Dallas Bar Association
HEADNOTES
Focus Energy Law
August 2011 Volume 36 Number 8
Practical Tips From the Bench
Rock On!
The Federal Bar Association and the DBA Judiciary Committee hosted a one-hour CLE panel discussion titled, “Practical Tips for Practicing in the Northern District of Texas: Views From the Bench.” Panelists included (left to right) Hon. Sidney A. Fitzwater, Hon. Jane J. Boyle, Hon. Barbara J. Houser, Hon. Jeff Kaplan and Hon. Sam A. Lindsay.
Focus
Energy Law
Participation Agreements in the Shale Plays by Arthur Wright
Recently, unconventional plays have dominated the industry news. These plays require technical expertise and are “cash hungry.” Some companies have acquired significant acreage but lack the necessary funds to develop it in time to hold it under oil and gas leases with near-term expiration dates. Other players have cash to invest but lack technical knowhow or the necessary acreage. Thus, companies are entering into joint development arrangements to participate in unconventional gas plays. One of the most common is a contractual relationship governing the joint exploration and development of specific assets or areas (a “Participation Agreement”). Variants include “Joint Exploration Agreements” and “Joint Development Agreements.”
Structure and Function of Participation Agreements
Participation Agreements range in length from two-page letter agreements to 60-plus page documents and normally include a Joint Operating Agreement for future operations and development of a project area. The parties (Participants) usually disclaim fiduciary obligations, joint liability, or the creation of a partnership or joint venture. The area to be explored and/or developed is defined by geographic area and/or geological structure. To avoid confusion it is important to describe applicable geologic formations with specificity, including descriptions of their depths by reference to existing wells. Typically, all parties to a Participation Agreement are required to participate in the initial planned development, whether it is the first well in the overall exploration area or the first well in a
specific prospect area. The Participation Agreement will then detail the procedures for proposing the development of further areas or prospects, including the initial well proposal for such prospects and the Participants’ elections whether to participate. These procedures usually require that proposals for additional development areas include an expenditure authority, geologic information, and prospective feature and interpretative data for the area’s initial well. Each Participant then has a certain period of time to elect whether to participate. It may be advisable to include a mechanism to prevent less financially strong Participants from being forced out of prospects by an aggressive drilling program proposed by a larger Participant. A Participant that forfeits its interest in a prospect area for non-participation often forfeits its rights in a related area of mutual interest and to seismic and drilling results, and may be bound by a non-compete provision with respect to such prospect area.
Management and Development Issues
Given the vast undeveloped acreages frequently encountered in shale plays, the Participants may agree upon a plan of development (POD) to facilitate the prompt development of an exploration area, thereby reducing the risk of lease termination. A POD is typically limited to a certain period of time, and sets forth the Participants’ intentions regarding drilling and how to modify the plan. Participants typically name one Participant (or its affiliate) as the operator. The party named as operator has primary responsibility for lease acquisition and making development proposals, and will Continued on Page 6
Inside 3 Your Client Signed a Lease—What Comes Next?
Join us for Law Jam 3 Saturday, August 20, 2011. Doors open at 5:30 p.m. Event starts at 6 The Granada Theater—Lower Greenville Avenue. Get your tickets today at www.dbalawjam.org. Tickets: $25 in advance/$30 after August 8. Any proceeds benefit the Dallas Volunteer Attorney Program.
Listen to great music by lawyer bands:
Big Wheel 7:00 p.m. – The Usuals 8:00 p.m. – Black Dirt Tango 9:00 p.m. – The Catdaddies 10:00 p.m. – Blue Collar Crime 11:00 p.m. – The Wrecking Crew Midnight – Texas Rock Association 6:00 p.m. –
NEED TO REFER A CASE? The DBA Lawyer Referral Service Can Help.
5 Mineral Royalty Mispayments: The Payor’s Right of Recoupment 9 Conflicts Between Mineral Owners and Surface Owners
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