agreement ("FOA"), often coupled with a joint operation agreement ("JOA"). The participation agreement ("PA") as we know it today did not exist during this period, although the JOA was occasionally used in a manner similar to the PA and included an Exhibit "A" providing for different carried and earned interests for the different parties. The parties to the FOA were the party owning a lease who farmed out the drilling to another party who agreed to drill a well in exchange for a 100% working interest
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before payout ("WI BPO") and a 75% (normally) working interest after payout ("WI...
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