Oil & Gas Contracts Flashcards
Oil and Gas Contracts
In addition to the Oil and Gas Lease, there are several other contracts commonly used in the oil and gas industry. Some of these contracts include: Support Agreements, Farmout Agreements, Operating Agreements, Drilling Contracts, Gas Contracts, Gas Balancing Agreements, Division Orders, and Purchase and Sale Agreements.
Oil and Gas Contracts are subject to general rules governing contract validity and interpretation.
General Contract Requirements
Offer and acceptance of agreed terms and conditions
Two or more parties with the capacity to contract
Legal subject matter
Supported by consideration
(Writing required if the contract cannot be fully performed within 1 year or the transfer of an interest in real property is involved.
Support Agreement
A contract whereby a non-drilling party contributes money or acreage to the drilling party in return for geological, engineering, and other information from the well:
What conditions must be satisfied to earn the contribution?
What information will be received for the contribution?
Common Support Agreements
Dry-Hole Agreement
Bottom-Hole Agreement
Acreage Contribution Agreement
Farmout Agreement
Farmout Agreement” – A contract to assign oil and gas lease right in certain acreage upon the completion of drilling obligations and the performance of other covenants and conditions therein.
A Farmout Agreement is used where the Lessee (“Farmout”) is unable or unwilling to drill on the Lease, but the Lessee is willing to assign an interest in the Lease to another (“Farmee”) who will assume the drilling obligations and satisfy the terms and conditions of the Lease.
A Farmout Agreement is subject to the terms and conditions of the underlying Oil and Gas Lease. The Farmout Agreement cannot change or amend the rights between the Lessor and Lessee.
Benefits to the Farmor [Assignor]
Well provides geological and engineering data for offset drilling.
Well satisfies certain clauses in the underlying Oil and Gas Lease.
Well satisfies certain implied covenants in the Oil and Gas Lease.
Well Extends the life of the lease for further development.
Farmor may obtain a share of the production without incurring the costs of drilling, completing and equipping the well.
Benefits to the Farmee [Assignee]
Farmee acquires the right to drill on a leasehold not otherwise available.
Farmee Acquires right to drill without incurring the initial leasehold costs.
Select Terms and Conditions in the Farmout Agreement
Identification of the acreage which is the subject on the Farmout.
Legal description and percentage of interest covered
Restrictions on interest covered
Warranty of title
Test Well” – The proposed well is to be drilled by the Farmee pursuant to the terms and conditions of the Farmout Agreement.
Commencement date
Depth and formation to be tested
Is the drilling commitment a covenant or a condition?
Conditions for assignment of inter0est earned by the Farmee
“Drill to Earn” – The Farmout acreage is earned and the leasehold interest is assigned when the Test Well is drilled to the target depth and tests the target formation.
“Produce to Earn” – The Farmout acreage is earned and the leasehold interest is assigned when the Test Well is drilled, completed, and produces in paying quantities (or is capable of producing in paying quantities) from the target formation.
Restrictions on interest earned
Interest reserved by Farmor
Information, data, and reports to be provided by Farmor
Limitation on Farmee’s right to assign
“Operating Agreement”
– A contract between working interest/leasehold owners for the joint development of a designated area [“Contract Area”]. The contract appoints an operator and provides conditions and directives for the drilling, completing, reworking, and producing of one or more oil or gas wells in the Contract Area.
AAPL Model Form Operating Agreement
1956, 1977, 1982 and 1989 Versions
Prior to entering into the Operating Agreement, the parties must agree on the following:
The Operator
The Contract Area
The target formation or depth for the Initial Well
The percentage interests of the Operator and Non-operators in the Contract Area
Select Terms and Conditions in the Operating Agreement [See 1989 AAPL Form]:
Definitions [Article I]
“AFE”
“Contract Area”
“Drilling Party” or “Consenting Party”
“Initial Well”
“Non-drilling Party” or “Non-Consenting Party”
“Oil and Gas”
“Oil and Gas Interests” or “Interests”
“Oil and Gas Lease”, “Lease”, or “Leasehold”Exhibits [Article II]
Exhibit A – Description of lands; restriction on depths, formations, or substances; parties to the agreement; ownership percentages in the contract area with any applicable limitations; oil and gas leases or interests subject to the agreement; and burden son the production.
Exhibit C – Accounting Procedure – “COPAS”
Exhibit E – Gas Balancing Agreement
Interests of the Parties [Article III]
Share of costs and production
Subsequently created interest
Titles – Loss or Failure of Title [Article IV]
Title Examination
Failure of Title
Loss by non-payment or erroneous payment of the amount due
Other losses
Operator [Article V]
Performance
Liability
Rights and duties:
Competitive rates and use of affiliates
Discharge of joint account obligations
Protection from liens
Custody of funds
Access to contract area and records
Filing and furnishing governmental reports
Drilling and testing operations
Cost estimates
Insurance
Operator [Article V] (cont.)
Resignation of Operator
Removal or Operator
Selection of successor Operator
Drilling of the Initial Well [Article VI.A]
Subsequent Operations [Article VI.B]
Notice of proposed operations
Election to participate
Operations by less than all parties
Relinquishment of non-participating parties interest
Paying wells
Liens and Security Interests [Article VII.B]
Rentals, Shut-in Well Payments and Minimum Royalties [Article VII.E]
Preferential Right to Purchase [Article VII.E]
Term of the Operating Agreement [Article XIII]
